By Nivedita Balu and Manya Saini
(Reuters) - Royal Bank of Canada (RBC) warned of a softer economy ahead and plans to cut about 1,800 job after Canada's largest bank beat analysts' estimates for the third quarter on Thursday helped by cost cutting measures.
Chief Executive Officer Dave McKay forecast slowing growth and lower inflation due to the lagging impact of monetary policy, combined with a slowdown in China and elevated climate and geopolitical risks.
"We are seeing evidence of slowing labor markets as evidenced by slowing wage growth, lower job postings and an increase in Canadian unemployment. Consequently, our base case forecasts a softer economic outlook," he told analysts.
"The operating environment is changing at a faster pace than we've seen for over a decade."
McKay in May said the lender would slow hiring after it overshot by thousands of people. The bank said the number of full-time employees was down 1% from the prior quarter, and it expects to further reduce headcount by about 1% to 2%. The bank had 93,753 full-time employees as of July 31.
"The bank did a commendable job in managing expenses, with an improvement in its overall efficiency ratio," Barclays (LON:BARC) analyst John Aiken said, noting the lender's earnings beat.
The country's second-largest bank Toronto-Dominion Bank, however, missed analysts' estimates for quarterly profit, which was hurt by higher expenses, rainy day funds to cover for unpaid loans and weakness in its U.S. business.
TD set aside C$766 million, a jump from C$351 million a year ago, while RBC set aside C$616 million for credit losses, up from C$340 million, as consumers struggle to make payments amid high costs of living.
The Bank of Canada has raised interest rates 10 times since March of last year to tackle sticky inflation, boosting profitability for banks' consumer businesses as they benefit from higher earnings from loans.
That helped boost earnings at RBC's retail business by 5%. At TD, however, income from its Canadian personal and commercial banking segment fell 1% and fell 9% at its U.S retail unit.
"The higher interest rate would put pressure on the consumer. But we're seeing so far they continue to be resilient... but we're continuously monitoring very closely," TD CFO Kelvin Tran said in an interview.
TD also plans to repurchase 90 million shares, after it launched a share buyback program for 30 million shares in May, shortly after terminating its $13.4 billion acquisition of a First Horizon (NYSE:FHN) deal giving the bank a capital boost.
Net interest income- the difference between what banks make on loans and pay out on deposits - rose 6.7% to C$6.29 billion at RBC and 3.5% to C$7.29 billion at TD.
RBC reported adjusted earnings of C$2.84 per share, beating analysts' estimates of C$2.71 per share, according to Refinitiv data.
The results also benefited from a low tax rate due to the Canada Recovery Dividend implemented in the 2023 budget.
TD's adjusted earnings of C$1.99 per share fell below the estimate of C$2.04.
The bank's earnings were also impacted by a C$306 million payment related to the termination of its First Horizon acquisition.
RBC and TD together account for half of the market share among the big six Canadian banks with a market capitalization of C$168 billion and C$151 billion respectively.
Their stocks have however underperformed, falling about 5% and 6% so far this year, compared to the broader index's 2.55% gain.
RBC's shares were up 1.6% while those of TD were down over 2%.
($1 = 1.3538 Canadian dollars)