Lowering Our Fair Value Estimate for Royal Bank of Canada Slightly After Q2 Earnings

Strategist

Eric Compton

Royal Bank of Canada is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation's banking deposits. The bank derives two thirds of its revenue from Canada, with the rest primarily coming from the United States. It has done an admirable job of expanding its nonbank lines of business, running efficient banking operations, and generating some of the best returns for shareholders in the industry. We believe RBC should remain one of the dominant Canadian banks for years to come, even as a more difficult macro backdrop pressures earnings growth in the medium term.

We expect Royal Bank of Canada to remain a steady player in its retail and commercial Canadian banking operations. It also remains a major player in global capital markets. We expect this segment to continue to be a strong contributor to net income, and if anything, capital markets have been countercyclical for the bank during the pandemic as earnings have soared for the unit. 

The wealth-management segment also earns strong returns on equity, and large inflows have led to a top market position. RBC remains a top asset manager and gatherer in Canada, and is also experiencing outsize growth from City National, where cross-selling and client integration efforts have gone well. The banks’ distribution networks are arguably the most dominant in Canada, and the bank has the largest amount of assets under management among the Canadian banks.

We like RBC's growth strategy in the U.S. through City National, focusing on wealth and commercial clients. We believe this is a much more focused strategy than its previous attempts at growth in the U.S., and it is paying dividends. While exposure to the U.S. isn't as great right now given some of the industry turmoil, deposit and earnings pressure has been manageable.

We are relatively neutral on RBC's latest announced acquisition of HSBC Canada. It is a decent franchise with a decent client base and will allow RBC to gain some incremental share in Canada, however, we believe client retention risks, the price paid, and regulatory risks make this a roughly neutral move.

Business Strategy & Outlook

With superior operating efficiency, leading share in the Canadian banking market, moaty nonbank businesses, and the ability to primarily operate in the favorable Canadian banking environment, Royal Bank of Canada is worthy of a Wide Morningstar Economic Moat Rating, in our view.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see switching costs in the Canadian system being driven by a tightly regulated oligopolistic market structure, which limits excess competition, therefore stabilizing product pricing and giving customers less incentive to switch banks. We see cost advantages as stemming from three primary factors: a low-cost deposit base, excellent operating efficiency, and conservative underwriting. Regulatory costs must also be considered. We view the Canadian banking environment as offering systemic cost advantages for the banks under its domain. These advantages manifest themselves in the form of lower operating costs, lower credit costs, lower regulatory costs, and lower absolute levels of and better diversification of risks, all of which allow the banks to achieve greater risk-adjusted returns.

In our view, Royal Bank of Canada has a wide moat because it has superior market share in the advantageous Canadian banking environment, superior operating efficiency, and exposure to more moaty nonbank businesses. The bank has consistently operated with one of the best efficiency ratios in Canada, partially through superior operational execution, and partially due to the highest noninterest income proportion among the Canadian banks. The bank is also one of the two largest banks in Canada (along with Toronto Dominion) and has dominant market share in many categories, including number-one or number-two share in all key retail banking products. It is also one of the dominant investment banks in Canada and a top-15 player worldwide. Once you reach the scale and reputation required to source and execute deals, offerings, and advice that Royal Bank of Canada has, we believe the investment banking business becomes moatier. It also has the largest amount of assets under management and assets under administration among the Canadian banks, giving it the largest exposure to this higher-margin, fee-based business, and a larger share of clients’ overall wealth. 

We believe the Canadian banking environment offers systemic cost advantages that lead to returns above the cost of capital, allowing the main banks operating under its jurisdiction to possess moats. 

Barriers to entry are very high for the Canadian banking system. Existing regulations prevent foreign competition, as non-Canadian residents may not own more than 25% of the shares of a bank unless approved by the government (preventing foreign takeover), and foreign banks can only operate in Canada under certain restrictions (preventing significant direct foreign competition). Domestic competition is also controlled, as Canada’s banking system historically developed to favor a few large banks controlling the majority of the domestic market, and this is actively enforced through the handling of chartering by the federal government exclusively. Additionally, the rejection of merger proposals in 1998--between Royal Bank of Canada and BMO, and between Toronto Dominion and Canadian Imperial Bank of Commerce--created a precedent where no further consolidation between the main Canadian banks will be accepted by the regulators. 

Having larger banks helps to spread out fixed costs across a larger operating base, increasing operating efficiency, as the four largest Canadian banks are all bigger than the largest U.S. regional bank. The Canadian banks, because their branch networks spread out through all of Canada, arguably have some of the most powerful distribution networks in Canada. This offers cost advantages via lower customer acquisition costs. In addition, the banks are involved in nearly every major financial product, including asset management, wealth management, insurance, investment banking, and a variety of other consumer and commercial banking products and services. Bigger scale, powerful distribution networks, a multitude of products, and diversification of business lines lead to economies of scope in addition to the economies of scale already achieved.

We believe a more protective and efficient regulatory system also leads to cost advantages, primarily through risk reduction. Less fragmented and well-integrated banking systems, like the Canadian system, have tended to be more stable over time, reducing risk. Also, the Canadian regulators must only primarily monitor and develop relationships with the big six Canadian banks, which is much easier than trying to monitor the thousands of banks that exist in the U.S., for example. This leads to more collaboration and cooperation between regulators and banks, as well as greater institutional memory and more coordinated and easily implemented responses if strains begin to appear in the system. Regulators also help to control pricing in the market at times, such as on mortgage products, helping to reduce the potential for pricing wars to gain market share at the expense of underwriting standards. Canadian regulation also makes it more difficult for bad credit to be issued in many ways, including mandatory insurance and standards on riskier mortgage loans, not having a GSE-like government-subsidized mortgage securitization market, and forcing banks to hold more of the risk on their own balance sheets. These factors help contribute to better absolute risk reduction in the system as well as regulatory economies of scale.

The Canadian banks are also more geographically diversified on average than, for example, the majority of U.S. regional banks, which often have concentrations in individual states or local economies. This diversifies credit risk, lowering the overall risk for each individual bank. Canada’s system of higher taxes, more social safety nets, and other complex factors have also led to a more robust and stable middle class that contributes to economic and political stability, further reducing systemic risk.

Combine all of these factors, along with explicit government subsidies on deposit insurance and mortgage insurance, as well as the implicit subsidy of being too big to fail domestically (all big six Canadian banks are labeled as domestic systemically important banks at a minimum), and we believe an environment exists where excess returns for banks are almost certain to exist in Canada.

Wide

Economic Moat

Royal Bank of Canada

City National Bank is an American financial institution headquartered in the City National Plaza in Los Angeles, California. It has been a wholly owned subsidiary of the Royal Bank of Canada since 2015. It offers a full complement of banking, trust and investment services through 75 offices, including 16 full-service regional centers, in Southern California, the San Francisco Bay Area, Nevada, New York City, Minneapolis, Nashville, Washington, DC and Atlanta with a total of $35.6 billion in total assets.

City National Bank

Royal Bank of Canada engages in the provision of banking and financial solutions. It operates through the following segments: Personal and Commercial Banking, Wealth Management, Insurance, Investor and Treasury Services, Capital Markets, and Corporate Support. The Personal and Commercial Banking segment deals with a broad suite of financial products and services in Canada. The Wealth Management segment offers a comprehensive suite of investment, trust, banking, credit, and other wealth management solutions to institutional and individual clients through its distribution channels and third-party distributors. The Insurance segment refers to a range of life, health, home, auto, travel, wealth, group, and reinsurance products. The Investor and Treasury Services segment comprises of asset services and a provider of cash management, transaction banking, and treasury services to institutional clients worldwide. The Capital Markets segment covers banking, finance and capital markets to corporations, institutional investors, asset managers, governments, and central banks around the world. The Corporate Support segment consists of technology and operations services. The company was founded by J. W. Merkell, Edward Kenny, T. C. Kinnear, James B. Duffus, William Cunard, John Tobin, George P. Mitchell and Jeremiah Northup in 1864 and is headquartered in Toronto, Canada.

Earnings data Q4 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Morningstar

Banco Santander

High-interest rates are here to stay for the foreseeable future. Financial services stocks promise to be some of the most affected by the Fed's pronouncement.

Ticking Time Bombs: 3 Financial Services Stocks to Dump Before the Damage Is Done

Today, I will explain the reasons for including the Royal Bank of Canada in The Dividend Income Accelerator Portfolio. I will also show you why I have selected Royal Bank of Canada over competitors such as The Toronto-Dominion Bank, Bank of Montreal, and The Bank of Nova Scotia. With the inclusion of Royal Bank of Canada, we have raised The Dividend Income Accelerator Portfolio's Weighted Average Dividend Yield [TTM] to 3.89%.

Royal Bank Of Canada: The Fourth Buy For The Dividend Income Accelerator Portfolio

Bank of America

Barclays

Citigroup

Goldman Sachs

JPMorgan Chase & Co

Morgan Stanley

Wells Fargo

A U.S. federal judge on Thursday said American cities may pursue class-action claims accusing eight large banks of driving up interest rates they paid on a popular municipal bond.

Eight big banks must face US cities' bond collusion claims

Bank of Montreal

Bank of Nova Scotia

Canadian Imperial Bank of Commerce

Toronto-Dominion Bank

Certain value stocks, including REITs, utilities, and particular financials, have suffered in recent months. Canadian banks are ranked among the safest banks in the world and have not cut their dividends in nearly 200 years. These are the most dependable dividend stocks on earth. The current bear market in Canadian banks presents a buying opportunity with attractive yields and solid long-term growth prospects.

It's The Best Time In 3 Years To Buy Canadian Banks

Royal Bank of Canada is one of the country's largest banks, serving 17 million customers across 29 countries. The bank's financial performance is solid compared to the largest North American banks, with a strong return on assets and return on equity. RY's stock is currently undervalued, with the stock's fair value close to $126.

Royal Bank Of Canada: An Undervalued Banking Star

Royal Bank of Canada (NYSE:RY ) Barclays 21st Annual Global Financial Services Conference Call September 12, 2023 3:30 PM ET Company Participants Nadine Ahn - Chief Financial Officer Conference Call Participants John Aiken - Barclays John Aiken [Call starts abruptly] Ladies and gentlemen, we're going to carry on. I'm very pleased to have meeting on CFO of Royal Bank.

Royal Bank of Canada (RY) Barclays 21st Annual Global Financial Services Conference (Transcript)

Investors with an interest in Banks - Foreign stocks have likely encountered both Swedbank AB (SWDBY) and Royal Bank (RY). But which of these two companies is the best option for those looking for undervalued stocks?

SWDBY vs. RY: Which Stock Is the Better Value Option?

Royal Bank of Canada (NYSE:RY ) Scotiabank 24th Annual Financials Summit Call September 6, 2023 9:35 AM ET Company Participants Dave McKay - President and Chief Executive Officer Unidentified Analyst [Starts Abruptly] President and CEO of Royal Bank of Canada. Hi, Dave. Dave McKay Good morning.

Royal Bank of Canada (RY) Scotiabank 24th Annual Financials Summit (Transcript)

HSBC Holdings

Canada's Competition Bureau said on Friday Royal Bank of Canada's (RBC) proposed acquisition of HSBC's domestic unit for C$13.5 billion ($10 billion) is unlikely to substantially hurt competition.

Canada's antitrust agency favors RBC's $10 bln deal for HSBC unit

AAON

First American Financial

NetEase

One should consider stocks that have recently raised their dividend payments. Five such stocks are: AAON, FAF, TD, RY, NTES.

5 Stocks With Recent Dividend Hike Amid August Volatility

Royal Bank of Canada (RBC) warned of a softer economy ahead and plans to cut about 1,800 job after Canada's largest bank beat analysts' estimates for the third quarter on Thursday helped by cost cutting measures.

RBC plans job cuts after profit beat, TD misses on higher expenses

Royal Bank of Canada (NYSE:RY ) Q3 2023 Earnings Conference Call August 24, 2023 8:00 AM ET Company Participants Asim Imran - Head of IR David McKay - President & CEO Nadine Ahn - CFO Neil McLaughlin - Group Head, Personal & Commercial Banking Graeme Hepworth - Chief Risk Officer Conference Call Participants Sohrab Movahedi - BMO Capital Markets Doug Young - Desjardins Capital Markets John Aiken - Barclays Gabriel Dechaine - National Bank Financial Meny Grauman - Scotiabank Ebrahim Poonawala - Bank of America Paul Holden - CIBC Mario Mendonca - TD Securities Lemar Persaud - Cormark Securities Nigel D'Souza - Veritas Investment Research Operator All participants please stand by, your conference is ready to begin. Good morning, ladies and gentlemen, and welcome to RBC's Conference Call for the Third Quarter 2023 Financial Results.

Royal Bank of Canada (RY) Q3 2023 Earnings Call Transcript

Royal Bank (RY) came out with quarterly earnings of $2.13 per share, beating the Zacks Consensus Estimate of $1.99 per share. This compares to earnings of $1.98 per share a year ago.

Royal Bank (RY) Q3 Earnings and Revenues Beat Estimates

NEW YORK, NY / ACCESSWIRE / August 14, 2023 / Aegis Capital Corp. (www.aegiscapcorp.com) a full-service wealth management, financial services and investment banking firm is pleased to announce Mark Brewer has joined the firm as a Managing Director. Mark Brewer has over 30 years of experience in the financial services industry and managed in excess of $150 million in client assets.

Aegis Capital Corp. Announces the Hiring of a New Managing Director

Royal Bank of Canada , facing criticism from climate activists for its lending to oil and gas companies, is creating a new position in its senior executive ranks to implement an effective response to climate issues.

Royal Bank of Canada, criticized on climate, seeks executive to tackle issue

DNB Bank ASA

Investors looking for stocks in the Banks - Foreign sector might want to consider either DNB Bank ASA (DNBBY) or Royal Bank (RY). But which of these two companies is the best option for those looking for undervalued stocks?

DNBBY or RY: Which Is the Better Value Stock Right Now?

The Toronto-Dominion Bank and Royal Bank of Canada are set to release earnings in mid-to-late August, following strong Q2 results from U.S. banks. Canada's inverted yield curve could squeeze margins and impact profitability at these banks. Toronto-Dominion Bank has better capital, liquidity, and stable funding ratios than Royal Bank does.

Toronto-Dominion And Royal Bank: Canada's Yield Curve Inverts

Netflix

In the financial world, not all that glitters is gold. Take, for instance, the realm of blue-chip stocks, those large, reliable, and profit-generating juggernauts that usually radiate nothing but success.

3 Doomed Blue-Chip Stocks Destined for Disaster

Canada's finance ministry has extended the consultation period for Royal Bank of Canada's $13.5 billion proposed acquisition of HSBC's Canadian unit by 15 days due to a technical error that prevented the department from receiving some submissions by email.

Canada extends consultation period for RBC's $13.5 bln bid for HSBC unit

Apple

Activision Blizzard

Brookfield Renewable Partners

Brookfield Infrastructure

BlackRock

Canadian Natural Resources

Disney

Fortis

Home Depot

Magna International

Microsoft

Starbucks

SPDR S&P 500 ETF Trust

TELUS

Texas Instruments

Visa

My goal is to build a portfolio generating 4-5% in yield across 15 positions. My current yield is at 4.81%. All dividend growth is coming from the stocks and not from any additional capital being added to the account.

Adding More Of Telus - May Dividend Income Report

JPMorgan BetaBuilders Canada ETF

Enbridge

iShares MSCI Canada ETF

Franklin FTSE Canada ETF

Take a look into how the recent interest rate hike by the Bank of Canada affects the economy and ETFs to gain an advantage.

Tough Time Ahead of Canada ETFs?

During the U.S. Financial Crisis, Canadian banks were considered some of the strongest in the world. Since 2009, Canadian bank's business models have changed significantly. Today, Canadian banks have major issues.

Big Banks Have Massive Exposure: A Look At Canadian Banks

The Royal Bank of Canada is working to resolve a technical issue that is preventing transactions displaying for online and mobile banking clients, the bank said on Twitter.

RBC says resolving display issue with online, mobile banking

Royal Bank of Canada (NYSE:RY ) Q2 2023 Results Conference Call May 25, 2023 8:30 AM ET Company Participants Asim Imran - Head of Investor Relations Dave McKay - President and Chief Executive Officer Nadine Ahn - Chief Financial Officer Graeme Hepworth - Chief Risk Officer Neil McLaughlin - Group Head, Personal & Commercial Banking Doug Guzman - Group Head, Wealth Management and Insurance Derek Neldner - Group Head, Capital Markets Conference Call Participants Meny Grauman - Scotiabank Gabriel Dechaine - National Bank Financial Mario Mendonca - TD Securities Doug Young - Desjardins Capital Markets Ebrahim Poonawala - Bank of America Paul Holden - CIBC Lemar Persaud - Cormark Securities Joo Ho Kim - Credit Suisse Mike Rizvanovic - KBW Research Operator Good morning, ladies and gentlemen. Welcome to RBC's Conference Call for the Second Quarter 2023 Financial Results.

Royal Bank of Canada (RY) Q2 2023 Earnings Call Transcript

Deutsche Bank

Citi (C), Deutsche Bank (DB), HSBC, Morgan Stanley (MS) and Royal Bank of Canada (RY) have allegedly conspired in chat rooms to swap sensitive information on UK bonds between 2009 and 2013.

HSBC, Citi, 3 Others Likely to be Fined for UK Bond Collusion

News for Royal Bank of Canada Stock (RY)