Gordon Nixon, RBC president and CEOMARK BLINCH
"Uneasy lies the head that wears the crown."
Henry IV, Part 2, William Shakespeare
That Bill Shakespeare guy knew something about the burden that comes with being Royal Bank of Canada.
The country's largest bank reported the second-best quarter in its history on Wednesday, ahead of its annual meeting. Royal Bank made $1.5-billion, up 35 per cent from the same period a year ago. The loan portfolio is in far better shape than expected. And Royal Bank hit analysts' forecasts by posting $1 of earnings per share.
Yet Royal Bank shares sold off from the start of Wednesday's session.
Welcome to a market that's priced near-perfection into the leading bank stocks.
Royal Bank is the king of Canadian financial services stocks, with a share price that reflects a premium to its rivals. That valuation is justified by past performance, but the king must defend his crown with each new quarter.
After a staggering rally over the past 12 months - Royal Bank stock has doubled - this bank needs to exceed expectations to demand continued loyalty from investors. On Wednesday, the critics found reason for doubt. After stronger-than-expected results from CIBC and Bank of Montreal, Royal Bank simply did what was expected. Analyst John Aiken at Barclays Capital summed up the numbers in a report that sported the headline: "Meeting consensus (is) never enough for Royal Bank."
In his first take on the numbers, Mr. Aiken said: "We would expect the lack of revenue growth and rising expenses to offset the benefit of the declining provisions, and begin to eat away at some of Royal Bank's premium valuation."
The same sentiment came from John Reucassel at BMO Nesbitt Burns, who wrote: "A number of factors worked against the bank in this quarter, including higher taxes, lower consolidated spreads, accounting changes, currency, and gains and losses on hedges, to name a few. While some of these factors are temporary, the results are likely to disappoint investors after relatively strong earnings from some of its peers."
In Mr. Reucassel's view, Royal Bank shares are trading at a lofty 15.3 times his earnings target for 2010, the highest multiple sported by any Canadian bank. The medium for the sector is 13.5 times forecast earnings.
And in one more take on the same theme, Credit Suisse analyst Jim Bantis offered up faint praise by writing: "We credit Royal Bank for the diversity of its earnings profile, wholesale 'gearing' and strong capital position. However, we believe that this is fully reflected in the bank's current valuation."
Andrew Willis