RBC Beats Analyst Earnings Estimates by Absorbing HSBC Canada Acquisition

Royal Bank of Canada reported a second-quarter profit that beat analyst estimates as capital markets activity picked up as the lender made lower-than-expected provisions for potentially troubled loans and acquired HSBC Bank Canada.

In March, RBC completed the acquisition of the Canadian subsidiary of Britain’s HSBC Holdings PLC for $13.5 billion – the country’s largest-ever banking transaction – marking the first quarter in which Canada’s largest lender reports earnings that include contributions from the country’s seventh-largest lender .

RBC’s profit rose 7 percent to $4 billion, or $2.74 per share, in the three months ended April 30. After adjusting for the exclusion of certain items, including transaction and integration costs related to the HSBC Bank Canada acquisition, the bank said it earned $2.92 per share, according to S&P Capital IQ beat analyst expectations of $2.75 per share.

The HSBC deal initially hurts results as RBC absorbs its loan loss reserves, reducing the bank’s profit by $51 million. However, after a month of incorporating the HSBC business, net income after tax was $63 million.

Since announcing the deal in late 2022, Canada’s largest lender has seen a slight decline in HSBC’s customer base. As of September 2022, loan balances declined 4 percent to $3.5 billion, which RBC said was within expectations.

“Some customers actually decided to come to RBC a little bit earlier – positive in Net-Net’s case – and had both relationships, and then they came to us and just wanted to avoid the migration,” head of personal and commercial banking Neil McLaughlin said on a conference call with analysts . “I think each company feels good about retention.”

RBC said it is on track to achieve targeted savings of $740 million by combining HSBC’s platforms and services with its own.

Chief executive Dave McKay said that even after a protracted acquisition process that has been delayed by regulatory and government approvals, the bank is “back in crime” with enough capital to continue investing in its businesses as it changes its strategy at NAS

The bank raised its quarterly dividend by 4 cents to $1.42 per share. RBC also said it plans to buy back 30 million shares.

Now that the bank has integrated HSBC, RBC has posted a Common Equity Tier 1 (CET1) ratio – a key measure of a bank’s ability to absorb losses – of 12.8%, well above the regulatory minimum. Last quarter, before the HSBC transaction closed, RBC had a CET1 ratio of 14.9%.

At the end of 2022, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, raised the national stability buffer – the capital reserve created by banks to cushion the effects of an economic downturn – to 3.5% of a bank’s risk-weighted assets from 2.5%. This increased the minimum CET1 ratio to 11.5 percent, prompting banks to hold billions of dollars in excess capital.

“Second-quarter earnings addressed one of the key market concerns about the bank: relative capital levels following the HSBC Canada acquisition,” Jefferies analyst John Aiken said in a note to clients. “With a regulatory capital ratio close to 13 percent and strengthened by self-buybacks and dividend growth, these concerns need to be allayed.”

RBC is the last major Canadian bank to report second-quarter earnings. The Canadian Imperial Bank of Commerce also published its financial results on Thursday. Bank of Montreal reported a profit that was worse than analysts’ expectations. Toronto-Dominion Bank, Bank of Nova Scotia and National Bank of Canada posted second-quarter results that beat analyst estimates.

During the quarter, RBC established loan loss reserves of $920 million – funds that banks set aside to cover loans that may not be repaid. The figure was slightly below analysts’ projections and included $672 million in loans that are still outstanding, based on models that use economic forecasts to predict future losses.

During the same quarter last year, RBC established reserves of $600 million.

Lender-owned City National Bank (CNB), known as Hollywood’s celebrity bank, posted a profit of $48 million, up 92% from the same quarter last year. The subsidiary struggled to make a profit last year and faced a $65 million payment and an order to implement reforms after a top U.S. regulator found weaknesses in multiple of City National’s internal control and risk management processes.

RBC is changing its U.S. strategy as it seeks to streamline its operations and increase cross-selling between its capital markets business, its wealth management unit and City National.

“There are many opportunities for us to simplify the business, whether that is selling non-core parts of CNB or buying out real estate – all with positive profitability benefits and positive shareholder value creation,” said Mr McKay during a conference call with analysts.

“We need to complete corrective actions and start reducing our very significant cost structure, which we plan to do. This will happen over the next approximately 18 months.

In March, RBC said it had fired CFO Nadine Ahn for violating its code of conduct over an undisclosed “close personal relationship” with a colleague that resulted in preferential treatment. Senior Vice President, Finance and Controller Katherine Gibson has been selected as interim CFO.