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Growth & Income

Earnings estimates for Royal Bank of Canada (RY - Snapshot Report) have been moving higher since this major Canadian bank posted strong fiscal third quarter 2012 results late last month, which included an earnings surprise of 12.0%. Moreover, this Zacks #2 Rank (Buy) has delivered positive earnings surprises in three of the last four quarters with an average beat of 5.1%.

In addition, RY currently pays a dividend that yields a solid 4.0%.

Third Quarter EPS Moves Higher

On August 30, Royal Bank of Canada reported fiscal third quarter 2012 adjusted earnings per share of $1.31, topping the Zacks Consensus Estimate of $1.17. The performance was helped by growth in revenue and improving credit quality.

Net interest income climbed 8.3% to $3.23 billion (C$3.29 billion). Non-interest income was up 6.0% to $4.39 billion (C$4.47 billion). Moreover, the net interest margin expanded 6 basis points (bps) to 1.61%, but the company's non-interest expenses rose 4.8% to $3.70 billion (C$3.76 billion).

The provision for credit losses as a percentage of net loans and acceptances decreased at Royal Bank of Canada, coming in at 0.34%, down 3 basis points on a year-over-year basis. Moreover, allowance for credit losses as a percentage of total loans and acceptances declined 7 basis points to 0.53%.

Rising Earnings Estimates

The past 30 days have seen four of five estimates for fiscal 2012 move higher, raising the Zacks Consensus Estimate by 5.1% to $4.96. For 2013, five of six estimates headed north, helping the Zacks Consensus Estimate advance 3.1% to $5.29.

The Zacks Consensus Estimates reflect year-over-year improvements of about 13.5% for 2012 and 6.7% for 2013.

Dividend Payment

Royal Bank of Canada is one of the few banks that have maintained regular dividend payments throughout the financial crisis. The company also enhanced its quarterly dividend from 57 cents per share to 60 cents in August 2012. The current dividend of 60 cents per share equates to a yield of 4.0%.

Premium Valuation

Shares of Royal Bank of Canada currently trade at 11.6x 12-month forward earnings, a 21% premium to the peer group average of 9.6x. Its price to book ratio of 2.1 is at a significant premium compared with the industry median of 0.6. The company has a trailing 12-month ROE of 18.6%, above the peer group average of 7.1%.

Chart Shows Strength

The stock has been consistently trading above its 200 days moving average since August 2012. The widening gap between the stock price line and that of 200-days moving average is significant.

Royal Bank of Canada is one of the few foreign banks with rising estimates, strong growth projections, a sturdy dividend yield and reasonable valuation. Moreover, with dividend increases and improving credit quality, it offers attractive upside potential.

Headquartered in Toronto, Canada, Royal Bank of Canada provides various banking products and services under the RBC name worldwide. The company was founded in 1864 and conducts business for personal, business, public sector and institutional clients through its offices in Canada, the U.S. and 51 other countries. It has a market capital of $82 billion.


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