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Royal Bank earnings beat estimates with dealmaking rebound

Royal Bank of Canada’s deal-making division is back to proving its worth.

The RBC Capital Markets unit had record earnings in the fiscal first quarter, helping Canada’s largest lender post results that beat analysts’ estimates. Fees from investment banking jumped 82 per cent from a year earlier amid a better deal making environment, and fixed-income trading more than doubled.

The turnaround, which follows back-to-back profit declines in the division, helped Royal Bank post an 11 per cent jump in earnings for the three months through January. The comeback follows a similar rebound at U.S. investment banks, which reported an improvement in trading revenue when they announced fourth-quarter results last month, and sets a benchmark for the other large Canadian lenders when they report their earnings next week.

“Both trading revenues and underwriting and advisory revenues easily surpassed our forecasts and pushed earnings past our above-consensus estimate,” Robert Sedran, a CIBC Capital Markets analyst, wrote in a note to clients Friday.

Trading revenue rose 21 per cent to C$1.27 billion ($954 million). The increase helped make RBC Capital Markets the bank’s top-performing business for the quarter. Profit in the division surged 35 per cent. Royal Bank’s adjusted per-share earnings of C$2.44 beat the C$2.30 average estimate of analysts in a Bloomberg survey.

Royal Bank rose 1.2 per cent to $109.31 at 9:37 AM in Toronto. It has gained 6.4 per cent this year, making it the top performer in the eight-company S&P/TSX Commercial Banks Index, which has climbed 3.6 per cent.

The lender has the biggest investment-banking operations among Canada’s large banks, with significant business in Canada and the US and a growing platform in Europe. That helped Royal Bank land more deals, lifting underwriting and advisory fees to C$627 million from C$345 million a year earlier.

Soured Loans

The Toronto-based lender set aside less money for soured loans, after rising credit losses caused concern among investors last year. Provisions for credit losses fell 18 per cent to C$419 million from a year earlier, when it was hurt by bad loans to a US shopping-mall owner and bankrupt California utility PG&E Corp.

Plans for slowing expense growth, however, have yet to come to fruition: Net interest expenses rose 7.9 per cent to C$6.4 billion, the largest increase in three quarters. After years of spending big on technology and investments, Royal Bank executives said in December they expected expense growth to moderate to “low single digits” this year. The increase was largely due to growth in staff-related costs, including higher variable compensation, Chief Financial Officer Rod Bolger said on a conference call with analysts.

Also in the earnings report:

  • Royal Bank saw little change in net interest margins, while gains in key businesses including Canadian banking and wealth management drove overall earnings to a record C$3.5 billion.
  • Canadian personal and commercial banking is the lender’s biggest division, and its largest source of profit. Earnings from the unit rose 5.2 per cent to a record C$1.62 billion in the quarter. Wealth management, meanwhile, had a 4.4 per cent increase in profit to C$623 million.
  • The growth in Royal Bank’s domestic mortgage book has accelerated for four straight quarters. In the three months through January, mortgages rose 8.6 per cent, their biggest increase from a year earlier in at least five years.