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Noah Zivitz

Managing Editor, BNN Bloomberg


Royal Bank of Canada missed profit expectations in its latest quarter by a wide margin as it stashed away hundreds of millions of dollars for loans that could go bad and its capital markets division withered amid "challenging market conditions."

RBC said its net income in the three-month period that ended July 31 fell 17 per cent year-over-year to $3.58 billion. On an adjusted basis, it earned $2.55 per share; analysts were expecting $2.67 in adjusted earnings per share.

“While the market is likely to punish this miss regardless of the source, especially considering [RBC’s] premium valuation heading into reporting, we note that this result did include an important silver lining called margin expansion,” stated Meny Grauman, an analyst at Scotiabank, in a note to clients Wednesday. He has a sector outperform (the equivalent of a buy) recommendation on RBC and a 12-month price target of $144.00.

Unlike Bank of Nova Scotia, which opened earnings season Tuesday and was battered by investors amid concern about its international division and a dip in profitability, RBC expanded in its net interest margin to 1.52 per cent from 1.45 per cent in the preceding quarter.

However, its bottom line was weighed down by $340 million in provisions for credit losses, almost all of which were booked in its Canadian banking division. By contrast, it released $342 million from its provisions in the previous quarter; in the prior year, it freed up $540 million from those funds that had been set aside for potential bad loans.

In a release, RBC said the provisions in its fiscal third quarter were the result of "unfavourable changes in our macroeconomic environment."

RBC's profit from personal and commercial banking operations fell four per cent year-over-year to $2.02 billion, due largely to the jump in provisions. The unit's net income was also held back by non-interest expenses, which inched up to $2.13 billion in the period. Those drags on profit were partly offset by a 10 per cent year-over-year jump in loans from Canadian banking activities.

The profit erosion from core banking was a drop in the bucket compared to the collapse in earnings from capital markets activities. RBC said that unit's net income sank 58 per cent year-over-year to $479 million, which it attributed mostly to $385 million in markdowns on loan underwriting in the U.S. As well, the recent plunge in deal activity showed up in the results as RBC's revenue from corporate and investment banking was halved to $625 million.

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