TORONTO 鈥� RBC reported a surge in impaired loans in its first quarter but says overall results were boosted by better-than-expected economic and banking conditions.
Canada's largest bank reported gross impaired loans of $7.88 billion in the quarter, up 34 per cent from the previous quarter as a single account in the utility sector added $1.5 billion to the total, while its provisions for potentially bad loans also saw a notable jump.
The bank downplayed concerns about the shaky loans as it reported a jump in trading revenue and other boosts to the business that helped lead it to a $5.13 billion profit for the first quarter.
"While our (provisions for credit loss) and impaired loans increased this quarter, they were largely within expectations given the point of the economic cycle," said chief executive Dave McKay on an analyst call Thursday.
The threat of tariffs and trade uncertainty ahead is leading to lower business confidence, and some clients have delayed investment decisions, but the economy held up well last quarter, said McKay.
"The Canadian economy performed through most of the quarter better than we thought. Client activity was strong across all our businesses."
He said commercial loan growth could moderate on the uncertainty of tariffs but some clients are still pushing for growth. Even if tariffs do come in, it won't mean shutting down the whole economy like at the start of the pandemic.
"The world's not going to collapse overnight, so it's very different. This should be more manageable at the end of the day."
In preparation for uncertainty, the bank increased its provisions for potentially bad loans to $1.05 billion for the quarter, up from $813 million a year earlier.
Provisions include new additions in commercial banking from sectors like real estate, consumer discretionary and agriculture, while it also took $45 million in provisions related to the California wildfires and $66 million in personal banking.
The bank also took additional provisions on previously impaired loans in the forestry and automotive sectors, two areas that are expected to be hit especially hard by tariffs.
RBC has been looking at various potential outcomes on how tariffs and an economic downturn could play out, with a worst-case scenario seeing Canadian unemployment rising to 10.4 per cent and real GDP falling by 7.4 per cent by mid-to-late 2026.
"We've looked at a whole range of scenarios here ranging from, you know, very severe across-the-board tariffs, global impact, through to ... more targeted scenarios and the impacts of things like steel and aluminum, so the range of outcomes there is very, very broad," said chief risk officer Graeme Hepworth.
The bank already, as a regulated practice, tests itself against several downturn potentials so the scenarios aren't new with tariffs, it could just be a trigger, he said.
"We already attribute a fairly significant weighting to these pessimistic outcomes, and in tariffs, we might just have what could be the driver of them."
While uncertainty could affect business, RBC also benefits from volatility, said McKay.
The bank, like others this past quarter, saw a big boost from heightened trading activity ushered in by the election of U.S. President Donald Trump.
The trading helped increase its capital markets division earnings to $1.43 billion, up from $1.15 billion a year earlier.
Overall profits of $3.54 per diluted share for the quarter ended Jan. 31 were up from a profit of $2.50 per diluted share a year earlier.
On an adjusted basis, RBC says it earned $3.62 per diluted share in its latest quarter, up from an adjusted profit of $2.85 per diluted share in the same quarter last year.
The average analyst estimate had been for an adjusted profit of $3.26 per share, according to LSEG Data & Analytics.
Scotiabank analyst Meny Grauman said in a note that while trading helped the bank's earnings, it would have still beat expectations by five per cent without the boost.
Other sources of the bottom line beat were strong positive operating leverage, and a solid beat on net interest income.
The bank's impaired provisions of $985 million were well above analyst estimates of $759 million, but the single isolated account did make up a good portion of that, said Grauman.
"Credit deterioration shouldn't overshadow underlying strength," he said.
RBC said its personal banking business earned $1.68 billion in its latest quarter, up from $1.35 billion in the same quarter a year earlier, while its commercial banking operations earned $777 million, up from $650 million.
The bank's wealth management business earned $980 million, up from $664 million. RBC's insurance division earned $272 million, up from $220 million.
This report by The Canadian Press was first published Feb. 27, 2025.
Companies in this story: (TSX:RY)
Ian Bickis, The Canadian Press
