RBC Misses Estimates in Tough Times for Investment Banking

(Bloomberg) -- Dwindling dealmaking and testy markets caught up with Royal Bank of Canada, leading to the company's first quarterly profit decline since the start of 2018.

The bank's capital-markets division had its worst quarter in two years for profit and revenue, with lower investment-banking fees and higher provisions causing a 12% earnings drop for the unit. The decline at RBC Capital Markets, which accounts for about a fifth of the bank's overall profit, undercut gains in consumer banking and pushed fiscal fourth-quarter earnings below analysts' expectations.

“This was a rare miss for Royal,” Barclays Plc analyst John Aiken said in a note to clients. “Capital markets earnings were down on the back of lower advisory fees as well as higher provisions and expenses.”

RBC Capital Markets was hurt by a tough year for dealmaking, with a 15% decline industrywide in the value of mergers and acquisitions and a 6% drop in equity financings hurting fee pools. At Royal Bank, investment-banking fees fell 17% to C$428 million ($322 million) in the period, the lowest since the first quarter.

“Corporate investment banking was impacted by an industrywide decline in fee pools as some clients stayed on the sidelines given ongoing economic uncertainty,” Royal Bank Chief Executive Officer Dave McKay said on a conference call Wednesday. “Our results were further impacted by delays in the completion of deals in our pipeline.”

The company's shares slumped 2% to C$105.05 at 9:46 a.m. in Toronto. They have risen 12% this year, in line with the gain for Canada's eight-company S&P/TSX Commercial Banks Index.

Trading revenue was C$706 million, the lowest in a year. RBC Capital Markets also set aside C$78 million for provisions, more than double the amount a year earlier and up 39% from the third quarter.

Overall, Royal Bank's net income slipped 1.4% to C$3.21 billion in the three months through Oct. 31, its first decline since the first quarter of 2018. Adjusted per-share earnings were C$2.22, missing the C$2.27 average estimate of 14 analysts in a Bloomberg survey.

Royal Bank still ended the year with profit of C$12.9 billion, extending a record streak that stretches back to 2011, though the pace of earnings growth is cooling. This year's 3.5% earnings increase marked the slowest annual growth for the Canadian bank in a decade.

Also in the report:

• Earnings from Canadian banking, the company's biggest unit, rose 6.3% to C$1.56 billion in the quarter.
• Royal Bank is showing continued strength in its domestic mortgage business, which is the largest among Canada's big lenders. Domestic mortgage balances rose 7.3%, the biggest year-over-year increase since 2016, to a record C$265 billion.
• Royal Bank's $5 billion takeover of City National in 2015 has helped lift revenue over the past four years. Profit from wealth management rose 32% to C$729 million, partly due to a C$134 million gain in the quarter from selling the private debt business of BlueBay Asset Management.
• The investor and treasury services division had a 71% decline in earnings to C$45 million after the bank pursued a “repositioning” of the business that included C$83 million in severance costs in the quarter. Royal Bank has pared roles in Europe and reduced its footprint in Australia as part of what McKay called a “quick pivot” into Asia.
• McKay announced during Wednesday's call that Chief Administrative Officer Jennifer Tory is retiring “shortly.” Tory previously served as group head of personal and commercial banking.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Daniel Taub

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