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(Adds comment from CFO, updates shares)
By John Tilak
TORONTO, May 28 (Reuters) - Royal Bank of Canada, the country's top lender, posted a stronger-than-expected quarterly profit on Thursday, helped by growth in its domestic banking and capital markets divisions.
Net income in Royal's Canadian banking segment climbed 7 percent in the company's second quarter, supported by healthy fee-based revenue growth.
The capital markets division recorded a 23 percent earnings increase.
The shares of Canadian banks have struggled in recent months because of investor concerns that the banks might face the brunt of the oil price slump, a sluggish domestic economy and a potential housing market correction.
Shares of RBC, Canada's most valuable company, closed at C$80.05, up 0.1 percent.
Chief Financial Officer Janice Fukakusa said in an interview that while the bank had solid operating results, it was keeping a close watch on credit quality in Western Canada, where the economy has been hit by the sharp drop in oil prices.
"We haven't seen any credit weakness at all. We are of course vigilant and stress-test the results extensively," Fukakusa said. "We've had no defaults, no nonpayments of interest and no current covenant breaches."
RBC has been expanding its U.S. wealth management business and launched a $5.4 billion bid in January for Los Angeles-based City National Corp. City National said on Wednesday its shareholders have approved the deal, which is expected to close in the fourth quarter.
"Looking ahead, it feels like the macro landscape is less volatile than it was a few months ago," Chief Executive David McKay said on a conference call with analysts. "However, as the outlook for the global economy remains uncertain, we are continuing to actively monitor industry headwinds."
"To date, we've not seen significant deterioration in our wholesale and retail loan portfolios from the sustained low oil prices," he added.
The company said net income for its second quarter, ended April 30, was C$2.5 billion ($2.02 billion), or C$1.68 a share, compared with C$2.2 billion, or C$1.47 a share, a year earlier. Excluding some special items, cash earnings were C$1.63 a share.
Analysts, on average, had expected earnings of C$1.60 a share, according to Thomson Reuters I/B/E/S.
It's likely the Canadian bank industry's domestic banking performance, loan growth and interest spreads will improve in the second half of the year, said Erik Oja, equity analyst at S&P Capital IQ, but he added that the recent extra-strong capital markets performance may not be sustainable.
$1=$1.24 Canadian Editing by Pravin Char, W Simon and Peter Galloway