(Reuters) – Royal Bank of Canada (RBC) said on Wednesday it expected a softer landing for the economy, but the country’s largest lender reiterated its forecast of a moderate recession this year after setting aside bigger provisions for potential bad loans.
The views come against the backdrop of the Bank of Canada hiking its key interest rate to a 15-year high in January to rein in inflation, with tighter monetary policies at home and abroad fueling economic turbulence and raising recession fears.
The Canadian central bank had also said in January it would hold off on further increases as long as prices eased as expected.
Still, as economic uncertainty persists, banks are building provisions in case of delays or defaults in loan repayments by borrowers who have already been squeezed by high inflation since last year.
“While central banks have successfully reigned in peak core inflation, strong services demand, labor shortages and reopening of China’s economy still present a challenge to getting firm control within stated target ranges,” RBC’s Chief Executive Officer Dave McKay said.
Earlier on Wednesday, RBC and National Bank of Canada reported first-quarter profits ahead of expectations, as demand for loans ticked up.
RBC, which has a large capital markets business in Canada, also saw its results receive a boost from a surge in fixed income trading activity, which cushioned the hit from lower revenues from corporate and investment banking.
Profit at RBC’s capital market segment jumped 9% to C$1.22 billion.
Shares of RBC were down 2.5% at C$135.14 while National Bank shares were up 2.4% at C$102.62.
“While underlying results (for RBC) were solid, we are concerned that it may not be enough to offset concerns on the outlook for further deterioration in credit,” Barclays analyst John Aiken said in a note.
The ongoing economic uncertainty, lack of easy money and volatile markets have, however, bolstered demand for loans, both among individuals and businesses.
But banks are also preparing for more of such borrowers to fall behind on loan repayments. RBC’s provisions for bad loans jumped five-fold to C$532 million ($391.49 million), while National Bank set aside C$86 million provisions, compared with a release of C$2 million last year.
Canada’s biggest lenders build rainy-day funds https://www.reuters.com/graphics/CANADA-BANKS/RESULTS/lbpgglwrepq/chart.png
On an adjusted basis, RBC earned C$3.10 per share for the quarter ended Jan. 31, ahead of analysts’ average estimate of C$2.93 per share, according to Refinitiv IBES data.
National Bank’s adjusted profit of C$2.56 per share also handily beat expectations of C$2.37 per share.
Earlier, RBC’s peers CIBC and Bank of Montreal also beat estimates, while Scotiabank fell short.
($1 = 1.3589 Canadian dollars)
(Reporting by Niket Nishant, Jaiveer Shekhawat and Nivedita Balu in Bengaluru; editing by Shailesh Kuber and Uttaresh Venkateshwaran)
