National Bank outperforms Royal Bank of Canada in terms of profitability

On Wednesday, Royal Bank of Canada (RBC) missed analyst profit estimates for the third quarter, while National Bank of Canada (OTC:NTIOF) narrowly missed them. The former's capital markets division negatively affected profitability, while the latter's contributed to their growth.

Canadian banks have mainly exceeded market expectations in recent quarters, but they are now beginning to experience the negative consequences of market issues and economic uncertainty.

On a conference call with analysts, RBC forecast a modest recession in Canada and the United States in 2023, as well as a 12 percent decline in the average Canadian home price from its peak.

During a conference call with analysts, National Bank representatives emphasized that a recession is not the bank's baseline scenario and that it expected a "soft landing" for the Canadian economy.

RBC set aside C$340 million in provisions for credit losses (PCLs) to protect against potential loan impairments, compared to C$540 million in recoveries a year prior. National Bank, the smallest of Canada's Big Six banks, had a PCL of C$57 million, compared to C$43 million the year prior.

William Bonnell, the National Bank's chief risk officer, said, "Current conditions (such as unemployment and economic growth) are so positive, but the future prognosis is so uncertain." This explains why there are very few impaired loans but a large increase in performing loan provisions.

Royal Bank's reported pre-tax, pre-provision earnings declined by 3 percent compared to the previous year, while National Bank's climbed by 7 percent.

RBC shares dropped 3.1% to C$122.59, compared to a 0.1% advance in the Toronto Stock Exchange's benchmark. The stock of National Bank grew by 0.5%.

RBC reported adjusted earnings per share of C$2.55, vs analyst projections of C$2.66.

The 58% decline in RBC's capital markets profitability masked the solid margin increase and loan growth of the banking division. The company's management predicts a 10 to 15 basis point boost in margins over the next two quarters.

RBC does not anticipate a significant risk in its mortgage portfolio until 2025 or 2026, when the fixed loans taken out during the pandemic at record-low interest rates are up for renewal.

National Bank announced earnings of $2.35 per share, exceeding analyst estimates of $2.34 per share.

Its 12 percent increase in capital markets profitability, driven by the strong performance of its trading section, helped to offset the decline in its transactions division. Additionally, National Bank reported substantial expansion in both commercial and mortgage lending.

On the conference call with analysts, National Bank officials indicated that firms and households still have savings above pre-pandemic levels, which protects them from rising interest rates and keeps delinquencies low.

Tuesday, Bank of Nova Scotia's earnings disappointed the markets due to a decline in earnings from its capital markets and international divisions.