Wide-moat Royal Bank of Canada (RY) reported OK fiscal third-quarter results, and our long-term thesis on the firm is unchanged. Earnings growth slowed, with revenue up only 5%, while expenses were well controlled, up only 2%. This led to adjusted earnings per share growth of 6% for the quarter, roughly on par with last quarter.
Management emphasized that it is cognizant of the potential revenue headwinds coming from slowing economic growth and lower interest rates, and that a key lever to offset this will be expense management. Management reaffirmed its target for slower expense growth in the second half of the year compared with roughly 7% in the first half. Management did not reference its previous 7% EPS growth goal for the year, but it should be giving a more detailed update during fourth-quarter results. With adjusted EPS up roughly 6% year to date and building rate cut pressure, it might come in just below 7%.
Given mounting interest-rate pressures, particularly in the U.S., growth issues in the investor and treasury services segment, and the possibility of slowing economic growth in general, the headwinds seem to be building more than they were a year ago. However, RBC still turned in a decent quarter of operating performance, as return on equity came in at 16.7%, and it remains well positioned competitively, taking share in key areas and managing expenses. Aside from a changing macro outlook, the underlying business appears healthy. We are maintaining our fair value estimate of $110 for the Canadian shares.
Provisioning for credit losses was roughly steady compared with second-quarter results, with the PCL ratio dropping to25 basis points. Gross impaired loans dropped to 0.47% of total loans. Delinquencies in the Canadian portfolio were roughly steady for consumer-related lending, including mortgages, while delinquencies are still higher year over year in the commercial portfolio. The pressure in wholesale has occurred in several areas, although much of it is in the oil and gas portfolio. Net income growth was strongest in personal and commercial banking and wealth management, while investor and treasury services and capital markets continued to struggle. Capital markets had made a bit of a comeback in the second quarter, but with the industry wide fee pool down and leveraged lending volume drying up, fee revenue came under pressure in the third quarter.
Citing the current pipeline, management believes there is a chance this segment can return to growth in the fourth quarter. Some of the headwinds for investor and treasury services are rate related, but there has also been some fee pressure in the investor services part of the business. Combined with the rate outlook, this segment could continue to see revenue headwinds. Otherwise, P&C banking was strong, with deposit balances up 10% and revenue growth of 7% more than offsetting 5% expense growth. Wealth management also continued to gain share, with positive net sales and 8% growth in assets under management.
