TORONTO (Reuters) - Royal Bank of Canada and Toronto-Dominion Bank both handily beat profit expectations on Thursday, sending their shares sharply higher, as a strong economy supported loan growth and investment banking profit.
The first-quarter results from Canada's two biggest banks followed impressive results from other Canadian lenders over the past two weeks, and confounded predictions that consumer lending was drying up.
"We're seeing underlying earnings growth which is a lot stronger than what I believe the market had been anticipating," said John Aiken, an analyst at Barclays Capital in Toronto.
TD also raised its quarterly dividend by 8.2 percent, the first of the country's big five banks to do so since the financial crisis.
Canada's banks weathered the crisis relatively well, due to conservative lending practices. Unlike many U.S. and European banks, no Canadian lenders required a government bailout.
Their results reflect a surge in economic growth in the fourth quarter of last year that, along with still-low interest rates, has spurred Canadians to keep borrowing.
"We're still seeing good (loan) growth, not at the double-digit level that we saw in 2010, but certainly still quite strong," Colleen Johnston, TD's chief financial officer, told Reuters.
But she said the bank had begun to see a slowdown in mortgage lending during the quarter to December 31, the first quarter of the banks' fiscal year.
RBC shares ended the session up 5.2 percent at C$59.92, while TD rose 3.9 percent to an all time high of C$83.60.
Smaller Canadian Western Bank climbed 1.3 percent to C$30.89 after it reported a stronger-than-expected 10 percent rise in first-quarter profit late on Wednesday.
The banks' core Canadian personal and commercial banking operations underpinned profit growth, and their U.S. divisions also showed unexpectedly strong results, particularly at RBC.
"I think for Royal perhaps the most encouraging thing was the turnaround in the U.S. operations," said Gavin Graham, president of Graham Investment Strategy.
RBC Bank (USA), Royal's U.S. consumer bank, has been a drag on earnings since it entered the space about a decade ago.
Bank officials last year said RBC's international division -- which had reported losses for ten straight quarters courtesy of the U.S. bank -- would return to quarterly profit at some point this year. But RBC Chief Executive Gordon Nixon said it happened faster than expected.
"We think that trend over the year is going to continue," he told reporters after the bank's annual meeting in Toronto.
Provisions for bad loans, which have steadily declined since the financial crisis, shrank further during the quarter, padding the bottom line of both lenders.
Adjusted profit at RBC, Canada's biggest bank, was C$1.26 a share, easily topping the C$1.01 a share expected by analysts polled by Thomson Reuters I/B/E/S.
On a net basis, RBC earned a record C$1.84 billion ($1.90 billion), or C$1.24 a share, up from C$1.50 billion, or C$1.00 a share, a year earlier.
Canadian personal and commercial banking income at RBC rose 14 percent to C$882 million, investment banking profit climbed 7 percent to C$613 million, and international banking -- which includes the U.S. retail bank -- turned a profit of C$24 million, compared with a loss of C$57 million last year.
TD, Canada's No. 2 bank, earned C$1.54 billion, or C$1.69 a share, up from C$1.30 billion, or C$1.44 a share.
Excluding items, TD earned C$1.74 a share, well ahead of analysts' expectations of a profit of C$1.55 a share.
TD raised its quarterly dividend to 66 Canadian cents a share from 61 Canadian cents.
"For one of the big five (banks) to do it is obviously a very important marker, because in essence now the clock is ticking on the other ones to raise it," said Graham.
Bank of Nova Scotia, which reports results next week, is seen as a longshot to raise its payout this quarter, while RBC and Canadian Imperial Bank of Commerce are expected to follow suit later this year.
Reporting by Cameron French; editing by Rob Wilson and Janet Guttsman