Noah Zivitz

Managing Editor, BNN Bloomberg

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Royal Bank of Canada surpassed profit expectations in the fourth quarter amid a surge in earnings from its trading and investment banking operations that helped mitigate the impact of COVID-19 on the lender’s other branches.

The bank's total net income inched up one per cent year-over-year to $3.25 billion in the three months ending Oct. 31. On an adjusted basis, RBC said Wednesday it earned $2.27 per share. Analysts, on average, were expecting $2.04 in profit per share. For the year, RBC's net income fell 11 per cent to $11.44 billion.

The clear-cut star performer in the quarter was RBC's capital markets division, where profit soared 44 per cent to $840 million. In a release, RBC attributed the growth to favourable market conditions and an increase in debt and equity offerings that boosted its investment banking team.

Credit quality also improved for RBC in the quarter, as the bank set aside $427 million for loans that could go bad, compared to $675 million in the prior quarter and $499 million in provisions a year earlier.

“While RBC came in ahead of consensus expectations, the amount can be chalked up to lower than expected provisions for credit losses,” wrote Barclays Capital Analyst John Aiken in a report to clients.

“While we do not believe that the beat, driven by provisions, will generate much outperformance, there is very little to complain about in RBC’s earnings and we believe that the fourth-quarter’s results more than justify supporting its valuation,” added Aiken, who has an overweight rating on RBC’s shares, with a $112.00 per-share price target.

RBC's core personal and commercial (P&C) banking operations saw profit fall seven per cent to $1.5 billion in the quarter. Similar to the banks that reported on Tuesday, RBC noted the impact of lower interest rates as central banks have attempted to cushion the economic blow from the pandemic by easing borrowing costs. Higher technology costs also weighed on RBC’s P&C earnings in the period.

Profit from wealth management was down 25 per cent year-over-year, mostly due to a substantial gain from an asset sale that boosted the division a year earlier.

“Looking ahead, while it is difficult to predict how the coming year will unfold, RBC has the strength, stability and operational resilience to face a range of scenarios, and to continue creating long-term sustainable value," said RBC CEO Dave McKay in a release.