February 24, 2016 / 12:30 PM / a year ago

CORRECTED-UPDATE 3-RBC 1st-qtr profit misses estimates as bad energy loans soar

(Corrects headline to say first quarter, not fourth)

By John Tilak

TORONTO, Feb 24 (Reuters) - Royal Bank of Canada reported a weaker-than-expected profit on Wednesday as crashing oil prices spurred the lender to set aside more money to cover potential bad loans, and the company's stock price tumbled about 3 percent.

Canada's second-largest bank by assets, also hurt by weakness in its insurance and capital markets units, said both bad loans and provisions for credit losses in the energy sector jumped in the first quarter ended Jan. 31.

Gross impaired loans in the oil and gas industry almost doubled from the fourth quarter to C$310 million ($224.04 million). Those loans were just C$5 million in the year-earlier period.

Provisions for credit losses, the amount set aside to cover bad loans, tied to the energy sector reached C$106 million versus none a year earlier.

"We are starting to see the credit deterioration that the market has been anticipating for some time," said Barclays analyst John Aiken, who said it was the first time since early 2013 that RBC missed profit estimates.

"It looks like they're putting more safety into the numbers than their peers may be doing."

Chief Financial Officer Janice Fukakusa said in an interview the increase in provisions was mainly due to weakness in five clients, including four in the energy sector. Three were exploration and production companies and the other was a drilling firm.

RBC does not expect to be repaid the full amount on those loans, she said.

The lender is engaged closely with its energy clients but has not become more stringent in recent months, Fukakusa added.

The energy sector accounts for 1.6 percent of RBC's loan book, and Alberta forms a significant portion of its total loan portfolio.

RBC added nine new clients to its energy watch list after running a stress test using a $30 oil price, said Chief Risk Officer Mark Hughes, who expects further deterioration in its retail loan portfolio in oil-exposed regions.

"We did see delinquencies move up this quarter from historical lows in our residential mortgage portfolio in Alberta," Hughes said on a conference call with analysts.

First-quarter net income dipped to C$2.45 billion, or C$1.58 per share. Excluding special items, earnings were C$1.64 per share. Analysts, on average, expected C$1.67, according to Thomson Reuters I/B/E/S.

The stock fell as much as 6 percent to C$65.55 before easing to C$67.75, even though RBC raised its dividend 3 percent.

$1 = 1.3837 Canadian dollars Editing by Jason Neely, Lisa Von Ahn, Jeffrey Benkoe and David Gregorio

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