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Should You Buy Royal Bank of Canada (TSX:RY) Stock After BoA’s Earnings?

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Last week, Bank of America (NYSE:BAC) released its second-quarter earnings. EPS beat analyst estimates by a country mile, while provisions for credit losses (PCLs) grew by $4 billion. Results were mixed overall, and analysts had varying takes on whether the quarter was good or bad.

At this point, BAC’s Q2 results have been well covered in the media. What has gotten comparatively less coverage is these earnings’ implications for Canadian banks. Canada’s economy is inextricably linked to that of the U.S. and is exposed to many of the same risk factors. COVID-19 lockdowns and missed mortgage payments are two of the big ones.

By looking at how BAC fared in Q2, we may get a hint of how Canadian banks are likely to do in their next quarter. A great place to start would be by looking at Royal Bank of Canada (TSX:RY)(NYSE:RY), as its recent results are similar to those reported last week by BAC.

Royal Bank’s earnings

Before going any further, I should clarify that the Royal Bank has already released its “Q2” earnings. It might seem like BAC’s Q2 earnings are now useless for forecasting RY’s. However, Canadian banks have an unusual fiscal year that ends on October 31. As a result, RY’s Q2 mostly overlaps BoA’s Q1. This means BAC’s earnings are more current.

RY’s most recent earnings did look pretty similar to BAC’s Q2 earnings. The Royal Bank reported a 54% decline in net income, compared to a 58% decline in pre-tax income for Bank of America. The Royal Bank reported a 138 basis point increase in PCL; Bank of America reported a $4 billion increase in PCL. Both banks saw only modest revenue declines. Both saw increases in deposits.

So, it’s a pretty similar overall picture. However, BAC’s earnings cover a more recent period and could thus tell us how things are likely to go for RY in Q3.

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What’s in store for Q3?

Two big takeaways from Bank of America’s Q2 earnings were that PCLs continued increasing in Q2 and revenue actually declined compared to Q1. That latter fact isn’t surprising. Bank of America’s first quarter ended in March, so it only had one month of COVID lockdowns in its Q1 results. The Royal Bank’s Q2 ended on April 30, so it reported more of the damage earlier.

For this reason, I wouldn’t expect the Royal Bank to increase PCLs by as much or have revenue decline as much, as Bank of America did in Q2. Apart from that, BAC and RY had very similar results in their most recent quarter. This points to a banking sector that’s having to cover a lot of potential losses but is seeing only modest damage apart from that.

Foolish takeaway

Canadian and American banks aren’t identical. But they’re similar enough to warrant comparisons. By comparing Bank of America to Royal Bank in their most recent quarters, we can see that both banks are facing similar risks. Overall, it’s a mixed picture. Both banks are increasing their PCLs, but are performing well apart from that. Overall, I wouldn’t hesitate to buy Royal Bank stock if you’re looking for solid dividend income.

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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 Andrew Button has no position in any of the stocks mentioned.

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