RBC chief upbeat on banking sector in face of gloomy economy

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Royal Bank of Canada's chief executive officer is painting a relatively upbeat picture for both his bank and the broader economy – even as concern grows about the health of Canada's energy sector and its potential impact on loans.

Following the release of stronger-than-expected quarterly results Wednesday, Dave McKay, CEO of Canada's largest bank, sought to address investor worries about prospects for the banking sector.

"We still forecast modest growth in Canada in the second half of the year, as a strengthening U.S. economy and lower Canadian dollar are expected to drive export growth, and consumer spending continues to be steady," Mr. McKay said during a conference call with analysts.

But his comments come amid mounting uncertainty about the economic backdrop to the Canadian banking sector. Shares of Canada's Big Six banks have been approaching bear-market territory during a year-long slump. RBC has seen its shares fall 14 per cent from its high in 2014.

Neither Mr. McKay's outlook or a quarterly profit that grew to $2.5-billion were enough to buck that trend on Wednesday. RBC's shares fell – even as the other big banks rose for the day.

Ugly economic indicators had led to subdued expectations for all of the big banks' earnings reports this week. Oil prices fell this week below $40 (U.S.) a barrel to their lowest levels since the financial crisis. As well, the Canadian economy has contracted for five consecutive months, putting it perilously close to a recession.

But third-quarter bank results have so far have offered a considerably sunnier view. Bank of Montreal and National Bank of Canada beat expectations with solid profit growth; RBC delivered similarly strong results, along with a quarterly dividend increase of 2 cents a share.

RBC said that profit rose 4 per cent from last year after adjusting for the sale of RBC Jamaica in 2014. Excluding that sale, this year's third-quarter profit rose 2 per cent.

On a per-share basis, earnings were $1.66 (Canadian), or $1.68 a share on an adjusted basis – a penny ahead of analysts' expectations.

"Perhaps it should have been expected, especially since, whatever the outlook for the oil price and the Canadian economy, there was always going to be a lag period before any impact would be felt," Robert Sedran, an analyst at CIBC World Markets, said in a note. "We think we are still in that lag period."

Indeed, apart from an uptick in bad loans, there are no indications that the struggling economy was affecting key segments within RBC.

Earnings from personal and commercial banking rose 13 per cent; earnings from Canadian banking rose 5 per cent, including a 6-per-cent rise in mortgage balances. The gains offset flat results in wealth management and declining earnings in capital markets, where fixed income and equity trading fell during the quarter.

Mr. McKay said that the results "demonstrate the strength of our diversified model and solid execution in an increasingly uncertain environment."

He said that Canada's housing market is being driven by a short supply of single-family homes in areas such as Toronto and Vancouver, along with demand from immigrants and new families.

"We continue to actively monitor key variables, including sales-to-listings, rental capacity in the market, affordability and inventory level," Mr. McKay said. "Over the years we've enhanced our lending policies and property valuation strategies."

He was similarly sanguine about the impact of depressed oil prices: "It's important to remember that many areas of Alberta are coming off several years of hyper growth, so the recent slowdown is in part a return to more normal growth levels. But we do recognize these markets remain vulnerable to lower oil prices."

RBC reported that bad loans rose by $234-million during the quarter, some of which were related to loans made to the energy sector.

However, Janice Fukakusa, RBC's chief financial officer, said in an interview that the bank was working closely with struggling companies to ensure that they were doing the right things with respect to capital expenditures and asset sales.

"It's a cyclical industry, and every time we go through one of these cycles the companies do get stronger," she said.