RBC Capital Markets, 29 August 2008
Royal Bank's EPS were ahead of our estimates on both a GAAP and core basis.
• GAAP EPS of $0.92 were well ahead of our estimate of estimate $0.75, although they were down 13% YoY.
• Core cash EPS of $1.14 were ahead of our estimate of $1.06 on better than expected performance from capital markets and insurance, offsetting weaker than expected results from the U.S. and international division. Core cash EPS were up 6% YoY.
• Separately disclosed write-offs of $498 million pre-tax were $102 million lower than our estimate. The bank netted off $105 million in compensation adjustments when disclosing the impact of write-offs, which we had not accounted for in our estimate.
• Provisions for credit losses of $334 million were slightly below Q2/08, but much higher than the $178 million booked in Q3/07. As expected, most of the increase came from the U.S. banking division.
• We have increased our estimated core cash EPS slightly in 2009 to $4.60 (from $4.55), reflecting higher expected capital markets profitability, offset by lower expected U.S. and international banking revenues.
Raising 12-month target price by $1/share
We have raised our 12-month target price per share to $50 from $49, reflecting a higher estimated book value following the smaller than expected net writedowns in Q3/08. Our target is based on a P/B of 2.2x, which compares to the current trading multiple of 2.4x. We maintain our Sector Perform rating. (We currently rate half of our Canadian bank universe as Sector Perform, half as Underperform).
• We like the bank's stock in 2009 but believe that it is too early to buy the bank's shares as we believe that exposures to U.S. lending will lead to continued increases in loan losses for the bank in the next few quarters, and exposures to capital markets-related issues remain an overhang in our view. Looking out to 2009, the bank should benefit from recent investments in its retail franchise, a strong funding base, an expanding global wealth management platform and capital markets profitability that has upside on a reported basis.
Royal Bank's EPS were ahead of our estimates on both a GAAP and core basis.
• GAAP EPS of $0.92 were well ahead of our estimate of estimate $0.75, although they were down 13% YoY.
• Core cash EPS of $1.14 were ahead of our estimate of $1.06 on better than expected performance from capital markets and insurance, offsetting weaker than expected results from the U.S. and international division. Core cash EPS were up 6% YoY.
• Separately disclosed write-offs of $498 million pre-tax were $102 million lower than our estimate. The bank netted off $105 million in compensation adjustments when disclosing the impact of write-offs, which we had not accounted for in our estimate.
• Provisions for credit losses of $334 million were slightly below Q2/08, but much higher than the $178 million booked in Q3/07. As expected, most of the increase came from the U.S. banking division.
• We have increased our estimated core cash EPS slightly in 2009 to $4.60 (from $4.55), reflecting higher expected capital markets profitability, offset by lower expected U.S. and international banking revenues.
Raising 12-month target price by $1/share
We have raised our 12-month target price per share to $50 from $49, reflecting a higher estimated book value following the smaller than expected net writedowns in Q3/08. Our target is based on a P/B of 2.2x, which compares to the current trading multiple of 2.4x. We maintain our Sector Perform rating. (We currently rate half of our Canadian bank universe as Sector Perform, half as Underperform).
• We like the bank's stock in 2009 but believe that it is too early to buy the bank's shares as we believe that exposures to U.S. lending will lead to continued increases in loan losses for the bank in the next few quarters, and exposures to capital markets-related issues remain an overhang in our view. Looking out to 2009, the bank should benefit from recent investments in its retail franchise, a strong funding base, an expanding global wealth management platform and capital markets profitability that has upside on a reported basis.
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Scotia Capital, 29 August 2008
• Royal Bank (RY) Q3/08 cash operating earnings increased 5% year over year to $1.14 per share, versus our estimate of $1.12 per share and consensus of $1.06 per share.
• Reported earnings were $0.95 per share, which included $498 million ($263 million after-tax or $0.20 per share) in writedowns on trading and securities portfolio and $14 million ($9 million after-tax or $0.01 per share) in gains on the increase in fair value of held-for-trading liabilities as the result of credit spreads widening. Therefore, net writedowns were $484 million ($254 million after-tax or $0.19 per share), slightly higher than expected
• Operating ROE was 23.8% versus 24.9% a year earlier. Reported ROE was an impressive 19.6%.
• Earnings were driven by strong Canadian Banking earnings increasing 19% from a year earlier followed by 15% growth in RBC Capital Markets (excluding writedowns), 10% growth in Wealth Management with Insurance increasing 33% to $137 million. The operating performance in the U.S. was disappointing as earnings declined 63% to $37 million (excluding writedowns) from $101 million a year earlier due to higher loan loss provisions. U.S. retail represented only 3% of total earnings.
• Overall bank operating leverage was impressive at 10.4%, with revenues (excluding writedowns) increasing 13.7% and non-interest expenses adjusted for insurance and VIEs increasing a modest 3.3%.
Canadian Banking Earnings Increase 19%
• Beginning this quarter, RY is reporting Canadian Banking earnings excluding Insurance.
• Canadian Banking earnings were up 19% to $710 million from $597 million a year earlier due to strong volume growth partially offset by narrower spreads and higher loan loss provisions.
• Revenues in the Canadian Banking segment increased 5.4% with non-interest expenses declining 2.7%, resulting in positive operating leverage of 8.1%.
• Loan loss provisions (LLPs) increased 7% to $204 million from $190 million a year earlier reflecting portfolio growth.
Canadian Retail NIM Declines 5 bp
• Retail net interest margin (NIM) declined 5 basis points (bp) sequentially and 20 bp from a year earlier to 2.95% due partly to mix shift as the bank focuses more on secured lending.
Insurance
• Insurance earnings were strong this quarter at $137 million versus $104 million in the previous quarter and $103 million a year earlier.
Wealth Management Earnings Increase 10%
• Wealth Management cash earnings increased 10% to $201 million from $183 million a year earlier.
• Revenue increased 1% with operating expenses increasing 1% with taxes and minority interest declining 10%.
• U.S. Wealth Management revenue declined 9% with Canadian Wealth Management increasing 4% and Global Asset Management revenue increasing 28%.
• Mutual fund revenue increased 8% from a year earlier to $414 million. Mutual Fund assets (IFIC) increased 10% from a year earlier to $108.6 billion including PH&N.
International Banking Earnings Decline
• The operating performance in the U.S. was disappointing as earnings declined 63% to $37 million from $101 million a year earlier due to higher loan loss provisions. LLPs increased sharply to $137 million from $17 million a year earlier and up from $91 million in the previous quarter relating primarily to U.S. residential builder finance.
• Revenue and expense growth were high at 21% and 25%, respectively due to the Alabama National and RBTT acquisitions. Operating leverage was negative 4%.
• Net interest margin improved 14 bp from a year earlier and 22 bp sequentially to 3.72%.
U.S. Banking Loan Portfolio
• RY provided additional disclosure on its loan portfolio in the U.S. The loan portfolio totals $23.1 billion with $15.8 billion in wholesale loans and the remaining $7.3 billion in retail loans. The U.S. residential builder finance loans total $2.0 billion representing 7% of the total U.S. loan portfolio. RY also has an additional $1.2 billion of exposure in a wholly-owned subsidiary set up to manage the wind up of loans in out of footprint states.
RBC Capital Markets Earnings Increased 15%
• RBC Capital Markets earnings increased 15% (excluding writedowns) to $415 million from $360 million a year earlier due to strong trading revenue.
Underlying Trading Revenue Very Strong
• Trading revenue was very strong at $717 million (excluding writedowns) versus $786 million in the previous quarter and $544 million a year earlier.
Capital Markets Revenue Solid
• Capital markets revenue was solid at $588 million versus $472 million in the previous quarter and $677 million a year earlier.
• Securities brokerage commissions declined 6% to $345 million from $368 million a year earlier, with underwriting and other advisory fees at $243 million, declining by 21%.
Security Gains Negligible
• Security gains were $5 million or nil per share versus a loss of $0.01 per share in the previous quarter and a gain of $0.02 per share a year earlier.
• Unrealized security surplus was a deficit of $546 million versus a deficit of $304 million in the previous quarter and a surplus of $89 million a year earlier.
Loan Loss Provisions Stable
• Specific loan loss provisions (LLPs) were stable at $334 million or 0.47% of loans from $178 million or 0.29% of loans a year earlier but were stable versus $349 million or 0.53% of loans in the previous quarter. LLPs in Canadian Banking increased 7% to $204 million from $190 million a year earlier but were down modestly from $224 million in the previous quarter. LLPs in International Banking increased sharply to $137 million from $17 million a year earlier and up from $91 million in the previous quarter relating U.S. residential builder finance.
• Our 2008 and 2009 LLP estimates are unchanged at $1,300 million or 0.47% of loans and $1,500 million or 0.54% of loans, respectively.
Loan Formations
• Gross impaired loan formations increased to $753 million versus $867 million in the previous quarter and $377 million a year earlier. Net impaired loan formations increased to $605 million, up from $737 million in the previous quarter and $274 million a year earlier, reflecting mainly higher impaired loans in the U.S. residential builder finance portfolio.
Tier 1 Ratio Solid at 9.5%
• Tier 1 capital (Basel II) was 9.5% versus 9.5% in the previous quarter.
• Risk-weighted assets increased 1.6% at $254.2 billion from a year earlier. Market-at-risk assets declined 7% to $17.6 billion.
• The common equity to risk-weighted assets (CE/RWA) ratio was 10.4%, versus 9.5% in the previous quarter and versus 9.0% a year earlier.
Additional Disclosure on High-Risk Assets
• The bank provided additional disclosure on its exposure to U.S. subprime, Auction rate securities, Municipal GICs, CMBS, U.S. Insurance and Pension solutions, and U.S. subprime and Alt-A mortgages. The notional and fair value exposure to these areas as well as year-to-date writedowns are detailed in Exhibit 2. We believe that RY has a good handle on exposure and that cumulative and potential writedowns are manageable.
RY Expanding - Taking Advantage of Market Fallout
• RY has taken advantage of the fallout in the U.S. by recruiting over 100 senior bankers from different U.S. and global institutions in order to build its own platforms. On June 24, 2008, RY hired two senior executives from Citigroup to add to its U.S. credit-trading platform. On July 5, 2008, RY hired five senior municipal bankers from UBS after UBS announced the closing of its municipal bond department. In addition, RY hired eight investment bankers from Bear Stearns, seven to work in its municipal finance healthcare group and Jim Wolfe, to lead its U.S. leveraged finance group. Lastly, on August 7, 2008, RY agreed to purchase ABN Amro's Canadian Commercial Leasing division, adding scale to the bank's existing platform and solidifying its leading position.
Recommendation
• Our 2008 and 2009 earnings estimates remain unchanged at $4.45 per share and $4.90 per share, respectively.
• We are trimming our 12-month share price target to $70 from $75 per share due to fatigue in equity markets and weaker economic outlook. Our new share price target represents 14.3x our 2009 earnings estimate.
• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on strength of franchise and operating platforms, particularly Retail Banking and Wealth Management, growth prospects from RBC Capital Markets and higher than bank group ROE.
• Royal Bank (RY) Q3/08 cash operating earnings increased 5% year over year to $1.14 per share, versus our estimate of $1.12 per share and consensus of $1.06 per share.
• Reported earnings were $0.95 per share, which included $498 million ($263 million after-tax or $0.20 per share) in writedowns on trading and securities portfolio and $14 million ($9 million after-tax or $0.01 per share) in gains on the increase in fair value of held-for-trading liabilities as the result of credit spreads widening. Therefore, net writedowns were $484 million ($254 million after-tax or $0.19 per share), slightly higher than expected
• Operating ROE was 23.8% versus 24.9% a year earlier. Reported ROE was an impressive 19.6%.
• Earnings were driven by strong Canadian Banking earnings increasing 19% from a year earlier followed by 15% growth in RBC Capital Markets (excluding writedowns), 10% growth in Wealth Management with Insurance increasing 33% to $137 million. The operating performance in the U.S. was disappointing as earnings declined 63% to $37 million (excluding writedowns) from $101 million a year earlier due to higher loan loss provisions. U.S. retail represented only 3% of total earnings.
• Overall bank operating leverage was impressive at 10.4%, with revenues (excluding writedowns) increasing 13.7% and non-interest expenses adjusted for insurance and VIEs increasing a modest 3.3%.
Canadian Banking Earnings Increase 19%
• Beginning this quarter, RY is reporting Canadian Banking earnings excluding Insurance.
• Canadian Banking earnings were up 19% to $710 million from $597 million a year earlier due to strong volume growth partially offset by narrower spreads and higher loan loss provisions.
• Revenues in the Canadian Banking segment increased 5.4% with non-interest expenses declining 2.7%, resulting in positive operating leverage of 8.1%.
• Loan loss provisions (LLPs) increased 7% to $204 million from $190 million a year earlier reflecting portfolio growth.
Canadian Retail NIM Declines 5 bp
• Retail net interest margin (NIM) declined 5 basis points (bp) sequentially and 20 bp from a year earlier to 2.95% due partly to mix shift as the bank focuses more on secured lending.
Insurance
• Insurance earnings were strong this quarter at $137 million versus $104 million in the previous quarter and $103 million a year earlier.
Wealth Management Earnings Increase 10%
• Wealth Management cash earnings increased 10% to $201 million from $183 million a year earlier.
• Revenue increased 1% with operating expenses increasing 1% with taxes and minority interest declining 10%.
• U.S. Wealth Management revenue declined 9% with Canadian Wealth Management increasing 4% and Global Asset Management revenue increasing 28%.
• Mutual fund revenue increased 8% from a year earlier to $414 million. Mutual Fund assets (IFIC) increased 10% from a year earlier to $108.6 billion including PH&N.
International Banking Earnings Decline
• The operating performance in the U.S. was disappointing as earnings declined 63% to $37 million from $101 million a year earlier due to higher loan loss provisions. LLPs increased sharply to $137 million from $17 million a year earlier and up from $91 million in the previous quarter relating primarily to U.S. residential builder finance.
• Revenue and expense growth were high at 21% and 25%, respectively due to the Alabama National and RBTT acquisitions. Operating leverage was negative 4%.
• Net interest margin improved 14 bp from a year earlier and 22 bp sequentially to 3.72%.
U.S. Banking Loan Portfolio
• RY provided additional disclosure on its loan portfolio in the U.S. The loan portfolio totals $23.1 billion with $15.8 billion in wholesale loans and the remaining $7.3 billion in retail loans. The U.S. residential builder finance loans total $2.0 billion representing 7% of the total U.S. loan portfolio. RY also has an additional $1.2 billion of exposure in a wholly-owned subsidiary set up to manage the wind up of loans in out of footprint states.
RBC Capital Markets Earnings Increased 15%
• RBC Capital Markets earnings increased 15% (excluding writedowns) to $415 million from $360 million a year earlier due to strong trading revenue.
Underlying Trading Revenue Very Strong
• Trading revenue was very strong at $717 million (excluding writedowns) versus $786 million in the previous quarter and $544 million a year earlier.
Capital Markets Revenue Solid
• Capital markets revenue was solid at $588 million versus $472 million in the previous quarter and $677 million a year earlier.
• Securities brokerage commissions declined 6% to $345 million from $368 million a year earlier, with underwriting and other advisory fees at $243 million, declining by 21%.
Security Gains Negligible
• Security gains were $5 million or nil per share versus a loss of $0.01 per share in the previous quarter and a gain of $0.02 per share a year earlier.
• Unrealized security surplus was a deficit of $546 million versus a deficit of $304 million in the previous quarter and a surplus of $89 million a year earlier.
Loan Loss Provisions Stable
• Specific loan loss provisions (LLPs) were stable at $334 million or 0.47% of loans from $178 million or 0.29% of loans a year earlier but were stable versus $349 million or 0.53% of loans in the previous quarter. LLPs in Canadian Banking increased 7% to $204 million from $190 million a year earlier but were down modestly from $224 million in the previous quarter. LLPs in International Banking increased sharply to $137 million from $17 million a year earlier and up from $91 million in the previous quarter relating U.S. residential builder finance.
• Our 2008 and 2009 LLP estimates are unchanged at $1,300 million or 0.47% of loans and $1,500 million or 0.54% of loans, respectively.
Loan Formations
• Gross impaired loan formations increased to $753 million versus $867 million in the previous quarter and $377 million a year earlier. Net impaired loan formations increased to $605 million, up from $737 million in the previous quarter and $274 million a year earlier, reflecting mainly higher impaired loans in the U.S. residential builder finance portfolio.
Tier 1 Ratio Solid at 9.5%
• Tier 1 capital (Basel II) was 9.5% versus 9.5% in the previous quarter.
• Risk-weighted assets increased 1.6% at $254.2 billion from a year earlier. Market-at-risk assets declined 7% to $17.6 billion.
• The common equity to risk-weighted assets (CE/RWA) ratio was 10.4%, versus 9.5% in the previous quarter and versus 9.0% a year earlier.
Additional Disclosure on High-Risk Assets
• The bank provided additional disclosure on its exposure to U.S. subprime, Auction rate securities, Municipal GICs, CMBS, U.S. Insurance and Pension solutions, and U.S. subprime and Alt-A mortgages. The notional and fair value exposure to these areas as well as year-to-date writedowns are detailed in Exhibit 2. We believe that RY has a good handle on exposure and that cumulative and potential writedowns are manageable.
RY Expanding - Taking Advantage of Market Fallout
• RY has taken advantage of the fallout in the U.S. by recruiting over 100 senior bankers from different U.S. and global institutions in order to build its own platforms. On June 24, 2008, RY hired two senior executives from Citigroup to add to its U.S. credit-trading platform. On July 5, 2008, RY hired five senior municipal bankers from UBS after UBS announced the closing of its municipal bond department. In addition, RY hired eight investment bankers from Bear Stearns, seven to work in its municipal finance healthcare group and Jim Wolfe, to lead its U.S. leveraged finance group. Lastly, on August 7, 2008, RY agreed to purchase ABN Amro's Canadian Commercial Leasing division, adding scale to the bank's existing platform and solidifying its leading position.
Recommendation
• Our 2008 and 2009 earnings estimates remain unchanged at $4.45 per share and $4.90 per share, respectively.
• We are trimming our 12-month share price target to $70 from $75 per share due to fatigue in equity markets and weaker economic outlook. Our new share price target represents 14.3x our 2009 earnings estimate.
• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on strength of franchise and operating platforms, particularly Retail Banking and Wealth Management, growth prospects from RBC Capital Markets and higher than bank group ROE.
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Financial Post, Jonathan Ratner, 28 August 2008
Royal Bank of Canada’s third quarter results beat expectations on strong revenues that were partially offset by higher expenses and a higher tax rate.
It’s $498-million writedown ($263-million after tax and compensation adjustments) was in the middle of most analyst expectations, according to Blackmont Capital’s Brad Smith. This was linked to MBIA hedges, CDOs and subprime securities.
Meanwhile, Royal’s earnings from personal and commercial banking rose 19% year-over-year, which is well ahead of its “more challenged peers,” Mr. Smith told clients.
“Overall, we believe Royal had a good quarter as it continues to position itself well in the face of weaker global competition,” he said, reiterating a “buy” recommendation and $55 price target on the stock.
Royal Bank of Canada’s third quarter results beat expectations on strong revenues that were partially offset by higher expenses and a higher tax rate.
It’s $498-million writedown ($263-million after tax and compensation adjustments) was in the middle of most analyst expectations, according to Blackmont Capital’s Brad Smith. This was linked to MBIA hedges, CDOs and subprime securities.
Meanwhile, Royal’s earnings from personal and commercial banking rose 19% year-over-year, which is well ahead of its “more challenged peers,” Mr. Smith told clients.
“Overall, we believe Royal had a good quarter as it continues to position itself well in the face of weaker global competition,” he said, reiterating a “buy” recommendation and $55 price target on the stock.
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Bloomberg, Doug Alexander, 28 August 2008
Talks between Royal Bank of Canada and U.S. regulators over the bank's role in the $330 billion market for failed auction-rate securities have been ``unproductive,'' the New York attorney general's office said.
``Hopefully we can avoid litigation, but that remains unclear right now,'' Alex Detrick, spokesman for Attorney General Andrew Cuomo, said today in an interview.
Royal Bank Chief Operating Officer Barbara Stymiest said today in an interview that there's ``ongoing discussions'' over the bank's role in selling the failed debt securities. The Toronto-based bank also said in an earnings report that it's currently in discussions with U.S. regulators.
Eight financial firms have settled claims in the last three weeks that they misled investors by fraudulently marketing the long-term securities as easy to buy and sell. Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank AG agreed last week to pay $160 million in fines and buy back as much as $15 billion in debt.
Buybacks "are the precedence for the other firms and we certainly have been communicating internally with our advisers that we're looking for ways to provide a liquidity facility to our investors," Stymiest said.
The Toronto-based bank said in its report that it couldn't estimate the impact of potential losses from such a program. Royal Bank also said other legal actions are pending, and that the liability from these proceedings won't be material.
"They'll take a hit for it, but they can withstand it," Dundee Securities Corp. analyst John Aiken said. "It's not going to be huge for Royal's standards, and from a shareholder value perspective, it'll likely be neutral to positive because you're eliminating an additional overhang."
Banks are settling claims stemming from an investigation into allegations they peddled auction-rate securities as investments that were as liquid as cash. The $330 billion market seized up in February, when the credit crisis prompted banks to stop supporting periodic auctions at which the long-term securities were bought and sold.
Royal Bank had C$3.5 billion ($3.3 billion) of auction-rate debt on its balance sheet as of July 31, down from about C$4.5 billion in January.
;
Talks between Royal Bank of Canada and U.S. regulators over the bank's role in the $330 billion market for failed auction-rate securities have been ``unproductive,'' the New York attorney general's office said.
``Hopefully we can avoid litigation, but that remains unclear right now,'' Alex Detrick, spokesman for Attorney General Andrew Cuomo, said today in an interview.
Royal Bank Chief Operating Officer Barbara Stymiest said today in an interview that there's ``ongoing discussions'' over the bank's role in selling the failed debt securities. The Toronto-based bank also said in an earnings report that it's currently in discussions with U.S. regulators.
Eight financial firms have settled claims in the last three weeks that they misled investors by fraudulently marketing the long-term securities as easy to buy and sell. Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank AG agreed last week to pay $160 million in fines and buy back as much as $15 billion in debt.
Buybacks "are the precedence for the other firms and we certainly have been communicating internally with our advisers that we're looking for ways to provide a liquidity facility to our investors," Stymiest said.
The Toronto-based bank said in its report that it couldn't estimate the impact of potential losses from such a program. Royal Bank also said other legal actions are pending, and that the liability from these proceedings won't be material.
"They'll take a hit for it, but they can withstand it," Dundee Securities Corp. analyst John Aiken said. "It's not going to be huge for Royal's standards, and from a shareholder value perspective, it'll likely be neutral to positive because you're eliminating an additional overhang."
Banks are settling claims stemming from an investigation into allegations they peddled auction-rate securities as investments that were as liquid as cash. The $330 billion market seized up in February, when the credit crisis prompted banks to stop supporting periodic auctions at which the long-term securities were bought and sold.
Royal Bank had C$3.5 billion ($3.3 billion) of auction-rate debt on its balance sheet as of July 31, down from about C$4.5 billion in January.
