December 3, 2010 / 4:47 PM / in 7 years

WRAPUP 2-RBC misses estimates, Scotiabank stronger

* RBC profit slides, stock falls 4.4 pct

* Drops reference to U.S. growth from plans

* Scotiabank slightly top estimates, shares up 3 pct (Updates with details from Scotiabank call)

By Cameron French

TORONTO, Dec 3 (Reuters) - Royal Bank of Canada (RY.TO) posted an unexpected drop in quarterly profit on Friday, sending its stock down 4 percent, and indicated it was no longer planning to build a leading U.S. retail bank unit around its money-losing North Carolina-based operation.

Rival Bank of Nova Scotia (BNS.TO), in contrast, posted better than expected results, sending its shares up 3 percent.

Profit at Royal, Canada’s largest bank, was stung by a drop in trading income, higher costs and a weak performance at its U.S. retail bank, which posted a quarterly loss for the 10th straight quarter due to foreclosures and higher staff costs.

“Overall, we are certainly disappointed with the results of our international banking segment,” Chief Executive Gord Nixon said on a conference call.

The U.S. operation, RBC Bank, has been a continual weak spot for Royal , which unveiled a new set of strategic objectives on Friday that noticeably omitted a previous goal of building a leading U.S. retail franchise.

The bank’s growth focus is now centered on international capital markets and wealth management, Nixon said. RBC agreed in October to buy British fund manager BlueBay Asset Management BBAY.L for about US$1.5 billion.

Nixon said RBC would decide what to do with the U.S. retail bank when it its performance improves.

However, speculation that it may pull out of the region has picked up since the RBC said in October it was selling its North Carolina-based Liberty Life insurance unit.

“It’s really ‘go big or go home’,” said Gavin Graham, president of Graham Investment Strategy.

Officials on the call said Royal’s international segment, which also includes its Caribbean operations and its RBC Dexia unit, should return to quarterly profit in 2011.

TRADING LOWER, COSTS HIGHER

RBC also said trading income fell due to narrow bond yield spreads and a drop in market activity from last year, while higher pension and marketing costs boosted expenses.

The result follows largely disappointing results from other Canadian banks this quarter, but it also comes as Canada’s banking sector has drawn praise for exiting the financial crisis with strong capital and profit levels.

“Expectations have grown quite high, and disappointments like this tend to be exacerbated in the stock price,” said Craig Fehr, an analyst at Edward Jones.

Net earnings, which included a C$116 million ($116 million) accounting loss on the sale of Liberty Life, were C$1.1 billion, or 74 Canadian cents a share, down from C$1.2 billion, or 82 Canadian cents a share in the year-ago quarter.

Core earnings of 84 Canadian cents a share fell short of analysts’ estimates of a profit of C$1.00 a share.

Royal’s shares closed down C$2.47 at C$53.25.

SCOTIABANK IN LINE

Scotiabank, Canada’s No. 3 lender, posted earnings of C$1.02 a share, narrowly beating estimates of C$1.00.

Profit was boosted by domestic and international retail banking income, partially offset by weaker trading revenue.

However, the trading had a muted impact on Scotiabank, whose focus is on expanding retail operations in Latin America and Asia, as well on as its wealth management arm.

Speaking on a conference call, Scotiabank Chief Executive Rick Waugh said the bank would raise its dividend payout ratio to a range of 40-50 percent going forward, from its previous target range of 35-45 percent.

“It provides us with greater flexibility to increase our dividend while still reinvesting for growth,” said Waugh, adding the bank’s current payout ratio is around 50 percent.

National Bank of Canada (NA.TO) raised its quarterly payout earlier this week and other Canadian banks are seen raising their payouts next year.

Last month Scotiabank agreed to buy the 82 percent of DundeeWealth (DW.TO) it does not own for C$2.3 billion.

Its shares rose C$1.66 to C$55.63 on Friday in Toronto.

For a FACTBOX on Canadian bank earnings, see [ID:nN03114480]

$1=$1.00 Canadian Reporting by Cameron French; editing by Rob Wilson

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