RBC gains on credit worthiness
Lower-than-expected provisions for energy loan losses helped propel Royal Bank of Canada to a thirdquarter profit that exceeded expectations Wednesday, but it was what some predict will bring the next wave of credit problems — a housing downturn — that generated the most noteworthy discussions with executives.
On a conference call with analysts, Royal Bank chief executive Dave McKay said Canada’s largest bank is under-represented in the red hot Vancouver housing market and tends to have clients that are among the most credit worthy. He added that the markets are being watched closely, and said Royal could react quickly in the event of a sudden downturn.
“From what we can tell, we’re under-indexed to the growth in that marketplace right now. So I think that’s the best proof point that we’re being careful in the deals that we select and the business that we do,” McKay said on the morning conference call.
The underrepresentation “should be tangible evidence that we are reacting to potentially a heated housing price market where … higher unemployment rates would have a harsher impact on the potential portfolio,” McKay added.
Royal has also bolstered insurance on its portfolio, with 48 per cent insured, up from 46 per cent a year ago, executives said.
In a note sent to investors after the call, National Bank Financial analyst Peter Routledge said high house prices in Vancouver and Toronto are acting as a “firewall” against deteriorating consumer credit in those markets, and cautioned that could change in a downturn.
“Households generally do not default on their debts when their home values are up 15 per cent to 25 per cent year-over-year,” the analyst said, noting that strength in Royal’s consumer credit in Toronto and Vancouver more than offset weakness in Alberta in the third quarter as the western province continued to struggle from the fallout of low oil prices.
“When house prices in those two cities stabilize or, more problematically, decline, then we expect a material increase in loan losses,” Routledge wrote. He expects that a decline in real estate values would lead to lower consumption in those markets, which would in turn lead to higher unemployment, making it harder for people to pay credit card debt and other unsecured loans.
On the energy front, analysts said Royal Bank performed better than expected in the third quarter, which ended July 31. The bank set aside provisions for credit losses of $318 million, a 31 per cent decline from a year earlier and well below consensus analyst expectations of $442 million