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Royal Bank says its diversified businesses will shield from volatility

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TORONTO - The head of Canada's largest bank offered reassurances Friday that it is well prepared to deal with slower growth in some areas, like retail banking, as it reported a record third-quarter profit boosted largely by a surge in its capital markets division.

"We are confident of capturing growth and are confident of organic growth going forward," Dave McKay, Royal bank's new president and chief executive, told analysts during a conference call.

Royal Bank of Canada (TSX:RY), the first of the Canadian banks to report third-quarter results, said it earned $2.38 billion in the period, up four per cent from a year earlier.

The performance, which exceeded analyst expectations, prompted the bank to hike its dividend by six per cent, or four cents, to 75 cents per share, payable Nov. 24.

The earnings were largely attributed to a 66 per cent increase in profits from the capital markets division, which earned $641 million on higher trading fees, more business from advising on takeovers and arranging stock sales.

McKay, who took over in August from long-time CEO Gord Nixon, dismissed concerns the bank may soon rein in capital markets division if profits continue to surpass its internal target of contributing no more than 25 per cent of overall revenues. Last quarter, capital markets made up nearly 27 per cent of Royal's earnings.

The bank established the target to ensure it is not invested too much in such a volatile area, as opposed to other more stable areas like wealth management, deposit-taking and lending.

However, McKay told analysts that the division benefited from a number of factors "unlikely to be repeated to the same degree," adding that the target is a "long-term strategic guideline" and not a hard cap and that the bank's diversification will help shield it from the ups and down of the market.

"We've crossed the 25 per cent (threshold) periodically over the past year, so it's something we've done before. But over the long term, we look forward and say, can we keep this in balance and we feel we can," he said.

Similarly positive results could be seen across nearly all of RBC's division in the latest quarter, except in its personal and commercial banking services which came in at $1.13 billion, down $29 million or two per cent from a year earlier due to costs associated with the sale of its Jamaican operations.

The Canadian banking had record net income of $1.18 billion, up three per cent from a year earlier, but slower growth than in other areas. However, McKay didn't express concern about the comparatively lower performance in Canadian banking division, which accounts for about half of the bank's earnings.

Barclays analyst John Aiken said although the profit and the dividend increase were higher than expected, the earnings have raised some worries over the bank's retail banking sector.

"The slowing growth in domestic retail is likely an issue for the group as a whole as opposed to being Royal-specific. Given its scale, we believe that RY's platform stacks up well, on a relative basis," he wrote in a research note.

Gareth Watson, vice-president of investment management and research at Richardson GMP, said Royal Bank's performance may be an indicator of what's in store next week when the other major Canadian banks report.

"As long as market conditions remain attractive which they have been for some time now, who knows how long that continues on for, it sets up extremely well for these banks," he said.

RBC's wealth management business earned $285 million, up $52 million or 22 per cent from a year ago, while the bank's insurance business earned $214 million of net income, up $54 million or 34 per cent year-year.

Despite the strong earnings and dividend bump, RBC shares closed down 86 cents or 1.05 per cent at $80.80 after hitting an all-time high of $82.15 in initial trading Friday. Its stock has surged more than 13 per cent this year.

Bank of Montreal (TSX:BMO), and Bank of Nova Scotia (TSX:BNS) are slated to release earnings on Aug. 26. National Bank (TSX:NA) will report on Aug. 27, with Canadian Imperial Bank of Commerce (TSX:CM) and TD Bank (TSX:TD) reporting Aug. 28.

Royal Bank said its quarterly profits included a $40-million loss related to the previously announced sale of RBC's Jamaican operations.

A year earlier, RBC recorded a $90-million income tax adjustment in its favour. Excluding those items, Royal Bank earned an adjusted profit of $2.42 billion — up 10 per cent from a year earlier and up 10 per cent from the previous quarter. Last year in Q3, it earned $2.3 billion before adjustments or $2.2 billion excluding the income-tax item.

The profit amounted to $1.59 per share under standard accounting and $1.64 per share on an adjusted basis. Analysts on average expected Royal to earn $1.54 per share of net income and $1.56 per share on an adjusted basis, according to estimates compiled by Thomson Reuters.

Total revenue was $8.98 billion, up 25.2 per cent from $7.17 billion in the third quarter of 2013 and up 8.6 per cent from $8.27 billion in the second quarter of 2014.

In addition to its earnings, Royal Bank also announced that it has appointed Jacynthe Cote as a new board member. Cote, the former president and chief executive of Montreal-based Rio Tinto Alcan, will take on the role effective Sept. 1 after leaving the aluminium mining and production giant in June.

Follow @LindaNguyenTO on Twitter.

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