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RBC Scores Top Premium Among Banks: Corporate Canada

The Royal Bank of Canada logo is displayed on a sign at their headquarters building in Toronto. Photographer: Norm Betts/Bloomberg
The Royal Bank of Canada logo is displayed on a sign at their headquarters building in Toronto. Photographer: Norm Betts/Bloomberg

March 29 (Bloomberg) -- Royal Bank of Canada is attracting the highest premium among the country’s bank stocks in at least nine years after selling a money-losing U.S. lender and beating analysts’ profit estimates for two straight quarters.

The premium investors are willing to pay for Royal Bank’s stock relative to earnings surged to 13 percent over its competitors March 13, the highest since at least February 2003, according to data compiled by Bloomberg. In November, shares of Canada’s biggest bank by assets traded at a 9 percent discount, their lowest in more than three years.

“This has run full circle,” said Bob Decker of Aurion Capital Management Inc., who helps manage C$5.6 billion ($5.6 billion) including bank shares at the Toronto-based firm. “They’ve regained lost ground through some tough decision-making and some heavy lifting on the cost side, and I congratulate them on that.”

Royal Bank’s price-to-earnings ratio, a measure of how expensive the stock is, has been the highest among Canada’s six-biggest banks since Dec. 6, even as its return on common equity is the lowest, the data show.

The bank is trading at 13.3 times profit for the last four quarters, compared with 12 for the eight-bank S&P/TSX Composite Commercial Banks Industry Index. The stock has risen 12 percent this year, Canada’s second-best performing bank stock after Canadian Western Bank. Royal Bank fell 1.3 percent to C$57.98 at 4 p.m. Toronto Stock Exchange trading. Royal Bank spokeswoman Katherine Gay declined to comment.

Canadian Lenders

Investors’ renewed interest in the stock comes despite a return on common equity of 14 percent in the last quarter. That compares with CIBC, which had the highest at 23 percent, and National Bank, at 19 percent. Royal Bank’s return on equity declined from a recent peak of 25 percent in 2007.

The rising cost of Royal Bank doesn’t trouble Decker, who notes the bank, which has traditionally traded at a premium, is on par with Toronto-Dominion Bank and Bank of Nova Scotia based on earnings expectations in the next 12 months.

Royal’s increase in valuation accelerated after it reported first-quarter net income on March 1 that topped analysts’ estimates for the second quarter in a row, driven by record profit in Canadian consumer lending.

Last year, Royal Bank sought to rein in costs and sell its unprofitable U.S. consumer lender, RBC Bank, while posting profit that missed analysts’ expectations. Royal Bank has missed analysts’ adjusted profit estimates in five of the last eight quarters, according to data compiled by Bloomberg.

Penalty Box

“Royal is coming out of the penalty box,” John Aiken, an analyst with Barclays Capital in Toronto, said in an interview. “Investors want to be optimistic.”

The surge in valuation is prompting Barry Schwartz of Baskin Financial Services to reconsider the stock.

“We’re actually thinking about exiting the position or looking at one of the other banks because of how well it’s done,” said Schwartz, who helps manage C$450 million for the Toronto-based money manager.

Schwartz says there is better value with Canadian lenders including Bank of Montreal, the fourth-largest lender, and Canadian Imperial Bank of Commerce, the fifth-biggest, and sixth-ranked National Bank of Canada.

“Investors overshot on the downside when lousy things were happening for Royal, and now they’ve overshot on the upside,” Schwartz said. “People shouldn’t be piling into Royal Bank stock at this price, they should be looking at the underperformers.”

To contact the reporter on this story: Doug Alexander in Toronto at

To contact the editors responsible for this story: David Scheer at; David Scanlan at

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