Royal Bank (TSX: RY) delivered good returns for shareholders last year. Investors who missed the rally 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 focused on dividends and long-term gains.
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Royal Bank stock price
Royal Bank trades near $168 per share at the time of writing. The stock is actually off the 12-month high of $180 but is still up 28% in the past year.
Royal Bank is getting a nice boost from its 2024 acquisition of HSBC Canada. The $13.5 billion deal added 780,000 clients and more than 100 branches. The purchase also gave Royal Bank a leg up on expanding its international capabilities in supporting international wealth, commercial, and retail banking customers.
Royal Bank negotiated the deal in 2022. The timing proved savvy as two of its Canadian competitors were busy buying or looking to buy banks in the United States and were not in a position to outbid Royal Bank for HSBC. The decision to purchase HSBC Canada instead of chasing an American bank looked even more attractive when regional banks in the U.S. tanked in early 2023 amid a wave of panic triggered by a handful of failures.
Risks and opportunities
Canada is entering a two-year period where more than two million fixed-rate mortgages are coming due. Most of these loans are at much lower rates than the rates currently available in the market, even after the drop from the highs reached in 2023.
Bond yields have been volatile in recent months as markets try to determine if sticky inflation will force the Bank of Canada to pause rate cuts or, in the case of the United States, potentially raise rates before the end of the year. Fixed-rate mortgages are priced according to movements in government bond yields. If bonds sell off (yields rise) on expectations of higher-for-longer interest rates, there could be some trouble on the way for the banks who have clients who are unable to cover the jump in interest costs on their mortgage renewals.
As long as unemployment remains near its current level, households should be fine. However, the tariffs being floated by Donald Trump and retaliatory tariffs coming from Canada risk driving the Canadian economy into a recession while also potentially pushing up prices. The Bank of Canada has to keep inflation in check by maintaining higher interest rates, so it might not be able to reduce rates as much as needed to stimulate a weak economy. In the worst-case scenario, unemployment would spike and rates would remain high. In that situation, loan defaults could surge.
On the positive side, Royal Bank can leverage its size and financial strength to compete for the best customers of other banks, as homeowners who need to renew their mortgages in the next two years shop for offers.
Time to buy?
Near-term risks need to be considered, but buy-and-hold investors might want to start nibbling on RY stock to take advantage of the recent dip and can look to add to the holding on any further weakness. Royal Bank is very profitable and is positioned well to grow in the coming years.
