Photographer: Ben Nelms/Bloomberg

RBC's Gains in Canadian Banking Bode Well for Domestic Peers

  • Earnings from domestic business climbed 5.1% in third quarter
  • Trading revenue slips 15% on drops in fixed income, currencies

Royal Bank of Canada is taking care of business at home.

Royal Bank, the first Canadian lender to report fiscal third-quarter results, saw a jump in profit from its domestic banking operations amid signs that the nation’s economy is accelerating. An improving outlook prompted Canada’s central bank to raise interest rates last month, and economists predict at least one more hike this year. The country is forecast to lead the Group of Seven in growth in 2017, data compiled by Bloomberg show.

That’s good for the domestic operations of Canadian lenders, as Royal Bank illustrated in its results for the quarter ended July 31. Earnings from domestic banking rose 5.1 percent to C$1.35 billion ($1.07 billion), while net interest income for the business hit a record and could improve further when the central bank’s rate hike kicks in.

“This is a strong signal to the market that Canadian banking is at least steady, and potentially there’s an opportunity for the banks to grow,” Jim Shanahan, an Edward Jones analyst, said in a phone interview. “There’s a lot of reason to be optimistic about what the banks could do in the fourth quarter and the next year based on what we’ve seen here this morning."

Shares Rise

Royal Bank shares climbed 1.4 percent to C$93.26 at 10:05 a.m. in Toronto, the best performance in the eight-company S&P/TSX Commercial Banks Index. The stock has gained 2.7 percent this year.

Bank of Canada’s July 12 increase, which was preceded a month earlier by soaring government bond yields, may help ease pressure on lenders that have seen low rates squeeze margins since the 2008 financial crisis. The central bank raised its overnight rate 25 basis points to 0.75 percent.

Despite higher earnings in personal and commercial banking and a 25 percent increase in wealth-management profit, Royal Bank showed it’s not immune to the trading slowdown that’s affected U.S. rivals.

Trading revenue fell 15 percent to C$835 million in the quarter, led by declines in fixed income, currency and commodities, the Toronto-based firm said Wednesday in a statement. That’s the second straight quarter of year-over-year declines at the bank, which runs the biggest trading operation among Canadian lenders.

Royal Bank cited “lower fixed-income trading results on reduced market volatility” as one reason for the 4 percent drop in earnings at its RBC Capital Markets business. Trading revenue was the lowest since the fourth quarter of 2016, mirroring the falloff at many Wall Street firms. Large U.S. banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. last month reported that fixed-income trading revenue declined in the second quarter from a year earlier as reduced market volatility kept many investors on the sidelines.

Profit Beats

Canadian banks have also sought to mitigate the impact of tax changes from the country’s 2015 federal budget, which stopped them from claiming an income-tax deduction on dividends received from companies under certain derivative contracts arranged for institutional investors. The government closed the tax loophole in 2015, though transition rules delayed the effect by making the change apply to payouts after April 2017.

Royal Bank’s net income fell 3.4 percent to C$2.8 billion, or C$1.85 a share, from C$2.9 billion, or C$1.88, a year earlier, when it had a gain from selling a home and auto insurance business, according to the statement. Excluding some items, profit was C$1.89 a share, the bank said, beating the $1.87 average estimate of 13 analysts surveyed by Bloomberg. The lender raised its dividend 4.6 percent to 91 cents a share.

Canadian Imperial Bank of Commerce is scheduled to report results Thursday, followed by Bank of Nova Scotia and Bank of Montreal on Aug. 29, National Bank of Canada on Aug. 30 and Toronto-Dominion Bank the following day.

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