RBC profit jumps 14 per cent to $2.5-billion

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Royal Bank of Canada's powerful capital-markets unit played a key role in the lender's better-than-expected results in the fiscal second quarter, offsetting the weak growth in retail banking that has essentially defined the banking sector this reporting season.

RBC reported net income of $2.5-billion, or $1.68 a share, up 14 per cent over last year.

After taking some one-time items into account, the bank's adjusted earnings were $1.63 a share, up 9 per cent and slightly ahead of the average estimate from analysts.

As companies feed into a frenzy for equity and debt issues, RBC has scored hefty underwriting and advisory fees, driving capital-markets earnings to $625-million, up 23 per cent over last year.

While other banks have also reported strong gains in their respective capital-markets units, RBC has traditionally been the Canadian powerhouse in this area, and has emerged as a major player in the United States as well.

"A strengthening U.S. macro-economic outlook appears to be flowing through to RBC Capital Markets' earnings, and this strength will offset weakness in Canada, enabling the segment to deliver strong earnings growth in fiscal 2015," said Peter Routledge, an analyst at National Bank Financial, in a note.

Indeed, the U.S. is the source of about 60 per cent of RBC's capital-markets revenue and 50 per cent of its earnings, as the bank taps into a market with a far greater appetite for new issues.

"It's not that we're competing against bulge bracket firms," said Janice Fukakusa, RBC's chief financial officer, referring to the largest multinational investment banks. "We're competing in the sectors that we know," such as infrastructure, real estate, energy, technology and telecom.

In other areas of the bank's results, earnings from investor and treasury services rose 42 per cent, insurance fell 20 per cent.

Wealth-management earnings fell 3 per cent, due to restructuring costs in the Caribbean and provisions for credit losses.

The bank recently struck a $5.4-billion (U.S.) deal to acquire Los Angeles-based City National Corp., which will expand its U.S. wealth-management business when the deal closes, expected in the fourth quarter.

RBC's earnings from Canadian personal and commercial banking – by far the biggest source of income – rose just 7 per cent.

However, executives remain upbeat about the domestic retail landscape.

Ms. Fukakusa said public attention is focused on consumer debt levels and high home prices, putting pressure on mortgage growth.

However, she said that the bank is seeing growth in its credit-card business and auto lending, and should benefit from steady, if unspectacular, economic activity and relatively low unemployment rates.

Deposits and investments rose about 6 per cent during the quarter, or faster than mortgage growth.

"Those particular products are lower margin, but they are really good anchor products for us to get clients," Ms. Fukakusa said. "So when the economy turns up, we're in a way better position" to sell additional products to existing customers.

Dave McKay, RBC's chief executive, also made a point of underscoring his belief that Canada's housing market is healthy, despite concerns from some observers that it has become dangerously overvalued.

"Notwithstanding the heightened media focus, we believe that the Canadian housing market generally continues to be supported by strong trends in employment, household income and population growth," he said in a conference call with analysts following the release of the bank's results.

"We also closely watch supply and demand factors and are seeing that buyers and sellers are generally aligned in most markets, and that new construction has been broadly absorbed."

RBC's shares were down 30 cents in Toronto, to $79.64.