In spite of future economic headwinds and potential downgrades, Royal Bank (RY) has positioned itself well to deliver healthy profits and maintain healthy profit margins.
About Royal Bank:
Since we opened our doors in 1864, RBC has grown to become one of North America's leading diversified financial services companies providing banking, wealth management, insurance and capital markets services on a global basis. We demonstrate our vision of "always earning the right to be our clients' first choice" through our values -- service, teamwork, responsibility, diversity and integrity.
For the three month period ending on January 31, Royal Bank of Canada had a profit of $1.9 billion. The profits were down 6% from last year due to the bank's capital markets and international banking segments. The per share net income was lower than a year before, but it was still 10 cents ahead of analysts' average estimate. With many Canadian banks showing relative strength in profits and beating analysts' estimates, it shows that the Canadian economy is still "relatively healthy".
With the Canadian housing market continuing to fare well, Royal Bank is confident that it will be able to make money and maintain healthy profit margins. The bank has shown confidence in its ability to make money by recently raising its dividend by 6%. President and CEO of Royal Bank Gordon M. Nixon states in the Morningstar Earning Transcript:
The Canadian housing market continues to fare well and we are not seeing any cause for concern. We are comfortable with our portfolio, which is well diversified across Canada. We uphold the highest underwriting standards and stress test our portfolios periodically under a number of scenarios encompassing both interest rate rises and housing price declines.
In support of Nixon's comments, the Regina Leader-Post reported:
Speaking on a conference call with analysts, Dave McKay, head of Canadian banking, said the bank has stress tested its loan book for a significant decline in housing prices and found defaults would likely rise less than 1%, a level the country's biggest bank by assets can safely absorb.
One of the red flags going forward for Royal Bank is a potential downgrade. The potential downgrade is due to the company's capital markets business, which makes the bank vulnerable to economic and regulatory challenges. From the Wall Street Journal:
Royal Bank could be downgraded by as much as two notches, Moody's said. That would be more humbling than costly for the Canadian bank, analysts argue. Typically, a higher, and so safer, rating makes funding cheaper. Dropping two notches would make Royal Bank the lowest-rated among its domestic peers. A one-notch downgrade would put it in line with its peers.
Even with declining sales this year and some potentially damaging economic news, Royal Bank still has an estimated profit of around $7.2 billion dollars in 2012. With the highest underwriting standards, continued stress tests and a relatively stable Canadian economy, the bank has set itself up to weather future economic headwinds.
Estimated Sales = $28.12 Billion
Estimated Profit Margin = 25.6%
Profit = $7.2 Billion
Shares Outstanding = 1.44 Billion
EPS = $5.00
Forward PE = 12.4
RY - Royal Bank Of Canada Stock Price Target for 2012 = $62.00 USD
Other Stock Targets
|Target||Canaccord Genuity||$59.00 « $58.00||01/23/12|
|Target||S&P Research||Buy||$55.00 « $60.00||12/05/11|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.