Royal Bank of Canada (NYSE, TSX: RY) is Canada's largest bank in terms of total assets. With almost $35.4 billion Canadian Dollars in 2009 revenue, RBC ranks 55th on Forbes Global 2000 list, which ranks companies' sizes on a composite of sales, profits, assets, and market value. Revenue from Canada accounts for 70% of RBC's revenue, but the Canadian bank also has a large presence in the Southeast U.S. and the Caribbean.
While RBC tops Canada's Big Five, five banks that dominate the Canadian banking system and control over 90% of all Canadian banking assets., its tier 1 risk-based capital ratio is the thinnest among its Canadian peers at 13.4% as of 2010. Tier 1 is a measure of equity and retained earnings to risk-adjusted capital and generally is used to indicate a bank's financial health.
Although RBC has suffered losses from the 2008 Financial Crisis, the bank competes in a highly regulated Canadian banking sector that has limited leverage and required conservative lending practices, which has left the Canadian Banks relatively unscathed. In fact, the Geneva-based World Economic Forum placed Canadian banks as the soundest in the world based on the likelihood and extent of government intervention necessary to support banks in each country. The U.S. was ranked 40th in the survey of 12,000 corporate executives. Focusing on banks' balance sheets, Canadian banks fair much better than their U.S. and European counter-parts. Canadian banks average a tier 1 risk-based capital of 9.8%, or twice that of the average American investment bank and three times greater than the mean of European commercial banks. The Canadian Government issued $75 billion in mortgage issuance to keep the international playing field level as other countries (especially the US and European nations) provided guarantees to bank assets.
Second Quarter 2010 Results
Royal Bank of Canada reported net income of $1,329 million for the second quarter ended April 30, 2010 compared to a net loss of $50 million in the prior-year period. Diluted earnings per share (EPS) were $.88 (up from a loss per share of $.07 in the second quarter of 2009. Earnings were driven by strong results across most businesses, continued stabilization of credit quality, effective cost management and a general improvement in market and economic conditions.
The strengthening of the Canadian dollar had a significant impact on RBC's financial results compared to last year, reducing revenue by $534 million, net income by $82 million and EPS by $.06.
Canadian Banking is the largest business segment of RBC. Personal financial services include taking deposits and originating loans. RBC profits on the net interest rate spread, or the difference between what it pays to borrow money and the revenue earned from lending money. Canadian Banking consists of its domestic personal and business banking operations and certain retail investment businesses and is operated through three business lines: Personal Financial Services, Business Financial Services, and Cards and Payment Solutions. Canadian Banking provides a suite of financial products and services to over 10 million individual and business clients through its branch, automated teller machines (ATMs), online and telephone banking networks, as well as through a large number of sales professionals. Personal Financial Services focuses on meeting the needs of the Company’s individual clients at every stage of their lives through a range of financing and investment products and services, including home equity financing, personal lending, deposit accounts, mutual funds and self-directed brokerage accounts, guaranteed investment certificates (GICs) and Canadian private banking. It has a retail banking network comprising 1,197 branches and 4,214 ATMs. Business Financial Services offers a range of lending, leasing, deposit, investment, foreign exchange, cash management, and trade products and services to small and medium-sized businesses and commercial, agriculture and agribusiness clients across Canada. RBC’s business banking network includes approximately 100 business banking centers and over 2,000 business account managers. Cards and Payment Solutions provides an array of credit cards and related payment products and solutions. In addition, this business line includes the Company’s 50% interest in Moneris Solutions, Inc., the merchant card processing joint venture with the Bank of Montreal.
Using a network of 4,000 financial consultants, wealth management provides financial advice, asset management, estate, and trust services to high net worth individuals (HNIs) and affluent clients. A key driver to growing revenue is assets under management (AUM), which grows by either attracting new funds or capital appreciation of underlying assets. More assets translates to higher management fees collected.
Wealth Management comprises three business lines: Canadian Wealth Management, U.S. & International Wealth Management and Global Asset Management. Canadian Wealth Management includes full-service retail brokerage in Canada, with over 1,430 investment advisors, providing advise-based financial solutions to affluent and high-net-worth clients. In addition, the Company provides discretionary investment management and estate and trust services to its domestic clients through more than 70 investment counselors and more than 120 trust professionals in locations across the country. U.S. & International Wealth Management consists of the Company’s retail brokerage business, which is a full-service firm in the United States with over 2,300 financial consultants. It also has a clearing and execution services business that serves small to mid-sized independent broker-dealers and institutions. Internationally, RBC provides customized banking, credit, investment and trust solutions to high-net-worth private clients across a network of 31 offices located in 21 countries worldwide. Global Asset Management is responsible for the Company’s asset management business. In Canada, it provides a range of investment management services through mutual funds, pooled funds and separately managed portfolios. The Company distributes its investment solutions through a network of its bank branches, its discount and full-service brokers, independent advisors and direct to consumers. It also provides investment solutions directly to institutional clients, including defined benefit and defined contribution pension plans, as well as endowments and foundations.
Using third-party and propreitary channels, RBC offers life, health, travel, home, auto, and creditor insurance services to individuals and business clients in Canada and the United States. Outside North America, RBC manages a specialty reinsurance business. RBC Insurance makes money when the premiums collected and investment returns exceed its insurance payouts.
Insurance consists of Canadian Insurance, U.S. Insurance, and International & Other. In Canada, the Company offers its products and services through its channels, including retail insurance branches, call centers, and its career sales force, as well as through independent insurance advisors and travel agencies. In the U.S., the Company offers products through independent marketing organizations, call centers, financial institutions, and its career sales force. Outside North America, the Company operates in reinsurance markets globally. Canadian Insurance offers life and health, home and auto and travel insurance products, as well as wealth accumulation solutions, to individual and group clients across Canada. Its life and health portfolio includes universal life, critical illness, disability, long-term care insurance, segregated funds, and group benefits. The Company offers personal home and auto insurance, and commercial insurance through its partnership with Aon Reed Stenhouse Inc. Its travel products include out of province medical coverage, trip cancellation and interruption insurance. .S. Insurance offers life insurance, annuities and travel insurance to clients across the United States. Life and health products include term, indexed universal life, whole life, accidental death and critical illness protection. It also offers traditional fixed and fixed-indexed annuities. Travel insurance products include trip cancellation, interruption insurance and emergency medical coverage. International & Other Insurance is primarily consists of its Reinsurance businesses, which insure risks of other insurance and reinsurance companies. The Company offers life and health, accident, and credit and financial reinsurance products.
RBC operates 438 full-service banking centers in the Southeast region of the United States. Headquartered in Raleigh, RBC Bank focuses on six states; North Carolina, South Carolina, Virginia, Georgia, Alabama, and Florida). According to the 2007 US Census Bureau and the US Bureau of Economic Analysis, this region accounts for 1/5th of US Gross Domestic Product, or twice as big as Canada. Also, the population is growing faster and employment has been more stable compared to the national average. RBC ranks in the top 7 for total deposits in each of these six states. Through a network of 127 branches, RBC operates banking services in 17 countries and territories in the Caribbean.
International Banking consists of Banking and its joint venture, RBC Dexia Investor Services (RBC Dexia IS). Banking includes its banking businesses in the United States and Caribbean, which offer a range of financial products and services to individuals, business clients and public institutions. RBC Dexia IS offers an integrated suite of products to institutional investors worldwide. RBC’s banking businesses in the United States and Caribbean.
The RBC capital markets business segment is ranked 12th on Bloomberg's Largest Global Investment Banks. Capital Markets structure and provide capital financing to help businesses achieve growth objectives. RBC especially is focused on Canada and U.S. mid-markets, as well as natural resource companies. As such, growth and an increase in mergers and acquisitions (M&A) among natural resource businesses tends to boost RBC's bottom-line.
Capital Markets Sales and Trading consists of its trading and distribution operations largely related to fixed income, foreign exchange, equities and derivative products for institutional and corporate clients and its trading operations. Corporate and Investment Banking consists of its investment banking, debt and equity origination, advisory services, corporate lending, private equity, and client securitization businesses. It also includes its global credit business, which oversees the management of its lending portfolios and global financial institutions business. The Company’s Research group offers economic and securities research to institutional and retail clients globally.
Illiquidity, rising defaults, and decline in financial investments have stemmed from the 2008 Financial Crisis. These factors have led to large losses in the investment community and have battered the financial services sector. Royal Bank of Canada was no exception; the bank wrote down C$2.79 billion for FY 2008. U.S. subprime losses at C$1.3 billion was the largest contributor. U.S. competitors such as Bear Stearns Companies (BSC), Lehman Brothers (LEH), and Washington Mutual (WM) failed. While not immune, Canadian banks, including Canada's largest bank, RBC, have managed better than European and American counter-parts. The Bank of Canada, which is the "Federal Reserve" of Canada, reported in December of 2008 that more conservative lending practices sheltered the industry more so than competitors in outside countries. Nevertheless, Canadian banks are not sheltered from investment write-downs and a slowing global economy can stall the demand for Canadian exports. RBC operates 439 banking offices in the Southeastern region of the United States. A substantial collapse in housing prices have contributed to an increase in defaults and a decrease in value of asset-backed securities.; as of September 2008, previously owned single-family homes in Miami were off 28.3% from a year ago. Canada is starting to see a spillover affect as well. For October 2008, sales of existing homes fell 14% to a six-year low and prices collapsed 10% compared to a year ago. However, a smaller subprime market and homeowner's equity averaging 70%, compared to the US at 48%, provides a cushion against losses from Canadian mortgages.
RBC's capital markets are focused on mid-market energy and mining markets. RBC wants to build its junior energy sector and grow its commodities trading business. As such, flucuations in the global energy and mining sectors will influcence the success of RBC. Increasing growth in the sector and a flurry of mergers and acquisitions (M&A) activity supports RBC, but a decline in business transactions decreases revenue for RBC's capital market. As prices of natural resources plunged, RBC Capital Markets saw net income fall 16.6% for Q4 2008 compared to the year ago.(excludes the addition to income resulting from a reduction in expected litigation provision for Enron) The orgination and equity trading business activity decreased year over year.
Fluctuations in the U.S. Dollar (USD) and the Canadian Dollar (CAD) impact RBC’s business operations and its ADR share price. On one hand, a rise in the US Dollar boosts values of its American portfolio of loans, but also reduces the dividend paid on the ADR all else equal. On the other hand, the Canadian economy is largely linked to exports of natural resources. As the CAD depreciates, it boosts domestic revenue for Canadian resources. For instance, if oil trades for $50USD/bl, and the USD/CAD is 1, then a Canadian exporter receives $50CAD/bl for his oil. Now if the CAD depreciates 20% relative to the USD and oil does not move, he would then receive $60CAD/bl for the same oil; thus, improving his return. In a nutshell, a weak Canadian dollar can boost the domestic economy and cushion the impact of falling natural resource prices. Therefore, Canada's economic health is dependent on the USD/CAD relationship.
|Bank||Net Income (C$/Yr)||Assets (C$)||Market Cap (NYSE)||Yields (NYSE)||Branches||Tier 1 Capital Ratio||Employees||Customers||Forbes Global 2000 Rank|
|Bank of Nova Scotia (BNS)||3.140B||455,500M||24.57B||7.5%||9.30%||69,000||12,500,000||92|
|Bank Of Montreal (BMO) ||1.978B||152,687M||12.37B||9.4%||1280||9.77%||37,100||8,200,000||189|
|Toronto-Dominion Bank (TD)||3.813B||563,214M||26.92B||6.8%||2200||9.80%||52,000||10,000,000||95|
|Canadian Imperial Bank of Commerce (CM)||-2.060B||353,930M||1.86B||8.3%||1048||10.50%||40,457||11,000,000||159|
According to the Bank of Canada and a survey by the World Economic Forum, Canadian banks weathered the 2008 Financial Crisis better than peers in outside nations. Nevertheless, they are not immune. Between 2007 and as of quarter ended Oct 31 (4Q FY2008 for most banks), Canadian banks had written down C$16.17 billion compared to global banks and brokers having written down USD$720 billion. Canadian Imperial Bank of Commerce (CM) has written down the largest amount in 2008 at C$4.969 billion, while RBC made C$2.79 billion of writedowns as of December 2008. Bank of Nova Scotia (BNS) took an after-tax writedown of C$595 million for its 4th quarter of fiscal year 2008. The remaining two of Canada's big five are not unscathed as well. Between the third quarter of 2007 and November 19, 2008, Bank Of Montreal (BMO) has written down C$899 million and Toronto-Dominion Bank (TD) C$65 million.
As Canada's largest bank in terms of total assets and market capitalization, RBC is larger than the remaining four banks, Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), Toronto-Dominion Bank (TD), and Bank Of Montreal (BMO), included in Canada's Big Five. These five banks, all included in Forbes Top 200 Banks, dwarf the remaining 14 domestic banks in terms of assets. RBC's total assets are C$200 million larger than its closest Canadian competitor, Toronto-Dominion Bank (TD). Royal Bank of Canada also has the largest investment banking presence in Canada in terms of transactions and ranked #1 on Euromoney's Global Canadian Dollar Dealer list.
RBC's operations are not limited to Canada. With 18% of 2008 revenue being generated in the United States, RBC competes for everyday banking services in the Southeast with regional banks, such as Regions Financing Tr I (RF) and also national ones like Bank of America (BAC). RBC is the 5th biggest deposit taker in North Carolina and Alabama. RBC's operations in Canada, the United States, and the Caribbean make it the 5th largest financial institution in North America in terms of revenue.. RBC also competes against American investment banks, like Goldman Sachs Group (GS), for mostly mid-market energy and mining business. For 2007, Bloomberg ranked RBC #13 in U.S. Equity Offerings and #16 in U.S. M&A Transactions.. In terms of total fees, RBC is the 12th largest investment bank in the world.