Final Blog: RBC posts first loss since 1993 on writedowns

http://www.canada.com/business/fp/posts+first+loss+since+1993+writedowns/1642688/story.html

Summary
Until the days that the recession comes to an end, the outlook for banks is not very brigth. But the chief executive of Royal Bank of Canada, Gord Nixon, is hopeful in thinking of the future with the fatter margins, higher interest rates and less competition with other banks. “You’re going to have a repriced balance sheet and a much better pricing of credit. You’ll see margin expansion… the pricing of assets has become more attractive,” the chief executive predicts. On Friday, RBC posted their first lost since 1993. As Canada’s largest bank, they had a net loss of $50-million compared to last year’s profit of $928-million. RBC has been expanding over the past few years into the United States, which has proved to be a bad decision with US’s economy worsening quicker than Canada’s. RBC’s operations in the US are mostly in the southeast where the housing market meltdown is definitely at its worst. Analyst, Jim Bantis, notes that the bank’s impaired loans are increasing as with loan loss.

Connection
Banks operate just like a business; they provide services to consumers. Just like a business, they would like to make a profit. As we learned in our Accounting class and in Chapter 14 of our textbook, banks are vital in our economy. They provide the safekeeping of each individual as well as each business’ money. Without their doing so, money could not be stored in a safe location, and this would result in businesses and individuals worrying about their cash. But the safekeeping of money is just a small part of what banks offer. RBC, just like any other bank, lends money out to businesses and individuals as well as issuing their bank credit card. The main reason why the RBC had a net loss this year is because they weren’t able to retrieve the money that they lent out due to the economic recession. With businesses doing poorly, they are not as likely able to make enough revenue to pay off their loans from RBC. When a lot of businesses do poorly and RBC isn’t able to collect the loans, they, themselves, get into hot water, resulting in their net loss of $50-million. The article that I based my blog on is written based on a financial statement, which we learned how to analyze in Chapter 15. I would assume that the writer collected their data from a comparative financial statement, where RBC’s figures from last year were put side by side with this year’s.

Reflection
Knowing that even one of Canada’s biggest banks aren’t doing so well during the times of recession really has me worried. Comparing this year with last year, there is definitely a huge difference. I’m wondering. What happens to the loans that RBC, or any other bank, lends out to businesses that go bankrupt? Are they the reason that the bank went into net loss? All those loans not being able to be collected. Just how many businesses had to go into bankrupt in order for RBC to have a net loss of $50-million? With that many businesses going bankrupt during the recession that would mean more jobs being lost. When unemployment rates soar, this adds burden to the government. Workers have a deduction on their pay stub, which is called unemployment insurance, where they have to pay a certain amount to the government, as we learned in Chapter 16. Although both the employee and the employer contributes to the unemployment insurance fund, the government is the one that is ultimately issuing money to those unemployed. So this ripple effect of businesses closing down, not only affects banks, but also the workers and the government.