Royal Bank Of Canada (RY) Q2 Earnings Impress, Revenues Up

Royal Bank of Canada (NYSE:RY) reported second-quarter fiscal 2017 (ended Apr 30) net income of C$2.8 billion ($2.1 billion), up 9% from the prior-year quarter.

Elevated loans and deposits balances, along with higher revenues, reflected organic growth. Moreover, lower provisions were another positive. However, a rise in non-interest expenses was a concern.

Revenue Escalate, Expenses Flare Up, Provisions Fall

Total revenue was C$10.3 billion ($7.7 billion), up 8.4% on a year-over-year basis. Revenue was driven by higher net interest and non-interest income.

Net interest income came in at C$4.2 billion ($3.2 billion), up 5.0% from the prior-year quarter. Non-interest income was C$6.1 billion ($4.6 billion), up 10.9% year over year.

Non-interest expenses were C$5.2 billion ($3.9 billion), up 6.1% from the year-ago quarter. The rise was primarily due to an increase in almost all the components.

During the quarter, Personal & Commercial Banking, Wealth Management, Investor & Treasury Services, Canadian Banking and Capital Markets segments’ net income reported a year-over-year rise of 5.0%, 12.0%, 39.0%, 8.3% and 15.0%, respectively. However, Insurance segment’s net income reported a year-over-year decline of 6.0%. Notably, the Corporate Support segment reported net loss.

As of Apr 30, 2017, Royal Bank of Canada’s total average loans and acceptances came in at C$540.5 billion ($395.7 billion), up 3.1% from the prior-year quarter. Additionally, deposits were C$785.6 billion ($575.1 billion), up 5.9% year over year. Total assets were C$1.2 trillion ($0.88 trillion), up 4.3% from the year-earlier quarter.

Total provision for credit losses was C$302 million ($226.9 million) in the quarter, down 34.3% year over year, mainly due to lower provisions in Personal & Commercial Banking, Canadian Banking and Capital Markets. However, provisions in Wealth Management increased.

Strong Capital Position

As of Apr 30, 2017, Royal Bank of Canada’s Tier 1 capital ratio came in at 12.0%, up 10 basis points from the prior-year quarter. Total capital ratio was 14.1%, expanding 10 basis points year over year.

The company’s estimated Common Equity Tier 1 (CET1) ratio came in at 10.6%, up 30 basis points year over year.

Our Viewpoint

We believe a consistent improvement in the top line and diversified product mix will help Royal Bank of Canada grow organically. Further, the export-driven economy of Canada is anticipated to benefit from the gradual recovery of the U.S. economy.

However, a persistent low interest rate environment and overall sluggishness in the economy, along with stringent regulatory reforms and escalating expenses, keep us skeptical about the company’s sustainable growth over the long term.

Royal Bank of Canada currently has a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Foreign Banks

Itau Unibanco Holding S.A. (NYSE:ITUB) posted recurring earnings of R$6.2 billion ($1.97 billion) in first-quarter 2017, up 19.2% year over year. Including non-recurring items, net income came in at R$6.1 billion ($1.94 billion), up 17.3% year over year. Results reflected an increase in revenues and a solid balance-sheet position. However, elevated expenses and lower managerial financial margin were headwinds.

Deutsche Bank AG (NYSE:DB) reported net income of €575 million ($612.6 million) in first-quarter 2017, significantly up on a year-over-year basis. Income before income taxes came in at €878 million ($935.4 million), up 52% year over year. Cost management and reduction in provisions were positive factors. However, lower revenues adversely affected the results.

UBS Group AG (NYSE:UBS) reported first-quarter 2017 pre-tax operating profit of CHF 1.93 billion ($1.92 billion) on an adjusted basis, up 40.9% from the prior-year quarter. Results reflected increase in net trading income (up 42% year over year), along with net fee and commission income (up 6% year over year). Notably, the quarter benefited from the company’s consistent focus on expense management.

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