Royal Bank of Canada showed it can defy expectations even while being more selective in lending.
The country’s second-largest bank posted record profit of C$11.5 billion ($7.57 billion) for the fiscal year ended Oct. 31 despite shrinking its corporate-loan book to its lowest level in more than two years. Royal Bank has taken a step back in corporate lending after spending the first half of the decade pushing to gain more large clients.
The bank’s corporate-loan book has shrunk to C$83 billion, down from a peak of C$89.7 billion in the first quarter of 2016 and the lowest since the third quarter of 2015, according to financial results posted Wednesday. Average balances of corporate loans have declined for seven straight quarters.
Royal Bank’s 2018 forecast includes a “plan to grow the capital markets loan book at a modest pace with an increased focus on higher fee-based revenue," according to a presentation on its website. The bank also expects “double-digit” loan growth at its City National U.S. banking operation, and “mid-single digit" mortgage growth in Canadian banking for next year.
The bank’s capital markets unit tripled lending to its largest corporate clients between 2010 and its 2016 peak, giving it an edge in winning other business including arranging stock sales and advising on takeovers. Such loans help companies bolster balance sheets, expand operations and finance takeovers.
‘Relatively Flat’
“We expect our corporate-lending portfolio to start growing again,” Royal Bank Chief Executive Officer David McKay said on a call with analysts. “It has been relatively flat as we’ve repurposed and recycled capital among client franchises for a number of years.”
Royal Bank posted C$584 million of earnings for its capital-markets business in the fourth quarter, up 21 percent from a year earlier, helped by lower provisions for credit losses and higher recoveries. Lower provisions also contributed to earnings gains in personal-and-commercial banking and wealth management as the Toronto-based lender posted fourth-quarter profit that topped analysts’ estimates.
“A solid quarter,” Robert Sedran, a CIBC Capital Markets analyst who rates the stock as outperform, said in a note. “Key revenue lines came in ahead of expectations and loan losses found a new trough.”
Here’s a summary of Royal Bank’s fourth-quarter results: