Friday, May 26, 2006

RBC Q2 2006 Earnings

The Globe and Mail, Sinclair Stewart, 27 May 2006

Royal Bank of Canada is on pace to shatter the industry's record for annual profit, due in no small part to a reinvigorated capital markets division that produced what one analyst called "outrageous" trading revenue this quarter.

RBC, the country's largest company, reported second-quarter profit yesterday of $1.1-billion or 85 cents a share, a 24-per-cent improvement from the $895-million or 69 cents it delivered to investors in the same period last year.

For the first six months of fiscal 2006, the bank has made nearly $2.3-billion in profit, positioning it to exceed its previous annual high-water mark of $3.3-billion in 2005.

All of RBC's major business units increased their profitability from last year, but the standout was RBC Dominion Securities Inc., the investment banking and brokerage division.

The capital markets business made $433-million this quarter, up 47 per cent from last year, amid a near perfect confluence of factors: Mergers and acquisitions activity was up, equity markets were solid and trading was stellar. The bank's trading operations contributed $586-million in revenue this quarter, more than 40 per cent above their output a year ago. "This past quarter was just one of those quarters where everything seemed to move in the right direction," RBC chief executive officer Gordon Nixon said of the trading business in a conference call with analysts to discuss the bank's results.

"They're hitting a lot of good things right now," said one analyst who covers the bank. "If you look at the trading revenue this quarter, it was outrageous."

RBC has been expanding its trading operations in the past couple of years, both geographically and in terms of the types of products it buys and sells. Yet the success of the bank's capital markets businesses this quarter, and in particular its trading, has elicited some questions about how much added risk RBC is assuming.

Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, both of which were scorched by corporate lending disasters a few years ago, have been weaning themselves off of the riskier, more volatile revenue stream from investment banking and focusing more heavily on retail banking. TD has become retail-centric under the leadership of Ed Clark, while CIBC has stripped capital away from its investment bank after some high-profile scandals.

RBC, however, is the only one of the major Canadian banks that has not meaningfully reduced the amount of capital it allocates to its investment bank, even though it has cut back on large corporate loans, according to a recent research report by National Bank Financial Inc. analyst Robert Wessel.

Mr. Wessel suggested this is one reason for RBC's "massive growth" in profitability over the past two years relative to its peers. He also noted that the bank appears to have raised its market risk, based on the growth in risk-weighted assets for the investment bank. Banks are required to have specific amounts of capital set aside for their assets; the amounts vary according to how risky each asset is deemed to be.

But RBC was not merely relying on its investment bank this quarter. Profit at the Canadian retail division, which includes personal banking and wealth management, was up 16 per cent. Strong mutual fund sales helped, as did the bank's ability to avoid a costly price war on loans and mortgages that has dented margins for some of its peers.

On a cash basis, which excludes some items, RBC made 86 cents a share in profit, about 4 cents better than analysts had been expecting. Its shares closed up 21 cents yesterday, at $46.66 on the Toronto Stock Exchange.
Bloomberg, 26 May 2006

Royal Bank of Canada said second- quarter profit rose 23 percent as trading revenue jumped to a record and soaring commodity prices led to more merger assignments.

The country's biggest bank said today that net income for the period ended April 30 climbed to C$1.12 billion ($1.01 billion), or 85 cents a share, from C$907 million, or 69 cents a year earlier.

Trading volume on the Toronto Stock Exchange rose by a third this year and new stock sales surged by half, increasing underwriting and trading fees for Royal Bank and Bank of Montreal. Canadian mergers almost doubled to $73.6 billion this year as record commodity prices led to takeover bids by Royal Bank clients such as nickel miner Inco Ltd.

"There's been healthy activity in the capital markets," said Gordon Higgins, who helps manage $4.9 billion including Royal Bank shares at Sentry Select Capital in Toronto. "Year over year it's steady, which is what you want to see."

Excluding one-time items such as hurricane-related insurance losses, profit for the Toronto-based bank was 86 cents a share, beating the 82-cent-a-share median estimate of seven analysts polled by Bloomberg News.

Profit from investment banking climbed 47 percent to C$433 million, the highest in at least eight quarters, led by trading revenue and brokerage fees. Canada's economy is growing at its fastest pace in six years as prices for copper, nickel and oil rise to records. Canada is the biggest supplier of crude to the U.S., and is the world's No. 2 producer of zinc and nickel.

Mergers Ranking

RBC Capital Markets ranks first for merger advice in Canada this year, working with companies such as Inco in its C$18.6 billion bid for mining rival Falconbridge Ltd. RBC Capital also ranks second for new stock sales in Canada, helping manage the initial public offering for Tim Hortons Inc., the country's biggest coffee and doughnut chain.

Revenue rose 9.3 percent to C$5.12 billion. Trading revenue from stocks and bonds almost doubled to C$724 million. Volume on the Toronto Stock Exchange has risen by more than a third this year, after the benchmark stock index rose 7 percent in the first quarter.

Non-interest expenses climbed 10 percent to C$2.93 billion in the quarter, mostly from an increase in compensation for investment bankers and traders.

Mutual Funds

Consumer banking profit jumped 16 percent to C$608 million as loans and deposits rose. Revenue from mutual funds rose by a third to C$316 million. The bank has increased its share of the C$570 billion mutual fund market by selling funds from its network of 1,105 branches and offering lower fees than independent fund companies. Royal Bank had the highest net sales in the industry for the past 10 quarters.

"Royal is a standout in that regard," Jason Bilodeau, an analyst at UBS Canada in Toronto, said before results were released. "They seem to have momentum on their side, and no reason to believe that that's going to slow down in the immediate term."

RBC Centura

Earnings from Royal Bank's U.S. and international consumer banking, which includes Rocky Mount, North Carolina-based RBC Centura, rose 29 percent to C$106 million. The bank cited higher U.S. brokerage fees and investment banking revenue. Chief Executive Officer Gordon Nixon, 49, trimmed costs after a 2004 slowdown in the U.S. led to the first annual profit decline in five years.

The bank said today it will buy back as many as 7 million shares by its fiscal year-end in October. Royal Bank has repurchased 8.8 million shares under a buyback program that ends next month.

Canadian bank profits have been tempered by a surging Canadian dollar, which has risen to a 28-year high of about 90 U.S. cents. That reduced the value of U.S. earnings when converted to Canadian dollars. Royal Bank said the stronger dollar cut profit by C$35 million.

The banks are also suffering from higher borrowing costs after the Bank of Canada raised rates seven times to stem inflation. Higher rates erode lending margins by forcing the banks to pay more for deposits, and lead to more loan defaults. Royal Bank set aside C$124 million for bad loans, up 6.9 percent from the year-ago period. The net interest margin as a percentage of assets fell to 1.34 percent, from 1.57 percent.


Results included a C$23 million gain for converting seats on the New York Stock Exchange to NYSE Group Inc. stock; C$61 million in hurricane-related costs for its insurance business and a C$47 million loss related to its credit card loyalty program.

Strong capital markets also helped boost profit for Bank of Montreal, which reported May 24 that profit rose 7.3 percent to C$644 million, or C$1.24 a share.

Toronto-Dominion Bank, Canada's second-biggest bank, reported yesterday that profit rose 23 percent to C$738 million, or C$1.01 a share, led by mutual fund sales and its U.S. operations. National Bank of Canada, the No. 6 bank, said that earnings climbed 5.9 percent to C$214 million, or C$1.26 a share.

National Bank, Bank of Montreal and Royal Bank topped analysts' estimates this quarter, while Toronto-Dominion fell short.

Bank of Nova Scotia and Canadian Imperial Bank of Commerce, respectively the country's third- and fifth-biggest banks, are scheduled to report earnings on May 29 and June 1.