(Adds executive comments, updates share price)
By Lynne Olver
TORONTO Aug 24 Strong results in domestic banking, capital markets and wealth management, and lower taxes, propelled Royal Bank of Canada (RY.TO) to a 19 percent increase in third-quarter profit, the country's largest bank said on Friday.
Royal Bank also raised its dividend by 9 percent, to 50 Canadian cents a share, and executives gave assurances on a conference call that the bank had little involvement in troubled segments of the U.S. and Canadian debt markets.
But in a repeat of last quarter, Royal's decent financial results paled in comparison to the numbers put out by its smaller rival, Toronto-Dominion Bank (TD.TO), and its stock slipped.
Royal Bank shares were down 0.6 percent at C$55.08 late Friday afternoon, while most bank stocks on the Toronto Stock Exchange were higher.
"They weren't quite as strong as the TD results," said Tom Kersting, an analyst at retail brokerage Edward Jones.
Although Royal is a good performer, "we just think the shares are fully valued and reflect a lot of the positive prospects," Kersting added.
Amid global volatility in credit markets, Royal Bank said it does not originate U.S. subprime mortgage loans, and has "minimal exposure" of about C$1.1 billion to U.S. subprime residential mortgage-backed securities and collateralized debt obligations, which is less than 0.2 percent of the bank's total assets. All of the securities are investment grade.
"We don't hold any subprime residential mortgage backed securities that have been downgraded, or are on negative watch," said the bank's chief risk officer, Morten Friis, on a conference call.
Royal described its underwriting commitments to leveraged buyouts, and its exposure to hedge funds, as minimal. No single LBO commitment exceeds C$250 million, Friis said.
The bank also said it has "nominal exposure" to Canada's nonbank-sponsored asset backed commercial paper (ABCP) market, which seized up last week when many nonbank ABCP issuers failed to refinance maturing notes.
Concerns that started with the U.S. subprime mortgage meltdown spilled over to unrelated high-quality debt markets, Royal Bank President and Chief Executive Gord Nixon said on the call.
"We have enjoyed robust capital markets conditions for an extended period of time and now credit markets are experiencing a correction," he said.
But the bank's businesses are diversified, and Canadian economic indicators are strong, Nixon noted.
"Our outlook remains positive," he said.
In the three months ended July 31, Royal earned C$1.395 billion ($1.33 billion), or C$1.06 a share. That compared with profit of C$1.18 billion, or 90 Canadian cents a share, a year earlier.
On a cash basis, which excludes the amortization of intangibles, the bank earned C$1.08 a share.
The mean analyst estimate was for profit of C$1.03 a share, excluding items, according to Reuters Estimates.
"Canadian banks are boring, and boring is really good at this stage of the credit cycle," said Gavin Graham, chief investment officer at Guardian Group of Funds.
"The Canadian economy continues to do really well, so if you happen to be the biggest retail bank in Canada, thank you RBC, or the second-biggest, hello TD, then you will do pretty well," Graham said.
Royal said its return on equity was 24.4 percent in the latest quarter, up from 23.1 percent a year ago.
In the Canadian banking segment, which includes global insurance, net income climbed 6 percent to C$699 million. Its global insurance profit rose, despite a decline in revenue, due to favorable disability claims experience.
Capital markets profit was up 19 percent at C$360 million, thanks to higher underwriting and advisory revenue, better foreign exchange and equity trading results, and gains on credit derivative contracts. But fixed income trading results fell, as credit spreads widened and market activity dwindled, Royal said.
Its wealth management unit saw quarterly profit increase 30 percent to C$177 million.