ROYAL BANK OF CANADA $76 - Toronto symbol RY

ROYAL BANK OF CANADA $76 (Toronto symbol RY; Conservative Growth and Income Portfolios, Finance sector; Shares outstanding: 1.4 billion; Market cap: $106.4 billion; Price-to-sales ratio: 3.2; Dividend yield: 4.1%; TSINetwork Rating: Above Average; www.rbc.com) recently said it would buy City National (New York symbol CYN).

This Los Angeles-based bank focuses on wealthy individuals and lending to businesses in the entertainment, technology and health care industries. Royal plans to merge it with its U.S. wealth management operations.

Royal will pay $5.4 billion U.S. (50% in cash and 50% in shares). Assuming City National shareholders and regulators approve, Royal expects to complete the purchase by the end of 2015. It will start contributing to Royal’s earnings in two years.

Meanwhile, the bank earned $2.5 billion in the three months ended January 31, 2015, up 12.5% from $2.2 billion a year earlier. Per-share earnings gained 14.6%, to $1.65 from $1.44, on fewer shares outstanding. Revenue jumped 14.0%, to $9.6 billion from $8.5 billion.

The bank set aside $270 million to cover potential bad loans in the latest quarter, down 7.5%, from $292 million. That’s mainly because more of its Canadian consumer and business clients are repaying their loans on time.

Earnings at Royal’s retail banking division (which supplied 52% of the total) rose 8.0% thanks to steady loan demand in Canada and better earnings from the Caribbean.

The securities-trading division (24% of total earnings) saw its profits jump 17.6% on higher fee income from corporate advisory services and the positive impact of the lower Canadian dollar on its U.S. and European operations.

The bank’s wealth management division (10%) reported 2.1% lower earnings due to restructuring costs in the U.S. and overseas. Insurance earnings (8%) gained 17.8% thanks to fewer claims in Canada and new contracts in the U.K.

The investor and treasury services business’s earnings (6%) rose 34.0% on more deposits and foreign exchange transactions.

The strong results prompted Royal to raise its quarterly dividend by 2.7%, to $0.77 a share from $0.75. The new annual rate of $3.08 yields 4.1%. The stock trades at just 11.6 times Royal’s forecast 2015 earnings of $6.54 a share.

Royal Bank is a buy.

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