Royal Bank (TSX: RY) is the largest financial institution in Canada by market capitalization. The bank is also the top stock on the S&P/TSX Composite Index by market cap. Canadian investors of all stripes should be interested in the trajectory of Canada’s top financial institution. Where will Royal Bank stock be in five years? Should investors be optimistic? Let’s dive in.
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How has Royal Bank performed over the last year?
Shares of Royal Bank have climbed 7.8% month over month as of close on Thursday, January 4, 2024. That vaulted its stock performance into positive territory in the year-over-year period. Royal Bank stock has now increased 3.8% compared to the same period in January 2023. Readers can see more of its recent performance, as they toggle the interactive price chart below.
Where do Canadian banks stand as we approach the middle of the 2020s?
The first half of this decade has provided major challenges and opportunities for investors in the Canadian financial space. Royal Bank and its peers were forced to contend with a generational pandemic in the opening months of this new decade. Domestic and global markets were throttled in February and March 2020. However, the Bank of Canada (BoC) and its central bank peers in the developed world moved quickly to push forward radical monetary and fiscal stimulus.
Royal Bank stock, for example, fell from a triple-digit price point to under $80 in the second half of March 2020. The bank stock was back above the $100 mark by the middle of November of that same year.
Canada’s top financial institutions have also been tested in the aftermath of the COVID-19 pandemic. Radical spending gave way to runaway inflation. Indeed, inflation rates rose to levels not seen in decades. This spurred the BoC to pursue its most aggressive interest rate tightening policy since the early 2000s. Royal Bank and its peers have seen profit margins improve due to higher rates, but investment and credit growth have been hindered in this climate.
Fortunately, there is optimism in early 2024. BoC Governor Tiff Macklem said that interest rates were likely to come down this year.
Should investors be happy with Royal Bank’s recent earnings?
Royal Bank unveiled its fourth-quarter (Q4) and full-year fiscal 2023 earnings on November 30, 2023. Canada’s top bank reported adjusted net income of $16.1 billion in Q4 2023 — up marginally compared to the prior year. Meanwhile, adjusted diluted earnings per share (EPS) rose 2% year over year to $11.38.
The bank also included its full-year business segment performance. For the full year, Royal Bank reported a 1% earnings dip in its Personal & Commercial Banking segment. It attributed that dip to an increase in provisions on performing and impaired loans. Moreover, Royal Bank’s Wealth Management segment suffered a 24% earnings drop for the full year, which the bank also attributed to higher staff costs and professional fees. Insurance also suffered a 6% earnings dip for the full year.
For the full year, Royal Bank achieved 23% earnings growth in its Capital Markets segment. It attributed this gain to lower taxes that reflected changes in the earnings mix. Moreover, Royal Bank achieved improved revenue in Corporate & Investment Banking and Global Markets.
Where will Royal Bank stock be in five years?
Canadian banks have largely weathered the storm of the pandemic and the most recent interest rate tightening cycle. Central banks will aim for a soft landing as rates start to come down in 2024. Royal Bank should be a beneficiary of this transition in 2024 and beyond. Investors hungry for opportunities to open this year should consider this top bank stock today.
Shares of Royal Bank currently possess a price-to-earnings ratio of 12. That puts this top bank stock in favourable value territory at the time of this writing. In Q4 2023, Royal Bank announced a quarterly dividend of $1.38 per share. That represents a 4.1% yield at the time of this writing. The bank has delivered dividend growth for 12 straight years, making it a Dividend Aristocrat.
