(Toronto) Royal Bank of Canada (RBC) reported lower third-quarter earnings from a year ago as it saw a sharp decline in capital markets activity and took provisions for potential payment defaults due to a deterioration in its economic outlook.
Updated yesterday at 4:18 p.m.
The bank said on Wednesday it posted net income of $3.6 billion, or $2.51 per share, for the quarter ended July 31, compared with earnings of $4.3 billion, or $2.97 per share, in same quarter a year earlier.
Chief Executive Dave McKay pointed to the uncertain macroeconomic environment, including inflation, supply chain constraints, geopolitical tensions, tight labor markets and climate change-related droughts as some of the factors contributing to the decline in profits.
“Our market-sensitive businesses had a string of challenging results, against the backdrop of one of the most challenging environments for financial markets,” he said on a call with analysts. This was underpinned by heightened uncertainty, heightened volatility, lower asset valuations and widening credit spreads which impacted client sentiment and activity. »
Earnings were hit by provisions for credit losses totaling $340 million for the quarter, compared with a reversal of $540 million in the same quarter last year.
McKay said provisions were cautious given the range of potential outcomes ahead, including the likelihood of a recession in North America, as central bank rate hikes push the economy further. near the end of a cycle.
Profits were also hit by its capital markets division, where net profit fell $650 million, or 58%, year on year to $479 million, as it took a $385 million underwriting cut caused by market conditions, while provisions and lower debt, equity and lending activity also weighed.
Personal and commercial banking saw profits fall $90 million, or 4%, to $2 billion on provisions, while the division posted a 14% increase in net interest income as it recorded a 10% loan growth, including double-digit mortgage growth, while credit card spending was 30% above pre-pandemic levels.
McKay added that while mortgage growth was strong, he doesn’t expect it to last as interest rates hit the housing market.
We expect mortgage growth to slow in the coming quarters given lower activity and housing prices, and a return to a more balanced sales-to-listings ratio.
Dave McKay, Managing Director of the Royal Bank of Canada
He added that given the economic challenges, there will likely be fewer people eligible for future loans as the bank remains disciplined.
“You can expect that with inflation, consumer challenges, potential job losses coming our way, more and more clients will lose their appetite for risk,” he explained. .
Chief risk officer Graeme Hepworth said rising rates and falling house prices were increasing the risks to the bank’s mortgage portfolio, but the most indebted borrowers, who took out mortgages on pandemic’s heady housing market, do not renew until 2025.
“This puts our customers in a strong position to weather rising rates and falling house prices…customers will also have time to adjust their behavior and benefit from wage and income inflation.” to moderate the impact of higher payments,” he said.
The bank had also seen delinquency rates on credit cards begin to rise toward pre-pandemic levels, but the bank noted that deposit rates were still 30% higher than pre-pandemic levels, he said. .
Although risks have increased due to rising rates, RBC has also seen benefits for its interest income. The bank recorded an overall 17% increase in net interest income to $5.9 billion, while its net interest margin rose 12 basis points from a year earlier.
Overall, the bank reported total revenue of $12.1 billion, up from $12.8 billion a year ago.
On an adjusted basis, RBC said it earned $2.55 per share for the quarter, compared with adjusted earnings of $3.00 per share a year earlier.
Analysts on average had expected adjusted earnings of $2.66 per share, according to financial markets data firm Refinitiv.
National Bank analyst Gabriel Dechaine said in a note that capital markets fell more than expected, with trading revenue of 480 million below his estimate of 790 million, largely due to the depreciation of the ready.
He added that while underwriting portfolio losses were disappointing, the bank’s net interest margin gains, with similar 10 to 15 basis points of net interest margin gains over the next two quarters, were encouraging.
“While the weakness in financial markets could be seen as transitory, the surprisingly strong expansion in the net interest margin [de RBC] should produce longer lasting benefits,” he concluded.