RBC's robust quarter features lower loan provisions and a significant boost from HSBC Canada acquisition
Royal Bank of Canada (RBC) shares reached a record high following a quarter characterized by strong earnings and lower-than-expected provisions for potentially bad loans, as highlighted by BNN Bloomberg.
RBC reported adjusted earnings of $3.26 per share in the fiscal third quarter, surpassing analysts’ expectations of $2.97 per share.
This quarter was the first full reporting period to include HSBC Holdings Plc’s Canadian assets, acquired by RBC in late March. The acquisition provided RBC with additional momentum amid a challenging domestic banking environment marked by slow loan growth and rising deposit costs.
RBC's Canadian personal and commercial banking unit recorded a net income of $2.5bn for the quarter ending in July, representing a 17 percent increase compared to the same period last year. Excluding HSBC Canada’s contributions, the unit’s net income rose by seven percent.
Provisions for potential credit losses during the quarter amounted to $659m, significantly lower than the $921m forecasted by analysts. This figure compared to $920m in the previous quarter and $616m from the same quarter the previous year.
The bank’s strong performance also enhanced its capital levels. CEO Dave McKay, in a conference call, expressed expectations of “an increasing level of buybacks in coming quarters,” aiming to deliver long-term value to shareholders.
As a result, RBC’s shares increased by 2.6 percent, reaching $160.62 by mid-morning in Toronto, with an earlier peak at $160.93, an all-time high.
RBC’s capital markets division reported a 23 percent year-over-year profit increase, totalling $1.17bn. This growth was primarily driven by higher revenue in corporate and investment banking.
However, this was a decline from the previous quarter’s record earnings of $1.26bn, attributed to lower merger-and-acquisition activity in the US.
Analysts have responded positively to RBC’s performance. John Aiken from Jefferies Financial Group Inc. described the quarter as a “standout,” anticipating that RBC’s strong results will be reflected in its valuation.
Similarly, Scotiabank analyst Meny Grauman acknowledged RBC’s robust results, although he noted that discussions would likely focus on credit-related issues.
Meanwhile, other major Canadian banks reported their quarterly results. National Bank of Canada and Bank of Nova Scotia both posted loan-loss provisions in line with expectations.
However, Bank of Montreal (BMO) set aside more than anticipated for potentially bad loans, raising concerns about its credit performance relative to other Canadian and US banks. BMO’s shares subsequently fell, leading several analysts to downgrade their outlook on the stock.
In leadership developments, RBC is set to reorganize its Canadian business into two separate reporting lines as of September 1. Erica Nielsen will head the new personal banking unit, while Sean Amato-Gauci will lead the commercial division.
Neil McLaughlin, who previously oversaw the combined banking division, will transition to the role of chief of wealth management, which includes responsibility for RBC’s US retail banking subsidiary, City National Bank.
Over the past year, RBC has replaced key executives at City National after injecting billions of dollars into the subsidiary to strengthen its balance sheet.
The subsidiary, which is currently improving its risk controls following a regulatory fine for compliance lapses, reported a net income of US$52m in the third quarter.
RBC is also involved in a legal dispute with its former chief financial officer, Nadine Ahn, who was dismissed in April amid allegations of an undisclosed personal relationship with another executive. The bank alleges that Ahn used this relationship to secure promotions and pay raises for the executive.
Ahn has denied these allegations, and RBC has filed a counterclaim seeking damages, asserting that it has evidence of the relationship.
On Tuesday, RBC’s shares closed at a record high of $156.57.
