RBC tops estimates on Canada’s recovery, surge in dealmaking

Bloomberg

Royal Bank of Canada (RBC) is benefiting from the lender’s dominance in its home country and a capital-markets division that’s cashing in on a surge in dealmaking.
As Canada’s largest mortgage lender, Royal Bank is getting a boost from strong home sales and surging real estate values that have lifted that portion of its loan book. The bank has also been successful in luring those mortgage customers into other products, giving it an outsize lift from a nascent rebound in consumer and commercial lending as the Canadian economy reopened last quarter, said John Aiken, an analyst at Barclays Plc.
“One of the advantages Royal has is, even though they already have the largest market share, which one would think would be an impediment, they’ve used that as a way to cross-sell and gain more market share,” Aiken said in an interview. Net income in the Canadian banking division surged 52% $1.6 billion in the fiscal third quarter, driven by a 7.9% increase in lending.
The Toronto-based bank’s RBC Capital Markets division had benefited from a boom in trading as the pandemic roiled markets early last year, then kept the momentum going by advising on a flood of equity- and debt-financing transactions for companies seeking to stockpile cash. RBC’s dealmakers have since capitalised on an increase in acquisitions spurred by cheap financing for buyers and high valuations for sellers.
Net income in the capital-markets division rise 19% from a year earlier to C$1.13 billion, helped by record corporate and investment-banking revenue that was fuelled by loan syndications and merger-advisory work. That marks the unit’s third straight quarter with more than C$1 billion in net income. Still, advisory revenue slowed from the second quarter, signalling the dealmaking cycle may have peaked.
Trading and debt capital-markets activity will continue to moderate but remain above pre-pandemic levels, while the investment-banking business still has strength ahead, Chief Financial Officer Rod Bolger said.
“The M&A deal pipeline remains solid heading into our fourth quarter, and equity-issuance activity is expected to remain solid,” he said in an interview.
In addition to helping lending, Canada’s vaccination campaign has allowed Royal Bank and its peers to set aside less money to absorb loan losses or even reverse some of their earlier set asides. In the three months through July, Royal Bank released C$540 million.
Net income rises 34% to C$4.3 billion, or C$2.97 a share. Excluding some items, profit was C$3 a share, beating analysts’ average estimate of C$2.72.
Chief Executive Officer Dave McKay said that he expects mortgage lending to continue growing, albeit at a slower rate than over the past 12 months, which have been “exceptional.” The bank also is seeing positive trends in credit-card spending and business investments that give it confidence the recovery can withstand an inconsistent global vaccine campaign, supply-chain strains, geopolitical risks and travel restrictions,
he said.
“While the momentum that’s building could moderate in the near term by rising virus cases, even with 75% of the eligible Canadian population being vaccinated, we believe the foundation of the economy remains solid and we’ll manage through the threat of the delta variant,” McKay said.