RBC Profit Hit by Dealmaking Slump, Souring Economic Outlook

(Bloomberg) -- Royal Bank of Canada's (NYSE:RY) profit took a hit last quarter as a slump in investment-banking activity took a toll on revenue and a deteriorating economic outlook prompted higher-than-expected provisions for loan losses. 

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

Royal Bank’s investment banking revenue was slammed by plunging equity markets that dried up investor demand for initial public offerings and share sales, along with C$385 million in markdowns on loans it had underwritten. Despite the quarter’s turbulent markets, trading revenue also fell, failing to counter the hit from the investment-banking downturn.

“Investment banking in particular was much weaker than people expected, even accounting for those markdowns,” Paul Gulberg, an analyst at Bloomberg Intelligence, said in an interview. “People knew there were no IPOs, they knew there was much weaker M&A, but it was still down a lot.”

RBC Capital Markets’ net income fell 58% to C$479 million. Corporate and investment banking revenue slid 52% to C$625 million, with the markdowns resulting in investment banking revenue of negative C$26 million. Revenue from global markets dropped 7.3% to C$1.14 billion.

By contrast, National Bank of Canada (OTC:NTIOF) on Wednesday posted an 18% increase in trading revenue that helped profit top analysts’ estimates. Among Canada’s six biggest banks, National Bank generates the largest portion of its revenue from capital-markets activities.

At Royal Bank, companywide net income fell 17% to C$3.58 billion, or C$2.51 a share. Excluding some items, profit was C$2.55 a share. Analysts estimated C$2.67, on average.

The company’s shares have slid 5.8% this year, compared with an 8.8% drop for the S&P/TSX Commercial Banks Index.

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

The bank’s common equity tier 1 capital ratio was little changed at 13.1%, compared with 13.2% at the end of the second quarter.

Despite the gloomier outlook, Royal Bank’s domestic banking operations underscored a Canadian economy that’s still performing well for now. Revenue in the division climbed 11%, helped by rising balances of mortgages, credit cards and small business loans. Net income for the unit fell, hurt by $331 million in provisions for credit losses, compared with C$122 million in releases a year earlier.

Royal Bank also got a lift from the Bank of Canada’s interest-rate increases, which helped boost its net interest margin to 1.52% last quarter from 1.45% in the second quarter, an expansion that National Bank analyst Gabriel Dechaine called “very strong.”

(Updates with capital-markets profit in fifth paragraph.)

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