RBC chief executive Dave McKay and newly appointed chief financial officer Nadine Ahn end 2021 with much to be happy about. Revenues rose 5% and pre-provision profits rose 6%.
In 2021, the bank was able to release a net 17% of the total provisions that it took in 2020, a reflection of the quality of its performing portfolio. The biggest release among its domestic peers was 3%.
The bank ends the year with a record common equity tier-1 ratio of 13.7%, up 120 basis points on the previous year.
RBC reckons it stands to gain if rates rise, given the profile and size of its Canadian domestic franchise. Presenting annual earnings to analysts on December 1, McKay said that the bank’s testing of its exposures meant it had no “material” credit concerns from higher defaults in a higher rate environment.
He thinks the unusually low rate period has cut some C$1 billion ($787 million) from the bank’s annual revenues in each of the last two years – a figure that would represent 20% of 2021’s total and 25% of 2020’s – giving an indication of how he thinks about the potential.
CFO Ahn added that a 25bp rise across the curve might equate to an incremental C$250 million revenues in the bank’s Canadian Banking and US wealth management franchises in just the first year, with bigger gains in years two and three.
Beyond that, McKay thinks there is a more fundamental recovery under way that the bank will also capture.
“The deployment of unprecedented liquidity among Canadians will be used to buy homes, for discretionary spending or to invest in the markets,” he said.
RBC will be hoping for a good chunk of that to end up on its own top line and reckons there are growth opportunities in all its businesses in Canada.
It captured plenty even in 2021, writing C$35 billion more in mortgages and gathering C$22 billion additional personal deposits. It has hired some 1,750 mortgage salespeople, on the back of expectations of high single-digit growth in mortgages.
The deployment of unprecedented liquidity among Canadians will be used to buy homes, for discretionary spending or to invest in the markets
Dave McKay
That’s also the story at the bank’s City National franchise in the US, where mortgages are up 23%.
Away from consumer spending, the bank says the recovery will also boost wealth and asset management businesses as liquidity is used.
RBC wants to be a top 10 global investment bank, and sees its US business as a critical component in that. It has been hiring managing directors there, especially in areas like technology and healthcare, as well as ramping up its focus on sustainable finance.
And 2021 was a decent year for the investment bank, with revenues up 20% in its advisory, capital markets and lending business, although its global markets unit revenues fell by 11% from the high-water mark set last year.
What’s promising for RBC is that not only was the latest quarter the eighth in a row where the investment bank posted pre-provision profits of more than C$1 billion, but that the first of those quarters pre-dated the pandemic, when the bank had previously tended to run at about C$800 million to C$850 million a quarter.
Investment bank head Derek Neldner thinks that the run rate will settle above pre-pandemic levels, even considering the normalization in secondary markets revenues. The bank heads into 2022 with plenty of promise.
