NEW YORK (TheStreet) -- Shares of Royal Bank of Canada (RY - Get Report) are down 2.27% to $72.43 after Barclays downgraded the Canadian bank to "underweight" from "equalweight" and lowered its price target to $77 from $80.
"Despite recent weakness in the performance of the Canadian banks, we see little additional upside potential and believe that slower-than-anticipated economic growth will weigh on the earnings growth and valuations of the group," analyst said.
Barclays has lowered their earnings estimates to reflect an even greater moderation in demand for consumer borrowing than they had previously priced in, and they have also lowered their target multiples to reflect a revised growth forecast, resulting in an average 8% reduction.
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"From our standpoint, the surprise reduction in the overnight rate by the Bank of Canada is a net negative for the banks. We believe that the action from the central bank implies lower economic growth than is currently reflected in the market," analysts added.
Furthermore, the decline in oil prices is anticipated to weigh on the economy of Alberta, potentially putting the province in a recession, analysts noted. Although lower gasoline prices should support consumption in other regions, analysts added, it is not expected to be a full offset.
As the market digests the headwinds facing Canadian economic growth, Barclays anticipates that earnings expectations are likely to decline in the near term.
Separately, TheStreet Ratings team rates ROYAL BANK OF CANADA as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate ROYAL BANK OF CANADA (RY) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and growth in earnings per share. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- RY's revenue growth has slightly outpaced the industry average of 0.3%. Since the same quarter one year prior, revenues slightly increased by 3.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Commercial Banks industry and the overall market, ROYAL BANK OF CANADA's return on equity exceeds that of both the industry average and the S&P 500.
- The gross profit margin for ROYAL BANK OF CANADA is currently very high, coming in at 76.34%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 22.56% trails the industry average.
- Net operating cash flow has remained constant at $6,096.00 million with no significant change when compared to the same quarter last year. Even though ROYAL BANK OF CANADA's cash flow growth was minimal, the firm managed to surpass its industry's average growth rate of -83.71%.
- RY has underperformed the S&P 500 Index, declining 8.70% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- You can view the full analysis from the report here: RY Ratings Report