Yahoo Finance Big Six banks continue to shore up loan loss provisions as profits drop
Profits at two of Canada’s Big Six banks began to buckle in the third quarter as they set aside larger stores of cash for bad loans amid a darker economic outlook.
Royal Bank of Canada’s net income fell to $3.58 billion, with the bank hit by a double whammy of rising provisions for credit losses and an ailing capital markets segment. Similarly, National Bank of Canada’s net income slipped two per cent year over year to $826 million for similar credit loss-related reasons.
RBC’s adjusted earnings slipped to $2.55 per share in the three months ending July 31, missing average analyst expectations of $2.67 per share.
Dave McKay, RBC’s chief executive, noted that banking businesses in Canada and the United States had double-digit loan volume growth, but market volatility took its toll, with the bank’s capital markets’ net income tumbling 58 per cent year over year to $479 million.
“Our market-sensitive businesses reported a challenging set of results against the backdrop of one of the toughest environments for financial markets,” McKay said during a conference call on Wednesday morning.
RBC’s personal and commercial banking segment’s net income slipped four per cent from a year ago to $2.02 billion, which the bank attributed to shoring up provisions on performing loans this year.
RBC joins Bank of Nova Scotia in taking a cautious approach with credit-loss provisions and analysts expect more banks to set aside reserves given the less certain economic environment.
Scott Chan, an analyst at Canaccord Genuity Group Inc., gave a mixed reaction on RBC’s earnings.
“Relative to the Street, (RBC)’s earnings miss was driven by a challenged capital markets performance, which was also impacted by $385 million of loan underwriting markdowns … alongside tough market conditions,” Chan said in a note to clients. “On the positive side, (RBC)’s core (personal and commercial banking) trends came in much stronger than expectations, supported by margin expansion and volume growth.”
National Bank’s adjusted diluted earnings, which reached $2.35 per share in the same period, was largely in-line with analyst expectations of $2.34 per share. Growth across all its main business lines blunted the impact that higher provisions for credit losses had on results.
“We released strong third-quarter results with pre-tax, pre-provision earnings up nine per cent driven by double-digit growth across all business segments,” Laurent Ferreira, National Bank’s chief executive, said during a press conference following the results.
“We continue to operate in an uncertain and complex environment dominated by elevated inflation, rising interest rates and heightened geopolitical risks.”
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Ferreira added that the bank was well-positioned to shoulder these challenges given its strong capital levels and larger allowances for credit losses.
National Bank’s personal and commercial segment grew 11 per cent to $335 million in the third quarter from a year earlier, as revenues rose from loan growth and higher net interest margins from rising rates.
Its wealth-management business’s net income grew ten per cent year over year to $181 million, with revenues driven by a boost in net interest income. However, the bank’s net income in its U.S. finance business declined 22 per cent and took on a $95-million loss in other expenses.
RBC’s stock slid three per cent during Wednesday to $122.61 as of 2:30 p.m. Shares of National Bank held steady throughout the trading day, and were at $92.13.
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