It was another strong year for Royal Bank of Canada (RBC), which saw increased provisioning at the start of the pandemic but had good performance throughout and is now well placed to benefit from the post-crisis recovery. Once again it is Euromoney’s choice as Canada’s best bank.
RBC has been gaining market share in its domestic retail and commercial banking activities, as well as wealth management. In its investment bank, corporate finance and equities in particular have been on a tear, with revenues up 38% and 51%, respectively, over the last four quarters.
Group revenues are up 5% over that period. Profit growth is flattered by provisions taken at the start of the pandemic, but stripping those out still leaves a year-on-year 6% underlying increase.
Internal capital generation hit a record in the latest quarter and the bank’s core equity tier-1 ratio now stands at 12.8%, up 1.1 percentage points since the second quarter of 2020. Average annualized return on equity in the last four quarters stands at more than 17%.
What is notable is how well RBC has managed in spite of what has been a tough pandemic for a number of its big businesses. The bank’s leading credit card franchise saw revenues fall but should also rebound well, says the bank.
“A stimulative macro backdrop sets the stage for higher-yielding card balances and purchase volumes to recover alongside economic activity,” chief executive Dave McKay told analysts when reporting the bank’s fiscal second quarter 2021 earnings, for the three months to the end of April. “This relationship is one that is highly correlated and we are confident that it will hold coming out of the pandemic.”
It’s a similar story in commercial banking, where utilization rates of operating lines have fallen to below where they were before the pandemic, although the additional of C$60 billion ($46.7 billion) of new deposits in the last two years, a rise of 38%, suggests relationships are as strong as ever.
But that growth, and a big upswing in personal deposits in Canada, has made the bank more sensitive to interest rates and it expects outsized revenue growth as a result as rates rise. Nearly half of the bank’s spot deposits are non-interest bearing or low cost.
With good increases in mortgages, personal deposits and assets under administration, the bank has gained share in these businesses. While RBC is as interested as any other bank in developing new lines and products, increasing its core deposits underpins its long-term strategy. About two-thirds of the bank’s domestic clients take another product in addition to their bank account. And when they do, they are more likely to stick – which creates other advantages too.
“Our mortgage relationships have higher retention rates for these multi-product clients, with mortgage profitability roughly two times higher when a client is retained for a second term,” McKay told analysts.
Helping with retention is a better client experience through the bank’s digital channels. The digital adoption rate rose 290 basis points year on year in the second quarter of 2021 and the pandemic drove a 22% increase in mobile banking sessions.
We have strong momentum across our core franchises and we will continue to focus on providing holistic solutions to grow and deepen client relationships
Dave McKay
Wealth management has been a good performer. The bank’s Canadian business saw revenues rise 15% in the most recent quarter and 6% over the past 12 months.
RBC Capital Markets has not won the award for Canada’s best investment bank this year, but the franchise remains strong and is an ever more important contributor to the group. Before other parts of the group began to see a recovery, it provided an important source of diversified revenues as other businesses flatlined at best.
Revenues rose 18% in the four quarters under review and the C$1 billion in net income in the second quarter of 2021 was another record. Pre-provision profits before tax rose 37% over the four quarters.
“We have continued to strengthen and expand senior coverage teams,” McKay told analysts. “We are already seeing strong results with a solid pipeline of M&A advisory and equity underwriting revenue.” The bank has also re-jigged its global markets division into cross-platform groups, something that it thinks will better reflect how clients see the firm.
Overall, the bank is in good shape, although it will undoubtedly face greater challenges as the business climate recovers. Canada’s big banks are all high quality, and while only TD Bank approaches RBC’s absolute scale, all of them will be hoping to build momentum from the rebound.
McKay is confident of his own bank’s ability to continue to do just that. “We have strong momentum across our core franchises and we will continue to focus on providing holistic solutions to grow and deepen client relationships,” he told analysts. “While we will continue to invest in new strategies, we remain committed to running our bank efficiently, with an emphasis on driving productivity.”
