* Stronger capital markets income and loan volume drives results
* Profit tops estimates
* Dividend increased by 5 percent
TORONTO, Feb 28 Royal Bank of Canada reported a stronger-than-expected 12 percent rise in quarterly profit on Thursday on the back of stronger loan growth and capital markets income, prompting the bank to raise its dividend by 5 percent.
The bank, Canada's largest, earned C$2.07 billion ($2.05 billion), or C$1.36 a share, in the first quarter ended Jan 31. That compares with a year-earlier profit of C$1.86 billion, or C$1.22 a share.
Excluding special items, the bank earned C$1.38 a share, beating analysts' expectations of C$1.31, according to Thomson Reuters I/B/E/S.
The profit gain was driven by a 25 percent rise in capital markets income, which benefited from higher U.S. lending and loan syndication as well as merger and acquisition activity. The division, which RBC has been expanding in the United States and Europe in recent years, earned C$464 million.
Retail banking income rose 11 percent to C$1.12 billion, with loan volume growth offsetting narrower lending spreads as interest rates remained at historical lows.
Canada's banks have been bracing for a sharp slowdown in retail banking growth due to a cooling housing market, more frugal borrowing trends among consumers, and low interest rates.
RBC's wealth management income increased 24 percent to C$233 million, helped by rallying markets in late 2012 and early 2013.
The bank raised its dividend by 3 Canadian cents to 63 Canadian cents a share.