Stockwatch – Royal Bank of Canada Sells $1 Billion of Subordinated Debt

Stockwatch – Royal Bank of Canada has issued $1 billion worth of subordinated debentures in its first Basel III-compliant debt sale, the bank said late last week.

Stockwatch – Royal Bank of Canada (TSE:RY, Mkt cap 114.91B, P/E 13.85, Div/yield 0.71/3.56, EPS 5.76, Shares 1.44B)

Stockwatch Royal Bank Canada $1 billion subordinated debentures

Stockwatch – Royal Bank of Canada has issued $1 billion worth of subordinated debentures.

The securities, sold through the lender’s mid-term note program, fall due on 17 July 2024. The non-viable contingent debt, which was also the first sale of its kind for Canada as a whole, carries a fixed annual interest rate of 3.04% to be paid twice a year in the first five years of the debt’s life. After that, holders will receive a floating rate based on the three-month banker’s acceptance rate plus 1.08%. The transaction, for which RBC Capital Markets acted as lead agent, will close on 17 July, the bank said.

The debt provides loss absorption and automatically becomes subject to conversion into common shares in the event of non-viability, with holders receiving a multiplier of the face value of the notes if this happens.

The issue attracted huge demand from investors, prompting the lender to increase the initial amount of $750m it was seeking by $250m, the Financial Post commented.

The borrowing is considered attractive because it is a new source of regulatory-approved financing. RBC’s most recent sale of subordinated debt took place two years ago under a different set of regulations, paying interest of 2.99%.

The new debenture issue was assigned a Baa1(hyb) rating from Moody’s, or two notches below the bank’s adjusted baseline credit assessment and in line with its standard guidance for contractual non-viability subordinated debt.

Baa1 is the eighth highest rating in Moody’s Long-term Corporate Obligation Rating. Obligations rated Baa1 are subject to moderate credit risk. Moody’s states that Baa1 issues “are considered medium grade and as such may possess certain speculative characteristics.” The “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.

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Stock Watch – Royal Bank of Canada Ponders $1B Investment in Proprietary Trading Spinout

Today our Stock Watch focuses on RBC decision to respond to new US bank regulation by creating Taursa Capital Partners.

Stock Watch – Royal Bank of Canada (TSE:RY, Mkt cap 107.89B, P/E 13.00, Div/yield 0.71/3.80, EPS 5.76, Shares 1.44B) is close to investing $1-billion in a hedge fund spun off from its US proprietary-trading unit, two people in the know told Bloomberg last week.

Stock WatchfRBC US regulation Taursa Capital Partners

Stock Watch – RBC responds to new US regulation by creating Taursa Capital Partners

The new firm, currently subject to regulatory clearance, will start operations by the end of 2014 and will be named Taursa Capital Partners, the sources said on condition of anonymity.

The business will have Mark Standish, a former New-York based co-head of RBC Capital Markets, as its principal, together with Richard Tavoso, currently in charge of the bank’s global arbitrage and trading business, and the unit’s head trader Ed McBride.

The Toronto-based bank will invest in the new fund without building a majority stake in the business, the sources also said.

The Canadian lender has been weighing up options for its global arbitrage and trading unit since December, when the United States issued the final version of the Volcker Rule. The new regulation is intended to prevent banks from taking on too much risk and restrict their ability to trade with their own funds.

When approached by Bloomberg, RBC spokesman Kevin Foster declined to comment on the bank’s plans for the business, saying only that it was seeking to overhaul its proprietary trading unit to bring it in line with the new US regulation.

Last year around 1,060 hedge funds started operations, boosting the total number to some 8,225, data from Hedge Fund Research in Chicago shows.

The Royal Bank of Canada is the largest financial institution in Canada, as measured by deposits, revenues, and market capitalization. The company corporate headquarters are located in Montreal, Quebec, and its operational head office in Toronto, Ontario. The bank was founded in 1864 in Halifax, Nova Scotia.

In Canada, the bank is branded as RBC Royal Bank in English and RBC Banque Royale in French and serves approximately ten million clients through its network of 1,209 branches. RBC Bank was the U.S. retail banking subsidiary with 439 branches across six states in the Southeast, which served more than a million customers. RBC also has 127 branches across seventeen countries in the Caribbean, which serve more than 1.6 million clients. RBC Capital Markets is RBC’s worldwide investment and corporate banking subsidiary. Its investment brokerage firm is known as RBC Dominion Securities. Investment banking services are also provided through RBC Bank and the focus is on middle market clients.

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The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

    Royal Bank of Canada To Exit Jamaica Market

    Royal Bank of Canada To Exit Jamaica Market

    Royal Bank of Canada (TSE:RY, Market cap 99.38B, P/E 12.43, Dividend/yield 0.67/3.89, EPS 5.54, Shares outstanding 1.44B) has decided to divest of its Jamaica-based business to a rival financial firm in a transaction that will mark its exit from a market where it has found it challenging to compete (given their small footprint in this market.)

    Royal Bank of Canada divest Jamaica-based business transaction.

    Royal Bank of Canada has decided to divest of its Jamaica-based business to a rival financial firm in a transaction.

    Toronto-based RBC, Canada’s second-biggest bank by assets, said it would sell RBC Royal Bank (Jamaica) Ltd and RBTT Securities Jamaica Ltd to Sagicor Group Jamaica Ltd in a move expected to ensure the long-term success of the business. The sale to Sagicor is the most reasonable decision in view of the buyer’s “size, scale and complementary capabilities” that RBC Jamaica doesn’t have at present, according to the Canadian lender. Nevertheless, it will remain committed to the Caribbean region and concentrate on countries where it has larger market share, RBC added.

    RBC did not disclose the size of the deal, saying only that it would be equal to the book value of the business. The lender expects to record a $60 million after-tax loss on the divestment, mainly as a result of a goodwill write-down and other intangibles acquired when it bought the units in 2008.

    With the sale, RBC joins a string of Canadian banks doing business in the Caribbean that have taken steps to overhaul their operations in the market, including Canadian Imperial Bank of Commerce and Bank of Nova Scotia. All three banks expressed concerns about the currently unfavourable state of the market when reporting their results for the most recent quarter.

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    BNN Market Call – Michael Sprung Interviewed by Michael Hainsworth

    Market Call – Michael Sprung Interviewed by Michael Hainsworth on BNN

    Michael Hainsworth:  Hello! I am Michael Hainsworth. Welcome to the one hour edition of Market Call! We have got Michael Sprung here, President of Sprung Investment Management, taking your calls, emails, and tweets on Canadian stocks.

    If you have got a question, we have got a line available for you right now. It’s 1-855-326-6266. You can email [email protected] or follow me on Twitter and send off a tweet.

    Michael, welcome back to the program!

    Michael Sprung Interviewed by Michael Hainsworth on BNN

    Market Call – “Overall, I think we are seeing more optimism with respect to the outlook for consumer spending and so on going forward.”

    Michael Sprung:        Well, it’s good to be here on a nice summer day.

    Michael Hainsworth:  Yes, it’s been quite heated over the course of the last week, as have the markets. You tell your clients that we are in reactionary times. How do we play that?

    Michael Sprung:        Well, I think one has got to be prepared to see a lot of volatility in the markets, and that’s been very, very evident over the last couple of months. Every time the Federal Reserve speaks we have a market reaction that seems to take things to an extreme.

    So Mr. Bernanke hints at the possible end of QE. I mean, that could possibly have been good news. People could have said, gee, the economy is getting strong enough, maybe it could be self-sufficient from here. But instead, they said, well, maybe the recovery is not strong enough to carry on without all this stimulus and therefore we had to run out of the market, and then the next thing we know he would say, well, perhaps not just yet.

    And then we have in Canada of course the Bank of Canada saying, we will be in a low interest rate environment as long as the economy looks like it is. It’s just limping along, and until we see more evidence of underpinnings in the recovery, it will likely remain so.

    So I think to some extent people are depending too much upon sort of the short-term noise here. I mean, the fact is that what we are seeing is we are seeing a recovery in the U.S. or some evidence thereof. We are seeing gradual, but more employment. We are seeing a recovery in the housing sector, although nothing goes in a straight line. It can be somewhat spotty.

    Overall, I think we are seeing more optimism with respect to the outlook for consumer spending and so on going forward.

    So I think that although if you look at a global environment, our expectations for growth this year have been somewhat dampened, still overall we are looking for positive global GDP growth; Europe being the big exception. And in that environment I think people can take advantage of this sort of volatility and pick their spot.

    So when you see markets come down very rapidly and a lot of the good stocks come down with the weaker ones, that’s the time that you should have some cash on the sidelines and be prepared to step in.

    Michael Hainsworth:  So then we see market weakness, that gives you the opportunity to pick your spots as you point out, how do you go about choosing which spot is an appropriate one to pick?

    Michael Sprung:        Well, since this could be a rather prolonged period here, I think that you have to be very, very choosy in terms of picking stocks that are, A, financially strong, that have the financial wherewithal to go through a relative weak period for demand, particularly in the commodity side.

    I mean, we have seen materials this year, we have seen them hit particularly hard. We are seeing some recovery now in the energy stocks, but I suspect that as long as you pick those players that are likely to be the acquirers or the survivors, you will do quite well over the next business cycle.

    Michael Hainsworth:  Well, let’s take a break and come back. I have got an email on the energy sector. We will take that one right at the start of the program.

    Michael Sprung:        Sure!

    Michael Hainsworth:  All right! We have got Michael Sprung here. He is the President of Sprung Investment Management. We are talking about Canadian stocks at 1-855-326-6266. We have got a line available for you right now.

    Michael Sprung is here, President of Sprung Investment Management. We are talking about Canadian equities at 1-855-326-6266. [email protected] is an alternative way to get a hold of us. That’s what Brian did so today.

    CNQ vs. BTE, he writes, “I am looking at investing in a Canadian oil exploration and development company. Do you think Baytex has better prospects for share appreciation over the short-term? Is it as safe a bet as CNQ for longer term appreciation excluding dividends?”

    Michael Sprung:        Well, for longer term appreciation I would certainly look at CNQ, and I think even in the short-term, on a relative valuation basis, even though CNQ has had somewhat better performance over the last period than Baytex has, I would still lean towards CNQ.

    You are looking at similar levels of profitability currently, but you are paying much less in terms of price to book. What you are paying for that profitability is less I think in CNQ than what you are paying in Baytex currently.

    They are both very well-managed companies, but the other thing I would say is that CNQ, their payout ratio is a lot lower than what you see at Baytex. Baytex is one of the stocks that started out, as I recall, originally as an income trust, and they have carried on with a very high payout.

    And hence, if you are buying it for yields, you would naturally be attracted to that, because I believe their yield is still in excess of or close to 5% or so, whereas it’s much less so in CNQ. But then again, Canadian Natural Resources actually earns their distribution and doesn’t depend on paying it out of just cash flow. So that’s a much longer term sustainable stock to own.

    Michael Hainsworth:  I am seeing $40 targer prices over the course of the next 12 months. Do you see 13% upside from here?

    Michael Sprung:        It could well be. I mean, a lot of this is going to be a function of the shorter term price of the commodities and so on. I do like Canadian Natural Resources. We don’t own it currently, but it’s certainly one that we would own at the right time.

    Michael Hainsworth:  What is the right entry point if it isn’t 34 and change?

    Michael Sprung:        Well, I mean that’s close to it, we just happen to be riding different horse at the moment.

    Michael Hainsworth:  Jino, thanks for holding in North York. Welcome to the program! Hello!

    Jino:                       Hello! Thank you for taking my call. My question is on H&R Real Estate. Despite all the REITs receiving everyday, it keeps on going down. Is this a good entry point? Thank you!

    Michael Hainsworth:  Thank you!

    Michael Sprung:        Well, of course in all of the REITs, they generally have done pretty well if you look over the last couple of years as people were sort of searching and searching for yield. And now that we have seen interest rates take a little bit different direction, we are seeing some pressure on the REITs. I think that that pressure could continue for a while.

    To some extent I think perhaps the REITs as a group were taken to a position where on a valuation basis, given the interest rate environment we were in, was perhaps not so sustainable. So what could we see going forward, if interest rates are going up, then cap rates could go up, and if cap rates go up, which is the price basis on which REITs are valued in terms of the yield that they earn on their properties, then those prices could be driven down to some extent.

    So I would step back and I think I would wait a little bit from here.

    Michael Hainsworth:  All right! Jino, thank you for that from North York. Comox, BC.

    Ron, good morning! Welcome to Market Call!

    Ron:                       Good morning!

    Michael Hainsworth:  Hello! Good morning! What’s your question?

    Ron:                       Well, my question is whether the Royal Bank is going to do well over the next year?

    Michael Hainsworth:  Where is the Royal Bank going over the next year?

    Michael Sprung:        Well, I think that all of our banks are reasonably valued at this point in time, although we saw a couple of them hitting highs in the last week. A few have been lagging that run up recently and the Royal is not one of them. So on a relative valuation basis I think I would be looking at one or two of the other banks, so we might get there later in the show.

    However, the Royal Bank today, you are getting yield that’s approaching 4%, not quite 4%, and on a multiple basis I think they have recaptured some of that discount that they were suffering from a few years ago.

    Now, we do have exposure to the Royal Bank. We are holding onto it, but I don’t think that I would be adding to our position today, at today’s price.

    Michael Hainsworth:  So Ron, stay with us, because at the end of the program we do have a bank opportunity for you as a top pick.

    We are taking a quick break. Michael Sprung is here, President of Sprung Investment Management. We are talking Canadian equities at 1-855-326-6226.

    View the rest of Michael’s interview here>>

    BNN Market Call – Top Stock Picks & Market Outlook

    Top Stock Picks & Market Outlook on BNN Market Call Tonight, June 12, 2013

    Royal Bank of Canada (TSE:RY) Mkt cap 97.10B, P/E 11.09, Div/yield 0.63/4.25, EPS 5.35, Shares outstanding 1.64B. Owned by clients, Last purchase June 11, 2013, $59.70 Company Website

    top stock picks Royal Bank of Canada: 200 Bay Street, Royal Bank Plaza, Toronto, ON, CA, M5J 2J5

    Royal Bank of Canada is Canada’s largest bank

    Royal Bank of Canada (RBC,) is the largest bank in Canada as measured by assets and stock market capitalization, and the 14th largest in the world as measured by stock market capitalization. RBC provides personal and commercial banking, wealth management, insurance, corporate and investment banking, and transaction processing services on a global basis.

    RBC’s international banking segment includes its banking businesses in the United States and Caribbean. RBC Bank in the United States provides a line of products and services through 426 banking centers. In July 2012, RBC acquired a 50% stake of RBC Dexia Investor Services Limited from Banque Internationale a Luxembourg S.A. In February 2013, it acquired the Canadian automotive finance and deposit business of Ally Financial Inc. In April 2013, it acquired Athena Energy Group of Cos.

    The Royal Bank of Canada has a strong capital base and earns a return on equity of around 18%.  Recent pressure on the stock has caused the price to pull back to attractive levels with a current dividend yield of 4.2%

    Goldcorp Inc. (TSE:G) Mkt cap 23.32B, P/E 15.92, Div/yield 0.05/2.13, EPS 1.80, Shares outstanding 812.00M. Owned by clients, Last Purchase June 11, 2013, $28.58 Company website

    Goldcorp engages in the acquisition, development, exploration, and operation of precious metal properties in Canada, the United States, Mexico, as well as in Central and South America. The company’s primary focus is gold.  It also mines silver, copper, lead, and zinc ores. The company’s principal mining properties include the Red Lake, Porcupine, and Musselwhite gold mines in Canada; the Peñasquito gold/silver/lead/zinc mine, and the Los Filos and El Sauzal gold mines in Mexico; the Marlin gold/silver mine in Guatemala; the Alumbrera gold/copper mine in Argentina; and the Marigold and Wharf gold mines in the United States.

    Goldcorp is one of North America’s largest gold companies with a number of promising development projects in the western hemisphere.  Gold production is anticipated to increase dramatically over the next four years.  The prices of the gold producers have significantly reduced with the price of bullion falling over the last year.  Goldcorp has a disciplined management team that will focus on cost control and returns on investment.  At current prices, the stock offers good long-term prospects for price appreciation.

    top stock picks Hudbay Mineral Constancia Peru.

    Hudbay Minerals’ Constancia project is located in the Andes Mountains in southern Peru.

    HudBay Minerals Inc. (TSE:HBM) Mkt cap 1.34B, P/E -, Div/yield 0.10/2.57, EPS -0.33, Shares 172.03M. Owned by clients, Last Purchase June 18, 2012, $7.66. Company Website

    HudBay Minerals Inc is an integrated mining company. The company produces copper concentrate (containing copper, gold and silver) and zinc metal and focuses on the discovery, production and marketing of base and precious metals. It owns mines, ore concentrators and zinc production facilities in northern Manitoba and Saskatchewan and South America. The South America properties include the Constancia project in Peru, Hudbay Chile, Hudbay Colombia and Hudbay Panama.

    With recent financing in place and several projects coming on-stream in the near term, production levels will increase.  The key is the Company’s ability to finance the large Constancia project in Peru.  Management is exploring several alternatives.  With a number of development projects nearing production, the shares should react positively from the current depressed levels.

    Market Outlook:

    Recent volatility in the global markets is reflective of the uncertainty with respect to the sustainability of the current economic recovery.  The Canadian stock market has lagged the US given our much larger exposure to commodities that have been under pressure.  We anticipate that this state of uncertainty will be with us over the coming months.  Investors should be prepared to take advantage of setbacks as they occur to position portfolios for the next business cycle.

    See Michael interviewed by Mark Bunting on BNN’s Market Call Tonight>>

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    Market Outlook – What are the prospects for the financial sector in 2013?

    Market Outlook – What are the prospects for the financial sector in 2013?

    RBC reported a fourth quarter profit $1.25 per share, up 22%, on increase business loan demand. The other major Canadian banks will report next week. We are looking for more good news after a benign quarter. Assuming the US government takes at least some steps to avert the Fiscal Cliff, moderate growth in the US should translate into moderate growth here in Canada. Our labour market is growing slowly, and wages are increasing slowly, an environment in which banks can do reasonably well. However, that is offset by the fact that the housing market in Canada is softening and the Canadian consumer is stretched. Given sluggish growth, the Bank of Canada is likely to continue its low rate policy.

    In this environment, banks are likely to focus on operational issues within the retail, commercial and corporate banking, as well as their wealth management units. Cost control will likely be the mantra in 2013. Our well managed banks could see modest profit growth and perhaps even dividend increases.

    Learn more about Michael Sprung