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Royal Bank of Canada Stock Here’s Why I’d Avoid its Stock Despite its Q3 Earnings Beat
Royal Bank of Canada (TSX:RY)(NYSE:RY) released its third quarter of fiscal 2020 results on August 26 before the market opening bell. The largest Canadian bank reported a 1.3% year-over-year (YoY) decline in its Q3 earnings to $2.23 per share. However, it was significantly better as compared to Bay Street analysts’ estimate of $1.77 per share.
RBC’s third-quarter earnings were primarily driven by solid YoY growth in its capital markets, insurance, and wealth management segments.
The earnings event seemingly boosted investors’ confidence, as its stock rose by 1.3% on Wednesday morning. At the same time, the S&P/TSX Composite Index was up 0.5% for the day.
RBC’s Q3 revenue rose amid the pandemic
In the quarter ended July 31, 2020, Royal Bank of Canada reported $12.9 billion in revenue — up 11.9% YoY. It was also better than analysts’ expectation of $11.5 billion.
While lower interest rates caused a decline in client activity, the bank’s net interest income rose by 2% in Q3 2020 as compared to the same quarter of the previous fiscal year. Also, its trading revenue from capital markets segment registered solid gains.
Its Canadian banking arm, as well as City National Bank — a subsidiary of Royal Bank of Canada — saw positive volume growth during the last quarter.
COVID-19 headwinds in the banking sector
The COVID-19 crisis has increased the challenges for the Canadian banking sector. In the third quarter, Royal Bank of Canada’s insurance segment was hit, as the pandemic led to a rise in insurance claims. Nonetheless, lower claims costs and a strong 51% YoY rise in its insurance segment revenue helped the Toronto-based bank negate these COVID-19-related headwinds.
In the last quarter, COVID-19-related measures also increased RBC’s overall expenses. Its management considers the extent and duration of the pandemic’s impact on the economy to be uncertain.
Uncertainties about the economic recovery
In its Q3 earnings report, Royal Bank of Canada confirmed a rise in economic activity across North America due to easing COVID-19 restrictions. But the bank predicts labour market weakness to continue in the near term and considers the trajectory of the economic recovery to remain uncertain.
Despite the recent rise in economic activities, Royal Bank of Canada expects the U.S. and Canada GDP to remain well below 2019 levels in the second half of 2020. Weak business and consumer confidence, along with higher unemployment rates, are likely to hurt the GDP.
How low interest rates are also hurting RBC
Unlike in capital markets and insurance segments, Royal Bank of Canada’s revenue from its investor & treasury services fell by 14% YoY and 32% sequentially to $484 million. It was primarily due to lower funding and liquidity revenue as a result of lower interest rates and a rise in enterprise liquidity.
Is Royal Bank of Canada stock a buy after Q3 results?
Royal Bank of Canada’s third-quarter results showcased strength due to a sharp rise in capital markets revenues and trading activity. I expect these factors and its strong Q3 results to accelerate the recovery in its stock in the coming weeks.
In contrast, low interest rates, higher insurance claims, and low business confidence could continue to hurt banking sector investors’ sentiments. That’s the reason why I wouldn’t recommend conservative investors to buy its stock, as these factors — along with a weak economic outlook — could keep RBC’s stock highly volatile in the short term.
But if you’re looking to invest your money in stocks for long-term wealth creation, then you can consider buying its stock on any dip towards the support level between $95 to $98 per share.
Source: – The Motley Fool Canada
Tesla has promised to start selling cheaper models next year, days after a Reuters report revealed that the company had shelved its plans for an all-new Tesla that would cost only $25,000.
The news that Tesla was scrapping the Model 2 came amid a drop in sales and profits, and a decision to slash a tenth of the company’s global workforce. Reuters also noted increased competition from Chinese EV makers.
Tesla’s deliveries slumped in the first quarter for the first annual drop since the start of the pandemic in 2020, missing analyst forecasts by a mile in a sign that even price cuts haven’t been able to stave off an increasingly heated competition on the EV market.
Profits dropped by 50%, disappointing investors and leading to a slump in the company’s share prices, which made any good news urgently needed. Tesla delivered: it said it would bring forward the date for the release of new, lower-cost models. These would be produced on its existing platform and rolled out in the second half of 2025, per the BBC.
Reuters cited the company as warning that this change of plans could “result in achieving less cost reduction than previously expected,” however. This suggests the price tag of the new models is unlikely to be as small as the $25,000 promised for the Model 2.
The decision is based on a substantially reduced risk appetite in Tesla’s management, likely affected by the recent financial results and the intensifying competition with Chinese EV makers. Shelving the Model 2 and opting instead for cars to be produced on existing manufacturing lines is the safer move in these “uncertain times”, per the company.
Tesla is also cutting prices, as many other EV makers are doing amid a palpable decline in sales in key markets such as Europe, where the phaseout of subsidies has hit demand for EVs seriously. The cut is of about $2,000 on all models that Tesla currently sells.
By Charles Kennedy for Oilprice.com
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Divisions within the Bank of Canada over the timing of a much-anticipated cut to its key overnight interest rate stem from concerns of some members of the central bank’s governing council that progress on taming inflation could stall in the face of stronger domestic demand — or even pick up again in the event of “new surprises.”
“Some members emphasized that, with the economy performing well, the risk had diminished that restrictive monetary policy would slow the economy more than necessary to return inflation to target,” according to a summary of deliberations for the April 10 rate decision that were published Wednesday. “They felt more reassurance was needed to reduce the risk that the downward progress on core inflation would stall, and to avoid jeopardizing the progress made thus far.”
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Others argued that there were additional risks from keeping monetary policy too tight in light of progress already made to tame inflation, which had come down “significantly” across most goods and services.
Some pointed out that the distribution of inflation rates across components of the consumer price index had approached normal, despite outsized price increases and decreases in certain components.
“Coupled with indicators that the economy was in excess supply and with a base case projection showing the output gap starting to close only next year, they felt there was a risk of keeping monetary policy more restrictive than needed.”
In the end, though, the central bankers agreed to hold the rate at five per cent because inflation remained too high and there were still upside risks to the outlook, albeit “less acute” than in the past couple of years.
Despite the “diversity of views” about when conditions will warrant cutting the interest rate, central bank officials agreed that monetary policy easing would probably be gradual, given risks to the outlook and the slow path for returning inflation to target, according to the summary of deliberations.
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They considered a number of potential risks to the outlook for economic growth and inflation, including housing and immigration, according to summary of deliberations.
The central bankers discussed the risk that housing market activity could accelerate and further boost shelter prices and acknowledged that easing monetary policy could increase the likelihood of this risk materializing. They concluded that their focus on measures such as CPI-trim, which strips out extreme movements in price changes, allowed them to effectively look through mortgage interest costs while capturing other shelter prices such as rent that are more reflective of supply and demand in housing.
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They also agreed to keep a close eye on immigration in the coming quarters due to uncertainty around recent announcements by the federal government.
“The projection incorporated continued strong population growth in the first half of 2024 followed by much softer growth, in line with the federal government’s target for reducing the share of non-permanent residents,” the summary said. “But details of how these plans will be implemented had not been announced. Governing council recognized that there was some uncertainty about future population growth and agreed it would be important to update the population forecast each quarter.”
• Email: bshecter@nationalpost.com
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Shares in US tech giant Meta have sunk in US after-hours trading despite better-than-expected earnings.
The Facebook and Instagram owner said expenses would be higher this year as it spends heavily on artificial intelligence (AI).
Its shares fell more than 15% after it said it expected to spend billions of dollars more than it had previously predicted in 2024.
Meta has been updating its ad-buying products with AI tools to boost earnings growth.
It has also been introducing more AI features on its social media platforms such as chat assistants.
The firm said it now expected to spend between $35bn and $40bn, (£28bn-32bn) in 2024, up from an earlier prediction of $30-$37bn.
Its shares fell despite it beating expectations on its earnings.
First quarter revenue rose 27% to $36.46bn, while analysts had expected earnings of $36.16bn.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said its spending plans were “aggressive”.
She said Meta’s “substantial investment” in AI has helped it get people to spend time on its platforms, so advertisers are willing to spend more money “in a time when digital advertising uncertainty remains rife”.
More than 50 countries are due to have elections this year, she said, “which hugely increases uncertainty” and can spook advertisers.
She added that Meta’s “fortunes are probably also being bolstered by TikTok’s uncertain future in the US”.
Meta’s rival has said it will fight an “unconstitutional” law that could result in TikTok being sold or banned in the US.
President Biden has signed into law a bill which gives the social media platform’s Chinese owner, ByteDance, nine months to sell off the app or it will be blocked in the US.
Ms Lund-Yates said that “looking further ahead, the biggest risk [for Meta] remains regulatory”.
Last year, Meta was fined €1.2bn (£1bn) by Ireland’s data authorities for mishandling people’s data when transferring it between Europe and the US.
And in February of this year, Meta chief executive Mark Zuckerberg faced blistering criticism from US lawmakers and was pushed to apologise to families of victims of child sexual exploitation.
Ms Lund-Yates added that the firm has “more than enough resources to throw at legal challenges, but that doesn’t rule out the risks of ups and downs in market sentiment”.
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