National Post (National Edition)
RBC profit comes up short, but CEO says bank poised for growth.
Net income down 2 per cent in fourth quarter
TORONTO • Royal Bank of Canada missed analyst earnings estimates for the fourth quarter, largely as a result of lower trading revenues, and scaled back its annual return-on-equity target amid concerns about low interest rates and potential changes to capital requirements.
But Canada’s largest bank says it is poised for improved performance in the coming year, RBC chief executive Dave McKay told analysts on a conference call Wednesday.
“We feel we’re exiting the year with enormous organic momentum,” McKay said. “We continue to look for opportunities to return capital to shareholders.”
RBC’s fourth quarter net income of $2.5 billion, or $1.65 a share, was down two per cent from a year ago. Analysts had been expecting earnings of $1.71 a share for the quarter ending Oct. 31.
“We see these as a solid set of results, with the miss (to consensus analyst estimates) driven by volatile trading, offset by better performances in some of the steadier business,” Citigroup analyst Ian Sealey said in a note.
McKay told analysts the bank stands to benefit from recent policy changes aimed at cooling Canada’s real estate market, where prices have been soaring in some regions as consumers load up on debt in the low interest rate environment.
“There are smaller players in the market whose funding model will be impacted, and you should expect to see some channel shifts — we would hope to be the beneficiary of that with our expanded sales force,” he said on the conference call. “How that plays out, it’s hard to predict, but certainly there are more challenges to some of the smaller players in the market who have relied on traditional funding models.”
He said the policy changes, which include more stringent qualifications for mortgage insurance, are a welcome means to slow down growth in some “very hot” markets and ensure a “sustainable, long-term” mortgage market in this country.
“In the absence of any monetary tightening in Canada, we need the policy changes we’re seeing to slow down some very hot markets out there,” McKay said.
Royal Bank missed its annual return on equity (ROE) target of 18 per cent or higher, coming in at 16.3 per cent in fiscal 2016. The bank has now revised that target to an ROE of 16 per cent or higher.
McKay said there were a combination of drivers behind the decision, including “significant rate uncertainty” that can weigh on earnings. The bank is also awaiting decisions from global regulators that could require big banks to hold larger capital cushions.
“We’re carrying a little more capital for the uncertainty of those, and we’re reducing our expectations of ROE given that uncertainty going forward,” McKay said. “We expect to grow back to that 18 per cent but it’s going to take a little bit longer to do that with the capital and interest-rate environment.”
John Aiken, a banking analyst at Barclays Capital, said Royal’s fourth-quarter earnings miss can be “largely chalked up to seasonality,” and he expects some of the lost ground in capital markets to be recovered in the coming quarters. However, in a note to clients, he said the weakness does not bode well for Canada’s remaining big banks as they report year-end financial results later this week and next.
The share price of four of Canada’s five largest banks touched 52-week highs Tuesday after Bank of Nova Scotia reported earnings that beat analyst expectations.
Aiken noted that Royal also took larger provisions for credit losses in both capital markets and retail banking, but he said credit quality actually improved outside energy and international retail. The rise in domestic retail provisions was due to a one-time change in methodology and is not expected to be repeated, the analyst said.
Still, Peter Routledge, an analyst at National Bank Financial, said investors should not ignore troubling trends, including a deterioration in the performance of RBC’s Canadian personal loan credit portfolios — both sequentially and yearover-year.
“Despite management’s declaration about resilient household credit performance in Alberta and B.C., we cannot ignore the sustained credit performance deterioration of personal loans” since the second quarter of fiscal 2014, Routledge wrote in a note to clients. He said this is especially noteworthy because it took place against a backdrop of rising house prices in Toronto and Vancouver.
“We now observe elevated levels of fragility in the Vancouver real estate market, which will exacerbate the consumer credit challenges ... This signals the potential for further erosion to personal loan credit performance,” Routledge wrote.