The U.S. banking crisis, which many hoped would be over in March, clearly is not over. Since March, we’ve seen First Republic fail and PacWest teeter on the edge of failure. It’s a difficult time for U.S. financial stocks. However, there are many great opportunities in the space as well. Because bank stocks are being sold off indiscriminately, there are many unjustly beaten-down stocks in the banking sector today, along with the rightfully beaten down. In this article, I will explore one TSX bank stock that could be a decent buy at today’s prices.
Royal Bank of Canada
The Royal Bank of Canada (TSX:RY) is Canada’s largest bank by market cap. It’s also one of Canada’s oldest banks, with a 160-year history.
Royal Bank operates in both Canada and the United States. In Canada, it is mainly known as a retail bank offering deposits and loans. In the U.S., it’s better known for investment banking and wealth management. Its wealth management business also operates in the Caribbean. More than 30% of Royal Bank’s earnings come from markets other than Canada, making RY a geographically diversified bank.
Decent earnings
In its most recent quarter, Royal Bank of Canada delivered “so-so” results. These results included:
- $4.3 billion in adjusted net income, up 4% year over year.
- $3.05 in diluted EPS, up 7%.
- A 12.6% return on equity (ROE).
- A 12.7% CET1 ratio. The CET1 ratio is cash plus equity divided by risk-weighted assets. Generally, it’s considered ideal for this ratio to be over 11%, and Royal Bank is comfortably within regulatory requirements here.
The quarter was not an amazing one by any stretch of the imagination. Many big banks grew earnings by 15% in the same period; RY’s quarter was underwhelming compared to that. However, it was a basically adequate quarter, showing that RY stock is relatively safe today.
A modest valuation
Another thing that RY has going for it today is a relatively modest valuation. I say “relatively” modest because it’s only modest compared to the markets as a whole. Compared to other banks, it’s a little pricey. At today’s prices, RY trades at:
- 11.6 times earnings.
- 3.7 times sales.
- 1.8 times book value.
- 5.8 times operating cash flow.
For a bank, this valuation is a little steep. In the wake of the U.S. regional banking crisis, it’s common for banks to trade somewhere between 8 and 10 times earnings today. Nevertheless, RY is much cheaper than the stock market as a whole, so it could still be a reasonably good buy compared to the alternatives.
Foolish takeaway
Banking can seem like a scary industry. Every few decades or so, you’ll see banks fail in groups, as depositors lose faith in them and rush to take their money out. It can make you wary to invest in the banking sector as a whole. But when we look at the facts, we can see that not all banks are really that risky. Stable, well-run banks often last for hundreds of years. Risk management is the name of the game in finance. If your bank knows what risk is and how to deal with it, you don’t need to worry about a doomsday scenario.
