RBC Joins CIBC Posting Profit Gains on Canadian Lending

Royal Bank of Canada, the country’s largest lender, and Canadian Imperial Bank of Commerce posted higher second-quarter profits amid gains in domestic consumer lending and a decline in provisions for bad loans.

Profit for the period ended April 30 rose 26 percent to C$1.94 billion ($1.88 billion), or C$1.27 a share, from C$1.53 billion, or 99 cents, a year earlier, Royal Bank said today in a statement. Canadian Imperial, the country’s fifth-largest bank, raised its dividend after posting an 8 percent increase in profit to C$876 million, or C$2.12 a share, from C$811 million, or C$1.90.

Both Toronto-based banks benefited from profit growth in domestic retail banking even as Canadians reduce borrowing amid a consumer-lending slowdown. Royal Bank’s domestic personal and commercial banking profit jumped 11 percent to C$1.04 billion from a year earlier, while CIBC’s retail and business banking rose 8.6 percent.

“Consumer lending hasn’t slowed yet,” Kash Pashootan, a portfolio manager at First Avenue Advisory of Raymond James Ltd., said in a phone interview. “We need to see consumer debt stabilize before we can say loan growth has peaked, but the banks are still milking the rise.”

Royal Bank earned C$1.31 a share excluding some items, according to the statement, missing the C$1.32 average estimate of 12 analysts surveyed by Bloomberg. CIBC’s adjusted profit was C$2.12 a share, the lender said, beating by five cents the average estimate of 14 analysts.

Loan Reserves

CIBC fell 1.5 percent to C$79.22 at 4:10 p.m. in Toronto trading, the most since March 26, and Royal Bank declined 1.8 percent to C$62.84, the worst performer today on the eight-company Standard & Poor’s/TSX Commercial Banks Index.

Royal Bank set aside C$288 million for bad loans, down 17 percent from a year earlier. CIBC reserved C$265 million in provisions, 14 percent less than the same period last year.

Royal Bank’s results were also helped by contributions from buying out partner Banque Internationale a Luxembourg SA in their RBC Dexia Investor Services joint venture in July, and its Feb. 1 takeover of the Canadian auto-financing and deposit business of Ally Financial Inc. (ALLY)

Canadian banks, ranked the world’s soundest for the past five years by the Geneva-based World Economic Forum, are facing a slowdown in domestic consumer lending as the housing market cools and Canadians are urged to curb borrowing.

Investment Banking

Household debt rose to a record 165 percent of disposable income at the end of last year, according to Statistics Canada. The International Monetary Fund last month cut its 2013 growth forecast for Canada to 1.5 percent, the slowest among Group of 20 countries outside Europe and down from a 2 percent estimate in October.

Bank of Montreal yesterday reported results that included a 0.7 percent decline in domestic banking, hurt by higher costs and lower net interest margins. Toronto-Dominion Bank, Canada’s second-largest lender, said May 23 that domestic consumer-banking profit rose 4.8 percent, while National Bank of Canada had a 1.8 percent increase in consumer lending. Bank of Nova Scotia reported a 19 percent surge in Canadian banking profit, aided by its C$3.1 billion takeover of ING Groep NV’s Canadian operations.

Personal and commercial-banking profit at Royal Bank, which included Caribbean operations, rose 12 percent to C$1.06 billion from a year earlier, helped by lower provisions and C$12 million of earnings from the Ally acquisition.

‘Hard Work’

“While the Canadian personal-lending market is slowing down there is still some growth, we’re still picking up volume,” Janice Fukakusa, chief financial officer, said in an interview. “You see the results of a lot of hard work around looking at productivity and making sure our spending doesn’t get ahead of our revenue growth.”

Investor and treasury services posted profit of C$67 million, compared with a year-earlier loss of C$121 million tied to costs from the RBC Dexia deal.

Insurance earnings rose 9.9 percent to C$166 million while wealth-management profit increased 6.1 percent to C$225 million. RBC Capital Markets, the firm’s investment-banking unit, reported profit of C$386 million, up 4 percent from a year earlier.

“With wealth management and capital market performances lackluster, focus will be on retail banking, and domestic in particular, which is also not likely to be warmly received by the market,” John Aiken, an analyst with Barclays Plc, said of RBC’s results in a note to clients.

Raises Dividend

CIBC also reported gains in investment banking, with profit from its wholesale unit surging 51 percent to C$198 million. Wealth-management earnings rose 16 percent to C$92 million from a year earlier.

The bank raised its dividend 2.1 percent to 96 cents a share, joining Montreal-based National Bank as the only other lender in the quarter to raise its quarterly payout.

CIBC continues to negotiate with Aimia Inc. on its Aeroplan card partnership and is considering alternatives if the deal doesn’t go through, Chief Executive Officer Gerald McCaughey said on a conference call after reporting earnings. The bank said it’s spending more than C$50 million over four quarters to create an alternative card if the agreement isn’t renewed.

To contact the reporters on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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