Royal Bank shifts focus as consumer lending begins to wane

TORONTO – Royal Bank (TSX:RY) says it’s shifting its focus to investment products and business lending, amid signs that Canadian consumers are beginning to lose their appetite for debt.

“As expected, we saw consumer lending moderate following many years of strong credit growth,” RBC chief executive Dave McKay told analysts during a conference call Wednesday.

“We’ve been planning for this shift for some time. In fact, we spent the last decade enhancing our suite of savings and investment solutions and increasing the number of investment professionals.”

However, low interest rates will continue to be a “headwind” for all of the banks, said McKay, who took over as the company’s president and chief executive in August following the retirement of Gord Nixon.

The Bank of Canada said Wednesday it is keeping its benchmark interest rate at one per cent.

RBC also said it is carefully monitoring its mortgage portfolio for any early warning signs that home buyers will be unable to repay their loans, particularly once interest rates do begin to rise.

Mark Hughes, the bank’s chief risk officer, says RBC is performing “ongoing stress testing for numerous scenarios, including increases in unemployment and interest rate, a downturn in the real estate market, and given current market conditions, the price of oil.”

So far, Hughes says he sees no cause for concern.

Strong performance at RBC’s Canadian operations helped the country’s largest bank increase its fourth-quarter profit to $2.33 billion, up 11 per cent from a year earlier.

Royal Bank of Canada’s net income amounted to $1.57 per common share, up 18 cents from a year earlier.

On an adjusted basis, it earned $1.59 per diluted share, which was a cent above the average estimate compiled by Thomson Reuters.

Total revenue for the three months ended Oct. 31 was $8.38 billion, up $463 million or 5.8 per cent from a year earlier, while return on equity increased to 19 per cent from 18.8 per cent.

On average, analysts were expecting adjusted earnings of $1.58 per share and $8.40 billion of revenue during the quarter.

Royal Bank (TSX:RY) said its Canadian banking arm had record-high net income of $1.21 billion in the quarter ended Oct. 31, up $123 million from a year earlier, with revenue rising to $3.34 billion from $3.11 billion.

However, CIBC analyst Robert Sedran noted that the Canadian banking earnings included “favourable accounting gains” that amounted to about $40 million.

RBC’s Canadian personal and commercial banking arm benefited from higher fee-based revenue, more volume and $40 million of accounting adjustments recognized in the quarter.

RBC Capital Markets was one of the few weak spots during the quarter, with net income falling 14 per cent to $402 million as a result of lower trading revenue.

For the full 2014 financial year ended Oct. 31, Royal Bank had $9 billion of net income, up eight per cent from $8.34 billion in fiscal 2013. Diluted earnings rose 51 cents to $6 per common share, while return on common equity fell to 19 per cent from 19.7 per cent. Revenue increased by $3.4 billion or 11 per cent to $34.1 billion.

The wealth management segment had $285 million of net income in the fourth quarter, up $83 million or 41 per cent compared with last year, despite $18 million of after-tax restructuring costs related to its U.S. and international wealth management businesses.

Last month, Royal Bank announced plans to exit its wealth management business in the Caribbean, a move that will affect international wealth management teams in Toronto, Montreal and the U.S. The company did not provide any clarity Wednesday around how many jobs will be lost as a result.

The bank is also repositioning its Caribbean banking operations, which have been hurt by economic challenges in the region. McKay said he is confident the segment will to return to profitability next year.

Earlier this year, RBC sold its operations in Jamaica — “a country where we did not have the scale to compete effectively or meet our hurdles,” McKay said.

For the full year, RBC recognized a $100-million loss related to the sale of RBC Jamaica plus $32 million after-tax provisions for post-employment benefits and restructuring charges in the Caribbean.

The bank said the moves would allow it to focus on serving high net worth and ultra-high net work clients in several key areas such as Canada, the U.S., Asia and the British Isles.

Challenging economic conditions in Europe and the United Kingdom are causing RBC to proceed cautiously with its expansion in the region.

“Although we expect conditions to improve as stimulus measures take hold, we believe economic growth will continue to be relatively slow,” McKay said. “Within this context, we will selectively expand our investment banking sector and geographic coverage.”

The company said last month that its European RBC Suisse business will undergo a strategic review.