RBC, Canada's Largest Bank, Signals Weaker Economy and Anticipates Workforce Reductions

25 Aug, 2023

RBC, Canada's Largest Bank, Signals Weaker Economy and Anticipates Workforce Reductions

Canada's leading financial institution, the Royal Bank of Canada (RBC), has issued a cautionary note about an impending softer economy. Additionally, RBC has unveiled plans to trim approximately 1,800 jobs after exceeding analysts' expectations for the third quarter. These achievements were bolstered by the bank's ongoing efforts to control costs.

CEO Dave McKay projected a deceleration in growth and reduced inflation due to the delayed impact of monetary policies, compounded by China's slowdown and heightened climate and geopolitical uncertainties. He cited evidence of a slowdown in labor markets, citing decreasing wage growth, diminished job postings, and a rise in Canadian unemployment.

McKay highlighted the swift evolution of the operating environment, surpassing changes witnessed over the past decade. Earlier in May, McKay had revealed RBC's intent to curtail hiring after surpassing hiring targets. The bank reported a 1% decline in full-time employees from the previous quarter and anticipates further staff reduction by 1 to 2%. The bank's current employee count stands at 93,753 full-time personnel as of July 31.

Barclays analyst John Aiken acknowledged RBC's effective expense management, leading to an improved overall efficiency ratio, resulting in earnings that outperformed expectations.

In contrast, Toronto-Dominion Bank (TD), the country's second-largest bank, fell short of analysts' projected quarterly profit due to elevated expenses, provisions for unpaid loans, and weak performance in its US business.

The Bank of Canada's 10 interest rate hikes since March of the previous year, aimed at tackling persistent inflation, have bolstered banks' consumer businesses. Higher loan earnings have contributed to a 5% increase in RBC's retail business earnings. Conversely, TD reported a 1% drop in income from its Canadian personal and commercial banking segment, along with a 9% decline in its US retail unit.

While the interest rate hike might strain consumers, TD's CFO Kelvin Tran noted their resilience, emphasizing the bank's vigilance in monitoring the situation.

TD's strategic actions include a share repurchase plan for 90 million shares, following the launch of a 30 million share buyback program in May. TD also terminated its $13.4 billion First Horizon acquisition, leading to a capital boost.

Net interest income, reflecting the disparity between loan earnings and deposit costs, rose by 6.7% to 6.29 billion Canadian dollars ($4.6 billion) at RBC and by 3.5% to 7.29 billion Canadian dollars ($5.4 billion) at TD.

RBC reported adjusted earnings of 2.84 Canadian dollars ($2.09) per share, surpassing analysts' projections. TD's adjusted earnings of 1.99 Canadian dollars ($1.46) per share fell short of estimates.

Despite accounting for a substantial portion of the Canadian banking landscape, RBC and TD have experienced underperformance in the stock market this year, with a decline of about 5% and 6% respectively, compared to the broader index's 2.55% gain. RBC's shares rose by 1.6%, while TD's shares dropped by over 2%.