By Nichola Saminather and Noor Zainab Hussain
TORONTO (Reuters) - Royal Bank of Canada warned on Wednesday that mortgage growth, trading and underwriting activity could slow, while loan delinquencies and impairments rise in fiscal 2021, after posting a better-than-expected profit in the fourth quarter of 2020.
Canada's biggest lender is now giving increased weight to its pessimistic economic scenario, which expects the Canadian unemployment rate will stay above 9% until March 2023, and home prices will drop 8% and remain depressed until late 2023, executives said on a conference call.
The Canadian housing market's surprising strength - sales jumped 32% in October, while the average price rose 15.2% - even as the economy slowed and unemployment spiked, helped drive a 11% increase in mortgages in 2020.
"We expect mortgage growth to slow going forward as pent-up housing demand begins to cool," Royal Bank Chief Executive Dave McKay said on the call.
Royal Bank joined rivals including Bank of Nova Scotia, Bank of Montreal and National Bank of Canada in reporting better-than-expected fourth-quarter profits as it set aside less money than analysts had estimated to cover future bad loans.
That came after three straight quarters of adding to provisions for credit losses, including on performing loans, that have built up record reserve levels.
But should the pessimistic scenario materialize, allowances on performing loans would have to increase by about 18%, Royal Bank Chief Risk Officer Graeme Hepworth said.
Amid short-term headwinds like the second coronavirus pandemic wave, and the end of loan deferrals and government support, "we do see a world where delinquencies and ... impairments will start to increase through 2021," Hepworth said.
That would come as trading and underwriting activity, which helped the bank's capital markets unit generate near-record earnings of C$2.8 billion this year, moderates, executives said.
Royal Bank reported fourth-quarter adjusted net income of C$2.27 per share, up 5 cents from a year earlier, and better than estimates of C$2.05.
National Bank, the smallest of Canada's six largest lenders, which also reported results on Wednesday, took provisions of C$110 million, versus the nearly C$160 million that was expected. That helped it post adjusted profit of C$1.69 a share, compared with expectations of C$1.52.
Royal Bank shares slipped 0.3% to C$107.72 in morning trading on the Toronto Stock Exchange, while National Bank's stock dropped 1.1% to C$72.67. The TSE's stock benchmark fell 0.1%.
($1 = 1.2953 Canadian dollars)
(Reporting by Nichola Saminather, Editing by Louise Heavens, Bernadette Baum and Paul Simao)