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TORONTO (Reuters) - Quarterly profit at Royal Bank of Canada fell more than expected due to weak trading income, while a similar drop in profit at smaller rival National Bank of Canada was not as severe as analysts had feared.
Shares of Royal, Canada's biggest bank, slumped 3.4 percent after markets opened, while National jumped 4.2 percent.
Canada's banks as a group are suffering from year-on-year comparisons to the third quarter of 2009, when recovering markets led to strong trading activity.
This quarter, the combination of the European debt crisis and a retrenching of equity prices has sapped activity from the market, leading to a drop in trading revenue that has exceeded what had already been dour predictions.
Bank of Montreal prompted a sell-off among Canada's big six banks earlier this week when it reported a surprisingly drop in trading profits, but Royal's results still managed to startle investors and analysts.
"After BMO reported, there were built-in expectations that revenue could potentially fall off a cliff. That being said, we were disappointed and little bit surprised by the amount of decline that Royal reported this quarter," said Barclays Capital analyst John Aiken.
RBC's net income fell 18 percent to C$1.28 billion ($1.2 billion) from C$1.56 billion, on a C$361 million drop in capital markets income.
"Trading revenue was certainly affected by industry-wide declines in client activity and lower trading margins, particularly throughout Europe," RBC Chief Executive Gord Nixon said on a conference call with analysts and media.
On an adjusted per-share basis, Royal's profit of 87 Canadian cents missed Bay Street forecasts of C$1.02.
Craig Fehr, an analyst at Edward Jones, said Royal's results were disappointing, but not particularly surprising.
"We're getting a little more of a carry-over from what we saw from the big U.S. banks when they reported their second-quarter results, in terms of some very weak trading results," Fehr said.
"The Canadian banks are showing that they're just as susceptible to those business lines."
The trading shortfall overshadowed a 44 percent drop in loan-loss provisions at Royal as improving credit quality allowed the bank to reduce the cash held to cover bad loans.
Shares of Royal fell C$1.74 to C$48.95 on the Toronto Stock Exchange, helping drag the TSX financial sector down 0.42 percent.
National, in contrast, surged C$2.35 to C$58.00, the strongest stock in the financials group.
The bank, Canada's sixth-largest, said net income dropped 10.6 percent to C$271 million from C$303 million.
Adjusted per-share earnings were C$1.57, slightly beating the C$1.52 estimates of analysts.
Profit from the bank's financial markets division fell 42 percent to C$98 million due to lackluster markets, while branch-banking income rose 32 percent to C$162 million.
Analysts said the earnings beat was due mainly to the strength of the retail bank.
Indeed, Barclay's Aiken said revenue growth among the banks that have reported so far has been fairly strong.
"Lending volume growth is a positive. The fact that the Bank of Canada has been raising interest rates should give them some margin relief and ... outside of capital markets, the core fee-based revenues are actually holding up quite well," Aiken said."
National's Tier 1 capital -- a key measure of stability -- was 13.0 percent, while Royal's was 12.9 pct, both well above international norms.
The banks have been stockpiling capital as they wait for the Basel committee on bank reform to unveil new international capital and liquidity rules this fall.
National Bank Chief Executive Louis Vachon said on a conference call Thursday he expects the new global rules will shave 250 basis points off his bank's Tier 1 capital ratio, suggesting the requirements might allow National to raise its dividend in the near future.
Reporting by Cameron French; editing by Rob Wilson