TORONTO — Royal Bank of Canada (TSX:RY) profit increased 10 per cent in the fourth quarter, but its chief executive officer is warning that next year will be a challenge as the economy struggles to get back on its feet.
“We expect our businesses to benefit modestly from the recovery in Canadian and global economies,” Gordon Nixon, RBC’s president and chief executive officer, told analysts in a conference call on Friday.
“Credit quality is expected to remain under pressure, with some improvement in the latter half of 2010.”
Canada’s biggest bank reported Friday it had net income of $1.2 billion for the quarter ended Oct. 31. That was up from $1.1 billion a year ago.
Revenues for the quarter totalled $7.5 billion, up from $5.1 billion last year. Diluted net earnings per share were 82 cents for the quarter, compared to 81 cents in last year’s fourth quarter.
RBC joins most of the other large Canadian banks in either meeting or beating analyst expectations.
Consensus estimates for Royal had been for $7.23 billion in revenue and $1.06 earnings per share, according to figures compiled by Thomson Reuters. RBC said the EPS estimate refers to cash earnings, a non-standard measure of profitability, which was $1.06 per share in the quarter.
In late morning trading, Royal’s shares were down $1.72 to $55.76 on the Toronto Stock Exchange.
Canada’s banks are considered among the most solid in the world and have avoided many of the major problems that have beset major banks in the United States and Europe.
At its Canadian banking operations, Royal posted a six per cent climb in profits to $717 million.
“Canadian banking performed extremely well and continued to underpin our results,” said Nixon, adding that the bank’s domestic sectors had seen double-digit volume growth across most of its retail product lines.
Nixon said that although harsh market conditions had hurt earnings per share, the bank’s cost control measures had helped it continue to deliver value to its customers and shareholders.
Provisions for credit losses, or the money reserved for bad loans, rose to $883 million, up from $619 million in the fourth quarter of fiscal 2008. The increase was due in part to credit issues in its U.S. banking business, where consumers struggled to repay debt in a recessionary environment.
RBC said its capital markets business recorded net income of $561 million. While this was down $23 million from a year ago, the bank noted that 2008 figures had included the favourable impact of the reduction of the Enron-related litigation provision of $542 million.
Overall, the capital markets division had stronger trading results and market-related gains of $31 million, compared to losses of $217 million last year.
“We project global capital markets will continue to stabilize and credit spreads will tighten further as the global economic recovery continues and access to credit improves,” Nixon said.
“Improving market conditions and economic conditions should result in lower writedowns in our trading books and lower credit losses on our corporate loan books, and should provide a better operating environment for investment banking activity.”
RBC’s international operations, which include its U.S. operations, produced a net loss of $125 million. This was, however, an improvement from a loss of $206 million a year ago.
The bank said the quarter’s loss in international banking reflected elevated provisions for credit losses due to a weak economic environment, and a provision related to the restructuring of certain Caribbean banking mutual funds.
Nixon told analysts that the bank is working on restructuring some of its U.S. operations to improve efficiency in the future, but said Royal would be ready to benefit from a full market recovery when it comes.
RBC reported that its wealth management businesses benefited from more favourable market conditions during the quarter which allowed it to post net income of $161 million, a 39 per cent increase from last year.
The bank’s insurance sector had net income of $104 million for the quarter, up $45 million from 2008 figures, reflecting investment losses in the previous year and solid business growth.
For fiscal 2009, RBC recorded revenue of $29.1 billion, up from $21.6 billion in the previous year. Annual net income was $3.9 billion, down from $4.6 billion in 2008.
The bank said it would maintain its quarterly dividend at 50 cents, but added that it expects its businesses to modestly improve over the coming quarters as global markets continue to stabilize.