Noah Zivitz

Managing Editor, BNN Bloomberg

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Royal Bank of Canada's profit in the latest quarter surged beyond expectations, despite a drop in revenue, as the country's largest lender released more than half a billion dollars from its rainy day fund.

RBC's net income in the fiscal third quarter, which ended July 31, rose 34 per cent year-over-year to almost $4.3 billion. On an adjusted basis, the bank earned $3.00 per share; analysts, on average, were expecting $2.72 on that basis. The bank's revenue slipped to $12.8 billion from $12.9 billion a year earlier. 

For the second consecutive quarter, RBC benefitted from lightening its provisions for credit losses. At the onset of the pandemic, Canada's banks set aside billions of dollars to brace themselves for the possibility of a surge in loan defaults. But that onslaught of sour loans never materialized. And so, in the latest quarter, RBC released $540 million from its provisions. In the prior quarter, the bank released $96 million. 

"Our diversified businesses and disciplined approach to risk and cost management underpinned our results," said Dave McKay, RBC's president and chief executive officer, in a release. "We remain cautiously optimistic about the macroeconomic outlook and focused on supporting clients and communities through the ongoing recovery."

Royal Bank's core personal and commercial banking unit posted a 55 per cent surge in profitability, as net income reached $2.1 billion. Revenue in the Canadian banking division rose eight per cent year-over-year to almost $4.5 billion amid an uptick in lending activity. Notably, the balance of residential mortgages hit $320.1 billion, compared to $283.4 billion a year earlier. 

The bank's other primary profit driver in the period was its capital markets division, where net income climbed 19 per cent year-over-year to $1.13 billion thanks to record revenue from corporate and investment banking. 

“After stripping out the lower than expected provisions, it appears that Royal’s third-quarter earnings were essentially in line with expectations. While this may generate some relative weakness, given the beats that we have seen to date, we view the results positively,” said Barclays Senior Analyst John Aiken in a note to clients Wednesday. 

RBC's key capital cushion - the Common Equity Tier 1 ratio - reached 13.6 per cent in the period, compared to 12.8 per cent in the fiscal second quarter. Canada's banks have seen that ratio rise in recent quarters amid a ban on share buybacks and dividend hikes. The Office of the Superintendent of Financial Institutions (OSFI) implemented that prohibition more than a year ago to ensure the financial system could operate properly during the pandemic. Analysts widely expect OSFI to stand down on that rule later this year.