Royal Bank of Canada Posts Strong 4Q

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Last week, Royal Bank of Canada (RY) reported net income from continuing operations of C$1.9 billion ($1.9 billion) for fiscal fourth quarter 2012 (ended on October 31), versus C$1.6 billion ($1.6 billion) recorded in the year-ago period. This reflects a 19% increase in income compared with the prior-year quarter.

Results reflect a rise in revenue and improved capital position. Moreover, lower interest expenses were a positive for the quarter. Yet, the key negatives were deteriorating credit quality and elevated non-interest expenses.

For fiscal year ended October 31, 2012, net income from continuing operations stood at C$7.6 billion ($7.6 billion), up 9% from C$7.0 billion ($7.1 billion) in the prior year. Including certain nonrecurring items, net income was C$7.5 billion ($7.5 billion), up 17% year over year.

Performance in Detail

Total revenues in the quarter were C$7.5 billion ($7.6 billion), elevating 11.9% from C$6.7 billion ($6.7 billion) reported in the comparable prior-year period. Revenue growth was mainly due to higher interest as well as non-interest income.

Furthermore, segment-wise on a year-over-year basis, Personal & Commercial banking, Wealth Management, Investor & Treasury Services and Capital Market reported a rise in revenues, while Insurance division recorded a fall.

Net interest income was C$3.2 billion ($3.2 billion), up 6.7% from C$3.0 billion ($3.0 billion) reported in the comparable prior-year period, aided by lower interest expenses. Non-interest income stood at C$4.3 billion ($4.4 billion), up 16.2% from C$3.7 billion ($3.7 billion) in the year-ago quarter, mainly due to higher trading and mutual fund revenue.

For the quarter, non-interest expenses were C$3.9 billion ($4.0 billion), up 11.4% from C$3.5 billion ($3.5 billion) recorded in the prior-year quarter. The increase was marked mainly by higher human resources, occupancy and equipment expenses.

Credit Quality

Total provision for credit losses was C$362 million ($367 million) in the quarter, up 31.1% from C$276 million ($276 million) in the prior-year quarter. The increase was largely due to elevated wholesale portfolio and Canadian Banking business lending portfolio provisions.

Capital Position

As of October 31, 2012, Royal Bank of Canada reported total loans of C$380.2 billion ($380.0 billion), up from C$349.5 billion ($352.2 billion) in the prior year, primarily due to higher demand in retail loans.

Moreover, deposits climbed to C$508.2 billion ($507.9 billion) from C$479.1 billion ($482.8 billion) as of October 31, 2011, mainly due to an increase in personal deposits. Total assets were C$825.1 billion ($824.6 billion), up from C$793.8 billion ($800 billion) as of October 31, 2011.

As of October 31, 2012, Royal Bank of Canada’s Tier 1 capital ratio came in at 13.1%, up 10 basis points (bps) sequentially. Total capital ratio was 15.1%, up 10 bps sequentially. The company’s estimated pro-forma Basel III common equity Tier 1 ratio was about 8.4%.

Our Viewpoint

Going forward, we expect Royal Bank of Canada’s strong business model, diversified product mix and sturdy capital position to boost its bottom line. However, a persistent low interest rate environment, weak economic recovery and stringent regulatory requirements will remain a drag on its financials.

Shares of Royal Bank of Canada currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We believe the announcement of positive results might lead to upward estimate revisions. This, in turn, could cause an improvement in the Zacks Rank.

Among peers, Canadian Imperial Bank of Commerce (CM) is scheduled to release its fourth quarter and fiscal 2012 results on December 6, 2012.

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