Royal Bank of Canada (TSX: RY) (NYSE: RY) has achieved strong total shareholder returns historically as compared with its peers
SmallCapPower | August 2, 2017: Royal Bank of Canada (TSX: RY) (NYSE: RY) is the largest bank in Canada and holds market-leading positions in its key business segments including Personal & Commercial Banking, Wealth Management and Insurance. Over the past several years, Royal Bank of Canada has delivered consistent earnings growth and solid ROE while maintaining a strong capital position with a disciplined approach to risk. Although the Bank appears fairly valued, investors looking for exposure to the Canadian and U.S. banking space could add this stock to their portfolio.
While the domestic market has been performing well of late and continues to drive the bank’s performance, future growth and profitability will likely come from the U.S. operations. Unlike the Canadian economy, which is highly sensitive to the price of commodities, the U.S. economy is large, stable and strong. Management believes its U.S. business will act as a huge tailwind in the long term for the Bank, and has put forth U.S. expansion initiatives, which will likely continue to grow the Company’s U.S. segment. As one of the world’s most highly-rated financial institutions, Royal Bank of Canada is committed to delivering excellent long-term returns to shareholders.
Investment Thesis
- Market leader with a focused-growth strategy
- Diversified business model with client-leading franchises; U.S. expansion initiatives to drive growth going forward
- Financial strength underpinned by prudent risk and cost management
- History of delivering value to its shareholders
Market leader with a focused-growth strategy
Royal Bank of Canada is a market leader across all its key businesses in Canada. Globally, the Company is one of the 15 largest global banks by market capitalization, with operations in 37 countries. Royal Bank of Canada currently serves over 16 million customers worldwide. The Company has a clear strategy for continued long-term growth in Canada, the U.S. and select global markets.
Diversified business model with client-leading franchises
Royal Bank of Canada has a well-diversified portfolio of businesses and derives revenues from various geographies. The Company is well positioned to capitalize on opportunities created by changing market dynamics and economic conditions and has wide breadth of products and capabilities, allowing it to meet client’s financial needs and build deep, long-term relationships. Although Canada accounts for the largest share of geographical earnings, management believes the U.S. business will act as a huge tailwind in the long term for the bank, and has put forth U.S. expansion initiatives, which will likely continue to grow the Company’s U.S. segment.
Strong financial profile
Royal Bank of Canada has consistent earnings growth and solid ROE, while maintaining a strong capital position with a disciplined approach to risk. A disciplined approach and diversification have driven stable credit trends.
History of delivering value to our shareholders
Royal Bank of Canada has achieved strong total shareholder returns historically as compared with its peers. In the last five years, the Company has delivered 15% average annual returns as compared with its peer average of 14%. Its dividend has grown at a CAGR of 8% to reach $3.24 in 2016, and current quarterly dividend is $0.87 (as of April’17)
Financial Analysis
Royal Bank of Canada reported net income of $2.8 billion for the second quarter ended April 30, 2017, up $236 million or 9% from a year ago, driven by strong earnings in Capital Markets, Investor & Treasury Services, and Wealth Management, as well as solid earnings in Personal & Commercial Banking.
Personal & Commercial Banking segment posted net income of $1,360 million (up 5% YoY). Canadian Banking net income of $1,316 million was up $75 million, or 6%, compared to last year, driven largely by volume growth of 7% partially offset by lower spreads, higher fee-based revenue, and lower PCL. Caribbean & U.S. Banking net income of $44 million was down $12 million from a year ago, due largely to lower gains from foreign exchange and lower fee-based revenue.
Wealth Management segment posted net income of $431 million (up 12% YoY), mainly due to increased earnings resulting from growth in average fee-based client assets, which benefited from favorable equity markets, and higher net interest income reflecting volume growth and the impact from higher U.S. interest rates.
Insurance segment posted net income of $166 million (down 6%), partially reflecting the impact from the sale of home and auto insurance manufacturing business.
Investor & Treasury Services segment posted net income of $193 million was (up 39%), driven mainly by higher funding and liquidity earnings reflecting volatility in interest and foreign exchange rates, and tightening credit spreads.
Capital Markets segment posted net income of $668 million (up 15%), driven by higher results in Corporate and Investment Banking and Global Markets reflecting increased client activity driven by improved market conditions, and lower PCL.
Key financial metrics
Valuation and outlook
Royal Bank of Canada seems fairly valued based on PE and Price-to-Book valuation multiples. At the current market price, the Company trades at 2.05x book and 12.63x TTM EPS, compared to the peer averages of 1.70x and 11.34x.
The return on assets based on the last filling is at 0.96%, higher than the peer average of 0.83% and Return on Equity is 15.96%, ahead of the 15.27% peer average.
Source- Yahoo Finance
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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