BUSINESS

Royal Bank posts $1.56-billion profit in second quarter, includes RBC Dexia deal

05/24/2012 09:09 EDT | Updated 07/24/2012 05:12 EDT
TORONTO - Royal Bank of Canada (TSX:RY) says its profits were pulled down seven per cent in the second quarter as it booked a loss from the acquisition of the remaining half of advisory firm RBC Dexia.

The country's biggest bank said Thursday that net income from continuing operations dropped to $1.56 billion, or $1.01 per share, down from $1.68 billion or $1.10 per share a year ago.

The results were equivalent to $1.17 in diluted earnings per share, which was a penny below the consensus estimate compiled by Thomson Reuters.

The bank took a $202-million hit to profits from acquiring the rest of RBC Dexia in April for $1.1 billion. Royal had set up the adviser to pension fund managers and institutional investors with European banking partner Banque Internationale a Luxembourg SA.

RBC chief executive Gord Nixon told analysts Thursday that the loss recorded on its own RBC Dexia holdings reflects the lower price paid for Dexia due to a writedown in its value when the sale was made. The bank paid less for the assets up front, which was beneficial, though it also took the loss as part of that arrangement. It would have shown a gain if it had paid a premium to its partner.

"These results, with the exception of the Dexia numbers, are very clean and they reflect solid performance in Canadian banking, capital markets, insurance and wealth management segments," Nixon said.

"Our ability to deliver strong results to our shareholders is a testament to the strength of our diversified business model and our ability to successfully execute on our disciplined growth strategy.

"Our results also reflect our strict discipline around managing costs and risks and our commitment to maintaining strong capital position, all of which are key to RBC's operating philosophy and especially important in today's environment with market and economic uncertainty."

Overall, the bank's quarterly revenue increased to $6.92 billion from $6.83 billion.

Royal Bank focused on results from continuing operations because it filtered out the money-losing U.S. assets that it has sold over the past year, including its U.S. regional retail banks in the second quarter and Liberty Life Insurance a year earlier.

When including the U.S. assets, the bank made $1.53 billion in profit during the quarter down from $1.63 billion a year earlier.

"At a first glance, we would characterize the results as solid, if unspectacular," said Barclays analyst John Aiken in a note.

"Royal enjoyed a lower than anticipated effective tax rate, however, from an earnings quality stand-point this was offset by higher than anticipated provisions for credit losses."

Shares of the bank were down $2.01 to $50.89 in afternoon trading on the Toronto Stock Exchange.

Breaking down the divisions, Royal Bank's Canadian banking arm accounted for $937 million of net income for the quarter ended April 30, up $42 million from the comparable period last year.

However, provisions for credit losses, or money set aside to cover bad loans, grew to $348 million from $273 million a year ago.

RBC's insurance business contributed $151 million of profit, up $28 million from a year ago, while RBC Capital Markets provided $449 million of net income, up $42 million from the second quarter of 2011.

The gains in those operations were partially offset by a $15-million decline in profit from wealth management, which contributed $212 million of net income.

The bank's international operations factored in the RBC Dexia transaction and posted a $196-million loss. If the takeover had been excluded, the bank would have had a slim $6-million profit — down $40 million from the second quarter of 2011.

The Luxembourg bank's parent company, Dexia SA, is one of the victims of the European debt crisis and the 2008 credit crunch sparked by the failure of Lehman Brothers, a Wall Street investment bank.

Dexia SA was the first major European bank to need a bailout in 2011 as a result of concerns over the sovereign debt crisis. It formed the partnership with Royal bank about six years ago.

Amid continuing uncertainty about the future of the eurozone as it appears Greece comes closer to abandoning the euro currency, analysts questioned Royal's position in Europe, though Nixon reaffirmed his confidence.

"Overall we continue to transact in a prudent manner and remain comfortable with our exposures in Europe, which are with well-rated counterparties mainly located in larger European countries," he said.

"Our direct exposure to Greece is minimal and our direct exposure to peripheral countries overall is quite small and very manageable."

Note to readers: This story includes a corrected headline.