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Royal Bank of Canada is the industry leader as the largest financial institution in the country. But the stock has been a laggard in terms of its year-to-date performance, with shares relatively unchanged.

I think RBC represents a solid core holding for investors. Let's take a closer look at some of the challenges facing the company, as well as some positives. I'll also detail some of the latest market signals for knowing when to buy and sell the stock.

  • Loan-loss provisions. Last month, the company reported first-quarter results below expectations, but what really caught the attention of investors was the dramatic increase in provisions for credit losses due to collapsing oil prices. Loan-loss provisions surged to $410-million from $292-million last quarter. The unemployment rate in Alberta, a province largely influenced by energy prices, rose to 7.9 per cent in February, its highest level since 1995.
  • Absence of growth. The Street is forecasting earnings will contract in 2016. Last quarter, first-quarter earnings declined year-over-year.
  • Negative earnings revisions. Prior to reporting first-quarter results, the consensus earnings per share (EPS) estimate for fiscal 2016 was $6.85, but fell to $6.70 after the company reported its results. Similarly, the Street’s EPS forecast for fiscal 2017 was reduced to $7 from $7.22.
  • Return on equity (ROE). ROE has declined for two consecutive years, and plunged to 15.3 per cent last quarter from 17.9 per cent during the same period last year. Over time, management believes ROE will return to the 18 per cent or higher level.
  • Net interest margin (NIM). NIM slipped to 2.6 per cent, driven lower by the low interest rate environment and competitive market conditions.
  • Despite these challenges, there are some positive factors working in the company’s favour.
  • Diversification. The company’s operations are diversified across five core business segments. Personal and Commercial Banking represents the largest segment, representing 52 per cent of the company’s earnings in fiscal 2015, followed by the Capital Markets division, representing 24 per cent of earnings. The company is also geographically diversified with 63 per cent of its revenue from Canada, 19 per cent from the United States and 18 per cent from international regions.
  • Firming oil prices. The lower price of oil was a key reason for the increase in the company’s loan-loss provisions. On Friday, the International Energy Agency (IEA) released its IEA Oil Market Report for the month of March and suggested that oil prices may have put in a bottom.
  • Market stabilization. Improving investor sentiment may drive higher trading volumes and financing activity.
  • The Bank of Canada’s recent decision to hold the overnight rate steady. Falling rates are negative for financials, squeezing a company’s profitability.
  • Insider Transactions. Geoffrey Beattie, who sits on the board of directors, acquired 50,000 shares of RBC in the public market in January, and an additional 50,000 shares the following month.
  • Dividend policy. Management is firmly committed to its dividend, and held its dividend steady during the 2008/09 recession. RBC recently announced a 2.5 per cent increase to its quarterly dividend, lifting it to 81 cents from 79 cents. The company pays shareholders $3.24 a share yearly, equating to an annualized dividend yield of more than 4 per cent.


According to Bloomberg, the stock is trading at a price-to-earnings multiple of 11 times the 2016 consensus estimate. The stock is reasonably valued with shares of RBC trading at a discount to its five-year historical average and 10-year historical average.

Relative to its peers, the stock is trading at a discount to Toronto-Dominion Bank and the Bank of Montreal, relatively in-line with Bank of Nova Scotia, and at a premium to Canadian Imperial Bank of Commerce and National Bank of Canada.

Analysts' recommendations

According to Bloomberg, there are six analysts with buy recommendations, 10 analysts with hold recommendations and there are two sell recommendations. The average one-year price target is $75.33, implying the shares are nearly fully valued.

Chart watch

The next overhead resistance level is around $76. There is downside support around $74, just above its 200-day moving average ($73.92), and then near $70, close to its 50-day moving average.

The relative strength index is at 65, suggesting the stock is in neutral territory, neither overbought nor oversold.

The bottom line

Historically, this stock has traded at a premium relative to its peers, and with time, shares should resume its dominant position and premium valuation. Investors may want to be opportunistic and accumulate shares on dips.

I strongly encourage readers to consult a financial adviser and to do their own proper due diligence before taking any investment action.

The author does not personally own shares in the security mentioned in this story.

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