RBC earnings hit by falling deals, economic outlook sour

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(Bloomberg) — Royal Bank of Canada’s earnings took a hit last quarter as slumping investment banking activity hit revenue and a deteriorating economic outlook led to higher-than-expected loan loss provisions. expected.

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RBC Capital Markets’ revenue fell by a third to C$1.65 billion ($1.27 billion) in the fiscal third quarter, the Toronto-based bank said in a statement on Wednesday. Overall earnings fell short of analyst estimates.

Royal Bank’s investment banking revenue was hit by slumping stock markets that dried up investor demand for initial public offerings and share sales, along with CAD385 million in loan downgrades that had subscribed. Despite the turbulent markets in the quarter, trading revenues also fell, unable to offset the impact of the investment banking recession.

“Investment banking in particular was much weaker than people expected, even taking those downgrades into account,” Paul Gulberg, an analyst at Bloomberg Intelligence, said in an interview. “People knew there were no IPOs, they knew there were much weaker M&As, but it still went down a lot.”

Royal Bank shares fell 3.1% to Cdn$122.61 at 9:46 am in Toronto. They have fallen 8.7% this year, compared with a 9.9% decline for the S&P/TSX Commercial Banks Index.

RBC Capital Markets net income fell 58% to 479 million Canadian dollars. Corporate and investment banking revenues fell 52% to C$625 million, with the downgrades resulting in investment banking revenues of negative C$26 million. Global markets revenue fell 7.3% to C$1.14 billion.

“The results of our capital markets platform this quarter do not reflect the strength of this premium franchise, nor the potential for its future performance,” Chief Executive Officer Dave McKay said on a conference call with analysts. “Results were impacted by an industry-wide decline in rate groups coupled with disruption to the broader and high-yield credit markets.”

By contrast, the National Bank of Canada posted an 18% rise in trading income on Wednesday that helped turn a profit according to leading analyst estimates. Among the six largest banks in Canada, National Bank generates the majority of its revenue from capital markets activities.

At Royal Bank, company-wide net income fell 17% to C$3.58 billion, or C$2.51 per share. Excluding some items, earnings were Cdn$2.55 per share. Analysts estimated C$2.67, on average.

Royal Bank’s results were also affected by higher-than-expected loan loss provisions, which the company said were “mainly due to unfavorable changes in our macroeconomic outlook.” The lender set aside C$340 million in provisions, more than the C$296.8 million analysts had projected, marking a reversal of C$342 million of releases in the previous three months.

The higher provisions were largely due to forecasts of future economic weakness rather than any current signs of trouble, Chief Financial Officer Nadine Ahn said. Unemployment remains low and clients have extra money that should cushion them against stress, she said in an interview.

“While conditions remained extraordinarily strong in the quarter, it’s really what’s on the horizon that determines our provisions,” Ahn said.

The bank’s common equity Tier 1 capital ratio was little changed at 13.1%, compared with 13.2% at the end of the second quarter.

Despite the bleaker outlook, Royal Bank’s domestic banking operations highlighted a Canadian economy that is still performing well for now. The division’s revenue increased 11%, helped by higher mortgage, credit card and small business loan balances. The unit’s net income fell, affected by $331 million in provisions for credit losses, compared with C$122 million in releases a year earlier.

Royal Bank also got a boost from Bank of Canada interest rate hikes, which helped boost its net interest margin to 1.52% last quarter from 1.45% in the second quarter, an expansion that the analyst of the National Bank, Gabriel Dechaine, described as “very strong”.

(Updates with stocks and CFOs, CEO comments beginning in fifth paragraph.)

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