RBC’s McKay says ’50-50′ chance of recession as he reports revenue down, profits up

TORONTO — Royal Bank of Canada reported higher earnings on Thursday, saying many underlying economic indicators remain strong despite heightened recession risk.

“We’re trying to present a balanced view of the economy right now and that we’re halfway through the cycle,” chief executive Dave McKay said on an earnings call.

He said, however, that Russia’s invasion of Ukraine has added complexity to challenges such as supply chain disruptions and energy, labor and housing shortages that contribute to inflation and potential end-of-cycle signals.

Central banks need to hit demand “very hard” to contain inflation, McKay said, making it difficult to predict the impact of rising rates and inflation on demand and shortages of goods and services. services to meet this demand.

“From that perspective, the markets are having a hard time predicting how we’ll stall the economy, will we stall it with a mild recession? And our message today is that it could go either way, that’s 50 -50.

The economy’s strong underlying tenants, such as liquidity and full employment, should act as good buffers to this uncertainty, however, he said.

For now, the bank continues to benefit from lower pandemic concerns, as it reported a $342 million reversal in provisions for credit losses, compared to a $96 million reversal in the same quarter l last year.

Provisions included a $504 million reversal on performing loans as a gradual reduction in pandemic-related provisions, offset by $174 million in new provisions on impaired loans related to new uncertainties, the chief financial officer said. Graeme Hepworth risks.

“Although our base scenario still calls for positive economic growth, we have increased both the severity and the likelihood of our downside scenarios, which partially offset the release of reserves related to COVID-19.”

He said employment rates, house prices and other macro variables were stronger than expected in the second quarter and a return to normal loan loss provisioning levels was likely pushed back further. late in 2023, while any high cost of credit associated with these emerging macroeconomic headwinds are unlikely to materialize until 2024.

The outlook came as the bank reported revenue of $11.22 billion for the second quarter, down 3% from a year ago, while its net profit of $4.25 billion was up 6% from the previous year.

Revenue at its capital markets division declined largely due to unfavorable market conditions, while profitability was boosted in part by the reversal of credit losses.

The bank said its second-quarter net profit rose to $4.25 billion from $4.02 billion in the same quarter last year as it announced it would now pay a quarterly dividend of $1. $.28 per share, down from $1.20 per share.

On an adjusted basis, RBC said it earned $2.99 ​​per diluted share, up from adjusted earnings of $2.79 per diluted share a year ago.

Analysts on average had expected adjusted earnings of $2.67 per share, according to estimates compiled by financial markets data firm Refinitiv.

“On the face of it, Royal Bank delivered an impressive 12% street beat on base EPS, but eliminates a very large pandemic-related reserve release of $504 million (or $516 million, including including other financial assets) and a favorable tax element. and the results come back to earth very quickly,” Scotiabank analyst Meny Grauman said in a note.

He said there were still bright spots, including impressive margin expansion and overall loan growth of 9%.

RBC reported 11% growth in Canadian residential mortgages in the banking sector, but expects the market to slow due to rising rates.

McKay said he expects the slowdown in the mortgage market to be offset by higher growth in commercial loans and credit cards as spending and card balances increase.

“Credit and debit card transactions were 30% above pre-COVID levels in April, with strong momentum through May,” he said.

The bank also said investor mortgages make up 13% of its Canadian portfolio of residential banking and mortgages, for which it has stricter underwriting standards.

This report from The Canadian Press was first published on May 26, 2022.

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Sallie R. Loera