Earnings Stabilize for Royal Bank of Canada in Q3

Thanks to lower provisioning and top-line growth help

Eric Compton 27 August, 2020 | 8:24AM
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Wide-moat Royal Bank of Canada (RY) reported good fiscal third-quarter results, all things considered. The strain from provisioning was much lower in the third quarter compared with the second quarter, and adjusted diluted EPS was only down 1% year over year, at $ 2.23 per share. Pre-provision net revenue growth was 6%, showing the resiliency of core revenue, while provisioning came in at $ 675, up roughly 60% year over year but down significantly compared with the $ 2.8 billion second quarter provisioning charge. Return on equity was a strong 15.7%. The trend in provisioning was better than what we saw for BMO and Scotiabank, and more in line with what we have seen with National Bank of Canada, which reported on the same day as RBC and also saw its provisioning decline materially in the third quarter. We were largely expecting the high-water mark for provisioning to be in the third quarter for most banks, so this has been a pleasant surprise, and management called this out last quarter, predicting second quarter would be the high point. Of course, the ultimate question remains, “is RBC adequately reserved?” With roughly 6%-7% of total loans estimated to be more sensitive to the impacts of COVID-19, the bank has a slightly higher estimated exposure here, while the ratio of loan loss reserves to gross loans is a bit above NBC’s and BMO’s ratios and behind Scotiabank’s (not unexpected given Scotiabank’s unique international footprint and loan exposures), so we don’t see an obvious imbalance. RBC’s common equity Tier 1 ratio remained strong, increasing to 12% from 11.7% last quarter. Internal capital generation was the primary driving factor, and lower risk weighted asset amounts also helped. Given RBC’s strong earnings profile and current reserve levels, we think it remains well positioned to weather the COVID-19 storm. As we incorporate third-quarter results into our projections, we do not plan to materially change our fair value estimate of $ 112 (USD 81).


Deferral stats are generally encouraging, but are admittedly still in their early stages, as the majority of deferrals still have yet to expire. Most deferral balances will have had a chance to expire by the end of fiscal 2020. Still, with roughly $ 23 billion of deferrals having expired so far, out of the roughly $ 57 billion offered, roughly 80% of deferrals that have expired have resumed regular payments, 19% have extended their deferral arrangement, and only 1% moved into delinquency.

On a segment level basis, personal and commercial banking saw net income decline roughly 18% year over year, as lower net interest margins and fee income weighed on top-line results, provisioning remained higher year over year, and expenses were up roughly 1%. We wouldn’t be surprised to see fee income gradually recover, and data shows debit and credit card volumes gradually improving in certain categories, such as dining and entertainment. Wealth management also saw the impact of lower rates and higher provisioning, as net income was down 12% year over year. Assets under management still saw good growth of 13% year over year, and we would expect earnings to improve for this segment. Insurance net income was up 6% year over year, and capital markets saw net income increase 45% year over year. The record volumes in capital markets can’t continue forever, but they have been a nice offset as other segments have faced pressure.

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Eric Compton

Eric Compton  Eric Compton is an equity analyst for Morningstar,

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