RBC’s third-quarter profits blow past analysts’ estimates

Royal Bank of Canada’s quarterly profit came in well above analysts’ estimates, as it set aside less money than anticipated for soured loans and reported strong numbers for its Canadian business.

The Toronto-based bank’s fiscal third-quarter profit rose to $4.48-billion, or $3.09 per share, for the three months that ended July 31. That was up from $3.86-billion, or $2.73 per share, from the same quarter the previous year.

Adjusted to exclude certain items, RBC RY-T said it earned a record $3.26 per share, which was well above analysts’ consensus estimate of $2.95.

RBC, Canada’s largest bank by market capitalization, held its quarterly dividend steady at $1.42 per share. That’s 7 cents higher than the same period in the previous year.

Provisions for credit losses, or money the bank sets aside to cover bad loans, were $659-million, up $43-million or 7 per cent from a year ago. The bank attributed the increase mainly to higher provisions in personal and commercial banking, offset by lower provisions in capital markets and wealth management.

The provision number came in below analysts’ estimates of $926-million. When a bank sets aside less money for future loan losses – an expense on the income statement – its earnings improve.

Banks make provisions both for loans where the borrower is making timely payments – called “performing” – and loans where the borrower has fallen behind, called “impaired.”

RBC’s provisions for losses on performing loans of $42-million decreased by $78-million, or 65 per cent from a year ago. RBC attributed this largely to changes to the models it uses to make forecasts about how loans will perform.

Meanwhile, provisions for losses on impaired loans of $623-million increased by $124-million, or 25 per cent. The bank made higher provisions in its Canadian banking portfolios but lower provisions in capital markets.

RBC’s recent earnings are the first to include HSBC Bank Canada for a full quarter, which it acquired in late March in the largest domestic banking takeover ever recorded. HSBC contributed $239-million to RBC’s net income this quarter.

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In a conference call Wednesday morning, Dave McKay, president and chief executive officer of RBC, said he was impressed by the strength of HSBC, particularly its balance sheet and client engagement.

Neil McLaughlin, head of personal and commercial baking at RBC, said the bank has seen an uptick in appointments, renewals and mobile adoption since integrating with HSBC and client attrition remains well within estimates.

“Obviously, not to say that there’s no attrition, but it’s something we’re feeling quite comfortable with,” he said.

RBC’s wealth-management business has already seen $100-million of assets under management come in from HSBC clients, Mr. McLaughlin added.

Mr. McKay expressed caution about Canada’s macroeconomic environment in his initial remarks, pointing towards higher interest rates and rising unemployment rates impacting consumer spending and business investment. While these factors have led to moderating inflation, aside from housing prices, they has also caused lower GDP per capita, he said.

This later prompted a question by BMO Nesbitt Burns Inc. analyst Sohrab Movahedi about how this impacted the bank’s outlook for loan-loss provisions.

In response, Mr. McKay said his comments were meant to express the uncertainty and volatility of the macroeconomic environment, with consumers not repricing their mortgages, for example. But he also said RBC is well positioned to respond to such shifts.

“There are some unknowns out there that we’re trying to manage,” he said, adding, “We feel we can manage them quite well.”

Earnings in RBC’s key Canadian banking operations rose 17 per cent from a year ago to $2.49-billion.

Credit card balances were up 13 per cent and mortgage growth was up 12 per cent.

The bank’s credit and bank-card customers spent 7 per cent more in the third-quarter than they did in the same quarter the year prior, driving more fee revenue.

Capital markets had a strong quarter, with earnings rising by 23 per cent to $1.17-billion, which the bank said was primarily driven by increased revenue in corporate and investment banking. Insurance-division profits decreased 21 per cent from a year ago, to $170-million.

Results in RBC’s wealth-management arm increased 30 per cent from a year ago to reach $862-million. The bank collected more fees for managing clients’ money, partly because the division brought in more assets and partly because markets increased the value of their portfolios.

The bank’s capital reserve increased, with its common equity Tier 1 capital ratio – a measure of the bank’s resilience against shocks – rising from 12.8 per cent in the second quarter to 13 per cent. The capital ratio was 14.1 per cent at the end of 2023′s third quarter.

National Bank of Canada NA-T also exceeded analysts’ expectations on Wednesday, reporting a profit of $1.03-billion, or $2.89 per share. This comes a week before a vote to determine whether the Montreal-based lender will be able to complete its proposed $5-billion takeover of rival Canadian Western Bank CWB-T.

On Tuesday, Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T both reported lower third-quarter profits, partly due to increases in their provisions for loan losses. BMO missed analyst expectations and its shares took a more than 7 per cent tumble during the day’s trading. Meanwhile, Scotiabank’s share price increased 2.5 per cent after beating expectations.

Editor’s note: A previous version of this article incorrectly stated that Royal Bank of Canada increased its dividend from the previous quarter. The dividend stayed the same. This version has been updated.