Royal Bank of Canada reported a surge in its trading businesses that helped fiscal first-quarter earnings top analysts’ estimates, helping make up for softening results in its retail-banking business.
(Bloomberg) — Royal Bank of Canada reported a surge in its trading businesses that helped fiscal first-quarter earnings top analysts’ estimates, helping make up for softening results in its retail-banking business.
Revenue from RBC Capital Markets — the largest capital-markets division among Canada’s banks — rose 4.3% to C$3.12 billion ($2.3 billion) in the three months through January, Royal Bank said Wednesday. That beat analysts’ C$2.35 billion average estimate. National Bank of Canada — which generates the highest proportion of its revenue from capital markets among Canada’s six largest banks — reported similarly strong trading results on Wednesday.
Bond markets have seesawed in recent months amid debates about whether central banks’ rate hikes are nearing an end and concerns that those tightening campaigns may cause a recession. That’s boosted trading revenue for Canada’s big banks, countering sluggish performance from some of their retail arms.
So far, the lenders’ shares haven’t gotten much of a boost from the trend. Canadian Imperial Bank of Commerce and Bank of Montreal both beat analysts’ estimates on strength in their trading businesses in recent days. CIBC shares rose the day it posted results but have since declined, while Bank of Montreal’s stock fell Tuesday after the firm reported its fiscal first-quarter results.
“Investors typically don’t pay up for capital-markets activity, unless it’s a sustained expansionary market trend,” Paul Gulberg, an analyst with Bloomberg Intelligence, said in an interview. “That was evidenced following CIBC and BMO’s results.”
Royal Bank shares slipped 3.2% to C$134.14 at 10:06 a.m. in Toronto, and have climbed 5.4% this year. National Bank rose 2.4% to C$102.61, and is up 13% this year, more than the 5.3% gain for the S&P/TSX Commercial Banks Index.
At Toronto-based Royal Bank, revenue from trading in interest-rate and credit products drove the gain, surging 74% from the fourth quarter and 63% from a year earlier. The company’s overall profit, excluding some items, was C$3.10 a share, beating the C$2.96 analysts had forecast.
Lending Disappoints
Results from the lending weren’t as strong. Net interest income of C$6.2 billion was up 18% from a year earlier but down 1.3% from the fourth quarter. The figure also missed analysts’ C$6.39 billion average estimate.
Royal Bank’s net interest margin, excluding its trading business and insurance assets, expanded to 1.85%, up only 1 basis point from the fourth quarter, showing that it’s not benefiting as much from rising interest rates as in previous quarters.
Loans continued to grow, but at a slower pace, with the increase in Royal Bank’s Canadian mortgage book — its largest loan category — slowing to 1.1% quarter over quarter, from 2.3% in the prior three months.
The bank’s costs also are rising, with non-interest expenses increasing to C$7.68 billion, up 6.5% from the fiscal fourth quarter.
Cost Forecast
Expense growth will moderate throughout the year after a few one-time anomalies and a major investment in the company’s sales force, Chief Financial Officer Nadine Ahn said. At the same time, the capital-markets performance was driven in part by market-share gains and investments in certain products that should continue to pay off during the year, she said.
“That diversification that we have within the business — and some of the benefit we got from our mix as it relates to spread products coming back — positions us well as we go through for the rest of the year,” Ahn said in an interview.
At National Bank, revenue in the financial-markets unit came in at C$689 million in the fiscal first quarter, up 4.1% from a year earlier. Analysts had projected revenue of C$634.9 million for the unit. Overall profit excluding some items, was C$2.56 a share, beating analysts’ C$2.39 average projection.
The Montreal-based bank posted stronger retail-banking results than Royal Bank did. At National Bank, revenue in its personal and commercial unit rose 17% from a year earlier, and the segment’s net interest margin expanded to 2.35% from 2.26% in the fiscal fourth quarter.
National Bank reported “a solid quarter at first look driven by a better-than-expected lending margin, strong trading revenue that was not nearly as outsized as what the bank’s peers have reported, and strong performance across all operating segments,” Mike Rizvanovic, an analyst at Keefe, Bruyette & Woods, said in a note to clients. “We expect the bank’s shares to outperform the peer group today.”
(Updates with CFO’s comments starting in 12th paragraph.)
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