RBC flags slower profit growth in second quarter after beating estimates in first quarter

(Reuters) – Royal Bank of Canada kicked off Canadian first-quarter bank earnings on Friday by beating analysts’ estimates, driven by surprise record profit in capital markets, but executives flagged lower earnings next quarter and warned dealmaking could be hit if coronavirus concerns linger.

Senior RBC executives told analysts on a conference call the bank expects possible margin compression this year, and uncertainties in investment banking from geopolitical concerns, including the coronavirus outbreak.

Investors are edging warily into lenders’ reporting season following their worst year for earnings growth, plagued by sluggish performance in deals advisory and trading businesses and rising credit-loss provisions.

Canada’s biggest lender reported a 35% jump in net income to C$882 million ($665.11 million) in its capital markets unit in the quarter ended Jan. 31, helped by higher revenue from bond trading and dealmaking.

RBC’s profits are expected to recover later this year and into next, executives said, although net interest margins, already down 7 basis points from a year ago, could decline a further 5 basis points as mortgage pricing remains competitive.

The shares rose 1.1% to C$109.18 in early trading in Toronto, compared with a 0.4% drop in the Canadian stocks benchmark

“While we thought we had modeled a surge in capital markets-related revenues, the actual results made our forecasts look more like a ripple in the pond,” Robert Sedran, an analyst at CIBC Capital Markets, wrote in a note.

RBC Chief Financial Officer Rod Bolger in December predicted a pickup in first-quarter deals, thanks to a strong backlog.

Strong loan growth, particularly in Canadian residential mortgages, bolstered the bank’s personal and commercial banking business, which rose 7% from a year earlier.

Canadian home loans could get a further marginal boost this year following a tweak to a government mortgage stress test that could lower borrowing rates.

Royal Bank’s net income jumped 11% to C$3.51 billion.. For earnings snapshot:

But tough times persist for the industry, with the Globe and Mail newspaper reporting on Friday that rival Canadian Imperial Bank of Commerce (CM.TO) will announce 2,000 job cuts and an executive reshuffle when it reports results on Wednesday. A CIBC spokesman declined to comment.

CIBC had flagged the cuts and a possible restructuring charge earlier.

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