RBC profit falls 54% as loan-loss provisions spike amid COVID-19 pandemic

Royal Bank of Canada’s second-quarter profit fell 54 per cent as the bank built up massive reserves to cover potential losses on loans as a result of the coronavirus pandemic.

Canada's largest bank set aside $2.83-billion in provisions for credit losses, an increase of 558 per cent from $426-million a year ago, which dragged down profits in each of the bank's major business lines.

RBC reported total profit of $1.48-billion, or $1 per share, compared with $3.23-billion, or $2.20 per share, a year ago.

Adjusted for certain items, RBC said it earned $1.03 per share, far below the consensus estimate by analysts of $1.53, according to Refinitiv.

The bank held its dividend steady at $1.08 per share.

The huge spike in RBC’s provisions for credit losses – which are the funds banks set aside to cover loans that may go sour – is mostly a result of adjustments to models that forecast potential losses in the future. The damage done to economies around the world by the novel coronavirus has caused unemployment to skyrocket and economic growth to fall, and banks have made their assumptions far more pessimistic.

RBC's second-quarter provisions make up 1.65 per cent of all loans, compared to only 0.29 per cent a year ago – a ratio that is higher than what the bank recorded at the peak of the global financial crisis of 2009.

The bank also disclosed that it has approved payment deferrals for more than 490,000 clients on loans totalling more than $76-billion.

As expected, RBC’s capital levels decreased, as its common equity Tier 1 (CET1) ratio – an important measure of a bank’s health and resilience – fell to 11.7 per cent, from 12 per cent in the prior quarter. But that is still well above the 9-per-cent minimum set by Canada’s banking regulator.

In RBC's core retail banking division, profit fell 66 per cent to $532-million, largely because of higher provisions required by adjustments for forward-looking forecasts. But the bank said competitive pricing, tighter margins due to lower interest rates and lower fees from cards due to a fall in spending by consumers also contributed to the division's weaker profit.

Capital markets profit fell 86 per cent to $105-million, as higher provisions for loan losses and lower revenue from corporate and investment banking sapped earnings. And wealth management profit of $424-million was down 28 per cent year over year, with higher loan-loss provisions as well as higher compensation and technology costs driving the drop.

The bank's investor and treasury services division, which has struggled in recent quarters, was a bright spot with profit up 50 per cent from a year ago, to $226-million, thanks to higher funding and liquidity revenue as markets responded to the pandemic.

RBC held its costs relatively flat at $5.9-billion, but its return on equity fell to 7.3 per cent, from 17.5 per cent a year ago.

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