RBC investors weigh growth plans as US trade feud worsens

TORONTO (Reuters) -When Royal Bank of Canada convenes its first investor day in seven years on Thursday, shareholders will focus on growth, as trade tensions worsen with its key U.S. market.

The United States accounts for 26% of RBC's revenue, and CEO Dave McKay has often called it the bank's second home market. "Where does Royal Bank grow?" asked Kevin Burkett, portfolio manager at Victoria, BC-based Burkett Asset Management. "If the tariff rhetoric coming from the U.S. is making that more complicated, how will they deliver for investors in terms of that growth?"

RBC, the largest lender in Canada and among the top 10 in North America, has focused on its southern neighbor in recent years, beefing up its U.S. capital market and wealth management businesses. It also injected more than $3 billion to save its U.S. subsidiary City National, a California-based lender that caters to Hollywood clientele.

McKay has also sought to make RBC "simpler, faster and more innovative" by adding scale, reducing complexity and investing in talent, according to memos to employees seen by Reuters.

The messages come after McKay carried out RBC's landmark $10 billion purchase of HSBC's Canadian operations, shook up senior leadership and divided the company's personal and commercial banking segments in Canada.

The HSBC acquisition expanded RBC's size and market share, giving it a more than C$80 billion advantage in market capitalization over Canada's next biggest lender, TD Bank.

"How do they level up?" Veritas Investment Research analyst Shalabh Garg asked, noting that RBC has managed to avoid "major landmines" that has plagued other Canadian banks including slower earnings growth and regulatory woes. "On a global basis, I think they can do lots more."

RBC has $2.1 trillion in assets, putting it into a category of major North American lenders alongside JPMorgan Chase, which has more than $4 trillion, Garg said.

RBC trades 12.02 times its forward earnings, beating TD's 10.82 times, Bank of Montreal's 11.48 times, Bank of Nova Scotia's 9.46 times and CIBC's 10.01 times, according to LSEG data.

Since RBC's last investor day in June 2018, the stock has gained 66%. Shares of the other top five Canadian banks have had mixed performances in that time, ranging from a loss of 8% to a gain of 43%.

All five banks have invested in the United States. Meanwhile, U.S. President Donald Trump has questioned the lack of U.S. banks in Canada, gutted a consumer banking watchdog and changed some immigration policies for Canadians.

Investors attending Thursday's gathering in Toronto expect RBC to shift its strategy to new markets such as Europe. They will also focus on executives' commentary on the bank's return on equity and its plans to deploy capital, potentially in higher-margin businesses that collect fees.

It makes more sense for RBC to buy smaller wealth management assets than bigger retail assets, said Anthony Visano, a managing director at Kingwest.

"They've suggested pretty strongly they have organic avenues for capital deployment south of the border," Visano said.

(Reporting by Nivedita Balu in Toronto; Editing by Lananh Nguyen and Mark Porter)