Royal Bank of Canada reported third-quarter financial results that beat analysts' expectations on Thursday, as strong performance by its capital markets division offset losses in international banking and a sharp rise in provisions for credit losses.
Canada's largest bank reported net income of $1.6-billion or $1.05 per share for the three months ended July 31, the third quarter of the bank's 2009 fiscal year. That was up 24 per cent from year-earlier profits of $1.3-billion or 92 cents per share.
Cash net income, which excludes certain one-time items, totalled $1.21, soundly beating estimates of 92 cents per share from analysts at Thomson Reuters.
"Global capital markets continued to improve from last quarter and we have seen some signs of recovery in the general economy," Royal Bank chief executive Gordon Nixon said on a conference call with analysts.
"Of course, higher unemployment levels have had an impact on loan portfolios and the low-interest environment in keeping pressure on retail margins."
Royal's stock reflected the strength of its earnings, rising more than six per cent to $56.57 in heavy morning trading on the Toronto Stock Exchange.
Calling Royal the "best of the best" in Canadian banking, Dundee Capital Markets analyst John Aiken characterized the period as "simply a stand-out quarter" as the brokerage increased its rating on the bank's stock to "neutral" from "sell."
"That said, we continue to believe that absolute valuations for the banks as a whole are too high and remain concerned about what climbing unemployment in the U.S. and Canada will do to retail and corporate credit quality over the next year," Mr. Aiken wrote in a note to clients.
"Our continuing complaint against Royal is the level of trading revenues, which were $1.6-billion in the quarter, or almost 21 per cent of all revenue," Mr. Aiken wrote.
"However, the market will likely look past this and focus on Royal's comments regarding the 'decline in the pace of credit deterioration' within its U.S. portfolios."
Mr. Aiken added that Royal does not suffer from the same drag on profitability from over-capitalization as do the other banks with its return on investment at around 20 per cent.
"Despite our complaints, this is very impressive."
Third-quarter gains were led by a 52 per cent increase in net income from Royal Bank's capital markets group, which reported profits of $562-million for the quarter.
Net income in the Canadian banking segment edged down to $669-million, while profits from insurance increased 18 per cent to $167-million.
Net losses at international banking widened to $95-million from $16-million the year before, due in part to higher provisions for credit losses in U.S. banking, but the "credit profile is showing signs of improvement as the rate of deterioration of our loan portfolios has slowed," Mr. Nixon said.
Overall provisions surged more than 40 per cent to $770-million, a $436-million increase over year-earlier levels.
The bank said its Tier 1 capital ratio, a key performance metric measuring the amount of money held in reserve, was 12.9 per cent at quarter's end.
The bank also held its quarterly dividend steady at 50 cents per share.
Editor's Note: Canadian Press incorrectly stated earlier that Royal Bank had missed analysts' expectations by posting cash earnings per share of $1.07. This has now been corrected.Report Typo/Error