RBC yields ‘surprise dividend’
Wealth management unit performs well, mortgage business grows during Q3
Royal Bank of Canada boosted its quarterly dividend more than expected after double-digit earnings growth at the bank’s wealth management division helped bolster third-quarter results.
Canada’s largest bank by market capitalization posted overall earnings of $2.8 billion for the period ending June 30.
Earnings per share after onetime items — including last year’s sale of a home and auto insurance division — were $1.89, two cents above analyst estimates.
The quarterly dividend was boosted by four cents, or five per cent, to 91 cents.
“We view the dividend surprise … as a positive signal to RY’s (Royal Bank’s) near-term outlook,” Scott Chan, an analyst at Canaccord Genuity, said in a note to clients.
Part of the performance in RBC’s wealth management division was attributed to City National, a U.S. private banking and wealth management firm acquired in 2015. Wealth management net income rose 25 per cent to $486 million.
The Canadian bank’s domestic franchise also performed well during the quarter, with Canadian personal and commercial earnings up five per cent to $1.35 billion. The bank’s mortgage business grew, albeit at a slower pace than the commercial segment.
During a conference call with analysts, RBC chief executive Dave McKay said he continues to support recently instituted policy measures aimed at cooling housing markets in Toronto and Vancouver to more sustainable growth levels.
“We welcome the changes that have happened,” he said, adding that RBC executives are watching to see if recent measures, such as a 15-per-cent foreign buyers’ tax, continue to dampen sales growth and prices in those markets.
A similar measure adopted by the British Columbia government had an early impact in Vancouver, but there was a subsequent rebound months later.
Other measures aimed at cooling Canada’s housing market, such as a regulatory requirement that buyers qualify at higher interest rates than their contracts specify, are not expected to have a large impact on RBC because internal underwriting standards already require high qualification thresholds in many cases, the bank’s executives said.
One area of weakness for RBC in the third quarter was its capital markets division. Net income fell four per cent to $611 million. The bank said fixed income trading results were lower due to reduced market volatility, while costs were higher as a result of changes in the timing of deferred compensation. This was partially offset by higher equity trading results and a lower effective tax rate.
Gabriel Dechaine, an analyst at National Bank Financial, said the quarter could be defined in one word: resilience. In a note to clients, the analyst noted that the bank managed to achieve adjusted earnings growth of seven per cent despite a “substantial” seven per cent pickup in expenses and a weak trading revenue environment.
“With higher rates, stable credit performance and normalization of expense growth acting as tailwinds over the next year, we believe RY should generate above average EPS (earnings) growth in the group,” Dechaine wrote.
Meanwhile, the bank’s decision to close 25 branches over the past year, mainly in city centres, is having a minimal impact on clients who increasingly favour an array of digital banking options, the company said.
Neil McLaughlin, head of Canadian personal and commercial banking, says the decision to shutter an overabundance of locations in some areas was aimed at redirecting costs of its operations.
“The core focus is thinning out (our) dense urban branch footprint where we’re not really impacting the convenience for customers,” he told analysts. “You may go from a two-minute drive to your branch to a three-minute drive.”
It’s part of a broader plan that included announcing 450 job cuts in June, mainly at its headquarters, and reinvesting in areas like data analytics and artificial intelligence.
Royal Bank was the first of Canada’s Big Five to report third-quarter earnings. Canadian Imperial Bank of Commerce reports on Thursday, with the other three largest banks, as well as National Bank of Canada, following next week.
The core focus is thinning out (our) dense urban branch footprint where we’re not really impacting the convenience for customers.