Canadian Rate Cut Winners: RBC，A Golden Choice in the Tide of Rate Reductions

The main business of RBC can be divided into the following areas:

(1) Personal and Commercial Banking: Providing services such as deposits, loans, credit cards, and investment products to individual and business customers in the United States and Canada.

(2) Wealth Management: Offering investment management, wealth consulting, retirement planning, and estate planning services.

(3) Capital Markets: Involving stock and bond trading, as well as providing financial advisory services such as listing, mergers and acquisitions, and restructuring for companies.

(4) Insurance Business: Offering life insurance, health insurance, property insurance, and other insurance products.

(5) Corporate Services: Providing businesses with account opening, performance inquiries, investment consulting, and financial planning services.

Chart: Main Business Composition

As of the end of March 24, RBC's market share in the Canadian banking industry is 23-24%, which is comparable to the combined market share of two other banks among the six largest banks. Therefore, RBC has a high profile and is far more trusted by customer groups than other banks. After completing the acquisition of HSBC Canada in early May, it is expected that RBC's market share will increase by about 5%, which is more conducive to the bank's development.

Thanks to the high market scale, RBC also has a deposit and loan amount that other banks cannot compare with, and its interest income scale is also more rapid than other banks. In the latest quarter, RBC's asset management scale increased by 11%, reaching 1.2 trillion Canadian dollars. Benefiting from the significant growth in the amount of deposits and loans, in the second quarter of the fiscal year 2024, RBC's interest income reached 29.95 billion Canadian dollars, an increase of 47.4% year-on-year, greatly promoting the growth of RBC's profits.

It is worth mentioning that in the latest quarter, the growth of all RBC businesses was over 10%, with no obvious short board business, showing the company's strong business model. Among them:

The revenue growth of RBC's capital market business is the highest, with an increase of more than 19% year-on-year, and the adjusted net profit reached 1.262 billion Canadian dollars, an increase of 34.4% year-on-year. This growth is due to the active performance of the Canadian capital market and the significant increase in fixed income trading revenue of RBC. The revenue of personal and commercial banking business also reached 6 billion Canadian dollars, a year-on-year increase of 13%, highlighting RBC's strong competitiveness in the field of personal and commercial financial services.

The bank's cost expenditure is nothing more than two types: interest expenditure and non-interest expenditure. Among them, interest expenditure is the interest paid by the bank for its own account's customer deposits; non-interest expenditure includes sales, management, financial expenses, and some investment activities.

According to the latest performance meeting call, after the merger of RBC and HSBC Canada, RBC's cross-selling will no longer generate additional costs, and it is expected to generate a synergy of 30 million Canadian dollars, equivalent to saving 360 million Canadian dollars per year. Correspondingly, the interest expenditure rate has decreased by about 6% compared to the same period last year, showing excellent cost control ability.

Considering that RBC has successfully reduced costs and the performance of revenue is also very good, in the latest quarter, RBC's adjusted net profit reached 4.194 billion Canadian dollars, an increase of 31.97% year-on-year; EPS also increased from 2.65 last year to 2.92 Canadian dollars, an increase of 10.19% year-on-year, showing the company's good profitability.

The interest rate cut by the Bank of Canada at the beginning of June will have a high probability of having a positive impact on RBC's subsequent performance. Similar to previous analyses, interest rate cuts usually stimulate loan demand. If the increase in loan volume is sufficient to offset the decline in single loan income, it can increase the bank's interest income. At the same time, after a period of interest rate cuts, as deposit interest rates are lowered, the bank's interest expenses will also decrease, further stimulating profit growth.

In addition, interest rate cuts may also attract more investors pursuing high returns to enter the stock market, further activating the capital market and bringing more trading opportunities and income to RBC's capital market business.

In the latest quarter, RBC's return to shareholders is reflected in its generous repurchase plan and dividend growth. In the second quarter, RBC announced a share repurchase plan of 30 million shares and increased the quarterly dividend by $0.04 (0.05 Canadian dollars), an increase of 3%. According to the current total share capital of 1.414 billion, this measure is expected to bring a return rate of about 2.12% to shareholders, plus a dividend rate of about 3.9% after raising dividends, RBC's comprehensive shareholder return rate for this year may reach 6%, which is very attractive in the environment of interest rate cuts.

In the latest telephone meeting, RBC's senior management disclosed: The economy of Canada and the United States continues to diverge. In Canada, relatively weak consumer demand, higher unemployment rates, and the impact of high interest rates in the past two years will continue to put pressure on consumers and businesses. In the United States, more persistent inflation means that borrowers may have to deal with higher interest rates for a longer period. Against this background, RBC's credit quality continues to weaken, and the default rate has increased. These results are in line with our expectations for the position of the credit cycle. To avoid the threat of potential bad debts, RBC has recently increased its loan provisions.

According to the performance meeting, RBC set aside a provision of 244 million Canadian dollars for normal loans in the second quarter, and the provision for acceptance bills also increased by 444 million Canadian dollars, with the total pre-provisioned funds reaching 6.1 billion Canadian dollars, which is more than 2.8 times the PCL (provision for credit losses) of non-performing loans in the past 12 months, ensuring its ability to cope with various risks in an uncertain macro environment and maintain stable development.

The Royal Bank of Canada's performance in the second quarter of 2024 once again proves its strength as a global financial leader. By continuously optimizing the business structure, actively responding to market changes, and prioritizing shareholder returns, RBC has not only achieved excellent results in the second quarter but also laid a solid foundation for its future business development through measures such as bad debt provisions.

At present, the expectation of global interest rate cuts is continuously increasing, and the Bank of Canada has taken the lead in lowering the country's interest rate to 4.75% on June 5. Against the backdrop of the interest rate cut tide, RBC's increased shareholder returns make it a trustworthy long-term partner for investors, and it is undoubtedly a good choice for investors seeking high returns.