August 26, 2010 / 10:19 AM / 8 years ago

UPDATE 2-Royal Bank of Canada profit drops on trading

* Q3 adj EPS C$0.87 vs est C$1.02

* Trading activity sends capital markets income lower

* Loan-loss provisions fall 44 pct

* (Adds details, analyst comment)

By Cameron French

TORONTO, Aug 26 (Reuters) - Royal Bank of Canada (RY.TO) (RY.TO) said on Thursday its third-quarter profit fell 18 percent, missing analysts’ estimates, as weak trading activity ate into capital markets income.

Canada’s largest bank earned a net C$1.28 billion ($1.2 billion), or 84 Canadian cents a share, in the quarter ended July 31. That compared with a year-earlier profit of C$1.56 billion, or C$1.05 a share.

Core cash earnings, which excludes amortization of intangibles, were 87 Canadian cents per share, the bank said.

Analysts polled by Thomson Reuters I/B/E/S had expected, on average, a profit of C$1.02 a share.

The bank said income from its capital markets division dropped by C$361 million, or 64 percent, to C$201 million, due to weak trading activity during the quarter.

“Business growth, improvements in credit quality and our ongoing cost management efforts were more than offset by a significant decline in trading revenue as volatility and general uncertainty in global capital markets reduced client activity,” the bank said in a statement.

A similar drop in trading activity forced rival Bank of Montreal (BMO.TO) to also report a sharper-than-expected drop in quarterly profit this week, prompting a sell-off in Canadian bank shares on Tuesday. [ID:nN24241238]

Craig Fehr, an analyst at Edward Jones, said Royal’s results were disappointing, but not particularly surprising.

“We’re getting a little more of a carry-on from what we saw from the big U.S. banks when they reported their second-quarter results in terms of some very weak trading results,” he said.

“The Canadian banks are showing that they’re just as susceptible to those business lines.”

But while weak trading activity has weighed on profit in the sector, improving credit quality has helped offset the impact.

Royal said loan loss provisions — or money set aside to cover off bad loans — fell 44 percent year-to-year to C$432 million.

Tier 1 capital ratio, which is considered a key measure of stability for banks, was 12.9 percent,

Return on equity fell to 14.3 percent from a year-before 19.4 percent.

Income from the Royal’s domestic branch-banking division rose 14 percent to C$766 million, while wealth management rose 10 percent to C$185 million and insurance slid 8 percent to C$153 million.

Royal’s troubled U.S. branch-banking franchise weighed on its international banking division, resulting in a loss of C$76 million, compared with a year-before loss of C$95 million.

The bank’s shares closed at C$50.69 on the Toronto Stock Exchange on Wednesday. ($1=$1.06 Canadian) (Editing by Gerald E. McCormick)

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