BMOMarch 1, 2023 | 18:35 ET~ Royal Bank RY-TSX RY-NYSE Rating Market Perform Price: Mar-1 $133.62 Target $132.00 Total Rtn 3% Q1/23 Beat on Record Trading and Lower Taxes Bottom Line: Beat. RY's cash adjusted diluted EPS of $3.10 came in above our/consensus expectation of $2.82/$2.96. The beat to our estimate came from Capital Markets (FICC/macro trading was very strong; continued strength in lending) and a lower effective tax rate (Capital Markets earnings mix). Balance sheet remains strong with CET1 ratio of 12.7% (20bps CRD/tax-adjustment impact); LCR of 130%. Key Points The beat to BMOe was largely from Trading. Better-than-expected earnings at Capital Markets (up 9% y/y) from impressive trading results (driven by FICC + record macro trading). Wealth Management was in line with earnings of $913MM (up 6% y/y), helped by the Brewin Dolphin acquisition and higher NII (higher rates offset lower deposit volumes). Earnings at CNB down 47% y/y (in source currency) driven by higher impaired PCLs. Earnings at Canadian Banking up 7% to $2,062MM, reflecting 9% loan growth, partly offset by higher PCLs. Insurance was down 25% y/y at $148MM. Outlook: Margin expansion through FY23 at Canadian Banking and City National. PTPP income was up 7% y/y. Revenue was up ~12% y/y, reflecting strong trading revenue of $1,362MM (up 28% y/y; prior eight-quarter average of $917M) and strong double-digit growth in spread revenue (margins up 37bps y/y). Adj. NIX was 56.1% vs. 53.9% in Q1/22 with negative ~5% operating leverage. Outlook: Decelerating growth of NIE (excl. variable compensation) and positive operating leverage in FY23. Higher Impaired Loan Provision. The quarter included $532MM/25bps in PCLs (Stage 1&2: 8bps; Stage 3: 17bps). Total allowances (specifics + collectives) now stand at ~ $4.4B or ~88bps of credit RWA (vs. "through the cycle" average of 92bps). Strong balance sheet and liquidity position. CET1 ratio of 12.7% was up 10bps q/ q reflecting internal capital generation (39bps) offsetting the impact of the CRD and other tax adjustments (-20bps) and RWA growth (-17bps). LCR was 130% (five-year average: ~129%). Outlook: BASEL III reform benefit of 70-80bps expected in Q2/23. CET1 expected to be at least 12% after the close of HSBC Canada (we model a January 2024 closing). Forecasts. F2023E EPS goes to $11.55 (given current quarter beat); F2024E EPS tweaked slightly lower to $12.20. Target price unchanged at $132 or ~10.8x 2024E EPS. Key Changes Estimates Q2 / 23E 2023E 2024E CEPS $2.72 $11.55 $12.20 Previous $2.75 $11.38 $12.25 Revenue (mm) $12,801 $53,080 $57,978 Previous $12,902 $53,099 $58,138 Expenses (mm) 7,194 29,682 32,073 Previous 7,214 29,587 32,203 Canadian Banks Sohrab Movahedi Analyst sohrab.movahedi@bmo.com (416) 359-7157 Ally Zhou, CFA Associate ally.zhou@bmo.com (416) 359-6856 Shoban Anandarajah Associate shoban.anandarajah@bmo.com (437) 998-2946 Legal Entity: BMO Nesbitt Burns Inc. 160 150 140 130 120 110 100 Aug Feb Aug Feb 20 15 10 5 0 LHS: Price (C$) / RHS: Volume (mm) Source: FactSet 2YR Price Volume Chart Company Data in C$ Dividend $5.28 Yield 4.0% P/BV 1.8x Shares O/S (mm) 1,385.6 Market Cap (mm) $185,143 Book Value $72.58 BMO Estimates in C$ (FY-Oct.) 2022A 2023E 2024E CEPS $11.19 $11.55↑ $12.20↓ Revenue (mm) $47,774 $53,080↓ $57,978↓ Expenses (mm) 26,609 29,682↑ 32,073↓ Provisions(mm) 484 2,195↑ 2,952↑ Dividends $4.96 $5.36 $5.68 Consensus Estimates 2022A 2023E 2024E EPS $11.80 $12.61 Valuation 2022A 2023E 2024E P/E 11.9x 11.6x 11.0x P/BVPS 1.8x 1.7x 1.6x P/TBV 2.2x 2.1x 1.9x QTR. CEPS Q1 Q2 Q3 Q4 2022A $2.87 $2.99 $2.55 $2.78 2023E $3.10a $2.72 $2.85 $2.88 2024E $3.12 $3.00 $3.01 $3.07 Our Thesis Market Perform. RY is a G-SIB (Bucket 1) universal bank with scale advantages in Cdn. mass market banking and is committed to gaining market share in Canada by investing in technology as it balances the business mix between retail and wholesale. In recent years it returned to U.S. retail banking in pursuit of growth. This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst Certification, please refer to page(s) 13 to 17. Royal Bank - Block Summary Model Income Statement (C$mm) 2022A 2023E 2024E Net Interest Income 20,693 24,088 26,711 Trading Revenues 3,466 4,137 3,800 Other Revenue 23,615 24,855 27,467 Total Revenues 47,774 53,080 57,978 Other Expenses 26,609 29,682 32,073 PTPP 21,165 23,397 25,906 Provisions for Credit Losses (PCL) 484 2,195 2,952 Pre-Tax Income 20,681 21,202 22,954 Taxes 4,887 5,211 5,853 After-Tax Income 15,794 15,991 17,101 Equity Int./Minority Interests & Pfd 247 232 267 Net Income to Common 15,547 15,759 16,833 After Tax Amort. of Intangibles 191 284 284 Cash Op'g NI to Common 15,738 16,043 17,117 Cash Operating EPS $11.19 $11.55 $12.20 Dividends $4.96 $5.36 $5.68 Balance Sheet (C$mm) 2022A 2023E 2024E Avg Loans and BAs 789,100 857,889 975,759 Avg Assets 1,886,400 2,112,382 2,402,614 Common Equity 100,746 107,836 118,953 Tangible Common Equity 82,386 89,476 100,593 BVPS $72.85 $77.40 $84.53 Tangible BVPS $59.57 $64.22 $71.48 RWAs 609,879 609,687 794,115 CET1 Ratio 12.6% 14.0% 12.2% TCE/TA 4.2% 4.2% 4.1% RWAs/Total (Avg) Assets 31% 28% 33% Tier 1 Leverage Ratio 4.4% 4.9% 4.2% Select Financial Ratios 2022A 2023E 2024E PCLs/Loans (bps) 6 26 30 Annualized ROE 16.3% 15.4% 15.1% Annualized ROCET1 20.6% 19.7% 18.8% Annualized ROA 0.83% 0.76% 0.71% Productivity Ratio 55.7% 55.9% 55.3% Tax Rate 23.6% 24.6% 25.5% Operating Leverage 0.5% -0.4% 1.2% Source: BMO Capital Markets, Company Reports