Royal Bank of Canada (TSX:RY)(NYSE:RY), along with the other Canadian banks, have been taking it on the chin lately. The stock is now off nearly 8% from its high as the pessimism over Canada’s banks continues to grow.
Many investors are turned off by the Canadian banks following the meltdown of Home Capital Group Inc. (TSX:HCG), which reminded investors that the Canadian housing market is overheated and the possibility of a collapse could be in the cards. The Canadian housing market is definitely frothy, especially in Vancouver and Toronto, but I don’t think it makes sense to dump shares of the Big Six Canadian banks after Home Capital Group fell off a cliff.
The mortgages in the Big Bank’s portfolios are far less risky than the subprime ones which many alternative lenders own. The general public is concerned about the high levels of household debt and sky-high housing prices, but these concerns are already baked in to the stock.
Royal Bank of Canada owned $244 billion worth of Canadian residential mortgages at the end of Q1 2017, 46% of which are insured. Even if a housing correction were to occur, it would have to be a catastrophic meltdown to have a big impact on the stock price of Royal Bank.
A violent meltdown isn’t the only way the Canadian housing market can cool off. A slow and steady, mild cool down is also a likely scenario, and this will not cause the big banks to plummet as many investors fear.
Sure, there’s a degree of systematic risk, but I think it’s blown out of proportion, and the current sell-off in the Canadian banks is nothing more than an entry point for long-term investors looking to beef up the cores of their portfolios.
Royal Bank of Canada wants a bigger slice of the U.S. investment banking pool
Royal Bank of Canada hopes to grab as much as 4.5% of the pool of U.S. investment banking sometime over the next three years. The management team is pushing hard to expand into the U.S., which is a market I believe will enjoy many tailwinds over the next few years thanks to a pro-business agenda put forth by President Trump.
You’ve probably heard that President Trump’s agenda may be in jeopardy if he gets impeached over the recent scandal involving Russia. I think the chance of impeachment is quite low, but, regardless, stocks will continue to be volatile, especially stocks with a considerable amount of U.S. presence that stand to benefit from the Trump administration’s proposed agenda.
Royal Bank of Canada, and all the other Canadian banks, are starting to look like value plays again, so I’d recommend picking up shares on the way down. Keep in mind that volatility spiked following the Trump turmoil, so I’d be cautious, but be on the lookout for any further dips to buy on.
Stay smart. Stay hungry. Stay Foolish.
