UBS Securities Canada Inc. said on Tuesday that it is now ranking Royal Bank as its best call among the Canadian banks, replacing Bank of Nova Scotia.

In a research report the firm said that it is replacing Scotiabank with RBC on its Canadian Key Calls list, which represents the highest conviction ideas of UBS analysts, strategists, and product managers over the next 12 to 18 months. While it continues to rate Scotia as a buy, it says that there is likely more upside to Royal over the next 12 months due to its recent underperformance.

It says that RBC: maintains dominant positions in all business segments, and continues to increase its market share, including capital markets; has one of the highest returns on equity among the banks at 18-20%, with good credit leverage and a significant opportunity to reduce operating expenses; and strong Tier 1 capital of 13.4%. Moreover, it says that RBC is currently undervalued, as it has historically traded at a 2% premium to rivals Scotia and TD Bank, but is now at a 4.6% discount.

Risks to its outlook include regulatory risk and higher than average capital market exposure.

IE