Earnings Rise for Royal Bank of Canada

Zacks

Royal Bank of Canada (RY) reported fiscal second-quarter 2013 net income of C$2.0 billion ($2.0 billion), surpassing the year-ago figure of C$1.7 billion ($1.7 billion). This reflects a year-over-year increase of 13%.

Results reflect a fall in expenses as well as provisions for credit losses, partly offset by decreasing revenues.

Including a restructuring charge, net income came in at C$1.9 billion ($1.9 billion), up 26% year-over-year.

Performance in Detail

Total revenue in the quarter was C$7.8 billion ($7.7 billion), down marginally by 1% from C$7.9 billion ($7.8 billion) reported in the comparable prior-year period. Revenue decline was mainly due to lower net interest as well as non-interest income.

Net interest income came in at C$3.2 billion ($3.1 billion), down 3% from C$3.3 billion ($3.2 billion) reported in the comparable prior-year period. Non-interest income came in at C$4.5 billion ($4.4 billion), down 2% from the year-ago quarter’s level.

For the quarter, non-interest expenses were recorded at C$4.0 billion ($3.9 billion), down 2% from the prior-year quarter. The decline is mainly attributable to a decrease in costs related to human resources.

Credit Quality

Total provision for credit losses stood at C$288.0 million ($283.1 million) in the quarter, down 17% from the year-ago quarter, primarily due to lower provisions in the Canadian Banking personal loan and credit card portfolios, and in the Caribbean wholesale portfolios.

Capital Position

As of Apr 30, 2013, Royal Bank of Canada reported total loans of C$398.6 billion ($391.9 billion), up 4% from the prior year.

Moreover, deposits climbed to C$531.2 billion ($522.2 billion), up 3% as of Apr 30, 2012. Total assets were C$867.5 billion ($852.8 billion), up 4% as of Apr 30, 2012.

As of Apr 30, 2013, Royal Bank of Canada’s Tier 1 capital ratio came in at 11.2%, down 30 basis points (bps) from the prior-year quarter. Total capital ratio was 14.0%, down 3 bps year over year.

The company’s estimated pro-forma Basel III common equity Tier 1 ratio was about 9.1%, down 20 basis points compared with 9.3% last quarter, as strong internal capital generation was more than offset by the 45 bps negative impact from the Ally Canada acquisition.

Dividend Update

Concurrent with the earnings release, the company’s board of directors declared a quarterly dividend of 63 cents per share. The dividend will be paid on and after Aug 23, 2013 to shareholders of record as of Jul 25.

Our Viewpoint

Going forward, we expect Royal Bank of Canada’s strong business model, diversified product mix and sturdy capital position to boost its bottom line. However, a persistent low interest rate environment, weak economic recovery and stringent regulatory requirements will remain a drag on its financials.

Royal Bank of Canada currently carries a Zacks Rank #2 (Buy). Other foreign banks worth a look include Mitsubishi UFJ Financial Group, Inc. (MTU), Credit Suisse Group AG (CS) and Deutsche Bank AG (DB). While Mitsubishi carries a Zacks Rank #1 (Strong Buy), the other two carry a Zacks Rank #2.

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