Royal Bank of Canada Dividend Increase Deflecting Some Financial Weakness?

Royal Bank of Canada (TSX: RY) saw its net income and Return on Equity fall during its third quarter

SmallCapPower | August 24, 2017: Royal Bank of Canada (TSX: RY) Wednesday reported its third-quarter financial results, with net income coming in lower by 3% YoY at $2,796 million. Excluding an after-tax gain of $235 million from the sale of home and auto insurance manufacturing business, Q3 net income was up 5%. Royal Bank also hiked its dividend by 5%, to $0.91 a share – higher than Street expectations. Credit quality remained strong, with a provision for credit losses (PCL) ratio of 0.23%. Royal Bank of Canada reported a Common Equity Tier 1 (CET1) ratio of 10.9%, implying it is well capitalized.

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Royal Bank witnessed double-digit earnings growth YoY in Wealth Management, Insurance and Investor & Treasury Services. Unadjusted earnings per share were down 2% YoY at $1.85, while revenue fell 2.6%, coming in below the $10 billion mark. Royal Bank of Canada reported adjusted earnings per share of $1.89, which excludes last year’s gain on sale beating consensus estimate by $0.02, according to Bloomberg LP. Net interest margin was unchanged from a year ago at 1.69%.

Earnings per share (unadjusted) missed the consensus analyst estimate as Royal Bank’s Capital Markets division saw its net income fall 4% year over year to $611 million as a result of lower revenue from fixed-income trading. RBC’s Return on Equity (ROE) also fell 170 basis points in the third quarter to 16.3%.

The dividend increase by Royal Bank seemed to have caught the market by surprise, sending its stock price up more than 1% Wednesday to close at $93.01. CIBC also raised its dividend this quarter, which could prompt Canada’s other Big Banks to do the same. Banks in Canada have conservative payout ratios, which gives them room to increase their dividend when they see fit.

Shares of Royal Bank have risen just 2% year to date, mirroring the performances of Canada’s other Big Banks, following worries about the overheated housing market and increased personal debt levels in Canada.

Royal Bank of Canada stock trades at a price to book multiple of 2.06x and a trailing price to earnings multiple of 12.66x.

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