RBC ready to wait out oil price storm

Al­berta a fac­tor in boost­ing loan loss pro­vi­sions by 52%

National Post (Latest Edition) - - FINANCIAL POST - Bar­bara Shecter

Royal Bank of Canada set aside more pro­vi­sions for credit losses tied to oil and gas woes in the first quar­ter, but ex­ec­u­tives told an­a­lysts that even in the bank’s worst- case sce­nario stress tests, losses aren’t ex­pected to rise above his­toric peaks.

Pro­vi­sions for credit losses rose to $410 mil­lion in the quar­ter that ended Jan. 31, up 52 per cent from a year ear­lier, largely due to the low oil price en­vi­ron­ment.

Gross im­paired loans in the oil and gas sec­tor rose to $ 310 mil­lion from $ 156 mil­lion in the pre­vi­ous quar­ter, and were just $ 5 mil­lion a year ago. Royal also took pro­vi­sions in its per­sonal lend­ing port­fo­lios.

“Retail pro­vi­sions i ncreased by 24 per cent in the quar­ter, with in­creases in both credit cards and other per­sonal loans,” said John Aiken, an an­a­lyst at Bar­clays Cap­i­tal.

“Weak­ness from Al­berta [ was] cited as the most sig­nif­i­cant fac­tor.”

Still, Canada’s l argest bank by mar­ket cap­i­tal­iza­tion re­ported record prof­its in per­sonal and com­mer­cial bank­ing, and the wealth man­age­ment seg­ment posted a 32 per cent in­crease in net in­come to $ 303 mil­lion, helped by last year’s pur­chase of Los An­ge­les- based City Na­tional Corp.

Royal raised its div­i­dend by three per cent to 81 cents per share.

But the per­for­mance of the bank’s cap­i­tal mar­kets and in­sur­ance busi­nesses con­trib­uted to a slight de­cline in over­all net in­come to $ 2.4 bil­lion ($ 1.58 per share) in the quar­ter. The ad­justed profit, a mea­sure­ment that ex­cludes some items, came in at $ 1.64 a share, two cents short of an­a­lyst ex­pec­ta­tions.

Rev­enue fell three per cent to $9.36 bil­lion.

In­vestors re­acted to the earn­ings re­port by knock­ing more than five per cent off Royal Bank’s share price in mid-day trad­ing.

But the shares re­bounded in the af­ter­noon and closed down 2.61 per cent, at $ 67.81, on the Toronto Stock Ex­change.

“While the de­te­ri­o­rat­ing trend in cor­po­rate credit losses aligns with our ex­pec­ta­tions, this quar­ter’s out­come was worse than we an­tic­i­pated,” said Peter Rout­ledge, an an­a­lyst at Na­tional Bank Fi­nan­cial, in a note to clients.

On a morn­ing con­fer­ence call with an­a­lysts, Royal Bank ex­ec­u­tives said they are pay­ing care­ful at­ten­tion to their en­ergy ex­po­sure and con­duct­ing in­ter­nal stress tests that sim­u­late the im­pact of var­i­ous sce­nar­ios.

Among th­ese are mount­ing job losses, na­tional house price de­clines of 25 per cent, oil at US$ 25 a bar­rel, and eco­nomic “con­ta­gion” from the oil- de­pen­dent provinces of Al­berta and Saskatchewan to the rest of Canada.

Royal Bank’s chief risk of­fi­cer Mark Hughes char­ac­ter­ized the most se­vere sim­u­la­tion as an “un­likely sce­nario.” But he said even if it were to ma­te­ri­al­ize and pro­vi­sions for credit losses were to in­crease sub­stan­tially, they are com­ing from record low lev­els and would not out strip his­tor­i­cal peaks.

“How is that pos­si­ble?” asked Gabriel Deschaine, an an­a­lyst at Canac­cord Ge­nu­ity Corp. “All that does is re­sult in your his­tor­i­cal loss rate, that’s what you’re say­ing?”

Hughes said the as­sump­tions in the stress tests are show­ing that out­come.

“It’ s a pos­i­tive, in a sense,” he said.

How­ever, he cau­tioned that if re­al­ity doesn’t mir­ror any one of the stress test in­puts, the re­sults would be dif­fer­ent.

Aiken, the Bar clays Cap­i­tal an­a­lyst, also praised Royal Bank af­ter the call for tak­ing what he called a“proac­tive stance on en­ergy” rel­a­tive to its Cana­dian bank­ing peers. How­ever, in a note to clients Wed­nes­day, he cau­tioned that the bank’s en­ergy re­serves lag rel­a­tive to global peers, and sug­gested that Royal’s “weak­en­ing con­sumer book” is ripe for fur­ther pro­vi­sions.

On Wed­nes­day’s con­fer­ence call, RBC ex­ec­u­tives said the ris­ing un­em­ploy­ment rate in Al­berta, which now ex­ceeds the na­tional av­er­age, ap­pears to be hav­ing an im­pact on con­sumers.

It is ev­i­dent when it comes to ris­ing delin­quen­cies in credit card pay­ments, but auto loans, un­se­cured lines of credit, and stu­dent loans are also af­fected, they said.

Na­tional Bank’s Rout­ledge ques­tioned whether the bank’s stress test­ing was se­vere enough, par­tic­u­larly when it comes to the is­sue of house prices.

“The gran­u­lar­ity ... pro­vided into its stress- test­ing strikes us a step for­ward,” he said, “but whether RY has made its stress- test se­vere enough re­mains an open ques­tion.”

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