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Canada's biggest bank, Royal Bank of Canada (NYSE: RY ) , reported on its fiscal Q4, bringing a bit of sunshine to the somewhat drab financial reporting season. Despite whispers of problems stemming from an overheated northern housing market, the bank reported a 12% increase in revenue and an uptick in earnings of over 22% since last year.
Lots of good news, tempered with caution
Though personal loan activity increased by 8% and mortgage loans were up 6%, the biggest jump came in the bank's net income from its sizable capital markets section -- to $410 million, an increase from last year of $285 million -- representing greater activity from fixed-income trading. In other news, the bank's Tier 1 capital ratio was up 10 basis points from last quarter, to a robust 13.1%.
But the bank CEO, Gordon Nixon, noted that the industry expected headwinds to develop next year, though he was upbeat about Royal Bank's ability to cope. The main concerns seen facing Canadian banks in the not-so-distant future involve two major problems: An over-leveraged consumer base, and a cooling off of the country's overheated housing market. Accordingly, some see the huge number of home loans held by Royal Bank and its peers becoming a problem over the next year.
U.S. banking regulations may also put some strain on Canadian institutions that do business here. For his part, RBC's Nixon has stated that plans to force foreign banks to set up holding companies for their subsidiaries won't affect his bank's business. But some predict that RBC and others with a large U.S. presence, such as Toronto-Dominion Bank (NYSE: TD ) and Bank of Montreal (NYSE: BMO ) , might have to bolster their capital to comply with the new rules.
One Fool's take
Though the predicted headwinds still haven't come to pass, RBC is aware of them, and seems to be planning ahead in that regard. RBC, like TD Bank and Bank of Montreal, is continuing to expand its business at home and abroad, and it just recently sealed a deal to buy Ally Financial's Canadian automotive finance unit. The bank's CEO has also said that his goal is for RBC to generate half of its revenue from operations outside of Canada. As for home loans, the bank has increased its provisions for credit losses by 76% year over year, possibly because of the cooling housing market.
For investors, keeping an eye on this last issue is important, but the very fact that the bank's CEO is acknowledging future problems and is taking them into account should go far to boost investor's faith in Canada's No. 1 bank.
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