WRAPUP 2-Loan growth drives profit beat at Royal Bank of Canada, TD Bank

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(Reuters) – Two of Canada’s largest lenders beat analysts’ estimates for quarterly profits on Thursday, as strong loan growth boosted their retail banking businesses and interest income.

The Royal Bank of Canada (RBC) logo is seen outside of a branch in Ottawa, Ontario, Canada, February 14, 2019. REUTERS/Chris Wattie

But shares of both Royal Bank of Canada and Toronto-Dominion Bank were pressured in midday trading as investors focused in on the spike in loan loss provisions, which rose 55% at RBC, and 14% at TD Bank.

RBC also gave a cautious outlook for net interest margins (NIM). On a post-earnings conference call, bank executives said NIM is expected to be relatively flat over the next several quarters, given the outlook for interest rates.

The Canadian central bank and the U.S. Federal Reserve have paused rate hikes after raising them multiple times since July 2017.

In the reported quarter, higher interest rates in Canada and the United States helped improve NIMs at the banks, as they earned more from loans than they paid out on deposits.

Total loans at RBC jumped 9% in the second quarter, while at TD, they rose 3%, with home, personal and business lending showing growth.

In contrast, smaller bank Canadian Imperial Bank of Commerce reported negligible quarterly loan growth on Wednesday. Its home loans business declined 0.5%.

Residential mortgage loan growth has been a focus for investors following stringent regulatory changes that require borrowers of uninsured mortgages to be stress-tested to check their ability to repay.

“Regulatory changes have helped some of Canada’s major housing markets stabilize, particularly in Ontario and to the East. Western Canadian markets remain under downward pressure,” said David McKay, chief executive officer of RBC.

Loans grew not only in the domestic markets, but also in the U.S., where both the banks have sizeable businesses.

“RBC is showing decent domestic loan growth and strong growth south of the border,” said John Aiken, an analyst with Barclays, while at TD, “underlying retail loan growth remains strong on both sides of the border.”

Net income at RBC’s personal and commercial banking division rose 6% from a year earlier, while TD’s domestic retail banking income rose 5.6%.

“Overall, we view the earnings at RBC and TD as strong…,” DBRS analyst Robert Colangelo said.

Capital markets results, including investment banking, advisory and trading, were mixed.

Trading rose at RBC on “improved market conditions and increased client activity,” while it fell at TD due to “challenging market conditions and reduced client activity.”

At CIBC, it was the only bright spot in an otherwise muted quarter.

Top investment banks in the U.S. reported huge declines in equities trading in the most recent quarter as tepid markets, due to the U.S.-China trade war, crimped activity.

RBC’s adjusted earnings per share of C$2.23 beat analyst estimates of C$2.21, while TD’s C$1.75 per share profit beat estimates by 8 Canadian cents.

RBC’s shares fell over 2% in trading around noon, while TD gave up some early session gains.

Reporting By Aparajita Saxena and Bharath Manjesh in Bengaluru; Editing by Shinjini Ganguli and Sriraj Kalluvila

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