Analyst Note| Eric Compton, CFA |
Wide-moat Royal Bank of Canada reported good fiscal third-quarter results, all things considered. The strain from provisioning was much lower in the third quarter compared with the second quarter, and adjusted diluted EPS was only down 1% year over year, at CAD 2.23 per share. Pre-provision net revenue growth was 6%, showing the resiliency of core revenue, while provisioning came in at CAD 675 million, up roughly 60% year over year but down significantly compared with the CAD 2.8 billion second-quarter provisioning charge. Return on equity was a strong 15.7%. The trend in provisioning was better than what we saw for BMO and Scotiabank, and more in line with what we have seen with National Bank of Canada, which reported on the same day as RBC and also saw its provisioning decline materially in the third quarter. We were largely expecting the high-water mark for provisioning to be in the third quarter for most banks, so this has been a pleasant surprise, and management called this out last quarter, predicting second quarter would be the high point. The ultimate question remains, “is RBC adequately reserved?” With roughly 6%-7% of total loans estimated to be more sensitive to the impacts of COVID-19, the bank has a slightly higher estimated exposure here, while the ratio of loan loss reserves to gross loans is a bit above NBC’s and BMO’s ratios and behind Scotiabank’s (not unexpected given Scotiabank’s unique international footprint and loan exposures), so we don’t see an obvious imbalance. RBC’s common equity Tier 1 ratio remained strong, increasing to 12% from 11.7% last quarter. Internal capital generation was the primary driving factor, and lower risk weighted asset amounts also helped. Given RBC’s strong earnings profile and current reserve levels, we think it remains well positioned to weather the COVID-19 storm. As we incorporate third-quarter results into our projections, we do not plan to materially change our fair value estimate of CAD 112 (USD 81).