RBC Centura Banks Inc., the U.S. banking arm of Royal Bank of Canada, said it was caught off guard by rapid housing market deterioration in recent months.
Executives at the $25.5 billion-asset Raleigh unit had previously been cautiously optimistic about the credit picture. But on Friday, after reporting a steep jump in credit-loss provisions and a sharp drop in profits for the period ended Oct. 31, Scott Custer, the chairman and chief executive, sounded decidedly more pessimistic.
"It's a very tough housing market, clearly," he said in an interview. "The market turned very quickly, and it really hit us in September and October dramatically. … We are having to take higher provisions, and it will take a protracted period of time to work things out."
Mr. Custer blamed a dramatic climb in delinquencies on loans to home builders in California and Atlanta which have been especially hard hit by the housing bust. Combined, these markets make up about 15% of his company's national home builder lending business.
Royal Bank's U.S. and international banking division, which consists primarily of RBC Centura, posted net income of $22 million in the quarter, down 76% from the previous quarter and 73% from a year earlier.
The provision for credit losses grew threefold from the previous quarter and nearly fourfold from a year earlier, to about $88 million. The bulk of the problem loans were originated by Royal Bank's U.S. residential builder finance business. Nationally, new-home sales through October were 23.5% lower than the year earlier, according to a Commerce Department report. Compared to a year earlier, the median price of a new home dropped 13%, to $217,800, in October.
Mr. Custer did not break out specific numbers for the U.S. operation. But he said the residential builder finance business originated about 16% of RBC Centura's total loan portfolio. This was down from about 20% a year earlier, the result of slower growth in the business and a yearlong focus on expanding lending in other areas. Excluding residential lending, he said, loan growth was steady in the quarter.
His company is focused on expanding commercial lending to businesses with $10 million or less in revenue, Mr. Custer said, a category that has grown in the Atlanta and Raleigh regions. He also said retail banking would grow substantially in the Southeast once RBC Centura closes its $1.6 billion deal for the $7.9 billion-asset Alabama National BanCorp in Birmingham, Ala. Closing is expected in February.
Further deals are not being planned in the near term, he said. "Our focus now is threefold: successfully integrating Alabama National, working our way through this housing downturn, and creating solid organic growth in the rest of our business," Mr. Custer said.
Morten N. Friis, Royal Bank's chief risk officer, who spoke on the company's earnings call Friday, said RBC Centura is scaling back mortgage originations in Georgia and California in response to this fall's weak results.
Analysts said some banking companies have relied this year on the strength of the Southeast economy to serve as a buffer against credit losses. But that protection has eroded as housing markets in Florida, Georgia, and other states in the region have swiftly weakened.
David Bishop, an analyst at Stifel Nicolaus & Co. Inc., said there is no glaring concern about the Alabama National deal but that the company does have exposure to mortgage losses in Birmingham and parts of Florida.
"A slew of banks have had problems down there," Mr. Bishop said in an interview. "It's nothing specific to Alabama National; it's just general market weakness that's a concern."
On the earnings conference call Friday, CEO Gordon M. Nixon said Royal Bank expects RBC Centura to successfully ride out the housing slump. The Canadian parent remains committed to "building a strong retail banking operation in the U.S. Southeast," he said; but the Raleigh unit's credit-loss provisions probably would "continue to trend upward" in early 2008.
Meanwhile, the $629 billion-asset Royal Bank, Canada's largest banking company, reported that overall earnings growth was dragged down by bad bets on securities tied to the subprime mortgage meltdown in the United States. The risky investments have proven to be a drag on most of Canada's big banking companies this year.
Royal Bank's net income climbed 4.9%, to $1.33 billion, in the latest quarter, thanks in large part to a $282 million gain on the exchange of its membership interest for shares in Visa Inc. in preparation for the card company's initial public offering. The Canadian company said it would take a writedown of about $283 million related to collateralized debt obligations and mortgage-backed securities.
