Royal Bank stock rating cut by National Bank Financial

On Friday, National Bank Financial adjusted its stance on Royal Bank of Canada (RY:CN) (NYSE: RY), a prominent financial institution with a market capitalization of $175.91 billion and a dividend yield of 3.41%, downgrading the stock from Outperform to Sector Perform and slightly reducing the price target to Cdn$177.00 from the previous Cdn$179.00. According to InvestingPro data, the stock’s RSI indicates overbought territory, suggesting cautious positioning might be warranted. The revision followed the release of Royal Bank’s second-quarter results for fiscal year 2025, which did not meet expectations due to higher Provision for Credit Losses (PCLs) and a weaker performance in the Capital Markets segment than anticipated. InvestingPro analysis reveals that six analysts have recently revised their earnings downward for the upcoming period, while the bank’s rapid cash burn has become a notable concern.

Gabriel Dechaine of National Bank Financial expressed concern over the bank’s updated credit outlook, noting that Royal Bank has delayed its forecast for peak PCLs to fiscal 2026. This delay is seen as a negative indicator, although not entirely unexpected. The bank’s commentary suggested a challenging environment for credit and growth, issues that are not solely affecting Royal Bank but are prevalent across the sector. Despite these challenges, the bank maintains a relatively attractive P/E ratio of 14.22 and has demonstrated strong revenue growth of 16.96% in the last twelve months. For deeper insights into RY’s valuation and growth prospects, investors can access the comprehensive Pro Research Report available on InvestingPro.

The decision to lower the price target was influenced by a combination of reduced earnings estimates and a consistent valuation multiple. The analyst indicated that the current outlook does not support an argument for a higher valuation multiple, given the weaker credit and growth prospects outlined by Royal Bank’s management.

The downgrade reflects a closer alignment of the stock’s rating with the analyst’s target price, suggesting limited potential for return. The new Sector Perform rating indicates that National Bank Financial expects Royal Bank’s stock performance to be in line with the overall sector in the near future.

In other recent news, Royal Bank of Canada (RBC) reported its second-quarter earnings for 2025, revealing a notable increase in revenue but a slight miss in earnings per share (EPS). The bank’s revenue rose to $15.67 billion, surpassing the forecasted $15.63 billion, marking an 11% year-over-year growth. However, RBC’s EPS came in at $3.12, slightly below the projected $3.16. This mixed performance included a significant $260 million contribution from its acquisition of HSBC Bank Canada. Despite the revenue growth, RBC’s stock saw a decline, reflecting investor concerns over the EPS miss. In response to the earnings report, RBC announced a 4% increase in its dividend and a plan to repurchase shares. Additionally, analysts from National Bank Financial highlighted an increase in RBC’s gross impaired loans, noting administrative factors related to the integration of HSBC Canada. RBC maintains a positive outlook for the year, expecting growth in net interest income and commercial banking loans.

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