Expenses Continue to Climb for Royal Bank of Canada in Q1 Results

Wide-moat-rated Royal Bank of Canada RY, or RBC, reported OK fiscal first-quarter earnings. Adjusted earnings per share were CAD 3.10, representing an increase of 8% year over year and 2% quarter over quarter. RBC recently acquired wealth manager Brewer Dolphin in September, which helped boost results. Results showed net interest income starting to stall out, a pattern we are seeing across the industry, while expenses rose at a faster clip than expected, up 13% year over year excluding Brewer Dolphin. This is likely to be the highest expense growth rate we will see this quarter among the Canadian banks. Management emphasized that it is recommitting to bringing expense growth down for the rest of the year, however, it does seem that even with a slowdown in growth, expenses are set to exceed our previous expectations. This was similar in theme to last quarter, where expenses surprised to the upside. With inflation beginning to recede, we’re hoping these sorts of expense risks will also start to recede, but we aren’t completely out of the woods yet.

Fees performed exceptionally well during the quarter, with trading and foreign exchange in particular remaining in a good environment and the capital markets segment arguably overperforming. Eventually, some of these items will recede, however, wealth and investment banking fees should arguably do better during the next cyclical upswing, helping balance out some of the potential headwinds in other items.

As we expected, loan growth is starting to slow, with period-end balances mostly flat sequentially, and management is expecting only single-digit percentage growth in mortgages for the year (down from double-digit percentage growth for multiple years). We would expect slowing economic and balance sheet growth to be a key theme for the rest of the year. As we revise our outlook (primarily increasing expenses), we expect a slight decline in our current fair value estimate of CAD 139/USD 103.