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Through the years, Royal Bank of Canada (TSX:RY) has shown us why it is one of Canada's leading banks. But the current macroeconomic environment is fraught with risks, leaving us questioning things, including this major bank. So let's try to determine where Royal Bank of Canada stock will be in five years.
It is not an easy task, but these are some of the things we must consider in our analysis.
A 2023 review
The past year has been challenging. A macro environment that was affected by negative trends regarding employment, growth, inflation and interest rates surely took its toll on banks like Royal Bank. This manifested itself in an increase in provisions for capital losses ($2.5 billion, an increase of 23 basis points), a 6% decrease in net income, and liquidity problems in the US regional banking industry.
This sent Royal Bank of Canada shares down 10% from their 2022 highs, and has left the market feeling shaky and uncertain.
But the year was not without its strong points. One of these strengths was Royal Bank's capital position, which remained strong. In fact, its common equity tier one (CET1) ratio stood at 14.5%, 190 basis points higher than in 2022.
Uncertainty persists as banks face challenges
While the first quarter of 2024 brought us data that points to a stronger macroeconomic environment going forward, it remains uncertain. For example, interest rates have been higher for longer than most market observers expected. This has brought problems for the Canadian consumer and, as mortgages reprice in the coming years, this will result in less disposable income. Actually this has already started.
The good news is that unemployment remains at historically high levels. An unemployment rate of 6% in Canada and 2% in the United States is helping the economy and the consumer remain quite resilient. But this is now, and I think we can all agree that the longer rates stay high, the greater the likelihood that we will start to see real cracks in the consumer and the economy.
It's a delicate balance between interest and inflation that the feds are trying to achieve. If they cut interest rates too quickly, inflation will come roaring back. Conversely, if they wait too long to reduce rates, the economy will fall into a recession.
Purchase of HSBC by Royal Bank
When we think about where Royal Bank of Canada stock will be in five years, we have to consider the bank's acquisition of HSBC. It is an acquisition that entails many strategic and operational synergies. It holds the promise of significant value creation in the form of revenue and cost synergies.
The $13.5 billion purchase of HSBC's domestic operations is expected to close this month. According to the CEO of Royal Bank, this acquisition is expected to generate significant cost synergies to the tune of $740 million. This will be accompanied by a multitude of revenue synergies. For example, Royal Bank will offer HSBC customers better cash management products, a better suite of investment products and a better selection of credit cards.
This transaction alone is a game-changer for Royal Bank of Canada stock. In five years, I think we will see enormous value added.
The bottom line
The Royal Bank of Canada, like all banks, will likely feel pressure in the short and medium term as the economy makes its way through higher rates and inflation. But as we have seen in the past, Royal Bank maintains its strong financial position. This means it will likely emerge from this turbulence as the healthy bank it always was. This, together with the new growth possibilities derived from the HSBC acquisition, positions Royal Bank of Canada shares very well. I think that in five years the Royal Bank of Canada stock will look good.
