Is Now The Time to Buy Royal Bank (TSE:RY) Stock?

Royal Bank of Canada: Is Now the Time to Buy?

Royal Bank dividend

The Royal Bank of Canada (NYSE:RY), one of the largest banks in Canada, offers a wide range of financial services, including personal and commercial banking, wealth management, insurance, corporate banking, and capital markets services.

Although its operations are largely focused in Canada, RBC also maintains a presence in the U.S. and internationally. The bank has seen its share price rise by nearly 13% year-to-date, driven by earnings and revenue that exceeded expectations over the past two quarters.

In this article, we explore RBC’s latest developments, its recent earnings report, a fair value assessment, and insights from the options market to evaluate whether the stock presents a buying opportunity.

Recent Developments

In July, RBC announced a strategic realignment to fuel its next phase of growth. The bank plans to split its Personal & Commercial Banking division into two separate units—Personal Banking and Commercial Banking—effective September 1. This restructuring aims to enhance decision-making speed and capitalize on RBC’s scale while aligning leadership with strategic growth priorities.

Following the reorganization, RBC will report across five business segments: Personal Banking, Commercial Banking, Wealth Management, Insurance, and Capital Markets.

Q2 2024 Earnings Recap

RBC’s performance in the second quarter of 2024 was robust, showcasing solid growth across multiple key metrics. On May 5, RBC reported earnings per share (EPS) of C$2.92, which exceeded consensus estimates by C$0.18. The bank reported total revenues of C$14.154 billion, surpassing expectations by C$500.6 million.

Net interest income (NII), a key measure of profitability for banks, grew by 9% year-over-year to reach C$6.62 billion. Non-interest income also saw significant gains, rising 19% to C$7.53 billion.

RBC’s balance sheet remains solid. As of April 30, 2024, total loans increased by 12% from the previous quarter, reaching C$966.25 billion. Total deposits rose by 7% to C$1.33 trillion. Overall, the bank’s total assets expanded to C$2.03 trillion, an increase of 3% compared to the prior quarter.

Despite the positive trends in its balance sheet, RBC’s capital ratios showed slight deterioration. The bank’s Tier 1 capital ratio decreased to 14.1%, down from 14.9% in the prior-year quarter, while its total capital ratio fell to 16.1% from 16.8%.

Additionally, RBC’s Common Equity Tier 1 (CET1) ratio, a key measure of a bank’s financial strength, declined to 12.8%, compared to 13.7% in the same quarter last year. These declines are worth monitoring, though they remain within healthy ranges.

Our Perspective

RBC’s diversified business model, strong loan balances, and favorable interest rate environment are likely to support continued financial performance. However, the bank faces near-term risks due to an uncertain economic outlook, particularly in Canada, where economic growth is slowing, unemployment is rising, and consumers are under pressure.

The credit quality of Canadian borrowers could face challenges due to rising interest rates, which may lead to higher allowances for credit losses. Despite this, RBC’s exposure to the well-regulated Canadian housing market—buoyed by population growth and limited housing supply—supports its credit quality. Additionally, the bank’s expansion through acquisitions and recruitment of wealth management advisors demonstrates its growth strategy.

Analysts’ Views

Wall Street analysts have an average “Buy” rating on Royal Bank of Canada, with price targets ranging from $97.73 to $118.56. The average target of $104.93 suggests a potential downside of more than 6% from current levels.

Source: Seeking Alpha

Most recently, in June, Argus Research raised its price target on Royal Bank of Canada to $120 from $115, while maintaining its Buy rating. In May, another firm, BMO Capital, upgraded the stock to Outperform from Market Perform, and raised its price target to $150 from $140.

Fair Value Assessment

We conducted a thorough fair value assessment of RBC using five different valuation models: Stable Growth Dividend Discount Model (DDM), Multi-Stage DDM, Price/Book multiples, Price/Earnings multiples, and Price/Sales multiples.

Based on our analysis, we estimate RBC’s fair value to be approximately $147 per share. This valuation implies a potential upside of around 31% from its current price, contradicting the somewhat bearish view held by analysts who expect a 6% downside.

Options Market Sentiment

Our analysis of the options market indicates mixed sentiment. Over the past 30 days, the net options flow has been negative, with a moving sum of -1,823 contracts. 

While August’s options data indicated no clear direction, September’s trends pointed toward a bullish outlook, signaling a potential rise in RBC’s stock price. However, a bearish pivot in October suggests a reversal, which may lead to declining stock values, prompting a cautious stance from investors.

Source: Visual Sectors

Conclusion

RBC is performing relatively well despite the macroeconomic challenges it faces. Analysts have a bullish view on the stock, but the consensus price target implies that the stock is slightly overvalued. However, our fair value assessment indicates significant upside potential. Options market sentiment remains mixed, pointing to potential volatility in the months ahead. 

Given these factors, it may be wise for investors to adopt a cautious approach and wait for RBC’s Q3 2024 earnings report on August 28 before making any major investment decisions. This upcoming earnings release should provide clearer insights into the bank’s future performance and help investors better assess the risks and rewards associated with the stock.