* Q3 adj EPS C$1.06 vs est C$1.08
* C$1.57 bln charge on sale of U.S. retail bank
* Trading revenue to remain weak
* Stock down 3.3 percent, touches year low (Adds analyst comment, updates shares)
By Cameron French
TORONTO, Aug 26 (Reuters) - Royal Bank of Canada's (RY.TO) stock sagged more than 3 percent on Friday, as the bank reported a disappointing quarterly profit and said weak market conditions would likely continue to weigh on its markets-related revenue.
Speaking on a conference call, executives said weak markets meant wealth management returns could suffer and the bank could be hard pressed to meet trading revenue expectations of C$700 million to C$900 million a quarter going forward.
"Banks around the world are facing ... significant headwinds, such as a slowdown in consumer lending, and the added difficulty of operating in a prolonged low interest rate environment," said Gord Nixon, the bank's chief executive, who mentioned the forecast in May.
"If trading revenues continue to be as volatile and illiquid as they are right now, it's going to be very difficult to meet those objectives."
Trading revenue during the quarter was C$356 million, helping account for quarterly results that disappointed both analysts and investors.
"The fundamental operating performance was weak; their capital markets segment was weaker than expected," said Peter Routledge, an analyst at National Bank Financial.
The shares hit a one-year low on Friday morning, before recovering slightly. Just after midday, RBC was down 3.3 percent at C$49.09 in Toronto.
Strong results from Bank of Montreal (BMO.TO) on Tuesday had raised hopes for a strong quarter from the sector, but National Bank of Canada (NA.TO) [ID:nN1E77O06N] as well as Royal have since failed to live up to heightened expectations.
Royal and National are the Canadian banks with the largest proportion of capital markets-related revenue, which includes stock and bond trading commissions, as well as underwriting, advisory, and other investment banking fees.
Banks reporting next week, including Toronto-Dominion Bank (TD.TO) and Canadian Imperial Bank of Commerce (CM.TO), are more dependent on personal and commercial lending, which has so far showed strong volumes, but at narrow interest margins.
RBC's earnings from operations in the third quarter, ended July 31, were C$1.57 billion, ($1.59 billion) or C$1.04 a share, up 13 percent from C$1.38 billion, or 92 Canadian cents, a year earlier.
Cash earnings per share from continuing operations came in at C$1.06, just shy of analysts' estimates of C$1.08.
CIBC World Markets analyst Robert Sedran said the weakness in the bottom line was partially obscured by a tax recovery.
"If you look at estimates going forward, street estimates probably need to come down, and that's the reaction of the stock today," he said.
Capital markets profits jumped 38 percent to C$277 million, but that figure was inflated by market and credit-related items and compared with a very weak quarter a year ago. Compared with the second quarter, capital markets profit fell C$130 million.
On a net basis, RBC posted a loss of C$92 million, as it took a C$1.57 billion ($1.59 billion) charge related to the sale of its its U.S. retail bank to PNC Financial Services Group (PNC.N), which was announced in June.
The sale of the U.S. operation will rid RBC of a unit that has been a drag on its bottom line since the bank entered the space a decade ago.
RBC bought South Carolina-based Centura bank for $2.2 billion in 2001, and has suffered through waves of home foreclosures in an area hit hard by the U.S. real estate collapse.
The C$1.6 billion charge includes a goodwill write-off of C$1.3 billion, the bank said.
$1=$0.99 Canadian Reporting by Cameron French