Royal Bank warns of headwinds following profit beat

Royal Bank of Canada warned on Wednesday that mortgage growth, trading and underwriting activity could slow, while loan delinquencies and impairments rise in fiscal 2021, after posting a better-than-expected profit in the fourth quarter of 2020.

Canada's biggest lender is now giving increased weight to its pessimistic economic scenario, which expects the Canadian unemployment rate will stay above nine per cent until March 2023, and home prices will drop eight per cent and remain depressed until late 2023, executives said on a conference call.

The Canadian housing market's surprising strength — sales jumped 32 per cent in October, while the average price rose 15.2 per cent — even as the economy slowed and unemployment spiked, helped drive a 11-per-cent increase in mortgages in 2020.

“We expect mortgage growth to slow going forward as pentup housing demand begins to cool,” Royal Bank CEO Dave McKay said on the call.

Royal Bank joined rivals including Bank of Nova Scotia, Bank of Montreal and National Bank of Canada in reporting better-than-expected fourth-quarter profits as it set aside less money than analysts had estimated to cover future bad loans.

That came after three straight quarters of adding to provisions for credit losses, including on performing loans, that have built up record reserve levels.

But should the pessimistic scenario materialize, allowances on performing loans would have to increase by about 18 per cent, Royal Bank chief risk officer Graeme Hepworth said.

Amid short-term headwinds like the second coronavirus pandemic wave, and the end of loan deferrals and government support, “we do see a world where delinquencies and ... impairments will start to increase through 2021,” Hepworth said.

That would come as trading and underwriting activity moderates, executives said.