RBC Falls as Profit Growth Slows at Domestic Retail Unit

Royal Bank of Canada, the nation’s second-largest lender, declined as much as 1.5 percent after reporting that profit growth at its domestic retail bank was the slowest in more than two years.

RBC dropped 1.1 percent to C$80.80 at 4:12 p.m. in Toronto and earlier fell as low as C$80.47, the biggest intraday decline in three weeks. The stock was the worst performer among eight companies in the Standard & Poor’s/TSX Commercial Banks Index.

“The market appears to have chosen to focus on the negatives, notably the slowing performance of domestic retail revenues and earnings,” John Aiken, a Barclays Plc analyst, said in a note to clients.

Domestic lending has slowed at the nation’s banks as Canadians curtail shopping for home loans. Mortgages expanded 4.9 percent in June from a year earlier, the slowest pace since November 2001, Bank of Canada data show.

Profit at the Canadian retail unit, which typically accounts for about half of the company’s net income, rose 3 percent to a record C$1.19 billion ($1.09 billion) in the three months ended July 31, Toronto-based RBC said today in its fiscal third-quarter earnings statement. That’s the slowest growth since the second quarter of 2012, company filings show.

Royal Bank, the first Canadian lender to report quarterly results, said net income climbed 4 percent to C$2.38 billion, or C$1.59 a share, from C$2.29 billion, or C$1.51, a year earlier. Adjusted profit, which excludes some items, was C$1.64 a share, beating the C$1.57 average estimate of 12 analysts surveyed by Bloomberg. The company boosted its quarterly dividend by 4 cents to 75 cents a share.

Capital Markets

“The numbers were good but the beat came primarily from the capital-markets division and insurance, which are less reliable in terms of ongoing or consistent earnings,” said Wes Mills, chief investment officer at Scotia Private Client Group in Toronto, who manages about C$14 billion. “A little pullback in light of a slightly weaker day is not unusual.”

The RBC Capital Markets unit posted record profit of C$641 million, up 66 percent from a year earlier, on a surge in investment banking fees and trading revenue. The quarter was the last under the leadership of Chief Executive Officer Gordon Nixon, 57, who retired Aug. 1 after 13 years at the helm and was succeeded by David McKay.

“It was an outstanding quarter for capital markets,” McKay, 50, said in a conference call with investors. “The segment benefited from a number of factors which are unlikely to be repeated to the same degree.”

‘Strategic Guideline’

The capital-markets division accounted for 27 percent of profit in the quarter, exceeding the bank’s 25 percent target, which McKay today referred to as a “strategic guideline” rather than a firm cap. Royal Bank intends to maintain that ratio, he said.

Royal Bank should take advantage of stronger capital markets to fuel profit even if it means exceeding the company’s 25 percent target, said Don Reed, CEO of the Franklin Templeton Investments in Canada.

“You strike while the iron’s hot and target these things,” said Reed, who oversees C$1.2 billion including Royal Bank shares. “We’ve been in a very strong M&A, underwriting market and capital markets have been very good, and to not take advantage of that, I would really question them.”

Trading revenue across the bank rose 67 percent to C$863 million from a year earlier. Wealth-management profit rose 22 percent to a record C$285 million, as assets under management benefited from higher equities markets.

Challenging Growth

“When we look at the main driver where earnings growth came from it’s clear that it’s going to be difficult to repeat that,” Kash Pashootan, a portfolio manager at First Avenue Advisory of Raymond James Ltd., which manages about C$250 million including Royal Bank shares.

Royal Bank’s profit from personal and commercial lending, which includes U.S. and Caribbean banking, fell 2.5 percent to C$1.14 billion from a year earlier on costs tied to selling its Jamaican banking operations, the company said. The lender recorded a C$40 million loss in the quarter on the sale, wider than its C$37 million estimate on June 27.

Before it's here, it's on the Bloomberg Terminal.