Citigroup Global Markets, Shannon Cowherd, 4 May 2008
• Reducing Estimated Write-Down to C$2.6B from C$5B — Based on incremental information and a broader comparison of similar institutions’ related write-down/mark to market valuation metrics, we have revised our assumptions on potential write-downs at RBC to be less aggressive than in our previous report. Of the C$2.6B, RBC has taken C$787mm, leaving C$1.8B.
• The Most Significant Changes Were to ARS, ABCP and ACL — We revised our assumptions to reflect a 10% valuation adjustment on auction rate securities and zero on asset backed commercial paper, driven by the lack of transparency and the potential market shift. The allowance for credit loss was reduced to reflect a 130% coverage ratio.
• Net Impact — The net effect of these changes is an C$0.11 increase to our prior FY08E of $2.91. Our target price rises to C$42 from C$40 previously, established by applying a discounted P/B multiple of 2.2x to our revised BVPS of $19.14. Changes to earnings and BVPS are driven by the revised allocation between net income and OCI for the estimated w/d.
• Maintaining 3H Rating — Given an ETR of -11.8%, we reiterate our 3H (Sell/High Risk) rating on Royal. The P/B multiple of 2.2x is a discount to the 10-year historical average of 2.5x. We think the discount is warranted given it reflects the current environment and lack of transparency surrounding the possibility of future write downs.
• Reducing Estimated Write-Down to C$2.6B from C$5B — Based on incremental information and a broader comparison of similar institutions’ related write-down/mark to market valuation metrics, we have revised our assumptions on potential write-downs at RBC to be less aggressive than in our previous report. Of the C$2.6B, RBC has taken C$787mm, leaving C$1.8B.
• The Most Significant Changes Were to ARS, ABCP and ACL — We revised our assumptions to reflect a 10% valuation adjustment on auction rate securities and zero on asset backed commercial paper, driven by the lack of transparency and the potential market shift. The allowance for credit loss was reduced to reflect a 130% coverage ratio.
• Net Impact — The net effect of these changes is an C$0.11 increase to our prior FY08E of $2.91. Our target price rises to C$42 from C$40 previously, established by applying a discounted P/B multiple of 2.2x to our revised BVPS of $19.14. Changes to earnings and BVPS are driven by the revised allocation between net income and OCI for the estimated w/d.
• Maintaining 3H Rating — Given an ETR of -11.8%, we reiterate our 3H (Sell/High Risk) rating on Royal. The P/B multiple of 2.2x is a discount to the 10-year historical average of 2.5x. We think the discount is warranted given it reflects the current environment and lack of transparency surrounding the possibility of future write downs.
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