(Toronto) Royal Bank of Canada is taking steps to prepare for a more uncertain year, but results from its most recent quarter still show gains in key areas like lending and adding new customers.
The bank, which announced on Tuesday that it had reached an agreement to acquire HSBC Bank Canada for 13.5 billion, said on Wednesday that it was increasing its quarterly dividend, but due to economic uncertainty, it said that would postpone share buybacks until the deal with HSBC closes.
The Royal also announced a 2% discount on dividend reinvestments, to help boost its balance sheet.
Given the potential downturn ahead, the bank also set aside 381 million for potentially bad loans, compared to endowment reversals of 227 million last year. That offset gains made elsewhere in the quarter, to leave a profit of 3.88 billion, just 10 million less than in the same period a year earlier.
Decisions on bad debt provisions and dividend reinvestment discount come as high housing and energy prices, geopolitical instability and rising interest rates put pressure on growth , affect asset valuations and add to market volatility, said Royal Chief Executive Dave McKay.
“We maintain our cautious position on the outlook for economic growth,” he said during a conference call with analysts.
“Even though higher interest rates are needed to preserve long-term economic stability, the lagged impact of monetary policy, combined with strong employment and ample liquidity in the system, has likely postponed what could end up being a brief, moderate recession. »
While rising rates are putting pressure on the economy, Royal is uniquely positioned to benefit as net interest margins on its large deposit base increase.
Expected increase in number of customers
The bank said it saw its personal and commercial banking net income increase 5% from a year ago to $2.14 billion, mainly due to these higher margins as well as growth. average volume of 10% of loans. The wealth management business was also boosted by higher net interest income and loan volume growth.
Higher interest margins are an advantage of Royal Bank’s size, which it continues to push to grow, both through the acquisition of HSBC Canada, and through stronger growth internal.
The acquisition of HSBC Canada will allow Royal to add some 800,000 customers, if it goes ahead as planned by the end of 2023. This year, the bank has added 400,000 customers and expects its deal to client referrals with the Canadian branch of Indian bank ICICI are bringing some 50,000 more clients to it as immigration levels hit record highs.
The bank is well positioned to add more customers and deposits next year to provide lower cost funding for its loans, McKay said.
“We believe our largely deposit-funded balance sheet will be a key driver of profitability in a rising rate environment,” he explained.
The bank’s capital markets business shows the clearest signs of volatility, with net profit of 617 million down 33% from a year earlier but up 29% from the third quarter .
Revenues totaled 12.57 billion, compared to 12.38 billion a year earlier.
The quarter showed strong loan growth and no sign of a credit spike for Royal Bank, Scotiabank analyst Meny Grauman noted in a note, but he wondered what the Royal Bank’s decision bank on the dividend reinvestment plan (DRP) discount meant for the bank’s capital outlook, given the tougher economic conditions expected next year.
“Against this backdrop, a defensive move on the RRD raises questions about downside risks,” Grauman said.
He noted that the bank’s better-than-expected adjusted earnings of $2.78 per share for the quarter, versus Refinitiv’s expectations of $2.68, were attributable to higher revenue and provisions. for lower than expected loan losses.
However, bank charges, which rose 9.5% for the quarter compared to last year due to higher personnel costs and some increase related to acquisitions, were higher than expected.
For its full year, Royal Bank reported earnings of $15.81 billion, or $11.06 per share, from revenue totaling $48.99 billion. That compared with a record profit of $16.05 billion, or $11.06 per share, on revenue of $49.69 billion in the prior year.