RBC warns of credit performance dependence on government aid after profit beat

(Reuters) – Royal Bank of Canada executives cautioned on Wednesday that the company’s credit performance in 2021 hinges on the outlook for government support after its quarterly profit beat estimates on much lower than expected provisions for loan losses.

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RBC, Canada’s top lender, also flagged a moderation in trading activity this year, after several quarters of strong capital markets performance and record earnings in the unit in the first quarter.

RBC and National Bank of Canada, the smallest of Canada’s six major lenders, followed rivals Bank of Montreal and Bank of Nova Scotia in posting better-than-expected profits that have also now surpassed pre-pandemic levels.

Canadian banks have largely avoided an increase in soured loans thanks to several government assistance measures, expected to end this summer.

While BMO and RBC released some reserves on performing loans during the quarter, signaling an improving outlook for loan losses, RBC said delinquencies will still increase for the remainder of 2021, accompanied by a rise in impaired loan provisions.

RBC Chief Risk Officer Graeme Hepworth told analysts the degree to which the government support is extended or transformed “will drive … the expectations and implications for our credit performance in the latter half of the year.”

RBC shares, which earlier rose from Tuesday’s record close, were flat in late morning, while National Bank stock was up 4.6% at C$79.30. The Toronto stock benchmark was up 0.55%.

Despite the somewhat murky credit picture, RBC executives said they were heartened by expected improvement in the second half on expectations of growth in higher-margin loans like commercial and credit cards as businesses reopen and the economy recovers.

Canadian lending rose 6% in the three months through January at RBC but this was driven entirely by increases in residential mortgages, which have lower margins than other loans.

RBC expects continued mortgage growth will help drive a consumer-led recovery in its Canadian banking unit, based on a forecast of high-single-digit growth in Canadian housing prices this year, following a record year in 2020 for resale activity.

RBC and National Bank also posted higher profits from a year earlier in their wealth management and capital markets units.

RBC reported adjusted cash earnings of C$2.69 per share versus analysts’ expectations of C$2.26. National Bank’s adjusted income rose to C$2.15 per share, compared with estimates of C$1.71.

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