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Royal Bank Finds Trading Tough
Royal Bank of Canada (NYSE:RY), or RBC, posted a loss on a net basis due to a charge on the sale of its lagging U.S. bank. Otherwise, the bank posted an operating profit the market found disappointing, as shares of the bank were driven down more than 3%. The bank expects continued weak markets for trading profits ahead.
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Difficult Trading
On an operating basis, earnings were C$1.57 billion or C$1.04 a share, compared to C$1.38 billion or C$92 a share in the year ago quarter. Cash earnings from operations were C$1.06. RBC took a C$1.57 billion charge on the sale of its U.S. Centura Bank which it sold to PNC Financial (NYSE:PNC), which brought on a net loss of C$92 million. Trading markets were weak, and the company expects them to remain so. RBC forecast it will be difficult to hit next quarter's target of C$700 million to C$900 million trading revenue. (For related reading on trading, see Day Trading Strategies For Beginners.)
Canadian Banking And U.S. Banking
When it comes to banks, the U.S. media (if not U.S. investors) seem fixated if not obsessed at times with the supersized banks, particularly Citigroup (NYSE:C) and Bank Of America (NYSE:BAC). These two usually alternate living in the headlines, the big bank of the moment currently being BAC. Is it worthwhile or not? Well run or not? While to some extent this attention is understandable, the media dominance of these banks, something like misbehaving students commanding most of the attention in the classroom, sometimes obscures that there are other banks that might be worth looking at.
The corollary of too much attention on the U.S. mega banks is not enough attention on other worthy banks, especially Canadian banks. The fundamentals of Canadian banks are arguably better than many U.S. banks. Canada's banks did not fall into the subprime mania that U.S. banks did, so its balance sheets look better. While there are complex arguments about the risks present in Canadian banks, among them whether total assets or risk-weighted assets are the best measure to predict banking distress, a cursory view of the entirety of the balance sheets as well as keeping the context of the Canadian banking system would strongly suggest that the Canadian banks are in better shape than their larger U.S. counterparts.
The more conservative (read: less reckless) style of Canadian banking's risk management, as well as the relative solidity of their asset base, speaks to this. On a worst-case base for Canadian banks, do investors really even imagine a potential for the gross amount of toxic assets that would approach what both BAC and Citi were spewing out by the billions at the height of the U.S. crisis? It's beyond unlikely.
Value and Stability
Prior to 2008 and 2009, investors might have shrugged off the idea of looking for value and stability in bank investments, finding that too prosaic. Maybe not so much now. One of the striking things about Royal Bank and its brethren, Toronto Dominion Bank (NYSE:TD), Bank of Montreal (NYSE:BMO), Canadian Imperial Bank of Commerce (NYSE:CM) and Bank of Nova Scotia (NYSE:BNS) is that they pay dividends that currently yield 4% or more. Remember when the big U.S. banks could do that?
The Bottom Line
The general comments about Canadian banks versus U.S. bank doesn't eliminate the need for investors to consider each bank also on an individual basis. Royal Bank is struggling because it is more involved in the trading markets rather than as a retail bank, focusing on commercial and personal lending more as do some of its peers such as Toronto Dominion or Canadian Imperial Bank of Commerce.
The markets being what they are, that should give a self-explanatory pause for any investor right now. That said, this too should be kept in context. Royal Bank has been historically well run and it is suffering right now more from the malaise in the financial markets and the world economy than anything it's doing wrong with its own management or policies. Still, with the choice in Canadian banks, perhaps some of the other names like Bank of Montreal might be more appealing right now. (Find out how economic capital and regulatory capital affects risk management. For more, see How Do Banks Determine Risk?)
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On an operating basis, earnings were C$1.57 billion or C$1.04 a share, compared to C$1.38 billion or C$92 a share in the year ago quarter. Cash earnings from operations were C$1.06. RBC took a C$1.57 billion charge on the sale of its U.S. Centura Bank which it sold to PNC Financial (NYSE:PNC), which brought on a net loss of C$92 million. Trading markets were weak, and the company expects them to remain so. RBC forecast it will be difficult to hit next quarter's target of C$700 million to C$900 million trading revenue. (For related reading on trading, see Day Trading Strategies For Beginners.)
Canadian Banking And U.S. Banking
When it comes to banks, the U.S. media (if not U.S. investors) seem fixated if not obsessed at times with the supersized banks, particularly Citigroup (NYSE:C) and Bank Of America (NYSE:BAC). These two usually alternate living in the headlines, the big bank of the moment currently being BAC. Is it worthwhile or not? Well run or not? While to some extent this attention is understandable, the media dominance of these banks, something like misbehaving students commanding most of the attention in the classroom, sometimes obscures that there are other banks that might be worth looking at.
The corollary of too much attention on the U.S. mega banks is not enough attention on other worthy banks, especially Canadian banks. The fundamentals of Canadian banks are arguably better than many U.S. banks. Canada's banks did not fall into the subprime mania that U.S. banks did, so its balance sheets look better. While there are complex arguments about the risks present in Canadian banks, among them whether total assets or risk-weighted assets are the best measure to predict banking distress, a cursory view of the entirety of the balance sheets as well as keeping the context of the Canadian banking system would strongly suggest that the Canadian banks are in better shape than their larger U.S. counterparts.
Value and Stability
Prior to 2008 and 2009, investors might have shrugged off the idea of looking for value and stability in bank investments, finding that too prosaic. Maybe not so much now. One of the striking things about Royal Bank and its brethren, Toronto Dominion Bank (NYSE:TD), Bank of Montreal (NYSE:BMO), Canadian Imperial Bank of Commerce (NYSE:CM) and Bank of Nova Scotia (NYSE:BNS) is that they pay dividends that currently yield 4% or more. Remember when the big U.S. banks could do that?
The Bottom Line
The general comments about Canadian banks versus U.S. bank doesn't eliminate the need for investors to consider each bank also on an individual basis. Royal Bank is struggling because it is more involved in the trading markets rather than as a retail bank, focusing on commercial and personal lending more as do some of its peers such as Toronto Dominion or Canadian Imperial Bank of Commerce.
The markets being what they are, that should give a self-explanatory pause for any investor right now. That said, this too should be kept in context. Royal Bank has been historically well run and it is suffering right now more from the malaise in the financial markets and the world economy than anything it's doing wrong with its own management or policies. Still, with the choice in Canadian banks, perhaps some of the other names like Bank of Montreal might be more appealing right now. (Find out how economic capital and regulatory capital affects risk management. For more, see How Do Banks Determine Risk?)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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