Noah Zivitz

Managing Editor, BNN Bloomberg

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Royal Bank of Canada trounced profit expectations in its latest quarter despite weakness in its capital markets division. It also announced a dividend hike.

RBC said Thursday its total net income rose six per cent year-over-year to $4.25 billion in the fiscal second quarter, which ended April 30. On an adjusted basis, it earned $2.99 per share; the average estimate among analysts tracked by Bloomberg was for $2.69 in per-share profit.

The bank also raised its quarterly dividend to $1.28 per share as of Aug. 24, from its current payment of $1.20. Bloomberg's dividend forecast tool anticipated a dividend of $1.23.

Even though markets have been rocked lately by worries about central bank policies, inflation, Russia's attack on Ukraine, and China's attempt to contain COVID-19, RBC's profit in the latest quarter got a big lift from the release of funds that were previously set aside for loans that could go bad. The bank said it freed up $342 million that had been reserved for loan loss provisions. In the preceding quarter, it booked $105 million in provisions.

In a release, RBC said the improvement in credit quality was "mainly driven by reduced uncertainty relating to the COVID-19 pandemic which was partially tempered by increased downside risks, including rising inflation and interest rates."

Several analysts questioned the quality of the earnings beat considering how much money RBC moved out of loan loss reserves.

“[RBC’s] earnings beat was entirely driven by better credit, which we estimate benefitted adjusted earnings per share by 33 cents,” wrote Scott Chan, an analyst at Canaccord Genuity Capital Markets, in a report to clients. “Including a lower tax rate, we note [RBC’s] core earnings per share was modestly below consensus.” 

The bank's bread-and-butter personal and commercial division's profit surged 17 per cent year-over-year to $2.23 billion. It benefitted from higher revenue, as well as the release of $276 million from loan loss provisions.

RBC's capital markets unit was the blemish on profit in the fiscal second quarter as net income tumbled 26 per cent year-over-year to $795 million. The bank attributed that primarily to a drop in fixed income and equity trading revenue.