The second Monday in October is reserved for Columbus day in the United States, but in Canada it coincides with the Canadian Thanksgiving or Harvest festival. Canadians have plenty of reasons to be thankful -- low government debt, unemployment rate of about 7%, strong real GDP growth, and one of the soundest banking systems in the world, according to the World Economic Forum. Royal Bank of Canada (RY), one of the largest banks in Canada, is a company that provides exposure to the strong Canadian economy as well as to selected international markets. The bank has strong fundamentals, well-diversified businesses, and strong growth initiatives that should provide investors with a good long-term investment opportunity. Let's look at its fundamentals first.
Royal Bank of Canada or RBC has 1.44 billion shares outstanding and a market capitalization of about $84 billion, making it the largest bank by market capitalization in Canada. The next two largest banks by market capitalization are Toronto Dominion Bank (TD) and Bank of Nova Scotia (BNS) with market capitalizations of about $76 billion and $65 billion, respectively. RBC currently pays a quarterly dividend of $0.60 per share for an annual yield of about 4.1%, compared to 3.8% and 4.2% dividend yields for Toronto Dominion and Bank of Nova Scotia, respectively. For comparison, the major U.S. banks, which had to be rescued by the U.S. government during the recent financial crisis, have dividend yields of less than 3%. JPMorgan Chase (JPM) has the highest dividend yield of 2.9%, followed by Wells Fargo (WFC) with 2.5%, and Bank of America (BAC) with 0.5%. In addition, the largest U.S. banks have to meet the Federal Reserve stress test in order to distribute dividends and/or buy-back shares.
Some highlights from the company's latest quarterly (July 31, 2012) performance report include a strong balance sheet with an estimated Basel III Common Equity Tier 1 ratio of 8.3%, a Canadian Banking net interest margin of 2.91%, and quarterly earnings of $2 billion (18% higher than the same quarter last year) on revenue of $7.6 billion (25%+ net income margin). For comparison, Toronto Dominion reported a Basel III Common Equity Tier 1 ratio of 7.7%, net interest margin of 2.86%, and quarterly earnings of $1.7 billion (14% higher than the same quarter last year) on revenue of $5.9 billion (28%+ net income margin). Net income margins for two U.S. counterparts, Wells Fargo and JPMorgan Chase, are at about 20% and their Basel III Common Equity Tier 1 ratios are 7.9% and 7.8%, respectively. It is interesting to note that Wells Fargo has a net interest margin of 3.9%, which should imply a better not worse profitability than its Canadian counterparts.
In terms of valuation, RBC has a price to earnings ratio of about 11, which is inline with that of other Canadian Banks (TD and Nova Scotia) and a price to tangible book value ratio of 2.7, which is also at par with the sample. Compared to U.S. banks, RBC has a richer valuation, as Wells Fargo and JPMorgan Chase trade at price to earnings ratios of about 10 and 8 and price to tangible book value of 1.8 and 1.2, respectively. A richer valuation for RBC, compared to it U.S. counterparts, implies a better management and business prospects.
In times when most banks are selling some of their businesses, RBC is able to enter new businesses and fill financing gaps. Recently, the company expanded in aviation finance. Aviation finance is an area that is seeing an increase in demand as discussed in a recent interview with RBC Capital Market head of aerospace and defence group, Jay Caldwell.
RBC Capital Markets is also seeing an increased demand for its services in merger and acquisition transactions as the company is among the top 20 global financial advisors in transactions. Expectations are that it will be able to gain from weak European banks. Year-to-date, as of September 30, 2012, RBC ranked 15th worldwide in announced deals, up from 22nd the year before. Importantly, it was first in both deals announced and completed with the involvement of a Canadian company.
The company also operates mainly in a country where there is a growing population, as Canada has one of the most robust legal immigration growth rates in the world. The influx of hard-working people who are prone to saving money benefits Canadian banks including RBC. On the lending side, Canada has exposure to many industries that are capital intensive such as oil and gas exploration, mining, logging, tourism, and manufacturing.
In addition to strong base of depositors, RBC is able to access the debt markets at reasonable terms. Moody's, S&P and Fitch rate the company Aa3 (very low credit risk and stable outlook), AA-(very strong capacity to meet financial commitments and negative outlook), and AA, respectively. These ratings are the same or favorable compared to the S&P ratings for TD, Bank of Nova Scotia, Wells Fargo, and JPMorgan Chase of AA-, AA-, A+, and A, respectively. Most recently, RBC was the first company in the world to register with the SEC a covered bond issue backed by mortgage loans (different from mortgage backed securities), which further lowered the cost of capital for the bank.
Canada has one of the most robust economies in the world fueled by a number of factors such as access to natural resources, democratic government, easy access to the U.S. market, immigration policies that encourage legal and skill-based immigration, and good infrastructure. The country's banking system has weathered the financial crisis well and its banks are healthier than their European and even U.S. counterparts. RBC is Canada's largest bank by assets and market capitalization and is well diversified across businesses as well as internationally. A dividend yield of over 4%, exposure to the Canadian economy, and solid fundamentals are reasons that make RBC a good long-term investment. Shares are traded in Canadian dollars and U.S. dollars on the Toronto and New York Stock exchanges, respectively. Happy Thanksgiving Canada and RBC!