Royal Bank of Canada’s strength in the Canadian market, along with increasing interest rates around the world, is expected to help it outperform peers in the banking sector.
TD Securities analyst Mario Mendonca increased his rating on shares of RBC from “hold” to “buy,” simultaneously hiking his price target from $86 to $96.
RBC’s scale in the domestic personal and commercial banking business is expected to be very important in the current low-growth environment, Mendonca emphasized.
The analyst also noted higher net interest margins on new and renewed fixed-rate products that the bank earns now compared to previous periods, as well as an upward move in the Canadian five-year bond yield that should benefit RBC more than others.
Aside from commercial and personal banking, Mendonca said that the restructuring and exit of European investment banks from certain markets makes RBC’s capital markets business particularly important.
“We expect capital markets activity in the U.S. to drive strong results for Royal Bank in 2017,” the analyst informed clients.
The bank’s strong 10.5% Tier 1 capital ratio, tied with Scotiabank as the banking sector’s strongest, and industry-leading return on equity also made the stock attractive to Mendonca.
“We believe that this gives the bank the flexibility to participate in further U.S. bank consolidation over the next two years,” Mendonca said.
RBC acquired a major US bank, City National, in 2015. The analyst expects that RBC will focus on California and New York moving forward, in line with the acquisition and related developments that have been covered in the news.
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