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Report On Business RBC’s record earnings look good, but problems persist in sector’s outlook

Beneath the surface of Royal Bank of Canada’s 2015 earnings are troubling signs that growth in the Canadian banking sector is slowing to a crawl.

MARK BLINCH/REUTERS

For the first time ever, a Canadian company has broken the $10-billion annual profit barrier. But beneath the surface of Royal Bank of Canada's 2015 earnings are troubling signs that growth in the Canadian banking sector is slowing to a crawl.

RBC reported its fiscal fourth-quarter and year-end results on Wednesday, making particular note of the lender's record-setting profitability.

"I'm very proud to say that we're the first Canadian company to earn over $10-billion in a given fiscal year," Dave McKay, RBC's chief executive officer, said during a conference call with analysts.

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That's up more than $1-billion from the previous year. Profit for the fourth quarter was also impressive, rising 11 per cent from last year to nearly $2.6-billion.

These so-called headline numbers appear to show few obstacles to growth opportunities. However, they obscured far less encouraging figures that are forcing RBC and other banks to address costs, especially those related to traditional branch banking as consumers conduct most of their daily banking on their smartphones or computers and new competitors emerge from the technology sector.

Analysts noted that if RBC reported profit that accounted for a large tax adjustment during the quarter, its year-over-year growth in the fourth quarter would shrink to about 4 per cent. In 2014, the bank's annual profit growth was 10 per cent.

More specifically, profit from RBC's personal and commercial banking operations – consisting of mortgages, lines of credit and small-business loans, which generate the largest share of the bank's earnings – showed growth of just 1 per cent from last year, or 5 per cent after accounting for a one-time gain in 2014.

Compared with the previous quarter, personal and commercial banking profit shrank about 1 per cent, reflecting challenges related to low interest rates, cheap oil prices and weak Canadian economic activity.

"There's an overhang in the macroeconomic environment," said Janice Fukakusa, RBC's chief financial officer.

RBC has responded, like most of its banking peers, by lowering costs as growth slows. It cut about 900 jobs in Canada and the United States during the quarter. It has outlined plans to simplify its operations and reduce cumbersome paper-based transactions in an effort to increase efficiencies and make banking easier for its clients.

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And it has encouraged the growth of retail deposits at the bank, which should position the bank for better growth when economic activity picks up again and consumers tap the bank for new loans.

"Those [deposits] are excellent to cross-sell into credit products," Ms. Fukakusa said.

RBC has also placed big hopes outside of Canada with its recent acquisition of City National Corp., the Los Angeles-based private and commercial bank.

"The U.S. is our second home market, which is why we made the decision to acquire City National and create a powerful platform for long-term growth," Mr. McKay said.

The challenges facing Canada's banking behemoth are also facing the smallest of the Big Six.

National Bank of Canada reported a profit of $347-million in the fourth quarter, up 5 per cent from last year. The bank's full-year profit also rose 5 per cent to $1.6-billion. National Bank also raised its quarterly dividend by 2 cents a share to 54 cents. "In 2015, National Bank achieved strong financial results in a context of a slowing Canadian economy," Louis Vachon, National Bank's CEO, said in a statement. He added on a conference call that he expects Quebec's economy to expand by just 1.6 per cent in 2016, only modestly better than his outlook for the overall Canadian economy.

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In a nod to the consumer shift away from bank branches, Mr. Vachon said National Bank faces significant changes in the financial services industry, adding that the bank will make investments to its technology platforms.

In the fourth quarter, National Bank cut 284 jobs but maintained the number of branches at 452.

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