Saturday, October 1

RBC profits slip on market volatility, shored-up loan loss provisions

Earnings drop in personal, commercial banking and insurance, rising salaries, technology investments all weighed on results

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The Royal Bank of Canada’s net income fell to $3.58 billion in the third quarter amid lower earnings in its capital markets and banking segments. The bank also set more money aside for bad loans as the economic outlook begins to darken.

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Adjusted earnings slipped to $2.55 per share in the three months ending July 31 compared to average analyst expectations of $2.67 per share.

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RBC attributed the miss to falling revenue in capital markets brought on by volatile markets, a drop in earnings in the bank’s personal, commercial banking segment and insurance segment, and pointed to rising salaries and technology investments that weighed on results.

“In an uncertain world, we continue to operate from a position of strategic and financial strength,” RBC chief executive Dave McKay said in a press release accompanying the results. “Our balance sheet is strong and our talented team is as focused as ever on delivering the innovative products, insightful advice and leading partnerships that our clients count on.”

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Provision for loan losses, or the amount banks set aside for bad loans, also played a role in the diminished results as RBC shored up $340 million in loan loss provisions this quarter compared to the $540 million released last year amid rising macroeconomic anxieties. RBC joins Bank of Nova Scotia in taking a cautious approach with its credit loss provisions and analysts expect more banks to set aside reserves.

Market volatility hit RBC’s capital markets business, with net income tumbling 58 per cent year over year to $479 million. The bank also pointed to $385 million in loan underwriting mark-downs, largely focused in the US, as well as loan provision releases for the lower results. Profits fell 40 per cent quarter over quarter.

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RBC’s personal and commercial banking segment saw its net income slip four per cent from a year ago to $2.02 billion, which the bank attributes to shoring up provisions on performing loans this year compared to released provisions last year. On a quarterly basis, net income fell nine per cent. However, the bank managed a 10-per-cent growth in average loan volumes, largely fuelled by mortgages, business lending, and credit cards.

Some of these losses were offset by modest four-per-cent growth in the wealth management segment, with net income reaching $777 million.

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