Canada's Royal Bank earnings disappoint, National Bank beats

© Reuters. The Royal Bank of Canada (RBC) logo is seen outside of a branch in Ottawa, Ontario, Canada, February 14, 2019. REUTERS/Chris Wattie/File Photo

By Nichola Saminather

(Reuters) - Royal Bank of Canada (RBC) on Wednesday missed analyst estimates for third-quarter profit, while National Bank of Canada (OTC:NTIOF) did slightly better than expected, as the former's capital markets business weighed on earnings while the latter's helped lift them.

Canadian banks, which have mostly outperformed market expectations for the past few quarters, are starting to see some negative impacts from market challenges and economic uncertainties.

RBC is forecasting a moderate recession in Canada and the United States in 2023, and sees a 12% decline in average Canadian home prices from their peak, executives said on its analyst call.

In response, RBC took provisions for credit losses (PCLs) of C$340 million to guard against potential loan impairments, compared with a recovery of C$540 million a year earlier. National Bank's PCL was C$57 million, compared with a release of C$43 million a year earlier, which weighed on both banks' profits.

Royal Bank's pre-tax, pre-provision earnings fell 3% from a year earlier, while National Bank's rose 7%.

Shares of RBC, Canada's biggest lender, dropped 3% to C$122.71, compared with a 0.1% gain in the Toronto stock benchmark. National Bank stocks rose 0.5%.

RBC reported a 58% decline in its capital markets earnings, which overshadowed strong margin expansion and loan growth in its banking business. It expects margins to rise another 10 to 15 basis points over the next couple of quarters, executives said.

National Bank's 12% increase in capital markets earnings, driven by strong performance in its trading business, helped offset deals weakness. It also reported strong growth in both commercial and mortgage loans.

Despite the challenges, RBC doesn't see much risk in its mortgage book until 2025 or 2026, when fixed loans taken at record-low rates during the pandemic come up for renewal, executives said.

Most variable-rate mortgages won't see higher payments until they renew, and those whose monthly payments may no longer cover the interest due and need to increase them make up less than 0.5% of customers, they said.

RBC reported adjusted earnings of C$2.55 per share, down 15% from a year earlier and compared with analysts' expectations of C$2.66.

National Bank, the smallest of the country's Big Six banks, posted earnings of C$2.35 a share, a decline from C$2.36 a year earlier, but beating estimates of C$2.34.

On Tuesday, Bank of Nova Scotia's earnings disappointed markets on a decline in profit in its capital markets business and lower margins from its international business.

($1 = 1.2974 Canadian dollars)