RBC beats expectations as revenue, income climb

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The head of Canada’s largest bank says it’s important “not to overreact” to the threat of excessive tariffs on Canadian imports by incoming United States president Donald Trump since he expects political leaders to “appropriately resolve” the issue.

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Some economists have been raising concerns about the Canadian economy possibly slipping into recession next year if Trump makes good on his threat of imposing a 25 per cent tariff on all Canadian and Mexican imports when he takes office. The tariff would remain until the countries work on curbing the flow of drugs and migrants across the U.S. border.

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But Royal Bank of Canada chief executive Dave McKay remains cautiously optimistic. As a result, RBC expects to meet its goals in the coming years and won’t be making any major changes to its business plans or credit strategy, he said on a conference call on Wednesday after the bank reported its fourth-quarter results.

“This was a strong message that we have to improve certain aspects of our operations in Canada, around our borders, and there are other ways of solving that without hurting both economies, the Canadian economy and the U.S. economy,” he said. “And I expect our political leaders to find a better path to do that.”

McKay expects Canada’s constrained approach to immigration — the country is trying to reduce population growth in 2025 and 2026 through a net reduction of about a million temporary residents — and the “threat of rising protectionism” to be headwinds for the economy.

But partly offsetting these risks are consumers’ rising income levels, “solid savings rates” and the Bank of Canada’s interest rate cuts.

RBC also expects to see “more activity” in the residential mortgage market next year. A lot of buyers who have been sitting on the sidelines are expected to get into the market as prices come down, Erica Neilson, who heads RBC’s personal banking segment, said.

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“There’s obviously an opportunity for us to gather switch business from our competitors, and likewise shore up our own business,” she said.

A “mortgage war” could be on the horizon as interest rates decline, since more than half of all mortgages at Canadian banks are set to be renewed in the next two fiscal years, RBC analyst Darko Mihelic said in a note in November.

RBC reported higher fourth-quarter profits than it did last year, exceeding analyst expectations.

On an adjusted basis, the bank earned $4.4 billion, up 18 per cent from a year ago, resulting in earnings per share of $3.07. Analysts had expected RBC to earn $3.01 per share.

Net income for the three-month period ending Oct. 31 was up seven per cent compared to the same period last year to $4.2 billion, resulting in net earnings per share of $2.92.

The lender said the increase was due to better results in personal and commercial banking, wealth management and insurance. The inclusion of HSBC Canada increased the bank’s net income by $265 million.

RBC’s total provisions for credit losses (PCL) — the amount of money banks keep aside to tackle potentially bad loans — increased $120 million, or 17 per cent from a year ago, to $840 million due to higher provisions in commercial and personal banking.

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PCL on performing loans, those the banks are likely to get back, increased $14 million, or seven per cent, from a year ago, while PCL on impaired loans, those the bank may not get back in their entirety, increased $101 million, or 19 per cent.

RBC increased its quarterly dividend by six cents to $1.48 per share.

“Royal posted solid earnings,” Jefferies Inc. analyst John Aiken said in a note on Wednesday. “Not only did RBC increase its capital ratios, but it announced a bigger-than-anticipated dividend increase, signalling its confidence in the ongoing integration of HSBC Canada. We anticipate that the results will be warmly received by the market.”

But Bank of Nova Scotia analyst Meny Grauman said RBC’s “already premium valuation” makes the interpretation of its latest results harder.

“It wasn’t a blowout quarter, but very solid in many ways,” he said in a note on Wednesday. “The numbers themselves are unlikely to drive the shares higher from here, but as we have been highlighting heading into earnings season, the key will be forward guidance.”

RBC has maintained its medium-term objectives, including delivering a return on equity, which measures the company’s financial performance, of more than 16 per cent.

• Email: nkarim@postmedia.com

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