February 29, 2008 / 12:51 PM / in 10 years

RBC profit falls on capital markets charges

TORONTO (Reuters) - Writedowns on U.S. asset-backed securities and a strong Canadian currency helped push down Royal Bank of Canada’s RY.TO first-quarter profit by 17 percent but its chief executive said on Friday that he expects the second half of the year will be better.

“It has been an interesting quarter to say the least,” RBC Chief Executive Gordon Nixon said on a conference call.

He added that stability will return to financial assets that have been rocked by the global credit crisis and Royal’s performance will improve.

“Aggressive action” taken by central banks to deal with the fallout should pave the way for markets to recover in the second half, Nixon said.

Royal, Canada’s biggest bank, said it earned C$1.25 billion, or 95 Canadian cents a share, in the three months ended January 31. That was down from C$1.49 billion, or C$1.14 a share, in the same quarter a year earlier.

The bank took a pretax charge of C$430 million (C$187 million after-tax) for losses on U.S. subprime exposure, on credit default swaps with U.S. bond insurers, and on other U.S. asset-backed paper.

Those charges pale in comparison to the billions in subprime-related securities written off by larger international banks and by Canadian Imperial Bank of Commerce CM.TO, which posted a C$1.46 billion quarterly loss on Thursday.

RBC’s charges, however, did come in higher than some observers had anticipated.

“We had expected some turbulence to depress earnings, but the charges were somewhat larger than expected,” BMO Capital Markets analyst Ian de Verteuil said in a research note.

At a news conference after RBC’s annual meeting, Nixon said he hoped the bank could still meet its objective of 7 percent to 10 percent growth in earnings per share this year, despite the weak start.

“We were certainly expecting the first part of this year to be more challenging because of the environment,” Nixon told reporters.

“Our expectation is that in the second half of the year we’ll start seeing some improvement in the markets and some stability in the United States in particular, which is an important driver.”

In the first quarter, the Canadian dollar’s 16 percent year-on-year appreciation against the U.S. currency also hurt earnings in various RBC businesses.

Together, the U.S. securities writedowns and currency appreciation knocked 18 Canadian cents per share from RBC’s net income.

The bank’s stock closed at C$49.39, down 73 Canadian cents, or 1.5 percent, on the Toronto Stock Exchange. RBC stock is down 3 percent so far in 2008, the best performance among Canada’s big banks.

Dundee Securities analyst John Aiken said the bank’s core earnings -- excluding writedowns -- were close to his C$1.09 estimate, and other analysts said the core results beat their estimates.

But Aiken also sees increased risk from Royal’s exposure to the weakening U.S. real estate market and U.S. bond insurers.

RBC’s provision for credit losses surged more than 80 percent to C$293 million, and impaired loans rose in its U.S. residential builder finance business.

Additionally, the bank did not increase its quarterly dividend, breaking a recent pattern of increases every other quarter.

Nixon said dividend increases are not “linear” or automatic, and he noted that RBC’s dividend payout ratio is at the high end of its planned range.

The bank’s return on equity, a key measure of profitability, fell to 21.4 percent in the first quarter from 27.3 percent a year earlier.

Net income in its large Canadian banking segment slipped 1 percent to C$762 million, but rose 8 percent if positive insurance adjustments from the year-earlier period are excluded.

“You’re continuing to see good growth out of the core Canadian consumer,” said Gavin Graham, chief investment officer at Guardian Group of Funds.

($1=$0.98 Canadian)

Additional reporting by Jonathan Spicer; Editing by Peter Galloway

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