The Big Banks Make Big Money no matter what

Royal Bank of Canada [RY-T], the country's largest bank, reported a 17 per cent drop in first-quarter profit on Friday to $1.245-billion.

The cash earnings of 97 cents per share fell short of analyst forecasts of $1.06 per share.

The profit, which was $249-million lower than a year ago, was hurt by $430-million (pretax) in writedowns related to U.S. subprime mortgages, the bank's municipal GIC business, its U.S. commercial mortgage-backed securities business and its U.S. auction rate securities portfolio.

The charges amount to $187-million after taxes and the resulting lower bonuses for employees are factored in.

“Almost all of our businesses within our four segments delivered solid performance this quarter and while a few have been affected by the difficult market conditions, our diversified business mix, proactive approach to risk management and rigorous operational discipline continue to underpin strong earnings,” stated chief executive Gord Nixon. The bank's profit one year earlier had been a record high.

The investment banking, or capital markets, division of RBC saw profit fall $92-million to $304-million primarily as a result of the writedowns. The stronger Canadian dollar also took a $24-million bite out of its earnings.

RBC's core Canadian consumer banking division showed no growth from a year ago, contributing $762-million to the bottom line, but profit was up 8 per cent once insurance gains a year ago are excluded.

Profit from the bank's insurance operations dropped by $96-million, or 52 per cent, to $89-million. Wealth management was down 14 per cent, or $30-million, at $181-million.

“We remain focused on aggressively growing this segment and, as our recent announcements demonstrate, we are committed to pursuing opportunities that leverage our strengths and position us to capitalize on favourable long term trends in wealth management,” stated Mr. Nixon. The bank recently announced plans to buy Phillips, Hager & North Investment Management Ltd. in Canada and Ferris, Baker Watts, Incorporated in the United States.

RBC's U.S. and international banking operations saw profits fall $36-million to $31-million this quarter, due to higher provisions for bad loans. The provision for credit losses rose to $61-million as the bank contends with more bad loans in its U.S. residential builder finance business as well as its commercial and consumer portfolios.

“Our U.S. residential builder finance business continues to face pressure as the U.S. economy remains under stress, but we are managing the current challenges and I am encouraged by the work being done to strengthen our retail banking operation in the U.S. Southeast,” Mr. Nixon stated.