Royal Bank of Canada reported a solid second-quarter profit of $2.2-billion, with earnings growth in all three of the lender's biggest units.
RBC benefited from big boosts to the bottom lines of its wealth management and capital markets arms, as well as better results in personal and commercial banking.
The bank's $2.2-billion profit amounted to $1.47 per share, 15 per cent more than the same period in 2013. Adjusted for non-cash items, the EPS of $1.49 beat analyst expectations of $1.44 per share.
RBC shares rose to a record high of $75.68, up 1.8 per cent on the TSX following release of the earnings.
Wealth management continues to be a shining star for the bank, with profit rising both relative to the second quarter of 2013, as well as to the previous reporting season, which already had a strong bottom line. Hot markets compelled more Canadians to put money into RRSP's this year, and the activity helped the bank earn $278-million from wealth management, up 25 per cent from the prior year.
Capital markets and personal and commercial banking both demonstrated strong growth over the same period in 2013, however, their results aren't as encouraging when compared to the prior quarter. Capital markets' $507-million profit jumped 32 per cent over the previous year, but was flat relative to the first quarter. Personal and commercial banking's profit climbed 7 per cent year-over-year to $1.1-billion, but core earnings fell 4 per cent from the prior quarter.
Within the Canadian banking operation, mortgage growth is finally showing signs of slowing – something analysts have long expected. "Certainly we've had a bit of a slower start to the mortgage season," RBC president and incoming chief executive officer Dave McKay said on a conference call, referring to the typically hot spring market. But he added that "slowing is not a bad thing necessarily," alluding to the statistics showing Canadians are heavily indebted.
RBC's small business lending growth is also cooling, something most people did not expect. "There is a lot of competition in the market," Mr. McKay said, forcing rival banks to be very aggressive when it comes to pricing and the restrictions they put on each loan. Because RBC already has a sizable market share, the bank doesn't feel the need to compete as intensely simply to drive growth.
Across the entire bank, RBC also benefited from plummeting provisions for credit losses, which are now near historic lows.
Because RBC has delivered solid results for over a year, the big question mark hanging over Canada's most profitable bank is not whether it can keep churning out earnings, but whether it can keep growing, which is why quarter-over-quarter comparisons have become important. RBC has proven it can consistently earn more than $2-billion a quarter, but still has to demonstrate that it can now reach a new milestone.
Management has vowed to keep striving. "History has shown that there can be a danger when leaders get complacent and take success for granted," said Mr. McKay at the bank's annual general meeting in February. "RBC does not, and it will not, belong to that group.
"We know we hold a privileged position, and we'll work hard to keep it," he added.
Despite the solid earnings run, RBC has struggled in the Caribbean, leading to a number of one-time charges in the first quarter. Since striking a $2-billion acquisition in the region in 2008, RBC has struggled to keep its Caribbean loan losses in order.
However, wealth management's gains have been able to offset a lot of the noise. This sector has been hot for Canadian banks over the past six months, because rising North American markets keep boosting the fees they are paid, which are usually calculated as a percentage of the assets under their management.
RBC has been one of the banks that benefits in a big way, because it started beefing up its wealth management business a decade ago, inking acquisitions both at home and abroad. That work is not only delivering more profits, but also puts RBC in a position to sit back without worrying about any need to buy expensive wealth management assets.