Pat McHugh Royal Bank RY-T TOP PICK May 28, 2007

Likes the big 5 Canadian banks; all have wealth management, retail, and commercial banking in Canada. This one is among the cream of the crop, over-capitalized, best performer. Rock-solid dividend yield ~4%. Nothing not to like about it. Best in wealth management. Steady dividend growth.

His least-favourite Canadian bank, the most over-valued. Prefers TD because it was beaten up, and BNS for better value. If it's new money, wait till $130-140, though you could buy a small tranche here.

His big position in Canada. Leader in wealth management. Great capital markets business. Great balance sheet. Very well managed. When you get into a sloppy market, you want to own the best. Thinks you could buy this here, but he's not adding any new positions in anything at all right now.

Good time to buy. Multiple has contracted on prospect of a slowing economy and potential for increased loan loss provisions. As a group, banks have been increasing loan loss provisions for a couple of years. Unknown how tariffs will impact economy; but RY is diversified with strong retail deposit base. HSBC Canada integration going well, source of future growth. Attractive dividend, increases a bit each year.

Both have a very large domestic presence, which helps them in this environment. Both had very good numbers last quarter and are very good businesses. As expected, all banks increased credit provisions.

RY will benefit more from its large capital markets business. Volatility helps capital markets a lot; perhaps you won't get the M&A, but a lot of trading goes on with equity, debt, and other derivatives. It's global. Expectation in US of deregulation in financial services; if so, RY will benefit a lot more than NA.

NA is smaller and more focused in Quebec, though the CWB acquisition is changing that.

RY is the least-exposed bank exposed to tariffs. Good. Volatilty in capital markets benefits RY's cap markets division. The dividend is reasonable and now trades at a premium valuation in this sector, but this is deserved.

Pretty stellar run last year. Banks may see some credit losses if we see job losses. Buy here, get a fairly decent return over a long period of time. But for upside like last year's, you'll be disappointed. Banks should be able to weather an economic slowdown.

You have to take all the indicators together. For example if the price is going up, but momentum is slowing, you know it's going to be bad news for the stock eventually. 

This chart hit a high ~$180, pulled back, and is attempting to hit it again. That will be a resistance point, which needs to be cracked. If momentum's already overbought, and it's about to hit resistance, he'd say it has less chance of going through resistance. However, if it's hooking up through the level, then you could see it go through $180.

Best name in the group in terms of quality, but that's reflected in the stock price. Has scale, a diversified revenue mix, synergy upside, long-term track record, most-trusted bank. Nice Bank of Hong Kong accretion upside. Over the next 10 years, especially if Canada's going to be in a more pro-growth phase and with the growth that the US is trying to engineer, it should be really good for RY.

Stumbled a bit on earnings yesterday, and that was probably a buying opportunity. Not his favourite bank right now (that's BMO), but can't go wrong with this one.

RY's EPS of $3.12 did miss estimates of $3.18. Revenue matched estimates ($15.67B). Provisions for credit losses were higher than expected and this was the main reason for the miss. RY has calibrated its models to higher risks, which preemptively increased provisions for performing loans, even as impaired loans moved gradually. The bank sees low-single-digit mortgage growth in the near term, potentially slower card spending and commercial loans growth in mid- to high-single digits in 2H. Combining a cautious growth view with less interest margin expansion potential could still support RY's high-single-digit to low-double-digit growth in non-trading net interest income. Holding expense growth at the upper end of mid-single digits in 2H can hold 2025 operating leverage. Markets revenue remains a quarterly variable. RBC sees the full-year impaired provision ratio potentially moving to the higher end mid-30s bps guidance, and provisions may peak in 2026. RY tends to be conservative, and we would not be too concerned here overall.
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