RBC beats expectations as loan loss provisions soar

RBC beats expectations as loan loss provisions soar

Performance in capital-markets and wealth-management businesses stronger than expected

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Royal Bank of Canada beat analysts’ estimates as stronger-than-expected performance in the firm’s capital-markets and wealth-management businesses countered an increase in loan-loss provisions and higher expenses.

The Toronto-based bank earned $2.85 per share on an adjusted basis in the fiscal first quarter, it said in a statement Wednesday, topping the $2.80 average estimate of analysts in a Bloomberg survey. Net income of $1.15 billion in the capital-markets business topped expectations of $943.7 million, with fixed-income revenue giving the unit a boost.

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Royal Bank has been working to rein in expenses with recent rounds of job cuts both in Canada and at its struggling City National Bank subsidiary in the United States. Los Angeles-based City National reported a net loss of US$22 million, its third straight quarterly loss. Royal Bank injected almost US$3 billion to boost City National’s balance sheet last year and has installed new top managers at the unit.

Provisions for credit losses in the three months through January totalled $813 million, a 53 per cent increase from the same quarter last year and slightly more than what analysts had forecast.

Results also were impacted by a special assessment of $159 million before taxes by the U.S. Federal Deposit Insurance Corp. related to bank failures.

“Royal posted a strong quarter, well ahead of expectations, particularly when the FDIC charge is removed from core,” said Jefferies Financial Group Inc. analysts John Aiken, Joe Ng and Aria Samarzadeh. “It continues to demonstrate solid growth in a challenging environment, and with the pending HSBC Canada acquisition, is set for additional growth heading into 2025.”

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Royal Bank’s $13.5 billion deal to acquire HSBC Holdings PLC’s Canadian operations won government approval in December and is set to close on March 28, which is later than analysts had initially expected. The purchase is expected to help boost operating leverage at Royal Bank as cost synergies kick in.

The company’s shares rose 1.2 per cent to $132.75 at 9:57 a.m. in Toronto. They have slipped almost one per cent this year, less than the 2.4 per cent decline for the S&P/TSX Commercial Banks Index.

Royal Bank’s Common Equity Tier 1 ratio came in at 14.9 per cent as of the first quarter, and the firm said it expects a CET1 ratio of 12.5 per cent after the deal closes. That’s well above the regulatory minimum level of 11.5 per cent.

The lender said in a slide presentation Wednesday that it plans to turn off the discount on its dividend reinvestment program as of May 24. It has used the discounted DRIP as a means of raising additional capital.

Non-interest expenses totalled $8.32 billion, up 9.7 per cent from a year earlier. That was a slower pace of growth than in 2023, when the bank reported a 15.8 per cent increase in year-over-year expenses. Costs rose as a result of higher spending on transaction and integration work for the HSBC deal as well as the FDIC charge, Royal Bank said.

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Provisions for impaired loans were up in Royal Bank’s Canadian commercial-lending business, particularly in the automotive and real estate sectors. The lender also provided new details on commercial real estate, noting that its total lending in the space represents 9.7 per cent of its overall loan book, while U.S. office loans represent just 0.6 per cent of its total portfolio.

Looking ahead, “downside provisioning scenarios account for a reduction in CRE prices of 25 per cent to 40 per cent,” the company said.

Many of Royal Bank’s customers are still sitting on savings built up over the pandemic — something that should provide a cushion in the months to come, chief financial officer Nadine Ahn said in an interview. And consumers in Canada are limiting spending as they prepare for elevated monthly expenses, with many mortgages set to renew at higher interest rates in 2025 and 2026.

“While we are seeing things like delinquencies tick up, as we would expect at this kind of interest-rate level, we are seeing spend start to slow down,” she said. “I think the Canadian consumer is adapting to the higher interest rate.”

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Royal Bank’s wealth business reported net income of $606 million, beating estimates of $520.3 million.

Competitor National Bank of Canada, which also reported results Wednesday, had adjusted earnings per share of $2.59 for the fiscal first quarter, topping estimates for $2.35.

The Montreal-based bank posted revenue growth across all of its businesses, it said in a statement, while provisions for credit losses rose to $120 million, slightly higher than analysts had forecast.

Loan-loss provisions rose at both Bank of Nova Scotia and Bank of Montreal, the first of Canada’s big banks to report earnings on Tuesday.


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