(Bloomberg) -- Canada’s biggest mortgage lender is weathering the industrywide cool-down in home loans.
- Royal Bank of Canada has outperformed rivals for the past year by expanding mortgage balances by about 5% each quarter from a year earlier and surpassing the industry’s 3.2% growth rate, which is at a 17-year low. Domestic mortgage balances at the Toronto-based bank rose 5.2% to C$252.6 billion ($187.5 billion) in the fiscal second quarter, as the company beat analysts’ earnings estimates.
Key Insights
- The mortgage-industry slowdown has been partly brought on by government efforts to cool housing markets, particularly in Toronto and Vancouver, along with tougher lending criteria introduced last year and record-high household debt. Canadian mortgage growth has steadily declined in recent years. Royal Bank has seen its domestic portfolio of home loans rise between 4.7% and 7.4% quarterly in the past four years.
- At Royal Bank, an impaired loan with a U.S. shopping-mall owner and a soured loan from a U.S. West Coast utility were the main contributors to an unexpected 54% jump in loan-loss provisions to C$514 million in the first quarter. In the second quarter, credit improved from the prior quarter, with the bank setting aside C$426 million for soured loans -- though it was a 55% increase in provisions from the year-earlier period.
- Slumping capital markets took a toll on that business at Royal Bank at the start of the year, resulting in declining revenue, investment-banking fees and earnings at RBC Capital Markets. That trend reversed in the second quarter, with earnings at the division increasing 17% from a year earlier to C$776 million.
Market Reaction
- Royal Bank’s stock has risen 13% this year, outperforming the 10% gain for the eight-company S&P/TSX Commercial Banks Index.
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- Second-quarter net income rose 5.6% to C$3.23 billion, or C$2.20 a share, from C$3.06 billion, or C$2.01 a share, a year earlier. Royal Bank said adjusted per-share earnings totaled C$2.23, topping the C$2.21 average estimate of 14 analysts in a Bloomberg survey.
- RBC executives set a goal last June of improving performance within Canadian banking, targeting a efficiency ratio of under 40% by 2021, down from 42.5% in 2018. RBC moved closer to that goal, posting a 42% efficiency ratio in the second quarter.
- Royal Bank’s Los Angeles-based City National Bank is now led by Kelly Coffey, who joined in February after leaving her role as head of JPMorgan Chase & Co.’s U.S. private-banking unit. In her first quarter, City National posted net income of $90 million, down 19% from $111 million a year earlier.
- Read more about Royal Bank’s quarterly results here.
To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Daniel Taub, Steve Dickson
©2019 Bloomberg L.P.
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