RBC Earnings Look Poised to Keep Pushing Higher

Royal Bank of Canada (NYSE: RY  ) will release its quarterly report on Thursday, and for bank investors who've looked for greater stability than is available from the U.S., the Canadian bank has been a reasonable bet for modest but steady returns in recent years. Yet with some economists pointing to signs of a possible housing bubble in Canada, are RBC earnings potentially vulnerable to a Northern version replay of the financial crisis?

For the most part, investors have looked at the Canadian banking system as a model for other countries to follow, with RBC and other banks having avoided the massive housing bets that U.S. banks made during the housing boom -- and which subsequently came back to bite them when the housing market crashed. With the resource-dependent economy now struggling from low prices on commodities like gold and other metals, the big question is whether Canada and its banking system will stay strong going forward. Let's take an early look at what's been happening with Royal Bank of Canada over the past quarter and what we're likely to see in its report.

Stats on Royal Bank of Canada

Analyst EPS Estimate

$1.38

Change From Year-Ago EPS

5.3%

Revenue Estimate

$7.93 billion

Change From Year-Ago Revenue

2.2%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can RBC earnings keep growing?
Analysts have been optimistic in recent months about the long-term prospects for RBC earnings. Although they've kept their July quarter estimates stable, they've added a nickel per share to their fiscal 2014 year projections. The stock, meanwhile, has held its own, climbing about 1% since late May.

Royal Bank of Canada actually started the quarter off on a disappointing note, with its April-quarter results having largely disappointed investors. Even though the bank fell short of analysts' estimates for earnings, it showed double-digit percentage figures for returns on equity and adjusted earnings growth from the year-ago quarter. Similar results from Bank of Nova Scotia (NYSE: BNS  ) and Bank of Montreal (NYSE: BMO  ) showed that investors aren't willing to forgive Canadian banks that don't outpace expectations, perhaps because their shares are relatively expensive compared to their American counterparts.

But one interesting way in which RBC has sought to stand out from the crowd comes from its treatment of high-frequency trading. Rather than embracing the profitable practice, RBC has actually imposed restrictions on high-frequency trading among its customers, seeking to attract a clientele that's interested in avoiding being victimized by the practice. The strategy has helped RBC grow the size of its American operations, and in June, it said that it's looking to partner with other Canadian banks to build an exchange that's less conducive to high-frequency trading. Such a long-term perspective is admirable and could result in more business down the road.

The big question facing both RBC and most other Canadian banks is whether they can live up to high expectations. For its part, ScotiaBank fell 1.5% yesterday after its report, which featured a 3% dividend boost and earnings that matched expectations on higher revenue than expected. Yet without boosted guidance, investors were disappointed with the results. On the other hand, Bank of Montreal climbed as it successfully topped earnings estimates, with adjusted earnings up 13% year over year, and with a boost in returns on equity helping send the stock higher.

In the RBC earnings report, watch to see whether the bank can live up to what shareholders want to see from its operations. Anything short of a strong performance could send the stock downward even if earnings continue to grow.

Canadian banks like RBC might be pricey, but bargains of a lifetime are still available in some U.S. bank stocks. Still, it's critical to understand what makes the best banks tick. The Motley Fool's new report "Finding the Next Bank Stock Home Run" demystifies the perils of investing in banks and reveals how savvy investors can win. It's completely free -- click here to get started.

Click here to add Royal Bank of Canada to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2613545, ~/Articles/ArticleHandler.aspx, 10/23/2014 2:41:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement