Royal Bank of Canada: The Market Is Not Impressed

By David Berman

Royal Bank of Canada (RY) shares were down in late-morning trading on Friday, a day after the bank reported disappointing second quarter results. Exactly what is the market upset about here?

Kevin Choquette, an analyst at Scotia Capital, cut his recommendation on the stock to “sector perform” from “sector outperform.” He also trimmed his 12-month price target to $68 from $75 – a 10% cut.

The reason relates to reduced earnings expectations. Mr. Choquette now believes that Royal Bank (full disclosure: I own shares) will generate $4.20 a share in earnings in 2010, down from an earlier estimate of $4.65. He also cut his 2011 estimates to $5 a share from $5.35.

“We continue to believe Royal Bank has very strong operating platforms in all business segments and will continue to outperform longer term,” he said in a note. “However, in the near to medium term weak relative earnings momentum is expected to mute relative share price performance.”

That weak momentum stems in part from a downturn in so-called wholesale banking – which serves institutional and large corporate clients – where Royal Bank’s earnings fell 10% in the second quarter, over last year.

Blame Europe and its debt crisis: “The European sovereign debt crisis is expected to further add to earnings momentum challenges in wholesale banking,” Mr. Choquette said.

A number of other analysts have similarly cut their recommendations or target prices (or both) on Royal Bank. BMO Nesbitt Burns cuts its target price to $63 from $67, but maintained an "outperform" recommendation.

Macquarie cut its target price to $61 from $66 and also reduced its recommendation to "neutral" from "outperform." Canaccord Genuity cut its target price to $65 from $71, but maintained a "buy" recommendation. And Cormark Securities cut its target price to $62 from $64, but maintained a "market perform" recommendation.