RBC Bank branch stock photo

Royal Bank of Canada saw profits slip in the first quarter as it joined other banks in setting more money aside for tougher economic conditions ahead, though like others it also benefited from higher capital markets revenue as the uncertainty helped boost trading volumes.

The bank reported a profit of $3.2 billion, down from $4.1 billion a year earlier, as a sharp increase in expenses also weighed, driven especially by salaries, as RBC looked to prepare itself for growth past the expected downturn this year.

“We hired aggressively into the year-end. We’re kind of walking the talk that we’re expecting a softer landing. We’re looking for future growth,” said chief executive Dave McKay on an earnings call Wednesday.

While other banks have also reported expense increases in the mid-to-high single digits as inflationary pressures weigh, RBC’s 17% increase in non-interest expenses compared with a year earlier had McKay promising to get spending under control.

“There is an opportunity to pull back. There is an opportunity to focus. And you have my commitment and my management team’s commitment that we can do better on cost side.”

Along with hiring and compensation increases, the bank also saw costs rise from investments in technology, its acquisition of Brewin Dolphin and work toward buying HSBC Canada, and foreign exchange. The bank has also seen a sharp increase in costs from its contracted third party advisory, consultant and technology services, said McKay, as well as discretionary costs like travel and business development that could be cut back if needed.

The spending increases come as the bank looks to respond to numerous shifts in the economy, including issues of productivity in hybrid workforces.

“The absence of working together in many ways has led to productivity and innovation challenges,” said McKay.

Last summer the bank had most workers return to the office two or three days a week, but the bank is still seeing productivity losses from the hybrid model in some areas of the bank, he said.

The hybrid model is also putting pressure on the commercial banking sector as questions about future demand remain up in the air. RBC warned that it expects to have losses in its commercial real estate sector, with its downside scenario reflecting declines in property values ranging from 15% to 40%, while its allowances for credit losses on performing commercial loans has doubled compared with pre-pandemic levels.

The uncertainty around the residential mortgage market, commercial real estate and the duration of high interest rates, among other shifts, means the bank has to be more adaptive and responsive, said McKay.

`”It’s a volatile market. There’s a lot of things going on. We’re repositioning the bank for a very different world going forward as far as technology capabilities across the board. It’s a very complex operating environment. Having said that, we got to do better, and we’re going to do better.”

The bank’s provision for credit losses amounted to $532 million compared with a provision of $105 million in the same quarter last year, as it continues to forecast a modest recession from the pressures of rising debt service costs on consumers.

Revenue for the quarter totalled $15.09 billion, up from $13.07 billion a year earlier.

Revenue in Canadian wealth management was $1.11 billion, up 4% from $1.07 billion in the first quarter of 2022, primarily due to higher net interest income from higher interest rates offset in part by lower average fee-based client assets largely driven by unfavourable market conditions. Worldwide, wealth management revenue was $4.59 billion, up 14% from $4.02 billion in Q1 2022.

Assets under management totalled $1.05 trillion on Jan. 31, up 3% from $1.02 trillion year over year.

On an adjusted basis, RBC says it earned $3.10 per diluted share in its latest quarter, up from an adjusted profit of $2.87 per diluted share a year earlier.

Analysts on average had expected a profit of $2.94 per diluted share in the quarter, according to estimates compiled by financial markets data firm Refinitiv.

While RBC’s capital markets segment surprised notably to the upside to help beat expectations, so did expenses to lead to a disappointing all bank margin, said Scotiabank analyst Meny Grauman.

The results also show potential concerns on the credit side, said Barclays analyst John Aiken.

“While underlying results were solid, we are concerned that it may not be enough to offset concerns on the outlook for further deterioration in credit,” he said in a note.