Royal Bank of CanadaRY-T +0.53%increase reported first quarter profit that beat analysts’ estimates even as the lender set aside more loan loss reserves driven by rising risk in real estate.
Canadian banks have been reserving more money to absorb loans that could default as consumers and businesses grappled with higher interest rates and inflation. RBC set aside $813-million in provisions for credit losses – the funds banks set aside to cover loans that may default – which was higher than analysts anticipated, and included $133-million against loans that are still being repaid.
In the same quarter last year, RBC had set aside $532-million in provisions.
To help customers withstand the higher cost of borrowing as Canada’s economic growth lags the United States, RBC chief executive officer Dave McKay said that the Bank of Canada is likely to start cutting interest rates earlier than the U.S. Federal Reserve this year.
“Growing consumer demand and rising unemployment points to a softening in the Canadian economic backdrop,” Mr. McKay said during a conference call with analysts. “In contrast, the U.S. is showing continued strength in labour markets, above average wage growth, a resilient U.S. consumer and higher corporate profits.”
Provisions for losses in Canadian personal and commercial banking were bolstered by reserves for credit cards and increased risk across all products.
A significant part of the increase flowed from rising risk in real estate, particularly commercial properties. In its capital markets division, RBC booked large provisions on an impaired office loan and a multi-family residential loan, both of which were in the U.S.
While gross impaired loans – debt that the bank believes will not be repaid – in real estate more than doubled since the same quarter last year, the bank’s provisions for the sector jumped to 182-million from $16-million in the first quarter a year prior.
“While you’re seeing the stresses you would anticipate related to increases in the sector, we have been provisioning for those sufficiently,” RBC chief financial officer Nadine Ahn said in an interview. “We have been building reserves commensurate with that, but given the diversification of our portfolio, we do feel that it’s within our risk appetite and we are comfortable overall with our exposure.”
The bank is on the cusp of closing the largest-ever domestic banking deal. RBC’s pending $13.5-billion takeover of British-based banking giant HSBC’s Canadian unit received approval from Finance Minister Chrystia Freeland in December. The deal, which was initially set to be completed last year until it faced delays with approvals, is expected to close at the end of March.
The bank updated its financial expectations for the deal. RBC anticipates pre-tax acquisition and integration costs of about $1.5-billion, up from $1-billion when it announced the deal in late 2022. But it also expects to close the deal with a higher capital tier one (CET1) ratio – a measure of a bank’s ability to absorb losses – at 12.5 per cent, up from the previous 11.5 per cent estimate.
Canada’s banking regulator requires banks to maintain a minimum of 11.5 per cent.
RBC is the third major Canadian bank to report earnings for the fiscal first quarter. National Bank of Canada also released results on Wednesday. Bank of Nova Scotia and Bank of Montreal reported financial results Tuesday. Toronto-Dominion Bank and Canadian Imperial Bank of Commerce will close out the week on Thursday.
RBC earned $3.6-billion, or $2.50 per share, in the three months that ended Jan. 31. That compared with $3.2-billion, or $2.29 per share, in the same quarter last year.
Adjusted to exclude certain items, including transaction and integration costs related to its proposed takeover of HSBC Bank Canada, the bank said it earned $2.85 per share, down 6 per cent from the same quarter last year. That edged out the $2.80 per share analysts expected, according to data from the London Stock Exchange Group.
Total revenue rose 1 per cent in the quarter to $13.5-billion on slimmer net interest margins – the difference between what banks earn on loans and pay on deposits. Expenses increased 10 per cent to $8.3-billion, in part driven by costs related to its HSBC Canada deal and higher salaries and benefits, partially offset by a staff reduction announced last year.
Profit from personal and commercial banking was $1.97-billion, down 4 per cent from a year earlier, mostly due to higher loan loss provisions and expenses.
The wealth management division generated $606-million of profit, down 27 per cent largely due to costs from an industry-wide special assessment by the U.S. Federal Deposit Insurance Corporation, as well as investments in its Los Angeles-based bank, City National.
Capital markets profit fell 7 per cent to $1.15-billion, driven by lower revenue in Global Markets and higher provisions.
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