Royal Bank of Canada announced a record $3 billion in net income, representing a 24% year-on-year increase, in its recent quarterly earnings report. While the bank certainly has plenty of reason to feel confident, it is confidence borne from appropriate caution – particularly with regard to the domestic housing market and uncertain political situations abroad.
“You’re seeing 20 per cent house price growth in [Toronto] where you shouldn’t see that much,” RBC CEO Dave McKay told the Financial Post. “That’s concerning. That’s not sustainable.”
He cited a “somewhat dangerous mix of catalysts” in Canada’s biggest city. These include ultra-low rates, a shortage of single-family homes, speculation, and an acceleration of foreign monetary inflows diverted from Vancouver, where a foreign buyers’ tax has been instituted to rein in runaway demand.
“I do believe we are now at a point where we need to consider similar types of measures that we saw in Vancouver,” McKay said.
Despite government efforts to contain inflating prices, experts and ratings agencies are still expressing concerns surrounding Canada’s housing market. RBC has said the underlying credit quality of its residential mortgage portfolio is strong.
“Given accelerated house price appreciation in both of these markets, we continue to closely monitor this portfolio with extra due diligence for higher value mortgages,” RBC Chief Risk Officer Mark Hughes said to analysts. “Overall, we remain comfortable with our residential mortgage portfolio, given our clients ability to repay, and the underlying credit quality of this portfolio.”
RBC is also keeping up investments to drive organic growth at City National, a Los Angeles-based bank it acquired in 2015, as well as its US Wealth Management business, in anticipation of an economic bump in the States from US President Donald Trump’s pro-growth policies. However, given the lack of clarity on the details of his policies – as well as ongoing uncertainty in Europe due to fallout from Brexit and upcoming elections in several countries – the bank is adopting a cautious stance.
“We are not holding back growing our business, nor are we getting too far ahead of this,” McKay said. “We are in a wait-and-see mode and trying to understand the impacts before we do anything. Again, it’s uncertainty. Some business groups can’t move forward until they have a greater degree of clarification there.”
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