ROYAL BANK OF CANADA $30 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.3 billion; Market cap: $39 billion; Price-to-sales ratio: 1.4; SI Rating: Above Average) is Canada’s largest bank, with total assets of $723.9 billion. Royal continues to expand its operations in the United States. These now account for 17% of its revenue, and have increased Royal’s exposure to the struggling U.S. housing market. In the fiscal year ended October 31, 2008, earnings declined 17.1%, to $4.6 billion from $5.5 billion in the prior year. Earnings per share fell 19.3%, to $3.38 from $4.19 on more shares outstanding. The drop was largely due to a 101.6% increase in loan-loss provisions. Troubled loans now account for 0.96% of total loans, up from 0.45% a year earlier.
Good opportunity to expand market share
Despite the higher loan-loss provisions, Royal’s U.S. operations are in much better shape than those of most of its competitors. This should help it add to its U.S. operations, probably at bargain prices. Royal is also successfully expanding its Canadian banking operations, which supply about 60% of its overall earnings. In 2008, this division’s profits rose 5%, thanks to a 13% rise in loan volumes. New high-interest savings accounts increased deposits by 5%. Royal will probably earn $3.98 a share in fiscal 2009, and the shares trade at 7.5 times that forecast. The $2.00 dividend yields 6.7%. Royal Bank is a buy.
