Executive Summary In today’s demanding market, it is essential to know how to make good investments. The following is an in depth qualitative and quantitative analysis of the Royal Bank of Canada. First, RBC and its subsidiaries will be introduced including information about its history and current situation. The qualitative analysis will consist of RBC’s general information, history, business segments, and corporate social responsibility. Secondly, ratios and other quantitative information pertaining to RBC’s investment situation will be analyzed.
Finally, with respect to the qualitative and quantitative data, an investment recommendation will be made Investment Criteria A company’s ethics and proper management are just as important for their success as their financial data. In order to decide whether or not to invest in a company one must research the company inside and out starting with where the company has come from all the way to their current situation. A company’s history is of the utmost importance because it reveals management trends and past ethical decision making that could reoccur.
Another important aspect of a company’s history is their international expansion and the companies they have done past business with. The industries companies choose to merge with are a good indicator of where they will invest their money in the future. More specific to the banking industry, sustainability has become one of the most important criteria for investment. Especially after the financial collapse of 2008, banks with strong sustainability stood out and gained ground on the high-risk high reward banks.
From a quantitative perspective, data trends can help predict if a company is on a small skid or headed toward future collapse. Ratios can help determine how quickly a company can pay back their liabilities as well as how efficient they are being with their shareholder’s money. A company’s stock may rise or fall depending on their current situation and how the market is fairing overall. The amount of assets and acquisitions a company makes can lead a potential investor to believe they are expanding. Usually good financial data investment criteria are a current ratio >2:1 and an ROA >5%.
Company Introduction The Royal Bank of Canada is Canada’s largest bank by assets and market capitalization. The bank has offices in Canada, United States and 49 other countries. Currently, there are 80,000 full and part time employees at RBC with close to 15 million clients worldwide. The company has a good balance between retail and wholesale banking with over two-thirds of their revenue coming from Canada. The other main geographical markets include U. S. (16%), while all other revenue is distributed internationally (17%). (See Appendix A) Qualitative Analysis
History The history of a company, industry it is present in, and prior success are some of the main factors when considering investing in a company. RBC has been a leading Canadian bank since June 22, 1864 when it was incorporated as the Merchants Bank of Halifax. Its name was changed to The Royal Bank of Canada in 1901. Twenty-four year later it merged with the Union Bank of Canada on the basis of 1 share of Royal Bank stock for two shares of Union Bank stock. Since then, RBC has taken advantage of many international joint ventures and foreign acquisitions.
Most notably in Cuba, Britain, and West Germany. Post-1980, the bank created joint ventures in China with China International Trust & Investment Corp. and began acquiring financial companies in North America. All of the sudden, RBC found themselves competing with large new international banks. During this time, the bank also made a larger commitment to their corporate social responsibility as their charitable donations reached 25. 5 million in 1999. Most recently, RBC has been striving to become a more broad-based financial services group rather than a traditional commercial bank.
Although RBC wanted to keep with it’s main goal of being the #1 banker in Canada, they also wanted to build a stronger overall North American identity. Technology based products took the lead in the bank’s new American market strategy. In going along with this strategy, RBC acquired the world’s first Internet bank in order to take advantage of e-banking services. Finally, the bank has developed a new global brand strategy in response to their growing North American presence, which requires the RBC financial group banner to each business platform and operating subsidiary. Business Segments
The Royal Bank of Canada has five main business segments. The largest of these segments is their personal and commercial banking segment, which makes up 56% of their earnings. RBC was named the largest and most profitable retail banking in Canada as well as the 2nd largest bank by assets in English Caribbean (”Corporate Profile”). The bank provides cross-border banking for Canadian clients and U. S. wealth management clients. Their second largest business segment is their capital markets sector. Their capital markets department deals with corporate and investment banking, equity and debt distribution as well as trading.
This segment is recognized as the 10th largest global investment bank by net revenue and was also named the best investment bank in Canada across equity, debt, and M&A five years in a row (“Corporate Profile”). The third business segment of RBC, which makes up 11% of their earnings, is their wealth management division. Investment, trust, credit, and other wealth management and asset management solutions are all included in wealth management. The division was named top six global wealth mangers by assets as well as ranked #1 in Canada in both retail and asset management (“Corporate Profile”).
Finally, their insurance and investor & treasury services make up the last 11% of the bank’s total earnings. The insurance segment deals with life, health, home, auto, travel, and wealth accumulation solutions. Achievements of the insurance segment include receiving high marks for “Likelihood to Recommend” and “Ease of Doing Business” (“Corporate Profile”). Their investor & treasury services provide global custody, fund administration, and asset servicing to institutional investors. (See Appendix B) SWOT Analysis Strengths: Leading Market Position:
RBC is Canada’s largest bank measured by assets and market capitalization. Leading market position in Canada enables the bank to gain economic economies of scale. Significant Presence in the US and UK RBC is the sixth largest full-service brokerage firm in the US and operates in a network of 42 states. In the UK, RBC is considered a Gilt-edged market maker and actively trades in either conventional or index-linked gilts (“Welcome to ALADIN”). Strong Balance Sheet RBC has a strong capital ratio and common ratio that are much greater than those required under Canadian standards.
Also, the bank’s operating leverage declined between the years 2008 and 2010 showing potential from raising new capital (“Welcome to ALADIN”). Weaknesses: Asset Quality Deterioration RBC’s asset quality has been deteriorating since 2007. More specifically their gross impaired loans to total loans and acceptances ratio has grown between the years 2008 to 2010. Growth and profitability concerns at US operations Although RBC realized an overall growth in revenue in 2009, they also experienced a loss of net income. The US is RBC’s second largest market and can deeply impact the companies overall growth as a whole.
Opportunities: International Expansion RBC has a rich history of international acquisitions over the past 30 years. Continuing with this aggressive strategy paves the way potential increases in revenue and profit expansion. Canada’s Promising Economic Prospects Canadian GDP has shown positive growth within the past two years. Attributing to this growth has been an increasing demand for commodities and improving global financial market conditions. Threats: Increasing Interest Rates As Canadian interest rates rise, so does the potential for a decrease in demand for financial services.
High Taxation Banks in Canada are taxed at a much higher rate than other countries. In addition to Canada’s high taxation, the bank also faces high tax rates in the US; it’s second largest market (“Welcome to ALADIN”). Corporate Social Responsibility RBC has a clearly defined community and sustainability mission as they have been contributing to building a better future since 1864. Emphasis is put mainly on investing in the future by delivering quality products, protecting the environment, and sustaining a productive workplace.
In respect to the community, RBC invests millions of dollars in health, sports, and the arts. More specifically they created RBC Play Hockey, which provides hockey gear to under privileged children. RBC believes that the game of hockey can bring a community together and provide a fun, competitive atmosphere among kids. Twenty grants, each of which was $25,000, will be awarded across North America (“Corporate Profile”). In respect to the environment, climate change, biodiversity, and water are weighed heavily upon. The RBC Blue
Water Project helps educate people about the importance of preserving clean water in order to have enough fresh water for the future. The main component of the program is a ten-year, $50 million donations program, which supports not-for-profit organizations that protect watersheds and ensure access to clean drinking water (“Corporate Profile”). In RBC’s workplace is built upon the notion of shared values, and a sense of responsibility toward others. They look to provide a safe and flexible working environment with career growth opportunities.
Also, the bank provides short and long term savings and wealth accumulation programs for their employees. Quantitative Analysis (See Appendix C) Balance Sheet: RBC has realized a 14% increase in assets over the last three years. This growth in assets is an indicator for an increase in stock returns. However, many times a growth in assets leads to sluggish returns as too many assets weigh down the bank (“Welcome to ALADIN”). Basic accounting procedures require all financial information on the balance sheet to even out. Therefore since RBC’s assets grew by 14%, so did they liabilities and shareholders equity.
This increase in the bank’s liabilities can be attributed to inventory being purchased, issuing bonds payable at a discount, retirement costs for current employees etc. Paid-in capital, the year’s net profits, or a new share offering can increase shareholder’s equity. Shareholder’s equity is especially important for banks such as RBC because of the amount of capital they are given to invest. Cash Flow: Net investments cash flow represents the gain or loss in cash flow from investments made in the financial market and operating subsidiaries.
In 2009, RBC had a positive cash flow indicating they were not investing heavily at the time. However, in the next two years, huge investments were made which made their net investments cash flow to go far below zero. Having a negative overall cash flow is not necessarily a bad thing, but instead may be a result of heavy investments. Nevertheless, RBC has maintained sustainability and kept their overall cash flow positive despite their large investments. Income Statement/Retained Earnings: RBC’s total revenue has decreased by 5% over the last three years.
However looking deeper will reveal a huge increase in the company’s revenue over the past five years. In 2007 and 2008 the total revenue was $22,462 and $21,582 respectively (“Welcome to ALADIN”). This data revels an overall increase in revenue of 22% between 2007 and 2011, which any company would be proud of. In addition, RBC shows their continued effort toward sustainability as their retained earnings increased by almost 20% in the past three years (“Welcome to ALADIN”). In effect, this increase shows that a healthy profit exists even after dividends are given out to the shareholders.