Canadians love their banks, and for good reason. These banks have outperformed even American banks during some of the largest financial crises on record. In fact, Canadian banks haven’t even gone through a banking crisis since 1837! When most of our banks didn’t even exist.
So that alone should perhaps ease some of the worry felt by investors, but not all of it. Which is why today we’re going to take a look at Royal Bank of Canada (TSX:RY). RBC stock is a strong bank and the largest by market cap on the TSX! But after earnings, what should investors do now?
What happened
Earnings were mixed for RBC, but overall quite positive. Especially compared to other Canadian banks. While net income and earnings per share (EPS) were up year over year, adjusted figures were down. There were higher expenses and lower capital markets returns, but RBC bank also experienced solid volume growth.
Overall, net income was up 14% year over year, with EPS up 12%. Credit quality saw total provisions for loan losses increase both year over year and quarter over quarter. This was taken as a caution due to higher provisions in the Canadian banking and capital markets.
Then there was the planned acquisition of HSBC Canada. While overall this does seem like a strong investment, one every other bank has been drooling over, it’s still costly. This also impacted results owing to the transaction and integration costs.
Looking back
It’s important at times like these to look back at how RBC bank performed during other financial crises. And of course that includes the most recent back in 2008. During that time, RBC stock outperformed many other banks. While RBC stock saw a stock price decrease, it fared better than others from several factors.
This included a stronger balance sheet, with a more conservative approach to risk management leading to a stronger financial position. Its diversified business model in wealth management and insurance helped mitigate losses as well. Further, it was even able to maintain dividends at a time when others couldn’t. This alone helped with investor confidence.
Analyst opinions
That’s all nice performance in the past, but it’s the future that matters. Which is why it’s also important to look at analyst recommendations during this time. In this case, analysts still believe the stock is a buy, even if just a moderate buy at this point.
On the plus side, the stock has seen solid volume growth, with strong client-driven volume growth across various sectors. There remains a solid capital position, with long-term prospects as well. Long-term value will certainly be created from the HSBC acquisition, as well as their continued conservative approach.
Now it’s not perfect. There continues to be mixed financial performance, and of course there is the increase in provisions for loan losses. This would raise concern about potential credit quality issues as well. And with lower revenue in certain sectors such as capital markets, that should be something to watch.
Bottom line
All in all, RBC stock has outperformed in the past, and seems to be continuing on this path at present. The bank holds a strong capital position and solid volume growth, and the future looks bright with HSBC on its growth path. There’s mixed recent performance, certainly, but the stock has already done far better than its peers. So with a dividend yield at 4.16%, it’s certainly a buy at this point.
