RBC Increases Dividend, Reports Higher Earnings But Under Pressure From Interest Rate Margins

TORONTO – The Royal Bank of Canada raised its dividend on Wednesday as it announced an increase in its fourth quarter profits from a year ago, although it said its profits were hit by higher margins. low in part because of low interest rates and increased competition.

The bank said it would now pay a quarterly dividend of $ 1.20 per share, up 11% from $ 1.08 per share, after the federal banking regulator lifted restrictions it had imposed to banks and insurers at the start of the pandemic on increasing payments. RBC has announced plans to repurchase up to 45 million shares, which represents approximately 3% of existing shares.

The quarter saw mortgage activity reach new highs, with RBC increasing total residential mortgages to $ 330 billion in the quarter ending Oct. 31, up 2.5% from the previous quarter, 12.5% ​​compared to the previous year and 25% for the last quarter of 2019.

Net interest margin, a measure of profitability, fell nine basis points from the previous quarter in the Canadian banking industry due to several issues, including a lower spread on mortgages.

“You’ve seen the momentum in the numbers quarter over quarter, which positions us well,” said David McKay, CEO of RBC, in a conference call with an analyst Wednesday. “Our disappointment was also that we didn’t hit the bottom line as much as we normally would with this type of volume.”

Neil McLaughlin, group leader of personal and commercial banking at RBC, said there was an unusually high volume of mortgages in the industry for a record number of originations, which created price pressure in the industry. the mortgage industry.

“With this really strong market and all this demand, you know, the price pressure from the competition has increased. So it’s a very tight market.”

The bank’s profits were also affected by a narrower interest margin in its U.S. operations, with a 20 basis point drop at its City National Bank, in part due to fees related to the federal government program. paycheck protection, as well as the overall asset mix.

Going forward, the bank expects to benefit from higher interest rates as central banks react to inflationary pressures.

McKay noted that falling interest rates have reduced the bank’s revenues by about $ 1 billion annually over the past two years, primarily in the Canadian banking industry and wealth management in the United States, while Nadine Ahn, the bank’s chief financial officer, said that a 25 basis point hike in interest rates could increase revenue by $ 250 million over 12 months in those two divisions.

The low interest rate environment improved the credit image of the bank’s loan portfolio, allowing the bank to reduce loan loss allowance provisions by $ 616 million compared to a year ago.

That helped boost profits to $ 3.9 billion for the quarter, from $ 3.2 billion in the same quarter last year.

RBC says its earnings were $ 2.68 per diluted share for the quarter ended Oct. 31, down from $ 2.23 per diluted share a year ago. Revenue totaled $ 12.4 billion, up from $ 11.1 billion in the same quarter last year.

Adjusted earnings were $ 2.71 per diluted share, compared to $ 2.27 per diluted share in the same quarter a year earlier.

Analysts on average expected adjusted earnings of $ 2.81 per share, according to estimates compiled by financial market data firm Refinitiv.

“[RBC] have suffered margin squeeze on both sides of the border, with strong loan growth unable to offset the pressure on revenues, ”noted Barclays analyst John Aiken.

He said bank lending outside of mortgages, such as credit cards, could help increase interest margins, while growth in areas less dependent on interest rate margins such as the markets. capital and traditional wealth management could also increase profits.

Aiken also noted that the challenges facing RBC are industry wide.

“The quarter was not as strong as we would have liked, but it appears to be an industry wide phenomenon rather than specific to equities this quarter.”

Another industry challenge looming on the horizon is a proposed three percentage point corporate income surtax on big banks and insurers that the Liberal Party pledged during its election campaign.

McKay said on the call now was not the time for such measures, and that singling out certain industries was not helpful in attracting capital.

“We are going through a huge transition in our economy, a supply chain transition, a climate transition where we will need up to $ 2 trillion and therefore create an environment that attracts capital and where the economic rules are certain for a longer period is really important, ”he said.

“When you start proposing taxes now, in this narrow way, can have a real detriment to the overall investment thesis for Canada.”

RBC declined to estimate the impacts of the tax because details of the proposal have yet to be released.

This report by The Canadian Press was first published on December 1, 2021.

Companies in this story: (TSX: RY)

Ian Bickis, The Canadian Press


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