- Key Insight: RBC lowered its loss provisions in the second quarter, even as its top executives expressed concern over the impact of tariffs, the Iran war and other issues on the global economy.
- Supporting Data: In the three months that ended on April 30, RBC's provisions for credit losses were CA$912 million, down from CA$1.4 billion in the same period last year.
- Expert Quote: "The second quarter earnings did come in ahead of expectations, but we note the bottom line benefited from lower than anticipated provisions." — Jefferies analyst John Aiken
Executives at the Royal Bank of Canada have many concerns about the global economy, but you wouldn't know that by looking at the lender's provisions for credit losses.
In the quarter that ended on April 30, RBC enjoyed what it called its second-highest quarterly earnings on record. Earnings per share reached $3.85 in Canadian dollars, beating analysts' consensus estimate of CA$3.71, according to S&P.
But this was partly thanks to lower-than-usual provisions. In the second quarter, Canada's largest bank set aside CA$912 million in provisions for credit losses, down from CA$1.1 billion in the previous quarter and CA$1.4 billion in the same period last year.
The reduction was not because RBC's leaders held a rosy view of the macroeconomic picture. In fact, they repeatedly expressed concern over global uncertainty and volatility, stemming from U.S. tariffs, the war in Iran and the still-unfinished Canada-United States-Mexico trade agreement.
"Uncertainty remains elevated," RBC CEO Dave McKay said during an earnings call on Thursday. "The near-term outlook for Canada hinges on how CUSMA negotiations unfold and how long the Middle East conflict persists, with impacts yet to be fully felt on input costs."
McKay emphasized that in spite of these challenges, Canada's economy remained resilient, and the damage from tariffs was not widespread. Even so, one analyst asked how RBC squares its economic worries with its low provisions.
Graeme Hepworth, RBC's chief risk officer, answered that the bank did "increase the severity" of the downside economic scenarios it is preparing for. But offsetting those concerns, he said, were encouraging trends in credit quality.
"We've seen more stability, if not some improvements, in a lot of our credit indicators," Hepworth said. "You're seeing that credit quality, that stability, playing through into our performing loan loss calculations."
In the most recent quarter, RBC's net income came out to CA$5.5 billion, a 25% jump from the same period last year. Total revenue was CA$17.5 billion, up 11% from a year ago.
One major contributor was capital markets, which earned net income of CA$1.5 billion, marking a 23% increase from last year. Another highlight was wealth management, which took in CA$1.2 billion, up 28% year over year.
Even RBC's recently troubled U.S. subsidiary, City National, pulled its weight.
Starting in 2023, the Los Angeles-based unit struggled amid rising interest rates and
"You're seeing strong growth coming out of City National," McKay said. "We're adding account managers, we're seeing a strong demand on that side, we're seeing geographic expansion, so City National is on its front foot."
Overall, the Jefferies analyst John Aiken wrote in a research note, it was a quarter in which RBC surpassed estimates "not just at the top of the house but along each of its operating segments as well." The one asterisk on this performance was the boost RBC got from smaller provisions.
"The bottom line benefited from lower than anticipated provisions, somewhat antithetical based on the domestic economic malaise," Aiken wrote.
