Royal Bank Of Canada (RY) Q2 Earnings Impress, Provisions Low

Royal Bank of Canada (NYSE:RY) reported second-quarter fiscal 2018 (ended Apr 30, 2018) net income of C$3.1 billion ($2.4 billion), up 9% from the prior-year quarter.

The bank experienced lower provisions and higher net interest income. Moreover, elevated loans and deposit balances were on the positive side. However, investors’ concerns were visible on escalating expenses and lower fee income which led its share price to fall 2.5% on the NYSE, following the results.

Furthermore, on a year-over-year basis, Wealth Management, Investor & Treasury Services, Personal & Commercial Banking, Insurance and Canadian Banking reported rise of 24.6%, 9.8%, 7.4%, 3.6% and 8.3%, respectively, in quarterly net income. Nevertheless, net income in the Capital Markets segment declined slightly. Corporate Support segment reported income as compared with loss in the prior-quarter.

Net Interest Income Rises, Provisions Fall, Partly Offset by Higher Expenses

Total revenues came in at C$10.1 billion ($7.9 billion) in the February-April quarter, down 2.9% on a year-over-year basis. Revenues were negatively impacted by lower non-interest income, partly offset by higher net interest income.

Net interest income came in at C$4.4 billion ($3.5 billion), up 4.8% from the prior-year quarter. Non-interest income was C$5.6 billion ($4.4 billion), down 9.7% year over year.

Non-interest expenses were C$5.5 billion ($4.3 billion), up 3.8% from the year-ago quarter. The rise came primarily due to an increase in almost all the components.

As of Apr 30, 2018, Royal Bank of Canada’s total loans came in at C$561.9 billion ($437.8 billion), up 4% from the prior-year quarter. Additionally, deposits totaled C$822 billion ($640.5 billion), up 4.6% year over year. Total assets were C$1.27 trillion ($0.99 trillion), up 5.8% from the year-earlier quarter.

Total provision for credit losses was C$274 million ($214.8 million) in the quarter, down 9.3% year over year, mainly due to benefit recorded in the Wealth Management and Capital Markets. This was partially offset by higher provisions in Personal & Commercial Banking as well as Canadian Banking.

Strong Capital Position

As of Apr 30, 2018, Royal Bank of Canada’s Tier 1 capital ratio came in at 12.3%, up from 12.0% in the prior-year quarter. Total capital ratio came in at 14.1%, in line with the year-earlier quarter.

The company’s estimated Common Equity Tier 1 (CET1) ratio came in at 10.9%, up 30 basis points from the prior-year quarter.

Our Viewpoint

We believe a continued improvement in loan balances and diversified product mix will drive Royal Bank of Canada’s organic growth. Though stringent regulatory reforms and escalating expenses keep us skeptical about the company’s sustainable growth over the long term, the export-driven economy of Canada is anticipated to benefit from the gradual recovery of the U.S. economy, thereby benefiting the bank.

Royal Bank of Canada currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Foreign Banks

Canadian Imperial Bank of Commerce’s (TO:CM) second-quarter fiscal 2018 (ended Apr 30) adjusted earnings per share came in at C$2.95, increasing from C$2.64 in the prior-year quarter. Results improved due to growth in both net interest income and non-interest income. Furthermore, a strong balance-sheet position supported the results. However, an increase in expenses and higher provisions were the undermining factors.

UBS Group AG (NYSE:UBS) reported first-quarter 2018 net profit attributable to shareholders of CHF 1.5 billion ($1.6 billion), up around 19% from the prior-year quarter. Results displayed rise in net fee and commission income (up 3% year over year) and higher net interest income (up 3% year over year). However, the quarter reflected elevated expenses.

Barclays (NYSE:BCS) incurred first-quarter 2018 net loss attributable to ordinary equity holders of £764 million ($1.06 billion). Net income attributable to ordinary equity holders was £190 million ($248 million) in the prior-year quarter. A fall in interest income and muted underwriting fees acted as headwinds. However, lower expenses, rise in trading income and decline in credit impairment charges supported the results.

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