TORONTO Royal Bank of Canada's (RY.TO) quarterly profit rose 22 percent on a sharp jump in fixed-income trading revenue and steady loan growth, suggesting the long-awaited slowdown in Canadian consumer lending has yet to materialize.
The bank, Canada's largest, also is exploring "strategic" wealth management acquisitions, and is seeking to significantly boost its share of international revenue, its chief executive said.
RBC, Canada's largest bank and the first Canadian lender to report year-end results, earned C$1.9 billion ($1.92 billion), or C$1.25 a share, in the fourth quarter ended October 31. That compared with a year-earlier profit of C$1.6 billion, or C$1.02 a share.
Excluding certain items, the bank earned C$1.27 a share, just ahead of analysts' average estimate of C$1.26, according to Thomson Reuters I/B/E/S.
"It was a solid quarter, but we're characterizing it as unspectacular," said John Aiken, an analyst at Barclays Capital Markets, noting that credit quality weakened in the quarter, with loan loss provisions rising 31 percent to C$362 million.
Capital markets income more than tripled to C$410 million, benefiting from fixed-income trading results that compared with an abnormally weak quarter a year earlier. Among Canadian banks, RBC has the largest capital markets-related business.
Personal and commercial banking income rose 9 percent to C$1.0 billion, as a 7 percent rise in loan volumes more than offset higher expenses.
The bank's shares were up 0.5 percent at C$58.61 on the Toronto Stock Exchange, moving roughly in line with other Canadian banks.
Canada's banks have long been hampered by a lack of domestic growth opportunities, and recent signals that Canada's housing markets are slowing have only made more clear the need to find other avenues of growth.
RBC has wealth management and investor services businesses in Europe and a large investment banking presence in both Europe and the United States, but the bank still earned two-thirds of its revenue from Canada in 2012 versus one-third from international operations.
RBC CEO Gordon Nixon would like to see that split move to 50/50, which might be a possibility within five years, he said on a conference call. Such growth would include expansion of the bank's wealth management business, he said.
"The wealth management area (is) one area where if we did find the right strategic opportunity, we'd certainly be prepared and we'd like to find the right strategic opportunity," he said.
RBC has already made sizeable buys on the wealth management size, adding Phillips, Hager & North in 2008 for $1.4 billion and buying BlueBay Asset Management in 2010 for $1.5 billion.
However, Nixon said a major buy would be challenge due to increasingly stringent capital requirements, such the Basel III rules.
RBC sold its U.S. retail bank last year, but it still has a large U.S. wholesale banking operation.
Nixon said a proposal by a top U.S. Federal Reserve Governor Daniel Tarullo to subject foreign banks operating in the United States to the same tough oversight rules as their U.S. rivals would not have much impact on the bank.
SLOWDOWN IN 2013?
While Canadian banks are looking at international markets for growth, it is still Canadian lending that makes up the biggest chunk of their revenue.
Expectations for a sharp slowdown in mortgage and consumer loan growth have risen over the past year as Canadians have dealt with record debt levels and as government moves to tighten mortgage standards have started to cool the red-hot housing market.
But RBC's strong results in the quarter confirm that a slowdown in lending will likely be a 2013 story, said Peter Routledge, an analyst at National Bank Financial.
"We're still waiting for it. If we do have a real slowdown in the housing market, it'll come later than anyone expected," he said.
Dave McKay, group head of RBC personal and commercial banking, acknowledged Canada's housing sector is primed to cool, though he said he expects the bank to outperform its peers on the lending side.
"I think obviously you'll see a slowing, (but) I think the industry will be positive and you should see roughly 3-4 percent growth in the industry going forward," he said on the call.
While loan growth was steady during the quarter, the interest margins on the loans narrowed to 2.82 percent from 2.97 percent in the third quarter, as expiring loans were renewed at rock-bottom interest rates.
RBC's results kick off what is expected to be a strong quarterly reporting period for Canadian banks, with year-over-year profit gains of around 15 percent expected, due largely to stronger capital markets-related revenue.
Bank of Montreal (BMO.TO), Canada's No. 4 bank, will report next Tuesday, followed two days later by Toronto-Dominion Bank (TD.TO) and Canadian Imperial Bank of Commerce (CM.TO), the country's No. 2 and No. 5 banks, respectively.
Bank of Nova Scotia (BNS.TO), the country's third-largest bank, releases results on December 7.
($1 = 0.9918 Canadian dollars)
(Editing by Leslie Gevirtz, Bernard Orr)