RBC shrugs off first-quarter tax hit to keep banks’ earnings season sunny

Royal Bank of Canada signalled Friday that it would keep up a brisk rate of returning earnings to shareholders, shrugging off a tax hit and flat profit and reporting strong results for its first quarter. 

RBC announced revenue of $10.8 billion for the quarter ended Jan. 31, up more than 12 per cent from the same three months of last year. However, net income for the first quarter compared with a year ago was essentially unchanged, at about $3 billion.

Toronto-based RBC, Canada’s largest bank by market capitalization, said a $178-million charge weighed on its first-quarter earnings, tied to U.S. tax reform and “primarily related to the write-down of net deferred tax assets.”

Canadian banks with businesses south of the border have been forced to adjust the value of their tax assets after U.S. President Donald Trump signed a bill late last year to cut his country’s corporate tax rate.

RBC also said that last year’s first quarter benefitted from a $212-million gain on the sale of the U.S. operations of payments processor Moneris Solutions Corp.

Despite this, RBC was the second of the Big Six Canadian banks to report solid results this earnings season, following Canadian Imperial Bank of Commerce’s example on Thursday.

“Results were strong across most business segments (P&C, Capital Markets, Wealth Management, Investor & Treasury services),” said Scott Chan, analyst at Canaccord Genuity, in a note. “Overall, we characterize the results as strong and this coincides with CM’s results yesterday.”

RBC announced that another round of share buybacks had been approved as well, after the bank repurchased more than $920 million in stock in its first quarter. The bank says it will buy back and cancel up to 30 million common shares, following a 30-million-share normal course issuer bid that wrapped up at the end of January.

“Share buybacks continue to be a useful tool to deploy excess capital after fully investing in our businesses,” said Rod Bolger, chief financial officer of RBC, on a conference call Friday morning.

RBC said it was also hiking its quarterly dividend, increasing it three cents to 94 cents a share. According to National Bank Financial, RBC returned 74 per cent of earnings to shareholders in its fiscal 2017, compared with 52 per cent by its peers. 

“In the absence of M&A (which the bank is not signalling), we expect the trend to continue,” wrote National analyst Gabriel Dechaine in a note on Friday.

RBC reported a common equity tier 1 capital ratio, a measure of a bank’s capital strength, of 11 per cent for the quarter, up 10 basis points from the previous quarter but unchanged from the same time last year.

Meanwhile, the tax write-down appears to be a speed bump for RBC, as the bank says it expects an annual benefit of about $250 million this year from U.S. tax reform. 

“Overall, we believe that tax reform will be positive for the broader U.S. economy and our businesses,” said Dave McKay, president and chief executive officer of RBC, on a conference call Friday morning. 

The tax cut provided a boost to the bank’s wealth management unit, including Los Angeles-based City National Bank, which was acquired by RBC in 2015. RBC reported that the wealth business’ first quarter included a 39-per-cent jump in profit compared with a year ago, pushing its net income up to $597 million. The bank said this was “largely reflecting higher average fee-based assets, an increase in net interest income, and a lower effective tax rate reflecting benefits from the U.S. Tax Reform.”

RBC reported net income of $1.48 billion in the quarter for its Canadian banking business, with residential mortgages growing 6.4 per cent over last year to $233 billion. This was despite new rules around uninsured mortgages coming into effect that may make borrowing more difficult. 

“We will not compromise in our risk profile just to add mortgage volume,” McKay said.

Excluding the tax charge and proceeds of the Moneris USA sale, RBC said net income for the first quarter was up more than 13 per cent, to about $3.2 billion. 

“Notwithstanding the sizeable amount by which it exceeded our estimate, we got what we expected from this bank this quarter: strong performance in key segments, a positive outlook that sustains estimates (and even nudges them higher) and evidence that it continues to press its advantages to position it well for growth,” Robert Sedran, analyst at CIBC World Markets, said in a note.

Financial Post

• Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne

Leave a Reply

Read the original at Financial Post - Top Stories.