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Can You Bank on Royal Bank of Canada?

By Zeeshan Siddique – Updated Nov 7, 2016 at 7:14PM

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In context with its growth prospects, RBC's pricing looks a bit stretched.

Canadian banks are reporting impressive earnings and offering good income to investors. Despite Royal Bank of Canada (NYSE: RY) posting a leap in profits in its latest quarter, it failed to impress investors. I decided to put it through the wringer to see whether it deserves space in my portfolio.

Performance
The Canadian giant has been performing well in general. It has been showing some considerable improvements such as a reduction in provisions for credit losses and volume growth due to leveraging of branch networks. Despite a few hiccups, the company posted a 13% jump in its quarterly net income. Provisions in the quarter decreased by 32% from a year ago, while segments such as Canadian banking, wealth management, and insurance businesses reported solid growth. But there are a few things that make me a little wary of RBC. Take a look.

What turns me off?
RBC's decision to sell off its loss-making retail banking operations in the U.S to PNC Financial Services (NYSE: PNC) doesn't look very far-sighted. I have already explained in a prior article that banks in the U.S, or anywhere for that matter, have seen a dip in their performance.

The U.S now seems to be on the recovery track for retail banking, and RBC's competitors are focusing on securing their foothold in the country. Plus, at home, declines in client volumes resulted in a 20% plunge in its capital markets revenue in its latest quarter. Moreover, RBC is struggling with domestic lending volumes. So it's not as if Canada is at 100% anyway.

The table below should give you an idea of how RBC scores from an investment standpoint when compared to its Maple-loving peers:

Company

Price-to-Earnings Ratio

Price-to-Book Ratio

Tier 1 Capital Ratio

Dividend Yield

Royal Bank of Canada 14.1 2.19 13.6% 4.00%
Bank of Montreal (NYSE: BMO) 12.2 1.79 13.8% 4.60%
Toronto-Dominion Bank (NYSE: TD) 14.5 1.86 12.7% 3.30%
The Bank of Nova Scotia (NYSE: BNS) 12.9 2.35 12.0% 3.60%

Source: Capital IQ, a division of Standard & Poor's.

Considering all the bottlenecks to growth and its price-to-earnings and price-to-book ratios, RBC's valuation doesn't seem particularly cheap. Although RBC's impressive capital adequacy reflects that the bank is pretty stable and looks like a dividend dynamo, its pricing doesn't look that attractive. The bank is refocusing on a growth strategy in the U.S. and may bounce back in the long run. But at the moment, its performance doesn't justify its price.

The Foolish bottom line
If we're sticking with Canada, I would rather go with other stocks in the table, which seem to be offering equally good dividend yields but look to be better priced than RBC, which fails to impress me with its growth prospects. Post your comments below.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Motley Fool newsletter services have recommended buying shares of The Bank Of Nova Scotia. 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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Stocks Mentioned

Royal Bank of Canada Stock Quote
Royal Bank of Canada
RY
$90.78 (-2.05%) $-1.90
The PNC Financial Services Group, Inc. Stock Quote
The PNC Financial Services Group, Inc.
PNC
$151.92 (-1.78%) $-2.75
The Toronto-Dominion Bank Stock Quote
The Toronto-Dominion Bank
TD
$62.08 (-2.82%) $-1.80
The Bank of Nova Scotia Stock Quote
The Bank of Nova Scotia
BNS
$50.94 (-1.70%) $0.88
Bank of Montreal Stock Quote
Bank of Montreal
BMO
$89.39 (-2.76%) $-2.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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