RBC tops estimates as investment banking revenue hits record

Royal Bank of Canada is still benefiting from the pandemic-era boom in capital markets.

RBC Capital Markets’ revenue rose to C$2.81 billion ($2.19 billion) in the fiscal first quarter, up 3.8% from a year earlier, the Toronto-based bank said Thursday. That compares with 1% growth in the third quarter and a decline in the fourth quarter. Overall profit topped analysts’ estimates.

Royal Bank’s capital-markets division has posted strong results throughout the pandemic, first from a boom in trading during the early days of the COVID-19 crisis, then from a surge in dealmaking over the past year.

Last quarter, the bank posted record investment banking revenue of C$1.39 billion as well as global-markets revenue that rose 34% from the previous three months, helped by gains in trading across credit products, equities and foreign exchange and commodities. 

“The big surprise was on the trading side,” Barclays Plc analyst John Aiken said in an interview. “There were a lot of questions around how strong that was going to be, especially given what we saw from the U.S. banks last quarter, and Royal Bank has posted some very strong numbers.”

The firm’s retail banking operations also got a lift last quarter from the continued strong performance of Canada’s housing market. Net income for the Canadian banking business rose 9.1% from a year earlier, helped by an 11% gain in its residential-mortgage balance. The bank also saw gains in credit card and wholesale lending.

“We’re starting to see more diversification in terms of where that loan growth is coming from,” Aiken said. “Residential mortgages were strong, and that’s not expected to change for a few more quarters, but we did see green shoots in other areas.” 

While loan balances are growing, Royal Bank’s lending margins remain anemic as the bank waits for expected interest rate increases this year. The lender’s net interest margin shrank to 1.39% last quarter from 1.43% in the previous three months.

The expansion of loan growth beyond the low-margin mortgage business, particularly in credit card balances, may help Royal Bank’s lending margins in the quarters ahead even before central banks begin raising rates, Aiken said.

Royal Bank set aside C$105 million in provisions for credit losses, more than the C$92.6 million analysts had projected, signaling that the wave of omicron-variant infections prompted a more cautious stance in the bank’s credit outlook. The company had released C$227 million in provisions in the fourth quarter.

The bank also managed to keep its costs under control last quarter, with noninterest expenses of C$6.58 billion little changed from the fourth quarter. Rivals in both Canada and the U.S., meanwhile, have signaled investors should expect faster expense growth this year. 

Royal Bank was able to keep costs in check because it has been investing for a long time in technology to increase efficiency, while “others may be catching up,” Chief Financial Officer Nadine Ahn said on a call with analysts and investors Thursday. 

Royal Bank shares dropped 2% at 9:39 a.m. in Toronto amid a global decline in stocks as Russian President Vladimir Putin’s decision to order a military attack on Ukraine cast a pall over markets worldwide. The bank has risen 2.4% this year, compared with a 2.6% gain for the S&P/TSX Commercial Banks Index. 

Net income rose 6.4% to C$4.1 billion, or C$2.84 a share. Excluding some items, profit was C$2.87 a share. Analysts estimated C$2.72, on average. Net loans and acceptances in the lender’s Canadian banking business rose 2.3% in the quarter from the previous three months.

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