Royal Bank of Canada

Royal Bank of Canada (TSX: RY) is one of the two largest banks in Canada. The group is offering personal and commercial banking, wealth management services, insurance, corporate banking, and capital markets services.

Key Highlights:

• Diversified Revenue base with healthy CET ratio: The company has a well-balanced portfolio and is less dependent on a particular segment, which is impressive. The company’s reported improved income from Wealth Management and Capital Markets segments amidst the persisting low-interest rate scenario. Furthermore, the company maintained its Common Equity Tier 1 (CET1) ratio at 12.5%, which improved from 12% in Q1FY20.         

Source: Company Presentation        

• Growing adaptation of Digital channels: In the recent past, most of the business have opted for digital services, as it has a higher penetration and is easily accessible by the consumers. In Canada, the company has been able to secure end-to-end account opening through the digital channel, which has resulted in impressive growth for the bank. Notably, the company’s mobile clients have benefitted from actively reading more than 1.5 billion financial insights, applying the predictive analytics which helped them to manage their finances. Moreover, higher digital adoption has helped the company for cross selling its products and services.

Source: Company Presentation

• Bullish Technical: The stock of RY is hovering above the short term as well as long-term moving averages of 50-days, 100-days and 200-days, indicating a bullish trend in the stock. Moreover, the stock generated a price returns of ~25% and ~46% in the last nine months and one year, respectively.                

Source: Refinitiv (Thomson Reuters)

Q1FY21 Financial Highlights:

• RY announced its quarterly results, wherein the company reported revenue of CAD 12,943 million, up 1% over the previous corresponding period (pcp). The muted performance was primarily due to the lower interest rate which resulted in a lower interest and dividend income (CAD 7,236 million v/s CAD 10,238 million in pcp), partially offset by lower interest expense.
• Non-interest expense stood higher at CAD 6,542 million v/s CAD 6,378 million in pcp, primarily due to higher Human resources expense (CAD 4,288 million v/s CAD 4,060 million in pcp), higher Equipment expense (CAD 493 million v/s CAD 462 million in pcp), partially offset by lower Communications expense (CAD 213 million v/s CAD 250 million in pcp).
• Net income stood at CAD 3,847 million, higher than CAD 3,509 million in Q1FY21.                

Q1FY21 Income Statement Highlights (Source: Company Presentations)

Risks: Persisting lower interest rates is likley to put pressure on the net interest margin. The group may witness a higher non performing loans if COVID-19 continue to affect the economic growth.

Valuation Methodology (Illustrative): Price to Book Value

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

Stock Recommendation:

In Q1FY21, the insurance segment reported a solid 11% y-o-y growth at CAD 201 million, supported by improved claims experience coupled with higher favorable investment-related experience, while lower new longevity reinsurance contracts and lower international life volumes remained a drag.

Source: Company Presentation

Notably, the stock of RY carries an impressive dividend yield of ~3.5%, which looks decent considering the current interest rate scenario. We have valued the stock using the Price to Book value based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like National Bank of Canada, Intact Financial Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 122.84 on May 19, 2021.

One-Year Price Chart (as on May 19, 2021). Source: Refinitiv (Thomson Reuters)

Bank of Montreal

Bank of Montreal (TSX: BMO) is a diversified financial-services provider which has a presence across North America. The bank operates through four business segments, namely, Canadian P&C banking, U.S. P&C banking, wealth management, and capital markets.

Key Highlights:

• An Income Play: The company has a solid history of constant dividend payment, irrespective of the general economic situation. The stable dividend payment is backed up by solid cash flows. Moreover, during the last fifteen years, the company reported a 6% CAGR growth in its dividend payment, which is encouraging. Moroeover, at the last traded price, the stock was offering a dividend yield of ~3.48%, which looks decent considering the current interest rate scenario.                         

Dividend History (Source: Company Presentation)

• Elevated Net Income suggests business resiliency: Despite the ongoing economic jolt, the bank reported a consistent growth in its bottom-line, which is encouraging. Due to the sluggish economic scenario, most of the organizations are failing to keep pace with the changing macro dynamics, while on the other hand, BMO’s elevated net profit is a sign of business resiliency.

Source: Company Presentation

• Strong Technical Indicators: The stock of BMO has been in a strong uptrend and closed above the long-term moving averages of 100-days, 150-days and 200-days, indicating a bullish trend. Additionally, the stock appreciated ~58% and ~87% in the last nine months and one year, respectively.

Source: Refinitiv (Thomson Reuters)

• Balanced Portfolio: The company operates across four key segments, namely Canadian P&C (~33% of revenue), BMO Capital Markets (~23%), U.S. P&C (~23%) and BMO Wealth Management (~21%). The above suggests that the company’s income is well diversified and is not dependent on a particular stream, which is a key positive.                                       

Source: Company Presentation

Q1FY21 Financial Highlights:

• BMO announced its quarterly result, wherein the company reported net revenue of CAD 6,374 million, improved from CAD 6,031 million in the previous corresponding period (pcp). The increase was driven by improved performance from all the segments.
• Expenses remained under check and stood at CAD 3,613 million as compared to CAD 3,669 million in pcp. The improvement was primarily attributable to lower Premises and equipment costs and a decline in travel and business development expense, professional fees, etc., which was partially offset by higher employee compensation.
• Net Income soared to CAD 2,017 million, from CAD 1,592 million in Q1FY20.
• CET1 ratio stood higher at 12.4% v/s 11.9% in Q4FY20 and 11.4% in Q1FY20, which is a key positive.                                   

Source: Company Presentation

Risks: Financial Institutions and banks performance is correlated to the economic conditions, and lower interest rates coupled with the sluggish loan repayment capability of the consumers may dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to Book based

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

Stock Recommendation:

Despite the ongoing lower interest rate scenario, the bank has performed well and reported a net interest income of CAD 3,578 million, as compared to CAD 3,388 million in Q1FY20. Moreover, the company’s capital market segment has grown handsomely in the recent past, driven by robust returns from the equity markets. Net income from the above segment stood at CAD 483 million, as compared to CAD 356 million in pcp.                           

Snapshot of Net Profit of Capital market Segment (Source: Company Presentation)

We have valued the stock using the Price to Book value based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like National Bank of Canada, Canadian Western Bank etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 122.0 on May 19, 2021.

One-Year Price Chart (as on May 19, 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.