Bloomberg News

RBC, Scotiabank Profits Top Estimates on Domestic Banking

December 06, 2011

(Updates with closing shares in fifth paragraph.)

Dec. 2 (Bloomberg) -- Royal Bank of Canada and Bank of Nova Scotia, two of Canada’s three biggest lenders, reported fourth- quarter profits that topped analysts’ estimates on consumer banking and asset-management gains.

Royal Bank, the country’s largest lender, said net income for the period ended Oct. 31 rose 43 percent to C$1.6 billion ($1.58 billion), or C$1.07 a share. Scotiabank, the No. 3 bank, said profit climbed 11 percent to C$1.24 billion, or C$1.07 a share.

The banks join Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, which reported yesterday that domestic banking profits climbed as Canada’s economy rebounded 3.5 percent in the third quarter. The lenders signaled that economic “headwinds” and increased competition will persist in 2012 due to a slowdown in lending and uncertainty from Europe’s debt crisis.

“There’s a lack of loan growth, lack of revenue expansion opportunities, you’ve got a plateauing in the domestic market,” said Bob Decker, a money manager at Aurion Capital Management in Toronto, whose firm oversees about C$5.5 billion. “It’s a very competitive environment.”

Royal Bank rose 3.7 percent to C$48.77 at 4 p.m. in trading on the Toronto Stock Exchange. Scotiabank, the country’s worst- performing bank stock this year, fell 2.5 percent to C$48.99.

Scotiabank said it expects 5 percent to 10 percent earnings-per-share growth in 2012, compared with an 18 percent increase in fiscal 2011. Last year’s target was 7 percent to 12 percent profit growth.

‘Escalating Costs’

“Escalating costs relative to revenues in both the domestic and international segments is something for investors to keep an eye on,” Brad Smith, an analyst at Stonecap Securities in Toronto, said in a note to clients.

Royal Bank said it earned C$1.11 a share from continuing operations, topping the 97-cent-a-share average adjusted estimate of 15 analysts surveyed by Bloomberg News. Scotiabank said it earned C$1.10 a share before one-time items, beating the C$1.08-a-share average estimate from analysts.

Royal Bank’s Canadian banking profit rose 18 percent to C$904 million as home-equity loans, personal and business deposits and business loans grew.

“We’re very focused on taking a disproportionate share of any growth in the market,” Janice Fukakusa, the bank’s chief financial officer, said in an interview. “We’re always talking about getting a 25 percent premium in growth over the rest of the market, and that really drives a lot of our longer-term value and profitability.”

Wealth Management

Wealth-management earnings rose 8 percent to C$189 million, while insurance profit surged 58 percent to C$196 million from a year earlier, when earnings were pared by a C$116 million loss on the sale of the bank’s Liberty Life Insurance Co. business.

Profit from the RBC Capital Markets investment-banking unit fell 25 percent to C$278 million on lower fixed-income trading due to “challenging” markets. Trading revenue across the bank fell by more than half to C$279 million, led by a decline in trading of interest rate and credit.

“The thumb of Europe has really been pressing on Royal Bank the hardest, largely because they are so sensitive to the capital markets businesses and trading more so than other banks,” said Craig Fehr, an analyst at Edward Jones & Co. in St. Louis.

Royal Bank told investors today it has C$36.9 billion in “gross drawn exposure” to Europe.

Caribbean Banking

International-banking profit, including Caribbean banking and its RBC Dexia partnership and excluding the U.S. RBC Bank that’s being sold, was C$12 million, compared with a C$7 million loss a year earlier.

For the year, Royal Bank said it earned C$4.85 billion, down from C$5.22 billion in 2010.

Scotiabank, also based in Toronto, said domestic consumer- banking profit climbed 4.3 percent to C$460 million, boosted by mortgage and auto loan fees. Asset-management earnings climbed 33 percent to C$250 million.

“Home is where the heart is and where the money is,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which oversees about C$4 billion. “Scotia is in various countries around the world and it’s significant for them, but as not as significant as Canadian operations.”

International-banking profit climbed 10 percent to C$373 million because of loan growth and acquisitions in Uruguay.

Scotiabank may continue to make more “strategic” acquisitions outside of Canada after making six last year, said Brian Porter, the international bank group head.

Investment-banking profit fell 16 percent to C$230 million on lower trading revenue and “a more modest risk appetite.”

For the year, profit climbed 21 percent to a record C$5.27 billion.

--Editors: David Scanlan, Steve Dickson

To contact the reporters on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Sean B. Pasternak in Toronto at spasternak@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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