Royal Bank to Slow Hiring After Earnings Miss on Higher Costs

(Bloomberg) -- Royal Bank of Canada missed analysts’ estimates as expenses and loan-loss provisions increased, making it the latest lender to take a profit hit due to a darkening economic picture. The shares slumped.

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Higher expenses were a big factor in the earnings decline. Compensation costs were up 15% from a year earlier as the bank added more than 8,000 employees.

"Honestly, we overshot — we overshot by thousands of people," Chief Executive Officer Dave McKay told analysts on a conference call Thursday. The bank, which has a workforce of about 94,000, is "committed to actively reducing expenses," he said, and will do so through attrition and slower hiring.

Excluding some items, Royal Bank earned C$3.76 billion ($2.76 billion), or C$2.65 a share, falling short of the C$2.80 average estimate of analysts in a Bloomberg survey.

Canada's largest bank is coming through a period of robust growth and dealmaking, including the acquisition of UK wealth manager Brewin Dolphin Ltd. and a C$13.5 billion deal for HSBC Holdings Plc's Canadian unit to extend its lead in domestic retail banking. The latter deal, announced last year, is expected to close in early 2024.

Slower economic growth and higher interest rates are bringing an end to a period of pristine credit quality. Banks have long warned that credit losses will eventually normalize, which means putting more into reserves for loans that borrowers are unable to pay off. Royal Bank took provisions for credit losses of C$600 million in the fiscal second quarter, higher than analysts’ forecasts of C$574.5 million.

"We are still in the early stages of the credit cycle we have been expecting for some time," Chief Risk Officer Graeme Hepworth told analysts.

Earnings in Royal Bank two largest divisions, wealth management and personal and commercial banking, came up shy of forecasts. The P&C group, which accounted for much of the increase in credit-loss provisions, made C$1.92 billion. Analysts had been expecting C$2.06 billion.

In the wealth-management group, which includes California-based City National Bank, non-interest expenses increased 16%.

Equities trading slumped, but RBC Capital Markets still had a strong quarter, with corporate and investment banking revenue rising 11% over the prior year. The group earned C$939 million, an increase of about 10% and better than analysts had forecast, according to data compiled by Bloomberg.

Canadian bank shares tumbled Wednesday to their lowest level in two months after Bank of Montreal and Bank of Nova Scotia both reported disappointing results. In both cases, provisions for loan losses went up, as they did at Royal Bank.

Although some of the headwinds at Royal Bank were expected, "we would expect the results to weigh on its valuation," Barclays Plc analyst John Aiken said in a note to clients.

Royal Bank shares fell 1.5% to C$121.86 at 9:38 a.m. in Toronto. They’ve dropped 4.9% this year, compared with a 3.9% decline for the S&P/TSX Commercial Banks Index.

(Updates with additional information beginning in the first paragraph. An earlier version was corrected to fix an incorrect adjective in the second paragraph.)