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Royal Bank Warns of ‘Headwinds’ as Profit Misses Estimates

Royal Bank of Canada Chief Executive Officer Gordon Nixon warned of “significant headwinds” for banks after his company posted profit that missed analysts’ estimates for the sixth time in seven quarters.

“Banks around the world are facing other significant headwinds such as a slowdown in consumer lending and the added difficulty of an operating and prolonged low interest rate environment,” Nixon said today in a conference call with analysts.

Canada’s largest lender missed estimates as earnings from capital markets and trading fell short of analysts’ expectations. The bank said it earned C$1.06 a share excluding items such as the loss from the sale of its U.S. consumer banking business, RBC Bank, missing the C$1.08 a share estimate of 13 analysts surveyed by Bloomberg.

Profit from continuing operations was C$1.57 billion ($1.59 billion), or C$1.04 a share, for the period ended July 31, up 13 percent from C$1.38 billion, or 92 cents, in the year-earlier period, the bank said in a statement. The bank had a net loss of C$92 million including C$1.57 billion in costs from selling RBC Bank.

Royal Bank fell C$1.78, or 3.5 percent, to C$48.98 at 4 p.m. trading on the Toronto Stock Exchange, the biggest drop since December. The stock had fallen 6.4 percent this year, compared with the 4.7 percent decline of the eight-company S&P/TSX Commercial Banks Index.

‘Crisis of Confidence’

Global markets face a “crisis of confidence” that’ll continue to hurt the banking industry, Nixon said in the call.

“Underpinning market reactions is a general fear that global economies could slow and the U.S. economy in particular could slip into a double-dip recession,” Nixon said. “Markets will likely remain fragile and may continue to be volatile.”

Royal Bank is “ramping up” efforts to cut costs, including discretionary spending such as travel and entertainment, to address what Nixon expects will be a slower growth environment. He also sees opportunities as the bank seeks to expand its wealth management and investment-banking businesses.

“The market turbulence is causing significant dislocation in the industry,” Nixon said. “Many of our competitors are being forced to restructure or withdraw from certain markets and businesses, which we see as a good opportunity.”

Third-quarter revenue rose 2 percent to C$6.79 billion. Provisions for loan losses fell to C$275 million, from C$277 million a year earlier.

‘Weak Quarter’

Profit from the RBC Capital Markets investment-banking unit was lower than analysts including John Aiken of Barclays Capital expected, as trading missed estimates. The Standard & Poor’s/TSX Composite Index dropped 3.7 percent in the quarter.

Capital markets had “a weak quarter predicated on a significant drop in trading revenues and weakness in commissions,” Aiken said today in a note to clients. “Advisory fees were quite strong and provided a partial offset.”

Profit at the investment-banking business rose 38 percent to C$277 million, from C$201 million a year earlier, on higher trading and fees.

“Royal’s miss on wholesale earnings was generally expected given the weakness in capital markets,” said Bob Decker, a money manager at Aurion Capital Management in Toronto who oversees about C$5.5 billion. “Market conditions weakened significantly in the August time frame, so I think investors will take a wait-and-see attitude on this bank until the year-end numbers are released.”

‘Small Base’

Overall trading revenue rose 46 percent to C$337 million from C$231 million a year earlier.

“It’s an unusually negative environment for trading,” Chief Financial Officer Janice Fukakusa said in an interview. “The trading was off considerably and it was off mostly in Europe, because of what’s happening with the sovereign crisis there, to some degree in the U.S.”

Canadian banking profit rose 12 percent to C$855 million, from C$766 million, on lending growth and lower provisions for credit losses. Wealth management fell 3.2 percent to C$179 million, while insurance earnings dropped 5.9 percent to C$144 million.

“The Canadian banking environment continues to be a tough environment, but we’re holding our own, we’re still increasing volumes,” Fukakusa said. “We’re still getting volume from the residential mortgage side.”

Caribbean Banking

International banking, including Caribbean banking and its RBC Dexia partnership and excluding the Raleigh, North Carolina-based RBC Bank, fell 14 percent to C$31 million from a year earlier. Royal Bank agreed in June to sell RBC Bank and credit-card assets to PNC Financial Services Group Inc. for $3.62 billion in a deal expected to close in March.

Royal Bank is the first Canadian bank to miss analysts’ estimates this quarter. Bank of Montreal, the fourth-biggest bank, said Aug. 23 that profit rose 19 percent to C$793 million, or C$1.27 a share, driven by higher investment-banking earnings. Montreal-based National Bank of Canada, the sixth-biggest lender, yesterday said profit rose 15 percent.

Bank of Nova Scotia reports results Aug. 30, followed by Canadian Imperial Bank of Commerce on Aug. 31 and Toronto-Dominion Bank on Sept. 1.

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