* Scotiabank shares fall on uncertainty, despte strong profit
* Capital markets profit weighs, wealth management strong
* European exposure, slower loan growth spark investor jitters (Adds background, updates share prices)
By Cameron French
TORONTO (Reuters) - Royal Bank of Canada’s shares jumped nearly 4 percent on on Friday on stronger-than-expected quarterly earnings, while Bank of Nova Scotia’s stock fell although its profit also topped analysts’ estimates.
Strong loan growth and insurance profits drove RBC to a fourth-quarter profit of C$1.6 billion ($1.58 billion), up 43 percent from a year earlier, despite a drop in capital markets-related income.
“A great quarter for Royal, much better than we thought,” said Peter Routledge, an analyst at National Bank Financial.
Scotiabank earned C$1.24 billion, up 10.7 percent on the year, due largely to its acquisition of DundeeWealth, which boosted its wealth management returns.
But the mixed market reaction - Scotiabank shares fell 2.5 percent on Friday - underscores investor nervousness about slowing loan growth and potential shock waves from the European debt crisis.
“If Europe resolves itself in a nondysfunctional nondisruptive way. Canadian banks are going to run up because the risk premiums inherent in their valuations are very high,” Routledge said.
“The flip side is if the euro (zone) breaks up, look out.”
Along with Europe, narrow interest rate margins and high consumer indebtedness have spurred bank officials to warn that they will face a tough task next year to wring profits from their biggest sellers: mortgages and other personal loans.
Scotiabank said it expected earnings per share growth of 5-10 percent for 2012, below the 7-12 percent target range the bank had set for 2011.
RBC’s shares, which have underformed their peers this year due to concerns about the bank’s high weighting of capital markets revenue and European exposure, jumped 3.7 percent to C$48.77, and during the session touched their highest level in more than a month.
Scotiabank’s stock eased 2.5 percent to C$48.99.
Shares of Toronto-Dominion Bank and Canadian Imperial Bank of Commerce sold off on Thursday even though they reported stronger-than-expected results.
Royal, Canada’s largest bank, earned C$1.6 billion, or C$1.07 a share, up from C$1.12 billion, or 74 Canadian cents a share, in the year-before quarter.
Excluding items, EPS was C$1.11, topping analysts’ expectations of 98 Canadian cents.
Income at RBC’s Canadian banking unit rose 18 percent to C$904 million as loan volumes grew, while the bank’s net interest margin remained relatively stable year-over-year, in contrast to narrower margins at its rivals.
“They look like big numbers and it seems to be fairly broad-based ... Insurance revenues were strong, the tax rate was a little lower than we were looking for,” said Robert Sedran, an analyst at CIBC World Markets.
Capital markets income, which was a strong point for TD and CIBC, declined 25 percent to C$278 million at RBC due to weak bond trading results, the bank said.
Chief Executive Gordon Nixon said the bank was scaling back its European fixed-income trading operation due to the unit’s falling profits.
However, he said the bank had no plans to significantly pull back from Europe, where it was been expanding its capital markets and wealth management business over the past year.
“When there is more clarity around European sovereign debt issues and the state of the global economy, we believe improved market conditions will result in a more stable trading environment,” he said on a conference call.
Indeed, he said the bank would consider making acquisitions in the wealth management space and said RBC has had “ongoing discussions” with Franco-Belgian lender Dexia. Nixon has said in the past that RBC is considering buying out Dexia’s share of the RBC Dexia asset-manager and financial-custodian joint venture.
RBC has C$37 billion in “gross drawn” exposure to Europe - exposure calculated on a similar basis to that of U.S. banks - 60 percent of which is in the United Kingdom and very little in countries such as Italy, Spain and Ireland, the bank said.
“(RBC’s exposure) is really immaterial given their balance sheet, and I don’t think anyone thinks the UK is about to default on their bonds,” said David Baskin, portfolio manager and president of Baskin Financial Services.
Scotiabank said it had a total of C$2.2 billion in exposure to Greece, Ireland, Italy, Portugal and Spain, and C$15.2 billion exposure to other countries, largely the U.K. and Germany.
Canada’s No. 3 lender earned C$1.24 billion, or C$1.07 a share, in the quarter, up from C$1.12 billion, or C$1.00 a share, a year earlier.
Excluding items, the bank earned C$1.10 a share, just ahead of analysts’ expectations for a profit of C$1.08.
Profit was driven by a 33 percent rise in global wealth management income following its purchase of Canada’s DundeeWealth earlier this year.
Scotiabank paid C$2.3 billion for the 82 percent of DundeeWealth that it did not already own, making the bank Canada’s No. 5 wealth manager.
$1=$1.02 Canadian Reporting By Cameron French; editing by Rob Wilson and Peter Galloway