November 30, 2016 / 11:37 AM / a year ago

RBC cuts key target after profit disappoints

TORONTO (Reuters) - Royal Bank of Canada (RY.TO) on Wednesday reported a bigger-than-expected decline in fourth-quarter profit and said it was trimming back a key financial target, sending its shares lower.

A Royal Bank of Canada (RBC) sign is seen outside of a branch in Ottawa, Ontario, Canada, May 26, 2016. REUTERS/Chris Wattie

RBC said earnings per share fell to C$1.65 from C$1.74 the year before, reflecting a decline in profit at its capital markets division. The earnings were below the C$1.71 average analyst forecast, according to Thomson Reuters I/B/E/S.

Shares in RBC, Canada’s largest bank, were down 3.4 percent in afternoon trading.

Speaking to analysts, Chief Executive Officer Dave McKay said the bank had decided to revise its medium-term target for return on equity (RoE), a key measure of how well it uses shareholder capital to earn profits. McKay said the decision was made because of “the pressure on returns in the market including persistently low interest rates and uncertainty on regulatory capital requirements.”

RBC is now aiming for RoE of at least 16 percent, compared with 18 percent before, a level which is still higher than the majority of large banks around the world.

In an interview, Chief Financial Officer Janice Fukakusa said the previous target had been set last year at a time when the bank had expectations of further U.S. interest rate rises which failed to materialise. She expects the bank will get back to a RoE of at least 18 percent in two to three years.

“We still want to strive for the 18 percent. It’s just going to take a bit longer,” she said.

Fukakusa also said she saw potential opportunities arising from Donald Trump’s victory in the U.S. presidential election, saying his policies could set the right conditions for “favorable growth” in the United States.

“They’re talking about growing the economy and stimulating growth through infrastructure spending which will be good and we’ve already seen some positive influences in terms of November’s pipeline being stronger, companies doing debt issuance and loan facilities in anticipation of rate increases there,” she said.

McKay said RBC would continue to pursue smaller acquisitions in the United States to help expand Los Angeles-based City National, which it bought for C$5 billion last year.

RBC said its overall net income fell by 2 percent to C$2.54 billion ($1.90 billion). Earnings at its capital markets business fell 13 percent, which the bank said was partly due to it benefiting from a lower tax rate the year before.

Reporting by Matt Scuffham; Editing by Meredith Mazzilli and Lisa Shumaker

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