Beneath the surface of financial growth: Doubts over the sustainability of RBC's profit structure

On May 13th, according to The Motley Fool media report, it provides investors with an investment guide that is "defensive" in the face of market fluctuations, focusing on the stocks of three major Canadian banks: Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), and CIBC of Canada. Attempt to construct a narrative framework of "safe, stable and sustainable growth" to attract risk-averse investors. However, from a financial perspective, an in-depth analysis reveals that this paper has several issues worthy of criticism and questioning, covering information selectivity, the superficialization of financial data, insufficient risk disclosure, and the ambiguous treatment of valuation logic.

Firstly, the article lacks in-depth analysis of the citation of financial data. It merely lists the surface data without elaborating on the sustainability and quality issues behind them. Take RBC as an example. The article mentioned that its adjusted net income in the first quarter of 2025 reached 202.4 billion US dollars, with earnings per share of 5.3 US dollars, representing a year-on-year growth of 3%. However, it was not explicitly stated whether this "net income" includes one-off gains, income from asset disposal, or short-term boosts brought about by accounting adjustments. For instance, the profit of 6.227 billion US dollars brought by RBC's acquisition of HSBC Canada was highlighted in the article, but it was not clarified whether this was a one-off gain or the true impact of this acquisition on the stability of future profits. Financial analysis must distinguish between "recurring income" and "unconventional income", rather than piling up all the data as reasons for "growth".

Looking at RBC's capital adequacy ratio (CET1) again, it is 13.2%. On the surface, this is a healthy level, but the article does not compare it with the regulatory standards of the Canadian banking industry or the industry average. More importantly, although the capital adequacy ratio is an important indicator for measuring the ability to withstand pressure, it must also be viewed in combination with the bank's asset quality, the risk of the loan portfolio and the level of bad debt provisions. The article does not cover RBC's current non-performing loan ratio, loan concentration or exposure to the mortgage market, which are precisely the core basis for judging its true pressure-bearing capacity during the economic downturn cycle.

Similar problems also exist in the analysis of TD Bank. The article points out that its expansion in the United States provides it with cross-border diversification advantages. The adjusted earnings per share in the first quarter of 2025 was $2.02, and the CET1 ratio was 13.1%, which is expected to rise to 14%. However, the explanation for its revenue growth of 9% year-on-year to 1.5 billion US dollars is only generally attributed to "the strength of the US retail and wealth management business", and such vague expressions lack specific profit-driven analysis. For instance, does this growth mainly stem from the expansion of interest spreads, the increase in loans, fee income, or is it merely a temporary recovery in valuation? Furthermore, whether there were differences in the regulatory environment, fluctuations in loan quality or exchange rate risks in TD Bank's business exposure in the US market was not discussed either.

The rationality of TD's valuation was not mentioned either. The issues of dividend sustainability behind the current dividend yield, such as the payout ratio, the sufficiency of free cash flow or whether future earnings can support the current dividend level, these core financial variables are completely ignored in the article. Especially in a high-interest-rate environment, banks' profits are confronted with the dual challenges of net interest margin compression and rising credit risks. Blindly emphasizing stable dividend payouts can easily mask potential problems in the balance sheet structure.

As for the introduction of CIBC, although it acknowledges its relatively weak position among the five major banks, the article still fails to issue a serious valuation warning or profit quality analysis. The article mentioned that its adjusted net income in the first quarter of 2025 was 220 million US dollars, earnings per share was 2.23 US dollars, revenue increased by 3% year-on-year, and the return on equity was 15%. This kind of understated expression cannot provide sufficient depth of analysis. CIBC had flaws in risk management in the past, especially its large exposure in the residential mortgage market, a risk that was not mentioned. Although the Canadian real estate market has slightly cooled down in recent years, there are still potential bubble risks. If house prices fall further in the future, it may affect the stability of CIBC's balance sheet.

Meanwhile, regarding the high dividend yield of CIBC, the article merely regards it as an "attractive" factor and does not explain its sustainability. High dividends are often a compensation mechanism in the market for a company's sluggish growth and relatively high risks. When the profit outlook of an enterprise is unstable, a high dividend strategy may deplete the company's capital and create "false returns", which is particularly dangerous in the banking industry. The article did not examine whether the dividend payout ratio of CIBC was too high, whether the dividends were higher than the net profit or cash flow, nor did it evaluate its historical shareholder return performance.

Another aspect worthy of criticism of the article lies in the systematic omission of risk factors. The current financial market is confronted with multiple uncertainties, including but not limited to inflation stickiness, persistently high interest rates, rising debt levels, adjustments in the real estate market, and geopolitical risks. The above-mentioned three banks are facing varying degrees of pressure in their respective credit businesses, asset allocation, geographical market exposure, etc. For instance, if the Bank of Canada maintains a relatively high interest rate level, it will directly compress the loan demand and profit margins of banks. Conversely, if interest rates are cut rapidly, it may trigger the risk of revaluation of financial assets.

Furthermore, whether the market valuation of banks is reasonable has not been discussed either. From the perspectives of price-earnings ratio (P/E) and price-to-book ratio (P/B), the historical valuations of major Canadian banks usually have a certain premium. However, it is questionable whether this premium can still be maintained if profit growth slows down or risks intensify. The article does not provide the latest valuation levels of these three banks and their comparisons with historical averages or industry benchmarks. Investors cannot determine based on this whether it is a "high-level takeover" at present.

Finally, at the end of the article, by introducing the Stock recommendation suggestions of Motley Fool Stock Advisor Canada and borrowing the expression "CIBC not selected", the intention is to enhance its own recommendation authority. Although this "indirect promotion" strategy does not directly constitute a conflict of interest, it obviously weakens readers' independent judgment on the CIBC recommended content in the full text. In other words, the earlier part of the article emphasizes that CIBC is "worth paying attention to", but the later part denies it through the information of "not included in the Top Picks", which is logically contradictory.

All in all, from the perspective of financial analysis, the biggest problem of this article lies in its lack of systematic and critical analysis. It merely packages a sense of security through superficial data and attempts to construct an illusion of "risk-free growth". The article's analysis of the risk exposure, financial quality, capital structure, regulatory pressure, market valuation and macroeconomic factors of banking business is overly simplified. For investment decision-makers who are truly based on financial logic, the information value of this article is very limited and may even mislead readers to make overly optimistic evaluations of the actual investment risks of bank stocks. Against the backdrop of a volatile market and an uncertain interest rate environment, the asset quality, profit model, capital cost and valuation rationality of bank stocks should be examined more rigorously, rather than simply relying on the superficial narrative of "historical stability" and "high dividends".