RBC's results show signs of weakening credit conditions

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The debt-trading malaise that hurt U.S. lenders last quarter has extended north of the border, though Royal Bank of Canada’s equities traders helped soften the blow.

The lender saw a 12% drop in trading revenue from fixed income, currencies and commodities in the three months through January, advancing the trend that affected U.S. banks including JPMorgan Chase and Citigroup at the end of 2018. The decline was countered by a 47% surge in equities trading. Investment banking fees at Royal Bank’s RBC Capital Markets division were down 36%, contributing to lower earnings in the investment banking business.

Earnings at Royal Bank, the first of Canada’s largest lenders to post fiscal first-quarter results, showed the impacts of the slump in markets that ended 2018 and signs of eroding credit conditions. Still, the company said that profits increased 5% from the same period in 2018, to C$3.2 billion ($2.4 billion in U.S. dollars).

Earnings per share of C$2.15 matched analysts’ expectations. Canada’s six biggest lenders are expected to post earnings growth of 6% for the first quarter, the median of estimates compiled by Bloomberg Intelligence.

Royal Bank faced “a challenging market backdrop” in the fiscal first quarter, Chief Executive Officer Dave McKay said in a statement Friday.

The Toronto-based bank set aside C$514 million ($389 million in U.S. dollars) for soured loans in the quarter, up 54% from a year earlier, and higher than the C$362 million analysts had expected. That was mainly due to one impaired loan in the utilities sector within RBC Capital Markets, though provisions also rose in Canadian banking and wealth management, “driven by unfavorable changes in certain near-term macroeconomic variables,” the bank said.

“The biggest issue is credit,” Jim Shanahan, an analyst with Edward Jones, said in a phone interview, noting an increase in impaired commercial real estate loans. “I think it’s alarming. Given the focus on real estate and all the concerns that investors have had, the timing is not good to report a significant increase in impaired loans within that sector. That’s likely to attract a lot of attention from investors.”

McKay vowed last month to do better on domestic mortgages after what he called a couple of years of disappointing performance. He need not worry: Royal Bank, Canada’s largest mortgage lender, had C$250.2 billion of home loans as of Jan. 31, up 4.9% from a year earlier even as the industry’s residential-mortgage growth has shrunk to a 17-year low in Canada.

Royal Bank’s profit growth was lifted by gains in personal and commercial banking and insurance, countering the 13% decline in RBC Capital Markets and a 26% drop in investor and treasury services. Wealth management earnings were unchanged from a year earlier. The company’s wealth business includes Los Angeles-based City National Bank.

Bloomberg News