Royal Bank of Canada (RY) lost 1.1% on the NYSE despite reporting strong fiscal third-quarter 2014 (ended Jul 31) earnings on Friday before the opening bell. Net income came in at C$2.4 billion ($2.2 billion), increasing 4% year over year.
Results benefited from top-line growth, partially offset by increased non-interest expenses and rise in the provision for credit losses.
Performance in Detail
Total revenue was C$9.0 billion ($8.3 billion), up 25.2% on a year-over-year basis. Revenue growth was driven by a rise in non-interest income and net interest income.
Net interest income came in at C$3.6 billion ($3.3 billion), up 7.5% from the prior-year quarter. Non-interest income was C$5.3 billion ($4.9 billion), rising 41.2% year over year.
Non-interest expenses were C$4.6 billion ($4.3 billion), up 15% from the year-ago quarter. The rise was primarily due to an increase in human resources expenses, equipment costs, occupancy costs, amortization costs and other expenses, partially offset by a fall in communication costs, professional fees and outsourced item processing fees.
During the quarter, all segments exhibited improved performance. Notably, net income in wealth management, insurance and capital market divisions were up 22.3%, 33.8% and 66.1%, respectively.
As of Jul 30, 2014, Royal Bank of Canada’s total average loans and acceptances stood at C$435.5 billion ($400.5 billion), up 6.2% from the prior-year quarter. Moreover, deposits were C$598.0 billion ($550 billion), up 9.3% year over year. Total assets were C$913.9 billion ($840.5 billion), rising 7.5% from the prior-year period.
Total provision for credit losses was C$283.0 million ($261.6 million) in the quarter, up 6% year over year, mainly due to higher provisions in personal and commercial banking division.
Capital Position
As of Jul 31, 2014, Royal Bank of Canada’s Tier 1 capital ratio came in at 11.2%, down 10 basis points (bps) from the prior-year quarter. Total capital ratio was 13.0%, down 50 bps year over year.
The company’s estimated Basel III Common Equity Tier 1 (CET1) ratio stood at 9.5%.
Capital Deployment Activities
Concurrent with the earnings release, Royal Bank of Canada announced a 6% increase in the quarterly dividend to C$0.75.
Our Viewpoint
In spite of the impressive results, we are skeptical about Royal Bank of Canada’s ability to sustain growth in the upcoming quarters, given the sluggish economic recovery, a still low interest rate environment and stringent regulatory requirements.
However, with the U.S. economy showing signs of improvement, the export-driven Canadian economy is anticipated to benefit. Moreover, the Royal Bank of Canada’s strong business model, diversified product mix and stable capital position will likely boost its bottom line going forward.
Royal Bank of Canada currently has a Zacks Rank #3 (Hold).
Among other foreign banks, The Bank of Nova Scotia (BNS) and Bank of Montreal (BMO) are scheduled to release fiscal third-quarter 2014 results on Aug 26, while Canadian Imperial Bank of Commerce (CM) is expected to report on Aug 28.
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