ROYAL BANK OF CANADA $56 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.3 billion; Market cap: $72.8 billion; SI Rating: Above average) is the largest of Canada’s big five banks, with total assets of $589.1 billion. It provides a wide range of financial services through over 1,300 branches in Canada, and 34 other countries. International operations account for 10% of Royal’s total revenue.

Royal sees limited opportunities in Canada, so it has used acquisitions in the U.S. to fuel its growth in the past few years.

Its U.S. retail banking operation, RBC Centura, now operates 270 branches in six southeast states. RBC Dain Rauscher is one of the top full-service brokerage firms in the U.S., with over 670,000 clients.

In its second fiscal quarter ended April 30, 2007, Royal earned $0.98 a share, up 15.3% from $0.85 a year earlier. Revenue grew 11.8%, to $5.7 billion from $5.1 billion. Most of the growth came from its Canadian and U.S. retail banking and wealth management operations, as low interest rates and a strong economy continued to spur strong loan demand. However, rising disability claims hurt profits at Royal’s insurance business.

Loan loss provisions in the most recent quarter rose 52% from a year earlier. Royal foresaw higher losses from personal loans and credit-card operations, so it raised its loss provisions in these areas. However, bad loans still accounted for just 0.37% of Royal’s total loans, down from 0.38% a year earlier.

The bank’s efficiency ratio (non-interest expenses, such as salaries and building costs, divided by revenue — the lower, the better) fell to 55.5% from 57.2% a year earlier. Ongoing cost cuts helped offset the costs of integrating new operations, as well as the cost of higher performance-related payouts to employees.

Upgrades to Royal’s Canadian branch network increased Royal’s non-interest costs. But these investments should help the bank improve its customer traffic and market share.

The stock has gained 20% in the past year, and hit a new peak of $62 in May 2007. It now trades at 13.2 times the $4.23 a share it will probably earn in fiscal 2007.

That’s a little higher than price-to-earnings ratios at the other four banks. This is mostly due to investor recognition of the strong earnings potential of Royal’s businesses. The $1.84 dividend yields 3.3%.

Royal Bank is a buy.