RBC to set aside more money for bad loans

TORONTO — Royal Bank of Canada joined its peers this quarter in setting more money aside for potentially bad loans, but the bank is also working to position itself to capture the substantial sums of money lying in wait for when economic trends shift.

RBC chief risk officer Graeme Hepworth said the economic outlook is improving overall.

“The market continues to gain confidence that interest rates have peaked to the current cycle, and the probability of a hard landing of the economy is decreasing,” Hepworth told a conference call with investors to discuss the bank’s latest results on Wednesday.

The bank’s provisions for credit losses totalled $813 million for its first quarter, up from $532 million a year earlier, as pockets of concern rose.

Commercial real estate, especially U.S. offices, has been a big area of worry, while consumer strain in Canada has also been growing in areas like credit cards and auto loans, and in mortgages to a much lesser extent.

But the bank is operating from a cautious perspective and the provisions don’t mean it will lose money on the loans necessarily.

RBC’s forecast that a recession would hit last summer came and went, and the Canadian economy is still managing growth. Statistics Canada’s preliminary estimate put GDP growth at 1.2 per cent annualized in the fourth quarter, with a final read set to be released Thursday.

The bank’s loan-loss provisions are also based on its expectation that unemployment will rise to 6.6 per cent this summer, but it acknowledges that its forecasts have been challenged by the economic reality. The unemployment rate was 5.7 per cent in January.

“Unemployment in Canada has proven to be a little bit more resilient than we had anticipated,” Hepworth said.

Unemployment and interest rates are key determining factors in how many people will default on loans. Prices, whether it’s for homes or offices, is the other main driver, Hepworth said.

With the interest rate trajectory a little more clear, employment holding up well and home prices only notching down slightly in the latest monthly report from the Canadian Real Estate Association, fears of rising mortgage defaults are easing.

Instead, with the Bank of Canada talking about when it will lower rates rather than if, there is an increasing focus on what lower rates may trigger.

RBC expects to see a big pickup in capital markets revenue when rates start to dip, that will shake off the subdued market for acquisitions and money raising.

RBC chief executive Dave McKay said the bank is already seeing activity pick up.

“We’re engaging in increased dialogue with corporate clients. Furthermore, we expect private equity activity to ramp up as sponsors sit on significant levels of uninvested client funds,” he said.