Royal Financial institution of Canada (TSX:RY) is Canada’s largest financial institution by income and market capitalization (i.e., the worth of all of the shares mixed). It additionally has a serious presence in U.S. funding banking and international wealth administration. Only recently, the financial institution accomplished the acquisition of HSBC Canada from HSBC (NYSE:HSBC) in a deal that may add $170 million in quarterly earnings energy ought to the financial institution hold incomes what it earned within the fourth quarter.

RY paid $13.5 billion for HSBC Canada. $170 million per quarter works out to $680 million per 12 months. It will seem that RY paid an un-heard of 19.85 instances earnings for HSBC Canada at a time when the S&P 500 banking index trades at 10.5 instances ahead earnings! RY is saying that it’s going to reduce prices by 55% and squeeze extra worth from HSBC Canada than HSBC might, however all these statements are often not greatest taken at face worth. By all accounts, Royal Financial institution’s HSBC Canada deal was one of the costly in international banking in a few years. Certainly, it was the costliest such deal in Canadian banking historical past.

However, Royal Financial institution of Canada has many issues going for it. 12-month income is up 11% during the last 12 months, and earnings have compounded at 5% per 12 months during the last 5 years. The corporate’s previous efficiency was fairly good. The query is, will it proceed to be good going ahead? And does it make the inventory value its present asking worth?

Latest earnings

We will begin to gauge Royal Financial institution’s worth by its most up-to-date earnings. In its most up-to-date quarter, the financial institution beat analyst expectations on income and adjusted earnings however missed on reported earnings. Reported earnings means earnings calculated in keeping with typically accepted accounting ideas (GAAP), and adjusted earnings means earnings calculated how the corporate sees match. The particular outcomes had been as follows:

• $13.4 billion in income, up 0.9%
• $3.6 billion in reported earnings, up 14%
• $4.1 billion in adjusted earnings, down 5%
• $2.50 in diluted earnings per share (EPS), up 12%

General, it wasn’t a foul displaying. The expansion wasn’t pretty much as good as what another banks did in the identical interval, nevertheless it was not less than optimistic on the highest line. The capital ratios had been all fairly excessive. I wouldn’t fear about Royal Financial institution primarily based on the outcomes delivered final quarter.

Future prospects

Right here’s the place issues begin to get extra questionable for Royal Financial institution.

Its future prospects. The financial institution’s final quarter wasn’t dangerous, nevertheless it simply completed paying an excessive amount of to purchase out a competitor. Numerous acquisition prices will start being booked beginning within the second quarter (Q2). For Q2 alone, these prices are anticipated to value $1.5 billion. Such prices will most likely hold coming in for just a few quarters and can maintain again the financial institution’s profitability.

Valuation

Going by Monday’s closing worth, Royal Financial institution trades on the following:

• 12.5 instances earnings
• 3.6 instances gross sales
• 1.8 instances guide worth

It’s not the most affordable of Canadian banks; in actual fact, it has one of many highest valuations amongst them. It’s actually not my number-one choose in Canadian banking.

My verdict: It’s a weak purchase

However, I take into account Royal Financial institution a weak purchase. It’s not low-cost, and its earnings are most likely going to be held again a bit by HSBC integration fees for the subsequent few quarters, nevertheless it beats the worth you get shopping for a number of the extraordinarily costly tech shares you see lately. I’m not shopping for it, however I don’t assume those that are shopping for it are out of their minds.