RBC wants more cash on hand

Higher chances of disruptive events, takeover of HSBC Canada has bank creating buffer room

Royal Bank of Canada is taking measures to boost its capital on hand after announcing a $13.5-billion deal on Tuesday to buy HSBC Bank Canada amid heightened market uncertainty.

The bank said Wednesday as it reported fourth quarter results that it would defer share repurchases until the close of the deal, expected in late 2023, and that it is rolling out a two per cent discount on dividend reinvestments, a move meant to add to their balance sheet.

The dividend reinvestment incentive, expected to add about $2 billion in capital, comes amid higher chances of unlikely but disruptive events, said chief executive Dave McKay.

“There’s a higher level of uncertainty, and therefore, you have higher tail risk right now,” he said on an analyst call. “Therefore, we’re building a little bit of a capital buffer for uncertainty. Capital has no halflife. It can only be used, and we’re very proud of how we’ve used it over the last 24 hours.”

Given the potential slowdown ahead, the bank also set aside $381 million for potentially bad loans, compared with a reversal of $227 million last year, which offset gains elsewhere in the quarter to leave earnings of $3.88 billion just $10 million shy from a year earlier.

The actions on loan provisions and dividend discounts come as elevated housing and energy prices, geopolitical instability and rising interest rates put pressure on growth, affect asset valuations and adds to market volatility, McKay said.

“We maintain our cautious stance on the outlook for economic growth,” he said. “Although higher interest rates are needed to preserve long term economic stability, the lagging impact of monetary policy, combined with strong employment and significant liquidity in the system, has likely delayed what may end up being a brief and moderate recession.”

Revenue totalled $12.57 billion, up from $12.38 billion a year earlier.

The quarter showed strong loan growth and no signs of a credit spike for RBC, said Scotiabank analyst Meny Grauman in a note, but he wondered about what the bank’s move on the discounted dividend reinvestment plan (DRIP) shows for the bank’s capital outlook, given the expected tougher economic conditions next year.

He said the bank’s better-than-expected earnings, which came in at an adjusted $2.78 per diluted share for the quarter compared with a consensus of $2.68, according to Refinitiv, was from higher revenues and smaller loan provisions than expected.

Bank expenses however, which were up 9.5 per cent for the quarter compared with last year on higher staffing costs and some acquisitionrelated increase, came in higher than expected.

For its full financial year, RBC said it earned $15.81 billion or $11.06 per diluted share on $48.99 billion in revenue compared with a record profit of $16.05 billion or $11.06 per diluted share on $49.69 billion in revenue in the same period last year.

RBC said it will now pay a quarterly dividend of $1.32 per share, an increase of four cents.