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Royal Bank of Canada Performing Royally Well

·3 min read

Royal Bank of Canada (CA:RY) is Canada’s largest bank, with a market cap of $148.6 billion, followed by Toronto-Dominion Bank (CA:TD), which has a market cap $132.3 billion. RY offers financial services with a broad range of diversified banking products serving both consumer and commercial markets. Services include home equity, consumer lending, mutual funds, credit services, investment, foreign exchange, asset management, and auto financing, among others.

RY’s net income increased year-over-year by $2.5 billion to $4 billion in Q2 2021 compared to Q2 2020. The strong earning is credited to its aggressive growth in consumer and commercial banking and a larger focus on capital markets overall.

The stock’s growth is outpacing the Dow, Nasdaq, and S&P 500 over the last five years. As of June 13, 2021, RY’s market cap is $148.54 billion, it has a price-to-earnings-growth ratio of 2.40 and beta of 0.80. The stock hit a one-year low of $65.42 and closed on June 11, 2021 at $103.69; the trailing P/E ratio is 12.82. (See Royal Bank of Canada stock analysis on TipRanks)

Considering the record-low interest rates that have been driven lower by the pandemic, the banking sector has been unable to increase the interest income. Despite this, RY continues to outperform indexes and expectations.

Poised for potential growth, one contributing factor has been the stabilization of equity markets. With a strong performance in March 2020, equity markets are adding to RY’s total value. With the economy starting to gain more confidence post the vaccine rollout, stabilizing factors would positively aid the banking sector.

With consumer and business banking seeking access to new and increased lines of credit, as a result of the recent uncertainty at the height of Covid-19 pandemic, RY saw an increase in net income across consumer and commercial products and solutions. While overall interest income has been a laggard in the bank’s rising portfolio, its net interest income is down 11% year-over-year. Expected tailwinds from the recovery will bolster performance in the coming months.

Analysts Weigh In

Fundamental Research (FRC), which provides investment research along with Argus Investors' Counsel (AIC), a SEC-registered Investment Advisor, both released reports in March 2021 with a Buy for RY. FRC has a price target of $127.27 and Argus set its price target at $100.00. Since May 14, 2021 RY has hit the $100-mark and has not looked back.

Other investment groups raising their price target include Canaccord Genuity ($123.00 to $128.00; C$128.00 to C$129.50) in April 2021, CIBC ($120.00 to $133.00) and BMO Capital Markets ($131.00 to $139.00; C$131.00 to C$139.00) in May 2021.

RY has outperformed peer stocks, increasing 9% in May 2021 and jumping 26.7% since January 2021. In Q2 2021, RY reported EPS of $2.28 compared to the estimated average $2.07. It is expected to post Q3 EPS of $8.3, which is an increase of 39.97%.

Wall Street’s Take

According to TipRanks' analyst rating consensus, RY’s stock had 6 Buys and 3 Holds, with a consensus of Moderate Buy. The average analyst Royal Bank of Canada price target of C$133.97 implies 6.2% upside potential, with a high forecast of C$144 and a low of C$114.25.

Bottom Line on RY

Considering the clear success RY had in the backdrop of pandemic uncertainty, it will likely continue to impress in Q3 and generate long-term upside, as seen over the last several years.

One of the bank’s main obstacle is its net income growth. This short-term consolidation may challenge its stock in the near term but presents a potential opportunity, as overall RY is poised to exceed its target estimates with its market leader stance.

Disclosure: Lukas Brenowitz held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.