RBC profits beat expectations amid surging financial market results, easing loan loss provisions

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Royal Bank of Canada profits fell just 2% from a year ago, despite the effects of a global pandemic, due to soaring financial market earnings and the easing of the provision for loan losses.

Canada’s largest lender reported profit of $ 3.2 billion, or $ 2.20 per share, for the three months ending July 31. In the same fiscal quarter a year earlier, RBC earned $ 3.26 billion, or $ 2.22 per share.

Adjusted for certain items, RBC said it earned $ 2.23 per share, well above analysts’ consensus estimate of $ 1.81, according to Refinitiv.

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The bank kept its quarterly dividend stable at $ 1.08 per share, in line with guidelines from the Canadian banking regulator not to increase payouts to investors.

Provisions for credit losses – or money banks set aside to cover loans that might not be repaid – stood at $ 675 million. It was up 59 percent from a year ago, and high by historical standards, but it was about half of the total provisions some analysts had predicted for the bank. Provisions fell precipitously from the previous quarter, when RBC allocated $ 2.83 billion of new reserves to possible future losses.

Profits at RBC’s core retail banking division came under pressure from squeezing loan margins, which fell 18% to $ 1.37 billion. The division also recorded most of the bank’s provisions for credit losses, adding $ 527 million in reserves, more than half of which was on loans that were already impaired.

But the full impact of the pandemic has been delayed by payment deferrals given to customers on mortgages, credit cards, personal and business loans. As of July 31, approximately 278,400 RBC customers still had deferred payments on 344,541 loans valued at $ 62.8 billion, compared to nearly 580,000 loans totaling $ 78.3 billion in the previous quarter. In RBC’s Canadian retail banking division, 12 percent of all loans were still deferred, worth $ 55 billion, although some customers with deferrals chose to continue making payments.

The decline in retail profits was roughly offset by a surge in financial market profits, which rose 45% to $ 949 million from a year ago. Higher returns from fixed income and equity transactions were the main driver amid volatile markets recovering from large losses at the start of the coronavirus pandemic.

The bank’s insurance division also increased profits 6% to $ 216 million, but wealth management profits fell 12% to $ 562 million.

The bank’s capital levels improved as companies paid off balances on lines of credit they had drawn down at the start of the pandemic. RBC’s Class 1 (CET1) common stock ratio rose to 12% from 11.7% in the previous quarter, which was already the highest among major Canadian banks. The CET1 ratio is an important measure of a bank’s ability to absorb losses and continue to lend.

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RBC is the third major bank to report third-quarter profits, after the Bank of Nova Scotia and Bank of Montreal each posted steeper declines in quarterly profits on Tuesday, weighed down by provisions for higher than expected credit losses.

National Bank of Canada also reported stronger results than analysts expected on Wednesday, dropping 1 percent to $ 602 million year over year.

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