Royal Bank of Canada (TSX: RY)

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.

• Stable Earnings: The Bank has reported a stable earnings performance in the recent past, which indicates strong operational resiliency. Moreover, Year to Date (YTD) net income for FY 21 stood at CAD 7.9 billion compared to YTD earnings of CAD 5.0 billion in FY2020. The company also reported an elevated book value per share along with Strong Leverage and Liquidity Ratios over the years.

Source: Company

• Strong Capital Position: Record internal capital generation deployed to drive strong organic growth empowered bank to improve its CET1 ratio to 12.8% in Q2 2021, up from 11.7% in previous corresponding period. The bank also witnessed a growth on the sequential basis, where its CET1 ratio improved from 12.5%, which is remarkable.

Source: Company

• Growing adaption 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 customers. In Canada, the bank has been able to secure end-to-end account opening through the digital channel, which has resulted in an impressive growth for the bank. Digital usage continued to grow with 90-day Active Mobile users increasing 9% from a year ago to 5.3 million, and active digital users grew 4% to 7.8 million against previous corresponding period. Digital adoption increased to 56.8%.

Source: Company

• Healthy dividend distribution: The bank has delivered a stable dividend payout over the years, which indicates strong financials. From FY10 to FY20, the company offered a dividend payout of 47%. Dividend payment grew at a CAGR of 8% at the same time. Moreover, at the last closing price, the stock was offering a healthy dividend yield of 3.436%.

20Y Dividend Distribution

Financial overview of Q2 2021

Source: Company

• In Q2 2021, the bank reported its revenue of CAD 11,618 million, increased by 12% compared to the previous corresponding period on the back of healthy performance from every segment.

• On a Y-o-Y basis, the bank increased its pre-provision, pre-tax earnings by 11% to CAD 5,090 million.

• The bank registered higher net income, which increased by 171% to CAD 4,015 million compared to the previous corresponding period. On a sequential basis, it grew by 4%.
• In the reported period the bank also improved its ROE to 19.4%.

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 would take a toll on profitability.

Valuation Methodology Illustrative: Price to Earnings

Stock recommendation

Despite a recent slowdown in the economy coupled with knee jerk reaction across the global equity markets, the bank reported net income of CAD 4,015 million in Q2 2021, up 171%, with strong diluted EPS growth against the previous corresponding period. The company maintained a strong capital position with a common equity tier 1 ratio of 12.8%, which improved from 11.7% in Q2FY20. The company focuses on continued growth across investment capabilities and innovative solutions for both institutional clients and retail investors, which augurs well for improved business prospects. Therefore, based on the rationales discussed above and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 125.71 on June 24, 2021. We have considered National Bank of Canada, U.S. Bancorp, etc., as the peer group for the comparison.

One-Year Technical Price Chart (as on June 24, 2021). Analysis by Kalkine Group

Bank of Montreal (TSX: BMO)

Bank of Montreal (TSX: BMO) is a diversified financial-services provider based in North America. The bank operates via 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 earnings 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 growth of 11% on a Y-o-Y basis, while U.S. Personal & Commercial segment has shown an increase of 22% for the same. The Wealth Management segment grew 53% with positive operating leverage, and the Capital Market segment grew 72% 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 193% in adjusted net income to CAD 2,095 million in Q2 2021, against CAD 715 million in Q2 2020. The group also witnessed this strong trend on a sequential basis, which is commendable. 

Source: Company

• Improved Common Equity Tier 1 Ratio: Strong internal capital generation from retained earnings growth facilitated bank to improve its CET1 ratio to 13.0% in Q2 2021, up from 12.4% in Q1 2021.

• Steady dividend distribution: The company has reported consistent dividend distribution, backed by strong fundamentals. Recently, the bank declared a quarterly dividend of CAD 1.06 per share, which is equivalent to an annual dividend of CAD 4.24 per common share, payable on August 26, 2021. Moreover, at the last closing price, the stock was offering a healthy dividend yield of 3.319%, which looks decent considering the current interest rates.

20Y Dividend Distribution

 Financial overview of Q1 2021

Source: Company

• In Q2 2021, the bank reported revenue, net of CCPB at CAD 6,359 million, increased by 16.4% compared to CAD 5,461 million in Q2 2020.

• The bank minimized its provision for credit losses to CAD 60 million in the reported quarter compared to CAD 1,118 million in the previous corresponding period.
• Income before income tax increased at CAD 1,890 million, compared to CAD 827 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 1,303 million against CAD 689 million in pcp.
  

Risk associated with investment

The COVID-19 pandemic has heightened risks of higher non-performing assets for FY2021. 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 

Stock recommendation

The bank continued to deliver very strong results with all its businesses performing well. For the first half of the year, adjusted pre provision pre-tax earnings stood at CAD 5.5 billion increased 27% from the previous corresponding period, driven by revenue growth of 11% reflecting the benefits of the diversified business model, and very strong operating leverage. Furthermore, the organization entered the second half of the year with strong momentum. The group focuses on continuity to build a strong, competitive bank, allocating capital to businesses that are positioned to grow and deliver strong returns, which would further improve its performance. Additionally, its capital position continues to strengthen with a CET1 ratio of 13%, positioning BMO well for growth. Therefore, based on the rationales discussed above and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 127.76 on June 24, 2021. We have considered Bank of Nova Scotia, Royal Bank of Canada, Toronto-Dominion Bank, etc., as the peer group for the comparison.

One-Year Technical Price Chart (as on June 24, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

change any time and readers of the reports should not consider these stocks as advice or recommendations later.

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