What’s Next for Royal Bank of Canada?

With a new CEO coming soon, is Canada’s largest bank able to sustain its momentum?

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

When Dave McKay takes over as CEO of Royal Bank of Canada (TSX:RY)(NYSE:RY), he’ll have a lot to live up to. Canada’s largest bank completed yet another strong quarter, with adjusted net income of $2.2 billion, up 5% year-over-year. Adjusted earnings per share came in at $1.47, beating the general analyst estimate by five cents. RBC also raised its dividend from $0.67 to $0.71 per share, an increase of 6%. The bank’s shares now yield nearly 4%.

Canadian banking continues to perform well, accounting for about half of RBC’s earnings for the quarter. But growth is clearly difficult to come by; the division grew by only 4% year over year. This was despite an increased contribution from Ally Canada, a leading auto finance business. The good news is that both housing and the Canadian consumer continue to perform well, despite repeated warnings of an overpriced real estate market and high consumer debt levels.

But what separates RBC from the other Canadian banks is its capital markets and wealth management businesses, both of which continue to perform well. Capital markets net income increased by 9% from a year ago, while wealth management increased earnings by 3% year-over-year, despite some abnormally high credit losses.

Ever since the financial crisis, many of the world’s largest banks have been retreating from the capital markets and wealth management businesses in an effort to conserve (or even raise) capital. RBC did not emerge from the crisis entirely unscathed, but like most of the Canadian banks, performed far better than its global peers. And as other banks cut back, RBC has been aggressively filling the void. RBC now ranks 11th on the global investment banking tables, and is the sixth largest wealth manager with over $1 trillion in assets under management.

Foolish bottom line

RBC’s global ambitions do not come risk-free. In fact Moody’s recently issued a report that sounded an alarm about the capital markets businesses of RBC, Bank of Montreal (TSX:BMO)(NYSE:BMO) and National Bank (TSX:NA). The report estimates that over 70% of RBC’s capital markets business comes from outside Canada, exposing the bank to “large and unpredictable losses”.

But it’s hard to argue with the bank’s success over the past five years, and the bank remains an excellent way to bet on a continued global economic recovery. With Mr. McKay, who has been running the bank’s retail banking unit, becoming CEO in just a few months, shareholders are hoping he is able to maintain RBC’s momentum.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Profit dial turned up to maximum
Tech Stocks

$1,000 Invested in Constellation Software Stock Would Be Worth This Much Today

Constellation Software (TSX:CSU) is trading above $2,000 today. Why this stock is so expensive, and is it worth buying?

Read more »

Dividend Stocks

Passive Income: 3 Top Canadian Stocks to Buy for Monthly Dividends

Companies such as Pembina Pipeline and Killam Apartment REIT pay investors monthly dividends, making them top bets for income-seeking investors.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »

Gold medal

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Are you looking for growth stocks that could be huge winners in the next decade? Here are three top picks!

Read more »

Retirees sip their morning coffee outside.

Retirees: How to Make Over $95/Week in Passive Income TAX FREE!

Canadian retirees who are hungry for passive income should look to snag stocks like Sienna Senior Living Inc. (TSX:SIA) in…

Read more »

Man holding magnifying glass over a document

Where to Invest $500 in the TSX Right Now

Given the massive correction, long-term investors can start buying stocks like Shopify and goeasy to outpace the broader markets by…

Read more »

Aircraft wing plane

Air Canada Stock Is a Fantastic Deal Right Now

Air Canada (TSX:AC) is a great stock to own, as market fear turns into hope amid falling recession fears.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern

Beginner Investors: Get Passive Income by Investing in REITs!

You can get passive income by investing in REITs like Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »