Before market open today, Canada’s largest bank, Royal Bank of Canada (RY) (TSE: RY), reported its Q3-2022 earnings results. Both revenue and earnings missed analysts’ estimates. As a result, the stock is currently trending lower.
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Royal Bank’s revenue came in at C$11.425 billion compared to the consensus estimate of about C$11.78 billion. Also, diluted earnings per share (EPS) were C$2.51, down 15% year-over-year, while analysts were expecting a figure of C$2.66.
Net income fell slightly more than EPS, registering a 17% drop. The reason for the discrepancy is that the company bought back C$1.3 billion of shares in Q3, reducing the overall share count, which boosted EPS.
Next, Royal Bank’s return on equity (ROE) fell to 14.6%, 500 basis points (bps) less than last year’s figure of 19.6%. The lower year-over-year profitability can be attributed to a worsening economy, causing the bank to increase its provisions for loan losses more than initially expected.
According to Bloomberg Intelligence analyst Paul Gulberg, investment banking activity, such as IPOs and M&A, was especially lighter than people had anticipated. As a result, trading revenues weren’t able to make up for the lack of investment banking activity.
Lastly, Royal Bank’s Common Equity Tier 1 (CET1) ratio fell 50 bps year-over-year to 13.1%. However, it is still well above the minimum regulatory requirement. The CET1 ratio is calculated by dividing Common Equity Tier 1 (CET1) by risk-weighted assets. It’s a liquidity metric, and RY’s CET1 ratio shows strong liquidity.
Is RY a Good Stock to Buy?
Turning to Wall Street, Royal Bank of Canada earns a Moderate Buy consensus rating based on six Buys, two Holds, and one Sell assigned in the past three months. The average RY price target of C$140.30 implies 14.7% upside potential.
Top TipRanks Investors are Neutral on RY Stock
TipRanks currently tracks 557,672 investor portfolios that use the Smart Portfolio tool. The top investors, which amount to 111,534 portfolios, appear neutral on RY stock.
In the past 30 days, the number of top-performing TipRanks portfolios holding RY stock increased by less than 0.1%, leading to 0.4% of portfolios holding the stock. However, in the past seven days, this number decreased by 0.4%. Royal Bank’s neutral investor sentiment is below the sector average, as shown in the image below:
Conclusion: Royal Bank’s Falling Profitability Disappoints Investors
While Royal Bank still has many positives, including being the biggest Canadian bank, having a respectable ROE of 14.6%, and consistently generating profits, its earnings and revenues fell short of expectations, disappointing investors. This led to the stock being down on the day.
Nonetheless, analysts are cautiously optimistic about the stock, but it will be interesting to see how analyst ratings change following this earnings report.
