Royal Bank of Canada (RBC) warned of a softer economy ahead and plans to cut about 1,800 jobs after Canada’s largest bank beat analysts’ estimates for the third quarter on Thursday, helped by cost-cutting measures.
Chief Executive Officer Dave McKay forecast slowing growth and lower inflation due to the lagging impact of monetary policy, combined with a slowdown in China and elevated climate and geopolitical risks.
“We are seeing evidence of slowing labour markets as evidenced by slowing wage growth, lower job postings and an increase in Canadian unemployment. Consequently, our base case forecasts a softer economic outlook,” he told analysts.
“The operating environment is changing at a faster pace than we’ve seen for over a decade.”
McKay in May said the lender would slow down hiring after it overshot by thousands of people. The bank said the number of full-time employees was down 1 percent from the prior quarter, and it expects to further reduce headcount by about 1 to 2 percent. The bank had 93,753 full-time employees as of July 31.
“The bank did a commendable job in managing expenses, with an improvement in its overall efficiency ratio,” Barclays analyst John Aiken said, noting the lender’s earnings beat.
The country’s second-largest bank, Toronto-Dominion Bank (TD), however, missed analysts’ estimates for quarterly profit, which was hurt by higher expenses, rainy day funds to cover unpaid loans and weakness in its US business.
TD set aside 766 million Canadian dollars ($565m), a jump from 351 million Canadian dollars ($274m) a year ago, while RBC set aside 616 million Canadian dollars ($455m) for credit losses, up from 340 million Canadian dollars ($266m), as consumers struggle to make payments amid high costs of living.
The Bank of Canada has raised interest rates 10 times since March of last year to tackle sticky inflation, boosting profitability for banks’ consumer businesses as they benefit from higher earnings from loans.
That helped boost earnings at RBC’s retail business by 5 percent. At TD, however, income from its Canadian personal and commercial banking segment fell 1 percent and fell 9 percent at its US retail unit.
“The higher interest rate would put pressure on the consumer. But we’re seeing so far they continue to be resilient … but we’re continuously monitoring very closely,” TD’s Chief Financial Officer Kelvin Tran said in an interview.
TD also plans to repurchase 90 million shares, after it launched a share buyback programme for 30 million shares in May, shortly after terminating its $13.4bn acquisition of a First Horizon deal giving the bank a capital boost.
Net interest income – the difference between what banks make on loans and pay out on deposits – rose 6.7 percent to 6.29 billion Canadian dollars ($4.6bn) at RBC and 3.5 percent to 7.29 billion Canadian dollars ($5.4bn) at TD.
RBC reported adjusted earnings of 2.84 Canadian dollars ($2.09) per share, beating analysts’ estimates of 2.71 Canadian dollars ($2) per share, according to Refinitiv data.
The results also benefitted from a low tax rate due to the Canada Recovery Dividend implemented in the 2023 budget.
TD’s adjusted earnings of 1.99 Canadian dollars ($1.46) per share fell below the estimate of 2.04 Canadian dollars ($1.5).
The bank’s earnings were also impacted by a 306 million Canadian dollars ($225m) payment related to the termination of its First Horizon acquisition.
RBC and TD together account for half of the market share among the big six Canadian banks with a market capitalisation of 168 billion Canadian dollars ($124bn) and 151 billion Canadian dollars ($111bn) respectively.
Their stocks have nevertheless underperformed, falling about 5 percent and 6 percent so far this year, compared with the broader index’s 2.55 percent gain.
RBC’s shares were up 1.6 percent while those of TD were down over 2 percent.