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Shares of Royal Bank of Canada (TSX:RY) are continuing to slide for the second consecutive year in 2023. After losing nearly 5.2% of its value last year, RY stock has seen 8.6% value erosion so far this year to currently trade at $116.38 per share with a market cap of $163.3 billion, bringing it among the worst-performing Canadian bank stocks on a year-to-date basis. By comparison, the TSX Composite benchmark has seen minor gains of 1.4% this year.
Before we discuss where Royal Bank stock could be five years from now, let’s closely look at some key factors that could be driving its share prices lower lately.
What’s driving Royal Bank stock lower in 2023?
Although the financial position of most large banks in Canada, including Royal Bank, remains strong, its recent stock losses could be attributed to the broader market weakness amid an uncertain macroeconomic environment.
After the COVID-19 pandemic badly affected businesses and economic growth in 2019, the U.S. Federal Reserve started slashing interest rates later that year, also launching a big quantitative easing program to spur economic activity. Similarly, the Bank of Canada cut interest rates in the first half of 2020 to help the economy recover from the pandemic’s blows.
While these rate cuts and quantitative easing measures by the U.S. and Canadian central banks strengthened the labour market, they also led to higher inflation, which forced them to start a round of interest rate hikes in 2022. Rapidly rising interest rates and high inflationary pressures triggered a selloff in Canadian stocks, driving the TSX Composite down by 8.7% that year. Besides risky high-growth stocks, bank stocks also witnessed big losses as investors feared that rapidly rising interest rate might badly affect their profitability.
Despite multiple interest rate hikes, the underlying inflationary pressures remained intact in 2023, which could be the primary reason for hurting the share price movement of Royal Bank stock.
Royal Bank’s financials are still strong
Despite RY stock’s weak performance in the last two years, its long-term growth outlook looks solid, as the Canadian lender’s well-diversified business model and strong financial position give it the ability to continue performing well financially even in tough economic environments.
Let me quickly explain that with an example. The COVID-19-related operational challenges drove Royal Bank’s adjusted annual earnings down by about 10% YoY (year over year) in its fiscal year 2020 (ended in October 2020). Nonetheless, as the macroeconomic environment slightly improved the next fiscal year, it posted an outstanding 40% YoY jump in its annual adjusted earnings.
The largest Canadian bank’s adjusted earnings in the first three quarters of its fiscal year 2023 (ended in July) witnessed a minor 2% YoY increase, despite challenging economic conditions, while its total revenue jumped by 18.4% from a year ago.
Where will RY stock be in five years?
On the one hand, the ongoing high interest rate environment might trim its profitability in the next few quarters. On the other hand, you can expect its margins to expand again after the macroeconomic concerns gradually subside.
At the current market price, RY stock offers an attractive 4.6% annualized dividend yield. Excluding the income from its dividends, the stock has delivered about 18% positive returns in the last five years, despite witnessing a selloff in the last two years. While it’s nearly impossible for anyone to precisely predict at what price level Royal Bank stock will trade five years from now, the underlying strength in its business model and balance sheet, along with expectations of improvement in the macroeconomic scenario, could help RY stock deliver significantly better returns in the next five years than it has in the last five years.
