RBC Beats Profit Estimates on Higher Interest and Fee Income By Reuters

© Reuters. Royal Bank of Canada sign in Toronto, Ontario, Canada, December 13, 2021. REUTERS/Carlos Osorio/File Photo

Written by: Nivedita Balu and Manya Saini

(Reuters) – Royal Bank of Canada on Wednesday beat analysts’ quarterly profit estimates. This is because the asset management and capital markets sectors have benefited from higher fee income and rising interest rates have enabled banks to earn more from their loans.

Still, Canada’s largest bank is preparing to set aside more funds to cover bad loans so households could feel the pressure of the Bank of Canada rapidly raising interest rates to fight inflation.

The financial market expects interest rates to fall in the second half of the year.

RBC CEO David McKay said 2024 would be a “transition year” for markets due to uncertainty surrounding monetary policy, given the impact of geopolitical tensions.

However, rising interest rates boosted RBC’s net interest income by 2.1% year over year, with its capital markets segment benefiting from bond income.

National Bank analyst Gabriel Dechaine cited an “improved revenue generation environment.”

Adjusted profit for the three months ended Jan. 31 was C$4.07 billion, or C$2.85 per share, beating analysts’ expectations of C$2.85 per share, according to LSEG data.

Provisions for credit losses increased 53% from a year ago to C$813 million.

On Tuesday, RBC’s fellow banks, the Bank of Montreal and the Bank of Nova Scotia, put in place provisions for non-performing loans and warned that growth would slow until interest rates begin to fall.

RBC shares rose 0.5% in Toronto, while Bank of Canada (OTC:) rose 3.5% after improving profits.

Ready for HSBC Canada

RBC also said its C$13.5 billion purchase of HSBC’s Canadian operations, which is scheduled to close next month, will increase integration costs by 50%.

Analysts have raised questions about the state of RBC’s balance sheet after the deal was completed after regulators raised the minimum requirement to 11.5%.

RBC said it expects its core capital ratio to be lowered to about 12.5% ​​after the deal closes, down from 14.9% at the end of January.

Jefferies analyst John Aiken said capital increases in recent quarters have eased concerns about the impact of the purchases.

The bank also announced it was eliminating discounts for its dividend reinvestment program, which could help raise capital.

America’s community banking crisis has put some strain on City National Bank, which serves Hollywood clients and was acquired by RBC in 2015. This forced the parent company to inject capital, lay off nearly 100 employees and change management.

RBC said City National remains a top priority and will focus on delivering a more normal level of net income in 2025.

“We have a real opportunity to expand this business and make more money using our existing balance sheet,” CEO McKay said.

He acknowledged that the company had placed “too much emphasis on growth over the profitability of growth.”

RBC’s profits were hurt by a C$159 million fee from the U.S. Federal Deposit Insurance Corporation. The company charged banks a fee to replenish deposit insurance funds lost in the collapse of Silicon Valley Bank. signature bank (OTC:) last year.