Investors’ Report Research Assignment: Royal Bank of Canada (RY)

To give you a better idea of my abilities as a business writer and researcher, I thought I’d post an assignment I completed for one of my university courses. We were tasked with choosing a well-known company, completing research into its financials, and reporting our findings in an investors’ report format. Below is the result of my work.

Profile

The publicly held financial services company Royal Bank of Canada (RBC) is the largest bank in Canada and has a long track record of success, both domestically and abroad. Founded in 1864, the company employs 74,000 employees in 58 countries, serving 15 million clients worldwide.

While offering personal and commercial banking accounts, charge cards, lines of credit, mortgages, investment portfolios, insurance coverage, and related financial products and services, RBC spearheads innovative strategies to build on its brand and deliver more to the consumer; notable is the company’s recent launch of a small number of retail store-concept branches that provide an interactive experience to customers while educating them about the banking products and options available to them.

Over the past year, Royal Bank has received numerous prestigious awards, including Dealmaker of the Year in Canada (Financial Post); Best Investment Bank in Canada (Euromoney); and third consecutive year on Canada’s Top 100 Employers List (Mediacorp Canada Inc.). Lastly, Royal Bank of Canada’s Vancouver 2010 Olympic Torch Relay and RBC Foundation programs were another set of initiatives which served to cement the bank’s reputation as a conscientious and community-oriented institution.

Financials

The value of RBC stock has consistently remained between $50 and $60, on average, over the past five years. Though a steep drop in value (down to $30) occurred in the first months of 2009, when the market was recoiling from the ABCP crisis, the share price returned to a healthy level relatively quickly. The company’s net income grew by about 45% (up $1.6 billion) year-over-year from fiscal 2009 to 2010, with earnings increasing by 10% when certain items are excluded; fiscal 2011, however, saw a modest decline in revenue (down $500 million).

Historically, a distinct upward trend across all positively predisposed indicators can be noted: for instance, the company posted revenues of $34.3 billion on October 2011, an increase of $19.5 billion since October 2010; more notable, perhaps, is the fact that all the years in between followed a safe, steady rise not just in revenue, but also in net income, net profit margin, and stock price. The 2008/2009 crisis was an important, though evidently surmountable exception.

Royal Bank’s main weakness lies in its declining asset quality, indicated by an increase in the company’s gross impaired loans ratio (GIL); between 2009 and 2011, its GIL increased from 0.96% to 1.65%. In addition, there was a significant rise in the company’s provision for credit losses between 2010 and 2011, suggesting aggressive profit management. Taken together, these trends point to potential pitfalls in the company’s future profitability. And while RBC Canada weathered the recession sufficiently well, the company’s US operations suffered a sizeable setback with a net loss of $1.13 billion during the market correction period of 2008-2009. The US remains the company’s second-largest market, and as the country continues to be under pressure, so risk is heightened for Royal Bank’s operations across the border compared to a decade ago.

Competition

Royal Bank of Canada’s chief competitors are TD Bank, Scotiabank, and CIBC. Currently, RBC outstrips its competition in terms of market capitalization and annual sales—clocking in at $67.7 billion and $34.3 billion, respectively—while falling behind on its net profit margin, at 16.7%. All told, the company is faring quite well compared to its competition, slight weaknesses notwithstanding.

Outlook

Both historic and recent financial figures point to the company’s continued growth and success despite the difficult economic climate. Royal Bank of Canada is one of those companies large enough, established enough, and savvy enough to prosper. This is particularly evident when the company’s performance history is examined in light of that of its competitors. The company’s overall worth, indicated by its close to $70 billion market capitalization, is the highest in the industry. Essentially, the above indications all seem to suggest that RBC is, financially speaking, a company of overall stability with a tendency for low volatility over the long term. Buying Royal Bank stock is a wise decision considering the annual rise in share value and the attractive dividends the company pays out. Moreover, investors can feel secure knowing that they have made a safe bet in keeping their money with the bank.

Recommendations

Though this report paints Royal Bank in rather rosy colours, prudence is recommended when investing in the company. Investors are advised to hold company stock; while all signs point to the bank’s continued growth, uncertain economic conditions should give investors pause on making large investments. In addition, the company’s stock value is quite high at the moment (at $50 a share), which should deter all but the most high-profile investors. A better long-term strategy would be to wait for the markets to stabilize, as the stock is not sufficiently undervalued to afford a buy recommendation.

editor writer

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