RBC ready to wait out oil price storm

Alberta a factor in boosting loan loss provisions by 52%

Royal Bank of Canada set aside more provisions for credit losses tied to oil and gas woes in the first quarter, but executives told analysts that even in the bank’s worst- case scenario stress tests, losses aren’t expected to rise above historic peaks.

Provisions for credit losses rose to $410 million in the quarter that ended Jan. 31, up 52 per cent from a year earlier, largely due to the low oil price environment.

Gross impaired loans in the oil and gas sector rose to $ 310 million from $ 156 million in the previous quarter, and were just $ 5 million a year ago. Royal also took provisions in its personal lending portfolios.

“Retail provisions i ncreased by 24 per cent in the quarter, with increases in both credit cards and other personal loans,” said John Aiken, an analyst at Barclays Capital.

“Weakness from Alberta [ was] cited as the most significant factor.”

Still, Canada’s l argest bank by market capitalization reported record profits in personal and commercial banking, and the wealth management segment posted a 32 per cent increase in net income to $ 303 million, helped by last year’s purchase of Los Angeles- based City National Corp.

Royal raised its dividend by three per cent to 81 cents per share.

But the performance of the bank’s capital markets and insurance businesses contributed to a slight decline in overall net income to $ 2.4 billion ($ 1.58 per share) in the quarter. The adjusted profit, a measurement that excludes some items, came in at $ 1.64 a share, two cents short of analyst expectations.

Revenue fell three per cent to $9.36 billion.

Investors reacted to the earnings report by knocking more than five per cent off Royal Bank’s share price in mid-day trading.

But the shares rebounded in the afternoon and closed down 2.61 per cent, at $ 67.81, on the Toronto Stock Exchange.

“While the deteriorating trend in corporate credit losses aligns with our expectations, this quarter’s outcome was worse than we anticipated,” said Peter Routledge, an analyst at National Bank Financial, in a note to clients.

On a morning conference call with analysts, Royal Bank executives said they are paying careful attention to their energy exposure and conducting internal stress tests that simulate the impact of various scenarios.

Among these are mounting job losses, national house price declines of 25 per cent, oil at US$ 25 a barrel, and economic “contagion” from the oil- dependent provinces of Alberta and Saskatchewan to the rest of Canada.

Royal Bank’s chief risk officer Mark Hughes characterized the most severe simulation as an “unlikely scenario.” But he said even if it were to materialize and provisions for credit losses were to increase substantially, they are coming from record low levels and would not out strip historical peaks.

“How is that possible?” asked Gabriel Deschaine, an analyst at Canaccord Genuity Corp. “All that does is result in your historical loss rate, that’s what you’re saying?”

Hughes said the assumptions in the stress tests are showing that outcome.

“It’ s a positive, in a sense,” he said.

However, he cautioned that if reality doesn’t mirror any one of the stress test inputs, the results would be different.

Aiken, the Bar clays Capital analyst, also praised Royal Bank after the call for taking what he called a“proactive stance on energy” relative to its Canadian banking peers. However, in a note to clients Wednesday, he cautioned that the bank’s energy reserves lag relative to global peers, and suggested that Royal’s “weakening consumer book” is ripe for further provisions.

On Wednesday’s conference call, RBC executives said the rising unemployment rate in Alberta, which now exceeds the national average, appears to be having an impact on consumers.

It is evident when it comes to rising delinquencies in credit card payments, but auto loans, unsecured lines of credit, and student loans are also affected, they said.

National Bank’s Routledge questioned whether the bank’s stress testing was severe enough, particularly when it comes to the issue of house prices.

“The granularity ... provided into its stress- testing strikes us a step forward,” he said, “but whether RY has made its stress- test severe enough remains an open question.”