Royal Bank of Canada (NYSE: RY) is the largest Canadian bank with a market capitalization of more than 140 billion US dollars. The company operates in 34 countries, in addition to Canada and the United States, and serves more than 17 million customers.
About company
The Royal Bank of Canada is traded in US dollars on the St. Petersburg stock exchange, and the bank discloses its financial results in Canadian currency. To eliminate confusion, all data, presented in this review, were also converted at the average rate for the reporting periods into US dollars.
The company's activities are divided into five business segments:
- Personal and commercial banking in the total income of the bank takes 36%.
- Wealth Management - 27%.
- Capital Markets - 19%.
- Insurance - 14%.
- Investor and Treasury Services - 4%.
Personal and commercial banking. Provides a wide range of financial products and services to individuals and businesses to solve everyday banking, investment and financial tasks. Main products: deposit accounts for individuals, enterprises and other organizations, various forms of lending, certificates of deposit and all kinds of monetary transactions, such as withdrawing funds, replenishment of the account and others. Key segment data:
— total base — more than 14 million customers;
- for the last 90 days more than 7 million active users used Royal Bank of Canada digital communication channels;
– the activities of the current direction are carried out in Canada and in the USA together with the countries of the Caribbean.
In Canada, the bank occupies a leading position in terms of market share, and it also has the largest network of branches and the largest number of ATMs. In the total revenue of this segment, this country accounts for 95%: personal banking 72%, and commercial 23%. USA and Caribbean countries 5% in total income.
Wealth management. This is a global business, serving individual and institutional clients in key financial centers. The company offers a full range of investment, trust, banking, credit and other wealth management solutions.
Over 650 billion US dollars are managed by the bank, of which $215 billion is owned by institutional investors, more than 245 billion dollars - to wealthy individuals, and $190 billion to mutual funds.
Geographically, this division is divided into three parts. The first is the American office, occupies a share 51% in overall results. The second is the Canadian office, his share of everything 27%. And the third is an international office with 22% in overall results.
Capital Markets. This segment offers investment products to corporations, institutional investors, asset managers, governments and central banks around the world. The company provides secured/unsecured lending services, municipal finance, fixed income, currencies and commodities, actions with shares and many other operations. Key segment data:
- the total number of clients is more than 15.5 thousand, who are served in 14 countries;
- lowest ROE = 11,7% compared to all other segments. Royal Bank of Canada Total ROE for 2020 - 14,2%;
- Geographically, the business is divided into four parts: USA since 53% share in overall results, Canada - 27%, Europe - 15%, Australia and Asia — 6%.
Insurance. This division offers clients a wide range of life insurance advice and solutions., health, housing, cars, travel, welfare, as well as business insurance services. In addition to the Canadian branch, there is also an international, which mainly operates in the reinsurance and retrocession markets. Key segment data:
- serves over 5 million clients;
- the highest profitability 21,7% compared to all other segments. Royal Bank of Canada Total ROE for 2020 - 14,2%;
- life and health insurance 51% in overall results, long-term investment funds with insurance (annuity and segregated fund deposits) — 47%, real estate insurance 2%.
Investor and Treasury Services. The current business provides various services to protect clients' assets, maximizing liquidity and risk management across jurisdictions. Key data:
- smallest segment, which manages assets totaling USD 3.6 billion;
- the division's revenues are geographically divided into four parts: North America - 38%, Europe without the UK 33%, United Kingdom — 16%, Asia - 13%.
Dividends
Royal Bank of Canada distributes about 40-50% of net profit to dividends, making payments four times a year - in each quarter. The Bank has been increasing its dividend payments in Canadian currency since 2011, but when viewed in US dollars, not everything is so beautiful. For example, payment for 2015 decreased compared to 2014 against the background of strong growth of the US currency.
Management view
About third quarter results 2021. “Royal Bank of Canada continued to deliver on its commitment to deliver long-term stability to our clients and shareholders this quarter.. Thanks to a diversified business and a disciplined approach to risk management, we managed to show strong results, which allowed the bank to make significant investments in its technological development. We remain cautiously optimistic about the macro outlook and are focused on supporting clients as the economy continues to recover.”, — Dave McKay, President Royal Bank of Canada.
ABOUT 2022. “We still see short-term global growth challenges, related to the coronavirus, inconsistent global vaccine introduction, disruption to supply chains, growing geopolitical risks and ongoing global travel restrictions. However, we are encouraged by the data, that we see on credit cards. And that means, that we are well positioned to leverage our scale and built-in business model across our core segments, to significantly increase profits in a more favorable economic scenario, which will include raising interest rates, higher credit card rates and growth in business lending", — Dave McKay, President Royal Bank of Canada.
On rising interest rates. "We expect, that the rise in short-term interest rates on 25 basis points would increase our net interest income from Canadian banks by 90 million, and income from asset management in the United States will add even more 80 million dollars in this scenario", — Rod Bolger, financial director.
About reserves. “The current increase in cases of the delta strain could affect the timing and pace of economic recovery and lead to, that outstanding loans will exceed our long-term average in 2022. However, we maintain sufficient reserves for the expected increase in delinquencies in 2022 and remain very positive about further progress in the economic recovery over the next 12-24 months.”, — Graham Hepworth, risk director.
Financial results
Royal Bank of Canada demonstrates strong financial performance, since 2016, they have been increasing annually by more than 6%. In 2020, the pandemic and quarantine restrictions could not stop growth for a long time, which, after a quarter of a fall, immediately returned to its previous pace.
Financial results for the last 6 years, billion dollars
| Revenue | Net profit | Capital | ROE | |
|---|---|---|---|---|
| 2016 | 28,448 | 7,707 | 52,605 | 16,3% |
| 2017 | 31,284 | 8,791 | 56,792 | 17% |
| 2018 | 32,751 | 9,538 | 61,432 | 17,6% |
| 2019 | 34,850 | 9,742 | 63,275 | 16,8% |
| 2020 | 36,293 | 8,794 | 66,665 | 14,2% |
| 9м2021 | 29,238 | 9,527 | 76,975 | 19,6% |
Comparison with competitors
| P / E | P / BV | ROE | |
|---|---|---|---|
| Royal Bank of Canada | 11,72 | 1,87 | 19,6% |
| J. P. Morgan Chase | 10,66 | 1,73 | 18% |
| Bank of America | 13,89 | 1,31 | 14,3% |
| Morgan Stanley | 14,03 | 1,74 | 13,8% |
| Wells Fargo & Company | 12,94 | 0,98 | 13,6% |
| Citigroup | 6,80 | 0,72 | 13% |
Arguments for
System-forming bank. Due to its size and large number of customers, Royal Bank of Canada has become an important bank for the Canadian financial system., which included it in a special list - Schedule I Bank. The list is used to classify only Canadian banks, that are not associated with foreign organizations. This classification should protect consumers and lead to the growth of the entire financial sector in Canada..
Strong business. Since 2016, Royal Bank of Canada has been profitable for its shareholders every quarter., on average, earning for the reporting period about 2.4 billion US dollars.
High profitability. Royal Bank of Canada outperforms leading US banks in terms of ROE. Over the past six years, the average return on equity for a Canadian company has been 17% versus 14-15% for American competitors.
Great dividend yield. Due to double-digit profitability and 50% distribution of Royal Bank of Canada net profit shows a high, as for a growing company, dividend yield in 3,4%.
Argument against
Appreciation. Historically, Royal Bank of Canada multiples are higher than those of leading US companies: P Morgan Chase, Bank of America, Morgan Stanley, Wells Fargo & Company and Citigroup.
What's the bottom line?
Royal Bank of Canada is a leading Canadian bank with high margins, strong business model and good dividend yield. The company may appeal to long-term investors, who need country-specific diversification of their portfolio.
The ideal moment to buy Royal Bank of Canada is the valuation at 1,5 capital or current 81,05 $. Why in 1,5, not in 1, as it was in the review about J. P. Morgan Chase? Because a Canadian bank hasn't been cheaper in a single quarter since 2016. 1 Capital, its minimum value P / BV = 1,11 was achieved in the first quarter of 2020.
