FINANCE RBC posts record results
Corporate lending falls to lowest level in over 2 years while profits hit $11.5B
Royal Bank of Canada showed it can defy expectations even while being more selective in lending.
The country’s second-largest bank posted record profit of $11.5 billion for the fiscal year ended Oct. 31 despite shrinking its corporate-loan book to its lowest level in more than two years. Royal Bank has taken a step back in corporate lending after spending the first half of the decade pushing to gain more large clients.
Total corporate loans dropped to $83 billion, down from a peak of $89.7 billion in the first quarter of 2016 and the lowest since the third quarter of 2015, according to financial results posted Wednesday. Average balances of corporate loans have declined for seven straight quarters.
A weakening greenback relative to the Canadian currency explains part of the decline, because some of RBC’s corporate loans are in U.S. dollars, chief financial officer Rod Bolger said. But the bank is also being more discriminating, he said.
“We also have focused on ensuring that we are achieving the relationships with those lending customers that we expected to achieve vis-a-vis advisory, underwriting and other relationship revenues,” Bolger said.
Royal Bank’s 2018 forecast includes a “plan to grow the capital markets loan book at a modest pace with an increased focus on higher fee-based revenue,” the company said in a presentation on its website. The bank also expects “double-digit” loan growth at its City National U.S. banking operation, and “mid-single-digit” mortgage growth in Canadian banking for next year.
The bank saw an uptick in demand for mortgages this fall as borrowers look to secure loans before tougher rules — including a stress test — take effect in the new year, another bank executive said.
Neil McLaughlin, RBC’s head of personal and commercial banking, told analysts there is a heightened awareness of the banking regulator’s revised mortgage underwriting guidelines, which is expected to reduce the maximum amount that homebuyers who don’t need mortgage insurance will be able to borrow.
“We have seen a little bit of pull forward this fall,” McLaughlin told analysts. “As we talk to customers, some of them are surprisingly aware of what the stress test is about and have decided to move more quickly.”
The revised guidelines, called B-20, require would-be homebuyers to prove they can still service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the fiveyear benchmark rate published by the Bank of Canada. An existing stress test requires those with insured mortgages to qualify at the Bank of Canada benchmark fiveyear mortgage rate.
Meanwhile, the Bank of Canada has raised interest rates twice in recent months to the current overnight lending rate of one per cent. On Tuesday, the central bank said in its semi-annual review of the financial system that the steady climb of household debt and stillhot housing markets remained top vulnerabilities. However, it said the new mortgage guidelines would help mitigate the risks associated with low-ratio mortgages (with down payments of 20 per cent or more).
McLaughlin told analysts Wednesday that more than 90 per cent of its mortgages are already underwritten at these higher rates, and expects the overall impact of the guidelines to be “fairly modest.”
“The vast majority of our portfolio and loan originations are not really going to be impacted,” he said.
The bank’s capital-markets unit tripled lending to its largest corporate clients between 2010 and its 2016 peak, giving it an edge in winning other business including arranging stock sales and advising on takeovers. Such loans help firms bolster balance sheets, expand operations and finance acquisitions.
Royal Bank posted $584 million of earnings for its capital-markets business in the fourth quarter, up 21 per cent from a year earlier, helped by lower provisions for credit losses and higher recoveries. Lower provisions also contributed to earnings gains in personal-andcommercial banking and wealth management as the Toronto-based lender reported profit that topped analysts’ estimates.