RBC and the National Bank of Canada increase their doubtful debt arrangement, denting stock

More money was set aside by the Royal Bank of Canada(RY.TO) and the National Bank of Canada (NA.TO) on Wednesday to cope with problematic loans, which impacted fourth-quarter profitability.

Shares of RBC and National Bank were discounted by clients worried about the impact of rapid increases in central bank rates by 1.4% and 4%, accordingly, while Canada’s benchmark index decreased by 0.5%.

To control inflation, the Bank of Canada raised interest rates by 350 basis points this year. Investors expect a slower rate of growth in 2023, but extended rises in borrowing costs. According to economists, this might affect the credit market’s constant rise.

Nigel D’Souza, an investment analyst at Veritas Investment Research, stated that if the economic outlook improves, “we should continue to see arrangements on performing loans in subsequent quarters.”

“An increase in default rates and PCLs (provisions for credit losses) on bad loans would be of greater concern. Although default rates and impairments have increased this quarter, these numbers are still below pre-pandemic levels.”

RBC upped doubtful debt arrangement to C$381 million from a C$227 million release a year earlier, while National Bank built C$87 million in PCLs compared to a C$41 million recovery last year. RBC announced plans on Tuesday to purchase HSBC’s Canadian arm for C$13.5 billion ($10 billion).

On Tuesday, PCLs at Bank of Nova Scotia(BNS.TO) more than tripled from a year ago to C$529 million.

RBC Chief Executive Dave McKay stated that “the trailing impact of monetary policy, along with solid employment and ample liquidity, has likely postponed what could end up being a brief and modest recession.”

This increased consumer and business banking for RBC and National Bank by 5% and 13%, respectively, in the quarter.
RBC’s domestic loan growth is expect to be below trend for “many” years as Canadian clients manage high household debt, as per James Shanahan of Edward Jones.

According to Allan Small, a senior financial adviser at Allan Small Financial Group with iA Private Wealth, the PCL is not “outrageous,” and markets currently feel somewhat more confident about the direction the central bank will follow.

Market-focused divisions at RBC and National Bank suffered in the fourth quarter as deal-making slowed. While National Bank’s financial markets division reported a 14% earnings decrease, RBC’s capital markets division saw a 33% decrease in total income.

According to Refinitiv IBES data, RBC earned C$2.78 per share after one-time costs, outperforming analysts’ average estimate of C$2.68.

National Bank declared estimated earnings of C$2.08 per share, under the C$2.24 analysts had predicted.

(1 Canadian dollar = 1.3540)