A Royal Bank of Canada (RBC) logo is seen on Bay Street in the heart of the financial district in Toronto, January 22, 2015.MARK BLINCH/Reuters
A day after Bank of Montreal alarmed observers with disappointing quarterly earnings that appeared to underscore a weak domestic economy, Royal Bank of Canada soothed nerves with upbeat results that topped expectations.
RBC reported net income of nearly $2.5-billion, up 17 per cent year-over-year, despite concerns about cheap oil prices, lower interest rates and a weaker dollar.
The bank boosted its quarterly dividend by 2 cents a share, or 3 per cent, to 77 cents a share.
"I would highlight the potential for some positive effects from lower oil and gas prices," said Dave McKay, RBC's president and chief executive, in a conference call. "For example, lower energy prices are expected to lead to increased consumer spending, which will help support [economic] growth. Additionally, a weaker Canadian dollar and an improving U.S. economy benefit our manufacturing sector," he said
The shares surged $2.75, or 3.7 per cent, to $77.80, lifting other bank stocks as investors took a more positive view of the broader banking sector following a widespread retreat in share prices on Tuesday.
Nonetheless, the whipsaw action of the past two days raises the question of why two of Canada's Big Six banks seem to be moving in opposite directions.
RBC's earnings rose to $1.65 a share, up 27 cents or 20 per cent from last year, beating analysts' estimates of $1.55 a share. In contrast, BMO's per-share earnings fell 8 per cent, missing expectations.
RBC benefited from surprisingly strong trading revenues, which drove income from its capital markets division up nearly 18 per cent. BMO's capital markets income fell 20 per cent, weighed down by weaker corporate and investment banking revenue.
More important, RBC's earnings from its massive personal and commercial banking division rose 7.9 per cent over last year. That's about double the pace of BMO's growth, which was hobbled by rising expenses related to U.S. dollar strength and a rising number of employees, according to analysts.
In late January, RBC struck a deal with City National Corp., paying $5.4-billion (U.S.) for the Los Angeles-based bank and marking a return to U.S. retail banking after RBC unloaded its U.S. division in 2011.
The deal underscored RBC's attempt to look for growth beyond Canada's well-served retail market. But in a conference call, Mr. McKay highlighted the strength of Canadian banking, where net income rose 7 per cent over last year.
"We have the No. 1 or No. 2 market position in all retail and business product categories, and we continue to gain market share across all of our core businesses while maintaining strong margins," he said.
Despite the successful quarter and an upbeat economic outlook, RBC executives remain cautious about the year ahead in a nod to concerns about the potential for even lower oil prices, lower interest rates and a bubbly real estate market.
Bank executives said they have conducted stress tests to gauge the impact of a particularly dire future, where oil trades for $45 a barrel over the longer term, unemployment rises as much as three percentage points and real estate prices collapse as much as 25 per cent.
Even with these gloomy conditions, though, RBC's chief risk officer Mark Hughes said that the bank would remain profitable.
"We always talk about the negatives first," said Janice Fukakusa, RBC's chief financial officer, adding that this approach allows the bank to capitalize on opportunities if reality turns out better than expected.
Even though low oil prices, low rates and a weak dollar are still seen as headwinds, they can deliver surprising results to parts of the country.
"When we're looking at our portfolio in Ontario, we see signs of people investing in their companies and feeling more confident about exporting," Ms. Fukakusa said.
"So we're cautiously optimistic and looking for opportunities."