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Make no mistake, investors hate Canadian banks right now. But they're facing an uphill battle given the relative strength of the financial sector for the last six months.
Royal Bank of Canada (
RY) is a perfect case in point. The mammoth institution is Canada's biggest bank, with more than C$750 billion in assets on its balance sheet. Shares of RY are up around 20% in the last 12 months, not factoring in the 3.88% dividend yield that the stock currently sports. A huge short interest ratio of 31.2 means that it would take a month and a half of buying for shorts to cover their positions.
It also makes Royal Bank of Canada one of the most heavily shorted blue-chips trading on the NYSE today.
Like other Canadian banks, RY fared better than its peers stateside, buoyed by a Canadian housing market that never really felt the same fall that real estate saw in the U.S. As a result, the bank's loan book boasted better performance numbers, and it managed to make it through the financial crisis without quite the same level of brinksmanship (and equity dilution) that U.S. peers experienced. Stronger exposure to retail and commercial banking, rather than riskier practices, is another big benefit to RY's structure.
That doesn't mean that this firm is spotless. Sustained low interest rates present problems for RY's ability to earn meaningful risk-adjusted returns from its loan book right now, especially since central bankers are concerned with concentration of risk in a handful of institutions. In other words, the firm can't pursue loan volume the way it would like to. Barring some huge unexpected customer deposit flight, this bank should remain in solid financial shape for the foreseeable future. And that hefty dividend will continue to eat into shorts' profits.