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A Royal Bank branch in Toronto.CARLOS OSORIO/Reuters

Royal Bank of Canada’s RY-T first-quarter profit rose 6 per cent to $4.1-billion as lending and fees increased, marking a strong start to its fiscal year against a backdrop of rising concern about inflation.

RBC is the first major bank to report earnings for the fiscal quarter that ended Jan. 31, with banks expected to post modest gains while awaiting a larger boost to earnings from anticipated interest-rate hikes later this year.

Retail banking profit was up 10 per cent, even as profit margins on loans shrank. Spending and borrowing by consumers and businesses has been picking up, and loans to personal and commercial customers were 8 per cent higher year over year, driven primarily by a growing mortgage book. Fees from managing investments and mutual funds also surged amid a strong run for stock markets.

Yet there are also mounting geopolitical tensions as Russia invaded Ukraine, which has compounded existing risks to the global economy from supply chain disruptions, labour shortages and high levels of inflation.

Bank earnings season is here. Expect more profits, no dividend hikes

“There are a lot of mixed signals out there,” Dave McKay, RBC’s chief executive officer, said on a conference call with analysts on Thursday. With Canadian consumers and households holding a record $200-billion in savings, inflationary pressure “is one of the real risks to our economy,” he said.

The outbreak of war in Europe could add to that pressure, most notably by driving commodity prices higher. RBC does not have direct exposure to Russia or Ukraine, though the economic fallout from the conflict will likely have indirect effects on banks and their clients.

“On one hand, Canada’s a net exporter of natural resources and that’s a positive for our economy,” said Graeme Hepworth, the bank’s chief risk officer. “On the other hand, those are things that are going to continue to fuel and exacerbate current risk concerns like inflation.”

Mr. McKay does not expect Russia’s invasion to derail the anticipated start of interest-rate hikes, which could come as soon as next month. Rate hikes would give banks’ earnings a major boost, as RBC estimates it lost out on $2-billion of revenue in 2020 and 2021 with rates stuck at ultralow levels. An increase to benchmark rates of 0.25 percentage points would add an extra $175-million to the bank’s revenue over one year.

“While the impact of low interest rates continued to persist, we started to see a stabilization of net interest margins in our banking franchises on both sides of the border,” said Nadine Ahn, the bank’s chief financial officer.

RBC also benefited from low provisions for credit losses – the money banks set aside to cover loans that may default – of $105-million, as high household savings and support from government programs through the COVID-19 pandemic have helped drive down loan defaults.

In the fiscal first quarter, RBC’s $4.1-billion profit amounted to $2.84 a share, compared with nearly $3.9-billion or $2.66 in the same quarter last year.

Adjusted to exclude certain items, RBC said it earned $2.87 a share, well ahead of the average estimate among analysts of $2.71, according to Refinitiv.

The bank kept its quarterly dividend unchanged at $1.20 a share, and bought back $1.2-billion of shares in the quarter.

“The results were quite clean and set the bank up for a solid run for the remainder of the year as anticipated rate increases should fuel further revenue growth,” John Aiken, an analyst at Barclays Capital Canada Inc., said in a note to clients.

Revenue of $13.1-billion rose 1 per cent, or 7 per cent, excluding an accounting change relating to insurance.

Inflation concerns have put a spotlight on banks’ costs, and RBC’s first-quarter expenses increased by 1 per cent from the same quarter a year ago to $6.5-billion.

But adjusting to exclude a release of $80-million in legal provisions previously set aside to cover possible legal costs as well as bonus pay and share-based compensation, expenses would have been 5 per cent higher year over year.

Personal and commercial banking profits of $2-billion were driven by rising mortgage balances, which increased 11 per cent as the bank added nearly $9-billion in new home loans in the quarter. The bank’s leaders expect mortgage demand will remain high, helped by immigration, but may ease as interest rates rise. Business lending was also strong, with loan balances up 8.4 per cent, and Mr. McKay said he expects continued demand for those loans as companies “rebuild inventory levels and adjust business models” to cope with supply chain problems.

Wealth management profit surged by 24 per cent to $795-million as fees climbed amid strong equity markets, helped by the release of legal provisions taken in the bank’s U.S. wealth management arm. Capital markets profits of $1-billion were down 3 per cent from an unusually strong first quarter last year, as revenue from corporate and investment banking remained high but returns from fixed-income trading fell 12 per cent.

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