EUR 850.00 For Business Accounts Only

Morningstar | Overall Another Solid Quarter for Royal Bank of Canada; Expense Growth Should Moderate in 3Q and 4Q. See Updated Analyst Note from 23 May 2019

Wide-moat Royal Bank of Canada reported decent fiscal second-quarter 2019 results, and our long-term thesis on the firm remains unchanged. Earnings growth picked back up during the quarter, with revenue up 14%. Expenses were up 8%, with at least one third of the increase simply due to incentive pay related to revenue growth. This led to adjusted EPS growth of 6% for the quarter, coming in at CAD 2.23. Management guided toward slower expense growth for the third and fourth quarters, leading to better operating leverage for the remainder of the year. Management also stuck to its 7% EPS growth goal for the year. Overall, the bank has turned in another excellent quarter of operating performance, as the return on equity was 17.5%--top tier among the Canadian banks--and it continues to maintain or gain share in key areas. While earnings growth may slow in the medium term as the Canadian housing market and economy come under more pressure, RBC remains well positioned. After making some minor adjustments to our forecasts, we are decreasing our fair value estimate for the Canadian shares to CAD 110 from CAD 111 and decreasing our fair value estimate for U.S. shares to $82 from $84 per share.

The bank continued to push further organic growth investments, but it highlighted that FTE expansion should be moderating and some of the previous, more tech focused investments are becoming more efficient over time, providing some relief to overall investment needs. Provisioning for credit improved compared with the first quarter but was still a bit higher compared with the second quarter of 2018. Management again highlighted that there were a few individual accounts that contributed to current provisioning levels, and nothing appeared systemic from its vantage point. Delinquency rates have still remained relatively steady in all key portfolios.

The capital markets segment had an improved quarter, with global markets revenue up 13%, while corporate and investment banking revenues were flat. The personal and commercial banking segment saw 6% net income growth, largely driven by the U.S. and Caribbean segment, as the Canadian segment saw net income growth of 2%. Deposit growth was strong in Canada, up 9%, while NIM expansion is probably over for the time being. The Canadian unit still achieved operating leverage of 1.7%. Wealth management also had a good quarter, with net income up 9% and assets under management up 11%. The bank continues to gain share in Canada, gathering more assets than competitors. Finally, the investor and treasury services segment remains under pressure, a trend present for the entire industry, with net income down 29%.