The Motley Fool

Why Canadian Banks Will Continue to Thrive

As fourth-quarter and year-end results are released from Canadian banks, we see their strength and the reasons why they will continue to be essential parts of investors’ portfolios.

Royal Bank of Canada (TSX:RY)(NYSE:RY) reported a 24% increase in net income, but after adjusting for its share of the gain on the sale of its Moneris operations, the increase in net income was 15% — still a very strong result.

This increase was driven by strength across the board in all segments, except for insurance. The Personal and Commercial Banking segment, which had improved credit quality due to the strengthening oil price in its Canadian operations, saw a 25% increase in net income for the quarter and a 24% increase for the year.

Wealth Management increased 8.6% in the quarter but over 40% for the year due to asset inflows. The interest rate hikes that the Fed has been instituting will benefit this segment. And Capital Markets was strong with a 37% increase in the fourth quarter due to strong investment banking performance due to strength in the oil patch and higher fixed-income trading.

The net interest margin was lower in the quarter, although we would have expected that higher rates would have improved this number. This is the impact of the impaired loan portfolio that was acquired, and as this runs off, we will see the expected increase in net interest margins that come along with interest rate increases. Going forward, the interest rate sensitivity is as follows: every 25-basis-point increase in rates will translate into a $50 million benefit.

Turning to the company’s Tier 1 Capital Ratio, which measures its financial health, we can see continued improvement, as it now stands at 12.6%. So the bank remains very well capitalized while still seeing strong growth.
The bank’s ROE this quarter was a strong 18%, and the stock trades at a P/E ratio of 14.2 times 2016 earnings and 13.3 times 2017 expected earnings with an EPS growth rate of 6.6% expected in 2017 and a recently hiked dividend yield of 3.6%. Royal Bank shares have a one-year return of 40%.

Going forward, CEO Dave McKay will continue to lead the company’s investment in technology and in leveraging the huge amounts of data the bank is in possession of. As an example, MyAdvisor was recently launched, which digitally connects clients with advisors. And while there is an environment of increased regulation, increased geo-political uncertainty, and a frothy Toronto real estate market, the bank will continue to take measures to grow while minimizing the risk in its business.

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Fool contributor Karen Thomas has no position in any stocks mentioned.

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