RBC exceeds estimates on recovery in Canada, increase in transactions

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(Bloomberg) – Royal Bank of Canada benefits from lender dominance in its home country and a capital markets division that benefits from increased transactions.

As the largest mortgage lender in Canada, Royal Bank is benefiting from strong home sales and surging real estate values ​​which have increased this portion of its loan portfolio. The bank has also been successful in attracting these mortgage customers to other products, giving it a disproportionate boost compared to an emerging rebound in consumer and business lending as the Canadian economy reopened in the last quarter, a said John Aiken, analyst at Barclays Plc.

“One of the advantages of Royal is that even though they already have the largest market share, which could be a hindrance, they have used it as a way to cross-sell and gain more share. market, ”Aiken said in an interview. The Canadian banking division’s net income jumped 52% to C $ 2.02 billion ($ 1.6 billion) in the fiscal third quarter, thanks to a 7.9% increase in loans.

The Toronto bank’s RBC Capital Markets division had benefited from a trading boom as the pandemic rocked markets early last year, then kept the momentum going by advising on a flood of corporate finance deals. equity and debt for companies looking to store cash. RBC traders have since capitalized on an increase in acquisitions spurred by cheap financing for buyers and high valuations for sellers.

The capital markets division’s net profit increased 19% from a year ago to C $ 1.13 billion, thanks to record revenues from corporate and investment banking services which were fueled by loan syndications and merger advisory work. This is the third consecutive quarter for the unit with net income of over C $ 1 billion. Nonetheless, consulting revenue slowed from the second quarter, signaling that the trading cycle may have peaked.

Trading and debt capital markets activity will continue to moderate but will remain above pre-pandemic levels, while investment banking activity continues to gain strength, CFO said Rod Bolger.

“The M&A pipeline remains strong heading into our fourth quarter, and equity issuance activity is expected to remain strong,” he said in an interview.

In addition to helping loans, Canada’s vaccination campaign has enabled Royal Bank and its peers to set aside less money to absorb loan losses or even to write off some of their earlier layaways. . In the three months leading up to July, the Royal Bank released C $ 540 million.

Net income increased 34% to C $ 4.3 billion, or C $ 2.97 per share. Excluding certain items, earnings were C $ 3 per share, beating the average analyst estimate of C $ 2.72.

Royal Bank shares rose 0.7% to C $ 133.02 at 9:52 a.m. in Toronto. They are up 27% this year, compared to a 26% gain for the S & P / TSX Commercial Bank Index.

CEO Dave McKay said in a conference call with analysts that he expects mortgages to continue to grow, albeit at a slower pace than in the past 12 months, which have been “exceptional”. The bank is also seeing positive trends in credit card spending and business investment that give it confidence the recovery can withstand an inconsistent global vaccine campaign, supply chain tensions, geopolitical risks and restrictions. of travel, he said.

“While the momentum that is building may moderate in the short term by the increase in cases of the virus, even with 75% of the eligible Canadian population vaccinated, we believe the fundamentals of the economy remain strong and we will manage. the threat of the delta variant, ”McKay said.

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