RBC Profit Rises 11% as Trading, Taxes Offset Slower Lending

  • Canadian banking grows at slowest pace in more than 2 years
  • Profit in wealth management, insurance falls from a year ago

Royal Bank of Canada said fiscal fourth-quarter profit rose 11 percent as a jump in trading revenue and a lower tax rate helped counter slowing earnings growth from Canadian banking and declines across other businesses.

Net income for the period ended Oct. 31 climbed to a record C$2.59 billion ($1.94 billion), or C$1.74 a share, from C$2.33 billion, or C$1.57, a year earlier, the Toronto-based lender said Wednesday in a statement. Adjusted profit, which excludes some items, was C$1.77 a share, the bank said, topping the C$1.64 average estimate of 14 analysts surveyed by Bloomberg.

“The results capped off a record year with earnings of C$10 billion," Chief Executive Officer Dave McKay said Wednesday in an earnings call with investors. “I’m very proud to say that we’re the first Canadian company to earn over C$10 billion in a given fiscal year."

RBC Capital Markets helped drive profit growth in the quarter on trading, lower taxes and favorable foreign-exchange trends. That offset declining earnings in wealth management, insurance and the bank’s investor and treasury services units. Profit from Canadian personal and commercial banking, Royal Bank’s largest operation, rose 1.4 percent to C$1.23 billion, the slowest pace in more than two years.

Shares Rise

Royal Bank rose 0.7 percent to C$77.41 at 1:44 p.m. in Toronto. The stock has fallen 3.5 percent this year, compared with the 3.8 percent decline of the eight-company Standard & Poor’s/TSX Commercial Banks Index.

Revenue fell 4.3 percent to C$8.02 billion, missing analysts’ estimates of C$9.05 billion. The lender set aside C$275 million for bad loans, or 20 percent less than last year. Royal Bank reported an effective tax rate of 7.6 percent in the quarter, compared with 20.8 percent a year earlier. The full-year rate was 20.6 percent, down from 23.1 percent in 2014.

“There is always a quarter in which this bank has a low tax rate to reflect the truing up of prior years -- but not this low," said Rob Sedran, an analyst with CIBC World Markets. "On balance, this looks more like a notional miss."

Retail banking earnings rose 10 percent to C$1.22 billion, aided by a return to profit in the Caribbean and U.S. from a year-earlier loss, Royal Bank said. Wealth management profit fell 11 percent to C$255 million, hurt by a C$38 million restructuring cost for its U.S. and international business and the RBC Suisse sale, the bank said. Insurance profit fell 12 percent to C$225 million, while investor and treasury services income fell 22 percent to C$88 million.

Headwinds

“Every one of our platforms has had headwinds," Chief Financial Officer Janice Fukakusa said in a telephone interview. “I think it was a pretty solid quarter in a fairly uncertain macro environment."

Capital markets profit rose 38 percent to C$555 million a year earlier, when the firm was hurt by a plunge in fixed-income trading and costs tied to exiting some proprietary trading strategies to comply with regulations. While trading revenue rose, underwriting and advisory fees fell 18 percent to C$350 million.

Royal Bank saw a 38 percent jump in trading revenue across the bank from a year ago to C$649 million, led by equities.

Capital Markets

At RBC Capital Markets, “revenues were decent again this quarter, much better than some weaker numbers we have seen elsewhere,” Jason Bilodeau, an analyst with Macquarie Capital Markets in Toronto, said in a note. Canadian consumer banking was “maybe a bit light,” he said.

Royal Bank had 1,375 fewer full-time employees as of Oct. 31 from the end of July, a 1.9 percent reduction to its workforce that now stands at 72,839. That follows the trend of job cuts at other Canadian banks amid slowing domestic growth and a shift to digital banking.

National Bank of Canada, the sixth-largest lender, also posted quarterly results Wednesday, with earnings climbing 5.2 percent to C$347 million on gains in retail lending and capital markets. The Montreal-based bank raised its dividend 3.8 percent to 54 cents.

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