Royal Bank of Canada T.RY.PR.M

Primary Symbol: T.RY Alternate Symbol(s): RBMCF | T.RY.PR.J | RBCPF | T.RY.PR.N | T.RY.PR.O | T.RY.PR.S | RYLBF | RY | T.RY.PR.H

Financial Services

Royal Bank of Canada is a global financial institution. Its business includes Personal & Commercial Banking, Wealth Management, Investor Services, Capital Markets and Insurance. The Personal & Commercial Banking comprises its personal banking operations and certain retail investment businesses in Canada, the Caribbean and United States, as well as its commercial and corporate banking operations in Canada and the Caribbean. Wealth Management provides a full suite of investment, trust and other wealth management solutions and businesses. Capital Markets provides public and private companies, institutional investors, governments and central banks globally with a range of capital markets products and services across its two main business lines, Corporate and Investment Banking and Global Markets. Insurance offers a range of life, health, home, auto, travel, wealth and reinsurance advice and solutions, and creditor and business insurance services to individual, business and group clients.

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Royal Bank of Canada

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Post by retiredcfon Aug 25, 2022 9:00am

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Post# 34919309

TD 2

Maintain their $140.00 target. GLTA

Royal Bank of Canada

(RY-T, RY-N) C$122.46 | US$97.52

Q3/22: Solid P&C Momentum Overshadowed by MTM on Leverage Loans

Event

RY reported Q3/22 adjusted EPS of $2.55 (down 15% y/y) vs. our estimate of $2.71 (consensus: $2.66). PCLs were in line with our estimate (we briefly discuss variable- rate mortgages in this report). PTPP down 2% y/y and 7% lower than expected reflecting much weaker trading revenue which reflected $385mm in leverage loan marks. We estimate the marks reduced EPS by $0.21.

Impact: MIXED (Strong NII growth, offset by weak CMRR)

Leveraged loans held-to-maturity are $9.6bn. These loans are not MTM and, as such, the issue is credit risk. Approximately 60% of the loans are B+ and below rated. 75% of exposure is secured. The underwriting portfolio (not sized by RY) is down materially since 2019. Spreads have started to improve early in Q4/22 and 75% of the marks are unrealized. The underwriting portfolio MTM charges this quarter were approximately double our forecast. Management stated that the loan lending book (HTM) did not experience material losses during COVID-19.
Q3/22 PTPP earnings were down 2% y/y, reflecting a 1% decline in revenue and 1% decline in expenses. RY's lower PTPP growth has generally been weaker CMRR growth. This quarter, CMRR was down 32% (likely to be weaker than peers reflecting MTM losses on leveraged loans). However, absent the MTM charges, RY PTPP would have been very strong reflecting higher NIMs. The upside comes from the bank's strong core low-beta chequing account base and the significant increase in securities and REPO/securities lending yields. RY guided to further NIM expansion. Rate sensitivity has not changed materially from last quarter which suggests the bank has not locked in higher rates by extending duration.

TD Investment Conclusion

Over the past 5-10 years, Royal has traded at a 5-7% premium to the group. In our view, the bank's structural advantages and track-record continue to support a healthy premium. We believe the bank is particularly well positioned for the themes we believe will favour bank stock performance in 2022. Consequently, we expect RY to be among the leaders in terms of PTPP growth in 2023. Finally, return of capital also supports a positive outlook on the bank.