* RBC Q1 cash EPS C$1.03 versus expectations C$1.04
* Laurentian Bank Q1 EPS C$1.21 vs expectations C$1.09
* RBC shares fall, Laurentian shares climb (Adds analyst's and CEO's comments on capital preservation)
By Andrea Hopkins
TORONTO, March 3 (Reuters) - Profit at Canada's biggest bank, Royal Bank of Canada (RY.TO), rose 35 percent in its first quarter as loan losses ebbed, but the results were weaker than those of its peers and its shares dropped on Wednesday.
RBC profits rose across most segments except perennially weak U.S. banking. But results at the other Canadian banks that have reported so far have surpassed expectations and RBC's profit looked less robust in comparison.
"Royal generated a significant decline in provisions for credit losses in the quarter. However, unlike other banks reporting this quarter, revenue and expense growth both missed expectations, offsetting the benefit," Barclays Capital analyst John Aiken said in a note to clients.
Stronger than expected results by Bank of Montreal (BMO.TO), Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NA.TO) in recent days boosted banking stocks toward or above 52-week highs, setting the stage for a selloff if RBC didn't similarly impress.
RBC shares were down 2.4 percent at C$56.87 in afternoon trade on the Toronto Stock Exchange. That was still close to the 52-week high of C$58.66 reached in November and more than double the C$28.56 low at this time last year.
Separately, regional bank Laurentian Bank of Canada (LB.TO) said profit rose 28 percent in its first quarter, outstripping analysts' expectations, as mortgage loans and revenue grew, pushing its shares 3.1 percent higher to C$41.63.
The Quebec-based bank said net income rose to C$32 million, or C$1.21 a share, in the quarter ended Jan. 31, beating expectations for a C$1.09 profit per share.
RBC said net income increased to C$1.5 billion for the quarter ended Jan. 31 from C$1.1 billion a year earlier.
Cash earnings per share, which include the amortization of intangibles such as acquisitions, were C$1.03, just below average analysts' expectations of C$1.04 per share.
"A number of factors worked against the bank in this quarter, including higher taxes, lower consolidated spreads, accounting changes, currency, and gains and losses on hedges ... to name a few," BMO Capital Markets analyst John Reucassel said in a research note.
"While some of these factors are temporary, the results are likely to disappoint investors after relatively strong earnings from some of its peers."
Still, RBC said provisions for loan losses fell to C$493 million, down from both a year earlier and the fourth quarter, suggesting the worst of the recession-linked credit woes may be behind the bank.
Consumers and businesses have struggled to repay debts during the recession, taking a bite out of bank profits in recent quarters.
RBC's domestic banking business was strong, with income up 12 percent, but international banking remained a weak spot. The segment lost C$57 million in the quarter -- an improvement from losses a year earlier and in the fourth quarter.
RBC's U.S. banking operations are concentrated in the U.S. Southeast, which has been hard hit by the recession and the housing downturn. The bank said provisions for loan losses have eased there, however, and it is working to cut costs.
Capital markets income was up again for RBC, a big player in investment banking and trading. Net income rose to C$571 million, but analysts said the level is unlikely to be sustained as trading returns to more normal levels.
RBC continued to boast strong capital levels, with Tier 1 capital of 12.7 percent, down slightly from 13.0 percent in the fourth quarter. That's in line with the levels at other Canadian banks and higher than most global peers.
The pile of cash puts the bank in a strong position to make acquisitions or invest in internal growth, and Chief Executive Gord Nixon said he expects to be able to consider giving some if it back to shareholders through buybacks or dividend increases -- but not before there is more regulatory certainty.
Global regulators have proposed imposing higher minimum capital standards for banks to prevent the crisis that hit the sector in 2008, when many international banks were forced to accept government bailouts or declare bankruptcy.
"I think as clarity comes around the rules in the latter half of this year, it should be a different environment and I think we'll be in a much better position to review share buybacks and dividend increases at that point in time," Nixon told analysts on a conference call.
He told reporters later that the bank had not been instructed by the Office of the Superintendent of Financial Institutions to avoid acquisitions that would deplete capital levels, but acknowledged the regulator did encourage it to preserve prudent levels of capital. ($1=$1.03 Canadian) (Reporting by Andrea Hopkins; Editing by Peter Galloway)