Royal Bank of Canada is celebrated as a conservative, blue-chip stock offering a dependable dividend yield.
But there’s more. It has also returned our investors a massive 1,673.0% gain since we first recommended it in April 1995. That gain dramatically outpaced the 391.0% rise for the S&P/TSX Composite index.
Why buy now? Current uncertainty caused by rising interest rates and still-high inflation has prompted Canada’s big banks to increase their loan-loss provisions.
[ofie_ad]
Those provisions remain well below their 2020 pandemic peaks. Still, the impact on earnings impacts valuations and that only increases the current buying opportunity.
The stock trades at modest 11.3 times forecast earnings. That’s cheap for such a solid business.
ROYAL BANK OF CANADA (Toronto symbol RY; www.rbc.com) agreed in November 2022 to pay $13.5 billion in cash for the Canadian operations of U.K.-based HSBC Holdings plc (New York symbol HSBC). That includes 130 branches, which mainly cater to businesses in industries that trade and bank internationally. HSBC also provides banking and wealth management services to over 770,000 retail clients. In all, it has total assets of $134 billion.
Meanwhile, the deal has now received all necessary regulatory and other approvals. The bank expects it will cost $1 billion to integrate the new operations, but also expects to realize annual cost savings of $740 million by the end of the second year.
The purchase will cut Royal’s capitalization ratio (CET1, or Common Equity Tier 1, a key measure of its ability to absorb bad loans) from 14.5% as of October 31, 2023, to around 11.7%. However, that is still well above the regulatory minimum of 11.0%.
The bank could sell more common shares to lift its CET1 ratio. If it does, the additional shares would have little dilutive effect on existing shareholders.
Due to the small size of the Canadian banking market, Royal prefers to expand internationally. For example, in 2015 it acquired Los Angeles-based City National Bank for $5.5 billion U.S. in cash and shares. City National lends to wealthy individuals as well as businesses in the entertainment, technology and health-care industries.
That acquisition is a big reason why overall revenue rose 20.5% for Royal, from $40.67 billion in 2017 to $48.99 billion in 2022 (fiscal years end October 31). In fiscal 2023, revenue then rose a further 14.6%, to $56.13 billion.
Overall earnings gained 12.5%, from $11.43 billion in 2017 to $12.86 billion in 2019; due to fewer shares outstanding, earnings per share rose at a faster rate of 15.7%, from $7.56 to $8.75.
Royal set aside $4.35 billion to cover potential loan defaults in fiscal 2020 due to the uncertainty over COVID-19; that was up 133.4% from $1.86 billion in 2019. As a result of the spike, earnings in 2020 fell 11.1% to $11.44 billion, while earnings per share declined 10.6% to $7.82.
However, Royal was reversing those provisions as the economy re-opened. As a result, earnings in 2021 jumped 40.3%, to $16.04 billion; per-share earnings rose 41.4% to $11.06. In fiscal 2022, earnings then dropped 1.5%, to $15.81 billion, or $11.06 a share (on fewer shares outstanding). The reduced profit reflected lower results in Capital Markets and Insurance, partially offset by higher earnings in Personal & Commercial Banking, Wealth Management, and Investor & Treasury Services. The current year also reflects lower releases of provisions on performing loans than a year ago. In fiscal 2023, earnings then dropped a further 6.0%, to $14.87 billion, or $10.50 a share. That decline was mostly due to a higher provision for credit losses.
Value Stocks: Both revenue and earnings are up in the latest quarter for Royal Bank of Canada
Meantime, thanks to higher interest income on its loans due to higher interest rates, Royal’s revenue in its fiscal 2023 fourth quarter, ended October 31, 2023, rose 3.7%, to $13.03 billion from $12.57 billion a year earlier.
Due to rising interest rates and the possibility of higher loan defaults, Royal set aside $720 million to cover future loan losses, up 89.0% from $381 million a year earlier.
In response to those higher provisions, Royal has cut the number of full-time employees by 3%.
If you exclude severance payments and other unusual items, Royal’s earnings in the quarter rose 0.9%, to $3.90 billion from $3.86 billion. Due to more shares outstanding, earnings per share were unchanged at $2.78.
Earnings from Royal’s retail banking division (58% of the total) fell 2.2%, mainly due to higher loan-loss provisions. As well, earnings at wealth management (6%) dropped 73.8%, due to the sale of a smaller business and higher staffing costs.
However, earnings at Royal’s capital markets business (28%) jumped 35.8% due to a lower tax rate and higher trading volumes. The Insurance division (8%) also reported 7.8% higher earnings due to lower claims.
For all of fiscal 2024, Royal will probably earn $11.39 a share, and the stock trades at an attractive 11.3 times that forecast.
As well. the bank is also raising your quarterly dividend by 2.2%. With the February 2024 payment, investors will receive $1.38 a share instead of $1.35. The new annual rate of $5.52 yields 4.3%.
Recommendation in The Successful Investor: Royal Bank of Canada is a buy.
