Canadian bank stocks have gone through a roller-coaster ride in the last two years. However, rising hopes that the U.S. Federal Reserve and the Bank of Canada will soon start easing their monetary policy stance seem to be helping investors show confidence in bank stocks, which could be the primary reason for their recent recovery.
In this article, I’ll talk about Royal Bank of Canada (TSX:RY) and its fundamentals to explore whether it’s the right time to buy its stock for the long term.
Royal Bank of Canada stock’s roller-coaster ride
If you don’t know it already, Royal Bank of Canada is currently the largest Canadian bank based on its market cap of $175.6 billion, as its stock trades at $ 125.47 per share with a minor 1.4% year-to-date loss after losing 8.7% of its value in 2022. By comparison, the TSX Composite benchmark has risen 4.8% in 2023 so far.
Last year, a massive selloff in Canadian stocks across sectors, especially high-growth tech stocks, began after central banks in the United States and Canada started rapidly raising interest rates to fight inflationary pressures in the post-pandemic era. As higher interest rates made the economic outlook grimmer with tougher borrowing conditions, bank stocks also started tanking, with investors being worried about the bank sector’s short-term earnings growth outlook.
Although Royal Bank stock began the calendar year 2022 on a positive note by trading positively in the first quarter, it fell sharply in the next two quarters after rapidly rising interest rates started affecting its profitability. Even as higher interest rates drove the largest Canadian bank’s net interest income higher, lower insurance premiums, investment, and fee income took a toll on its non-interest income, leading to a 1.4% YoY (year-over-year) decline in total annual revenue for its fiscal year 2022 (ended in October 2002).
The calendar year 2023 hasn’t been much different for Royal Bank stock, as multiple rate hikes continued to take a toll on its investors’ sentiments, driving it down by 13% in the first 10 months of the year. Nonetheless, RY stock staged a spectacular recovery in November 2023 by posting 10.7% gains for the month amid rising expectations of a pause in interest rate hikes.
But will this rally in RY stock continue?
After posting dismal results in the fiscal year 2022, Royal Bank’s latest annual results look encouraging. In its fiscal year 2023 (ended in October 2023), the lending giant’s total revenue rose 14.6% YoY to $56.1 billion with the help of strong gains in non-interest income and continued strength in net interest income. Despite the negative factors like the slowing economic growth and rising interest rates inflating its provisions for credit losses during the year, Royal Bank managed to post a 1.7% YoY positive growth in its adjusted annual earnings to $11.38 per share.
Although macroeconomic challenges aren’t completely over yet, I expect Royal Bank’s financial growth trends to improve in the coming years as we have already started seeing early signs of easing inflation, which should encourage central banks to ease their monetary stance.
Considering that, RY stock looks cheap to buy for the long term, as it’s still down 6.5% from its 2021 closing level, despite the recent recovery. Also, its annualized dividend yield of 4.4% makes it even more attractive for long-term income investors.
