Thursday, March 23, 2006

RBC, Priced to Perfection?

The Globe and Mail, Angela Barnes, 23 March 2006

Royal Bank of Canada shares hit a record high Thursday, the same day as a Desjardins Securities report came out suggesting that the Royal's shares are richly valued.

“We believe that Royal is now priced to perfection,” said Desjardins analyst Michael Goldberg. Even after its “surprisingly” big dividend increase, Canada's largest bank has the lowest relative yield among the banks while its capital position is the second weakest after Canadian Imperial Bank of Commerce. Yields for the banks are measured against long corporate bonds.

Meanwhile, Bank of Montreal, whose shares have been lagging and are well below their high, is currently trading at the highest relative yield among the major banks, Mr. Goldberg noted in a report yesterday. “Considering BMO's earning power and its growth and capital flexibility, its low valuation looks like an anomaly to us,” he said.

Mr. Goldberg rates Royal a “hold” along with National Bank of Canada and Laurentian Bank of Canada. He has BMO as a “buy” and upgraded CIBC to a “buy” from a “hold.” His top picks are Bank of Nova Scotia and Toronto-Dominion Bank, which are the two best capitalized banks.

Mr. Goldberg adjusted some of his 12-month target prices for the banks. He raised CIBC to $89.50 from $87, BMO to $75.50 from $70.50 and Royal to $104 from $93 largely because of the higher than anticipated dividend increase. Royal began trading on the Toronto Stock Exchange yesterday after an effective two-for-one split so the adjusted target is $52, up from $46.50. He left his targets of $52.50 for Scotiabank, $70 for TD, $65 for National Bank and $34.50 for Laurentian unchanged.

He noted that BMO has the most upside to his target.

Mr. Goldberg noted in his report that nearly all the banks delivered positive surprises in their first quarter reporting season but market reaction to the surprises was mixed. Investors rewarded CIBC and TD for their growth in operating profit, while banks whose profit growth came from non-operating sources saw their results ignored or punished. The two examples of the latter were National and BMO. “BMO was punished for interest margin compression as its positive earnings surprise was driven by better-than-expected loan quality and a lower tax rate,” Mr. Goldberg said.