Royal Bank of Canada

Royal Bank of Canada (TSX: RY) is one of the leading banks in Canada and has a diversified financial product offering, which offers personal and commercial banking, wealth management services, insurance, corporate banking, and capital markets services. 

Key Updates:

• Stable Earnings: The company has reported a stable earnings performance in the recent past, which indicates strong operational resiliency. The company also reported a higher reserve and an elevated book value per share along with Strong Leverage and Liquidity Ratios over the years.         

(Source: Company Presentation)

• An income Play: The company has delivered a stable dividend payout over the years, which indicates strong cash flows despite economic cycles. During FY10 to FY20, the company delivered a dividend payout of ~47%. Dividend payment grew at a CAGR of 8% at the same time. At the last closing price, the stock of RY was offering a dividend yield of ~4.06% amid low interest rate environment.                    

Distribution Trend (Source: Company Presentation)

• Improved performance from the capital market segment: The company delivered a decent performance from the capital market segment, which posted CAGR 15% Average Assets from FY17 to FY20, despite the recent fall in the equity markets, which is noteworthy.

Source: Company Presentations

FY20 Financial Highlights:

• RY announced its yearly results, wherein the company posted Interest and dividend income of CAD 34,883 million, lower than CAD 41,333 million in FY19. Net interest income grew to CAD 20,835 million, from CAD 19,749 million, supported by a significantly lower interest expense (CAD 14, 048 million versus CAD 21,584 million in FY19).
• Total revenue stood at CAD 47,181 million, slightly higher from CAD 46,002 million in the previous financial year.
• Net income stood at CAD 11,437 million, slightly lower than CAD 12,871 million in FY19, due to a higher provision for credit losses (CAD 4,351 million versus CAD 1,864 million in FY19).

Income Statement Highlights (Source: Company Reports)

Risks: The banking system reflects the current health of any economy, and uncertain economic outlook may lead to higher provisions for losses and would take a toll on profitability.

Valuation Methodology (Illustrative): Price to Book based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

Despite a recent slowdown in the economy coupled with knee jerk reaction across the global equity markets, the stock appreciated ~10% and ~18% in the last six months, as investors were leaning towards stable businesses. The company maintained a strong capital position with a common equity tier 1 ratio of 12.5%, improved from 12% in Q3FY20. The company is focusing on continued growth across investment capabilities and innovative solutions for both institutional clients and retail investors, which augurs well for improved business prospects. We have valued the stock using Price to Book based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Toronto-Dominion Bank, Toronto-Dominion Bank etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 106.25 on December 9, 2020. 

RY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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