Is RBC Another Short Target?

Royal Bank of Canada (TSX:RBC) is in a better position than its peers.

| More on:

Bets against Canada’s banks are ramping up. Last week, it was revealed that TD Bank, Canada’s second-largest lender, was the most shorted bank in the world. In other words, hedge funds and institutional investors were betting more than US$4.2 billion (CA$5.7 billion). Should this fact concern investors in Canada’s banking sector? Are other giants, like RBC (TSX:RY), at risk too? Here’s a closer look. 

Canada’s banking concerns

There are two reasons why foreign investors are worried about Canada’s large banks. One is the ongoing banking crisis. Major banks from California to Switzerland have failed in recent weeks. Governments have stepped in to protect depositors, but the equity and bondholders were not bailed out. Now, investors are worried that this crisis is contagious and could spread to other parts of the world. 

Canada seems vulnerable because much of our banking is focused on home loans and out homes are egregiously overvalued. Investors are betting that the housing market will plummet and drag the banking sector down along with it. 

However, analysts and industry experts believe these fears are overblown. They believe Canada’s banks are in a better position than their global peers. That’s why major banks like RBC may avoid the same hurdles as others. 

RBC outlook

RBC is much more than Canada’s biggest mortgage lender. It’s also one of the largest wealth management, commercial lenders, and investment banks in the world. Put simply, the business is highly diversified and not as exposed to Canadian housing as some believe. 

Only 60% of RBC’s revenue was generated in Canada, as of January 31, 2023. Only 53% of earnings, meanwhile, were generated from the personal and commercial banking operations. The rest was generated in either Capital Market services (21%) or the Wealth Management division (21%). 5% of earnings came from insurance premiums. 

The company is also reasonably valued and comfortably profitable. RBC declared a return on equity of 16.4% in 2022. The company generated $15.8 billion in net earnings over that period and paid out just 50% of it in dividends. The stock trades at a price-to-book ratio of 1.8, which is also justified for a large-scale bank.

Put simply, RBC is in a strong position which is probably why short-sellers haven’t targeted it. In fact, investors could see any weakness as a buying opportunity in the months ahead.  

Bottom line

Canada’s housing market is vulnerable, but its largest banks may be better protected. RBC is well diversified and well capitalized. It’s not as vulnerable as some of its global banking peers. That’s why investors are not keen on betting against it. 

If you’re looking for a robust source of passive income, this dividend stock should certainly be on your radar. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Bank Stocks

calculate and analyze stock
Bank Stocks

4% Dividend Yield? I Keep Buying This Dividend Stock in Bulk!

If you find the perfect dividend stock, you never have to worry about investing again. And that's what you get…

Read more »

Investor reading the newspaper
Bank Stocks

Is Canadian Imperial Bank of Commerce Stock a Good Buy?

Let's dive into whether Canadian Imperial Bank of Commerce (TSX:CM) is a top buy, sell, or hold right now.

Read more »

Man data analyze
Bank Stocks

Where Will BNS Stock Be in 3 Years?

Bank of Nova Scotia is primed for growth with a bold U.S. expansion, steady dividends, and a value focus that…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Stocks for Beginners

TFSA 101: Earn $1,596.60 per Year Tax-Free!

Investors don't have to buy some risky stock if they want tax-free high income. Instead, buy this top stock instead.

Read more »

data analyze research
Bank Stocks

TD Bank: Buy, Hold, or Sell Now?

TD is underperforming its large Canadian peers this year. Is a rebound on the way?

Read more »

data analyze research
Bank Stocks

A Dividend Bank Stock I’d Buy Over TD Stock Right Now

TD stock has long been a strong dividend and growth provider. However, recent issues could cause investors to think twice.

Read more »

An analyst uses a computer and dashboard for data business analysis and Data Management System with KPI and metrics connected to the database for technology finance, operations, sales, marketing, and artificial intelligence.
Bank Stocks

Where Will TD Stock Be in 1 Year?

TD Bank (TSX:TD) stock could heat up again as we enter a new year with a new manager and potentially…

Read more »

Confused person shrugging
Bank Stocks

Royal Bank vs. National Bank: Where Should You Park Your Investment Capital?

If we go by growth alone, it's easy to identify the top contender in the Canadian banking sector, but a…

Read more »