December 11, 2016

The next update will be for Royal Bank. I just read closely through about 100 pages of its massive annual report. The saying “Too Big to Analyse” comes to mind. Last March 6th I added Royal Bank to the site as a Strong Buy at $71.38. I also noted that it was very highly leveraged and therefore potentially risky. I bought only a modest amount as I had very little cash on hand. It’s now risen 27%. Earnings have not risen much and so the numbers would now likely suggest more like a Buy rating. But it also may face an earnings drag as interest rates rise due to mark to market accounting on some of its assets. Any rise in the Canadian dollar would also hurt reported earnings (and vice versa). I think this will end up being a Buy rating.

Canadian bank shares have done extremely well over the years. As a result many Canadian investors may be over-exposed to the banks. Given their high leverage, which does involve risk, it would be prudent to trim positions that are too large a proportion of the portfolio ( but I am not going to hazard a guess as to exactly what percentage is too much). Especially in non-taxable accounts, I would consider trimming if the exposure seems too high.

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