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Introduction
In business terms finance investments refers to the process of dedicating funds to a given asset(s). The assets could be in the form of real assets, foreign financial assets, and the main business assets being marketable securities and financial assets. The main objectives of financial investment can be categorized into primary and secondary objectives. Primary objectives include: principal safety, income, and increasing capital. On the other hand, secondary investment encompasses: liquidity and tax maximization. The primary and secondary investment objectives must be in line with a business’s overall objectives and constraints. These primary and secondary investment objectives are inter-related; for instance, the significance of safety is directly related to risk, timely understanding of market demand, emotion, rate of inflation, and returns. In the same manner, to realize growth it is important to factor in the aspects of taxation, basic investment returns, risks, returns, and rate of inflation. The importance of studying these investment objectives in relation to operation of businesses is to make important investment decisions; such as, underlying investment decisions, returns, and risks.
In order to understand how the investment analysis and management work in real business set up, we are going to take a case study with the RBC Royal Bank of Canada and note how the institution carry out its investment obligations in line with the overall objectives of this essay. The history of the bank dates back to 1864 when it was founded as a private commercial institution by the Haligonian merchants and it was located in wharves of Halifax. It targeted the finances resulting from fishing and timber trade in addition to the flow of retail trade from Europe into the colony. The name of Merchant’s Royal Bank of Halifax was changed in the year 1901 to The Royal Bank of Canada. This institution was popular among the public due to its ability to remain active and alive in relation to services providence. The institution has always been in the forefront in setting new heights in the banking sector even if it involved taking high risks. As a result, the regional bank grew to a national bank and this success is not only attributed to the strategies of the institution itself but also the role played by the people of Canada and the rest of their clients spread in the whole world.
The historical success of the Royal Bank of Canada goes hand in hand with the evolution of Canada’s growth to maturity. Today the environment avails new market challenges for the institution; from the emergence of market along the growing national railway to the opportunities created via e-commerce. Royal bank has always risen to the occasion to meet these new needs of the market. It is due to this institution’s success in investment analysis and management that this essay undertakes a case study with the Royal Bank in a bid to give an in depth discussion on the topic of this research.
Economic Analysis of the Royal Bank of Canada
Economic analysis is procedural actions that are undertaken to determine how scarce resources can be used to maximize profit. This can be done by comparing two or more alternatives that can be applied in achieving output target for a business organization. The concept follows after taking some given assumptions while at the same time looking at constraints that can impede adopting a given production process. Economic analysis considers opportunity costs of available resources needed in the creation of services and to measure private costs, social costs, and the beneficial values of the project to the society or economy of a given country. The Royal bank of Canada has grown with the growth of Canadian economy. This is because proper management and use of assets by individual business enterprises determine the economic situation at any given time. Investment into a given sector is encouraged by robust economic environment. Economic foundation of an institution/business organization is determined by its real assets alongside financial assets that aid physical assets in facilitation of business activities. The economic environment provides opportunities and challenges and in this regard, RBC has an established department; Economic Research. “RBC Economics Research provides timely and relevant analysis and forecasts of the economy and financial markets in Canada, the United States and key international markets to RBC and its clients,” (RBC Economics Research).
Some of the mechanisms used to analyze economic standoff of an organization are by carrying out economic impact analysis. Economic impact analysis refers to the study of economic effects resulting from shocks that alter environment of an economy. These shocks could be natural disasters, environment, and physical among other changes. Economic impact analysis aims at simulating the above mentioned impacts with mathematical formulas; for instance, input-output model in a bid to show how sector of an economy is linked to functions of the industrial sector, amid other factors. The RBC undertakes this approach in determining and forecasting how effects of economic environment would influence its activities. Taking the most recent shock; RBC Economic Research provides economic impact analysis resulting from the financial markets. Global recovery from the financial crisis seem to be on course with major world economies reporting growth in their forth quarter data. Though this happens, the team reports that there are uncertainties following regulatory reforms that most central banks want to implement. Central banks want to withdrawal of stimulus packages and this is bound to create certain market uncertainties. With a 5% growth in GDP, Canada seems to be in the right track. “The fourth quarter showed solid gain in most of the major domestic expenditure categories with consumer spending, residential investment and government spending rising while exports posted a double digit gain,” (Desjardins).
All these changes in the economic environment can be of vital application to the operation of RBC given that the institution offers banking, investment, insurance, wealth management, and capital market services. A robust economy for instance would restore investor confidence and the bank has to respond to this need by reviewing its investment and capital market services. An investor with renewed hope in the capital market especially in RBC shares is bound to be encouraged by looking at the Personal Investing Services offered by RBC. The institution offers Guaranteed Investment Certificates (GIS), Mutual Funds, and Tax-Free savings Accounts (TFSAs) among other benefits. Making market needs adjustments will not only ensure that the institution increases its profit margin but it will also meet clients need and as a result they will remain loyal to the services of RBC institution.
Industry Analysis for Royal Bank of Canada
Industry analysis refers to the mechanisms put in place to investigate what factors contribute to the operation of a given sector of an economy. One such mechanism is via adoption of PEST analysis. PEST analysis stands for political, economic, social, and technological analysis that is very much applicable to the banking sector and so is the RBC. To begin with, political aspects of PEST analysis focuses on a number of administrative policies meant to regulate a given sector of the economy. Government regulations include: tax policies, tariff barriers, and laws and regulations among other policy driven measures. Secondly, economic factors refer to changes in the wider economic front like growth or slump of economy of a country, inflation rates, exchange rates, and interest rates. Social factors usually focus on cultural aspects; for instance, concerns for healthcare provision, rate of population growth, age distribution and how it affects buying trends, and other social factors that may be evident. Lastly technological factors refer to the level of use of modern inventions and ideas carried out by R&D, rate of technological advances, and automation. Synergy’s PEST analysis is an important tool for business leaders intending to analyze market forces that are driving a given sector of an economy, (Synergyst,).
In Canada, monetary policies are set by Bank of Canada whose goal is to model monetary policies that would reflect needs of the rising living standards of the Canadians. The Bank aims at maintaining the rate of inflation using annual Consumer Price Index. The objective of the Bank in measuring inflation rate is to make sure the rate fluctuates between 1-3% a feat that was jointly coined with government. The Bank influences and determines short term interest rates which in turn affect monetary status of the economy. The overall effect of such measures influences the operation systems of financial institutions the RBC being one of them. RBC has to make adjustments in its interest rates for instance, to reflect the set changes made by the policy makers (The Bank). In general, the monetary policy affect interest rates whose consequences: affect financial market via exchange and interest rates, rate of inflation, and finally it can lead to employment, spending, and employment via cost of credit.
Having discussed the economic analysis, the next industrial analysis focuses on the social factor. In any given economy, labor force and job competition is influenced by the rate of population growth and how often workers migrate in addition to other factors that may influence labor force. The period of the Great Depression saw birth rates reduce instantly, and then between 1946-1962 high birth rates was experienced. The so called baby boom made generational impacts from schools, to universities and finally to the job market in the 1970s. This social factor can therefore be justified to have increased availability of labor in the 1970s.
In addition, the effects of the Great Depression has made Canada experience high immigration rate. The government has been encouraging immigrants to work in Canada so that they can take jobs regarded as non-lucrative by Canadian citizens. Emigrants also depart the county to look for highly paid professional jobs in the United States. To now lay focus on how the immigration could affect the running of activities of the RBC, we take a look at the sort of jobs available at the institution and a possibility that immigrants could work for the bank. RBC offers online job opportunities and vending opportunities that can attract an immigrant into Canada. Besides, the institution offers new comers loads of information pertaining to their stay in Canada. ‘Welcome to Canada’ package is tailor made for immigrants/newcomers in a bid to meet their banking needs. The package also offers a range of products and solutions to newcomers besides saving and discounts that are meant to attract them, (RBC Welcome to Canada Package).
Finally, it is worth considering the impacts of technological advancement in the Growth of banking institutions with reference to the RBC. The banking sector has been in the front line in embracing technology in operation. RBC uses cutting edge technology in ensuring their debit cards give maximum utility to their clients. The redesigned debit card employs the use of chip technology in order to offer the best security in their payment system. RBC’s client cards enable their customers access payment need through ATM, Interac Direct Payment also referred to as Point-of-Sale Debit, worldwide access, and online banking and telephone services. Interact Direct payment allow card users to buy goods and services from over 230,000 business entities that accept their cards, (RBC Royal Bank, banking).
RBC Royal Bank Company Analysis
Royal Bank of Canada has a set financial and strategic analysis review team. Company analysis is not only important to the institution itself, but it is a bridge through which government administrators and clients in general monitor the operations of the firm. “The report provides a comprehensive insight into the company, including business structure and operations, executive biographies and key competitors. The hallmark of the report is the detailed strategic analysis of the company,” (Global Markets Direct). The aim of the strategy is to offer the institution’s SWOT analysis (strength, weaknesses, opportunities and threats) it faces on its way to market dominance. RBC is one of the leading banking institutions in Canada providing a range of services to its clients and potential customers. It engages in banking services, personal and wealth management, investment opportunities, insurance, transaction processes, and corporate responsibilities. The brand name RBC is sellable to a majority of its clients spread in Canada, United States and an additional 53 nations. This brings its total number of customers to about 18 million in various sectors of the economy. Headquarter of the institution is in Ontario, Canada.
Company analysis is crucial because it provides useful information to the company in a bid to realign needs of business intelligence. This can be done through analysis of strengths and weaknesses to identify areas to pump in more investment and areas to pull out services. To arrive at such conclusions, financial, strategic, and operational mechanisms are to be considered. The opportunities that are created by the market environment are a consideration that RBC management has to factor in whether technological or competitive. Another scope of the report is to give significant company information; for instance, location of its branches, structure and operation, information about their important staffs, and their Corporate Social Responsibility (CSR) among others information. Also contained in the report are the company’s financial figures for the last five years of operation and interim values of the passed one year.
RBC’s Intrinsic Value Forecast
Intrinsic value can be defined as real value of a given security and not its book/market price value. In addition, copyrights, trademarks, company names are also variables that should be considered as intrinsic value but due to the difficulty in arriving at their figures, their market prices are often inaccurately reflected. Depending on a given business organization, intrinsic value are arrived at via use of different techniques; for instance, using the price an investor would pay for a security as a gauge of market capitalization instead of using the real worth of the security that firm. Intrinsic value can also be defined as value of the difference between market price and strike price of the underlier.
Arriving at intrinsic value is a procedure that begins with a thesis statement. Thesis statement should try to identify market needs, industrial advantages a firm may take in the seeable future, and financial strength of a given firm. A company has to ask itself if taking advantage of a prevailing market need would reward the company in terms of cash flow. A firm has to state its plan of increasing such cash flow and weigh whether the plan would be viable in the near future. The next step in analysis intrinsic value of a company is to give a company description in short like we have done for RBC above. Consequently, after a company’s description, Key Investment Points should be looked at. In this stage it is important to ask what markets are targeted by a given organization and this forms the backbone of a firm’s cash source. In the case of RBC, their market targets are Canadian citizens, the United States market, and an additional 53 nations who they serve via use of information and communication technology.
Another point to address is ensuring that company products have superior advantage over its competitors. This point has been achieved by RBC in the state-of-the-art technology (chip technology) used in debit card design. Also, firms should be able to shield other market entrants from getting into the industry. Some of the greatest barriers to entry into a market is when the amount of capital needed to establish a business organization or company is very high or when the technology requires specialized skills only mastered by an inventor. The management has to set goals that are clearly defined by time period so as to judge whether or not they have been executed. Such a move will attract investors to the services offered by an institution like: the issuance of bonds, purchase of stocks, and banking services offered by RBC. It is also important that a firm look at the risks involved in service providence so as to cushion its clients from possible risks. What should then follow is looking at a firm’s business plan and financial analysis. In the financial analysis the sources of cash and resources that drive operation, how cash flow grows or slumps, and monitoring cost of sale among other financial prospects are looked into.
Having considered the points above, the next step is to analyze the financial position of a firm and forecast of financial position. It is important to do sensitivity analysis in order to gauge what would happen to the cash flow presuming different scenarios will occur. It is also in order that at this stage, the management looks at major issues that are likely to alter the operations of a firm in a bid to predict a possible scenario that would be vital in the sensitivity analysis. The management of RBC through RBC Economics Research is able to achieve this objective; for instance, the department’s study of the effects and opportunities that passing of the US healthcare bill would pose to the operations of the institution. Another major market issue to have been raised by the RBC Economic Research was in regard to consumer behavior, “The share of consumers who say that their personal financial situation is strong, rose to 25 per cent this month, compared to 21 per cent in February,” (RBC CASH Index).
Illustration of Forecasting Intrinsic Value for RBC
The following figures are not real but are used for the basis of demonstrating how to arrive at intrinsic value. They are therefore not the accurate figures of the RBC financial records. The forecast is done ten years from base year; 2008.
Summation of PV = $25.34 billion. After determining PV, the next step is to get the terminal value of RBC. Assuming that the firm would be worth ten times in the year 2017, FCF = $57.8 billion whose present value is $18.4 billion. This therefore means that the total PV is $18.4 + $25.34 = $43.74 billion which is the estimated intrinsic value. To get price per share of RBC, the figure is divided by number of shares RBC owns and then compared to the current price of the stock. To arrive at more accurate figures of intrinsic values, the team that deals with the forecast should be well vast with both the external and internal affairs of the firm. This statement therefore calls for an efficient management of a given firm whose leaders must be critical thinkers and competent in regard to the running of the institution. Another important determinant of intrinsic value is how the business leaders spend their cash; whether in large or small amounts and any other aspect that the management would deem necessary to consider in calculating the value.
The most challenging bit of calculating intrinsic value is not the final calculation but coming up with the right values. Right values are what minimize unforeseen risks that would deter potential investors from buying a company’s share. Forecasting a company’s intrinsic values is the long term solution to giving it that competitive edge in market share and it is on this foundation that most successful institutions and business organizations like RBC ride on. This is because for such companies it is easier to predict future flow of cash with justifiable degree of certainty. “A cash flow statement is composed of three sections: (1) cash flows from operating activities, (2) cash flows from investing activities, and (3) cash flow from financing activities,” (Taulli p. 184). The management of RBC should consider all the mentioned cash flow sections because all of them apply to the running of the institution. Leadership of the firm is in position to know economic moats and find ways in which they can be delinked from competitive threats.
Conclusion and Recommendation
Financial analysis and management are significant concepts that must be mastered by management of business organizations, and those aspiring to have successful investments. This discussion has tried to bring out the real concept of financial management by taking a case study with the Royal Bank of Canada. The bank has had historical success since its inception in 1864 when it was founded as a private commercial institution by the Haligonian merchants. Following good finance management the firm has existed to date with significant strides made in their capital base and level of technology in use. Running an institution is not an organization’s self effort but a collective one because there should be policies and regulations for checks and balances that would ensure interests of clients are served and protected. Therefore government has to set policies and regulations that can aid in that line. Given the technological advances, such policies have to be reviewed to ensure that modern business challenges are curbed.
Environmental sustainability and an effective Corporate Social Responsibility (CSR) programs are the most crucial consideration that business entities should be concerned with given the challenges we face in regard to deteriorating environmental conditions. All sectors of the economy have to play their part in combating this challenge. RBC should develop carbon emission reduction strategies for offices to enable utilization of energy moves from typical to good. Given that RBC has several branches all over the world, just a little effort to reduce amount of energy used in one given office would make significant effort to sustaining our environment and make the institution likable to most people. People have become environmental conscious and would shy away from services of institutions that do not conserve the environment. Environmental sustainability should therefore be the main focus of The Royal bank of Canada.
Works Cited
Desjardins, Dawn. “Canada’s Economy Moves Solidly into Recovery Mode.” Economics Digest, 2010. Web.
Global Markets Direct. Royal bank of Canada – Financial and Strategic Analysis Review. 2010. Web.
RBC CASH Index. U.S. Consumer Confidence Heats up again in March, according to RBC Index. 2010. Web.
Synergysts. PEST Analysis – Banking Sector in Canada. 2007. Web.
Taulli, Tom. “The Edgar Online Guide to Decoding Financial Statements: Tips, Tools, and Techniques for Becoming a Savvy Investor.” J Ross Publishing Series. Ontario: J. Ross Publishing, 2004. Print.
Welcome to RBC. Financial Products & Services – Canada. 2010. Web.
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