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RBC moves to boost capital after announcing $13.5Bn deal for HSBC Canada

TORONTO — Royal Bank of Canada is taking measures to boost its capital on hand after announcing a $13.5 billion deal on Tuesday to buy HSBC Bank Canada amid heightened market uncertainty.

The bank said Wednesday as it reported fourth quarter results that it would defer share repurchases until the close of the deal, expected in late 2023, and that it is rolling out a two per cent discount on dividend reinvestments, a move meant to add to their balance sheet.

The dividend reinvestment incentive, expected to add about $2 billion in capital, comes amid higher chances of unlikely but disruptive events, said chief executive Dave McKay.

"There's a higher level of uncertainty, and therefore, you have higher tail risk right now," he said on an analyst call.

"Therefore, we're building a little bit of a capital buffer for uncertainty. Capital has no half-life. It can only be used, and we're very proud of how we've used it over the last 24 hours."

Given the potential slowdown ahead, the bank also set aside $381 million for potentially bad loans, compared with a reversal of $227 million last year, which offset gains elsewhere in the quarter to leave earnings of $3.88 billion just $10 million shy from a year earlier.

The actions on loan provisions and dividend discounts come as elevated housing and energy prices, geopolitical instability, and rising interest rates put pressure on growth, affect asset valuations and adds to market volatility, said McKay.

"We maintain our cautious stance on the outlook for economic growth," he said.

"Although higher interest rates are needed to preserve long term economic stability, the lagging impact of monetary policy, combined with strong employment and significant liquidity in the system, has likely delayed what may end up being a brief and moderate recession."

While rising rates put pressure on the economy, RBC is especially well positioned to benefit from them as the net interest margins on its sizable deposit base grows.

The bank said it saw net income in personal and commercial banking grow five per cent from a year ago to $2.14 billion, mostly due to those higher margins along with average volume growth of 10 per cent in loans, and wealth management also got a boost from higher net interest income and loan volume growth.

The boost from rising interest margins come as a benefit of RBC's scale, which it continues to push to increase, both through the HSBC Canada acquisition, and more organic growth.

HSBC Canada gives the potential for RBC to add some 800,000 clients if it goes through as expected in late 2023, while this year the bank added 400,000 clients, and expects its client referral deal with the Canadian division of India's ICICI Bank to direct some 50,000 more customers as immigration levels reach record highs.

The bank is well-positioned to add more clients, and deposits, next year to provide lower-cost funding for its loans, said McKay.

"We believe our largely deposit-funded balance sheet will be a key driver of profitability in a rising rate environment," he said.

The bank's capital markets business shows the clearest indications of volatility, with net income of $617 million down 33 per cent from a year earlier, but up 29 per cent from the third quarter.

Revenue totalled $12.57 billion, up from $12.38 billion a year earlier.

The quarter showed strong loan growth and no signs of a credit spike for RBC, said Scotiabank analyst Meny Grauman in a note, but he wondered about what the bank's move on the discounted dividend reinvestment plan (DRIP) shows for the bank's capital outlook, given the expected tougher economic conditions next year.

"In that context a defensive move on the DRIP raises questions about downside risks," said Grauman.

He said the bank's better-than-expected earnings, which came in at an adjusted $2.78 per diluted share for the quarter compared with a consensus of $2.68, according to Refinitiv, was from higher revenues and smaller loan provisions than expected.

Bank expenses however, which were up 9.5 per cent for the quarter compared with last year on higher staffing costs and some acquisition-related increase, came in higher than expected.

For its full financial year, RBC said it earned $15.81 billion or $11.06 per diluted share on $48.99 billion in revenue compared with a record profit of $16.05 billion or $11.06 per diluted share on $49.69 billion in revenue in the same period last year.

RBC said it will now pay a quarterly dividend of $1.32 per share, an increase of four cents.

This report by The Canadian Press was first published Nov. 30, 2022.

Companies in this story: (TSX:RY)

Ian Bickis, The Canadian Press

Note to readers: This is a corrected story. A previous version referred to the incorrect measure RBC was deferring until it closes the HSBC Canada acquisition.