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Royal Bank of Canada: Should You Buy, Sell, or Hold?

Royal Bank of Canada (TSX:RY)(NYSE:RY) just released strong Q1 2015 earnings and investors are wondering if fears about revenue growth are overblown.

Let’s take a look at the current situation to see if Royal deserves a spot in your portfolio.

Earnings snapshot

Royal reported record results in Q1 2015, as earnings topped $2.4 billion, a 17% year-over-year increase compared to Q1 2014.

Return on equity for the quarter was 19.3%, supported by strong results in all areas of the business.

For the 12 months ending with January 31, personal and commercial banking accounted for 51% of earnings. Capital markets contributed 23%, wealth management added 12%, insurance delivered 9%, and investor and treasury services chipped in the remaining 5% of earnings.

Canada supplied 64% of revenue in the past 12 months, while U.S and international revenues contributed the other 36%.

Royal’s recently announced US$5.4 billion acquisition of City National sends a strong message to investors that the company is looking to its U.S.-based wealth management operations to drive growth moving forward.

Risks

The crash in oil prices has pundits worried about the potential impact on Royal’s energy-exposed businesses.

So far, Royal’s credit quality remains strong. Loss provisions on credit cards, mortgages, personal loans, and small business loans are all sitting at low levels.

The Canadian residential mortgage portfolio was $194 billion at the end of Q1 2015. Uninsured mortgages accounted for 60% of the portfolio, and 19% of the mortgages were located in Alberta.

Royal Bank is closely monitoring its Alberta-based exposure. On the Q1 2015 conference call, Chief Risk Officer Mark Hughes told analysts the bank has not yet seen any stress in the portfolio, but some clients are drawing on their lines of credit.

The drawn-loan exposure to the oil and gas sector only accounts for 1.5% of Royal Bank’s total loan book.

Hughes said the company has stress tested both the wholesale and retail portfolios at $45 oil. The company has also analyzed the potential effects of a significant increase in Canadian unemployment, a national downturn in the real estate market, and a recession in Alberta. Based on an extreme scenario, Royal believes its potential losses would be manageable, and would still sit within the company’s risk comfort zone.

Dividends

Royal just raised its quarterly dividend by two cents to $0.77 per share. The company has increased the distribution by more than 50% in the past four years.

What should investors do?

Royal’s stock has risen almost 7% in the past month, so the easy money on the latest run has already been made. Earnings headwinds in Canada will probably slow down growth in the near term, and Royal’s increased focus on capital markets and wealth management means revenues could be more volatile going forward.

Royal Bank is a solid long-term investment, but the stock has enjoyed a big run since the lows of Great Recession. At this point, the company is probably a hold.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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