Royal Bank of Canada Posts Strong Q2 Earnings - Analyst Blog

Royal Bank of Canada RY gained 1.8% on the NYSE after the company released strong second-quarter 2014 (ended April 30) earnings on Thursday. Net income of C$2.2 billion ($2.0 billion) increased 15% year over year. Notably, the prior-year quarter includes certain restructuring charges.

Results benefited from top-line growth and lower provision for credit losses, partially offset by increased non-interest expenses.

Performance in Detail

Total revenue in the quarter was C$8.3 billion ($7.5 billion), up 7.2% on a year-over-year basis. The revenue growth was driven by a rise in non-interest income and net interest income.

Net interest income came in at C$3.5 billion ($3.2 billion), up 7.0% from the prior-year quarter. Non-interest income was C$4.8 billion ($4.3 billion), rising 7.3% year over year.

Non-interest expenses were C$4.3 billion ($3.9 billion), up 7.9% from the year-earlier quarter. The rise was primarily due to increase in human resources expenses, equipment costs, occupancy costs, communication expenses amortization costs.

During the quarter, the segments exhibited decent performance. Notably, net income in wealth management and capital market divisions were up 25% and 32% year over year, respectively.

As of Apr 30, 2014, Royal Bank of Canada's total loans stood at C$423.3 billion ($382.8 billion), up 6.2% from the prior-year quarter.

Moreover, deposits stood at C$587.1 billion ($530.9 billion), up 10.3% year over year. Total assets were C$895.9 billion ($810.2 billion), rising 3.4% from the prior-year period.

Credit Quality

Total provision for credit losses was C$244.0 million ($220.6 million) in the quarter, down 15.0% year over year, mainly due to lower provisions in capital markets and the Canadian banking portfolios.

Capital Position

As of Apr 30, 2014, Royal Bank of Canada's Tier 1 capital ratio came in at 11.4%, up 20 basis points (bps) from the prior-year quarter. Total capital ratio was 13.2%, down 80 bps year over year.

The company's estimated Basel III Common Equity Tier 1 (CET1) ratio stood at 9.7%.

Our Viewpoint

In spite of the impressive results, we are skeptical about Royal Bank of Canada's ability to sustain the same in the upcoming quarters, given the sluggish economy, a still low interest rate environment and stringent regulatory requirements.

However, with the U.S. economy showing signs of improvement, we expect the export-driven Canadian economy to benefit. Moreover, the Royal Bank of Canada's strong business model, diversified product mix and sturdy capital position will likely boost its bottom line going forward.

Royal Bank of Canada currently has a Zacks Rank #3 (Hold).

Among other foreign banks, The Bank of Nova Scotia BNS is scheduled to report its fiscal second-quarter 2014 results on May 27, while Canadian Imperial Bank of Commerce CM and Bank of Montreal BMO is expected to report on May 29 and May 28, respectively.