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TORONTO (Reuters) - Royal Bank of Canada said on Friday its quarterly profit rose 10 percent as strong domestic banking offset losses at its big U.S. operations.
Even so, shares of Canada's largest bank fell in early trade after analysts said its performance failed to measure up to stronger-than-expected results posted by other big banks.
RBC's core cash earnings come in at just over C$1.06 a share, matching the average analysts' estimate compiled by Thomson Reuters I/B/E/S.
The headwinds were just as expected: RBC set aside more money to cover bad loans as consumers and businesses struggled to repay debts amid the recession, especially in the United States, and trading revenues cooled from the red-hot pace of previous quarters.
Once again, RBC's strong domestic retail banking operation, with branches in nearly every city and town in Canada, muscled past the obstacles, pushing net income up 6 percent from a year earlier.
"The domestic bank performance was impressive. When you look at volume growth, margin expansion across the board, it really signifies the strength of the domestic operation for RBC. The flip side is the U.S. unit continues to be very weak," Edward Jones analyst Craig Fehr said.
While provisions for loan losses in Canada rose from a year earlier, they declined from the third quarter as the bank set aside less money to cover bad business loans. The quarter-to-quarter drop in loan losses suggests credit woes are beginning to ebb, at least in Canada.
The overall amount of money set aside by RBC to cover bad loans rose to C$883 million from C$619 million, mostly due to credit woes in the company's big U.S. retail banking group, which is concentrated in the recession-hit U.S. Southeast.
International banking had a net loss of C$125 million, extending a string of weak results this year, and Chief Executive Gord Nixon said the bank was working hard to improve the U.S. business -- viewed by some as RBC's albatross.
Fehr said RBC needs to spend some more money and boost management of U.S. operations if it was serious about turning the corner south of the border.
"It's going to need to be a key area of focus for management going forward, both from a capital perspective as well as an efficiency management perspective. I think this is going to be a key segment for them if they want to be a long-term outperformer," Fehr said.
Still, the U.S. operations are not the only concern to analysts. After huge trading gains through much of 2009, RBC's big capital markets operations saw income fall C$23 million to C$561 million, in part because the 2008 results included gains from Enron-related litigation.
Trading results were once again stronger from a year earlier, but were down 20 percent from the third quarter -- a trend that is expected to continue as financial markets stabilize.
So far, RBC's domestic banking and strong wealth management business has picked up the slack as trading revenues ebb, but observers are divided over whether the price of RBC's shares are looking overvalued.
The stock fell 1.1 percent at C$56.87 shortly after opening on the Toronto Stock Exchange. Shares had hit a 52-week high in late November, setting the stage for some profit taking if results were less than stellar.
"While it is very difficult to argue with the strength of its domestic franchises, our issue with Royal remains its absolute valuation levels," Barclays Capital analyst John Aiken said in a note to clients.
"On a relative basis, although Royal's earnings were quite strong, particularly in context with the current economy, we note they lack the 'standout' quality that some of its peers reported this quarter."
Fehr disagreed: "The fundamental outlook is quite strong for RBC. They're performing pretty well. They've got a few areas of weakness but in my mind the valuation premium they typically get is warranted," Fehr said.
By the numbers, RBC's net income increased to C$1.24 billion, or 82 Canadian cents a share, in the fourth quarter ended October 31 from C$1.12 billion, or 81 Canadian cents, a year earlier.
Core cash income, which excludes securities-related losses, restructuring charges and amortization of intangibles, was C$1.6 billion, or C$1.06 per share.
The bank also ended the year with huge capital levels. Its Tier I ratio rose to 13.0 percent, among the highest in global banking. While the pile of cash cuts into potential earnings, it puts RBC in a good position to make acquisitions as weaker international rivals recover from the financial crisis.
"I would say in terms of opportunities there's probably never been more incoming calls than there are today," Nixon told analysts on a conference call.
He said the bank wanted to preserve fortress capital levels as they wait for global regulators to decide at minimum requirements in the future, but he expected to make acquisitions.
Reporting by Andrea Hopkins; Editing by Lisa Von Ahn