Rare earnings miss for Big Six bank

by Doug Alexander

Dwindling dealmaking and testy markets caught up with Royal Bank of Canada, leading to the company’s first quarterly profit decline since the start of 2018.

The bank’s capital-markets division had its worst quarter in two years for profit and revenue, with lower investment-banking fees and higher provisions for soured corporate loans causing a 12% drop in earnings for the business. The decline at RBC Capital Markets, which accounts for about 20% of the bank’s overall earnings, undercut gains at the consumer banking and wealth divisions, and earnings for the fiscal fourth quarter missed analysts’ expectations.

“This was a rare miss for Royal,” Barclays Plc analyst John Aiken said in a note to clients. “Capital markets earnings were down on the back of lower advisory fees as well as higher provisions and expenses.”

RBC Capital Markets was hurt by a tough year for dealmaking, with the industry coping with a 15% decline in the value of mergers and acquisitions amid fewer transactions and a 6% drop in equity financings, hurting fee pools among investment banks worldwide. At Royal Bank, investment-banking fees fell 17% to C$428 million ($322 million) in the quarter, the lowest since the first quarter.

Trading revenue was C$706 million, the lowest in a year and down from the third quarter. RBC Capital Markets also set aside C$78 million for provisions, more than double the amount a year earlier and up 39% from the third quarter.

Overall, Royal Bank’s net income slipped 1.4% to C$3.21 billion in the three months through Oct. 31, its first decline since the first quarter of 2018. Adjusted per-share earnings were C$2.22, missing the C$2.27 average estimate of 14 analysts in a Bloomberg survey.

Record Year

Royal Bank still ended the year with profit of C$12.9 billion, extending a record streak that stretches back to 2011, though the pace of earnings growth is cooling. This year’s 3.5% earnings increase marked the slowest annual growth for the Canadian bank in a decade.

Also in the earnings report:

• Royal Bank is one of Canada’s most diversified banks, with worldwide operations in asset management and capital markets and ownership of Los Angeles-based City National Bank. Yet Canadian personal and commercial banking remains the lender’s biggest division. Earnings from Canadian banking rose 6.3% to C$1.56 billion in the quarter.
• Royal Bank is showing continued strength in its domestic mortgage business, which is the largest among Canada’s big lenders. Domestic mortgage balances rose 7.3%, the biggest year-over-year increase since 2016, to a record C$265 billion.
• Royal Bank’s $5 billion takeover of City National in 2015 has helped lift wealth management revenue over the past four years. Profit from wealth management rose 32% to C$729 million.
• The bank’s investor and treasury services division is seeing an even bigger drop in profit, with earnings declining 71% to C$45 million. The business had its worst quarter for earnings in at least two years.

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