03/01/2012 06:21 EST | Updated 05/01/2012 05:12 EDT

Royal Bank Q1 Earnings: Dividend Boosted As Net Income Falls To $1.86 Billion

TORONTO - Royal Bank of Canada (TSX:RY) raised its dividend six per cent Thursday even as it reported a drop in first quarter earnings as a record performance in Canadian banking failed to offset weakness in several other divisions.

Canada's biggest bank said Thursday its quarterly dividend would rise three cents to 57 cents per share as it said it remained optimistic about the bank's ability to adapt to tougher regulations, a challenging economic environment and lower interest rates.

"Our outlook for RBC for this year, for the year ahead, remains optimistic, we are confident that RBC has positioned itself to grow and prosper even through what is a challenging environment," RBC's president and CEO Gordon Nixon told investors at its annual general meeting Thursday.

However, Royal Bank's net income fell five per cent to $1.86 billion, or $1.21 per share, versus $1.95 billion or $1.27 per share, at the same time last year.

The results beat analyst expectations on a cash diluted basis of $1.25 per share, compared to consensus expectations of $1.13, according to Thomson Reuters.

Royal Bank said profits were down as business growth in Canadian Banking and Insurance, and stable credit quality were offset by lower earnings in its capital markets operations. Its international and wealth management operations also suffered.

Rivals TD Bank and Bank of Montreal have also reported that their capital markets divisions, hard hit by weak confidence in volatile stock markets, were a drag on first quarter earnings.

TD Bank, which also reported first quarter results and raised its dividend Thursday said first-quarter net income dropped five per cent to $1.48 billion, or $1.55 per share, a decline from $1.56 billion, or $1.67, a year ago.

Bank of Montreal, which reported a slow down in capital markets earlier this week, has also cut about 60 jobs in the division to keep staffing in line with demand.

At RBC, the capital markets operation recorded net income of $448 million, a decrease of $189 million from a year ago, largely due to lower trading results and lower origination activity compared to record earnings in the previous year.

Canadian banking net income was a record $994 million, up seven per cent from the same quarter of 2011, on the back of solid growth in home equity products, improved credit quality and improved business deposits and business loans.

Provisions for credit losses — the amount set aside to cover bad loans — fell to $243 million during the first quarter compared to $272 million in the quarter a year earlier.

Nixon noted that there has recently been increased attention on the potential fallout from high housing prices and record consumer debt levels.

However, he said the bank is comfortable with its retail portfolio as home affordability continues to be "reasonable" in most markets, and consumer debt service ratios remain within historical average range.

Income in its wealth management division fell 12 per cent from the quarter a year earlier to $188 million, pushed down by lower volumes and higher costs.

"Wealth Management continues to be impacted by low interest rates and challenging markets although we saw improving investor confidence towards the end of the quarter," Nixon said.

International banking income fell to $24 million, less than half of what the division earned in the quarter a year earlier due to spread compression and challenging economic conditions in its Caribbean banking operations.

Banking analyst John Aiken said earnings were higher than he expected, but the dividend increase was a surprise.

"It could indicate that the board is comfortable assuming that higher run-rate contributions from capital markets could continue," he said.

Aiken noted that Royal benefited from especially strong trading revenues.

"While we do not believe that the street will give full valuation credit for these revenues, we do note that Royal has been running well below what we would consider normalized trading revenues," Oaken said.

"That said, with few other holes to pick at, we believe that the results will be viewed favourably."

Shares in the bank were up $1.38 to $57.06 in afternoon trading on the Toronto Stock Exchange.

One of the issues that had dogged Royal last year was inefficient cost controls and it appears that it is now clamping down on costs, which should help prop up its share price.

Royal Bank earned a record $6.7 billion from its continuing operations last year, while total net income dropped to $4.85 billion from $5.22 billion in 2010 due to a writedown related to the sale of its U.S. retail banking operations. The sale of those 400 branches is expected to close Friday.

Royal is the country's largest bank by assets and market capitalization and has 77,000 employees serving more than 18 million clients. The bank has operations across North America and in 52 other countries.

At its annual general meeting Thursday, the bank announced that Richard George, CEO of Suncor Energy Inc. has been elected as a director of the board.