RBC warns of credit yield dependency on government assistance after falling profits
(Reuters) – Royal Bank of Canada executives warned on Wednesday that the company’s credit performance in 2021 hinges on the outlook for government support after its quarterly profits exceeded estimates on much more loan loss allowances weak than expected.
RBC, the largest lender in Canada, also reported a moderation in its trading activity this year.
The National Bank of Canada, which also beat earnings expectations, said trading revenues could drop if volumes were to disappear following recent increases, which some CEO Louis Vachon attributed to “pockets of irrational exuberance” and the distortions caused by quantitative easing.
Both banks posted record profits in their capital markets activities in the first quarter.
RBC and National Bank, the smallest of Canada’s six largest lenders, followed rivals Bank of Montreal and Bank of Nova Scotia in posting better-than-expected earnings that also exceeded pre-pandemic levels.
Canadian banks have largely avoided an increase in bad loans thanks to several government assistance measures, which are expected to end this summer.
As BMO and RBC freed up reserves on performing loans during the quarter, signaling an improving outlook for loan losses, RBC said defaults would continue to rise for the remainder of 2021, accompanied by a decline. increase in provisions for impaired loans.
RBC’s chief risk officer, Graeme Hepworth, told analysts that the degree of extension or transformation of government support “will drive (…) the expectations and implications for our credit performance over the course of the second half of the year. “
National Bank executives said that while loan losses could be lower than initially thought, the bank is maintaining its provisions on performing loans.
Despite the somewhat murky credit situation, executives at RBC said they were encouraged by the expected improvement in the second half of the year on growth expectations for higher margin loans like commercial and credit cards as new markets emerge. businesses reopen and the economy recovers.
RBC shares rose 0.3% to C $ 112.53 in afternoon trading in Toronto, while National Bank shares rose 4.6% to 79 , C $ 30, both heading for their highest close on record. Toronto’s benchmark equities rose 0.9%.
Canadian lending rose 6% in the three months to January at RBC, but the rise was entirely due to the increase in residential mortgages.
RBC expects continued growth in mortgages to contribute to a consumer-led recovery in its Canadian banking unit, based on a forecast for single-digit growth in house prices in Canada this year, after a record year in 2020 for the resale activity.
RBC reported adjusted cash earnings of C $ 2.69 per share, compared to C $ 2.26 according to analysts’ expectations. National Bank adjusted earnings were C $ 2.15 per share, compared to estimates of C $ 1.71.
Reporting by Nichola Saminather in Toronto and Noor Zainab Hussain in Bengaluru; Additional reporting by Sohini Podder in Bangalore; Editing by Amy Caren Daniel, Matthew Lewis and Marguerita Choy