HSBC Canada Acquisition Expected To Deliver $740 Million In Cost Synergies By 2026

Key Takeaways

• The bank's digital expansion and streamlined processes aim to boost customer satisfaction and transaction volume, driving future revenue growth.
  
• Opportunistic share buybacks and strong deposit growth are poised to enhance earnings per share and strengthen net interest margins.
  
• Rising trade policy uncertainty, low business confidence, and competitive pressures could impact Royal Bank of Canada's revenue, loan growth, and risk profile.

Catalysts

Operates as a diversified financial service company worldwide.

• The acquisition of HSBC Canada is expected to generate full cost synergies of $740 million by early 2026, which could positively impact net margins and earnings as realization of cost savings progresses.
  
• The bank's expansion in digital capabilities, such as the streamlined mortgage renewal process via the RBC mobile app, is likely to enhance customer satisfaction and increase transaction volumes, thereby driving future revenue growth.
  
• As the Canadian macroeconomic environment shows constructive trends and the Bank of Canada adopts a more dovish stance, improved consumer sentiment and activity in markets like Wealth Management create potential for increased revenue.
  
• The capital deployment strategy which includes continued opportunistic share buybacks positions the bank to enhance earnings per share by reducing the outstanding share count.
  
• Strong growth in nonmaturity deposits and higher spreads are likely to continue benefiting all-bank net interest income, with an upward revision in guidance for 2025, suggesting potential revenue growth and strengthened net interest margins.

Royal Bank of Canada Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Royal Bank of Canada's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.5% today to 27.8% in 3 years time.
• Analysts expect earnings to reach CA$20.2 billion (and earnings per share of CA$14.46) by about March 2028, up from CA$17.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the CA Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Royal Bank of Canada Future Earnings Per Share Growth

Risks

• Rising uncertainty around trade policy and geopolitics, combined with immigration restrictions, could moderate client activity, impacting revenues in certain parts of the Canadian economy.
  
• Delays in investment decisions by Commercial Banking clients due to lower business confidence may affect loan growth and, consequently, future revenue streams.
  
• The modest Canadian housing activity, despite lower interest rates, could affect mortgage growth and net interest income.
  
• The elevated credit provisions across Commercial Banking, particularly in economically sensitive sectors, could increase the bank's overall risk profile and impact earnings.
  
• Competitive pressures in Canadian Banking, especially regarding term deposit rates, could squeeze net interest margins if intensified.

Valuation

• The analysts have a consensus price target of CA$185.933 for Royal Bank of Canada based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$198.0, and the most bearish reporting a price target of just CA$157.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$72.7 billion, earnings will come to CA$20.2 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of CA$160.84, the analyst price target of CA$185.93 is 13.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.