RBC beats analysts’ forecasts despite drop in first-quarter profit

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Royal Bank of Canada RY-T posted a drop in first-quarter profit as it set aside more loan-loss reserves amid deteriorating economic conditions, but it outperformed analyst expectations as higher interest rates boosted fixed-income trading.

RBC and National Bank of Canada NA-T joined most of their peers in recording lower earnings in the quarter as clients absorbed higher borrowing costs and lenders set aside more funds for bad loans.

“While interest rates may be peaking, they may remain higher for longer as tight labour markets and other supply imbalances keep inflation high and constrain economic and market activity,” RBC chief executive officer Dave McKay said during a conference call with analysts.

RBC earned $3.2-billion or $2.29 a share in the three months that ended Jan. 31. That compared with $4.1-billion or $2.84 in the same quarter last year. Adjusted to exclude certain items, including tax-related adjustments, the bank said it earned $3.10 a share, edging out the $2.94 analysts estimated, according to Refinitiv.

RBC is the fourth major Canadian bank to report earnings for the fiscal first quarter, with National Bank also posting results on Wednesday. Canadian Imperial Bank of Commerce CM-T and Bank of Montreal BMO-T also posted lower profit that still beat analyst estimates, while Bank of Nova Scotia BNS-T reported lower-than-expected results. Toronto-Dominion Bank TD-T is set to post its financial results on Thursday.

RBC set aside more funds to cover sour loans than analysts had expected. The bank posted $532-million in provisions for credit losses, up from the $105-million it reserved in the same quarter a year earlier.

Montreal-based National Bank also posted a drop in earnings, while topping analyst estimates on loan-loss provisions that rose less than expected. In the quarter, National Bank set aside $86-million in provisions for credit losses. In the same quarter last year, it had a recovery of $2-million in provisions.

The Montreal-based lender earned $881-million or $2.49 a share in the three months that ended Jan. 31. That compared with $930-million or $2.64 in the same quarter last year. Adjusted to exclude certain items, the bank said it earned $2.56 a share. That beat the $2.37 analysts expected, according to Refinitiv.

“The uncertainty is really around the path of inflation and how interest rates react, as well as how the tight labour market reacts in the near future,” National Bank CEO Laurent Ferreira said in an interview.

RBC’s revenue climbed 16 per cent to $15.1-billion in the quarter, boosted by a spike in its global markets division as higher interest rates boosted bonds and fixed-income trading. That offset a slump in corporate and investment banking as capital markets profit rose 9 per cent to $1.22-billion. But that bump was largely fuelled by market volatility, and trading activity typically picks up during the bank’s first-quarter earnings, RBC head of capital markets Derek Neldner said on the conference call.

RBC’s share price slumped 3.6 per cent on Wednesday as investors shunned narrowing net interest margins and rising expenses.

“It is hard to get too negative on a 5 [per cent earnings-per-share] beat, but certainly our view of the quarter is coloured by the fact that the bank’s capital markets business did all the heavy lifting with a record trading quarter,” Scotiabank analyst Meny Grauman said in a note to clients. “The problem is that other parts of the business missed the mark,” including costs and lending margins, he added.

As the bank hired staff and invested in technology, expenses in the quarter surged 17 per cent to $7.68-billion. Inflation also caused an increase in salaries and in fees from third-party suppliers, as well as a pickup in travel and conference spending from slow activity during the pandemic, according to chief financial officer Nadine Ahn.

“When you look at technology spend, it’s been a huge contributor to client acquisition,” Ms. Ahn said in an interview. “The focus going forward is that we’re very diligent in terms of what that next dollar of tech spend is, and what it’s going to add in terms of value.”

Lending margins have also been thrust into the spotlight as higher rates push homebuyers and borrowers to the sidelines. RBC’s net interest margin – the difference that the bank earns on loans and pays on deposits – tumbled nine basis points from the previous quarter to 1.47 per cent. (One hundred basis points equal one percentage point.)

While earnings in its retail arm benefited from loan growth, with profit rising 8 per cent from a year earlier, lending margins were offset by weaker lending margins in its U.S. division. Customers also transferred money into longer-term savings accounts to take advantage of higher interest rates. These are costlier for banks than cheaper deposit products, such as chequing accounts, and put pressure on lending margins.

Investors rewarded National Bank as it bucked the trend, boosting the stock 1.6 per cent in Toronto on Wednesday. The lender posted a spike in its net interest margin from the previous quarter, benefiting from higher interest rates. But waning demand for loans could temper margins this year.

“There is so much uncertainty depending on interest rates,” National Bank chief financial officer Marie Chantal Gingras said in an interview, adding that clients could start stashing more money away in high-interest savings products.