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Report on Business RBC earnings overcome volatile December to post profit growth

Royal Bank of Canada weathered December’s wild swings in financial markets to improve its fiscal first-quarter profit by 5 per cent compared with a year ago, but recorded weaker results in some businesses as the bank worked through the hangover.

The country’s largest lender is the first of Canada’s Big Six banks to report earnings for the quarter that ended Jan. 31. Although RBC posted solid returns over all, key divisions suffered from the volatility that roiled markets at the end of 2018. Profits were down in capital markets and flat in wealth management, signalling that Canadian banks could be in for a more sluggish start to 2019.

Markets recovered somewhat in January as central banks made more dovish comments regarding potential interest-rate increases, while economic growth was healthy and unemployment rates remained low. Banks have mostly remained bullish on their prospects for the rest of the year and RBC still expects to reach medium-term targets. But its anticipated loan losses spiked in the first quarter, largely owing to a single large loss on a utilities account. And RBC continues to take a cautious approach to potential writeoffs, building a larger store of provisions to guard against an eventual downturn in the credit cycle.

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“Notwithstanding a difficult December, our core business is strong and our outlook remains positive,” RBC chief executive Dave McKay said on a conference call with analysts.

Credit losses have been very low for an extended period of time, so some uptick is to be expected. But in the first quarter, RBC’s provisions for credit losses – or the funds banks set aside to cover loans that may go bad – swelled to $514-million, up 54 per cent from a year ago. Most of that increase came from a single account in the utilities sector, identified by some analysts as RBC’s loans to PG&E Corp., the California utility giant that recently filed for bankruptcy protection. RBC has sold off about a third of its position in an effort to limit the damage.

Even so, "provisions came in well above expectations,” said Scott Chan, an analyst at Canaccord Genuity Group Inc. RBC set aside higher sums to cover losses in its Caribbean business, which has been affected by a sovereign-debt restructuring in Barbados. The bank was caught off guard by a charge-off relating to a fast-food restaurant client of its U.S. subsidiary, City National Bank. And RBC has increased provisions for expected losses from loans that are still performing, which must now be disclosed as part of a recent change to accounting standards.

RBC’s chief financial officer, Rod Bolger, cast the provisions as a measure of the bank’s prudence, rather than an indicator that credit quality is eroding more broadly. Consumer credit has been stable, despite a minor increase in delinquencies in Alberta amid swings in oil prices. “The overall credit outlook, absent the occasional fallen angel, remains strong,” he said in an interview. “Basically, we have been prudent given the potential that we’re [in the late stages of] the cycle. We don’t know how late-stage we are.”

For the fiscal first quarter that ended Jan. 31, RBC earned $3.17-billion, or $2.15 a share, compared with $3.01-billion, or $2.01 a share, in the same quarter last year.

Adjusted to exclude certain items, RBC said its profit was $2.19 a share, in line with the consensus estimate among analysts surveyed by Thomson Reuters I/B/E/S.

RBC also announced it will raise its quarterly dividend by 4 cents, or 4 per cent, to $1.02 a share.

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Profit in RBC’s core retail banking division rose 3 per cent to $1.57-billion, and the bank’s mortgage portfolio proved resilient, increasing 5 per cent year over year even as activity in major housing markets like Vancouver and Toronto has slowed.

In capital markets, profit fell 13 per cent to $653-million, mostly the result of the higher loan loss provision from the utilities account, as well as weaker revenue from corporate and investment banking. And profit from wealth management was flat compared with a year earlier – at $597-million – with higher revenue from fees and better margins compensating for higher costs and lower transaction volumes.

“I think there was some choppiness in the results caused by the market volatility in November and December,” Mr. Bolger said.

City National, which RBC acquired for $7.1-billion in 2015, contributed adjusted profit of US$104-million, up 5 per cent from a year earlier, as loan growth increased by 15 per cent and margins expanded. After the recent $37-billion merger of BB&T Corp. with rival SunTrust Banks Inc. set off speculation about further consolidation among U.S. banks, Mr. McKay said RBC is still scanning the market for smaller acquisitions.

But “prices are still high," he said, and the bank’s U.S. footprint has ample room to grow on its own by adding bankers and opening new offices in cities such as Washington. “We really think that the playbook stays the same," he added.

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