National Post (National Edition)
U.S. wealth unit helps lift bank to $3.1B profit
WE EXPECT A HIGHER CONTRIBUTION FROM THIS BUSINESS TO OVERALL EARNINGS IN THE FUTURE
Royal Bank of Canada’s wealth management business in the United States posted strong gains in the third quarter, and the bank says it expects the unit’s contribution to overall profitability will only increase.
RBC president and CEO Dave Mckay said Wednesday that its U.S. wealth management operations now account for almost 60 per cent of total revenue from south of the border.
“And we expect a higher contribution from this business to overall earnings in the future,” Mckay said on a morning conference call, where he also noted that RBC had added commercial and private bankers to teams in Atlanta and Nashville.
RBC, Canada’s biggest bank, reported on Wednesday record net income of $3.1 billion for the three months ended July 31, an 11-per-cent increase over the prior year.
The U.S. represented about 18 per cent of RBC’S total earnings in the past 12 months, which was up from 15 per cent from a year ago, the bank’s investor presentation said. The U.S. wealth management unit, including Los Angeles-based City National Bank, posted profit of US$202 million, up 44 per cent over last year.
Among other factors, RBC said its quarterly results benefited from higher interest rates — the Bank of Canada and the U.S. Federal Reserve have been hiking their benchmarks — which helped the lender overcome increased spending on technology and business growth.
RBC is also counting on continued loan growth at City National, which announced earlier this month that it had acquired a “provider of innovative (software as a service) solutions for complex payments in the entertainment industry.”
City National said it had previously taken part in a $10-million funding round for the company, Exactuals, but terms of the latest acquisition were not released.
“The company is a unique payments provider for the entertainment industry, leveraging artificial intelligence tools to provide innovative payments solutions to clients of all sizes,” Mckay said.
Barclays Capital analyst John Aiken added that RBC “demonstrated strong cost containment ... and impressive results in both domestic retail and U.S. Wealth Management, including a strong contribution from City National.”
Economic growth and employment trends in North America remain strong as well, according to Mckay.
“All of our large businesses saw strong earnings growth in the third quarter and we had market-share gains in our core franchises,” he said. “Although geopolitical and trade risks have risen, our core markets remain stable.”
The bank’s focus on the U.S. comes after a cut to that country’s corporate tax rate and as Canadian consumers back home grapple with high levels of debt. However, the shift also comes amid ongoing uncertainty created by ongoing renegotiation of the North American Free Trade Agreement.
RBC’S third-quarter earnings even included $90 million in provisions for credit losses on performing loans that could have trade-related ties.
“Though our base economic outlook remained unchanged, we have reflected cautionary elements in our provisions as external risks to the macroeconomic outlook have risen, with volume growth also contributing to the increase,” the bank noted.
Meanwhile, RBC chief financial officer Rod Bolger noted that gains from future rate hikes could be tempered somewhat by the battle among Canadian lenders in the mortgage market. That battle has come in the wake of the introduction of new mortgage rules, which appear to have cooled the housing market, but caused a pricing skirmish to break out.
On the Canadian housing market in general, RBC said in its report to shareholders that they “are beginning to stabilize after a slowdown earlier this year when new mortgage regulations took effect.” Those new regulations included a stress test for uninsured home loans that was anticipated to curb the growth of mortgage originations.
In addition to the record profit, RBC also boosted its quarterly dividend by four cents, to 98 cents per share. Canaccord Genuity analyst Scott Chan wrote that RBC management “painted a strong near-term outlook, which complemented the above-average dividend increase of 4 (per cent).”
The latest results from RBC kicked off another earnings season for Canada’s big banks, with Canadian Imperial Bank of Commerce set to report results on Thursday and the rest of the Big Six to to come next week.