Bets against Canada’s banks are ramping up. Last week, it was revealed that TD Bank, Canada’s second-largest lender, was the most shorted bank in the world. In other words, hedge funds and institutional investors were betting more than US$4.2 billion (CA$5.7 billion). Should this fact concern investors in Canada’s banking sector? Are other giants, like RBC (TSX: RY), at risk too? Here’s a closer look.
Canada’s banking concerns
There are two reasons why foreign investors are worried about Canada’s large banks. One is the ongoing banking crisis. Major banks from California to Switzerland have failed in recent weeks. Governments have stepped in to protect depositors, but the equity and bondholders were not bailed out. Now, investors are worried that this crisis is contagious and could spread to other parts of the world.
Canada seems vulnerable because much of our banking is focused on home loans and out homes are egregiously overvalued. Investors are betting that the housing market will plummet and drag the banking sector down along with it.
However, analysts and industry experts believe these fears are overblown. They believe Canada’s banks are in a better position than their global peers. That’s why major banks like RBC may avoid the same hurdles as others.
RBC outlook
RBC is much more than Canada’s biggest mortgage lender. It’s also one of the largest wealth management, commercial lenders, and investment banks in the world. Put simply, the business is highly diversified and not as exposed to Canadian housing as some believe.
Only 60% of RBC’s revenue was generated in Canada, as of January 31, 2023. Only 53% of earnings, meanwhile, were generated from the personal and commercial banking operations. The rest was generated in either Capital Market services (21%) or the Wealth Management division (21%). 5% of earnings came from insurance premiums.
The company is also reasonably valued and comfortably profitable. RBC declared a return on equity of 16.4% in 2022. The company generated $15.8 billion in net earnings over that period and paid out just 50% of it in dividends. The stock trades at a price-to-book ratio of 1.8, which is also justified for a large-scale bank.
Put simply, RBC is in a strong position which is probably why short-sellers haven’t targeted it. In fact, investors could see any weakness as a buying opportunity in the months ahead.
Bottom line
Canada’s housing market is vulnerable, but its largest banks may be better protected. RBC is well diversified and well capitalized. It’s not as vulnerable as some of its global banking peers. That’s why investors are not keen on betting against it.
If you’re looking for a robust source of passive income, this dividend stock should certainly be on your radar.
