With some investors already having deemed large banks like Royal Bank of Canada (TSX:RY)(NYSE:RY) as too cheap to ignore in the wake of the coronavirus pandemic which resulted in a marked drop in valuations for most North American large cap banks, some like myself still remain on the sidelines.
In this article, I’m going to discuss why this is still the case for me personally, and why Royal Bank is on my watch list rather than my buy list right now.
In many respects, I believe Royal Bank to be among the best large cap blue chip options for investors today on the basis of value and income. The lender’s books remain quite solid, with a mortgage portfolio that is supported by relatively low loan to value (LTV) metrics, and a credit spread that has not completely deteriorated yet.
While I do see certain trends such as loan losses continuing to rise and credit quality to deteriorate somewhat, there is no question that Royal Bank is a "too-big-to-fail" bank, as one of the top 10 largest banks in the world right now.
That said, until markets have more insight into exactly how bad mortgage defaults and overall credit losses will be, I expect a significant overhang to persist for this stock. Royal Bank has been perhaps overly aggressive in terms of building up loan loss provisions, so it could be the case that some near-term upside could be on the horizon.
That said, until uncertainty in the markets cool down, I’d encourage investors to keep Royal Bank on their watch lists.
Invest wisely, my friends.
