Royal Bank of Canada Earnings: Results Roughly as Expected, Although Expenses Keep Rising

Wide-moat-rated Royal Bank of Canada RY reported decent fiscal third-quarter results. Adjusted earnings per share came in at CAD 2.84, representing growth of 11% year over year, although adjusted EPS has been stuck in the roughly CAD 2.70-CAD 3.00 range for several years now. Results generally fit within our overall expectations, as we have been looking for a slowdown in loan growth, an increase in credit costs, and some pressure on net interest income growth. As such, we do not expect to make material changes to our forecasts, and we are maintaining our CAD 130/$95 fair value estimate.

For the bank to meet some of its previous goals, it was going to need to see a turnaround in net interest income, and indeed NII was able to grow in the third quarter after declining in the previous two quarters. Net interest margin was down slightly, to 1.5% from 1.53%, but balance sheet growth more than made up for this. RBC maintains a positive sensitivity to higher rates, and we are hoping that some of this latent sensitivity begins to shine through a bit more in the coming quarters.

Provisioning for loan losses ticked up during the quarter, driven by some provisioning on performing balances and some provisioning on impaired balances. Provisioning in the commercial real estate book continues to increase, and impaired balances are also trending higher. We expect to see reserve builds across the industry for the rest of the year as credit strain increases. We still expect any future losses to be manageable.

Rising expenses has been a theme for RBC for the last several quarters, and expenses once again came in a bit above where we had hoped. Management focused its commentary on cost-control measures, with reductions in full-time equivalent employees expected in the short term. As we incorporate these slightly higher expense rates, we expect them to be offset by slightly better fee developments, as wealth-related fees are doing a bit better than we had forecast.