Corporate Canada's "dead money" is showing signs of life.
Executives at Royal Bank of Canada say they are starting to see more appetite for loans from the corporate sector, after two years of stagnant growth during which companies hunkered down and delayed expansion plans.
Those positive signals come months after Bank of Canada Governor Mark Carney chided corporate executives for failing to invest in growth – and for sitting on large cash stockpiles – which he argued was hindering an economic recovery. Mr. Carney referred to it as the "dead money" problem: Companies have declined to spend their cash or use their credit lines, out of fear that another economic shock could roil financial markets and disrupt their access to capital, as happened in 2008.
But those fears may be starting to subside. RBC, which reported a 22-per-cent increase in fourth-quarter profit on Thursday, said the bank is seeing more demand for business loans. Wholesale lending in Canada rose 11 per cent over last year. "The type of investment we're seeing is stuff that's been put off because of the recession and the financial crisis," RBC chief financial officer Janice Fukakusa said in an interview. "There has been more volume growth there, and draw-down of loans."
A resurgence in trading revenues in the capital markets division, along with an uptick in lending, pushed Canada's largest bank to a profit of $1.91-billion, or $1.25 a share, in the fourth quarter. For the year, it earned a record $7.5-billion – an increase of 17 per cent from 2011.
"We ended the year strongly," chief executive officer Gordon Nixon said in a statement. "While the financial industry is expected to face headwinds in 2013, we are confident in our ability to weather these challenges given our strong financial and competitive position."
While the bank says it is seeing positive signs from corporate Canada, it had a bigger increase in corporate lending south of the border. Wholesale lending in the U.S. jumped 53 per cent amid a surge in demand for large financing deals through RBC's capital markets division. A retreat from the North American market by European banks during the financial crisis has created lending opportunities for RBC, the bank said. Wholesale lending in the U.S. in the quarter was $17.1-billion, compared to $54.5-billion in Canada.
But analysts remain skeptical that business lending is picking up in a meaningful way in some key areas in Canada. Analyst Brad Smith of Stonecap Securities said in a research note that the increase of less than 1 per cent in loans to medium– and small-business clients was "anemic."
In the United States, however, the bank has added about 40 new lending clients per quarter in the U.S., Doug McGregor, co-CEO of RBC Dominion Securities Inc., told analysts on a conference call.
The bank said it is considering expanding its operations in the U.S., including asset management and retail banking. After RBC sold off its struggling U.S. retail bank operations last summer, Mr. Nixon suggested it would consider further deals if they arose.
In retail banking, however, he said the bank has been considering a different approach, such as online banking, rather than invest in branches – a strategy it tried during the past decade and suffered vast losses on.
"In the United States, although we don't have the branch network … there are still some pretty attractive opportunities, at least in our view, for us to conservatively continue to take advantage of our strength," Mr. Nixon said, pointing out that RBC's New York-based U.S. capital markets operations are bigger than that same business in Canada.
RBC's earnings in the fourth quarter were slightly better than what analysts expected. Excluding non-cash items, Royal Bank made $1.27 a share. Analysts were expecting about $1.26 per share for the quarter on average. RBC is the first of Canada's major banks to report fourth-quarter earnings. The rest report next week.
The bank's personal and commercial banking operations, which include its network of retail branches across Canada, made $1.03-billion in the quarter, up 9 per cent from last year.
The bank's capital markets division made $410-million in the quarter, up $285-million from last year when slumping markets took a toll on profits. In particular, higher revenue from fixed-income trading helped boost profits in the quarter, RBC said.
Provisions for credit losses, or the money that banks set aside to cover bad loans, rose to $362-million, up $86-million from a year ago. RBC said the increase was mainly due to a loss associated with a single account in its corporate lending portfolio.