Wide-moat 
Royal Bank of Canada (RY) yesterday announced a record $12.4 billion profit for the year ended October 31, an 8% increase from the previous year.
GAAP earnings per share came in at $8.36, up 10.6% compared with 2017 and slightly above Morningstar analyst expectations of $8.33.
“The return on equity improved during the quarter, to 17.6%, and the return on equity for the full year was also 17.6%. These are exceptional results and will likely keep RBC as one of the top two Canadian banks by this metric” said Morningstar equity analyst Eric Crompton in an analyst note.
Crompton has increased his fair value estimate of RBC’s shares to $109 per share, from $107 per share, after updating his models with the latest quarterly results.
“Given these returns on equity, EPS growth of over 10%, and a 45% dividend payout ratio for the year, the bank met all medium-term objectives. Further, management maintained these goals for 2019”, Crompton explained.
The fair value estimate is 12.5 times estimated 2019 earnings and 2.8 times tangible book value as of July 2018.
“Our base-case scenario assumes that the net interest margin for RBC gradually improves over our forecast period, as rates slowly increase in Canada and in the US. We see average loan and deposit growth of roughly 3% each”, he adds.
He further pointed out that the bank's common equity Tier 1 ratio increased to 11.5%, giving RBC plenty of room for further investment as the bank beefs up organic growth efforts, particularly in the United States.
“Credit quality remained excellent, as RBC's gross impaired loan ratio declined to 37 basis points, its provision for credit losses, or PCL, ratio remained fairly stable at 20 basis points, and delinquency rates remained range-bound”, he added.
RBC is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation's banking deposits. The bank derives two thirds of its revenue from Canada, with the rest spread primarily across the United States and the Caribbean.
“RBC has done an admirable job of expanding its nonbank lines of business, running efficient banking operations, and generating some of the best returns for shareholders in the industry. With over $5 trillion of assets under administration and over $650 billion of assets under management, strong global capital markets operations, and a dominant share of domestic banking operations, it should remain one of the dominant Canadian banks for years to come”, Crompton said.
He also likes RBC's growth strategy in the US through City National, focusing on wealth and commercial clients, and believes it is a much more focused strategy.
