RBC hikes dividend 11%, plans share buyback as earnings fall short of expectations

Two major Canadian banks have reported higher fourth-quarter profits and large dividend hikes but still failed to meet Bay Street’s expectations, as narrowing profit margins and lower trading activity led to lacklustre revenues.

Royal Bank of Canada’s quarterly profit of $3.9-billion was up 20 per cent year over year but down from the third quarter, and its $12.4-billion of revenue was weaker than expected. Margins on loans such as mortgages shrank because of competitive pressure and low interest rates, and trading in fixed-income products cooled after a hot streak last year.

The same trend was evident at National Bank of Canada. Profit rose 58 per cent to $776-million from the low levels of a year ago, as the pandemic took hold, but fell almost 8 per cent from the third quarter. Revenue of $2.2-billion was roughly unchanged from the previous quarter, with weaker lending margins and trading revenues again having a dampening effect.

Adjusted earnings per share fell short of expectations at both banks – by 10 cents at RBC, where profits were sapped by a $116-million legal provision tied to its California-based City National Bank subsidiary, and by 3 cents at National Bank. But the chief executive officers at both banks expressed optimism about their prospects for the year to come, especially if anticipated interest-rate hikes by central banks go ahead as planned, which would help increase lending margins.

“Yes, we are somewhat disappointed” in the fourth-quarter results, RBC CEO Dave McKay said on a Wednesday conference call with analysts. “While we’re not as happy with the bottom line this quarter, we’re happy with the momentum in the overall franchise core.”

Both banks announced significant dividend hikes – though not as large as some analysts anticipated. RBC raised quarterly payouts by 11 per cent; National Bank, by 23 per cent. RBC announced a program to buy back as much as 3.2 per cent of its shares, while National Bank launched a plan that allows it to repurchase 2 per cent of its shares over the coming year.

RBC also boosted profits by recovering $227-million of provisions for credit losses – funds that are earmarked for possible loan defaults – as economic forecasts improved and actual losses on loans were unusually low. RBC has now reclaimed more than half the extra allowances against loan losses that it built up in the early months of the pandemic.

National Bank was more conservative, recovering just $41-million of provisions against losses that never materialized. Its reserves are still 52 per cent higher than they were before the pandemic. Uncertainty about the economic recovery is keeping banks cautious, as the threat of new variants such as Omicron, as well as supply chain issues, labour shortages and rising inflation, are all cause for concern.

“It’s not over. It’s important to keep your risk-management hat on with remaining uncertainties in the market. It’s present, and you can see how it comes up and volatility hits the market very suddenly,” Laurent Ferreira, who took over as National Bank’s CEO on Nov. 1, said in an interview. “We’re going to remain on our toes here.”

In the quarter that ended Oct. 31, RBC earned $3.9-billion, or $2.68 a share, compared with $3.2-billion, or $2.23 a share, in the same quarter last year. After adjusting for certain items, the bank said it earned $2.71 a share, whereas analysts expected $2.81, according to Refinitiv.

“Overall, this is not the result that we expected, but we continue to believe that [RBC] has more upside to a pandemic-related recovery than the market is giving it credit for,” said Meny Grauman, an analyst at Scotia Capital Inc., in a note to clients.

Over the same period, National Bank earned $776-million, or $2.19 a share, compared with $492-million, or $1.36 a share, a year ago. Adjusted earnings per share were $2.21, just shy of the $2.24 analysts predicted.

National Bank’s share price fell 3.5 per cent to $95.84 on the Toronto Stock Exchange Wednesday, while RBC’s shares declined 0.4 per cent to $125.74.

Large increases in mortgage balances and rebounding commercial lending drove relatively strong retail banking earnings. Profit from RBC’s personal and commercial banking arm was $2-billion, up 25 per cent year over year. Mortgage balances were up 12 per cent as hot housing markets stayed hot, but the bank is facing “increased price pressure from competition,” said Neil McLaughlin, the head of personal and commercial banking.

National Bank’s personal and commercial banking division also performed well, with profit of $353-million, up 42 per cent from a year ago. For the full fiscal year, residential mortgage balances increased 11 per cent and commercial loans rose 18 per cent.

By contrast, returns from capital markets sagged, as a slow summer for trading largely offset a busy quarter for mergers and acquisitions. Profit of $920-million in RBC’s capital markets unit was up 10 per cent year over year but still lower than in each of the past three quarters.

Financial markets profit of $208-million at National Bank was unchanged year over year and down 8 per cent from the third quarter, as revenue from fixed-income securities fell 49 per cent from the lofty levels reached last year.

“August and September were quite soft, and I think you saw that across the industry,” Mr. Ferreira said. “That was definitely a factor in revenues for the end of the year.”

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.