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An RBC logo is seen in Toronto's financial district, in a Sept. 18, 2019, file photo.Doug Ives/The Canadian Press

Royal Bank of Canada raised its profit by 11 per cent with a standout quarter from its capital markets division and encouraging signs of steadying loan losses, setting a high bar to start the fiscal first-quarter earnings season for the country’s large banks.

In a quarter when analysts expected strong trading revenue, RBC’s capital markets arm still surprised investors with $882-million in profit, a 35-per-cent increase from a year earlier. Trading revenue surged to $458-million, and so did underwriting revenue from RBC’s investment bank, which reached $627-million. And while chief financial officer Rod Bolger said in an interview that “this might be the high water mark” for capital markets, “we continue to expect to grow market share."

RBC’s provisions for credit losses – the money banks set aside to cover loans gone bad – were lower than expected, falling to $419-million, from $499-million in the fourth quarter last year. Banks’ projected loan losses spiked late last year, rebounding from unusually low levels, putting analysts on high alert for signs of deteriorating credit.

“In our view the more important takeaway was the stability in credit metrics," said Scotia Capital Inc. analyst Sumit Malhotra, in a research note, "particularly given the shakier end to 2019 for the sector from a credit quality perspective.”

Even so, RBC’s chief executive officer, Dave McKay, warned that the bank still faces “challenging headwinds” from low interest rates and slowing global economic growth. Just as trade tensions appear to be easing, across North America and between the United States and China, the deadly outbreak of COVID-19 combined with rail blockades set up by Wet’suwet’en hereditary chiefs to oppose the Coastal GasLink natural gas pipeline on their traditional territories have once again clouded the outlook for banks.

“Certainly there’s a sigh of relief on [the trade] front," Mr. Bolger said. "But the world being the world, there’s always something new to worry about. So we just have to make sure that we keep a balanced view on things and keep our eye on what’s going on.”

The bank’s chief risk officer, Graeme Hepworth, said it’s “too soon to really have a view as to the real impact” of the virus or the blockades. “Certainly clients are being impacted, but it will really depend on the duration of this and whether it has any staying power or not.”

For the three months that ended Jan. 31, RBC earned $3.51-billion, or $2.40 a share, compared with $3.17-billion, or $2.15, a year ago. On average, analysts expected earnings for each share of $2.26, or adjusted EPS of $2.30, according to data from Refinitiv.

The bank raised its quarterly dividend by 3 cents, or 3 per cent, to $1.08 a share.

RBC’s core retail banking operations turned in a solid performance, with profit up 7 per cent overall, and 5 per cent in Canada, despite a continuing squeeze on the profit margins on loans. Some of that pressure came from rapid growth in the size of the bank’s mortgage portfolio, which increased by nearly 9 per cent year over year, but typically produces slimmer margins.

RBC’s head of personal and commercial banking, Neil McLaughlin, said the bank is grabbing a larger share of mortgages as a result of an “end-to-end review” that revamped processes, underwriting and response times. “We’ve not at all gone down the risk curve," he said, a reference to not having to chase less creditworthy borrowers.

Mortgage lending could get a further boost from recently announced changes to the way home loans are stress tested, which will take effect in April. But Mr. McLaughlin predicted the revised stress tests will have “a minimal impact," allowing the average borrower to spend $20,000 to $25,000 more on a home.

The strong results spurred higher expenses, which rose 8 per cent to $6.38-billion, mostly because of higher bonuses and stock-based pay. But year-over-year revenue increased nearly 11 per cent to $12.84-billion.

“We believe these results will be hard to top,” said Steve Theriault, an analyst at Eight Capital Corp.

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Royal Bank of Canada
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National Bank of Canada
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