National Post (National Edition)
RBC calls for cooling of GTA homes market
TORONTO • The CEO of Canada’s largest bank says it is time to consider bringing measures that cooled Vancouver’s sizzling housing market to Toronto.
Dave McKay, chief executive of Royal Bank of Canada, cited a “somewhat dangerous mix of catalysts” in Canada’s largest city, such as ultra-low rates, lack of supply of single-family homes, speculation, and foreign money coming in at an increasing rate since Vancouver instituted measures to dampen its market, including a foreign-buyers’ tax.
“You’re seeing 20-percent house price growth in a market where you shouldn’t see that much,” McKay said in an interview. “That’s concerning. That’s not sustainable. Therefore, I do believe we are now at a point where we need to consider similar types of measures that we saw in Vancouver.”
The housing market in Toronto, along with geopolitical uncertainty in the U.S. and Europe, may be the only things that could give RBC’s CEO pause these days.
The bank on Friday posted a record $3-billion net income for its latest quarter, beating expectations with an increase of 24 per cent from a year earlier and showing strong growth across most divisions.
RBC reported diluted earnings-per-share of $1.97, up 39 cents compared to a year earlier. After adjustments, EPS was $1.87 compared to analyst estimates of $1.76, according to those surveyed by Bloomberg.
The bank also increased its quarterly dividend by five per cent to 87 cents per share, better than analysts had forecast.
“Overall, this feels to us a like a bit of a workmanlike quarter from Canada’s biggest bank,” CIBC Capital Markets analyst Robert Sedran said in a note to clients. “Canadian Banking did well, and so did the U.S. businesses (including the capital markets side). This is not the kind of quarter that changes an investment thesis, in our view, but rather one that supports our positive one.”
Canadian personal and commercial banking, excluding a gain on the sale of the U.S. operations of payments processor Moneris, rose eight per cent year-on-year to $1.3-billion. The capital markets segment saw net income of $662-million, up 16 per cent from a year earlier. Wealth management earnings rose 42 per cent from a year earlier, to $430-million.
This gain in wealth management was driven in part by earnings gains at City National, a Los Angeles bank popular with Hollywood celebrities which RBC acquired in 2015.
While concerns surrounding Canada’s housing market continue to bubble, RBC said Friday the underlying credit quality of its residential mortgage portfolio continued to be strong.
“Given accelerated house price appreciation in both of these markets, we continue to closely monitor this portfolio with extra due diligence for higher value mortgages,” said Mark Hughes, RBC’s chief risk officer, on a call with analysts.
“Overall, we remain comfortable with our residential mortgage portfolio, given our clients’ ability to repay, and the underlying credit quality of this portfolio.”
Oil prices are no longer top of McKay’s mind the way they were a year ago, but they remain below 2014 peaks.
“While oil provinces are stabilizing, we expect employment trends to lag the recovery in the oil and gas sector,” said Hughes. “However the impact of elevated unemployment rates in oil-exposed regions continue to be offset by lower-than-average unemployment rates in the larger markets of Ontario and B.C.”
Still, credit was a nonissue this quarter, analysts said. Provisions for credit losses (PCL) came in almost $100-million below expectations at $294 million, said Barclays analyst John Aiken. This was an 18-per-cent drop from the previous quarter.
The bank’s closely watched capital measure, the CET1 ratio, rose 20 basis points to 11 per cent — a capital level which RBC says gives it “flexibility.”
RBC is continuing to invest to drive organic growth at City National and its U.S. wealth management business, McKay said, ahead of an anticipated economic bump south of the border from U.S. President Donald Trump’s pro-growth policies, such as deregulation and corporate tax cuts.
However, the lack of clarity around the details of Trump’s policies — as well as in Europe in the wake of Brexit and elections several countries including Germany — leaves RBC in a holding pattern, he said.
“We are not holding back growing our business, nor are we getting too far ahead of this,” said McKay, referring to RBC’s U.S. growth strategy and City National. “We are in a wait-and-see mode and trying to understand the impacts before we do anything. Again, it’s uncertainty. Some business groups can’t move forward until they have a greater degree of clarification there.”
RBC also announced a shuffle. After three years as the bank’s group head of personal and commercial banking, Jennifer Tory will take on the role of chief administrative officer as of May 1. Neil McLaughlin, executive vice-president of business financial services for personal and commercial banking, will replace Tory.