Monday, March 05, 2007

RBC Q1 2007 Earnings

  
Scotia Capital, 5 March 2007

Q1/07 Earnings Increase 32%

• Royal Bank (RY) reported a 32% increase in cash operating EPS to $1.16 per share versus $0.88 per share a year earlier the strongest results of the bank group.

• Cash return on equity was a remarkable 27.5% versus 23.6% a year earlier. Return on risk weighted assets was 2.55% versus 2.27% a year earlier.

• Earnings growth was stellar in all business lines. Canadian Personal & Business, RY's largest earnings component representing 60% of earnings, adjusted operating earnings increased 20% year over year driven by Wealth Management, Insurance and Retail banking.

RBC Capital Markets earnings increased 34% driven by strong trading revenue and capital markets revenue. U.S. & International P&B earnings increased 45% driven by wealth management.

• Overall revenue growth was very strong at 15%, or 17.3% excluding insurance, with very high operating leverage of 5.8%.

Dividend increased 15%

• RY increased its dividend a significant 15% to $1.84 per share from $1.60 per share with payout ratio of 41% on our 2007 earnings estimate which is in the lower end of target range of 40%-50%.

Strong Revenue Growth Major Earnings Driver

• RY’s leading earnings momentum is being driven by excellent revenue growth at 15% in the quarter. Revenue growth was supported by strong trading revenue and solid revenue growth across a broad range of bank products. Revenue growth excluding the impact of insurance was 17.3% against comparable non-interest expense growth of 11.5% for high positive operating leverage of 5.8%. Expense growth was driven by 19% increase in variable compensation and 14% increase in salaries.

Solid Retail & Wealth Management Earnings

• Canadian Personal and Business (P&B) cash earnings increased 20% to $879 million from a year earlier excluding the $61 million hurricane-related charge in Q1/06.

• Revenues in the Canadian P&B segment increased 13.1% with expenses increasing 7.8% producing high operating leverage of 5.3%. Revenue was strong across all products, excluding the Global Insurance operations; revenue was up 8% while expenses declined 1%.

• Leading revenue growth in the quarter was Wealth Management at 14%, reflecting strong net sales and growth in mutual fund assets.

• Mutual fund revenue increased 5% sequentially and 36% from a year earlier to $354 million. RY led the industry in long-term asset (LTA) net sales with a 20% market share in Q1. Mutual Fund assets (IFIC) increased 21% from a year earlier to $73.3 billion.

• Loan loss provisions increased to $182 million versus $173 million in the previous quarter and $142 million a year earlier. LLP increases were in personal unsecured credit loans, small business loans and credit cards.

Canadian Retail NIM Improves 2 bp

• Underlying retail NIM increased 2 bp from a year earlier to 3.26%, but declined 4 bp sequentially remaining relatively stable.

• We are forecasting modest retail NIM improvement in 2007 and 2008, supported by the higher level of short-term interest rates. A source of positive earnings surprise would be more meaningful margin expansion, which is very possible, depending on competitive pressures.

U.S. & International P&B Earnings

• U.S. & International P&B Q1/07 cash earnings increased 45% YOY to $161 million with revenue growth of 13% and expense growth of 8%. Revenue growth was particularly strong in wealth management at 18% with banking revenue growth more modest at 5%.

• Net interest margin was flat sequentially at 3.08% but declined 26 bp from a year earlier.

RBC Capital Markets Earnings Increase 34%

• RBC Capital Markets Q1 earnings increased 34% to $426 million due to strong trading results and higher M&A fees.

• Operating leverage was high in Q1 at 10%, with revenue increasing 38% and expenses increasing 28%.

Trading Revenue Very Strong

• Trading revenue increased 40% to a record $652 million representing 11.3% of total revenue versus $447 million representing 8.3% of revenue in the previous quarter and $465 million representing 9.3% of revenue a year earlier. Strong trading revenue added an estimated $0.05 to $0.07 per share to earnings.

• Strong trading results are across all product areas, with product and geographic expansion the major driver for the higher trading revenue.

Capital Markets Revenue Solid

• Capital markets revenue was strong at $611 million, increasing 4% from $589 million in the previous quarter, and increasing 16% from $528 million a year earlier.

• Securities brokerage commissions were strong at $323 million with underwriting and other advisory fees at $288 million, an increase of 31%.

Market-related revenue

• RY’s reliance on market-related revenue is moderate, with security gains, trading, and capital markets revenue representing 23% of total revenue.

Security Gains Remain Negligible

• Security gains were once again modest in the fourth quarter at $48 million or $0.02 per share versus $0.01 per share in the previous quarter and $0.02 per share a year earlier.

• The bank continues to have very low reliance on security gains.

• Unrealized security surplus was $255 million at quarter-end (now contained in AOCI) versus the $365 million surplus at the end of the previous quarter and $62 million a year earlier.

Loan Loss Provisions Increase

• Specific loan loss provisions (LLPs) increased to $162 million or 0.28% of loans, versus $159 million or 0.29% of loans in the previous quarter, and $97 million or 0.19% of loans a year earlier. The modest increase in LLPs was due to higher loan losses on increased personal loans, small business loans and credit cards.

• Our 2007 and 2008 LLP estimates remain unchanged at $600 million or 0.27% of loans and $700 million or 0.31% of loans, respectively.

Loan Formations Stable

• New impaired loan formations were $311 million versus $309 million in the previous quarter and $270 million a year earlier. Net impaired loan formations were $237 million versus $245 million in the previous quarter and $190 million a year earlier.

Tier 1 Ratio Declined to 9.2% - RWA Growth

• Tier 1 capital declined to 9.2% versus 9.5% a year earlier due to a 19% increase in risk weighted assets. Market at risk increased 30% to $19 billion.

• The common equity to risk-weighted assets (CE/RWA) ratio was 9.0%, compared with 9.4% in the previous quarter and 9.6% a year earlier.

Share Buybacks

• This quarter RY repurchased 7.6 million shares at an average price of $54.15 per share for a total of $414 million.

Recent Events

• On January 11, 2007 RBC Capital Markets announced the completion of its acquisition of Daniels & Associates, L.P., the most active M&A advisor to the cable, telecom, and broadcast industries in the U.S. Terms of the transaction were not disclosed.

• RY announced on February 7, 2006 that beginning in Q2/07 it will report financial results for its Wealth Management segment. We expect this would be positive for the bank, given RY’s significant Wealth Management business and the overall impact of Wealth Management earnings, which carry a higher P/E multiple than other business segments.

Recommendation

• We are increasing our 2007 earnings estimate to $4.50 per share from $4.00 per share and our 2008 earnings estimate to $5.00 per share from $4.40 per share due to high revenue growth and favourable operating leverage especially in wealth management. We are increasing our 12-month share price target to $75, representing 16.7x our 2007 earnings estimate or 15.0x our 2008 earnings estimate.

• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on strong earnings momentum, strength of franchise and operating platforms (particularly wealth management), superior profitability, and P/E valuation discount to the group.
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Bloomberg, Doug Alexander, 2 March 2007

Royal Bank of Canada, the country's biggest bank, said first-quarter profit rose to a record, topping analysts' estimates, led by mutual fund sales and investment-banking fees. The bank raised its dividend 15 percent, the most in at least a decade.

Net income for the period ended Jan. 31 increased 28 percent to C$1.49 billion ($1.27 billion), or C$1.14 a share, from C$1.17 billion, or 89 cents, the Toronto-based bank said today in a statement. Revenue rose 15 percent to C$5.7 billion, the biggest increase in at least two years.

Royal Bank's mutual fund revenue soared 36 percent to a record from the previous year, as industry sales rose to a decade high in January on higher stock prices. The bank also benefited from record mergers in Canada last year and increased sales of new stock and bonds.

``The results were tremendous,'' said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc., which manages C$4.5 billion in Toronto, including Royal Bank stock. ``I don't think there's any doubt that they're the leaders in Canada in terms of banking.''

Shares of Royal Bank rose 98 cents, or 1.8 percent, to C$54.86 at 4:10 p.m. on the Toronto Stock Exchange, the biggest gain in four months.

Chief Executive Officer Gordon Nixon said he's looking to the U.S. and Europe to grow, after he resumed expansion of the bank's RBC Centura U.S. consumer banking unit with the $434 million acquisition of Flag Financial Corp. in December. Royal Bank also agreed to buy 39 branches in Alabama from AmSouth Bancorporation in November.

``We're going to continue more of the same, building Centura, continue to make smaller acquisitions,'' Nixon told reporters today following the annual meeting in Toronto. ``If there is a change in the environment, you might see us be willing to be a little more active.''

Royal Bank said profit before some items was C$1.16 a share, topping the median estimate of 99 cents a share in Bloomberg survey of 10 analysts. National Bank Financial analyst Robert Wessel, who rates the stock ``sector perform,'' said profit was C$1.13 a share on that basis, higher than his estimate of C$1.01 a share.

Royal Bank raised its quarterly dividend 15 percent to 46 cents a share, the biggest increase since at least 1996.

Consumer banking profit in Canada rose 31 percent to C$877 million, driven by credit cards and mutual funds. A 5.6 percent gain for the Canadian benchmark stock index during the quarter helped push fund sales to a decade high in January, according to the Investment Funds Institute of Canada. Mutual fund revenue was C$354 million in the quarter, after Royal and smaller rival Toronto-Dominion Bank took market share from money managers such as AIC Ltd.

RBC Capital Markets' profit rose 27 percent to C$420 million on stocks sales and mergers. The value of new equity sold by Royal Bank more than doubled to $1.97 billion, and the value of government debt issues rose 49 percent to C$2.94 billion from a year earlier, according to Bloomberg data. Net trading revenue soared 40 percent to C$652 million.

``Trading revenue continues to produce strong results, but the sustainability of this volatile stream will be questioned,'' Mario Mendonca, an analyst at Genuity Capital Markets, said today in a note to clients.

The bank advised on nine mergers worth $18.9 billion in the period, including Cia Vale do Rio Doce's $16.7 billion takeover of Inco Ltd., according to data compiled by Bloomberg. A year earlier, the investment bank closed nine deals worth $7.6 billion.

Royal Bank is ``not as reliant on financial markets as the other banks,'' said Stephen Gauthier, who oversees $17 million including Royal Bank shares as partner in Montreal-based investment firm Gauthier & Cie. ``For others it will be tougher, if equity markets don't rise as much as they've done in the past few years.''

Royal Bank's investment banking unit has been hiring and buying companies to expand in the U.S., U.K. and Asia. The bank acquired Denver-based investment advisers Daniels & Associates LP and New York-based Carlin Financial Group's brokerage unit last year.

Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, rose 48 percent to C$149 million, led by asset management. Canadian insurers also benefited from rising fund sales in the U.S., with Sun Life Financial Inc. posting a 58 percent increase in asset management earnings.

Royal Bank set aside C$162 million for bad loans, more than triple the C$47 million it set aside a year ago.
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Dow Jones Newswires, Monica Gutschi, 2 March 2007

Royal Bank of Canada showed once again that it's "best in class" among Canada's domestic banks, easily outpacing analyst forecasts in the first quarter and boosting its dividend. All of its business segments did well, led by trading and insurance.

The country's largest lender earned C$1.49 billion or C$1.14 a share in its latest quarter, up from C$1.17 billion or 89 Canadian cents a year earlier.

On a cash basis, first quarter earnings were C$1.16 a share, solidly above the Thomson First Call mean estimate of 99 Canadian cents a share.

Return on equity was 27.3% versus 23.9%.

"Royal remains a best in class franchise in most of its business segments, and this showed through both the retail and wholesale businesses," BMO Capital Markets analyst Ian de Verteuil said in a note, while UBS said the quarterly result "confirms solid momentum continues across most of (the bank's) key businesses."

Moreover, UBS said, Royal Bank has one of the better outlooks among Canadian banks in a year where the economy is expected to slow. Analyst Jason Bilodeau also said Royal Bank's premium valuation over its peers - which has narrowed in recent weeks - "is likely to return on back of the best numbers we have seen from this group."

Both BMO and UBS have an investment-banking relationship with Royal Bank and both make a market in its securities.

As expected, the bank announced a 15% increase in its quarterly dividend to 46 Canadian cents from 40 Canadian cents.

Royal Bank also announced plans to redeem all C$500 million (US$426 million) of its outstanding 6.75% subordinated debentures due June 4, 2012 for 100% of the principal amount plus accrued interest. The redemption will occur on June 4.

On a conference call to discuss the results, Chief Executive Gordon Nixon said he was "very pleased" with the performance of all business units, but said there was still "lots to be done."

He said the extremely strong return on equity was due to how the bank was expanding its business lines effectively and at a faster rate than its peers.

"It's a function of mix, where our business is growing, and a very good environment generally for financial services," Nixon said.

The bank's loan loss provisions jumped to C$162 million from C$47 million, primarily due to a C$50 million reversal of the general allowance in the year-earlier period and lower corporate recoveries this quarter.

Royal Bank said total revenue was up 15% to C$5.70 billion in the latest quarter as a result of solid growth in its wealth management and banking businesses.

The bank's Canadian Personal and Business net income increased C$208 million, or 31%, from a year ago with strong growth evident across all business lines. In particular, its insurance operations did well, especially since the bank had to take a charge last year related to Hurricane Katrina.

The U.S. and International Personal and Business net income increased C$48 million, or 48%, from a year ago, boosted by RBC Centura's acquisition Flag Financial Corporation (Flag).

And RBC Capital Markets net income increased C$90 million, or 27%, from a year ago.

About 14 Canadian cents of the bank's outperformance over analyst forecasts has to do with trading and insurance, BMO noted.

Royal Bank had a "monster quarter" in trading, de Verteuil said, with 20% higher trading revenue than three of its smaller peers combined. He suggested that accounted for 7 Canadian cents in additional earnings.

As well, the insurance business added another 7 Canadian cents more than forecast, due to business growth and some one-time items, de Verteuil said.
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