November 3, 2015

On Tuesday, the S&P 500 rose 0.3% and Toronto was up 0.6%.

Oil (West Texas Intermediate) was up 3.7% and is just under U.S. $48.

Alimentation Couche-Tard partially recovered some recent losses and was up 3.8% today.

Visa was up 3.6% as this largely unregulated-as-to-fees giant with monopolistic characteristics continues to grow including by purchasing Visa Europe. The difficulty with this stock is that it always seems to look very expensive.

The Canadian Western Bank preferred shares fell 2.5% giving up yesterday’s gain. The Bank’s common shares were up 2.1%.

I am now taking a very close read of the annual report of Royal Bank of Canada. I have not had any of the large Canadian Banks on the list here in about ten years.  I had given up attempting to analyse them years ago due to the complexity and in favor of the far simpler Canadian Western Bank.

So far, two things strike me about the RBC annual report. First, the disclosure seems very good and very clear. Second, I am surprised at just how incredibly leveraged it is. Banks are regulated as to their leverage but are still allowed a huge amount of leverage (low equity compared to assets).

From my very first look at a bank on this site (CIBC in February 2000) I have always noted that banks have very high leverage. Still, I am surprised just how high the leverage of Royal Bank is. As long as its assets are low enough risk the high leverage works out well.

On the face of it, I suspect Royal Bank will rate as a (higher) Buy or Strong Buy based on its earnings and book value and growth but it is difficult to know what to make of the risk.

Bank debt always seems to be given the highest ratings by the debt rating agencies in spite of the leverage. Banks do enjoy a lot of government support including mortgage insurance and including deposit insurance (which vastly lowers the risks to depositors allowing them to attract deposits while these days paying little or no interest). Still, it is a bit of a mystery to me how they can be considered so very low in risk.