RBC earnings are hit by the trading crisis and the economic outlook is deteriorating

(Bloomberg) – Royal Bank of Canada’s earnings were hit last quarter as a decline in investment banking activity weighed on earnings and a deteriorating economic outlook led to higher-than-expected provisions for loan losses.

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RBC Capital Markets revenue fell by a third to C$1.65 billion ($1.27 billion) in the fiscal third quarter, the RBC-based bank said on Wednesday. Toronto in a statement. The overall profit missed analysts’ estimates.

Royal Bank’s investment banking revenue was wiped out by falling stock markets which dried up investor demand for initial public offerings and share sales, as well as 385 million Canadian dollars in markdowns on the loans it had taken out. Despite the turbulent markets in the quarter, trading revenue also fell, failing to counter the blow of slowing investment banks.

“Investment banking in particular was much weaker than expected, even taking into account these markdowns,” Bloomberg Intelligence analyst Paul Gulberg said in an interview. “People knew there was no IPO, they knew there was much weaker M&A, but it was still down a lot.”

Royal Bank shares fell 3.1% to C$122.61 at 9:46 a.m. Toronto. They are down 8.7% this year, compared to a 9.9% decline for the S&P/TSX Commercial Banks Index.

RBC Capital Markets net income fell 58% to C$479 million. Corporate and investment banking revenue fell 52% to C$625 million, as markdowns led to negative investment banking revenue of C$26 million. Global Markets revenue fell 7.3% to C$1.14 billion.

“The results of our capital markets platform this quarter do not reflect the strength of this premium franchise, nor its performance potential going forward,” Chief Executive Dave McKay said in a conference call with analysts. . “Results were impacted by a decline in industry-wide fee pools as well as disruption in high-yield and broader credit markets.”

In contrast, National Bank of Canada posted an 18% increase in trading revenue on Wednesday, helping to benefit from analysts’ best estimates. Of Canada’s six largest banks, National Bank derives most of its revenue from capital markets activities.

At Royal Bank, company-wide net profit fell 17% to C$3.58 billion, or C$2.51 per share. Excluding certain items, earnings were C$2.55 per share. Analysts estimated it at C$2.67 on average.

Royal Bank’s results were also weighed down by higher-than-expected provisions for credit losses, which the company said were “primarily due to adverse changes in our macroeconomic outlook.” The lender set aside C$340 million in provisions, more than the C$296.8 million forecast by analysts, marking a reversal from C$342 million in releases in the previous three months.

The higher provisions were largely the result of forecasts of future economic weakness rather than any current signs of trouble, chief financial officer Nadine Ahn said. Unemployment remains low and customers are sitting on extra cash which should protect them against the strains, she said in an interview.

“While conditions remained extraordinarily strong during the quarter, it’s really what’s on the horizon that drives our provisions,” Ahn said.

The bank’s Common Equity Tier 1 capital ratio was little changed at 13.1% from 13.2% at the end of the second quarter.

Despite the bleaker outlook, Royal Bank’s domestic banking operations underscored a Canadian economy that is still doing well for now. Revenue for the division climbed 11%, helped by higher mortgage, credit card and small business loan balances. The unit’s net profit fell, hurt by C$331 million in provisions for credit losses, compared with C$122 million in reversals a year earlier.

Royal Bank also benefited from the Bank of Canada’s interest rate hike, which helped push its net interest margin to 1.52% last quarter from 1.45% in the second quarter. an expansion that National Bank analyst Gabriel Dechaine described as “very strong”.

(Updates with shares and CFO, CEO comments from fifth paragraph.)

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