The Canadian Press
Royal Bank racked up a $1.5-billion profit in the first quarter of fiscal 2010, 35% more than it reported a year earlier and its second-highest quarterly profit ever but not enough to impress investors keen to see booming numbers from Canada’s banks.
Shares in Canada’s largest bank fell almost 2% on the Toronto Stock Exchange, even as RBC RBC (TSX:RY) reported reduced load loss provisions, saw better performances from its main businesses and its chief executive expressed optimism that the worst of the recession is over.
“We are seeing signs of improvement in market and economic conditions,” president and chief executive Gordon Nixon said Wednesday during an investor conference call.
RBC’s net earnings amounted to $1 per share, up from 78¢ per share or $1.1 billion a year earlier. Cash earnings per share, a measure used to compare profits and performance among the big banks, came in at $1.03 in the first quarter, slightly below a consensus analyst forecast of $1.04 per share gathered by Thomson Reuters.
“You can see from our results that we have made significant strides on the cost side,” Nixon said. “At the same time we are continuing to invest in our business for the long term.”
Of Canada’s big banks to report quarterly earnings so far, RBC was the first to come up short against analyst predictions. CIBC (TSX:CM), National Bank (TSX:NA) and Bank of Montreal (TSX:BMO) all beat analyst estimates when they announced their results over the past week.
CI Capital Markets analyst Brad Smith characterized the RBC earnings as “moderately disappointing” and noted that revenues at the bank — $ 7.33 billion versus a year-earlier $7.06 billion — were below the brokerage’s expectation, mostly due to a 5.5% decline in net interest income.
That likely reflected competition for customer deposits, Smith said, “and perhaps to a lesser extent investment selection — they may have selected safer investments that yielded less as a result of their safety.”
Nixon said the bank’s Canadian banking division performed extremely well and continued to underpin earnings, with strong volume growth and gains in market share. The business accounted for about half of RBC’s profit in the fiscal first quarter, with net income of $777 million, up $81 million or 12%.
Nixon said he expects the bank’s domestic performance to continue to be high as long the economic conditions continue to be stable, but sounded a cautions note.
“It’s a question of: Where does the economy head next? If you look at the broad spectrum there is no specific sector that we have a concern with,” he said.
“It’s just the uncertainty about the near term developments means one should be careful about being too confident that this quarter’s performance is sustainable.”
As it trimmed costs, the bank shaved its 1.4 percentage points from its efficiency ratio — a measure of financial prudence that generally translates to higher profits when it is lower — to 45.7%, with an eye to moving that into the low 40% range in the medium term, Nixon added.
Royal’s provision for credit losses — an amount set aside for bad loans — shrank 37% in the quarter to $493 million from $786 million a year ago and $883 million in the prior quarter, but still remained high.
Nixon said the bank continues to experience elevated provision for credit losses but he expects credit quality in Canada to improve in the last half of 2010.
Smith said RBC’s credit provisions were more than 40% lower than his expectation.
“They left their allowance for future credit losses unchanged pretty much from the end of the last quarter. They’re signalling, in doing that, that they think credit losses are going to recede.” Royal’s international banking operation reported a $57-million loss, but that was an improvement from a year-earlier loss of $100 million.
Nixon said the bank has seen broad based deterioration in its U.S. portfolio, but added that should also improve in 2010.
RBC’s wealth management business accounted for $219 million in profit, up $91 million or 71% from the same time last year while the profit at RBC Capital Markets more than doubled to $571 million.
As was widely expected, the bank left its common share dividend unchanged at 50¢ per share.
Ninety-one per cent of shareholders approved the bank’s 2010 approach to executive compensation in a non-binding “say on pay” vote at its annual general meeting Wednesday.
@page_break@Nixon earned a total of $10.4 million in 2009, including share-based awards, option-based awards and deferred share-based compensation, compared with $8.75 million in 2008.
CIBC was the first in Canada’s financial industry to give shareholders the opportunity to vote for or against how they compensate their executives. Shareholders voted 92.89% in favour of the current pay structure at the bank’s annual meeting in Montreal.
Nixon said he does not expect new federal mortgage rules that require stricter conditions when Canadians apply for loans — intended to crack down on real-estate speculation and reduce the opportunity for homebuyers to take on too much debt — to have much impact on the bank.
“I do believe the proposed changes could head off potential speculative activity in the housing market,” Nixon said.
“But from RBC’s perspective, we already have a very conservative underwriting standard and we don’t anticipate any significant changes in how we underwrite our loans or how we operate our business.”
Economists from several of Canada’s biggest banks advised to make minor adjustments to deal with the potential of very low interest rates creating an unsustainable rise in home prices.
Royal shares declined $1.03 or 1.8% to $57.210 in Wednesday trading.