Royal Bank (TSX:RY) is Canada’s largest company on the TSX, with a current market capitalization near $185 billion. Long-term investors have done well with the stock, and new investors looking to build retirement wealth in a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) are wondering if RY stock is still good to buy.
Royal Bank share price
Royal Bank trades near $132 per share at the time of writing compared to $108 in October and not far off the record high near $147 the stock reached in early 2022 before the Bank of Canada and the U.S. Federal Reserve began to aggressively raise interest rates.
The surge in the share price over the past 10 weeks occurred amid a shift in market sentiment, regarding interest rate hikes and their impact on the economy. A drop in 10-year U.S. treasury yields by nearly 1% from the 2023 high suggests the market expects interest rates to drop in 2024.
If that turns out to be the case, there should be more upside on the way for Royal Bank and other bank stocks.
Provisions for credit losses at all the large Canadian banks have increased in the past year. Businesses and homeowners are immediately getting squeezed on variable-rate loans when rates rise and are taking big hits on fixed-rate mortgages when they have to be renewed. The sooner rates begin to fall, the better it is for borrowers who are finding themselves struggling to cover loan payments. Banks expect to continue to set more cash aside for bad loans, but the pain might not turn out to be as bad as the market previously anticipated.
Risks for banks?
Inflation for December rose from November in both Canada and the United States to 3.4%. This is down from around 6.5% in December 2022 but is still above the 2% target. If inflation remains sticky in the next few months, the market could rethink its outlook for rate cuts in 2024 and push the expectation to 2025. This would potentially lead to another surge in bond yields and drive up borrowing costs.
Another assumption by the market is that the economy will go through a soft landing this year. That might not turn out to be the case if the central banks are forced to hold rates at current levels into next year.
Should you buy Royal Bank Now?
Royal Bank remains very profitable despite the current headwinds. Adjusted earnings for fiscal 2023 came in around $16 billion, roughly in line with fiscal 2022. This is one reason the share price has held up relatively well over the past two years.
Ongoing volatility should be expected, and a near-term pullback wouldn’t be a surprise after the big surge in the past couple of months. That being said, a quick look at the long-term chart of RY stock suggests that patient investors should do well picking up the shares when they have some cash to put to work and look to add to the position on corrections. At the current price, investors get a 4.2% yield, so you are paid well to ride out any new turbulence.
