RBC beats expectations, but increases provisions for credit losses

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The Royal Bank of Canada’s first-quarter earnings comfortably beat analysts’ expectations, but it was United States President Donald Trump’s tariff threats that dominated discussions with analysts.

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RBC chief executive Dave McKay said Canada’s largest bank is preparing itself for a number of economic scenarios in the future due to the uncertainty linked to the tariffs.

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“We have run several scenarios … we believe we are in a strong position,” he said on a call with analysts on Thursday. “Our stress testing suggests that even under a more severe scenario of lower revenue and higher credit losses, our capital levels would remain above regulatory minimums.”

But he hopes the situation can be resolved without causing severe damage to the economies of both the U.S. and Canada.

“You’ve got to believe that if that much damage is done on both sides with across-the-board tariffs, that, hopefully, we find a better solution than that,” he said.

It’s still not certain as to when Trump will impose a 25 per cent tariff on most Canadian exports to the U.S. The levies were supposed to begin in early February, but the plan was delayed until March.

McKay echoed other banking executives’ sentiments by saying activity was slowing down, with some commercial clients “opting to delay certain investment decisions.” But clients who aren’t impacted by the current scenario were “moving forward with confidence.”

Comparisons have also been made with the economic situation during the COVID-19 pandemic, although McKay expects the concerns linked to tariffs will be more manageable.
“At the end of the day, we are not shutting down the whole economy, like we had to during COVID,” he said.

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For the three months ending Jan. 31, RBC posted higher profits in its personal and commercial banking, wealth management and capital market segments.
Its net income was $5.1 billion, up $1.5 billion or 43 per cent from the same quarter a year ago, resulting in net earnings per share of $3.54. Including HSBC Bank Canada’s operations increased net income by $214 million, the bank said.
RBC’s adjusted net income was $5.3 billion, up 29 per cent from a year ago, resulting in adjusted earnings per share of $3.62, which beat analysts’ expectations of $3.25 per share.

Its total provisions for credit losses (PCLs) — the amount of money banks keep aside to tackle potentially bad loans — increased $237 million, or 29 per cent from a year ago and 25 per cent from the fourth quarter of 2024, to $1.05 billion due to higher provisions in commercial banking, personal banking and wealth management.

RBC didn’t build its provisions with tariffs in mind, but considering how well the economy performed in the past quarter — with inflation largely in control — it wasn’t able to reduce its “weight for pessimism” this quarter, according to the bank’s chief risk officer, Graeme Hepworth.

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“We didn’t build (provisions) for it, but we certainly kind of held back on some releases,” he said.
Meny Grauman, an analyst at the Bank of Nova Scotia, said RBC’s credit deterioration shouldn’t overshadow its “underlying” strength.

“Royal Bank didn’t put up the largest beat of the season, but a double-digit beat is still something to highlight,” he said in a note on Thursday. “The key weakness of this quarter was credit as PCLs missed expectations.”

John Aiken, an analyst at Jefferies Inc., also said the uptick in RBC’s impaired loans was a “little dramatic,” but that it “largely relates to a single account in capital markets and appears to be contained.”

• Email: nkarim@postmedia.com

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