Royal Bank of Canada (RY)

Equity
Canada
Financial Services

RISK

RETURN

Key risk factors

Low price volatility

Resilient to price shocks

Limited default risk

Key return factors

Solid dividends

Good growth

Slightly overvalued vs peers

Corporate actions & dividendsDividend of USD 1.041 with an ex-date of 25 Jul 2024.

Company profileRoyal Bank of Canada operates as a diversified financial service company worldwide. The company's Personal & Commercial Banking segment offers checking and savings accounts, home equity financing, personal lending, private banking, indirect lending, including auto financing, mutual funds and self-directed brokerage accounts, guaranteed investment certificates, credit cards, and payment products and solutions; and lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer financing, trade products, and services to small and medium-sized commercial businesses. This segment offers financial products and services through branches, automated teller machines, and mobile sales network. Its Wealth Management segment provides a suite of advice-based solutions and strategies to high net worth and ultra-high net worth individuals, and institutional clients. The company's Insurance segment offers life, health, home, auto, travel, wealth, annuities, and reinsurance advice and solutions; and business insurance services to individual, business, and group clients through its advice centers, RBC insurance stores, and mobile advisors; digital, mobile, and social platforms; independent brokers; and travel partners. Its Investor & Treasury Services segment provides asset servicing, custody, payments, and treasury services to financial and other investors; and fund and investment administration, shareholder, private capital, performance measurement and compliance monitoring, distribution, transaction banking, cash and liquidity management, foreign exchange, and global securities finance services. The company's Capital Markets segment offers corporate and investment banking, as well as equity and debt origination, distribution, advisory services, sale, and trading services for corporations, institutional investors, asset managers, private equity firms, and governments. The company was founded in 1864 and is headquartered in Toronto, Canada.

Valuation: Slightly overvalued

Multiple

TTM

NTM

P/E

13.70

14.30

PEG

2.60

P/B

1.80

1.60

P/CR

2.40

P/RIBPT

2.00

P/IBPT

10.50

Considering past and projected metrics, the stock is moderately 'expensive' compared to its peers. Specifically, the stock is fairly valued on P/E, neutral on P/IBPT, reasonably priced on P/RIBPT. Editor's note: P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR = Net interest income + Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT = Core revenue -- Operating expenses + Non-recurring income. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT = Core revenue -- Operating expenses.

Performance: Mixed

Over the past six months, the stock has consistently climbed, resulting in 11% total increase. When compared to its international counterparts in the same sector and industry (as shown above), the stock has exceeded their performances, leading by 7ppts in total. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Neutral

The average target price is 144 and suggests 4% downside potential. Usually, this means a SELL recommendation among investment firms, or a recommendation to decrease one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 168.0. This translates into 12% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 118.0. This is equivalent to 22% downside potential in the worst case.

Profitability: Modest

RoE

Royal Bank of Canada reported a return on equity (RoE) of 13.0% in the last 12 months, down from 13.5% in FY23. The market consensus projects a RoE of 13.1% in FY24, again ahead of the peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 0.8% in the last 12 months, a decrease from 0.8% in FY23. The market analysts predict that RoA will be 0.8% in FY24, again weaker than the peers.

C/I

In the last 12 months, the cost-to-income ratio (C/I) declined to 51.0%, above the peers. The consensus estimate for FY24 for CI is 26.6%, however, this time below the peers.

Growth: Good

EPS

Core revenue

IBPT

RIBPT

RY.TO reported revenue of CAD 64 233mn in the last 12 months, up 2% from FY23. The institution earned CAD 22 115 mn of interest before provisioning and taxes (IBPT) in the trailing 12 months (TTM), growth of 5% from FY23 The dynamics of more stable income, as measure by recurring income before provisioning and taxes (RIBPT), were rather similar. EPS grew 2% from FY23 to CAD 10.89. Market expects EPS to reach CAD 11.54 in FY24.The core revenue growth has been moderate in the last several years (positive-to-neutral), while IBPT has been growing slowly in the recent years. This all contributed to slow EPS growth (neutral). The RIBPT trend is rapidly growing, way better than that of IBPT. We emphasize the highly volatile dynamics of RIBPT. On the positive side, IBPT dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been strong and significantly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Limited

The solvency (credit quality) of RY is strong. The credit profile rests on (a) a substandard capital position, (b) relatively poor asset quality, (с) a very strong corporate governance framework, (d) below average earnings power and cost efficiency, and (e) its slightly weak liquidity profile. We draw special attention to the rather low capital adequacy.

Volatility: Low

In normal market circumstances, RY is not overly volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible. Finally, it may be affected by inherently volatile sector.

Stress-test: Resilient

In highly turbulent market conditions, RY is not overly volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low. At the same time, due to inherently volatile sector, its maximum losses could be low.

Selling difficulty: Small

RY has above average trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually quite stable and becomes extremely unfavourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.