© Reuters. A sign for the Royal Bank of Canada in Toronto, Ontario, Canada, December 13, 2021. REUTERS/Carlos Osorio/File Photo
By Nivedita Balu and Manya Saini
(Reuters) -Royal Bank of Canada beat analyst estimates for quarterly profit on Wednesday, as its wealth management and capital markets divisions benefited from higher fee income, while high interest rates helped the bank to earn more with the loans.
Still, Canada's largest bank set aside more funds to cover bad loans, preparing for households to feel the pressure from the Bank of Canada, which rapidly raised interest rates to combat inflation.
Money markets expect interest rates to fall in the second half of the year.
RBC CEO David McKay said uncertainty around monetary policy points to 2024 being a “transitional year” for markets, also considering the effect of geopolitical tensions.
However, higher rates boosted RBC's net interest income by 2.1% year-on-year, while the capital markets unit benefited from fixed income income.
National Bank analyst Gabriel Dechaine cited an “improved revenue generation environment.”
Adjusted profit was C$4.07 billion, or C$2.85 per share, for the three months ended Jan. 31, above analyst expectations of C$2.80 per share, according to data from LSEG.
Provisions for credit losses increased 53% from a year ago to C$813 million.
On Tuesday, RBC peers Bank of Montreal and Bank of Nova Scotia said they had created provisions for bad loans and warned that growth would be subdued until rates began to fall.
RBC shares rose 0.5% in Toronto, while National Bank of Canada (OTC:) rose 3.5% after beating earnings.
READY FOR HSBC CANADA
RBC also flagged a 50% increase in integration costs due to its C$13.5 billion purchase of HSBC's Canadian unit, which is set to close next month.
Analysts have raised questions about the strength of RBC's balance sheet after the deal closes, after the regulator raised the minimum requirement to 11.5%.
RBC said it expects its core capital ratio to be around 12.5% after the deal closes, up from 14.9% at the end of January.
Jefferies analyst John Aiken said capital growth in the latest quarter eases concerns about the impact of the purchase.
The bank also announced it would eliminate a discount on its dividend reinvestment program, which could help boost capital.
The regional banking crisis in the US has put some pressure on City National Bank, which serves a Hollywood clientele and was acquired by RBC in 2015, forcing its parent to inject capital, cut nearly 100 jobs and make management changes.
RBC said City National remains a top priority and will focus on generating a more normal level of net income in 2025.
“There is a real opportunity for us… to build this business and make more money doing it, even with the existing balance sheet,” CEO McKay said.
He admitted that the company had placed too much emphasis on “growth over profitability of growth.”
RBC's profits were hit by a C$159 million fee from the U.S. Federal Deposit Insurance Corporation, which has charged banks fees to replenish their deposit insurance fund depleted by the collapse of Silicon Valley Bank and signature bank (OTC:) last year.
