RBC books $4.3 billion profit for quarter, says Delta variant risks manageable

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Royal Bank of Canada blew past analyst expectations booking $4.3 billion in profit for its third quarter Wednesday, fuelled by lower provisions for sour loans and higher revenue in Canadian banking and wealth management as the country’s economy rebounds.

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Canada’s largest lender earned $2.97 per share in the three months ended July 31, up from $2.20 per share, or $3.2 billion, in the same period a year earlier.

Adjusting for one-time items, RBC earned $3 per share, surpassing analyst expectations of $2.71 a share, according to Bloomberg data.

RBC recovered $540 million of provisions for credit losses — which are funds that banks must hold in reserve to cover potential losses from loan defaults – compared to the $96 million that it recovered in the second quarter.

At the outset of the pandemic last spring, banks set aside billions to cover potential loans defaults due to job losses and business closures. But those sour loans never materialized, and rising vaccination rates and easing pandemic restrictions have increased bankers’ confidence that they can recover those contingency funds — even as the highly contagious Delta variant looms.

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Four of Canada’s Big Six banks have now reported expectations-beating quarters on reduced provisions for credit losses.

“(RBC) has released provisions at a relatively high rate,” National Bank of Canada analyst Gabriel Dechaine said in a note, adding that performing provision reversals of $995 million in 2021 represent 40 per cent of the total additions to the performing allowance for credit losses that the bank tucked away last year. “This ratio is second only to Bank of Nova Scotia of the four banks that have reported third quarter results,” Dechaine said.

The bank said that it was confident that the funds it still had tucked away would be sufficient to cover any slowdown brought about by the Delta variant.

With climbing vaccination rates in its primary markets in Canada and the United States, and the widespread adoption of technologies that allow people to work and run businesses from home, the blow of the Delta variant is unlikely to shut down economies to the same extent as it has over the past year, according to chief financial officer Rod Bolger.

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“As the Delta variant becomes more prevalent, lockdown activity can be more focused instead of as broad-ranging as it was last year,” Bolger said in an interview. “It doesn’t pose a material risk for our outlook at this point.”

Profit in RBC’s Canadian banking division climbed 55 per cent to $2.11 billion, driven by lower provisions and gains in secured lending products as homebuyers raced to lock in low interest rates and businesses prepared to re-open. Residential mortgages rose 12.9 per cent and business loans ticked up 2.5 per cent.

But personal loans and credits cards — products that charge higher interest rates and a key segment that signals consumer sentiment — continue to lag. Personal loans crawled up one per cent from last year, and 0.5 per cent from the second quarter. While credit cards fell 2.4 per cent from last year, the segment grew 3.1 per cent from the previous quarter.

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The pressure in part comes from high levels of deposits as Canadians stashed away cash during the pandemic. Personal and business deposits rose 6.5 per cent and 13.1 per cent respectively from last year, and 1.8 per cent and 3.3 per cent from the second quarter.

The uptick in quarterly credit card balances is an “encouraging sign that the economy is continuing to reopen,” Bolger said. “But there are numerous factors that impact the return to pre-pandemic credit-card-balance levels. Given the resilience of consumer deposits, we do anticipate that there will be a lag in the balance recovery relative to the client spend growth.”

Customers are also directing some of that extra cash into investing, fuelling RBC’s wealth management unit, where profit soared 31 per cent as assets under management rose 17 per cent and assets under administration increased 18 per cent.

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The bank also saw record investment banking revenue in its capital markets unit. The investment banking and global markets arms have helped lift the Big Six banks in recent quarters, with dealmaking keeping a blistering pace so far in 2021. Analysts were watching this segment, expecting a summer slump to weigh on earnings.

RBC’s capital markets profit boomed to $1.13 billion, surging 19 per cent from a year earlier, driven largely by a $337 million recovery in provisions while lower trading revenue was partially offset by a boost in loan and mergers and acquisitions activity. But the division was one of the only business lines to book a slump in pre-tax pre-provision (PTPP) earnings, down 14 per cent, along with the bank’s U.S. arm.

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However, the capital markets slowdown did not weigh on PTPP growth overall, which grew six per cent from last year, according to CIBC analyst Paul Holden.

“Cooling capital markets revenue and earnings were broadly expected, but there has been a concern they would hinder PTPP growth,” Holden said in a note to clients. “We assume capital markets revenue will slow in fiscal 2022, but still forecast PTPP growth.”

National Bank of Canada also reported better-than-expected third-quarter earnings on Wednesday. The country’s sixth largest bank earned $839 million for the three months that ended July 31, or $2.36 per share, up from with $602 million, or $1.66 per share, in the same quarter last year. Analysts expected an average earnings per share of $2.13, according to Bloomberg.

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