RBC Tops Estimates as Trading Boom Helps Capital Markets

(Bloomberg) -- Royal Bank of Canada is benefiting from a boom in trading activity as investors navigate pandemic-roiled markets, helping sustain surging profits in the company’s capital-markets business.

Net income in the unit climbed to C$840 million ($649 million) in the fiscal fourth quarter, helping the company post earnings that beat analysts’ estimates. The business’s 44% increase from a year earlier was the second straight quarter of strong earnings gains, after they rose 45% in the third quarter.

With the Covid-19 crisis rattling markets across geographies and asset classes this year, capital-markets businesses have seen a jump in trading, and Royal Bank has been a particular beneficiary of the trend. Trading revenue in the fiscal fourth quarter quarter surged 32% from a year earlier to C$952 million, helped by higher equity and fixed-income trading in the U.S. and an increase in commodities trading in Canada.

“One of the advantages that Royal has against its peer group is a broader geographic diversity of its business mix,” John Aiken, an analyst at Barclays Plc, said in an interview. “For Royal, a greater amount of business is generated in the U.S., and in up markets the U.S. going to generate greater lift, and Royal is participating in that.”

Royal Bank’s shares were little changed at C$106.89 at 9:47 a.m. in Toronto. The shares had risen 4% this year, compared with a 1.7% drop for the eight-company S&P/TSX Commercial Banks Index.

Royal Bank’s personal and commercial banking business, its largest source of earnings, posted a smaller earnings decline last quarter. The unit has been weighed down this year by lower interest rates and higher provisions for credit losses.

Smaller Drop

Profit in the division fell 7.2% from a year earlier to C$1.5 billion in the three months through October, smaller than the third quarter’s 18% drop. Compared with the previous three months, earnings in the business were up 9.9% in the fourth quarter.

The business benefited from strength in residential mortgages, with average balances last quarter rising 11% from a year earlier to C$293 billion. The unit also is seeing early signs of a rebound in more profitable categories like credit cards, with average balances rising 2.4% from the third quarter but still down from last year.

Chief Financial Officer Rod Bolger said that credit-card spending on some everyday items already is up over last year, while still underperforming on certain discretionary items. Depending on how quickly Covid-19 vaccines are distributed, a rebound in travel could help that discretionary spending catch up, he said.

‘Opens Up’

“As the economy opens up and the vaccines take hold, we would expect credit-card spending to improve through the course of next year,” Bolger said in an interview.

Royal Bank’s more cautious stance on potential loan losses early in the pandemic is paying off, allowing it to dial back provisions for credit losses in more recent quarters. The bank set aside a record C$2.83 billion in the second quarter, and those loan-loss provisions declined to C$675 million in the third quarter and C$427 million in the fourth quarter, taking a smaller bite out of the bank’s profit.

“Consistent with peers, deferred loan balances were significantly lower sequentially across all loan categories, which we see as a positive read-through on the bank’s PCLs in the coming quarters,” Credit Suisse Group AG analyst Mike Rizvanovic said in a note to investors Wednesday.

For the bank as a whole, fourth-quarter net income rose 1.2% to C$3.25 billion, or C$2.23 a share. Excluding some items, profit was C$2.27 a share, beating the C$2.04 average estimate of analysts.

©2020 Bloomberg L.P.