ROYAL BANK OF CANADA (Toronto symbol RY; www.rbc.com) is Canada’s largest bank, with $867.5 billion of assets.
Royal recently paid $3.7 billion for Ally Financial’s Canadian operations. This business mainly provides car loans through over 1,600 dealerships across the country. It also offers no-fee savings accounts and consumer and business loans.
If you exclude unusual items, such as the cost of integrating this business, Royal earned $2.0 billion in the quarter ended April 30, 2013. That’s up 13.4% from $1.7 billion a year earlier.
Earnings per share rose 14.2%, to $1.29 from $1.13, on fewer shares outstanding. The Ally business contributed to Royal’s latest earnings. As well, more of Royal’s borrowers are repaying their loans on time. The bank set aside $288 million for potential bad loans, down 17.2% from $348 million a year earlier.
In addition, Royal Bank recently raised the interest rate on its mortgage loans, which will probably spur other lenders to do the same.
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Revenue rose 12.2%, to $7.8 billion from $6.9 billion. Revenue at Royal’s main retail banking division (which supplies 41% of the bank’s overall revenue) rose 5.6%.
Revenue from securities trading (20%) rose just 0.4%, as lower trading volumes offset higher fees from corporate lending. Royal’s other divisions performed well. Revenue from wealth management (17%) rose 10.3%, as rising stock prices pushed up the value of this business’s assets under administration. Insurance revenue (16%) jumped 34.6%, mainly due to gains on this division’s investment portfolio. The investor and treasury services business’s revenue (6%) soared 60.3%, because Royal purchased 50% of a joint venture that it didn’t already own.
The stock trades at 10.8 times the bank’s projected fiscal 2013 earnings of $5.47 a share. The $2.52 dividend yields 4.3%.
In the latest edition of The Successful Investor, we examine the impact of the Ally Financial acquisition on Royal Bank’s outlook. We also look at whether increased loan demand in Canada is sufficient to offset lower loan volumes in some of Royal’s international operations. We conclude with our clear buy-sell-hold advice on the stock.
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The Chretien government prevented the big Canadian banks from undertaking mergers back in the 1990s. Do you think that was the right decision? Do you believe the post-merger banks would have been a better investment than the big five? Would they have offered better service? Let us know what you think.
