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RBC’s results were bolstered by a record-breaking quarter for its capital markets division, where profit soared by 45 per cent to $949-million.Mark Blinch/Reuters

Rebounding third-quarter profits at Royal Bank of Canada and National Bank of Canada nearly reached prepandemic levels, though the chief executives of both lenders warned there are likely more trying times ahead as relief programs for consumers and businesses wind down.

Profits for the quarter ended July 31 fell by just 2 per cent at RBC and 1 per cent at National Bank compared with the same period a year ago, as both banks made modest top-ups to already massive reserves to cover future loan losses. Each bank faced high expectations coming into earnings season, and comfortably surpassed them.

RBC’s results were bolstered by a record-breaking quarter for its capital markets division, where profit soared by 45 per cent to $949-million, driven by huge volumes of trading in fixed-income securities and equities amid volatile markets – a helpful tailwind that is unlikely to repeat next quarter.

While executives touted an array of measures they have taken to pandemic-proof their banks, from boosting capital and liquidity levels to aggressively provisioning for potential losses, they also cautioned that the real test is yet to come. As government-led support programs wind down, and hundreds of thousands of loan payment deferrals granted by banks expire, some consumers and businesses will not recover financially. And bank executives still worry there could be a second wave of novel coronavirus cases, forcing parts of the economy back into lockdown.

Even as RBC and National Bank saw their profits bounce back, they added greater weight to the most pessimistic scenarios they use to estimate future losses, which forecast what would happen if high unemployment and low economic growth persist well into 2022.

“We still have uncertainty ahead of us,” said Dave McKay, RBC’s chief executive officer, on a Wednesday conference call. “We’re not out of this yet, we’ve got the fall to get through, we have [the risk of] re-contagion.”

RBC’s new provisions for credit losses – the money banks set aside to cover loans that may go bad – totalled $675-million in the third quarter, up 59 per cent from a year earlier. But that was only about half as much as most analysts expected, after the bank earmarked $2.83-billion in the previous quarter. National Bank’s $143-million in provisions was also a sharp pullback from the $504-million it added three months earlier.

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Most of the provisions booked so far cover loans that are still being paid back, but are deemed at risk based on economic models. As payments deferrals expire and government relief measures wind down, banks expect an uptick – but not a sudden wave – in delinquencies and defaults.

As of July 31, RBC had 278,400 clients with deferred payments on 344,541 loans worth $62.8-billion, down from $78.3-billion last quarter. Twelve per cent of all Canadian retail banking loans, including mortgages and credit card debt, are on deferral.

National Bank’s deferrals for personal banking clients have expired more quickly, down by 60 per cent to $4-billion, though it also still has $4.5-billion in deferred loans to commercial clients, unchanged from the previous quarter.

Nearly all of those deferrals are set to expire by October. Among those already ended at RBC, normal payments resumed on 80 per cent of the loans, deferrals were extended on 19 per cent and 1 per cent are delinquent. But because many loans aren’t considered impaired until they are 90 days past due, it may be several quarters before the full fallout is apparent.

“We expect that the majority of our clients with deferrals will resume regular payments, and it will be a small portion that won’t be able to,” said Rod Bolger, RBC’s chief financial officer, in an interview. “And we’re prepared for that.”

RBC earned $3.2-billion, or $2.20 a share, for the three months that ended July 31, compared with $3.26-billion, or $2.22 a share, a year earlier. Adjusted for certain items, RBC said it earned $2.23 a share, while the consensus estimate among analysts was $1.81, according to Refinitiv.

In the same period, National Bank reported profit of $602-million, or $1.66 a share, compared with $608-million, or $1.66, a year ago. On average, analysts expected earnings per share of $1.30.

Even after RBC set aside $3.5-billion to cover potential losses over the past two quarters, the bank’s capital levels are back where they were before the pandemic struck, with a common equity Tier 1 (CET1) ratio – a key measure of resilience – of 12 per cent. That is likely to be the largest buffer carried by any Canadian bank, but Mr. McKay said it is justified, given widespread uncertainty about how the pandemic will unfold.

“The capital is not burning a hole in our pocket,” Mr. McKay said. “We’re going to remain somewhat defensive and careful through what I think will be a fairly challenging year.”

National Bank’s CET1 ratio was unchanged from the prior quarter at 11.4 per cent, but CEO Louis Vachon said he expects it to “creep up over time.”

Results were also strong despite declining profits from retail banking, which fell 18 per cent for the quarter at RBC and 15 per cent at National Bank, as lending margins tightened and new lending slowed. Those could prove to be lasting challenges for banks in the current environment.

“I think it is too early for a parade on Saint Catherine Street,” Mr. Vachon said, referring to Montreal’s main commercial artery. “We know where we are, and it’s a better picture than the pessimistic scenarios that all of us had in [the second quarter], but at the same time I think it’s extremely important to remind ourselves that the crisis is not over. So let’s stay focused and humble.”

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