The Company in a Nutshell
- Royal bank raised its dividend twice a year, a nice tradition for shareholders.
- Royal Bank has been ranked highest in overall customer satisfaction for the second year in a row.
- RBC wealth management division will continue to be a growth vector going forward.
Business Model
Royal Bank is the largest bank of the group by market cap (it battles with TD) and provides various financial services to individuals as well as commercial and institutional clients. RY has a strong position in the personal and commercial banking sector (50% of its revenue). In 2015, RY bought City National, a Los Angeles-based bank focused on high net worth clients. The transaction opened US doors and another growth vector: wealth management.
Potential Risks
After the last market crash, the bank put its focus on growing its smaller sectors. While wealth management should continue to post stable income, the insurance and capital markets are more inclined to hectic returns. As the largest Canadian bank, Royal Bank could also get hurt by a bearish housing market
Dividend Growth Perspective
Royal Bank has a “tradition” of increasing its dividend twice a year. Therefore, you can count on two low-single digit dividend growth per year. It paused its dividend growth policy between 2008 and 2010, but came back with the double dividend growth tradition in 2012. Even with the crisis, RBC sustained a distribution growth of 8% CAGR for the past 5 years. For our DDM valuation, we have used a 6% dividend growth rate to keep a conservative approach.
Final Thoughts
Over the past 5 years, RY did well because of its smaller divisions acting as growth vectors. The insurance, wealth management and capital markets push RY revenue. Those sectors combined now represent about 50% of its revenue. Royal bank also made huge efforts into diversifying its activities outside Canada. Canadian banks are protected by federal regulations, but this limits their growth. Having a foot outside of the country helps RY to reduce risk and to improve growth potential.
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