Royal Bank of Canada (TSX:RY) just reported solid fiscal first-quarter (Q1) 2024 results. The stock is up more than 20% over the past four months, and investors who missed the surge are wondering if RY stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Royal Bank share price
Royal Bank trades for close to $132.50 at the time of writing compared to $108.50 in late October. The stock was as high as $147 in early 2022 after the big rally that occurred after the 2020 market crash.
Bank stocks came under pressure over the past two years, as investors worried that interest rate hikes by the Bank of Canada and the U.S. Federal Reserve would drive the economy into a deep recession as the central banks battle to get inflation under control. In Canada, inflation was down to 2.9% in January compared to 8% in June 2022, so progress is being made towards the 2% target.
Higher interest rates normally help banks generate higher net interest margins, but the steep increase that has occurred in rates over such a short timeframe is also putting businesses and households with high debt in a tough situation. The longer that rates remain at current levels, the more likely it is that the economy could slip into a deep recession, consumers cut spending, and companies reduce staff.
Economists broadly expect to see a soft landing for the economy. The rally in bank stocks that happened over the past four months occurred amid a sentiment shift in the markets from fears of higher rates to expectations of rate cuts in 2024.
Persistent inflation is still a risk, but the next move by the central banks will likely be to the downside. The timing is the big unknown.
Royal Bank earnings
Royal Bank remains a very profitable company, even in the current economic conditions. The bank generated fiscal Q1 2024 adjusted net income of $4.1 billion, down about 5% from the same period last year. The dip is partly due to an increase in the bank’s provision for credit losses (PCL). Total PCL increased to $813 million in the quarter compared to $532 million in the same period last year. PCL is money the bank sets aside to cover loans that it thinks could go into default.
Return on equity (ROE) remained high at 13.1% for the latest quarter, and Royal Bank has a solid capital cushion to ride out any further turbulence in the market.
Looking ahead, the bank is expected to close its acquisition of HSBC Canada this year. The purchase should give revenue and earnings a boost.
Dividend
Royal Bank raised the dividend twice last year. At the current share price, investors can get a 4.1% dividend yield.
Is RY stock a buy?
Royal Bank isn’t as cheap as it was a few months ago, but the stock still deserves to be on your radar for a buy-and-hold TFSA or RRSP portfolio. Ongoing volatility should be expected. Investors might want to take a small position now to make sure they benefit from any extended surge and look to add to the holdings on weakness in the stock. Over the long haul, the total returns should be attractive.
