Canada's Royal Bank, National Bank post profit beat on markets strength, fewer provisions

TORONTO (Reuters) - Royal Bank of Canada and National Bank of Canada comfortably beat estimates for third-quarter profit on Wednesday as they set aside about half the money analysts had expected to cover bad loans.

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But executives at Canada’s biggest bank RBC said on an analyst call that the lender is putting greater emphasis on its downside scenario to reflect the “increasing uncertainty about how the economy will perform through the fall.” That scenario assumes Canadian unemployment will remain at around 10% until mid-2022, and home prices will decline 8% and remain depressed until mid-2023.

RBC and National Bank set aside C$675 million ($512.3 million) and C$143 million in provisions respectively, including on performing loans in anticipation of higher delinquencies as government and customer support programs aimed at helping clients hurt by the coronavirus pandemic wind down.

RBC also received a boost from its capital markets business, which posted a 45% jump in earnings.

Shares of both RBC and National Bank rose 2.1% in morning trading in Toronto, on track for their highest close in six months. The Toronto stock benchmark added 0.4%.

Both banks’ smaller-than-expected provisions were attributable to their “sizable reserve build” in the previous quarter, Credit Suisse analyst Mike Rizvanovic wrote in a note.

But the weaker performance of both lenders’ Canadian banking businesses, driven by more margin compression than anticipated and higher provisions, raised concerns about more challenges in future quarters.

RBC said about 70% of customers with deferred loans were in Canadian banking, where active deferral balances accounted for 12% of the total loan portfolio. Most of these wind down in the fourth quarter. Deferred loans at National Bank account for 5.6% of its portfolio, the lender said.

Investors had surmised before the results announcements that extended and expanded assistance programs that helped keep borrowers in decent shape likely contained loan impairments at Canadian banks.

That also helped support capital levels, with RBC posting an increase in its Common Equity Tier 1 ratio - the core measure of a bank’s capital - from the prior quarter to 12%, while National Bank maintained its level of 11.4%. Both were above the regulatory requirement of 9%.

On Tuesday, Bank of Montreal also posted better-than-expected earnings, while Bank of Nova Scotia missed estimates, weighed down by its Latin American business, which was hit by the coronavirus pandemic later than North America.

Toronto-Dominion Bank and Canadian Imperial Bank of Commerce report results on Thursday.

($1 = 1.3176 Canadian dollars)

Reporting by Nichola Saminather; editing by Chizu Nomiyama and Grant McCool