Royal Bank of Canada $49 - Toronto symbol RY

ROYAL BANK OF CANADA $49 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.3 billion; Market cap: $63.7 billion; SI Rating: Above average) is Canada’s largest bank, with assets of $600.3 billion. Royal has built up its operations in the United States in the past few years, mainly through acquisitions. The U.S. now accounts for about 15% of its total earnings. Despite its sizable American operations, Royal does not originate subprime mortgages. Securities backed by subprime mortgages and other risky loans account for less than 1% of its assets. Still, the lack of liquidity for these securities forced Royal to write down its holdings by $357 million (pre-tax). A $326 million pre-tax gain from the Visa restructuring helped offset the writedown. Royal’s earnings in the year ended October 31, 2007 rose 16.7%, to $4.19 a share (total $5.5 billion) from $3.59 a share ($4.7 billion) in 2006. Revenue rose 9.2%, to $22.5 billion from $20.6 billion, thanks to strong gains at its retail banking, wealth management and stock market-related businesses. Despite the costs to expand and upgrade branches, as well as the costs of integrating acquisitions, Royal’s efficiency ratio fell to 55.5% in 2007 from 55.7% in 2006. Bad loans, however, crept up to 0.45% of total loans from 0.38%. Royal should earn $4.51 a share in 2008, which gives the stock a p/e of 11.1. The $2.00 dividend yields 4.0%. Royal Bank is a buy.