Canadian bank stocks have been highly volatile in the last year, as growing macroeconomic uncertainties amid high inflationary pressures have taken a toll on investors’ sentiments. While higher interest rates have increased the net interest income of most large banks, an unstable economy has led to an increase in their provisions for credit losses.
Despite these challenges, Royal Bank of Canada (TSX:RY) continues to be among the most profitable banks in the country with the help of its strong balance sheet, diversified revenue streams, and solid capital position. Royal Bank recently announced the financial results of the first quarter of its fiscal year 2024 (ended in January). Let’s take a closer look at some key highlights from its latest earnings before I tell you why RY stock looks so attractive to buy right now.
Royal Bank of Canada’s latest earnings
In the quarter ended in January 2024, Royal Bank of Canada’s total revenue slipped about 11% YoY (year over year) to $13.49 billion due partly to lower revenue from its capital market segment amid volatile markets. However, despite a significant 53% year-over-year jump in its provision for credit losses, the largest Canadian bank managed to post an adjusted quarterly net profit of $4.07 billion, beating Bay Street analysts’ expectations of $3.95 billion.
Its diluted earnings also saw an impressive 12% YoY rise to $2.50 per share. After adjusting for specific one-time items, Royal Bank’s adjusted earnings were $2.85 per share in the last quarter, representing a slight dip of 5.4% from a year ago but better than Street’s estimates of $2.80 per share.
Strong financial position and increasing dividends
Although it saw an uptick in the provision for credit losses due mainly to the challenging economic environment, Royal Bank still maintains a solid capital position. It currently has a common equity tier-one (CET1) ratio of 14.9%, comfortably exceeding regulatory requirements. This strong CET1 ratio not only enables sustained volume growth but also highlights Royal Bank’s ability to reward investors with increasing dividends. Notably, the bank distributed $1.9 billion in common share dividends last quarter, up 6% YoY.
Royal Bank’s proactive risk management is clearly reflected in its credit metrics, suggesting that it’s well-prepared to deal with economic challenges.
Why RY stock is a great buy today
RY stock currently trades at $132.82 per share after witnessing a 3.2% value erosion in the last year, trimming its market cap to $187.1 billion. It’s true that high interest rates are a mixed bag for banks. High rates mean banks can earn more from the difference between what they pay on deposits and what they earn on loans, boosting their main source of income. However, higher rates also make borrowing more expensive for people and businesses, which usually tends to slow down loan requests and increase the risk of loan defaults.
Despite these short-term challenges, Royal Bank has shown its ability to handle the situation well in recent quarters. Moreover, upcoming interest rate cuts in Canada and the United States could help the bank further improve its financial growth trends in the coming quarters, which can lead to a rally in its share prices. Given these positive expectations, RY could be a very attractive dividend stock to buy on the dip now and hold for the long term.
