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Tickers in this Article: CICHY, RY, DBSDY
Rising earnings estimates on the back of strong fiscal third quarter results and the announcement of a dividend hike have helped Royal Bank of Canada (RY) achieve a Zacks #1 Rank (Strong Buy) on September 15. Moreover, this major Canadian bank has delivered positive earnings surprises in three of the last four quarters with an average beat of 5.1%.

With a solid return of 27.0% in a year's time, a long-term earnings growth projection of 10.0% and a sturdy dividend yield of 4.0%, Royal Bank of Canada offers an attractive investment opportunity.

The Rank Driver

Better-than-expected fiscal third quarter earnings, stable credit quality and the recent dividend hike are the primary rank drivers for this stock.

On August 30, Royal Bank of Canada reported fiscal third quarter (July ended) 2012 adjusted earnings of $1.31 per share, topping the Zacks Consensus Estimate of $1.17 by 12.0%. The performance was helped by growth in revenue and improving credit quality. However, higher operating expenses marginally marred the results.

Net interest income climbed 8.3% to $3.23 billion (C$3.29 billion). Likewise, non-interest income was up 6.0% to $4.39 billion (C$4.47 billion). Moreover, the net interest margin expanded 6 basis points (bps) to 1.61%, but the company's non-interest expenses rose 4.8% to $3.70 billion (C$3.76 billion).

The provision for credit losses as a percentage of net loans and acceptances decreased at Royal Bank of Canada, coming in at 0.34%, down 3 bps on a year-over-year basis. Moreover, allowance for credit losses as a percentage of total loans and acceptances declined 7 bps to 0.53%.

Moreover, Royal Bank of Canada is one of the few banks that have maintained regular dividend payments throughout the financial crisis. Further on August 30, the company enhanced its quarterly dividend by 5.3% to 60 cents.

Surge in Earnings Estimates

The past 30 days have seen four out of five estimates for fiscal 2012 moving higher, raising the Zacks Consensus Estimate by 6.4% to $4.99. For 2013, five out of six estimates headed north, helping the Zacks Consensus Estimate advance 4.7% to $5.32.

The estimates reflect year-over-year improvements of about 14.1% for 2012 and 6.6% for 2013.

Valuation

Royal Bank of Canada currently trades at a forward P/E of 11.6x, an 18% premium to the peer group average of 9.8x. Its price to book ratio of 2.1 is at a significant premium compared with the industry median of 0.6. Given the company's strong fundamentals, the valuation looks reasonable.

Royal Bank of Canada has a trailing 12-month ROE of 18.6% compared with the peer group average of 7.1%.

About the Company

Headquartered in Toronto, Canada, Royal Bank of Canada provides various banking products and services under the RBC name worldwide. The company was founded in 1864 and conducts business for personal, business, public sector and institutional clients through its offices in Canada, the U.S. and 51 other countries. It has a market capital of about $83.5 billion.

Other Zacks #1 Rank foreign bank stocks include DBS Group Holdings Limited (DBSDY) and China Construction Bank Corporation (CICHY).
 

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