Royal Bank of Canada

Royal Bank of Canada (TSX: RY) is one of the two largest banks in Canada. It is a diversified financial services company, offering personal and commercial banking, wealth-management services, insurance, corporate banking, and capital markets services. The bank is concentrated in Canada, with additional operations in the U.S. and other countries.

Key highlights 

• Stable Earnings: The Bank has reported a stable earnings performance in the recent past, which indicates strong operational resiliency. Moreover, in Q1 2021 it reported higher net income, which stood at CAD 3.8 billion compared to CAD 3.5 billion in the previous corresponding period. The company also reported an elevated book value per share along with Strong Leverage and Liquidity Ratios over the years.

Source: Company 

• Robust performance from the U.S. operations segment: The bank’s U.S. segment represented 20% or over USD 2 billion of total bank’s net income and 25% of total bank’s revenue over the last 12 months. Meanwhile, in Q1 2021, the bank’s U.S. earnings were up 22%, and revenue was up 10% Y-o-Y, primarily driven by capital markets and wealth. management.

Source: Company 

• Strong Capital Position: Record internal capital generation deployed to drive strong organic growth empowered bank to improve its CET1 ratio to 12.5% in Q1 2021, up from 12.0% in Q1 2020.

Source: Company 

• Healthy dividend distribution: The bank has delivered a stable dividend payout over the years, which indicates a strong financial flexibility. From FY10 to FY20, the company offered a dividend payout of 47% and dividend payment grew at a CAGR of 8% at the same time. Moreover, at the last closing price, the stock was offering a dividend yield of 3.70%, which is decent amid a low interest rate environment.

Source: Refinitiv, Thomson Reuters 

Financial overview of Q1 2020 (In millions of CAD)

Source: Company 

• In Q1 2021, the bank reported its revenue of CAD 12,943 million, increased by 1% compared to the previous corresponding period. On a sequential basis, the revenue grew by 17%, which is appreciable.

• On a Y-o-Y basis, the bank’s pre-provision, pre-tax earnings increased by 3% to CAD 4,995 million.

• The bank registered higher net income, which increased by 10% to CAD 3,847 million compared to the previous corresponding period. On a sequential basis, it grew by 19%. 

Risks associated with investment

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

Valuation Methodology (Illustrative): Price to Earnings 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Despite a recent slowdown in the economy coupled with knee jerk reaction across the global equity markets, the organization reported net income of CAD 3,847 million in Q1 2021, up to CAD 338 million or 10%, with strong diluted EPS growth of 11%, against the previous corresponding period. The company maintained a strong capital position with a common equity tier 1 ratio of 12.5%, which improved from 12% in Q1FY20. The company focuses on continued growth across investment capabilities and innovative solutions for both institutional clients and retail investors. Therefore, based on the rationales discussed above and valuation, we recommend a "Hold" rating at the closing price of CAD 116.60 as of April 20, 2021. We have considered Toronto-Dominion Bank, Bank of America Corp, U.S. Bancorp, etc., as the peer group for the comparison.

1-Year Price Chart (as on April 20, 2021). Source: Refinitiv (Thomson Reuters)

Bank of Montreal

Bank of Montreal (TSX: BMO) is a diversified financial-services provider based in North America, operating four business segments: Canadian personal and commercial banking, U.S. P&C banking, wealth management, and capital markets.

Key highlights

• Strong earnings across diversified businesses: The bank witnessed strong gains across its diversified businesses. On the back of good revenue momentum and expense management, its Canadian Personal & Commercial segment registered a Pre-Provision Pre-Tax earnings (PPTE) growth of 4% on a Y-o-Y basis, while U.S. Personal & Commercial segment has shown an increase of 24% for the same time. PPTE from the Wealth Management segment grew 18% with positive operating leverage, and in the Capital Market segment grew 34% with record U.S earnings.

• A rising trend in Net Income: The Bank’s diversified and resilient model with a strong capital position and good momentum across its businesses, along with a decrease in expenses and lower provisions for credit losses, helped the bank to report an increase of 27.3% in net income to CAD 2,017 million in Q1 2021, against CAD 1,584 million in Q4 2020. The group recorded an increase in net income for the last three quarters on sequential basis. 

Source: Company

• Improved Common Equity Tier 1 Ratio: Strong internal capital generation from retained earnings growth facilitated bank to improve its CET1 ratio to 12.4% in Q1 2021, up from 11.9% in Q4 2020.

Source: Company

• Steady dividend distribution: The company has reported consistent dividend distribution, backed by a stable financial metrics. Recently, the bank declared a quarterly dividend of CAD 1.06 per share, payable on April 26, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of 3.76%, which is decent amid low interest rate environment.

Source: Refinitiv, Thomson Reuters

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the bank reported revenue, net of CCPB at CAD 6,374 million, increased by 5.7% compared to CAD 6,031 million in Q1 2020.

• The bank minimized its provision for credit losses to CAD 156 million in the reported quarter compared to CAD 349 million in the previous corresponding period.

• Income before income tax increased at CAD 2,605 million, compared to CAD 2,013 million in the previous corresponding period. The rise was mainly due to higher revenue and controlled non-interest expenses.

• On the back of the above-discussed points, the bank’s net income enhanced to CAD 2,017 million, against CAD 1,592 million in pcp.

Risk associated with investment

The COVID-19 pandemic has heightened risks of higher non-performing assets. Further, a low-interest-rate environment and increased chances of loan default are likely to put pressure on the bank's performance, as the lower interest rate would drag NIM, and heightened uncertainties may lead to a rise in provisioning.

Valuation Methodology (Illustrative): Price to Book Value

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation 

Diversified operations across businesses and geographies positioned for resilience and growth, operating momentum in each business, and improved efficiency empowered the bank to report strong Q1 2021 results with solid revenue growth and net income. Moreover, the U.S. segment is going strong and driving earnings growth, contributing over 40% of total bank earnings this quarter. The management expects the momentum to continue in the near term. Further, the bank's balance sheet remain strong with capital position continues to strengthen with CET1 ratio of 12.4%, positioning BMO well for growth. Also, the stock is offering a decent dividend yield amid a low interest rate environment. Therefore, based on the rationales discussed above and valuation, we recommend a "Hold" rating at the closing price of CAD 112.67 as on April 20, 2021. We have considered Bank of Nova Scotia, Royal Bank of Canada, National Bank of Canada, etc., as the peer group for the comparison.

1-Year Price Chart (as on April 20, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.