May 27, 2011 / 10:20 AM / 6 years ago

RPT-UPDATE 5-RBC profit misses forecasts as Canada lending slows

(Repeats without changes)

* Q2 EPS C$1 vs C$0.88 a year earlier

* Q2 cash earnings C$1.03; consensus view C$1.12

* RBC raises dividend 8 pct to C$0.54 a share

* Shares close down 3 percent on the TSX (Adds analyst’s comment, updates share price move)

By Euan Rocha

TORONTO, May 27 (Reuters) - Royal Bank of Canada (RY.TO), the country’s biggest bank, reported a 13 percent increase in quarterly profit on Friday, but the results fell short of market expectations and its shares fell sharply.

While RBC’s capital markets segment was the main culprit in the profit miss, the results also provided further evidence that growth in consumer lending in Canada has begun to slow.

That underscored concerns that banks are heading into a tougher part of the business cycle as tighter lending rules and the prospect of higher interest rates depress consumer borrowing.

Shares of RBC were the biggest drag on the Toronto Stock Exchange’s blue-chip S&P TSX 60 index .TSE60 on Friday. RBC’s results came just a day after rivals Toronto-Dominion Bank (TD.TO) and Canadian Imperial Bank of Commerce CM.TO also reported weaker-than-expected profits, sending Canadian bank stocks tumbling. [ID:nN26238530]

“What we are seeing is a slowdown in domestic lending volumes and this is negatively impacting earnings growth,” said Barclays Capital analyst John Aiken. “This is definitely a trend that we have seen across the banks and something that the banks and market are anticipating to carry on.”

“We are in an environment where earnings growth is going to be much more difficult for Canadian banks than it has been in the past,” he said.

Shares of Canada’s top six banks, which had risen about 12 percent year-to-date before their second-quarter earnings began to roll out this week, have pared gains and are now up 8.9 percent on average this year.

”Soft quarter was generally what we were expecting and soft quarter is generally what is being delivered. We are seeing the slowdown in the domestic businesses that we had expected,“ said CIBC analyst Robert Sedran. ”And the outlook is for a more challenging environment.

“A part of the impact on the share prices has been perhaps that the markets were hopeful that the banks could come through with one more beat before the slowdown began. Instead it feels like the slowdown has started.”

EARNINGS MISS

Excluding certain amortization costs, cash earnings were C$1.03 a share, the bank said. Analysts on average had forecast earnings of C$1.12 a share, according to Thomson Reuters I/B/E/S.

“RBC had a generally strong underlying business performance in the Canadian banking unit, insurance and wealth management,” said National Bank analyst Peter Routledge. “The miss, as far as we can discern, is entirely due to capital markets trading, which is typically volatile.”

Net income in the second quarter ended April 30 rose to C$1.51 billion ($1.54 billion), or C$1 a share, from C$1.33 billion, or 88 Canadian cents, in the year-before quarter.

“Although market trends point to a slowdown in consumer loan growth, we had growth in commercial loans for the second consecutive quarter as companies regained confidence,” RBC Chief Executive Gordon Nixon said on a conference call.

While commercial lending is likely to gather steam, the gains are unlikely to offset a slowdown in personal lending, analysts said, as the household credit market in Canada is about three times larger than the business lending market. [ID:nN20244603]

RBC said its international banking segment posted a C$23 million loss in the quarter and profit in the capital markets segment fell almost 20 percent to C$407 million due to lower fixed income trading results and higher costs.

“The miss was largely driven by the inherent volatility in capital markets revenues, which could very well bounce back in subsequent quarters,” Aiken said.

The results of RBC and other banks that have reported this week have benefited from smaller provisions for bad loans.

RBC said its provisions for soured loans declined more than 30 percent from a year earlier to C$344 million, reflecting lower write-offs in its Canadian credit card portfolio and an improving credit quality within its U.S. and Caribbean wholesale portfolios.

RBC raised its quarterly dividend by 4 Canadian cents, or 8 percent.

“While we had been calling for it, the increase in the dividend to C$0.54 per share was not widely anticipated in the market,” said Aiken, noting that the increase was bigger than he had expected.

RBC shares closed down 3 percent at C$57.36 on the Toronto Stock Exchange on Friday. ($1=$0.98 Canadian) (Reporting by Euan Rocha; Editing by Frank McGurty and Peter Galloway)

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