Royal Bank of Canada shares are poised to reach a record high, leading a rally in bank stocks as wealth-management activity boosts profit, say investors such as Baskin Financial Services Inc.’s Barry Schwartz.
Royal Bank, Canada’s largest lender, rose 0.4 percent to C$61.96 at 4 p.m. in Toronto, approaching its C$62.42 peak of May 3, 2010. Shares in the Toronto-based bank have risen 12 percent since Nov. 15, the best-performing bank stock in the eight-member Standard & Poor’s/TSX Commercial Banks Industry Index (STCBNK), which has gained 9.6 percent over that period.
Banks have “had no losses on loans whatsoever and wealth management is starting to move at a nice clip because stock markets have done well,” said Schwartz, who helps oversee C$475 million ($478 million) at Toronto-based Baskin.
Canadian banks, ranked the world’s soundest for five straight years by the Geneva-based World Economic Forum, posted record profit last year, with growth partly lifted by trading and gains from investment banking. The S&P/TSX composite index has rallied 2.9 percent this year compared with a 4 percent gain for all of last year.
Royal Bank may push past record territory, said Bob Decker, a Toronto-based fund manager with Aurion Capital, which oversees C$6 billion in assets.
“My return expectation for this company is that it can get into the low C$70s in a year,” Decker said. “It’s a Steady Eddy.”
The banks index (BKX) closed today at its highest level since April 6, 2011, after outperforming Canada’s benchmark index with an 11 percent return in 2012. While the Canadian bank index has outperformed the broad Canadian stock gauge, it has underperformed relative to U.S. banks. The 24-company KBW Bank Index of U.S. lenders rose 30 percent in 2012.
The Canadian bank rally may “fizzle” by April as the broader stock market eases and Canada’s economy slows, said Shailesh Kshatriya, a Toronto-based senior investment analyst with Russell Investments Group, which manages C$11 billion in Canada.
“We’re definitely more cautious on the Canadian economy, and that filters down to the banks as well,” Kshatriya said. “The banks are the pulse of what’s going on in the broader economy.”
The Canadian economy will slow to a 1.8 percent rate of growth in 2013, from 2 percent last year and 2.6 percent in 2011, according to the median estimate of 29 analysts surveyed by Bloomberg. That would be the weakest annual pace since the recession of 2009 and below economists’ estimates for 2 percent growth in the U.S. this year.
Bank executives have warned about a slowdown in consumer lending amid government efforts to cool Canada’s housing market and discourage household spending. Finance Minister Jim Flaherty has tightened mortgage lending rules four times to stop the country’s home market from overheating.
Canadian banks will see profit growth slow this year compared to the past two years, with lenders expected to post adjusted per-share earnings of 3 percent for 2013 and 6 percent in 2014, RBC Capital Markets analyst Andre-Philippe Hardy said in a Dec. 13 note. He anticipates earnings will shift more to commercial lending, wealth management and capital markets as consumer loan growth slows.
Royal Bank’s premium to the Canadian banks index was at its widest last week since October, according to data compiled by Bloomberg.
“We’re getting to a point where a lot of the upside has already been priced into Royal Bank,” John Aiken, a Barclays Plc analyst who rates the stock underweight, said in an interview.
Royal Bank shares have 10 buy recommendations, eight holds and two sells according to ratings compiled by Bloomberg.
Katherine Gay, a Royal Bank spokeswoman, declined to comment.
Aurion Capital’s Decker says it may be too late for investors to take advantage of the surge among Canadian banks.
“The bank rally is far from over in a three-month context, but I think it’s late in the game to be chasing them,” said Decker, who’s firm is paring bank stocks for laggards such as materials and energy.
“We’re optimistic that earnings will grow through 2013, just not at the same pace as we’ve enjoyed over the last couple of years,” Aiken said. “So investors are going to have be satisfied with lower returns, both on capital gains, as well as slower growth on the dividend.”
Bank shares should trade at 12 times to 13 times per-share earnings during “good times”, according to Schwartz, leaving “still some upside to come” for Canada’s lenders.
Royal Bank’s price-to-earnings ratio, a measure of how expensive the stock is, is the highest among Canada’s six- largest lenders. Royal Bank shares are trading at 12.8 times per-share earnings, compared to 12.4 for Bank of Nova Scotia (BNS) and 11.3 for Toronto-Dominion Bank. (TD) National Bank of Canada (NA) is the cheapest among Canada’s six-biggest lenders, trading at 8.8 times earnings.
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