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Canadian Stock Series: RBC—A Combination of Growth and High Dividends

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Moomoo Research joined discussion · May 31 04:23
$Royal Bank of Canada(RY.CA)$ (RBC) released its financial report for the second quarter of the 2024 fiscal year on May 30th, 2024, Eastern Time. Driven by the growth in banking and capital market business revenue, the company's overall performance was commendable.
According to financial data, RBC's net revenue reached CAD 14.154 billion in this quarter, a year-on-year increase of 4.69%; interest income was CAD 29.95 billion, a year-on-year increase of 47.4%; adjusted net profit reached CAD 4.194 billion, a year-on-year increase of 31.97%. As of May 30th, the company's stock price was CAD 148.27.
Canadian Stock Series: RBC—A Combination of Growth and High Dividends
Main Business Composition
RBC's main business can be divided into Personal and Commercial Banking, Wealth Management, Capital Markets, and Insurance. Details are as follows:
(1)Personal and Commercial Banking: Provides financial services such as deposits, loans, credit cards, investment products, trade financing, and commercial real estate loans to individuals or business customers.
(2)Wealth Management: Offers investment management, wealth consulting, retirement planning, estate planning, and other services to help customers protect and manage their wealth.
(3)Capital Markets: Engages in buying and selling stocks, bonds, and other financial instruments, as well as providing financial advisory services such as IPOs, mergers, and restructuring for companies.
(4)Insurance: Provides a range of insurance products, such as life insurance, health insurance, property insurance, etc.
Chart: Main Business Composition (%)
Source: Company Financial Report
Source: Company Financial Report
Next, let's analyze the impact of each type of business on RBC's revenue and the prospects for each business.
I. Double Growth in Deposits and Loans, Banking Business Revenue Hits New High
This quarter, RBC's Personal and Commercial Banking business total revenue was CAD 6 billion, a year-on-year increase of 13%; adjusted net profit was CAD 2.051 billion, a year-on-year increase of 7%. The strong growth in banking business mainly came from the increase in deposit and loan amounts. Financial data shows that RBC's banking business deposit amount was CAD 664.8 billion this quarter, a year-on-year increase of 13%; loan amount was CAD 631 billion, a year-on-year increase of 7.55%.
(1)The earnings call revealed that the number of new accounts opened by RBC this quarter was 40% higher than the same period last year, driving the increase in deposit and loan amounts. At the same time, RBC also partnered with "Moi Rewards" to launch a co-branded credit card in Quebec to attract new users.
(2)RBC announced a new partnership with "Pattison Food Group" this quarter, gaining over 3.5 million family members in Western Canada, further driving the increase in deposits and family loans.
(3)RBC also completed the acquisition of HSBC Bank Canada this quarter, further helping RBC to expand its banking business.
Chart: RBC Personal and Commercial Banking Net Profit (Million CAD)
Source: Bloomberg
Source: Bloomberg
II. Record Capital Market Performance, Investment Products More Diversified
This quarter, RBC's Capital Markets business total revenue was CAD 3.153 billion, a year-on-year increase of 19.75%; adjusted net profit was CAD 1.262 billion, a year-on-year increase of 34.4%. The historical high growth in capital market performance mainly stemmed from the strong performance of the Canadian capital market.
(1)Currently, Canada's inflation indicator is within the target range of 1% to 3%. There are predictions that the Bank of Canada will take action before the Federal Reserve and start to cut interest rates in the next few months.
The expectation of interest rate cuts has led RBC to shift from term deposits and cash ETFs to fixed-income investments such as bonds. The bank's debt and equity issuance volume has increased, and fixed-income trading revenue has also risen. According to the earnings call, RBC's investment banking department's revenue grew by 45% compared to last year, and various types of investment products have yielded very considerable returns.
(2)RBC also launched "RBC Clear," which has a digital end-to-end onboarding platform. It is a cloud-native cash management business that can provide rich investment insights to institutional users, promote transaction behavior, and enable RBC to earn transaction fees and other income.
Chart: RBC Capital Markets Net Profit (Million CAD)
Source: Bloomberg
Source: Bloomberg
III. Interest Rate Cut Expectations Benefit Investment Activities, Wealth Management Scale Grows Rapidly
This quarter, RBC's Wealth Management business total revenue was CAD 4.618 billion, a year-on-year increase of 4.39%; adjusted net profit was CAD 769 million, a year-on-year increase of 3.64%. The increase in revenue from the Wealth Management business this quarter mainly benefited from the expectation of interest rate cuts in Canada and the rise in asset management scale.
(1)Financial report data disclosed that the expectation of interest rate cuts by the Bank of Canada has led to a strong performance in Canada's stock market recently, and the investment income of various assets managed by RBC has further increased.
Chart:  Canada Stock Market Index (S&P/TSX)
Source: moomoo
Source: moomoo
(2)According to the performance meeting guidance, benefiting from the growth of more families and individual users (40%), the asset management scale of RBC Global Asset Management Company increased by 11% compared to last year, reaching CAD 1.2 trillion. The increase in funds has led to an increase in asset management fees earned by RBC's Wealth Management Department.
Chart: RBC Wealth Management Business Net Profit (Million CAD)
Source: Bloomberg
Source: Bloomberg
IV. Profitability Remains Stable, Expected Shareholder Return is Attractive
Expenses
As repeatedly mentioned in previous articles, a bank's expense expenditures are nothing more than two types: interest expenses and non-interest expenses. Interest expenses are the interest paid by the bank for its own customer deposits; non-interest expenses include sales, management, financial expenses, and some investment activities.
Looking at interest expenses, RBC's interest expense ratio this quarter was about 6% lower than the same period last year. The performance meeting also pointed out that after the merger with HSBC Canada, RBC's cross-selling will no longer generate additional costs, and it is expected to produce a synergy effect of CAD 30 million, equivalent to saving CAD 360 million per year.
In terms of non-interest expenses, due to the expansion of asset scale and some expenditures from the acquisition of HSBC Canada, this quarter's non-interest expense ratio increased by 7%.
Profit
Although the total expenses this quarter have increased, they have all been offset by strong growth in interest income. Financial data shows that RBC's net revenue still increased by 4.69% this quarter, reaching CAD 14.154 billion. The adjusted net profit also reached CAD 4.194 billion, a year-on-year increase of 31.97%; EPS also increased from 2.65 last year to 2.92 CAD this year, a year-on-year increase of 10.19%.
Chart: RBC Adjusted Net Revenue (Million CAD)
Source: Bloomberg
Source: Bloomberg
Shareholder Return
In this quarter's conference call, RBC's senior management disclosed the company's buyback plan of 30 million shares for this fiscal year, and announced an increase in the bank's quarterly dividend by $0.04 (CAD 0.05), an increase of up to 3%. Based on the current total share capital of 1.414 billion, it is estimated that this buyback plan can generate a return rate of about 2.12% for RBC.
After increasing the dividend by CAD 0.05, the bank's dividend rate can rise to 3.85%, so the comprehensive shareholder return can reach 5.97%. In addition, as of the end of this quarter, RBC's free cash flow balance on the books is CAD 3.95 billion, with sufficient cash on hand, which is expected to ensure a generous shareholder return.
Ⅴ. Summary
Overall, RBC's performance this quarter was very good, with excellent performance in net profit, EPS, and shareholder returns. The stock price increased by 5.19% after the financial report was released, and the stock price has risen by 13% from the beginning of the year to now.
Considering that RBC completed the acquisition of HSBC Bank Canada this quarter, we expect that RBC's performance in the next few quarters may be even more impressive.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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