RBC Drops Most Since November After Missing Estimates

Royal Bank of Canada dropped the most in almost seven months after the nation’s largest lender posted second-quarter profit that missed analysts’ estimates.

Royal Bank said net income from continuing operations, excluding a loss from its investment in RBC Dexia Investor Services, increased 4.9 percent to C$1.77 billion ($1.73 billion). Profit excluding some one-time items was $1.17 a share compared with the C$1.18 average estimate of 15 analysts surveyed by Bloomberg. Toronto-Dominion, Canada’s second-largest bank, said profit climbed 21 percent to C$1.69 billion, or C$1.78 a share, beating analysts’ estimates.

Toronto-Dominion benefited from record profit at its U.S. consumer-banking unit and a rise in auto lending, credit cards and business banking, while Royal Bank posted higher earnings from Canadian consumer banking on growth in deposits, mortgages and business loans.

“Royal Bank and TD lead the pack in terms of personal and commercial,” Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc., which manages about C$4 billion, said in an interview before results. “I’d like to see if they can maintain, if not extend, that lead.”

Royal Bank fell 2.9 percent to close at C$51.38 in Toronto, its biggest one-day drop since Nov. 1, leading the Standard & Poor’s/TSX Financials Index to a 0.6 percent decline. Toronto-Dominion gained 0.3 percent to C$78.99.

Acquisition Loss

Royal Bank said net income, including a previously announced C$202 million acquisition loss from buying an additional 50 percent stake in RBC Dexia, declined 6.1 percent to C$1.53 billion, or 99 cents a share, from C$1.63 billion, or C$1.06 a share.

Toronto-Dominion said it earned C$1.82 a share excluding items, topping the C$1.78-a-share average estimate of 15 analysts.

Higher earnings from Canadian consumer banking as well as a 26 percent increase in trading revenue helped lift Royal Bank’s profit. Continuing operations exclude the Raleigh, North Carolina-based RBC Bank, which Royal Bank sold to PNC Financial Services Group Inc.

Royal Bank set aside C$348 million for bad loans, 27 percent higher than a year ago.

‘Lost in the Woods’

Canadian banking profit rose 4.7 percent to C$937 million, from C$895 million a year ago. International banking, which includes RBC Dexia and Caribbean banking, had a net loss of C$196 million after the acquisition costs.

Royal Bank “looks like they’re lost in the woods,” John Kinsey, who helps manage about C$1 billion at Caldwell Securities Ltd. in Toronto, said in an interview. “They sold the U.S. insurance and U.S. banking. I don’t know where they’re going.”

Profit at the RBC Capital Markets investment-banking business rose 11 percent to C$449 million on higher trading and corporate and investment banking. Trading revenue across the bank climbed to C$761 million from C$602 million a year ago, led by trading of equities and interest rate and credit securities.

Wealth management profit slid 6.6 percent to C$212 million, while insurance gained 23 percent to C$151 million on volume growth and lower claims costs on Canadian insurance products.

‘Market Confidence’

“Our retail bank is still performing,” Janice Fukakusa, Royal Bank’s chief financial officer, said in an interview. “Market confidence issues weigh heavily on the wealth business, but the minute we see some uptick we should see some performance.”

Toronto-Dominion said its U.S.-based consumer lender reported profit of C$356 million on higher fees from loans and deposits. The lender, which has spent more than $25 billion on U.S. acquisitions since 2004, has more branches there than in Canada, and expects annual profit of $1.6 billion from U.S. operations by next year. U.S. personal and commercial banking profit was C$1.27 billion in 2011.

Toronto-Dominion expects profit to be at the “lower end” of its 7 percent to 10 percent growth forecast for 2012, Chief Financial Officer Colleen Johnston said.

“Some of the headwinds are going to affect us in the latter half of the year,” Johnston said today in a telephone interview. Profit has increased 10 percent in the first half of the fiscal year, Johnston said.

Canada’s second-largest bank also expects to have a lower rate of expense growth next fiscal year, Johnston said.

Toronto-Dominion’s Canadian consumer banking profit rose 10 percent to C$808 million and wealth and insurance gained 16 percent to C$365 million, the bank said. Earnings at the TD Securities investment-banking unit climbed 4.8 percent to C$197 million.

“We had tremendous strength in the retail earnings,” Johnston said. “This was a record retail quarter for us.”

To contact the reporters on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Sean B. Pasternak in Toronto at spasternak@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; David Scheer at dscheer@bloomberg.net

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