Royal Bank of Canada plans to cut scores of jobs

Toronto/Bengaluru — Royal Bank of Canada (RBC) warned of a softer economy ahead and plans to cut about 1,800 job to reduce costs after Canada’s largest bank beat analysts’ estimates for the third quarter on Thursday.

CEO Dave McKay forecast slowing growth and lower inflation due to the lagging impact of monetary policy, combined with a slowdown in China and elevated climate and geopolitical risks.

“We are seeing evidence of slowing labour markets as evidenced by slowing wage growth, lower job postings and an increase in Canadian unemployment. Consequently, our base case forecasts a softer economic outlook,” he told analysts.

“The operating environment is changing at a faster pace than we have seen for more than a decade.”

McKay in May said the lender would slow hiring after it overshot by thousands of people. The bank said the number of full-time employees was down 1% from the prior quarter, and it expects to further reduce headcount by about 1% to 2%. The bank had 93,753 full-time employees on July 31.

“The bank did a commendable job in managing expenses, with an improvement in its overall efficiency ratio,” Barclays analyst John Aiken said, noting the lender’s earnings beat.

The country’s second-largest bank, Toronto-Dominion Bank, however, missed analysts’ estimates for quarterly profit, which was hurt by higher expenses, rainy day funds to cover for unpaid loans and weakness in its US business.

TD set aside C$766m, a jump from C$351m a year ago, while RBC set aside C$616m for credit losses, up from C$340m as consumers struggle to make payments amid high costs of living.

Boost earnings

The Bank of Canada has raised interest rates 10 times since March last year to tackle sticky inflation, boosting profitability for banks’ consumer businesses as they benefit from higher earnings from loans.

That helped boost earnings at RBC’s retail business by 5%. At TD, however, income from its Canadian personal and commercial banking segment fell 1% and declined 9% at its US retail unit.

“The higher interest rate would put pressure on the consumer. But we are seeing so far they continue to be resilient … but we are continuously monitoring very closely,” TD CFO Kelvin Tran said.

Net interest income — the difference between what banks make on loans and pay out on deposits — rose 6.7% to C$6.29bn at RBC and 3.5% to C$7.29bn at TD.

RBC reported adjusted earnings of C$2.84 per share, beating analysts’ estimates of C$2.71 per share, according to Refinitiv data.

The results also benefited from a low tax rate due to the Canada recovery dividend implemented in the 2023 budget.

TD’s adjusted earnings of C$1.99 per share fell below the estimate of C$2.04. The bank’s earnings were also affected by a C$306m charge related to the termination of its First Horizon acquisition.

RBC and TD together account for half of the market share among the big six Canadian banks with a market capitalisation of C$168bn and C$151bn respectively.

Their stocks have underperformed, falling about 5% and 6% respectively so far this year, compared with the broader index’s 2.55% gain.

RBC’s shares were up 1.7% while those of TD were down nearly 2% on Thursday morning.

Reuters