Canadian banks bask in latest profit reports

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Canadian banks bask in latest profit reports

Royal Bank sees silver lining in European debt crisis, but investors concerned about future

BY JOHN GREENWOOD, POSTMEDIA NEWS DECEMBER 5, 2011 2:10 AM


Europe's growing debt crisis is causing huge losses in the region's financial sector, but the Royal Bank of Canada sees a silver lining as weakened competitors abandon businesses and surrender market share to lick their wounds.

The turmoil has created "a very large growth opportunity," Gord Nixon, the chief executive, said Friday on a conference call with analysts after releasing fourth quarter results which showed profit up 43 per cent.

"One of our biggest businesses in Europe is wealth management and the competitive position of that business in some respects has never been stronger," Nixon said, adding he believes the "environment is extremely positive."

Bank officials said they are also expanding parts of the capital markets business in London and the United States as competitors struggle with headwinds from sovereign debt and the slow economy.

Canada's biggest bank by assets reported profit well ahead of analyst estimates, as strong results in retail banking and wealth management more than made up for a drop in capital-markets activity.

For the three months ended Oct. 31, RBC reported net income of $1.6 billion, or $1.09 a share.
Analysts worried going into the quarter that the storm buffeting Europe that is now affecting global markets would push down earnings at all the banks, particularly their vulnerable capital markets operations.

While some, including RBC, have felt the cold draft, their results this earnings season have been stellar.

So far four banks - Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Bank of Nova Scotia and RBC - have come out with better-than-expected profits, driven primarily by their core retail lending operations.

Scotiabank, which also reported fourth-quarter results Friday, posted a profit of $1.2 billion, or $1.07 a share, up 11 per cent from last year on higher revenues from the DundeeWealth acquisition and healthy domestic banking performance.

With operations across Latin America and Asia, Scotiabank is Canada's most geographically diversified bank, which has enabled it to benefit from growth in emerging economies.
After the financial crisis that began in 2008 the banks found themselves with similar opportunity. Having emerged mostly unscathed, they were able to take advantage of the weakness of their U.S. and European rivals through opportunistic acquisitions. The deals worked out because they were mostly small and few in number. But this time around investors are less confident about the future.

"People are a little bit nervous," said John Kinsey, a portfolio manager at Caldwell Securities Ltd. "I think the (fourth-quarter) earnings were good in comparison to what a lot of people had been expecting, but the earnings are now in the past. . . . This gets back to the Canadian economy going forward and if the Bank of Canada is right, we are going to be in for harder times."
The major worry is that the European problem continues to worsen and spreads to the global economy. Analysts warn that heavily indebted Canadian consumers would find themselves under pressure in the event of a rise in unemployment, with many unable to make their mortgage payments. Ultimately, the banks would feel the pressure too.

For now, RBC, the lender with the most operations in Europe, says its exposure to the region is well-hedged and very small compared to its other exposures.

Shares in RBC moved up 3.7 per cent in Toronto trading to close at $48.77. Scotiabank shares slid 2.5 per cent to $48.99.

While the RBC's domestic lending operation has one of the largest homeloan portfolios of all the banks, mortgage performance has been impressive with no provisions for credit losses for the final three quarters.

Helped by stronger consumer lending, RBC's domestic retail operation had a record profit of $904 million, up $139 million from last year.

Despite market volatility in the quarter, wealth management had a profit of $189 million, up eight per cent from last year.

The low point in the quarter was capital markets which had a profit of $278 million, down 25 per cent on the back of significantly lower fixed income trading results caused by negative market conditions.
Copyright (c) The Vancouver Sun

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