Royal Bank of CanadaNATHAN DENETTE
Royal Bank of Canada got caught up in "the eye of the storm" of the European sovereign debt crisis, as the bank's trading operations took a hit from the market upheaval in countries like Greece, Italy and Portugal.
RBC reported a 93 per cent drop in trading revenues, to $125-million, largely because of the dive in European markets in May, which caused the market for some bonds to grind to a halt and equities around the world to slump. That was the major factor in a disappointing quarter: Over all, profits at the country's largest bank fell 18 per cent in the third quarter to $1.28-billion, missing analysts' expectations.
However, RBC chief executive officer Gordon Nixon tried to ease concerns among analysts and investors, saying the sector-wide trend of lower trading revenues will not be prolonged.
"May was a particularly difficult month [for trading] And of course that was the heart of the sovereign debt crisis," Mr. Nixon said. "We saw improvements over the course of June and July as markets stabilized, confidence improved and clients returned to the market. Market activity continues to improve."
As Canada's chartered banks began unveiling their third quarter earnings this week, Bay Street expected that Europe's problems would weigh on trading revenues, with RBC at the top of that list given its size in the business of trading bonds, equities and derivatives.
"In a sovereign debt crisis, that puts us front and centre in the eye of the storm," Mark Standish, co-CEO of RBC Dominion Securities said on a conference call with analysts. However, he added that bank executives like what they see in the months to come as the European debt situation begins to stabilize.
"The pipeline for new [bond issues]in Europe is massive. And that's something that we have the intention of being part of," Mr. Standish said.
The $1.28-billion quarterly profit at RBC, equal to 84 cents a share, was a drop from record profits of $1.56-billion, or $1.05 cents a share a year ago. Revenue fell 13 per cent to $6.83-billion.
Adjusted profit, removing one-time items, was 87 cents a share, well back of the $1.02 a share average Bay Street was forecasting for the quarter.
"This came in well below our expectations and will likely still be a surprise to the market," Barclays Capital analyst John Aiken wrote in a note to clients after the numbers were made public. RBC shares closed down more than 3 per cent Thursday.
Canadian bank earnings began this week in similar fashion as Bank of Montreal reported net income at BMO Capital Markets fell to $130-million, a decrease of $180-million from a year ago. RBC Capital Markets made $201-million, a decline of $361-million from a year ago, speaking to the magnitude of the slowdown.
Investors and analysts have long debated the reliability of trading revenues, which tend to be volatile. "The longer-term impact may be that investors are more skeptical of the sustainability of trading revenue," Desjardins analyst Michael Goldberg wrote in a research note.
RBC's core retail banking division in Canada painted a different picture. The bank's branch network reported a 14 per cent jump in profit to $766-million, a sign that the Canadian economy is improving.
Loan loss provisions, another closely watched indicator of the economy, improved 44 per cent to $432-million. Provisions for credit losses are the amount of money banks set aside to cover bad loans and offer insight into how well consumers are keeping up with their payments.
Business at RBC's struggling U.S. operations was not as robust. RBC's international banking division, which includes its U.S. branch network in North Carolina, Georgia and other states, lost $76-million in the quarter, though that was an improvement on a $95-million loss a year ago.
"Our U.S. banking portfolio remains under pressure, primarily as a result of our historical business mix, which is weighted towards commercial real estate and residential builder finance," RBC chief risk officer Morton Friis said. "Our footprint in the U.S. southeast encompasses some of the hardest hit areas in the recent economic downturn, including some of the hardest hit areas in the recent economic downturn, including Georgia and Florida."
A bright spot for the bank was its wealth management division, which RBC has been expanding in the U.K. in recent months hoping to take advantage of an eventual market recovery. That business saw profit jump 10 per cent, to $185-million, but part of the increase was due to accounting gains and income tax adjustments.
Editors Note: Profit at BMO Capital Markets fell to $130-million, a decrease of $180-million from a year ago. This clarifies information from an earlier version of this story.
Grant Robertson