Pedestrians walk past a Royal Bank of Canada branch at the corner of Yonge St. and Adelaide St. East on May 15. RBC’s profit jumped 7 per cent to $4-billion, or $2.74 a share, in the three months that ended April 30.Fred Lum/The Globe and Mail
Royal Bank of Canada’s RY-T share price surged after the lender posted second-quarter profit that beat analysts’ estimates on a boost from its capital markets business as it set aside lower-than-expected provisions for potentially sour loans and integrates its takeover of HSBC Bank Canada.
In March, RBC completed its $13.5-billion takeover of British HSBC Holdings PLC’s Canadian subsidiary – the largest domestic banking deal on record – marking the first quarter that Canada’s largest lender is reporting earnings that include the contribution from the country’s seventh-largest lender.
RBC’s profit jumped 7 per cent to $4-billion, or $2.74 a share, in the three months that ended April 30. Adjusted to exclude certain items, including transaction and integration costs from the HSBC Bank Canada acquisition, the bank said it earned $2.92 a share, topping the $2.75 a share analysts expected, according to S&P Capital IQ.
Shares of RBC climbed 5.2 per cent to $148.27, while the S&P/TSX Composite Banks Index rose 2.7 per cent Thursday in Toronto.
The HSBC deal is initially weighing on results as RBC absorbs its provisions for credit losses, reducing the bank’s profit by $51-million. But after one month of being incorporated into RBC, HSBC’s business contributed $63-million in net income after taxes.
Canada largest lender has seen some slight attrition from HSBC customers since the deal was announced in late 2022. Loan balances were down 4 per cent to $3.5-billion since September, 2022, which RBC said was within its expectations.
“Some clients actually chose to come to RBC a bit early – a net positive – and had both relationships and came to us and just wanted to sidestep the migration,” head of personal and commercial banking Neil McLaughlin said during a conference call with analysts. “I think each of the businesses feel good about retention.”
RBC said it is on track to meet its target cost savings of $740-million by combining HSBC’s platforms and services with its own.
Chief executive officer Dave McKay said that even after a drawn-out acquisition process that was delayed by regulatory and government approvals, the bank is “back on to the offence” with enough capital to continue investing in its businesses as it rejigs its strategy in the United States.
The bank raised its quarterly dividend by 4 cents to $1.42 a share. RBC also said it plans to repurchase 30 million shares.
Now that the bank has integrated HSBC, RBC booked a common equity tier 1 (CET1) ratio – a key measure of a bank’s ability to absorb losses – of 12.8 per cent, well above the regulatory minimum. Last quarter, before closing the HSBC transaction, RBC had a CET1 ratio of 14.9 per cent.
Since late 2022, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, has hiked the domestic stability buffer – a capital reserve that banks build to soften the blow of an economic downturn – to 3.5 per cent of a bank’s risk-weighted assets from 2.5 per cent. That has increased the minimum CET1 ratio to 11.5 per cent, prompting the banks to hold billions of dollars in excess capital.
“Second-quarter earnings removed one of the key concerns the market had with the bank: Relative capital levels post the HSBC Canada acquisition,” Jefferies analyst John Aiken said in a note to clients. “With a regulatory capital ratio close to 13 per cent and underscored by a buyback and dividend increase, these concerns should be put to rest.”
RBC is the final major Canadian bank to report earnings for the second quarter. Canadian Imperial Bank of Commerce also released earnings on Thursday that topped analyst estimates. Bank of Montreal posted a profit that fell below analysts’ expectations. Toronto-Dominion Bank, Bank of Nova Scotia and National Bank of Canada posted second-quarter results that beat analysts’ estimates.
In the quarter, RBC set aside $920-million in provisions for credit losses – the funds banks set aside to cover loans that may default. That was slightly lower than analysts anticipated, and included $672-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 set aside $600-million in provisions.
RBC is rejigging its strategy in the U.S., aiming to streamline its operations and boost cross-selling between its capital markets business, its wealth management unit and City National Bank.
The lender’s Los Angeles-based City National Bank, known as the Hollywood bank to the stars, posted a profit of US$48-million, a 92-per-cent jump from the same quarter last year. The subsidiary has struggled to turn a profit over the past year and faced a US$65-million fine and an order to implement reforms after a top U.S. regulatory found failings in many of City National’s internal controls and risk-management processes.
“There are a number of opportunities for us to simplify the business, whether it is selling non-core parts of CNB or taking out real estate – that all has positive run-rate benefits and positive shareholder value creation,” Mr. McKay said during a conference call with analysts.
“We have to complete remediation and start to bring our very significant cost structure down, which we plan to do. That will happen over the next roughly 18 months.”
In March, RBC said that it terminated chief financial officer Nadine Ahn for violating its code of conduct with an undisclosed “close personal relationship” with a colleague, which resulted in preferential treatment. Senior vice-president, finance and controller Katherine Gibson was tapped as interim CFO.