By Nivedita Balu and Arasu Kannagi Basil
TORONTO (Reuters) -Royal Bank of Canada surpassed quarterly profit estimates that pushed shares to a record high on Wednesday, while executives said they were cautious about the impact economic uncertainties would have on consumers.
CEO Dave McKay told analysts the caution came amid uncertainty about the pace of interest-rate cuts that could affect consumers repricing their mortgages next year and the bank's net interest income as deposit costs rise.
"We are trying to express it's uncertain and it's volatile ... there are some unknowns out there that we're trying to manage, but we feel we can manage them quite well," McKay said.
"It's hard to see exactly how fast rates come down and it impacts consumers, but we wanted to be just a little bit cautious there."
Bank of Canada cut its interest rates, with money markets expecting a couple more reductions this year, while the U.S. Federal Reserve is expected to begin its cuts later next month.
While low interest rates reduce the burden for mortgage owners, banks will have to spend more to retain deposits from consumers as they move their money to investments that could pay more. That in turn, could hurt margins, while the banks continue to set aside funds to shield against bad loans.
Third-quarter results were powered by a 17% rise in earnings at RBC's personal and commercial banking segment to C$2.49 billion ($1.85 billion), of which C$198 million came from its C$13.5-billion acquisition of HSBC's domestic operations.
Canada's biggest bank by market capitalization, RBC has moved to rejig its upper ranks and change its reporting segments while absorbing HSBC's 780,000 clients and C$71-billion loan book in the country.
"Royal reported a standout quarter ... (its) earnings are gaining the lift of a full quarter's inclusion from HSBC," Jefferies analyst John Aiken wrote.
The lender's shares rose as much as 3.1% to hit a record high of C$161.5.
A resurgence in dealmaking activity amid expectations of a soft landing drove a 23% jump in net income at RBC's capital market business.
Smaller peer National Bank of Canada (OTC:NTIOF) also reported better-than-expected quarterly earnings, helped by growth at its capital markets unit and wealth management unit. Its shares also hit a record of C$127.22 after gaining as much as 6.1%.
The Montreal-based lender is also focusing on growth at home, expanding from Canada's east coast to west coast through its C$2.5-billion acquisition of Canadian Western Bank (TSX:CWB). The deal is awaiting regulatory approval.
The results are in contrast with others from Canada's big five banks that have reported so far, which were dragged down by credit pressures or provisions for penalties related to U.S. investigations.
RBC's net interest income — the difference between what a bank earns on loans and pays out on deposits - rose 16.5%.
Provisions for credit losses came in at C$659 million, compared with analysts' estimate of C$903 million, according to LSEG data.
On a per share basis, the bank earned C$3.26, above the average analyst estimate of C$2.95.
National Bank's earnings of C$2.68 per share were more than the expected C$2.49 per share.
($1 = 1.3457 Canadian dollars)