What’s Next for Royal Bank Stock as the Economy Drifts?

Royal Bank of Canada (TSX:RY) has a lot of big things coming up in 2023.

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Royal Bank of Canada (TSX:RY) is one of Canada’s most beloved bank stocks. With a 150-year history, it has stood the test of time, not only surviving but thriving through the economy’s many ups and downs. Today, Royal Bank is Canada’s largest company by market cap and has a 4.3% dividend yield — a very enticing prospect for income investors.

In this article, I will explore the latest news about Royal Bank as well as some up-and-coming developments.

HSBC Canada buyout

By far the biggest recent news story from Royal Bank of Canada was the bank announcing its intent to buy HSBC Bank Canada from HSBC. Royal Bank will pay $13.5 billion to acquire HSBC’s Canadian assets. The deal will add $123.3 billion in assets to RY’s balance sheet and will also add about $309 million in quarterly net income. Or, rather, it will add that much net income if upcoming quarterly earnings look similar to last quarter’s earnings.

Because HSBC Canada operated as a subsidiary of HSBC, its information was never publicly reported in as much detail as we’d have for a standalone company. It’s hard to say what future quarters’ earnings will look like, but we do know that profit was trending upward as of the first quarter.

If Royal Bank closes its deal with HSBC, and if quarterly earnings are about $309 million, then RY is valuing HSBC Canada at 10.8 times earnings. This strikes me as a fairly reasonable valuation for a bank being wholly acquired. In the past, I was skeptical of TD Bank’s offer to buy First Horizon at 15.5 times earnings. The price Royal Bank is offering for HSBC Canada is much more modest. I think this deal is a pretty good one overall.

Possible interest rate hikes

Another big development that could affect Royal Bank this year is interest rate hikes. The Bank of Canada spent all of last year hiking interest rates; this year, it is continuing the hikes. The Bank’s governor Tiff Macklem noticed that progress had been made in taming inflation, which contributed to a pause last month. However, this month saw yet another 25-basis-point hike. Housing prices are once again trending upward across Canada, after spending all of 2022 on the decline. This fact could inspire the Bank of Canada to continue its rate hikes. Housing affordability is one of the Bank’s top priorities, as shelter costs are part of inflation.

If the Bank of Canada continues hiking interest rates, it could affect Royal Bank of Canada in several ways. On the positive side, Royal Bank would increase the interest rate it charges on loans, leading to higher interest income. On a more sour note, the bank’s treasury holdings would likely decline in value. Declining treasury bond prices were among the factors that caused several U.S. banks to fail this year. It’s unlikely that Bank of Canada rate hikes would cause a Canadian bank to fail, as Canadian banks are very strictly regulated. However, they could cause some liquidity issues, so Bank of Canada policy is something RY shareholders will want to keep an eye on.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Andrew Button has positions in the Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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