Scotia Capital, 1 December 2006
Fourth Quarter Results – Stellar Earnings
• Royal Bank reported Q4/06 cash operating EPS of $0.97 per share, up 19% from $0.82 per share a year earlier. Earnings were driven by significant revenue growth of 12% with negligible earnings contribution from security gains.
• RBC Capital Markets led earnings growth at 20%, with Canadian Retail and U.S. & International P&B both at 9%, respectively.
• Cash operating ROE is extremely high at 24.1% versus 23.3% in the previous quarter and 21.7% a year earlier.
Fiscal 2006 Earnings Increase 20%
• Fiscal 2006 cash operating earnings increased 20% to $3.62 per share with RY expected to lead the bank group in earnings growth for the second straight year.
• Earnings growth in fiscal 2006 was led by RBC Capital Markets at 31%, with U.S. & International earnings up 15% and Canadian Personal & Commercial earnings up 14%.
• Cash operating ROE for the fiscal year was 23.8% compared with 21.4% in F2005.
Strong Revenue Growth Major Earnings Driver
• RY's leading earnings momentum is being driven by excellent revenue growth at 12% in the quarter and 8% for fiscal 2006. Wealth Management revenue growth was 17% in 2006. Revenue growth was supported by strong trading revenue and solid revenue growth across a broad range of bank products.
• RY's operating leverage in Q4 was 3.0% with revenue growth of 12% while expenses increased 9%.
• For the fiscal year, operating leverage was 2.7% with revenues increasing 8% and expenses increasing 5%.
Solid Retail & Wealth Management Earnings
• Canadian Personal and Business (P&B) cash earnings increased 9% YOY to $778 million (excluding the after-tax charge for hurricane claims and small business realignment charge in Q4/05).
• Revenues in the Canadian retail segment increased 8% with expenses increasing 7%, reflecting higher revenue growth across all business lines. Excluding the Global Insurance operations, revenue was up 8% while expenses increased 4%.
• Leading revenue growth in the quarter was Wealth Management at 12%, reflecting strong net sales and capital appreciation in mutual funds. For the fiscal year, wealth management revenues increased 17%.
• Mutual fund revenue increased 3% QOQ and 30% YOY to $337 million. RY led the industry in long-term asset (LTA) net sales with an astonishing 40% market share in Q4. Mutual Fund assets (IFIC) increased 25% in fiscal 2006 to $68.5 billion.
• Loan loss provisions increased to $173 million due to higher lending volumes and increased provisions in the small business portfolio.
• Canadian P&B fiscal 2006 cash earnings increased 14% to $2,862 million compared to fiscal 2005 due to strong revenue growth in banking and wealth management businesses, and partially offset by higher variable compensation.
Canadian Retail NIM Improves 3 bp
• Underlying Canadian retail net interest margin (NIM) improved 3 basis points (bp) sequentially to 3.34% (excluding an accrual for a cumulative interest rate payment adjustment).
• The Canadian retail NIM for fiscal 2006 stabilized, increasing 1 bp to 3.27% versus F2005 level of 3.26%. However, retail NIM remains significantly lower than 3.31% in 2004, 3.65% in 2003, and 3.81% in 2002.
• We are forecasting modest retail NIM improvement in 2007 and 2008 supported by the higher level of short term interest rates. A source of positive earnings surprise would be more meaningful margin expansion which is very possible depending on competitive pressures.
U.S. & International P&B Earnings
• U.S. & International P&B Q4/06 cash earnings increased 9% YOY to $137 million. Cash earnings growth was due to the impact of amortization, which was $11 million this quarter versus a negative $5 million a year earlier.
• Net interest margin remained flat sequentially at 3.08%.
• U.S. & International P&B, fiscal 2006 earnings increased 15% to $487 million due to strong revenue growth in Wealth Management and solid business volume growth in Banking.
RBC Capital Markets Earnings Increase 20%
• RBC Capital Markets Q4 earnings increased 20% YOY to $323 million (excluding the $326 million after-tax Enron charge in Q4/05) due to strong trading results, higher M&A fees and a lower effective tax rate.
• Operating leverage was high in Q4 at 6.5% with revenue increasing 23% and expenses increasing 16%. Revenue increase reflected stronger trading results in all products from improved market conditions, growth in certain trading strategies as well as higher M&A fees, primarily in Canada.
• Cash earnings for the fiscal year increased 31% to $1,414 million, reflecting record trading results, and lower effective tax rate and near-record M&A fees, partially offset by higher variable compensation.
Trading Revenue Strong
• Trading revenue in Q4/06 increased 39% YOY to $447 million, representing 8.3% of total revenue from $321 million or 6.6% of revenue a year earlier. However, trading revenue declined from the extremely robust levels of $537 million or 10.2% of revenue in Q3 and the record $586 million or 11.3% of revenue in Q2.
• Trading revenue for the fiscal year increased 26% to $2,035 million or 9.8% of revenue versus $1,615 million or 8.4% of revenues in F2005.
• Strong trading results are across all product areas with product and geographic expansion the major driver for the higher trading revenue.
Capital Markets Revenue Solid
• Capital markets revenue was strong at $589 million, increasing 8% from $544 million in the previous quarter, and increasing 11% from $533 million a year earlier.
• Underwriting and other advisory fees were record $293 million due to participation in a number of large mining M&A transactions.
• Fiscal 2006 capital markets revenues increased 4% to $2,267 million versus $2,189 million a year earlier.
Market Sensitive Revenue
• RY's reliance on market sensitive revenue is moderate with security gains, trading and capital markets revenue representing 20% of total revenue. This compares to National Bank industry high 30% in Q4/06.
Security Gains Remain Negligible – Unrealized Security Surplus
• Security gains were once again negligible in the fourth quarter at $16 million or $0.01 per share versus $0.01 per share in the previous quarter and $0.01 per share a year earlier.
• The bank continues to have negligible reliance on security gains.
• Unrealized security surplus was $365 million at quarter end, a major improvement from the $49 million deficit at the end of Q3.
Loan Loss Provisions Increase
• Specific loan loss provisions (LLPs) increased to $159 million, or 0.29% of loans, versus $99 million, or 0.18% of loans, in the previous quarter and $103 million, or 0.21% of loans, a year earlier. The modest increase in LLPs was due to higher small business loan losses in Central Canada.
• Specific LLPs for fiscal 2006 were $479 million or 0.22% of loans versus $455 million or 0.23% of loans in 2005. We are increasing our 2007 LLP estimate to $600 million or 0.28% of loans from $500 million or 0.23% of loans to reflect loan growth and potential softening of the economy. Our 2008 specific LLP estimate is $700 million or 0.32% of loans.
Tier 1 Ratio 9.6%
• Tier 1 capital was 9.6%, unchanged from the previous quarter and from the previous year.
• The common equity to risk-weighted assets (CE/RWA) ratio was 9.4% compared with 9.3% in the previous quarter and 9.7% a year earlier.
Share Buybacks
• In fiscal 2006, RY repurchased 18.2 million shares for $844 million at an average cost of $46.30 per share, a 13% discount to the current share price.
• On November 1, RY renewed its normal course issuer bid to repurchase up to 40 million common shares or 3% of shares outstanding. The share buyback program will expire on October 31, 2007.
Recent Events
• On September 6, RY announced its intention to acquire American Guaranty & Trust (AG&T) of the National Life Group. The acquisition allows RBC to provide U.S. trust solutions to high net worth clients. AG&T has over 30 employees and holds more than US$1.3 billion in trust and investment accounts. The transaction closed on October 3, 2006.
• On September 19, Goldman Sachs JBWere Asset Management announced that it had selected RBC Dexia Investor Services to provide fund administration and transfer agency services for its AUD$8 billion portfolio of funds in Australia.
• On October 17, it was announced that RY is among four banks to lead a multi-billion pounds infrastructure loan backing Australian investment bank Macquarie's 8.0 billion pounds bid for Thames Water. Other banks include Barclay's Bank, Dresdner Kleinwort and HSBC.
• On October 25, RBC Capital Markets entered into an agreement to acquire the broker-dealer business and certain of assets of Carlin Financial Group. The transaction is expected to close in the first quarter of 2007. Terms of the transaction were not disclosed.
• On October 30, RY entered into a joint venture with China Minsheng Banking Corp. to launch a new Chinese joint venture fund management company. The joint venture will create, manage and sell mutual funds in local currency to retail and institutional investors in China. Under the agreement, RY will hold a 30% interest, China Minsheng Bank will hold 60% interest and Three Gorges Finance Co. will hold the remaining 10% interest.
• On November 1, RBC Centura Bank agreed to acquire 39 branches in Alabama from AmSouth Bancorporation. This transaction will make RBC Centura the state's 7th largest financial institution by deposits. As at July 31, 2006, ASO had US$1.5 billion in loans and US$2.0 billion in deposits. Terms of the transaction were not disclosed and expected closing is March 2007. This transaction is not expected to have a material impact on RY earnings.
• On November 21, RBC Capital Market announced its agreement to acquire Daniels & Associates, L.P., the nation's most active M&A advisor to the cable, telecom and broadcast industries. Terms of the transaction were not disclosed. Closing is expected for the first quarter of 2007.
Earnings Estimates
• Our 2007 earnings estimate is unchanged at $4.00 per share. We are introducing our 2008 earnings estimates at $4.40 per share. Our 12-month share price target is unchanged at $68, representing 17.0x our 2007 earnings estimate and 15.5x our 2008 earnings estimate.
Maintain 1-Sector Outperform Rating
• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on strong earnings momentum, strength of franchise and operating platforms, superior profitability, and no meaningful valuation premium.
Fourth Quarter Results – Stellar Earnings
• Royal Bank reported Q4/06 cash operating EPS of $0.97 per share, up 19% from $0.82 per share a year earlier. Earnings were driven by significant revenue growth of 12% with negligible earnings contribution from security gains.
• RBC Capital Markets led earnings growth at 20%, with Canadian Retail and U.S. & International P&B both at 9%, respectively.
• Cash operating ROE is extremely high at 24.1% versus 23.3% in the previous quarter and 21.7% a year earlier.
Fiscal 2006 Earnings Increase 20%
• Fiscal 2006 cash operating earnings increased 20% to $3.62 per share with RY expected to lead the bank group in earnings growth for the second straight year.
• Earnings growth in fiscal 2006 was led by RBC Capital Markets at 31%, with U.S. & International earnings up 15% and Canadian Personal & Commercial earnings up 14%.
• Cash operating ROE for the fiscal year was 23.8% compared with 21.4% in F2005.
Strong Revenue Growth Major Earnings Driver
• RY's leading earnings momentum is being driven by excellent revenue growth at 12% in the quarter and 8% for fiscal 2006. Wealth Management revenue growth was 17% in 2006. Revenue growth was supported by strong trading revenue and solid revenue growth across a broad range of bank products.
• RY's operating leverage in Q4 was 3.0% with revenue growth of 12% while expenses increased 9%.
• For the fiscal year, operating leverage was 2.7% with revenues increasing 8% and expenses increasing 5%.
Solid Retail & Wealth Management Earnings
• Canadian Personal and Business (P&B) cash earnings increased 9% YOY to $778 million (excluding the after-tax charge for hurricane claims and small business realignment charge in Q4/05).
• Revenues in the Canadian retail segment increased 8% with expenses increasing 7%, reflecting higher revenue growth across all business lines. Excluding the Global Insurance operations, revenue was up 8% while expenses increased 4%.
• Leading revenue growth in the quarter was Wealth Management at 12%, reflecting strong net sales and capital appreciation in mutual funds. For the fiscal year, wealth management revenues increased 17%.
• Mutual fund revenue increased 3% QOQ and 30% YOY to $337 million. RY led the industry in long-term asset (LTA) net sales with an astonishing 40% market share in Q4. Mutual Fund assets (IFIC) increased 25% in fiscal 2006 to $68.5 billion.
• Loan loss provisions increased to $173 million due to higher lending volumes and increased provisions in the small business portfolio.
• Canadian P&B fiscal 2006 cash earnings increased 14% to $2,862 million compared to fiscal 2005 due to strong revenue growth in banking and wealth management businesses, and partially offset by higher variable compensation.
Canadian Retail NIM Improves 3 bp
• Underlying Canadian retail net interest margin (NIM) improved 3 basis points (bp) sequentially to 3.34% (excluding an accrual for a cumulative interest rate payment adjustment).
• The Canadian retail NIM for fiscal 2006 stabilized, increasing 1 bp to 3.27% versus F2005 level of 3.26%. However, retail NIM remains significantly lower than 3.31% in 2004, 3.65% in 2003, and 3.81% in 2002.
• We are forecasting modest retail NIM improvement in 2007 and 2008 supported by the higher level of short term interest rates. A source of positive earnings surprise would be more meaningful margin expansion which is very possible depending on competitive pressures.
U.S. & International P&B Earnings
• U.S. & International P&B Q4/06 cash earnings increased 9% YOY to $137 million. Cash earnings growth was due to the impact of amortization, which was $11 million this quarter versus a negative $5 million a year earlier.
• Net interest margin remained flat sequentially at 3.08%.
• U.S. & International P&B, fiscal 2006 earnings increased 15% to $487 million due to strong revenue growth in Wealth Management and solid business volume growth in Banking.
RBC Capital Markets Earnings Increase 20%
• RBC Capital Markets Q4 earnings increased 20% YOY to $323 million (excluding the $326 million after-tax Enron charge in Q4/05) due to strong trading results, higher M&A fees and a lower effective tax rate.
• Operating leverage was high in Q4 at 6.5% with revenue increasing 23% and expenses increasing 16%. Revenue increase reflected stronger trading results in all products from improved market conditions, growth in certain trading strategies as well as higher M&A fees, primarily in Canada.
• Cash earnings for the fiscal year increased 31% to $1,414 million, reflecting record trading results, and lower effective tax rate and near-record M&A fees, partially offset by higher variable compensation.
Trading Revenue Strong
• Trading revenue in Q4/06 increased 39% YOY to $447 million, representing 8.3% of total revenue from $321 million or 6.6% of revenue a year earlier. However, trading revenue declined from the extremely robust levels of $537 million or 10.2% of revenue in Q3 and the record $586 million or 11.3% of revenue in Q2.
• Trading revenue for the fiscal year increased 26% to $2,035 million or 9.8% of revenue versus $1,615 million or 8.4% of revenues in F2005.
• Strong trading results are across all product areas with product and geographic expansion the major driver for the higher trading revenue.
Capital Markets Revenue Solid
• Capital markets revenue was strong at $589 million, increasing 8% from $544 million in the previous quarter, and increasing 11% from $533 million a year earlier.
• Underwriting and other advisory fees were record $293 million due to participation in a number of large mining M&A transactions.
• Fiscal 2006 capital markets revenues increased 4% to $2,267 million versus $2,189 million a year earlier.
Market Sensitive Revenue
• RY's reliance on market sensitive revenue is moderate with security gains, trading and capital markets revenue representing 20% of total revenue. This compares to National Bank industry high 30% in Q4/06.
Security Gains Remain Negligible – Unrealized Security Surplus
• Security gains were once again negligible in the fourth quarter at $16 million or $0.01 per share versus $0.01 per share in the previous quarter and $0.01 per share a year earlier.
• The bank continues to have negligible reliance on security gains.
• Unrealized security surplus was $365 million at quarter end, a major improvement from the $49 million deficit at the end of Q3.
Loan Loss Provisions Increase
• Specific loan loss provisions (LLPs) increased to $159 million, or 0.29% of loans, versus $99 million, or 0.18% of loans, in the previous quarter and $103 million, or 0.21% of loans, a year earlier. The modest increase in LLPs was due to higher small business loan losses in Central Canada.
• Specific LLPs for fiscal 2006 were $479 million or 0.22% of loans versus $455 million or 0.23% of loans in 2005. We are increasing our 2007 LLP estimate to $600 million or 0.28% of loans from $500 million or 0.23% of loans to reflect loan growth and potential softening of the economy. Our 2008 specific LLP estimate is $700 million or 0.32% of loans.
Tier 1 Ratio 9.6%
• Tier 1 capital was 9.6%, unchanged from the previous quarter and from the previous year.
• The common equity to risk-weighted assets (CE/RWA) ratio was 9.4% compared with 9.3% in the previous quarter and 9.7% a year earlier.
Share Buybacks
• In fiscal 2006, RY repurchased 18.2 million shares for $844 million at an average cost of $46.30 per share, a 13% discount to the current share price.
• On November 1, RY renewed its normal course issuer bid to repurchase up to 40 million common shares or 3% of shares outstanding. The share buyback program will expire on October 31, 2007.
Recent Events
• On September 6, RY announced its intention to acquire American Guaranty & Trust (AG&T) of the National Life Group. The acquisition allows RBC to provide U.S. trust solutions to high net worth clients. AG&T has over 30 employees and holds more than US$1.3 billion in trust and investment accounts. The transaction closed on October 3, 2006.
• On September 19, Goldman Sachs JBWere Asset Management announced that it had selected RBC Dexia Investor Services to provide fund administration and transfer agency services for its AUD$8 billion portfolio of funds in Australia.
• On October 17, it was announced that RY is among four banks to lead a multi-billion pounds infrastructure loan backing Australian investment bank Macquarie's 8.0 billion pounds bid for Thames Water. Other banks include Barclay's Bank, Dresdner Kleinwort and HSBC.
• On October 25, RBC Capital Markets entered into an agreement to acquire the broker-dealer business and certain of assets of Carlin Financial Group. The transaction is expected to close in the first quarter of 2007. Terms of the transaction were not disclosed.
• On October 30, RY entered into a joint venture with China Minsheng Banking Corp. to launch a new Chinese joint venture fund management company. The joint venture will create, manage and sell mutual funds in local currency to retail and institutional investors in China. Under the agreement, RY will hold a 30% interest, China Minsheng Bank will hold 60% interest and Three Gorges Finance Co. will hold the remaining 10% interest.
• On November 1, RBC Centura Bank agreed to acquire 39 branches in Alabama from AmSouth Bancorporation. This transaction will make RBC Centura the state's 7th largest financial institution by deposits. As at July 31, 2006, ASO had US$1.5 billion in loans and US$2.0 billion in deposits. Terms of the transaction were not disclosed and expected closing is March 2007. This transaction is not expected to have a material impact on RY earnings.
• On November 21, RBC Capital Market announced its agreement to acquire Daniels & Associates, L.P., the nation's most active M&A advisor to the cable, telecom and broadcast industries. Terms of the transaction were not disclosed. Closing is expected for the first quarter of 2007.
Earnings Estimates
• Our 2007 earnings estimate is unchanged at $4.00 per share. We are introducing our 2008 earnings estimates at $4.40 per share. Our 12-month share price target is unchanged at $68, representing 17.0x our 2007 earnings estimate and 15.5x our 2008 earnings estimate.
Maintain 1-Sector Outperform Rating
• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on strong earnings momentum, strength of franchise and operating platforms, superior profitability, and no meaningful valuation premium.
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newratings, 1 December 2006
Analysts at UBS maintain their "neutral" rating on RBC Financial Group, while raising their estimates for the company. The target price has been raised from C$56 to C$59.
In a research note published this morning, the analysts mention that the company has reported healthy 4Q06 results, benefiting from encouraging progress across the capital markets. RBC Financial's EPS growth guidance of 10% is reasonable, the analysts add. The EPS estimates for FY07 and FY08 have been raised from C$3.75 to C$4.00 and from C$4.15 to C$4.35, respectively.
Analysts at UBS maintain their "neutral" rating on RBC Financial Group, while raising their estimates for the company. The target price has been raised from C$56 to C$59.
In a research note published this morning, the analysts mention that the company has reported healthy 4Q06 results, benefiting from encouraging progress across the capital markets. RBC Financial's EPS growth guidance of 10% is reasonable, the analysts add. The EPS estimates for FY07 and FY08 have been raised from C$3.75 to C$4.00 and from C$4.15 to C$4.35, respectively.
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• BMO Capital Markets maintained RBC at Market Perform; the target price was raised from $52.00 to $58.00.
• Blackmont Capital maintained RBC at Buy.
• Credit Suisse maintains "Outperform" rating on RBC, while raising estimates for the company. The 12-month target price has been raised from C$55 to C$59. In a research note, the analyst mentions that the company has reported its 4Q operating EPS significantly ahead of the consensus. RBC has recently declared several US acquisitions, including those of Flag Financial Corp, 39 AmSouth branches, American Guaranty Trust and Daniels & Associates. The EPS estimate for 2007 has been raised from $3.95 to $4.05 to reflect robust domestic retail loan volumes, increasing private banking operations, declining corporate taxes and strong capital markets.
• Desjardins Securities maintained RBC at Buy, and raised the target price from $55.50 to $56.50.
• Dundee Securities cut RBC from Outperform to Neutral.
• Genuity Capital raised the target price of RBC from C$56.00 to $63.00.
• Merrill Lynch maintained RBC at Neutral. The target price is $56.00.
• RBC Capital Markets maintained RBC at Outperform, and raised the target price from $62.00 to $63.00
• Blackmont Capital maintained RBC at Buy.
• Credit Suisse maintains "Outperform" rating on RBC, while raising estimates for the company. The 12-month target price has been raised from C$55 to C$59. In a research note, the analyst mentions that the company has reported its 4Q operating EPS significantly ahead of the consensus. RBC has recently declared several US acquisitions, including those of Flag Financial Corp, 39 AmSouth branches, American Guaranty Trust and Daniels & Associates. The EPS estimate for 2007 has been raised from $3.95 to $4.05 to reflect robust domestic retail loan volumes, increasing private banking operations, declining corporate taxes and strong capital markets.
• Desjardins Securities maintained RBC at Buy, and raised the target price from $55.50 to $56.50.
• Dundee Securities cut RBC from Outperform to Neutral.
• Genuity Capital raised the target price of RBC from C$56.00 to $63.00.
• Merrill Lynch maintained RBC at Neutral. The target price is $56.00.
• RBC Capital Markets maintained RBC at Outperform, and raised the target price from $62.00 to $63.00
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TD Newcrest, 1 December 2006
Event
RBC reported Q3/06 cash EPS of $0.97, considerably ahead of our estimate and consensus of $0.89. The strong result compares to $0.91 and $0.79 reported in Q3/06 and Q4/05 respectively. We consider this quarter to be excellent, driven by Canadian retail domestic operations. We believe RBC is the financial services company with the most operating momentum, yet is trading in-line with the other large capitalization Canadian banks.
Impact
Positive. We are increasing our 2007 EPS estimate to $4.03 (from $3.80) to reflect the bank’s unmatched retail prowess and unfettered operating momentum, in our opinion. We are also increasing our 12-month target price to $61.00 (from $58.00). We reiterate our Action List Buy recommendation. We are also introducing our 2008 EPS estimate of $4.45.
Details
Canadian Retail and Wealth results far exceeded expectations, with operating cash earnings of $778 million, up 16% from Q4/05, as we believe the bank is taking advantage of weaker players. Revenue growth was an impressive 8% year over year, driven by broad based growth across multiple business lines). Some other key year over year stats include:
• AUM up 24%, leading to total wealth management revenues increasing 12%. These are high ROE, sticky businesses that RY is growing faster than any other bank.
• Loans and acceptances up 12%, helped by strong market share growth in virtually every product category.
• Net interest margins were stable at 3.28% (excluding a one-time charge), and unlike certain peers, expects a positive trend developing.
• Despite still investing in the business, operating leverage is excellent, demonstrated by the Q4/06 efficiency ratio improving 160bps.
U.S. Retail and International results were slightly higher than expectations, with cash net income of $137 million, up 10% from Q4/05. Better than expected US wealth management results (up 15% Y/Y) and a lower tax rate were the two main contributing factors in beating our estimates. Of note, Centura grew new personal and business accounts by 37% and 20% (Q2 through Q4) despite a tough operating environment in the U.S. Southeast.
Centura announced two transactions aimed at expanding its presence in the Southeastern U.S. Overall, the results show improvement and provide confidence in management’s U.S. build-out strategy.
RBC Capital Markets results were satisfactory, reporting operating cash earnings of $323 million. Trading revenues were slightly disappointing, falling to $447 million, the lowest result of the year. Overall, trading volatility for the bank has been impressively controlled, and we hope that as the bank continues to expand, that diversification and risk management will continue to prove out management’s claim that trading can be a stable business, deserving of higher valuation than the market likely assesses to those earnings today. RBC’s other capital market’s businesses preformed well.
Credit performance deteriorated slightly, with total bank PCL’s of $159 million, up from $99 million in Q3/06 and $103 million for the same period a year ago largely reflecting higher provisions in the personal loan and small business portfolios, and lower loss recoveries in the agriculture portfolio in Q4/06. Formations increased to $309 million from $240 million in Q3/06, and decreased from $318 million in Q4/05. We are not concerned.
Tier 1 Capital was stable at 9.6%, as risk-weighted assets growth of 14% outpaced profit growth. Risk weighted asset growth is particularly strong in the growing wholesale business, but also in the domestic bank. Management bought back $90 million worth of shares during the quarter. We expect a dividend increase next quarter.
Justification of Target Price
Our $61.00 target is a product of adding 50% of the $60.56 value derived from our 2007 P/E valuation of 15.2 times to 50% of the $61.14 value derived from our 2007 price-to-book valuation of 3.92 times.
Key Risks to Target Price – Overall Risk Rating: Low
We believe the key risks are: 1) unfavorable interest rate movements; 2) a downturn in the credit cycle; and 3) additional US acquisitions at premium valuations.
Investment Conclusion
Given the strength of the “clean” $0.97 result, we were surprised by RY’s share price falling yesterday. We highlight that: 1) RY’s earning momentum and operating leverage appear to be the best of any large capitalization financial services company in Canada, 2) The company returns capital consistently to shareholders, demonstrated by its 40-50% dividend payout ratio and having bought back 1.8 million shares in 2006, 3) All operations are enjoying momentum, including US retail, which has returned to an expansion strategy and 4) RY’s stock closed at 13.2 x our 2007 EPS estimates, in-line with the Big 5 average.
Considering the momentum RY is enjoying, we argue the stock deserves a significant valuation premium. We believe the bank is clearly breaking away from most competitors in the Canadian financial services market (stealing market share from the likes of BMO and CIBC) and is growing in multiple business outside of the domestic market. We strongly reiterate our Action List Buy recommendation with a $61.00 target price.
Event
RBC reported Q3/06 cash EPS of $0.97, considerably ahead of our estimate and consensus of $0.89. The strong result compares to $0.91 and $0.79 reported in Q3/06 and Q4/05 respectively. We consider this quarter to be excellent, driven by Canadian retail domestic operations. We believe RBC is the financial services company with the most operating momentum, yet is trading in-line with the other large capitalization Canadian banks.
Impact
Positive. We are increasing our 2007 EPS estimate to $4.03 (from $3.80) to reflect the bank’s unmatched retail prowess and unfettered operating momentum, in our opinion. We are also increasing our 12-month target price to $61.00 (from $58.00). We reiterate our Action List Buy recommendation. We are also introducing our 2008 EPS estimate of $4.45.
Details
Canadian Retail and Wealth results far exceeded expectations, with operating cash earnings of $778 million, up 16% from Q4/05, as we believe the bank is taking advantage of weaker players. Revenue growth was an impressive 8% year over year, driven by broad based growth across multiple business lines). Some other key year over year stats include:
• AUM up 24%, leading to total wealth management revenues increasing 12%. These are high ROE, sticky businesses that RY is growing faster than any other bank.
• Loans and acceptances up 12%, helped by strong market share growth in virtually every product category.
• Net interest margins were stable at 3.28% (excluding a one-time charge), and unlike certain peers, expects a positive trend developing.
• Despite still investing in the business, operating leverage is excellent, demonstrated by the Q4/06 efficiency ratio improving 160bps.
U.S. Retail and International results were slightly higher than expectations, with cash net income of $137 million, up 10% from Q4/05. Better than expected US wealth management results (up 15% Y/Y) and a lower tax rate were the two main contributing factors in beating our estimates. Of note, Centura grew new personal and business accounts by 37% and 20% (Q2 through Q4) despite a tough operating environment in the U.S. Southeast.
Centura announced two transactions aimed at expanding its presence in the Southeastern U.S. Overall, the results show improvement and provide confidence in management’s U.S. build-out strategy.
RBC Capital Markets results were satisfactory, reporting operating cash earnings of $323 million. Trading revenues were slightly disappointing, falling to $447 million, the lowest result of the year. Overall, trading volatility for the bank has been impressively controlled, and we hope that as the bank continues to expand, that diversification and risk management will continue to prove out management’s claim that trading can be a stable business, deserving of higher valuation than the market likely assesses to those earnings today. RBC’s other capital market’s businesses preformed well.
Credit performance deteriorated slightly, with total bank PCL’s of $159 million, up from $99 million in Q3/06 and $103 million for the same period a year ago largely reflecting higher provisions in the personal loan and small business portfolios, and lower loss recoveries in the agriculture portfolio in Q4/06. Formations increased to $309 million from $240 million in Q3/06, and decreased from $318 million in Q4/05. We are not concerned.
Tier 1 Capital was stable at 9.6%, as risk-weighted assets growth of 14% outpaced profit growth. Risk weighted asset growth is particularly strong in the growing wholesale business, but also in the domestic bank. Management bought back $90 million worth of shares during the quarter. We expect a dividend increase next quarter.
Justification of Target Price
Our $61.00 target is a product of adding 50% of the $60.56 value derived from our 2007 P/E valuation of 15.2 times to 50% of the $61.14 value derived from our 2007 price-to-book valuation of 3.92 times.
Key Risks to Target Price – Overall Risk Rating: Low
We believe the key risks are: 1) unfavorable interest rate movements; 2) a downturn in the credit cycle; and 3) additional US acquisitions at premium valuations.
Investment Conclusion
Given the strength of the “clean” $0.97 result, we were surprised by RY’s share price falling yesterday. We highlight that: 1) RY’s earning momentum and operating leverage appear to be the best of any large capitalization financial services company in Canada, 2) The company returns capital consistently to shareholders, demonstrated by its 40-50% dividend payout ratio and having bought back 1.8 million shares in 2006, 3) All operations are enjoying momentum, including US retail, which has returned to an expansion strategy and 4) RY’s stock closed at 13.2 x our 2007 EPS estimates, in-line with the Big 5 average.
Considering the momentum RY is enjoying, we argue the stock deserves a significant valuation premium. We believe the bank is clearly breaking away from most competitors in the Canadian financial services market (stealing market share from the likes of BMO and CIBC) and is growing in multiple business outside of the domestic market. We strongly reiterate our Action List Buy recommendation with a $61.00 target price.
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Dow Jones Newswire, Monica Gutschi, 1 December 2006
More and more of Royal Bank of Canada's business is global and that's not only diversifying its operations but helping drive its tax rate lower.
In the fourth quarter, the lower tax rate added up to 8 Canadian cents a share to the quarterly earnings, helping Royal Bank easily beat analyst forecasts.
Meanwhile, most of Royal Bank's material acquisitions in the past year have been outside Canada, which will likely translate to a steadily dropping tax rate.
"Our business is becoming increasingly global," Chief Executive Gord Nixon said in a quarterly conference call.
Royal Bank said its fourth-quarter net earnings totaled C$1.26 billion or 96 Canadian cents a share, from C$522 million or 39 Canadian cents a year earlier. For the year as a whole, Canada's largest financial institution reported record earnings of C$4.73 billion, up 40% from a year ago. Revenues also reached a record, rising 8% to C$20.6 billion.
On a cash basis, earnings were 97 Canadian cents a share, well above analyst mean estimates of 90 Canadian cents a share.
In Toronto, Royal Bank shares closed down 18 Canadian cents to C$53.28 on volume of 3.5 million.
In 2006, 33% of Royal Bank's earnings came from outside of Canada, compared to only 25% in the U.S.
That helped reduce its effective tax rate to 21.1% in the fourth quarter, the lowest in a year, and well below the rates reported in fiscal 2005. The effective tax rate in the third quarter this year was 23.5% while in the third quarter of 2005 it was 28.3%.
The tax rate in the fourth quarter last year was unusually low, but that included a C$591 million provision for Enron-related litigation.
"The tax rate in 4Q was lower than we expected and declined by 2.6% sequentially," noted Michael Goldberg at Desjardins Securities. He said the tax benefit explained the difference between his estimate for fourth-quarter earnings of 93 Canadian cents a share, and the 96 Canadian cents that Royal Bank reported.
BMO Capital Markets also estimated the lower taxes added 3 Canadian cents to per-share earnings, while UBS suggested the lower tax rate versus its estimates bumped the bottom line up by 5 Canadian cents.
RBC Capital Market's Jamie Keating said the 21% tax rate compared to his estimate of 28% caused net earnings to come in 8 Canadian cents a share higher than his expectations.
"This may be more sustainable than we first thought, as it synthesizes a 32% domestic tax rate, with 19-21% for International and Capital Markets," he said in a note.
Royal Bank isn't the only Canadian bank to benefit from lower taxes in the fourth quarter. Bank of Montreal paid a tax rate of 17.4% compared with 29.7% a year earlier, which analysts said could have added up to 20 Canadian cents to the bottom line. However, that variance was due to a one-time gain and a number of initiatives that all came together, Bank of Montreal officials said. Going forward, the tax rate is expected to be between 25%-28%.
In contrast, Nixon said a tax rate in the low 20% range was most likely in the future, given the bank's changing earnings mix and increasingly global operations.
In fact, Chuck Winograd, the head of RBC Capital Markets, said the majority of his division's earnings were from international operations in 2006.
The global expertise in capital markets is "becoming a clear differentiator for us domestically," Winograd said, adding that RBC Capital Markets is "winning broad mandates" around the world.
For example, he said, the bank helped raise US$150 million in the initial public offering in shares of the New Star RBC Hedge 250 Index Exchange Traded Securities PCC Ltd., or Hedge ETS, which is linked to the performance of more than 250 hedge funds. The Hedge ETS was listed in London.
Meanwhile, Royal Bank has expanded in the U.S. on a number of fronts. Earlier this year, it purchased Flag Financial Corp. of Atlanta for US$456 million, and acquired 39 bank branches in Alabama from AmSouth Bancorporation. It also acquired American Guaranty & Trust in Delaware; Carlin Financial Group, a New York-based boutique broker; and Daniels and Associates, a mergers and acquisitions adviser in the media and telecommunications sector.
It purchased Abacus Financial Services Group, which provides trust services in the U.K., and has broadened its exposure to China. It upgraded its Beijing representative office to a branch and was co-lead manager of the institutional tranche for the Industrial and Commercial Bank of China's US$21.9 billion initial public offering.
Both UBS and BMO have an investment-banking relationship with Royal Bank and make a market in its securities. It wasn't immediately clear if there were any banking conflicts with Desjardins Securities.
More and more of Royal Bank of Canada's business is global and that's not only diversifying its operations but helping drive its tax rate lower.
In the fourth quarter, the lower tax rate added up to 8 Canadian cents a share to the quarterly earnings, helping Royal Bank easily beat analyst forecasts.
Meanwhile, most of Royal Bank's material acquisitions in the past year have been outside Canada, which will likely translate to a steadily dropping tax rate.
"Our business is becoming increasingly global," Chief Executive Gord Nixon said in a quarterly conference call.
Royal Bank said its fourth-quarter net earnings totaled C$1.26 billion or 96 Canadian cents a share, from C$522 million or 39 Canadian cents a year earlier. For the year as a whole, Canada's largest financial institution reported record earnings of C$4.73 billion, up 40% from a year ago. Revenues also reached a record, rising 8% to C$20.6 billion.
On a cash basis, earnings were 97 Canadian cents a share, well above analyst mean estimates of 90 Canadian cents a share.
In Toronto, Royal Bank shares closed down 18 Canadian cents to C$53.28 on volume of 3.5 million.
In 2006, 33% of Royal Bank's earnings came from outside of Canada, compared to only 25% in the U.S.
That helped reduce its effective tax rate to 21.1% in the fourth quarter, the lowest in a year, and well below the rates reported in fiscal 2005. The effective tax rate in the third quarter this year was 23.5% while in the third quarter of 2005 it was 28.3%.
The tax rate in the fourth quarter last year was unusually low, but that included a C$591 million provision for Enron-related litigation.
"The tax rate in 4Q was lower than we expected and declined by 2.6% sequentially," noted Michael Goldberg at Desjardins Securities. He said the tax benefit explained the difference between his estimate for fourth-quarter earnings of 93 Canadian cents a share, and the 96 Canadian cents that Royal Bank reported.
BMO Capital Markets also estimated the lower taxes added 3 Canadian cents to per-share earnings, while UBS suggested the lower tax rate versus its estimates bumped the bottom line up by 5 Canadian cents.
RBC Capital Market's Jamie Keating said the 21% tax rate compared to his estimate of 28% caused net earnings to come in 8 Canadian cents a share higher than his expectations.
"This may be more sustainable than we first thought, as it synthesizes a 32% domestic tax rate, with 19-21% for International and Capital Markets," he said in a note.
Royal Bank isn't the only Canadian bank to benefit from lower taxes in the fourth quarter. Bank of Montreal paid a tax rate of 17.4% compared with 29.7% a year earlier, which analysts said could have added up to 20 Canadian cents to the bottom line. However, that variance was due to a one-time gain and a number of initiatives that all came together, Bank of Montreal officials said. Going forward, the tax rate is expected to be between 25%-28%.
In contrast, Nixon said a tax rate in the low 20% range was most likely in the future, given the bank's changing earnings mix and increasingly global operations.
In fact, Chuck Winograd, the head of RBC Capital Markets, said the majority of his division's earnings were from international operations in 2006.
The global expertise in capital markets is "becoming a clear differentiator for us domestically," Winograd said, adding that RBC Capital Markets is "winning broad mandates" around the world.
For example, he said, the bank helped raise US$150 million in the initial public offering in shares of the New Star RBC Hedge 250 Index Exchange Traded Securities PCC Ltd., or Hedge ETS, which is linked to the performance of more than 250 hedge funds. The Hedge ETS was listed in London.
Meanwhile, Royal Bank has expanded in the U.S. on a number of fronts. Earlier this year, it purchased Flag Financial Corp. of Atlanta for US$456 million, and acquired 39 bank branches in Alabama from AmSouth Bancorporation. It also acquired American Guaranty & Trust in Delaware; Carlin Financial Group, a New York-based boutique broker; and Daniels and Associates, a mergers and acquisitions adviser in the media and telecommunications sector.
It purchased Abacus Financial Services Group, which provides trust services in the U.K., and has broadened its exposure to China. It upgraded its Beijing representative office to a branch and was co-lead manager of the institutional tranche for the Industrial and Commercial Bank of China's US$21.9 billion initial public offering.
Both UBS and BMO have an investment-banking relationship with Royal Bank and make a market in its securities. It wasn't immediately clear if there were any banking conflicts with Desjardins Securities.
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Financial Post, Duncan Mavin, 1 December 2006
Royal Bank of Canada reported record annual earnings yesterday on the back of strong domestic retail-banking results that contrasted with problems in the same retail-banking arena for one of its major rivals.
RBC's Canadian personal and commercial bank division delivered earnings of $2.8-billion, up $490-million, or 21%, from the previous year.
The results follow on from relatively flat performance in Canadian personal and commercial banking announced by Bank of Montreal, which reported its earnings on Tuesday. BMO's net income for 2006 was $1.1-billion, up just 6.2% from last year.
"Domestic trends [at RBC] look better than those at BMO," said UBS Investment Research analyst Jason Bilodeau.
RBC gained market share in mortgages and loans, and at its full-service brokerage service, Mr. Bilodeau said. He also noted the bank posted a 16% year-over-year growth in credit-card market share.
Edward Jones analyst Tom Kersting said RBC is "executing better" than BMO on basic retail-banking activities, like staff training and systems that help bank personnel cross-sell additional products to their customers.
"It certainly appears that RBC is taking retail market share [from other banks,]" Mr. Kersting said.
BMO in particular has been accused of driving down margins on mortgages and loans earlier this year in a failed attempt to increase market share. Bill Downe, who was confirmed as BMO's next chief executive this week, said BMO's executives are still "working our way through margin issues relating to pricing decisions taken earlier [in 2006]."
Overall, RBC delivered net income of $4.7-billion for 2006, up $1.3-billion, or 40%, from last year. Revenue was $20.6-billion, up $1.5-billion, or 8%, from last year.
Fourth-quarter net income at Canada's biggest bank was $1.3-billion, up $740-million from the same quarter last year, when the bank booked a provision for $591-million related to its involvement in Enron.
It was "another big quarter for Royal Bank," said RBC Capital Markets analyst Jamie Keating.
Mr. Keating noted that RBC's results were helped by "some unusual or non-recurring benefits" -- specifically, he pointed to a lower-than-expected tax rate and an accounting gain on "a non-core hedge."
However, he said "the underlying" results were still much better than expected.
RBC said it is expecting a "moderately slower economy" in 2007 that could have some impact on earnings growth. The bank lowered its target for earnings-per-share growth from 20% in 2006 to 10% for next year.
Edward Jones' Mr. Kersting said margin pressure, higher loan losses and a downturn in the economy in the United States could all affect RBC's performance in 2007. However, none of those factors was likely to surprise investors, and are all already priced into RBC's stock price, he said.
Royal Bank of Canada reported record annual earnings yesterday on the back of strong domestic retail-banking results that contrasted with problems in the same retail-banking arena for one of its major rivals.
RBC's Canadian personal and commercial bank division delivered earnings of $2.8-billion, up $490-million, or 21%, from the previous year.
The results follow on from relatively flat performance in Canadian personal and commercial banking announced by Bank of Montreal, which reported its earnings on Tuesday. BMO's net income for 2006 was $1.1-billion, up just 6.2% from last year.
"Domestic trends [at RBC] look better than those at BMO," said UBS Investment Research analyst Jason Bilodeau.
RBC gained market share in mortgages and loans, and at its full-service brokerage service, Mr. Bilodeau said. He also noted the bank posted a 16% year-over-year growth in credit-card market share.
Edward Jones analyst Tom Kersting said RBC is "executing better" than BMO on basic retail-banking activities, like staff training and systems that help bank personnel cross-sell additional products to their customers.
"It certainly appears that RBC is taking retail market share [from other banks,]" Mr. Kersting said.
BMO in particular has been accused of driving down margins on mortgages and loans earlier this year in a failed attempt to increase market share. Bill Downe, who was confirmed as BMO's next chief executive this week, said BMO's executives are still "working our way through margin issues relating to pricing decisions taken earlier [in 2006]."
Overall, RBC delivered net income of $4.7-billion for 2006, up $1.3-billion, or 40%, from last year. Revenue was $20.6-billion, up $1.5-billion, or 8%, from last year.
Fourth-quarter net income at Canada's biggest bank was $1.3-billion, up $740-million from the same quarter last year, when the bank booked a provision for $591-million related to its involvement in Enron.
It was "another big quarter for Royal Bank," said RBC Capital Markets analyst Jamie Keating.
Mr. Keating noted that RBC's results were helped by "some unusual or non-recurring benefits" -- specifically, he pointed to a lower-than-expected tax rate and an accounting gain on "a non-core hedge."
However, he said "the underlying" results were still much better than expected.
RBC said it is expecting a "moderately slower economy" in 2007 that could have some impact on earnings growth. The bank lowered its target for earnings-per-share growth from 20% in 2006 to 10% for next year.
Edward Jones' Mr. Kersting said margin pressure, higher loan losses and a downturn in the economy in the United States could all affect RBC's performance in 2007. However, none of those factors was likely to surprise investors, and are all already priced into RBC's stock price, he said.
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The Globe and Mail, Andrew Willis, 30 November 2006
Each evening on the way home from the Royal Bank of Canada branch that he runs, Dennis Conway walks past branches run by his five biggest competitors.
Last night, Mr. Conway made that stroll knowing he's stealing customers away from those other branches, to the benefit of RBC shareholders. Strong growth in its retail network helped earn the bank a record $4.7-billion of profit in fiscal 2006, the largest annual profit yet at a Canadian bank.
How are Mr. Conway and the 52 people who work at his branch winning the battle in the trenches? “It's all about the day-to-day dialogue with the customers,” the 27-year RBC veteran says. “We've got an environment where our people are motivated and focused on meeting the clients' needs.”
RBC's record year showed it is doing basic banking very well. A growing sales culture is backed by a computer system that flags what the bank calls “offers and opportunities.”
For example, if a long-time customer doesn't carry an RBC credit card, a blue box shows up on the teller's screen.
“Royal Bank gained share in mortgages, loans, full-service brokerage; in particular we note 16-per-cent year-over-year growth and share gains in credit cards,” said Jason Bilodeau, bank analyst at UBS Securities.
Bank of Montreal revealed this week that it was losing market share in domestic retail banking.
RBC, on the other hand, saw a $57-million jump in revenue from personal banking services, such as mortgages, a $62-million boost in insurance sales and a $73-million rise in sales of wealth products, such as mutual funds. In all, the Canadian retail arm of the bank had revenue of $13.4-billion, up 8 per cent from last year.
“It appears that Bank of Montreal's pain was Royal Bank's gain,” said Jamie Keating, who follows the sector for RBC Dominion Securities Inc. Attracting more customers into bank branches turbocharges RBC's profit. The bank's domestic retail operations boast a 31.5-per-cent return on equity. The far smaller U.S. and international retail division posted a 13.6-per-cent return.
RBC achieved a record year on strength in all three of its major divisions. The U.S. and international network, a drag on earnings in past years, showed continued signs of a turnaround, with profit up 15 per cent to $393-million.
RBC Dominion Securities Inc., the investment banking arm, had a record year on the back of deal making and trading fees, with $1.4-billion in profit, up 85 per cent from $760-million in 2005.
The bank's overall return on equity was 23.5 per cent, and RBC exceeded performance targets in every major area. In a note that reflects healthy bonus cheques for some employees, RBC explained its non-interest expenses rose $729-million, or 7 per cent, to reflect “higher variable compensation on stronger business performance.”
The good times are expected to continue. RBC's loan losses remain near historic lows. Mr. Keating said the bank's “conservative attitude” toward provisions for bad debt “suggest RBC's earnings are more sustainable as impaired loans start to rise.”
In addition to targeting 10-per-cent profit growth for next year, chief executive officer Gordon Nixon committed the bank to 20-per-cent-plus return on equity and a dividend payout of 40 to 50 per cent of profit in 2007. RBC raised dividends twice in 2006, but did not boost the payout in the fourth quarter.
“Domestic trends look better than those at Bank of Montreal, lending some confidence to the view that BMO's challenges are company-specific, not endemic of the industry,” Mr. Bilodeau said.
RBC's profit was 96 cents a share on a diluted basis in the fourth quarter. On a cash basis, which most analysts use, the bank earned 97 cents a share, easily surpassing the 90 cents forecast by analysts surveyed by Thomson Financial.
For the year, RBC earned $3.59 a share fully diluted, up 40 per cent from 2005. Excluding provisions for Enron-related litigation in 2005, profit rose 27 per cent.
Each evening on the way home from the Royal Bank of Canada branch that he runs, Dennis Conway walks past branches run by his five biggest competitors.
Last night, Mr. Conway made that stroll knowing he's stealing customers away from those other branches, to the benefit of RBC shareholders. Strong growth in its retail network helped earn the bank a record $4.7-billion of profit in fiscal 2006, the largest annual profit yet at a Canadian bank.
How are Mr. Conway and the 52 people who work at his branch winning the battle in the trenches? “It's all about the day-to-day dialogue with the customers,” the 27-year RBC veteran says. “We've got an environment where our people are motivated and focused on meeting the clients' needs.”
RBC's record year showed it is doing basic banking very well. A growing sales culture is backed by a computer system that flags what the bank calls “offers and opportunities.”
For example, if a long-time customer doesn't carry an RBC credit card, a blue box shows up on the teller's screen.
“Royal Bank gained share in mortgages, loans, full-service brokerage; in particular we note 16-per-cent year-over-year growth and share gains in credit cards,” said Jason Bilodeau, bank analyst at UBS Securities.
Bank of Montreal revealed this week that it was losing market share in domestic retail banking.
RBC, on the other hand, saw a $57-million jump in revenue from personal banking services, such as mortgages, a $62-million boost in insurance sales and a $73-million rise in sales of wealth products, such as mutual funds. In all, the Canadian retail arm of the bank had revenue of $13.4-billion, up 8 per cent from last year.
“It appears that Bank of Montreal's pain was Royal Bank's gain,” said Jamie Keating, who follows the sector for RBC Dominion Securities Inc. Attracting more customers into bank branches turbocharges RBC's profit. The bank's domestic retail operations boast a 31.5-per-cent return on equity. The far smaller U.S. and international retail division posted a 13.6-per-cent return.
RBC achieved a record year on strength in all three of its major divisions. The U.S. and international network, a drag on earnings in past years, showed continued signs of a turnaround, with profit up 15 per cent to $393-million.
RBC Dominion Securities Inc., the investment banking arm, had a record year on the back of deal making and trading fees, with $1.4-billion in profit, up 85 per cent from $760-million in 2005.
The bank's overall return on equity was 23.5 per cent, and RBC exceeded performance targets in every major area. In a note that reflects healthy bonus cheques for some employees, RBC explained its non-interest expenses rose $729-million, or 7 per cent, to reflect “higher variable compensation on stronger business performance.”
The good times are expected to continue. RBC's loan losses remain near historic lows. Mr. Keating said the bank's “conservative attitude” toward provisions for bad debt “suggest RBC's earnings are more sustainable as impaired loans start to rise.”
In addition to targeting 10-per-cent profit growth for next year, chief executive officer Gordon Nixon committed the bank to 20-per-cent-plus return on equity and a dividend payout of 40 to 50 per cent of profit in 2007. RBC raised dividends twice in 2006, but did not boost the payout in the fourth quarter.
“Domestic trends look better than those at Bank of Montreal, lending some confidence to the view that BMO's challenges are company-specific, not endemic of the industry,” Mr. Bilodeau said.
RBC's profit was 96 cents a share on a diluted basis in the fourth quarter. On a cash basis, which most analysts use, the bank earned 97 cents a share, easily surpassing the 90 cents forecast by analysts surveyed by Thomson Financial.
For the year, RBC earned $3.59 a share fully diluted, up 40 per cent from 2005. Excluding provisions for Enron-related litigation in 2005, profit rose 27 per cent.
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Canadian Press, David Friend, 30 November 2006
Royal Bank posted a record annual profit of $4.73 billion Thursday, the highest annual earnings ever reported by a Canadian bank, but scaled back projections for growth in the new year.
Canada's largest bank said quarterly profit jumped 142 per cent to a record $1.26 billion in the fourth quarter ended Oct. 31, from a year-ago $522 million last year. In 2005, profits were pulled down by $591 million in lawsuit settlements related to Enron Corp., the bankrupt former Houston-based energy trader, as well as insurance claims from hurricanes Katrina, Rita and Wilma.
Full-year earnings at the Royal amounted to $3.59 per share on a diluted basis, compared with a year-earlier $3.4 billion or $2.57 per share.
"Each of our businesses contributed to our growth as they continued to build on the strong momentum that they've enjoyed throughout the year," president and CEO Gordon Nixon said in a conference call with investors.
Cash earnings per share amounted to 97 cents for the quarter ended Oct. 31, versus a year-earlier 39 cents, the Toronto-based bank said. On average, analysts had forecast quarterly earnings of 90 cents a share, according to Thomson Financial.
In its outlook for the new year, Royal reined in its estimate for earnings per share growth to "at least 10 per cent," down from an earlier growth target of more than 20 per cent set for fiscal 2006.
"These objectives are based on our expectation of a robust Canadian economy with continued strong consumer spending and solid business investment," Nixon said.
He added that the company continues to look outside the country for growth.
"In 2006 about a third of our earnings - over $1.5 billion - came from outside of Canada, compared to 25 per cent in 2002," he said.
While the bank is cashing in on a strong housing market in Canada, with solid growth in mortgages and consumer loans, it faces tougher competition in the United States, where a slowing economy and slumping housing market is squeezing its Centura regional bank and other subsidiaries.
However, the weakened outlook shouldn't disturb investors, said Tom Kersting, a financial services analyst with Edward Jones in St. Louis.
"I don't think it necessarily means anything too significant," he said, adding that the drop in profits at its U.S. and international operations, down to $126 million in the quarter from $132 million last year, weren't significant.
Considering "the strong currency translation and a difficult environment in the U.S., I continue to believe that the U.S. operations are doing quite well for Royal Bank," Kersting said.
Overall, Royal's 20 per cent growth projection last year "was off an artificially low base, because they had some Enron issues and the hurricanes. They're coming off a cleaner base going into '07," he said.
In its financial statement, the bank reported total revenue from continuing operations for the fourth-quarter of $5.35 billion, up from last year's $4.8 billion. For all of fiscal 2006, Royal's revenue rose to $20.6 billion from $19.2 billion.
The Canadian personal and business segment - which provided about 59 per cent of net income from continuing operations - saw its annual profit jump $490 million, or 17.6 per cent, to $2.79 billion.
Royal said that year-over-year, its banking and wealth management businesses saw strong revenue growth. Banking revenues climbed to $3.6 billion from $3.4 billion, while wealth management rose to $2.7 million from $2.3 million.
Royal's return on common equity for the year - a broad measure of efficiency and profitability - was 23.5 per cent. The bank's return on equity for 2005 was 18 per cent.
The bank also declared a quarterly dividend of 40 cents per share, payable Feb. 23 to shareholders of record on Jan. 25.
Kersting said Edward Jones maintains its "hold" rating on Royal Bank shares.
"The company is really firing on all cylinders and they're very well positioned in the industry. However, there is a difference between a company and an investment. The shares of Royal Bank are fully priced with most of that positive news reflected in today's stock price," he said.
Royal Bank posted a record annual profit of $4.73 billion Thursday, the highest annual earnings ever reported by a Canadian bank, but scaled back projections for growth in the new year.
Canada's largest bank said quarterly profit jumped 142 per cent to a record $1.26 billion in the fourth quarter ended Oct. 31, from a year-ago $522 million last year. In 2005, profits were pulled down by $591 million in lawsuit settlements related to Enron Corp., the bankrupt former Houston-based energy trader, as well as insurance claims from hurricanes Katrina, Rita and Wilma.
Full-year earnings at the Royal amounted to $3.59 per share on a diluted basis, compared with a year-earlier $3.4 billion or $2.57 per share.
"Each of our businesses contributed to our growth as they continued to build on the strong momentum that they've enjoyed throughout the year," president and CEO Gordon Nixon said in a conference call with investors.
Cash earnings per share amounted to 97 cents for the quarter ended Oct. 31, versus a year-earlier 39 cents, the Toronto-based bank said. On average, analysts had forecast quarterly earnings of 90 cents a share, according to Thomson Financial.
In its outlook for the new year, Royal reined in its estimate for earnings per share growth to "at least 10 per cent," down from an earlier growth target of more than 20 per cent set for fiscal 2006.
"These objectives are based on our expectation of a robust Canadian economy with continued strong consumer spending and solid business investment," Nixon said.
He added that the company continues to look outside the country for growth.
"In 2006 about a third of our earnings - over $1.5 billion - came from outside of Canada, compared to 25 per cent in 2002," he said.
While the bank is cashing in on a strong housing market in Canada, with solid growth in mortgages and consumer loans, it faces tougher competition in the United States, where a slowing economy and slumping housing market is squeezing its Centura regional bank and other subsidiaries.
However, the weakened outlook shouldn't disturb investors, said Tom Kersting, a financial services analyst with Edward Jones in St. Louis.
"I don't think it necessarily means anything too significant," he said, adding that the drop in profits at its U.S. and international operations, down to $126 million in the quarter from $132 million last year, weren't significant.
Considering "the strong currency translation and a difficult environment in the U.S., I continue to believe that the U.S. operations are doing quite well for Royal Bank," Kersting said.
Overall, Royal's 20 per cent growth projection last year "was off an artificially low base, because they had some Enron issues and the hurricanes. They're coming off a cleaner base going into '07," he said.
In its financial statement, the bank reported total revenue from continuing operations for the fourth-quarter of $5.35 billion, up from last year's $4.8 billion. For all of fiscal 2006, Royal's revenue rose to $20.6 billion from $19.2 billion.
The Canadian personal and business segment - which provided about 59 per cent of net income from continuing operations - saw its annual profit jump $490 million, or 17.6 per cent, to $2.79 billion.
Royal said that year-over-year, its banking and wealth management businesses saw strong revenue growth. Banking revenues climbed to $3.6 billion from $3.4 billion, while wealth management rose to $2.7 million from $2.3 million.
Royal's return on common equity for the year - a broad measure of efficiency and profitability - was 23.5 per cent. The bank's return on equity for 2005 was 18 per cent.
The bank also declared a quarterly dividend of 40 cents per share, payable Feb. 23 to shareholders of record on Jan. 25.
Kersting said Edward Jones maintains its "hold" rating on Royal Bank shares.
"The company is really firing on all cylinders and they're very well positioned in the industry. However, there is a difference between a company and an investment. The shares of Royal Bank are fully priced with most of that positive news reflected in today's stock price," he said.
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Bloomberg, Doug Alexander and Sean B. Pasternak, 30 November 2006
Royal Bank of Canada, the country's biggest bank, said profit rose for the eighth straight quarter to a record, as equity trading revenue more than doubled and investment banking fees surged.
Fourth-quarter net income climbed to C$1.26 billion ($1.11 billion), or 96 cents a share, from C$522 million, or 39 cents a year ago when profit was cut by legal costs, the bank said today in a statement. Earnings topped analysts' estimates.
Royal Bank led all lenders for managing stock sales this year and ranked seventh for mergers advice in a record year for takeovers, according to data compiled by Bloomberg. Profit from the RBC Capital Markets investment banking unit was C$315 million, compared with a C$57 million loss a year ago.
``Certainly, 2006 in general has been great for the investment banking business, the deal flow has been so strong,'' said Tom Kersting, an analyst with Edward Jones in St. Louis, who rates Royal Bank stock a ``hold'' and doesn't own any.
Shares of Royal Bank fell 18 cents to C$53.28 at 4:10 p.m. on the Toronto Stock Exchange. The stock has climbed 17 percent this year, compared with a 15 percent increase for the 39-member Standard & Poor's/TSX Financials Index.
The bank said profit before one-time items was 97 cents a share, topping the 92-cent estimate from National Bank Financial analyst Robert Wessel, and the median estimate of 91 cents from nine analysts surveyed by Bloomberg News. Overall revenue in the period ended Oct. 31 rose 12 percent to C$5.35 billion.
Profit a year ago was reduced as Royal Bank set aside C$326 million for legal costs related to a class-action lawsuit by shareholders of Enron Corp., the collapsed energy trader, and C$203 million for insurance claims from hurricanes Katrina, Wilma and Rita. Excluding the Enron provision, profit rose 49 percent.
``This looks like a very solid quarter,' said John Kinsey, who helps manage $800 million at Caldwell Securities Ltd. in Toronto, including Royal Bank shares. ``They seem to have the right formula for what they're doing.''
Royal Bank and other lenders in Canada are benefiting from a surge in mergers among mining and oil and gas companies. The value of mergers Royal Bank advised on in the fiscal quarter rose by a third to $23.3 billion, according to Bloomberg. Trading revenue from equities, currencies and commodities rose 39 percent to C$447 million.
Investment banking profit accounted for 30 percent of total net income for the fiscal year, compared with 22 percent the previous year. A total 56 percent of investment banking revenue came from outside Canada.
Consumer banking profit in Canada rose 54 percent to C$775 million from C$504 million, driven by higher revenue from credit cards, insurance and asset management. Mortgage balances rose 12 percent to C$105.1 billion. Royal Bank set aside C$159 million for bad loans, the most in at least three years, compared with C$103 million a year ago.
``Earnings appear helped somewhat by low taxes, better insurance revenues and some derivative gains, but in aggregate these are offset by the higher than expected loan loss provisions,'' CIBC World Markets analyst Darko Mihelic said today in a note to clients. Mihelic said revenue topped his estimates, while provisions and trading fees fell short.
Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, fell 4.5 percent to C$126 million from C$132 million, as the stronger Canadian dollar pared earnings. Compensation costs also rose.
Royal Bank resumed its U.S. expansion after agreeing in August to acquire Flag Financial Corp. of Atlanta for about C$433.5 million. On Nov. 1, Royal Bank agreed to buy 39 branches in Alabama from AmSouth Bancorporation to make RBC Centura the seventh-largest lender in that state.
Profit for the fiscal year rose 40 percent to a record C$4.73 billion, or C$3.59 a share, from C$3.39 billion, or C$2.57 a share. Annual revenue rose 7.6 percent to C$20.6 billion.
Royal Bank said it met six of its seven annual financial targets. Earnings per share topped its target of 20 percent growth. For next year, Royal Bank aims to increase earnings per share by at least 10 percent and post a return on equity of at least 20 percent. The dividend payout will be between 40 percent and 50 percent of earnings.
Royal Bank's growth compared with the last 18 months ``is going to start to peter out a little bit,'' UBS Canada analyst Jason Bilodeau said in an interview before earnings. ``At some point they've got to get back to a more normal trend.''
Equity financings are already starting to slow for Canadian banks. Stock sales fell 29 percent to C$9.1 billion in the third quarter from a year ago as income trusts offerings slowed, according to a report today by the Investment Industry Association of Canada.
National Bank of Canada, the sixth-largest lender, said today that profit rose 6.2 percent to C$220 million, or C$1.31 a share. The Montreal-based bank also boosted its quarterly dividend by 8 percent to 54 cents a share. The bank was expected to earn C$1.23 a share, according to the median estimate of nine analysts polled by Bloomberg News.
Investment banking earnings surged 44 percent to C$75 million after the bank advised on mergers worth almost C$2 billion in the quarter, triple the year earlier. Consumer banking profit rose 13 percent to C$124 million, boosted by higher lending and mortgages, while asset management earnings climbed 12 percent to C$29 million, National Bank said.
Bank of Montreal, the No. 4 bank, was the first Canadian lender to report fourth-quarter results, when it said Nov. 28 that profit rose 4.8 percent to C$696 million on fewer loan losses.
Royal Bank of Canada, the country's biggest bank, said profit rose for the eighth straight quarter to a record, as equity trading revenue more than doubled and investment banking fees surged.
Fourth-quarter net income climbed to C$1.26 billion ($1.11 billion), or 96 cents a share, from C$522 million, or 39 cents a year ago when profit was cut by legal costs, the bank said today in a statement. Earnings topped analysts' estimates.
Royal Bank led all lenders for managing stock sales this year and ranked seventh for mergers advice in a record year for takeovers, according to data compiled by Bloomberg. Profit from the RBC Capital Markets investment banking unit was C$315 million, compared with a C$57 million loss a year ago.
``Certainly, 2006 in general has been great for the investment banking business, the deal flow has been so strong,'' said Tom Kersting, an analyst with Edward Jones in St. Louis, who rates Royal Bank stock a ``hold'' and doesn't own any.
Shares of Royal Bank fell 18 cents to C$53.28 at 4:10 p.m. on the Toronto Stock Exchange. The stock has climbed 17 percent this year, compared with a 15 percent increase for the 39-member Standard & Poor's/TSX Financials Index.
The bank said profit before one-time items was 97 cents a share, topping the 92-cent estimate from National Bank Financial analyst Robert Wessel, and the median estimate of 91 cents from nine analysts surveyed by Bloomberg News. Overall revenue in the period ended Oct. 31 rose 12 percent to C$5.35 billion.
Profit a year ago was reduced as Royal Bank set aside C$326 million for legal costs related to a class-action lawsuit by shareholders of Enron Corp., the collapsed energy trader, and C$203 million for insurance claims from hurricanes Katrina, Wilma and Rita. Excluding the Enron provision, profit rose 49 percent.
``This looks like a very solid quarter,' said John Kinsey, who helps manage $800 million at Caldwell Securities Ltd. in Toronto, including Royal Bank shares. ``They seem to have the right formula for what they're doing.''
Royal Bank and other lenders in Canada are benefiting from a surge in mergers among mining and oil and gas companies. The value of mergers Royal Bank advised on in the fiscal quarter rose by a third to $23.3 billion, according to Bloomberg. Trading revenue from equities, currencies and commodities rose 39 percent to C$447 million.
Investment banking profit accounted for 30 percent of total net income for the fiscal year, compared with 22 percent the previous year. A total 56 percent of investment banking revenue came from outside Canada.
Consumer banking profit in Canada rose 54 percent to C$775 million from C$504 million, driven by higher revenue from credit cards, insurance and asset management. Mortgage balances rose 12 percent to C$105.1 billion. Royal Bank set aside C$159 million for bad loans, the most in at least three years, compared with C$103 million a year ago.
``Earnings appear helped somewhat by low taxes, better insurance revenues and some derivative gains, but in aggregate these are offset by the higher than expected loan loss provisions,'' CIBC World Markets analyst Darko Mihelic said today in a note to clients. Mihelic said revenue topped his estimates, while provisions and trading fees fell short.
Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, fell 4.5 percent to C$126 million from C$132 million, as the stronger Canadian dollar pared earnings. Compensation costs also rose.
Royal Bank resumed its U.S. expansion after agreeing in August to acquire Flag Financial Corp. of Atlanta for about C$433.5 million. On Nov. 1, Royal Bank agreed to buy 39 branches in Alabama from AmSouth Bancorporation to make RBC Centura the seventh-largest lender in that state.
Profit for the fiscal year rose 40 percent to a record C$4.73 billion, or C$3.59 a share, from C$3.39 billion, or C$2.57 a share. Annual revenue rose 7.6 percent to C$20.6 billion.
Royal Bank said it met six of its seven annual financial targets. Earnings per share topped its target of 20 percent growth. For next year, Royal Bank aims to increase earnings per share by at least 10 percent and post a return on equity of at least 20 percent. The dividend payout will be between 40 percent and 50 percent of earnings.
Royal Bank's growth compared with the last 18 months ``is going to start to peter out a little bit,'' UBS Canada analyst Jason Bilodeau said in an interview before earnings. ``At some point they've got to get back to a more normal trend.''
Equity financings are already starting to slow for Canadian banks. Stock sales fell 29 percent to C$9.1 billion in the third quarter from a year ago as income trusts offerings slowed, according to a report today by the Investment Industry Association of Canada.
National Bank of Canada, the sixth-largest lender, said today that profit rose 6.2 percent to C$220 million, or C$1.31 a share. The Montreal-based bank also boosted its quarterly dividend by 8 percent to 54 cents a share. The bank was expected to earn C$1.23 a share, according to the median estimate of nine analysts polled by Bloomberg News.
Investment banking earnings surged 44 percent to C$75 million after the bank advised on mergers worth almost C$2 billion in the quarter, triple the year earlier. Consumer banking profit rose 13 percent to C$124 million, boosted by higher lending and mortgages, while asset management earnings climbed 12 percent to C$29 million, National Bank said.
Bank of Montreal, the No. 4 bank, was the first Canadian lender to report fourth-quarter results, when it said Nov. 28 that profit rose 4.8 percent to C$696 million on fewer loan losses.
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Report on Business Television, 30 November 2006
Click here for the ROBTv video clip, of Barbara Stymiest (COO, RBC) speaking about RBC's Q4 2006 Earnings.
Click here for the ROBTv video clip, of Barbara Stymiest (COO, RBC) speaking about RBC's Q4 2006 Earnings.
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RBC Capital Markets, 30 November 2006
First Impression
• RY Q4 Above Consensus. RY reported 97¢ cash EPS, 9% above the 89¢ consensus expectation. Our first impression is the result may include some unusual or non-recurring benefits, but that the underlying was still much better than consensus. Revenue growth and operating leverage were both very strong.
• Low Tax Rate and High AcG-13 were Helpers. RY’s tax rate was 21% (non-TEB) relative to our 28% estimate, accounting for ~$0.08 positive variance versus our estimate. This may be more sustainable than we first thought, as it synthesizes a 32% domestic tax rate, with 19-21% for International and Capital Markets. Also helpful would have been a non core hedge gain that swung from an earnings drag in recent quarters to an earnings helper in this quarter.
• Loan Loss Accrual Above Expectation. The loan loss at $159MM (~0.29% of L&A) was well above the $131MM consensus estimate (2¢) and our $115MM forecast (3¢). This more conservative accrual is, in our opinion, more indicative of a through-the-cycle run rate than at many peers, suggesting RY’s earnings are more sustainable as impaired loans start to rise. RY did record a 5% QoQ lift in impaired loans to $834MM, on rising formations, largely from residential mortgages and corporate.
• Domestic Retail Very Strong. Big loan volume and solid spreads drove earnings to a record $778MM versus $743MM in last quarter, and up 17% YoY. It appears that BMO’s pain was RY’s gain.
• U.S. & International Improved. Net income of $126MM was 14% above our estimate, and up a similar percentage QoQ.
• Capital Markets Held Steady. Earnings of $315MM was just above our $309MM estimate down from $329MM last quarter but up 17% YoY, Trading weakened but much less than at BMO, while securities gains were in line and underwriting was above our estimate.
• Positive EPS revisions thesis INTACT. We believe street estimates will be going up. Consensus 2007 EPS is $3.86 or ~$0.92/quarter (RY just beat that by 5cts or 5%). Our 2007 estimate is higher at $3.94 and we are reading high-on-street is now $4.00.
First Impression
• RY Q4 Above Consensus. RY reported 97¢ cash EPS, 9% above the 89¢ consensus expectation. Our first impression is the result may include some unusual or non-recurring benefits, but that the underlying was still much better than consensus. Revenue growth and operating leverage were both very strong.
• Low Tax Rate and High AcG-13 were Helpers. RY’s tax rate was 21% (non-TEB) relative to our 28% estimate, accounting for ~$0.08 positive variance versus our estimate. This may be more sustainable than we first thought, as it synthesizes a 32% domestic tax rate, with 19-21% for International and Capital Markets. Also helpful would have been a non core hedge gain that swung from an earnings drag in recent quarters to an earnings helper in this quarter.
• Loan Loss Accrual Above Expectation. The loan loss at $159MM (~0.29% of L&A) was well above the $131MM consensus estimate (2¢) and our $115MM forecast (3¢). This more conservative accrual is, in our opinion, more indicative of a through-the-cycle run rate than at many peers, suggesting RY’s earnings are more sustainable as impaired loans start to rise. RY did record a 5% QoQ lift in impaired loans to $834MM, on rising formations, largely from residential mortgages and corporate.
• Domestic Retail Very Strong. Big loan volume and solid spreads drove earnings to a record $778MM versus $743MM in last quarter, and up 17% YoY. It appears that BMO’s pain was RY’s gain.
• U.S. & International Improved. Net income of $126MM was 14% above our estimate, and up a similar percentage QoQ.
• Capital Markets Held Steady. Earnings of $315MM was just above our $309MM estimate down from $329MM last quarter but up 17% YoY, Trading weakened but much less than at BMO, while securities gains were in line and underwriting was above our estimate.
• Positive EPS revisions thesis INTACT. We believe street estimates will be going up. Consensus 2007 EPS is $3.86 or ~$0.92/quarter (RY just beat that by 5cts or 5%). Our 2007 estimate is higher at $3.94 and we are reading high-on-street is now $4.00.
