RBC profit falls 14%, misses forecasts as banks set aside more money for bad loans

Royal Bank of Canada RY-T reported a drop second-quarter profit and missed analysts’ estimates as a worsening economic outlook drives lenders to set aside more money for loans that could turn sour.

RBC profit fell 14 per cent from a year earlier to $3.6-billion, or $2.58 per share, in the three months that ended April 30. That compared with $4.25-billion, or $2.96 per share, in the same quarter last year.

Adjusted to exclude certain items, the bank said it earned $2.65 per share. That fell below the $2.80 per share analysts expected, according to Refinitiv.

“As our second quarter results demonstrate, RBC will never compromise on doing right by our clients and delivering sustainable, long-term value to them, our communities and shareholders,” RBC chief executive officer Dave McKay said in a statement. “Our focused growth strategy, prudent risk and capital management, and diversified business mix exemplify our strength and stability amidst a complex macro environment.”

The bank raised its quarterly dividend by 3 cents to $1.35 per share.

RBC is the fourth major Canadian bank to report earnings for the fiscal second quarter. Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T reported results Wednesday, reported results Wednesday that missed analyst expectations. Canadian Imperial Bank of Commerce CM-T and Toronto-Dominion Bank TD-T also release results Thursday, and National Bank of Canada NA-T next week.

In the quarter, RBC set aside $600-million in provisions for credit losses – the funds banks set aside to cover loans that may default. That was higher than analysts anticipated, and included $173-million against loans that are still being repaid, based on models that use economic forecasting to predict future losses.

In the same quarter last year, RBC had a recovery of $342-million in provisions, as loan loss reserves began to edge higher from the reversals issued last year during the COVID-19 pandemic, when default rates were more resilient than expected.

Total revenue rose in the quarter, to $13.52-billion from $11.22-billion a year earlier, but expenses also edged higher to $7.49-billion.

Profit from personal and commercial banking was $1.92-billion, down 14 per cent from a year earlier, as rising loan loss provisions and staff and technology costs offset higher net interest income – the difference between what a bank charges on loans and pays on deposits. But deposits and loans grew 8 per cent year-over-year on average.

The wealth management division generated $742-million of profit, down 8 per cent as market volatility dragged on fee-based client assets even as higher interest rates boosted net interest income.

Profit from insurance was down 33 per cent at $139-million on higher costs. And capital markets profit rose 10 per cent to $939-million on a lower tax rate and higher revenue in corporate and investment banking.