Royal Bank of Canada Fails to Match Up to Investors' Expectations

Royal Bank of Canada (NYSE: RY  ) posted a 13% jump in net income and boosted its dividend for the first time in almost four years. On the face of it, this is an exciting piece of news for investors. But the fact that RBC's shares fell by 3% on the news tells a somewhat different story.

The numbers
Compared to the second quarter of 2010, net income grew 13% to $1.59 billion while return on equity rose to 16.7% from 15.8%. The bank's tier 1 capital ratio remained high at 13.6% as well.

Like most of the U.S. banks, earnings at Canadian banks such as RBC and Bank of Montreal (NYSE: BMO  ) have benefited from a general cutback in provisions. Total provision for credit losses declined 32% to $362.3 million, owing to lower provisions in the U.S. and Caribbean commercial portfolios.

Segment strong
Solid growth in its Canadian banking, wealth management, and insurance businesses helped RBC report an impressive quarter. The Canadian banking segment saw an increase of 16% in net income and 7% volume growth due to leveraging of branch networks. Wealth management's net income increased by $133 million to $225 million, reflecting higher average fee-based client assets and increased transaction volumes.

The insurance segment witnessed growth of 36% driven by net investment gains and lower claims costs. In spite of such solid year-on-year growth, investors weren't really enticed. The following paragraph tells you why.

High expectations?
Compared to the first quarter of 2011, the bank's second quarter was a drag. RBC's net income declined 18%. Return on equity, too, was down to 16.7% from 20.3%. Robust growth in the previous quarter's trading revenue that didn't manifest itself once again this quarter raised expectations beyond a realistic level.

To investors' chagrin, a 20% plunge in capital markets revenue owing to a fall in client volumes sent quarterly earnings off 18%. Add that to the fact that domestic lending volumes are expected to remain sluggish while most of the big banks have announced mortgage rate cuts to cope. For instance, RBC and Toronto-Dominion (NYSE: TD  ) are among the Canadian banks that have been offering points reward systems to real estate agents to grab business. Things aren't totally back on track for Canadian financials yet.

The Foolish bottom line
If you are an investor who pays more attention to the long-term prospects of a stock, you may consider making RBC a part of your portfolio. That's despite the latest sell-off. With a healthy and consistent payout ratio and various other parameters, RBC looks like a strong and stable stock.

Add Royal Bank of Canada to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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