Royal Bank of Canada (TSX: RY) is up 14% from the April low. Investors who missed the rebound 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 total returns.
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Royal Bank share price
Royal Bank trades near $175 per share at the time of writing. The stock is up $20 from the bottom of the April pullback and isn’t far off the $180 record high it reached at the peak of the rally that occurred in the second half of last year.
Bank stocks pulled back in 2022 and 2023 when the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to get inflation under control. Investors feared the rate increases would cause a recession, drive up unemployment, and trigger a wave of loan defaults. The recession didn’t materialize, largely due to businesses and households being flush with pandemic cash received from government assistance programs. The jobs market in the United States remains robust. In Canada, however, unemployment has drifted higher to the recent level of 7%, but massive job losses have not occurred.
The central banks started to cut rates in the second half of 2024. This provided most bank stocks with a new tailwind as investors bet that loan losses would decline. In some cases, share prices hit new record highs before the end of the year. Royal Bank is also benefiting from a revenue and income boost from the assets it acquired through its takeover of HSBC Canada in 2024.
Risks
Royal Bank pretty much trades where it did at the start of the year. Investors are waiting to see how tariffs will impact the American and Canadian economies. There is a risk that inflation could spike while the economy contracts. The central banks could hold interest rates steady for longer than expected, or potentially be forced to raise them again if inflation takes off. In that scenario, loan defaults could soar as households and businesses struggle to cover debt payments.
Opportunity
Analysts widely expect interest rates to trend lower through 2026, with the need for stimulus overpowering the need to check inflation. Any breakthrough on a trade deal between Canada and the United States that reduces or eliminates tariffs would support both economies and reduce the risk of a sharp increase in unemployment. A deal would also provide clarity for businesses that want to borrow to invest for growth, but are currently sitting on the sidelines. New programs from the Canadian government to encourage investment in large infrastructure projects could also bring a wave of revenue opportunities for the banks.
Time to buy?
Near-term volatility is expected amid the trade uncertainty. Markets have had a big run and are due for a pullback, so I wouldn’t back up the truck right now. That being said, Royal Bank should deliver solid long-term returns, even from this level. Any correction in RY stock would be viewed as an opportunity to buy. The bank is very profitable and has the financial firepower to grow both organically and through strategic acquisitions.
If you have some cash to put to work, keep this stock on your radar.
