Royal Bank of Canada (TSX:RY)(NYSE:RY) continues to trade near its all-time highs and investors who have been sitting on the sidelines are wondering if it is still safe to buy the stock.
Let’s take a look at the current situation to see if Royal Bank belongs in your portfolio.
Earnings strength
Royal continues to deliver solid results, despite warnings from all the big banks that they are facing difficult market conditions.
In its Q1 2015 earnings statement Royal reported record profits of $2.4 billion, a solid 17% gain over the same period last year. Royal gets revenues from a variety of segments and the diversification is a big reason for the strong performance.
Canadian personal and commercial banking operations continue to be the backbone of the business, representing about half of the company’s earnings. Despite some of the concerns around the Canadian housing market and weakness in the oil patch, the retail operations are doing well.
Canadian banks are masters at getting customers to pay more fees. As costs go up, the banks just find new ways of offsetting them through increased charges.
For example, many of Royal’s clients are going to pay more fees beginning in June because the company is adjusting the rules on a number of accounts.
Currently, customers with various savings accounts are not hit for fees when they make payments on loans and mortgages because these don’t count toward the debit transaction tally. That is set to change, and some clients will have to cough up an additional fee when they make these payments.
When you consider the number of accounts that could be affected, that’s a nice pop to the bottom line. If you are a customer, it can be frustrating. As a shareholder, you are all smiles.
Retail banking is the still the bread-and-butter operation, but Royal has a large capital markets segment that continues to perform well, and the company has built a strong insurance division that now accounts for 9% of earnings.
Another area of interest for investors is Royal’s big bet on wealthy Americans. The company recently entered an agreement to buy California-based City National Corp. for US$5.4 billion. The deal provides Royal with a strong platform to expand its wealth management and commercial banking business in the U.S.
Dividend growth
Royal increased its dividend by eight cents when it announced the Q1 earnings. The new payout of $3.08 per share yields about 3.9%. Investors should continue to see regular increases, although the 10-year annualized growth rate of 11% might slow down.
Risks
Royal’s energy exposure only accounts for about 1.5% of its total loan book, so investors shouldn’t be too concerned about troubles in the oil patch. The bank finished Q1 with $194 billion in Canadian residential mortgages. About 19% of the mortgages are located in Alberta, which is a bit higher than its peers.
If the Canadian housing market crashes, Royal will get hit, but the company is more than capable of riding out some tough times.
Competition in the mobile banking sphere might be the biggest concern for all the banks. Silicon Valley’s largest players are going after a piece of the payment-fee pie, and investors should keep a close eye on how that is going to play out in Canada.
Royal is investing heavily in mobile payment technology to stave off the competition, but the trend in using phones to make purchases is an important one to watch.
Should you buy Royal Bank?
Royal trades at a reasonable 11.5 times forward earnings and 2.2 times book value. As a long-term investment, Royal Bank is still a solid pick.
