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Royal Bank of Canada (RY) Q3 Earnings Improve Y/Y, Costs Rise

Zacks Equity Research

Royal Bank of Canada’s RY third-quarter fiscal 2019 (ended Jul 31, 2019) net income was C$3.3 billion ($2.5 billion), up 5% from the prior-year quarter.

The bank witnessed higher revenues and strong capital position in the quarter. Notably, growth in loans and deposit balances were positives. However, rise in expenses and higher provisions adversely impacted results to some extent.

Furthermore, on a year-over-year basis, Personal & Commercial Banking, Wealth Management, Insurance, and Canadian Banking reported rise of 10%, 11%, 29% and 8%, respectively, in quarterly net income. Nevertheless, net income in Investor & Treasury Services and Capital Markets declined 24% and 6%, respectively. The Corporate Support segment reported net loss against net income reported in the prior-year quarter.

Revenues Improve, Expenses & Provisions Rise

Total revenues were C$11.5 billion ($8.7 billion) in the May-July quarter, up 5% on a year-over-year basis. Revenues were driven by higher net interest income as well as non-interest income.

Net interest income was C$5 billion ($3.8 billion), up 10% from the prior-year quarter. Non-interest income was C$6.5 billion ($4.9 billion), up 1% year over year.

Non-interest expenses were C$6 billion ($4.5 billion), up 2% from the year-ago quarter. The upswing primarily resulted from rise in almost all the components, except for professional fees and other expenses.

As of Jul 31, 2019, Royal Bank of Canada’s total loans were C$615.5 billion ($466.4 billion), up 9% from the prior-year quarter. Additionally, deposits totaled C$881.2 billion ($667.8 billion), up 6% year over year. Total assets were C$1.41 trillion ($1.07 trillion), up 9% from the year-earlier quarter.

Total provision for credit losses was C$425 million ($240.7 million) in the quarter, up 23% year over year mainly due to elevated provisions in Personal & Commercial Banking, Wealth Management, and Capital Markets.

Strong Capital Position

As of Jul 31, 2019, Royal Bank of Canada’s Tier 1 capital ratio was 13%, up from the prior-year quarter’s 12.3%. Total capital ratio was 15%, up from 14.1% reported in the year-earlier quarter.

The company’s estimated Common Equity Tier 1 (CET1) ratio was 11.9%, up 80 basis points from the prior-year quarter.

Dividend Update

Concurrently, the company announced a quarterly dividend of $1.05 per share, marking a 3% hike from the prior payout. The dividend will be paid on Nov 22 to shareholders of record as of Oct 24.

Our Viewpoint

We believe that continued improvement in loan balances and diversified product mix will drive Royal Bank of Canada’s organic growth. However, stringent regulatory reforms and escalating expenses keep us skeptical about the company’s sustainable growth over the long term.

Royal Bank Of Canada Price, Consensus and EPS Surprise

Royal Bank Of Canada Price, Consensus and EPS Surprise

Royal Bank Of Canada price-consensus-eps-surprise-chart | Royal Bank Of Canada Quote

Royal Bank of Canada currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Foreign Banks

Deutsche Bank DB reported second-quarter 2019 net loss of €3.15 billion ($3.54 billion) against net income of €401 million in the year-ago quarter. Also, the German lender incurred loss before taxes of €946 million ($1.06 billion).

UBS Group AG UBS reported second-quarter 2019 net profit attributable to shareholders of $1.39 billion, up nearly 1% from the prior-year quarter. Notably, the company’s performance reflects lower expenses. Also, results were supported by rise in net fee and commission income (up 1% year over year), partially offset by lower net interest income (down 15%).

HSBC Holdings HSBC recorded second-quarter 2019 pre-tax profit of $6.2 billion, up 4% year over year. The increase was due to rise in revenues.

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