May 29, 2008 / 12:09 PM / in 10 years

RBC profit hit by writedowns, drops 27 percent

TORONTO (Reuters) - Profit at Royal Bank of Canada (RY.TO) fell 27 percent in its second quarter, weighed down by previously disclosed after-tax writedowns of C$436 million ($440 million) and higher provisions for loan losses.

A Royal Bank of Canada (RBC) logo is seen at a branch in Toronto November 9, 2007. REUTERS/Mark Blinch

Canada’s largest bank said on Thursday it would generally stop making new loans to U.S. home builders located outside of the southeastern United States, where RBC focuses its U.S. banking business, because impaired loans are rising in its U.S. builder finance portfolio.

Royal Bank said it earned C$928 million, or 70 Canadian cents a share, in the quarter ended April 30, down from a profit of C$1.28 billion, or 98 Canadian cents a share, in the same 2007 period.

On a cash basis, which typically adjusts for the amortization of intangibles, RBC said it earned 72 Canadian cents a share, with the writedowns in capital markets and corporate support cutting earnings by 33 Canadian cents a share.

That means results were generally in line with market expectations, as analysts had expected C$1.01 a share in earnings before one-time items, according to Reuters Estimates.

“We think this was a pretty decent quarter for them,” said Blackmont Capital analyst Brad Smith, noting that the bank had braced the market earlier this month for the drop in “headline” earnings.

Smith pointed to Royal’s growth in Canadian retail bank earnings and its higher U.S. credit provisions as signs that the earnings were of high quality.

Shares of Royal Bank were up 2.2 percent at C$50.53 on Thursday afternoon on the Toronto Stock Exchange.

Profit in Canadian banking, RBC’s largest unit, rose 15 percent to C$708 million.

Better insurance results, volume growth in home equity loans and personal deposits, and cost controls helped to boost Canadian retail profits, Chief Financial Officer Janice Fukakusa said on a conference call.

RBC’s overall provisions for credit losses jumped to C$349 million from C$188 million a year earlier, primarily due to higher provisions on its $3 billion U.S. residential builder loan portfolio, and higher writeoffs on U.S. retail loans, the bank said.

Executives said they would wind down a big chunk of the builder finance portfolio. They plan to liquidate about C$1 billion in loans made to companies outside of RBC’s banking “footprint” in the southeastern United States.

Those builder loans will be wound down over the next three or four years as market conditions permit, Chief Risk Officer Morten Friis said on the call.

Royal inherited additional loans to home builders when it bought Alabama National Bancorp in February. But as the U.S. residential real estate market worsened, those loans have pushed up the bank’s gross impaired loans, particularly in California, Georgia and Arizona.

RBC’s U.S. and international banking profit fell 43 percent to C$38 million, mainly due to the higher provisions for loan losses, it said.

Within RBC Capital Markets, second-quarter profit almost disappeared, falling 96 percent to just C$13 million on writedowns of C$714 million before tax.

The bank’s quarterly writedowns totaled C$854 million before tax, including some taken in its corporate support group. The writedowns cover a variety of debt securities and credit default spreads tied to bond insurer MBIA Inc.

Royal Bank President and Chief Executive Gordon Nixon repeated that the bank was “not happy” with the writedowns, and said that financial markets are expected to remain stressed. But he noted that many businesses, including RBC’s core Canadian banking and wealth management units, were performing well.

($1=$0.99 Canadian)

Reporting by Lynne Olver; Editing by Peter Galloway

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