RBC hikes dividend amid analysts’ credit concerns
Royal Bank of Canada raised its dividend Wednesday as it posted third-quarter earnings that beat analyst expectations.
However, the stock price traded lower for much of the day as analysts expressed concern about credit trends including a rise in energy-related provisions.
“Although credit did not generate a headwind to earnings in the quarter, a couple of underlying credit trends bear watching, including continued rise in energy related provisions, and gross impaired loans,” Barclays analyst John Aiken said in a note to clients.
He added that RBC’s U.S. and international wealth management division also experienced an “uptick in new impaired (loan) formations.”
Royal’s management remains “quite positive” on the outlook for earnings growth, the analyst said, before adding that he believes a “wait and see” approach taken by the market “is justifiable.”
Aiken added that a lack of meaningful recovery in the Canadian economy is “likely to weigh on the valuations of Royal and its peers.”
Royal posted net income of nearly $2.47 billion in the period that ended July 31, up four per cent from the corresponding period last year.
Diluted earnings per share were $1.66, up seven cents from a year ago. Core cash earnings per share were $1.68, just beating consensus analyst estimates.
Still, Royal’s share price shed 26¢ to close at $72.10 on the Toronto Stock Exchange after trading even lower for much of the day.
The dividend was raised by nearly three per cent, to 79 cents, but analysts said the increase had been widely expected in the market.
Royal’s personal and commercial banking segment posted record earnings, while results from the wealth management unit were flat. Meanwhile, the capital markets operation was hit by a 15 per cent decline in earnings as both trading revenue and advisory fees fell compared with a very strong second quarter.
“Strength in retail bank earnings (was) offset by moderation in other segments,” Aiken said in his note.
He concluded that, while the performance of the domestic retail banking franchise was solid, helped by a meaningful contribution from international banking, the benefits were diminished by the “moderated” contributions from other segments that are “anticipated to fuel future growth.”
Despite the tepid reaction the results, Royal’s chief executive Dave McKay said diversification by both segment and geography is helping the bank adapt to “the changing market” and “economic headwinds.”
As was the case when Bank of Montreal reported financial results Tuesday, analysts on a conference call peppered bank executives with questions about oil and gas exposure.
Royal executives said 1.6 per cent of the bank’s loan book is tied to the oil and gas sector, and they continue to “stress test” the portfolio to try to determine and provision for possible losses from their drawn and undrawn exposure.
Industry watchers say banks appear able to manage their oil and gas exposure at this point, but there are concerns about the secondary effects of a faltering sector on consumer debt. Job losses among consumers in oil-dependent provinces could lead to higher arrears and defaults on debt such as credit cards and mortgages.
Royal Bank’s chief risk officer Mark Hughes told analysts any upticks so far have been “insignificant,” even in Alberta where a rising unemployment level is still lower than the national average.