Head of RBC says underlying economy still strong despite heightened volatility risk

Head of RBC says underlying economy still strong despite heightened volatility risk

TORONTO — The head of RBC says market volatility caused by geopolitical risks shouldn’t be enough to throw off rate increases and the underlying strength of the economy.

Chief executive Dave McKay’s comments Thursday come after Russia attacked Ukraine overnight, pushing markets down and creating uncertainty on the potential fallout of the unprovoked aggression.

“Geopolitical risk tends to smooth out over time, but can be quite volatile in the short term,” said McKay on an earnings call.

“So I still expect the strength of the economy, the inflationary pressures that we talked about, economic capacity being used, that I would still expect some form of rate increase to continue to move forward and monetary policy to continue to tighten.”

RBC chief risk officer Graeme Hepworth said on the call that the bank has no direct or meaningful exposure to Russia or Ukraine because of the underlying risks, so the bank is more focused on the indirect impacts such as higher commodity prices that could result.

Already the action has helped briefly push oil to over US$100 a barrel for the first time since 2014, while natural gas prices are also rising.

“Those are things that are going to continue to fuel and exacerbate current risk concerns like inflation,” said Hepworth.

The geopolitical risk is only one of the economic challenges McKay highlighted, as supply chain disruptions, acute labour capacity shortages, and energy market imbalances also drive uncertainty, but he said the underlying economic drivers are still strong.

“As we move past the Omicron peak, we can look to record household savings — over $200 billion in Canada alone — driving consumer spending on goods and services; renewed immigration driving demand for housing; increased business investment into just-in-case inventory strategies and building new digital capabilities.”

The bank’s optimism comes as it topped analyst expectations in its first quarter results, earning net income of $4.1 billion or $2.84 per diluted share for the quarter ended Jan. 31, up from $3.8 billion or $2.66 per diluted share in the same quarter a year earlier.

On an adjusted basis, RBC says it earned $2.87 per diluted share for the quarter, up from an adjusted profit of $2.69 per diluted share a year ago, beating the average analyst estimate of $2.73 per share, according to financial markets data firm Refinitiv.

Revenue totalled nearly $13.1 billion, up from $12.9 billion a year earlier.

Provisions for credit losses amounted to $105 million for the quarter compared with $110 million in the same quarter last year.

Barclays analyst John Aiken said the bank did better than expected especially on capital markets-related revenues as trading rebounded 40 per cent and advisory fees were up seven per cent. Canadian retail banking also saw gains with average loans up 9.7 per cent from a year earlier, offsetting a slight decline in net interest margins.

“The results were quite clean and set the bank up for a solid run for the remainder of the year as anticipated rate increases should fuel further revenue growth, offsetting any potential easing in volumes.”

The bank said non-interest expenses grew one per cent from a year earlier as declines in some variable compensation help offset increases elsewhere.

Expenses were up three per cent excluding the impact of some compensation, while also excluding gains from reduced legal provisions had expenses up by five per cent from a year earlier.

Chief financial officer Nadine Ahn said the bank saw an increase in marketing and travel costs compared with the first half of 2021, while personnel costs are also rising.

“Salaries and benefits were up four per cent as we continued to invest in sales capacity and back-end operations to support increasing client activity in our many growth verticals.”

RBC’s personal and commercial banking business reported a profit of $1.97 billion, up from $1.79 billion a year earlier, helped by strength in its Canadian banking business including residential mortgage growth.

RBC’s wealth management arm earned $795 million, up from $641 million, while its capital markets business earned $1.03 billion, down from nearly $1.07 billion a year ago.

The bank’s investor and treasury services operations earned $118 million, down from $123 million a year ago, while RBC’s insurance operations earned $197 million, down from $201 million in the same quarter a year earlier.

This report by The Canadian Press was first published Feb. 24, 2022.

Companies in this story: (TSX:RY)

Ian Bickis, The Canadian Press