TORONTO - Royal Bank of Canada expects to face a challenging environment in the coming year amid uncertainty about where interest rates are headed but believes it's well-prepared to gain market share, RBC officials said Wednesday after the bank announced a slightly lower fourth-quarter profit compared with a year ago.
The decline in RBC's fourth quarter profit was due in part to declines at its capital markets and insurance units, and increased provisions for credit losses in banking, wealth management and capital markets.
In addition, net income at RBC's investor and treasury services unit fell 71 per cent or $110 million from a year ago to $45 million in the fourth quarter, primarily due to severance and costs associated with repositioning of the business.
RBC chief executive Dave McKay told analysts in a conference call that the bank had to quickly reposition its investor services operations but said that such short-term moves aren't the norm.
"So we don't forecast having to take (another) aggressive short-term repositioning, because we are trying to get ahead of things," McKay said.
His comment came a day after Bank of Montreal announced it will reduce its global workforce across the board, resulting in about $357-million in restructuring charges announced Tuesday with BMO's fourth-quarter report.
Bank of Montreal said the restructuring charge, mainly due to severance, was the result of a decision to accelerate delivery of digitization initiatives and simplification of the way it does business.
McKay said RBC enters 2020 with strong momentum in all its Canadian retail franchises, driven by multi-year investments in people, products and technology but he noted the macro environment poses challenges.
"As we look out to 2020, while we still see strength in our core markets, there's no question that it's going to be a challenging macro environment."
"Uncertainty is weighing on both global growth and trade and was a key factor on the recent Fed rate cuts."
But McKay said RBC's growth strategy positions it to deliver gain market share and return capital to shareholders.
RBC chief financial officer Rod Bolger, in answering an analyst's question Wednesday about the potential need for a future large repositioning at Royal, said it has various other ways to manage its costs with less disruption.
For example, he said, RBC can raise or lower expenses at its wealth management and capital markets units in response to revenue performance.
In addition, he said spending on technology advances can ease following significant growth in that type of expense over the past five years as RBC aimed to capture new opportunities.
"Now we have a lot of the pieces in place both from a technology standpoint and a talent standpoint and distribution standpoint to continue to grow revenue despite those macroeconomic uncertainties."
The primary macroeconomic uncertainty is where interest rates are headed, Bolger said.
His comment came shortly before the Bank of Canada announced that its key short-term interest rate will remain unchanged at 1.75 per cent — in line with analyst expectations.
However, for most of Canada's big banks, the bigger question is what the U.S. Federal Reserve will do next after it lowered its benchmark three times this year.
The Fed rate cuts, which followed four rate hikes last year, have helped interest-rate sensitive sectors of the U.S. economy such as housing and auto sales.
Earlier Wednesday, RBC reported nearly $3.21 billion or $2.18 per diluted share in the quarter ended Oct. 31, down from $3.25 billion or $2.20 per diluted share in the same quarter last year.
Its adjusted diluted cash earnings per share amounted to $2.22 for the quarter, which was below the average analyst estimate of $2.28 per share, according to financial markets data firm Refinitiv.
Royal Bank's total provisions for credit losses rose to $499 million from $353 million a year earlier, mainly at its banking, wealth management and capital markets units.
RBC said its personal and commercial banking unit, which increased net income by five per cent or $80 million to $1.62 billion, benefited from solid housing activity, a growing sales force and favourable interest rate environments.
However, the core banking unit also increased its provisions for credit losses and recorded higher provisions for impaired loans by $70 million or 22 per cent compared with last year's fourth quarter to $387 million.
— with files from The Associated Press.
This report by The Canadian Press was first published Dec. 4, 2019.
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