What Should Investors Know Ahead of RBC's Earnings?

Key areas to watch in the upcoming report include the progress of synergies following RBC's acquisition of HSBC Canada. This strategic move is projected to add full third-quarter revenue, with cost synergies and cross-sales initiatives expected to contribute to mid-single-digit EPS accretion and improved operating leverage. Analysts will be keen to see if RBC maintains its pace to extract C$740 million in synergies over two years, thereby reducing total costs by over 2% and potentially eliminating 55% of HSBC Canada's expenses.

In wealth management, RBC contends with Canada's slower economic growth, which could constrain the core profitability of its Canadian banking segment. Nevertheless, the acquisition of HSBC Canada's operations aids market share expansion and presents opportunities for growth within the wealth unit. The sector has experienced a dynamic shift, with asset values in wealth reflecting gains that help to offset the impact of residual outflows. Further, RBC's capital markets unit, which ranks 10th globally by fees, sees potential for further improvement.

The bank's largest wealth management division has pursued expansion in the US through City National Bank and in the UK by acquiring Brewin Dolphin. Despite these strategic moves, growth in the wealth sector remains a challenge, particularly in the face of global economic uncertainties. However, the integration of HSBC's Canadian operations is anticipated to bolster the wealth unit by enhancing its client base and service capabilities. According to Bloomberg, Wealth Management fees may experience an uptick in the third quarter as fund assets have reportedly grown by 7%.

Upon evaluating the stock against its industry counterparts, it is clear that while it commands the top spot in terms of price-to-book ratio, it concurrently showcases the most robust return on equity (ROE). Occupying the forefront as Canada's premier mortgage provider, holding close to one-third of the market share, the bank is favorably poised to benefit from any rise in mortgage interest prompted by a reduction in rates.

Risks include the potential plateauing of stock growth if rate reductions fail to stimulate the mortgage market as expected. Although residential mortgage demand remains robust, the current rates, significantly higher than the 0.25% of 2020, could dampen growth if the anticipated rate cuts proceed more slowly.

Nonetheless, the acquisition of HSBC Canada presents significant growth opportunities. For example, RBC gained $32.6 million in residential lending assets as of April 2024 through the acquisition, enhancing its capacity to cross-sell mortgages to both existing and new customers.

Analysts have been reassessing their outlook on the Royal Bank of Canada (RBC) as the bank approaches its third-quarter earnings release.Barclays has recently increased its price target for RBC, raising it to C$150 from the previous C$145, while maintaining an Equal Weight rating on the shares. The firm says Canadian bank Q3 earnings should be relatively in line with expectations, aided by solid investment banking and asset management fees partially offset by net interest income headwinds.

On the other hand, Scotiabank has marginally lowered its price target for RBC to C$154 from C$157, while maintaining an Outperform rating.