The Bank of Nova Scotia (USA) (BNS), Bank of Montreal (USA) (BMO): Royal Bank of Canada (USA) (RY) Earnings Look Poised to Keep Pushing Higher

Page 1 of 2

Royal Bank of Canada (USA) (NYSE:RY) will release its quarterly report on Thursday, and for bank investors who’ve looked for greater stability than is available from the U.S., the Canadian bank has been a reasonable bet for modest but steady returns in recent years. Yet with some economists pointing to signs of a possible housing bubble in Canada, are RBC earnings potentially vulnerable to a Northern version replay of the financial crisis?

Royal Bank of Canada (USA)

For the most part, investors have looked at the Canadian banking system as a model for other countries to follow, with RBC and other banks having avoided the massive housing bets that U.S. banks made during the housing boom — and which subsequently came back to bite them when the housing market crashed. With the resource-dependent economy now struggling from low prices on commodities like gold and other metals, the big question is whether Canada and its banking system will stay strong going forward. Let’s take an early look at what’s been happening with Royal Bank of Canada (USA) (NYSE:RY) over the past quarter and what we’re likely to see in its report.

Stats on Royal Bank of Canada

Analyst EPS Estimate $1.38
Change From Year-Ago EPS 5.3%
Revenue Estimate $7.93 billion
Change From Year-Ago Revenue 2.2%
Earnings Beats in Past 4 Quarters 3

Source: Yahoo! Finance.

Can RBC earnings keep growing?

Analysts have been optimistic in recent months about the long-term prospects for Royal Bank of Canada (USA) (NYSE:RY) earnings. Although they’ve kept their July quarter estimates stable, they’ve added a nickel per share to their fiscal 2014 year projections. The stock, meanwhile, has held its own, climbing about 1% since late May.

Royal Bank of Canada (USA) (NYSE:RY) actually started the quarter off on a disappointing note, with its April-quarter results having largely disappointed investors. Even though the bank fell short of analysts’ estimates for earnings, it showed double-digit percentage figures for returns on equity and adjusted earnings growth from the year-ago quarter. Similar results from The Bank of Nova Scotia (USA) (NYSE:BNS) and Bank of Montreal (USA) (NYSE:BMO) showed that investors aren’t willing to forgive Canadian banks that don’t outpace expectations, perhaps because their shares are relatively expensive compared to their American counterparts.

But one interesting way in which Royal Bank of Canada (USA) (NYSE:RY) has sought to stand out from the crowd comes from its treatment of high-frequency trading. Rather than embracing the profitable practice, RBC has actually imposed restrictions on high-frequency trading among its customers, seeking to attract a clientele that’s interested in avoiding being victimized by the practice. The strategy has helped RBC grow the size of its American operations, and in June, it said that it’s looking to partner with other Canadian banks to build an exchange that’s less conducive to high-frequency trading. Such a long-term perspective is admirable and could result in more business down the road.

The big question facing both RBC and most other Canadian banks is whether they can live up to high expectations. For its part, ScotiaBank fell 1.5% yesterday after its report, which featured a 3% dividend boost and earnings that matched expectations on higher revenue than expected. Yet without boosted guidance, investors were disappointed with the results. On the other hand, Bank of Montreal (USA) (NYSE:BMO) climbed as it successfully topped earnings estimates, with adjusted earnings up 13% year over year, and with a boost in returns on equity helping send the stock higher.

Page 1 of 2