Post by
retiredcf on Aug 24, 2022 9:46am
CIBC
Have a $146.00 target. GLTA
EQUITY RESEARCH
August 24, 2022 Flash Research
ROYAL BANK OF CANADA
FQ3 First Look: Headline Miss Driven By Loan Markdowns
Our Take: Neutral. Headline miss due to syndicated loan markdowns, but
with strong underlying banking results in both Canada and U.S. (loan growth,
NIM expansion, impairments, etc).
Overview Of Results: RY reported Adjusted EPS of $2.55, below our
estimate of $2.77 and consensus of $2.66. Adjusted ROE was 14.8% and
BVPS of $69.44 was up 0.3% from last quarter. CET1 finished the quarter at
13.1%, relative to last quarter’s 13.2% and in line with our estimate and
consensus.
Sources Of Variance: The major drivers of the negative variance to our
estimates were from trading revenue (-$0.23/share, largely due to loan
underwriting markdowns), fee income (-$0.07/share) and insurance income
(-$0.05/share), partially offset by higher NII (+$0.13/share).
Mark-to-market losses were sizable: RY booked a loan underwriting
markdown of $385MM, equivalent to $0.21/share (effectively the difference
between reported EPS and our estimate). The majority of the losses were
unrealized and represent RY’s participation in levered loan syndicates. RY
has reduced its exposure and we view these losses as non-recurring.
PTPP in line excluding mark-to-market losses: Pre-tax pre provision
earnings (tax equivalent basis) of $5,039MM was down 1.4% Q/Q and 2.4%
Y/Y. PTPP was short of our estimate at $5,395MM. However, if we exclude
the mark-to-market losses, PTPP would have been in line with our estimate.
Better than expected NII growth: Net interest income of $5,295MM was up
13.9% from last quarter and much better than BNS’ NII growth of 5.0% Q/Q.
Average earning assets were up 3.8% Q/Q, while all bank NIM of 1.51% was
up 9bps Q/Q. Average deposits were up 2.2% Q/Q for P&C banking.
Performing PCLs came in higher, as expected: The total PCL ratio of
17bps compares to negative 18bps last quarter and in line with our
assumption of +16bps. Performing PCLs saw a build of 9bps ($177MM) and
impaired PCLs of 8bps ($170M) compared to 9bps last quarter.
Operating leverage negative on first glance: Adjusted revenue growth was
-1.4% and non-interest expense growth was -0.5%. Adjusted operating
leverage was negative 0.9%. However, excluding the loan underwriting
markdown, operating leverage would have been positive 2.5%.
Capital markets results were short of expectations: Capital markets
related revenue came in at $1,323MM, down 33% Y/Y and 32% Q/Q. The
results were weaker than our estimate of $1,750MM mostly on the mark-to-
market losses.
Conference Call: We will be publishing a more detailed look following the
conference call at 8:00 AM EST (416-340-2217; 3163897# / 1-866-696-
5910).