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Royal Bank of Canada, Toronto-Dominion Tops Estimates

Royal Bank of Canada Says Profit Falls 6% on Investment Bank
Pedestrians stand outside of the RBC Royal Bank office near Bay Street in Toronto. Photographer: Brent Lewin/Bloomberg

Royal Bank of Canada and Toronto-Dominion Bank, the country’s two biggest banks, raised their dividends after reporting profits that topped analysts’ estimates on record earnings from consumer lending.

Royal Bank’s first-quarter earnings from continuing operations fell 6 percent to C$1.88 billion ($1.91 billion), or C$1.23 a share, the Toronto-based bank said today in a statement. At Toronto-Dominion, net income for the period ended Jan. 31 declined 5.3 percent to C$1.48 billion, or C$1.55 a share, according to a statement.

Record earnings from consumer and business lending drove profits higher than forecast at the Canadian banks. The economy is expected to expand 2 percent this year after an estimated 2.4 percent in 2011, even as global weakness and the strong dollar remain a challenge to exports, the Bank of Canada said last month.

“The banks are back to their usual selves,” said Barry Schwartz, portfolio manager with Baskin Financial Services Inc. in Toronto, which oversees about C$450 million in assets. “All things are rosy; we’re raising dividends again, personal banking was strong and obviously the bond traders had a very, very good quarter.”

Royal Bank rose 2 percent to C$56.80 at in Toronto trading, the biggest gain since Dec. 22. Toronto-Dominion climbed 1.2 percent to C$81.83.

Domestic Banking

Royal Bank, the country’s largest lender by assets, said Canadian banking profit rose 6.5 percent to a record C$994 million as mortgages, personal loans and deposits grew and the bank set aside less for bad loans. Royal Bank said it plans to outpace growth in the Canadian banking industry by 25 percent.

“Across our Canadian businesses, the signs remain quite reasonable,” Royal Bank Chief Executive Officer Gordon Nixon told reporters at the bank’s annual meeting in Toronto. “We’re starting to see a pickup in commercial loan demand, which is a good thing. It’s a sign the companies are investing.”

Toronto-Dominion said Canadian consumer-banking net income climbed 11 percent to a record C$850 million because of increases in commercial lending.

Domestic consumer banking “exceeded our expectations for the quarter,” Toronto-Dominion Chief Financial Officer Colleen Johnston said in a telephone interview. “It really just shows you the strength of our franchise and our business model.”

Royal Bank said it earned C$1.25 a share excluding some items and the U.S. consumer bank it’s selling. The lender was expected to have adjusted profit of C$1.14, based on the average estimate of 15 analysts surveyed by Bloomberg News.

‘Display of Strength’

“There is nothing to complain about in these results, and we see them as an across-the-board display of strength from Royal,” Sumit Malhotra, an analyst with Macquarie Capital Markets, said today in a note.

Excluding a litigation reserve and other one-time items, Toronto-Dominion said it earned C$1.86 a share. That topped the C$1.77 average estimate of 15 analysts surveyed by Bloomberg News. Bank of Montreal, the country’s fifth-biggest bank, also beat analysts’ estimates when it reported Feb. 28.

Earnings growth prompted Toronto-Dominion and Royal Bank to raise their quarterly dividends by about 6 percent.

Royal’s dividend increase “was a surprise and could indicate that the board is comfortable assuming that higher run-rate contributions from capital markets could continue,” said John Aiken, an analyst at Barclays Capital in Toronto.

RBC Bank Sale

Royal Bank’s net income, which includes its RBC Bank business in the U.S. that’s being sold, fell 4.8 percent to C$1.86 billion, or C$1.21 a share, according to its statement.

Royal Bank agreed in June to sell its Raleigh, North Carolina-based RBC Bank to PNC Financial Services Group Inc., which agreed to pay $3.62 billion for the U.S. lender and credit card assets in a deal expected to be completed tomorrow.

Royal Bank’s earnings were pared by a capital markets slowdown and lower trading revenue from a year ago. Profit from the RBC Capital Markets investment-banking business fell 30 percent to C$448 million from the year-earlier period. Underwriting and advisory fees declined 40 percent to C$294 million.

Standard & Poor’s today lowered its recommendation on Royal Bank to “hold” from “buy” because of the earnings contribution from “volatile” trading and underwriting.

Trading revenue across the bank fell to C$784 million, down 22 percent from C$1 billion a year earlier, on a decline in trading of stocks, interest rate and credit securities.

Insurance Surged

Wealth-management earnings decreased 12 percent to C$188 million, while insurance profit surged 40 percent to C$190 million from a year earlier.

International banking profit, including Caribbean banking and its RBC Dexia partnership and excluding the U.S. RBC Bank, was C$24 million, down from C$68 million a year earlier.

The bank set aside C$267 million for bad loans, compared with C$264 million a year earlier.

Toronto-Dominion net income declined for the first time in more than a year after it recorded litigation costs related to a Ponzi scheme in Florida.

Toronto-Dominion recorded costs of C$171 million for litigation related to disbarred Florida attorney Scott Rothstein, who admitted running a $1.2 billion Ponzi scheme. The bank lost a $67 million jury verdict in January over an investor group’s claims the lender helped Rothstein.

Excluding one-time items, Toronto-Dominion’s profit climbed 9 percent to C$1.7 billion.

‘Modest’ Growth

U.S. consumer-banking profit increased 8 percent to C$352 million. Toronto-Dominion expects “modest” growth for that unit over the balance of the year.

“That’s a business where we felt it’s going to be a challenge to grow the bottom line, given what’s happening on the regulatory front,” Johnston said.

Toronto-Dominion has “strategic size” in the U.S. and doesn’t need to make further acquisitions, CEO Edmund Clark said in a conference call with investors.

“We continue to look at things, but we’re not in a hurry to do deals,” Clark said in the call.

Wealth management and insurance profit rose 14 percent to C$349 million in the first quarter for reporting those businesses as a combined unit.

Profit from TD Securities investment bank declined 17 percent to C$194 million, as the bank had higher investment portfolio gains a year earlier. Toronto-Dominion set aside C$404 million for soured loans, down from C$421 million.

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