(Reuters) - Royal Bank of Canada RY.TO expects a pickup in deal-making in early fiscal 2020, its chief financial officer told Reuters on Wednesday after Canada's biggest bank unveiled disappointing quarterly earnings as investment banking fees dried up.
“We did see a number of large marquee deals move from Q4 of 2019 to Q1 of 2020,” CFO Rod Bolger said in an interview. “So we do have a strong backlog as a result, going into 2020.” Capital markets accounted for 18% RBC’s net income.
Gabriel Dechaine, an analyst at National Bank of Canada Financial Markets, said the division’s woes are far from over.
“While Capital Markets’ performance is notoriously difficult to predict, we expect normalization (i.e., higher) of credit losses and margin pressures to weigh on 2020 growth,” he wrote in a note.
RBC was the second major Canadian bank whose fourth-quarter performance disappointed investors. As TD TD.TO and Canadian Imperial Bank of Commerce (CIBC) CM.TO prepare to wrap up the 2019 fiscal reporting season on Thursday, the picture emerging is of a sector battling higher bad debt provisions, margin pressure in the United States and a sluggish environment for deals, making it the worst year for earnings growth since the financial crisis.
A 12% drop in RBC's capital markets business' profit led to a drop in overall earnings. In contrast, smaller rival National Bank of Canada NA.TO reported a 7% increase in income from its financial markets business.
National Bank “is strong in the trading business, always has been,” Robert Sedran, an analyst at CIBC Capital Markets, said by email. “Even in down quarters, they often outperform.”
Royal Bank shares fell 2.1% in Toronto, their lowest close in almost two months. National Bank rose 2% to a record. The Toronto stock benchmark was unchanged.
RBC’s earnings per share grew 5% in 2019 from the previous year. While meeting its 7%-plus EPS growth objective may be challenging in the near term, it does expect to achieve it in three to five years, executives said on an analyst call.
Despite the challenges, most Canadian banks’ retail businesses have posted earnings growth and steady margins at home as interest rates have remained unchanged this year.
The exception was Montreal-based lender Laurentian Bank of Canada LB.TO, which posted a 20% decline in adjusted income from a year ago on Wednesday, missing analyst estimates.
Royal Bank’s 41% jump in loan-loss provisions was bigger than expected and surpassed National Bank’s 22% rise, which was lower than estimates. Banks have been increasing provisions in anticipation of worsening economic conditions.
Royal Bank is cutting fewer than 200 jobs in its Investor and Treasury Services business in Europe and relocating some of the headcount to Malaysia, Bolger said. BMO on Tuesday surprised markets by announcing cuts to 5% of its workforce.
Reporting by Nichola Saminather in Toronto; Additional reporting by Abhishek Manikandan and C Nivedita in Bengaluru; Editing by Steve Orlofsky, Lisa Shumaker and Cynthia Osterman
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