Why Royal Bank of Canada Fell 3% in September

Shares of the Royal Bank of Canada have fallen close to 3% in the last month. But its financials remain solid, making it a top bet for long-term investors.

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One of Canada’s largest companies, Royal Bank of Canada (TSX:RY)(NYSE:RY) fell over 3% in the last month compared to the 2.6% decline of the TSX. The equity markets have been choppy due to a variety of reasons that include a slower-than-expected economic recovery, rising inflation rates, the threat of higher bond yields, as well as the financial crisis surrounding China’s real estate giant Evergrande.

We can see that investors were wary of multiple macro-economic factors, weighing heavily on an overvalued stock market that was poised for a slight correction.

Despite the minor pullback in the stock markets, the S&P 500 has gained close to 40% since the start of January 2020. This performance has been quite outstanding given equities all around the world entered bear market territory in March 2020 due to the COVID-19 pandemic.

Royal Bank of Canada has been volatile

Shares of Canada’s biggest bank have remained volatile in the last two years, as they fell from $109 in February 2020 to less than $80 a month later. Its currently trading at $126, valuing RY stock at a market cap of $179.6 billion.

Royal Bank of Canada and several other banking peers saw a sharp decline in stock prices at the start of the pandemic on the back of rising unemployment rates and a worldwide economic recession. However, support from the federal government in the form of grants and benefit payments as well as a low-interest-rate environment allowed the banking sector to stage an impressive recovery in the last 18 months.

Now, as economic recovery gains pace, Royal Bank of Canada is well positioned to continue to derive outsized gains in Q4 of 2021 and beyond. In the last decade, RY stock has gained over 200% in dividend-adjusted returns and is a top TSX stock for long-term investors.

RY reported strong Q3 results

In the fiscal third quarter of 2021 that ended in July, the Royal Bank of Canada reported a net income of $4.3 billion. This was 34% higher than its net income of $1.1 billion in the year-ago period. Diluted earnings per share also rose 35% year over year to $2.97 in Q3.

Royal Bank of Canada’s results in Q3 included the release of provisions on performing loans that totaled $638 million due to improvements in credit quality as well as an improved economic outlook.

Its earnings in business segments including Personal & Commercial Banking, Capital Markets, and Wealth Management increased year over year due to a positive impact of lower provisions.

Net income from the wealth management business surged 31% due to higher average-fee-based client assets and net sales. Insurance earnings grew 8% to $234 million due to the impact of new longevity reinsurance contracts, lower claims costs, and the favourable impact of actuarial adjustments.

At the end of Q3, its CET1 ratio was 13.6% which was a sequential increase of 80 basis points due to a decrease in risk-weighted assets and internal capital generation. Risk-weighted assets were down by $12.6 billion while RY’s liquidity coverage ratio stood at 125%, indicating a surplus of $69.2 billion.

We can see that Royal Bank of Canada’s improving financials, low valuation, and a tasty forward yield of 3.4% make it one of the top stocks on the TSX right now.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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