RBC Follows U.S. Lenders in Fixed-Income Trading Declines

(Bloomberg) -- The debt-trading malaise that hurt U.S. lenders last quarter has extended north of the border, though Royal Bank of Canada’s equities traders helped soften the blow.

The lender saw a 12 percent drop in trading revenue from fixed income, currencies and commodities in the three months through January, advancing the trend that affected U.S. banks including JPMorgan Chase & Co. and Citigroup Inc. at the end of 2018. The decline was countered by a 47 percent surge in equities trading. Investment banking fees at Royal Bank’s RBC Capital Markets division were down 36 percent, contributing to lower earnings in that business.

Royal Bank, the first of Canada’s largest lenders to post fiscal first-quarter results, showed the impacts of the slump in markets that ended 2018 and signs of eroding credit conditions. Still, earnings matched analysts’ expectations as home-lending grew.

“The diversity of our franchise really showed through in a quarter that had significant volatility, particularly in December,” Chief Executive Officer Dave McKay said on an earnings call Friday. “Underlying all that is significant client momentum, market-share gains and great core activity that we’re able to earn through.”

The Toronto-based bank set aside C$514 million ($389 million) in provisions for credit losses in the quarter, up 54 percent from a year earlier and higher than the C$362 million analysts had expected. That was mainly due to an impaired loan with a U.S. shopping-mall owner, and a soured loan from a U.S. West Coast utility the bank didn’t identify, according to Chief Financial Officer Rod Bolger. Royal Bank is one of the lenders to PG&E Corp., the California utility owner that filed for bankruptcy protection, according to data compiled by Bloomberg.

“Credit quality remains quite strong,” Bolger said in a phone interview. “Even if there was a higher PCL, we are growing market share, we are deepening relationships and, even in uneven economic times, RBC is well-positioned to grow.”

Shares of Royal Bank fell 0.7 percent to C$101.60 at 9:54 a.m. in Toronto. The stock has risen 8.7 percent this year, less than the 11 percent gain for the eight-company S&P/TSX Commercial Banks Index.

“The biggest issue is credit,” Jim Shanahan, an analyst with Edward Jones & Co., said in a phone interview, noting an increase in impaired commercial real estate loans. “I think it’s alarming. Given the focus on real estate and all the concerns that investors have had, the timing is not good to report a significant increase in impaired loans within that sector. That’s likely to attract a lot of attention from investors.”

Canada’s six biggest lenders are expected to post earnings growth of 6 percent for the first quarter, the median of estimates compiled by Bloomberg Intelligence.

Key Insights

• McKay vowed last month to do better on domestic mortgages after what he called a couple years of disappointing performance. He need not worry: Royal Bank, Canada’s largest mortgage lender, had C$250.2 billion of home loans as of Jan. 31, up 4.9 percent from a year earlier even as the industry’s residential-mortgage growth has shrunk to a 17-year low in Canada.
• Royal Bank’s profit growth was lifted by gains in personal and commercial banking and insurance, countering the 13 percent decline in RBC Capital Markets and a 26 percent drop in investor and treasury services.
• Wealth management earnings were unchanged from a year earlier. The company’s wealth business includes Los Angeles-based City National Bank, which is now being led by Kelly Coffey, who joined Hollywood’s “bank to the stars” earlier this month after five years as CEO of JPMorgan’s U.S. private-banking unit.

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• First-quarter net income rose 5.3 percent to C$3.17 billion, or C$2.15 a share, from C$3.01 billion, or C$2.01, a year earlier, Royal Bank said in the statement. Adjusted per-share earnings were C$2.19, matching the average estimate of 12 analysts in a Bloomberg survey.
• Royal Bank raised its per-share quarterly dividend 4.1 percent to C$1.02.
• Read more about Royal Bank’s quarterly results here.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Daniel Taub

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