This big bank’s ready to assist cannabis producers

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Although fear of repercussions in the United States previously made Canada’s big banks reluctant to help the cannabis industry, this bank is now the third to offer its services. 

It will begin by giving cannabis firms advice on selling stock, and will also provide help with mergers and acquisitions. The bank is dealing from a position of strength; in the most recent quarter, revenue rose 14.6% and earnings beat the consensus estimate. Its shares are trading at a low 10.2 times projected earnings for 2019. The bank increased its dividend with the November 2018 payment, for a current yield of 4.3%.


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ROYAL BANK OF CANADA $92.06 (Toronto symbol RY; Shares outstanding: 1.4 billion; Market cap: $129.8 billion; is this country’s largest bank by market cap. It has over 16 million individual and business clients in Canada, the U.S. and 35 other countries.

Most of Canada’s big banks have avoided lending funds or arranging financing for cannabis companies. That’s due to fears that those activities could hurt their U.S. operations, where cannabis is still a prohibited substance at the federal level.

However, Royal recently announced that its investment banking operations would begin offering companies in the cannabis industry advice on selling stock. It will also help them with mergers and acquisitions.

Royal now joins Bank of Montreal and Canadian Imperial Bank of Commerce, which have helped prominent cannabis companies, including Canopy Growth, Cronos Group and Aurora Cannabis, raise capital.

Meantime, Royal’s overall earnings in its fiscal 2018 fourth quarter, ended October 31, 2018, rose 14.6%, to $3.25 billion from $2.84 billion a year earlier. But due to fewer shares outstanding, earnings per share gained 17.0%, to $2.20 from $1.88.

If you exclude unusual items, Royal earned $2.24 a share in the latest quarter. On that basis, the latest earnings beat the consensus estimate of $2.15.

Earnings from retail banking (47% of the total) rose 9.5%, mainly due to higher interest rates. Strong demand for mortgages, credit cards and business loans also spurred earnings from retail banking.

The bank’s capital markets business (21%) saw its earnings jump 14.0%, mainly due to the lower U.S. tax rates and steady demand for debt and equity underwriting services. The wealth management business (17%) reported 12.6% higher earnings as rising stock prices pushed up the value of the securities it manages. In addition, lower tax rates in the U.S. helped raise earnings for that segment.

Earnings for Royal’s insurance operations (10%) rose 20.0%, partly due to a gain on its investment portfolio. However, earnings from investor and treasury services (5%) slipped 0.6%. That’s partly because the bank has increased spending on that business to spur future growth.

In the quarter, overall revenue improved 1.4%, to $10.7 billion from $10.5 billion. The bank set aside $353 million to cover potential bad loans, up 50.9% from $234 million a year earlier. That jump is mainly due to new accounting rules regarding the calculation of potential credit losses.

The stock trades at just 10.2 times the $9.05 a share that Royal will probably earn in fiscal 2019.

The bank also raised its quarterly dividend with the November 2018 payment, to $0.98 a share, up 4.3% from $0.94. The new annual rate of $3.92 yields 4.3%.

Royal Bank is a buy.


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