RBC hikes dividend as Q4 profit holds steady amid interest-rate surges

Royal Bank of Canada reported fiscal Q4 profit that was roughly unchanged from a year earlier and raised its dividend as a tailwind from rising interest rates helped offset a sluggish quarter for investment banking.

Canada’s largest bank is the second major lender to report fourth-quarter earnings, one day after it announced a $13.5-billion deal to acquire HSBC Bank Canada. On Tuesday, Bank of Nova Scotia reported weaker quarterly earnings, but both banks exceeded analysts’ earnings estimates.

For the three months that ended Oct. 31, RBC earned $3.88-billion, or $2.74 per share, compared with $3.89-billion, or $2.68 per share in the same quarter last year.

On an adjusted basis, RBC said it earned $2.78 per share, ahead of the $2.69 per share that banking analysts anticipated, according to Refinitiv.

The bank increased its quarterly dividend by 4 cents to $1.32 per share, a three-per-cent hike.

For the full fiscal year, RBC’s profit of $15.8-billion fell 2 per cent, while revenue was just shy of $49-billion, down about 1 per cent. Banks are facing pressures from a slowing economy and tough comparisons against results from a year ago as loan loss provisions are rebounding from unusually low levels.

The strength of RBC’s fourth-quarter results was its core personal and commercial banking division, which is a unit RBC is aiming to further strengthen by acquiring HSBC Canada.

Profit from retail banking increased 5 per cent to $2.14-billion, and revenue was up 17 per cent. The division’s net interest margin – the difference between what it charges on loans and pays on deposits – increased by 10 basis points from the previous quarter, and 28 basis points year over year. (100 basis points equal one percentage point).

Rising interest rates have helped improve the profit margins on loans, and lending activity continued to increase despite a slowing economy. RBC’s personal and commercial loans were up 15 per cent, while mortgage balances increased by 9.8 per cent.

Higher provisions for credit losses – the money banks set aside in case loans go bad – were a drag on results, however. The bank set aside $381-million in the quarter, after recovering $227-million in provisions a year ago as it unwound some of the reserves it built up during the COVID-19 pandemic.

RBC’s loss rates on credit are still below prepandemic levels, at 18 basis points, but have started to creep higher.

The bank’s capital markets division had a tougher quarter, with profit of $617-million down 33 per cent year over year. Some of that was due to the timing of changes to its compensation plans. But revenue from corporate and investment banking also fell as debt and equity origination as well as loan syndication activity slowed.

Profit from wealth management was up at $822-million, and earnings from insurance and from investor and treasury services were more or less unchanged when compared with a year earlier.

RBC’s common equity Tier 1 (CET1) capital ratio was 12.6 per cent, compared with 13.1 per cent in the previous quarter. The CET1 ratio is a core measure of a bank’s capital reserves and resilience against shocks. Should the bank close its deal to buy HSBC Canada, which it expects will happen in late in 2023, it estimates its capital levels would remain above 11.5 per cent.

On average, profits for the Big Six banks are expected to drop 4% from last year, hurt by lower investment banking activity. Mergers and acquisitions (M&A) in the three months ended Sept. 30 nearly halved to C$22.8 billion ($17 billion), according to Refinitiv data.

Tuesday, Scotiabank reported net income of $10,174 million for the fiscal year 2022, compared with net income of $9,955 million in 2021. Diluted earnings per share (EPS) were $8.02 , compared to $7.70 in the previous year. Return on equity was 14.8%, compared to 14.7% in the previous year.

Reported net income for the fourth quarter ended October 31, 2022 was $2,093 million compared to $2,559 million in the same period last year. Diluted earnings per share were $1.63 , compared to $1.97 in the same period a year ago.

TD, CIBC and BMO will release their fourth quarter financial results this Thursday.

This article was reported by the Globe and Mail.