Royal Bank CEO says consumer lending business still growing but more slowly

A Royal Bank of Canada sign is pictured in downtown Toronto on Dec. 2, 2011. (Nathan Denette / THE CANADIAN PRESS)

TORONTO -- The Royal Bank has seen the growth of its consumer lending business slow down and that's a good thing, RBC chief executive Gord Nixon said Wednesday.

"I think there is no question that consumer debt growing at the pace that it has over the last number of years is not sustainable," Nixon said.

However, the head of one of Canada's largest banks, noted RBC's consumer lending business is still growing in the mid-single digits.

"It is not as robust as it was, but it is still a pretty healthy market," Nixon said.

Canadians have taken advantage of record-low interest rates in recent years to borrow heavily and are carrying record amounts in debt.

Now, with interest rates expected to rise over the coming years, policy-makers have raised concerns about what that might mean for the housing market and the economy in general.

Nixon made the comments as the bank reported a first-quarter profit of $2.09 billion and increased its quarterly dividend by four cents to 71 cents per share.

The profit amounted to $1.38 per diluted share of net earnings on $8.45 billion in revenue for the quarter ended Jan. 31, compared with a profit of $2.05 billion or $1.34 per share on $7.86 billion in revenue a year ago.

The results included a loss of $60 million related to the sale of RBC Jamaica and $40 million in restructuring charges for the bank's Caribbean operation. Excluding the one-time charges, RBC said it earned $2.18 billion or $1.44 per share compared with $2.05 billion or $1.34 per share a year ago.

Nixon said RBC remains committed to the Caribbean, but was consolidating branches, cutting jobs and streamlining its head office structure to help improve the business.

Barclays analyst John Aiken noted that RBC's core cash earnings came in at $1.47 per share, above the consensus estimate of $1.44 per share.

"The beat against expectations appears to be from lower provisions and better-than-anticipated capital markets revenues, largely trading," Aiken wrote in a note to clients.

"Although we cannot characterize this as a true stand-out quarter, the solid earnings beat and lift to the dividend should be enough to garner some investor enthusiasm."

Nixon said Wednesday that RBC was on the hunt for acquisitions to expand its wealth management business, but many of the options were too expensive.

"When you look at the asset management business or the wealth management business generally, you've got extremely high valuations generally often with very poor underlying performance," Nixon said.

"We've tried to be extremely disciplined and I do believe it will come and it is something that we continue to remain focused on, but it is going to have to come on terms that I think we as an institution are comfortable with."

Nixon announced last year that he would step down as chief executive on Aug. 1.

His designated successor, Dave McKay, has been group head of RBC personal and commercial banking, which generated more than half of the company's overall profit during the first quarter.

RBC said its personal and commercial banking operations saw its profits slip $33 million compared with last year to $1.071 billion. However, excluding the Caribbean banking charges, the group increased its profit $59 million or five per cent from a year ago.

Despite the slowdown in the growth in consumer lending, the Canadian banking operations earned $1.14 billion, up four per cent from a year ago, helped by the Ally Canada acquisition, partially offset by higher provision for credit losses.

McKay said the bank has also been growing its market share in consumer lending and credit cards.

Its other major divisions were generally more profitable than last year, with the exception RBC Insurance, which had $157 million of net income, down four per cent from a year earlier.

RBC said the insurance division was affected by higher disability and weather-related claims.

The bank's wealth management earned $235 million, up $6 million or three per cent from a year before, while net income from investor and treasury services was $106 million, up $27 million or 34 per cent.

RBC Capital Markets earned $505 million, up $43 million or nine per cent from a year earlier.

Royal said the improvement at its capital markets division was the result of several factors, including lower provisions for credit losses, a lower tax rate and the impact of foreign exchange fluctuations.

The financial results came as RBC held its annual meeting in Toronto.

Shareholder advocacy group Medac made five proposals at the annual meeting including a plan to phase out of stock options as compensation, that the bank pay its fair share of taxes and a plan to conduct a tender process for audit services every five years.

The group also sought to have the bank inform shareholders what it has done following any significant vote against the executive compensation policy and have the board report what it has done in response when a high percentage of votes are withheld for a director.

All of the Medac proposals were overwhelmingly voted down by shareholders.