RBC's rising margins push Canadian banking profit to record

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Royal Bank of Canada posted its highest domestic net interest margin in five years, pushing quarterly earnings past analysts' estimates and boosting annual profit from its Canadian banking division to a record.

Canadian banks have been benefiting from rising interest rates, which increase NIM — the difference between what a bank charges for loans and pays for deposits — as well as net interest income. In Royal Bank's case, margins in Canadian banking jumped to 2.77 percent, the Toronto-based lender said Wednesday in a statement. That's the highest since the third quarter of 2013.

"You have central banks raising interest rates but deposit rates aren't going up — so you have really a sweet spot," said Bryden Teich, a partner and portfolio manager with Avenue Investment Management in Toronto, which manages about C$350 million ($263 million). "This is where the banks should be hitting it out of the park in terms of their NIM, and it looks like Royal from that perspective is doing it."

Canadian banking is Royal Bank's biggest division, accounting for almost half of overall profit. Earnings from that business for the three months ended Oct. 31 rose 7.6 percent from a year earlier to C$1.46 billion, helping drive the division to record annual profit of C$5.86 billion. The company predicted further margin expansion in Canada in coming quarters.

"We would expect to see continued improvement next year," Chief Financial Officer Rod Bolger said in a phone interview, adding that he expects "1 to 2 basis points per quarter, with quarterly volatility that could increase or decrease."

John Aiken, an analyst at Barclays Plc, said the results weren't as robust as the headline numbers suggest.

"Several unusual factors led to material benefits to the bottom line, including higher than expected insurance earnings, a low effective tax rate and provision reversals in the Caribbean," Aiken said in a note. "Factoring these items in would take earnings much closer to consensus, below if investors would prefer to take a conservative stance.

Bloomberg News