Monday, May 28, 2007

RBC Q2 2007 Earnings

Analysts' ratings and target prices for RBC:

• BMO Capital Markets maintains "outperform," 12-month target price has been raised from $62.00 to $63.00

• Blackmont Capital maintains "buy," 12-month target price has been raised to $65.00

• CIBC World Markets downgrades from "outperform" to "sector perform,"

• Desjardins Securities downgrades from "buy" to "hold," 12-month target price is $60.00

• National Bank Financial maintains "sector perform," 12-month target price has been raised to $64.00

• RBC Capital Markets maintains "sector perform," 12 month target price is $64.00

• Scotia Capital maintains "sector outperform," 12 month target price is $75.00

• TD Securities maintains "action list buy," 12 month target price is $67.00

• UBS maintains "neutral," target price has been raised from $65.00 to $66.00

UBS analysts mentioned that RBC has reported its results for the 2nd quarter short of expectations due to a decline in trading, expenses associated with several acquisitions, and volatility at the insurance unit. UBS analysts expect RBC to post robust results in the forthcoming quarters, with the performance of the core global wealth management and domestic banking operations continuing to be impressive.
BMO Capital Markets, 28 May 2007

Royal Bank reported second quarter cash earnings of $1.3 billion, or $0.99 per share, compared to $1.5 billion, or $1.16 per share, in the last quarter, and $1.1 billion, or $0.86 per share, in the same quarter of last year. Excluding unusual items included in the previous quarters, the appropriate operating comparison is $0.99 per share this quarter, $1.13 last quarter, and $0.86 in the same quarter of last year.

On virtually all metrics, this was a great quarter from Royal Bank. Retail Banking in Canada and Wealth Management were both up 21% and the U.S. and International Banking businesses were strong. Cash EPS rose by 15% and Cash ROE was over 23%. Having said that, the expectations for the bank were very high with two other banks having already reported results 10-15% ahead of our expectations.

Why didn't Royal surprise as much as its peers? Two reasons - one, the insurance business reported a very disappointing result. Two, the Capital Markets business was comparing to two very strong quarters. The reality is that the stellar results came from the 'high P/E' parts of the bank and this bodes well for the company longer term. We also believe that the Insurance and Capital Markets operations will report stronger earnings in the coming quarter. We maintain an Outperform rating on Royal Bank.

The Canadian Banking segment (which no longer includes Wealth Management) reported earnings of $620 million. Results were down from the previous quarter due to a combination of seasonal factors and a large swing in Insurance results. The Insurance contribution was very weak- at the lowest level in several years (if we ignore the quarter that was impacted by Hurricane Katrina). We believe that the weakness in earnings is short-term in nature and expect quarterly contribution that is at least 50% higher than that achieved this quarter.

The newly formed Wealth Management segment reported earnings of $199 million, down 8% over the quarter but up 21% over the year. Due to a tax reversal booked in the last quarter, the year-over-year trend is more indicative of this segment's strong performance.

The U.S. and International Banking segment reported earnings roughly flat over the quarter and up 11% over the year. Results reflect the integration of Royal's various acquisitions in the U.S. as well as a strong contribution from Dexia. Our forecasts assume a modest increase in the contribution from this segment as expense growth moderates.

The Capital Markets segment moderated in the quarter, although the comparison quarters were the two highest earning quarters for this segment ever. While the underwriting and advisory businesses appeared solid, trading revenues declined from the comparative quarters due to lower fixed income trading.

The corporate segment reported earnings of $50 million, higher than our forecasts due to the favourable resolution of an income tax audit and higher securitization activity. We are forecasting results closer to breakeven going forward.

From a credit perspective, loan losses were $188 million, slightly higher than our expectations, driven largely by higher provisioning for business lending. Gross impaired loans remained stable, and net impaired loans declined over the quarter. Like TD, Royal is experiencing higher levels of provisioning as loan volumes grow.

Royal's Tier 1 ratio was 9.3% at the end of the quarter, up slightly from the last quarter, on the back of a preferred share issue which offset higher goodwill due to acquisitions. We were pleased to see the growth in risk-weighted assets stabilize after several periods of sharp build-up.

Projections and Valuation

Our earnings estimates for 2007 are unchanged at $4.25, but we are bumping our 2008 forecast to $4.50 given TD and Bank of Montreal’s material earnings surprises.

The issue for RY shares is how much premium is warranted. On the positive side, the leadership positions in retail banking and wealth management are impeccable and the track record in capital markets is impressive. On the other hand, it appears as if the bank has been more aggressive on lending and trading than its peers. Given the current environment, however, we believe that Royal will continue to outperform its peers from a fundamental perspective. We believe that a 5-10% premium is warranted for the high ROE and growth rates. We are raising our target price modestly to $63 to reflect our slight uptick in earnings for 2008. We continue to recommend CM, TD and RY within the bank group.
RBC Capital Markets, 28 May 2007

Investment Opinion

RY's Q2/07 cash EPS were $0.99, lower than our estimate of $1.05 and the street estimate of $1.01, but still up 16% versus Q2/06 on a core basis. The higher earnings were driven by 11% revenue growth and 8% expense growth. Canadian banking, wealth management and US & International Banking all posted double-digit revenue growth, offsetting flat revenue in capital markets. Core net income was up by 18% or more in all divisions except for capital markets, which witnessed an 11% decline. Our 2007E EPS are down $0.05 to $4.25, reflecting the negative earnings variance against our estimates in Q2/07. We believe that many of the items that caused earnings to be lower than our forecast were specific to Q2/07, and as such our 2008E EPS of $4.70 are unchanged, as is our 12-month price target of $64.

We maintain our $64 price target on Royal Bank and Sector Perform rating. The bank's premium valuation (13.8x 2007E EPS versus the Canadian bank median of 13.1x) reflects, in our view, its leading position in Canada, above average revenue momentum (which has been partly driven by capital deployment), improved U.S. performance and an industry-leading wealth management platform. The bank is not immune to deteriorating credit quality, however, and some of the other banks have less exposure. Royal Bank also has greater exposure to wholesale revenues - a lower P/E source of earnings, in our view - than some competitors. Our 12-month price target of $64 implies a forward P/E multiple of 13.6x, essentially in line with the current valuation multiple.
Scotia Capital, 28 May 2007

Q2/07 Earnings - Below Expectations

• Royal Bank reported a 15% increase in cash operating EPS of $0.99 per share, below expectations. Earnings were negatively impacted by $0.04 per share from higher insurance disability claims as well as by $0.04 per share from lower loan loss recoveries.

• Return on equity was 24.0% versus 23.3% a year earlier. Return on risk-weighted assets declined to 2.16% versus 2.23% a year earlier.

• Overall earnings disappointment was due to relatively weak earnings from RBC Capital Markets which declined 15%. Retail and Wealth Management earnings remained strong both growing 21%. U.S. & International Banking earnings growth was 11%.

• Bank revenue growth in Q2 was strong at 10.2% with non-interest expenses increasing 7.7%. Operating leverage was solid at 2.5% in the quarter.

Retail Earnings Increase 21%

• Canadian Personal and Business (P&B) cash earnings increased 21% to $620 million from $512 million a year earlier due to strong loan and deposit growth and a higher net interest margin, partially offset by higher loan losses.

• Revenues in the Canadian P&B segment increased 10.8%, with expenses increasing 3.4% producing high operating leverage of 7.4%. Revenue was strong across all products, excluding the Global Insurance operations; revenue was up 12.7%, while expenses increased 3.1%.

• Loan loss provisions (LLPs) increased 21% to $204 million versus $168 million a year earlier. Higher LLPs were due to volume increases in personal loans and credit cards and some deterioration in the business loan portfolio.

• Overall retail market share including personal lending, credit cards and residential mortgages increased 30 bp this quarter to 15.3% from 15.0%.

Canadian Retail NIM Improves 5 bp

• Retail NIM increased 5 bp from a year earlier to 3.25% aided by some transfer pricing and increased 6 bp sequentially.

Wealth Management Earnings Strong

• Wealth Management cash earnings increased 21% to $199 million from $164 million a year earlier, reflecting strong net sales and growth in mutual fund assets. This is the first quarter RY is reporting its Wealth Management business earnings on a segmented basis.

• Revenue growth was an impressive 13.4% with operating expenses up 10.2% due to higher variable compensation. Operating leverage was a solid 3.2%

• U.S. Wealth Management revenue growth was strong at 15% with Canadian Wealth Management earnings increasing 11%.

• Mutual fund revenue increased 2% sequentially and 14% from a year earlier to $361 million. RY led the industry in long-term asset (LTA) net sales with a 17% market share in Q2. Mutual Fund assets (IFIC) increased 21% from a year earlier to $77.3 billion.

U.S. & International P&B Earnings Solid

• U.S. & International P&B Q2/07 cash earnings increased 11% YOY to $82 million due to higher loan and deposit volumes and the impact of recent acquisitions.

• Revenue growth was strong at 17% with expense growth high at 18% due to integration costs from recent acquisitions.

• Net interest margin increased 8 bp sequentially to 3.69% but declined 10 bp from a year earlier.

RBC Capital Markets Earnings Relatively Weak

• RBC Capital Markets earnings were weak compared with peers, declining 15% to $350 million versus TD Wholesale Banking growing 55% and BMO Capital Markets up 17%. RBC Capital Markets was relatively weak due to lower trading revenue and lower LLP recoveries.

• Operating leverage was negative 7% in Q2 with revenue remaining flat from a year earlier and expenses increasing 7% due to higher costs of growth initiatives.

Trading Revenue - Weak Fixed Income Trading Revenue

• Trading revenue declined 7% to $544 million from $586 million a year earlier and $652 million in the previous quarter. Fixed income and money market trading revenue declined 40% with equity and foreign exchange contracts remaining relatively stable.

Capital Markets Revenue Increases 8%

• Capital markets revenue was $657 million versus $611 million in the previous quarter and $606 million a year earlier.

• Securities brokerage commissions were strong at $338 million, with underwriting and other advisory fees at $319 million, an increase of 23%.

Security Gains Negligible

• Security gains were negligible at $5 million or nil per share versus $0.02 per share in the previous quarter and $0.01 per share a year earlier. The bank continues to have very low reliance on security gains.

• Unrealized security surplus was $112 million at quarter-end (now contained in AOCI) versus the $135 million surplus at the end of the previous quarter and the $166 million deficit a year earlier.

Loan Loss Provisions Increase to 33 Bp

• Specific loan loss provisions (LLPs) increased 52% to $188 million, or 0.33% of loans versus $124 million or 0.25% of loans a year earlier. LLPs in retail increased 21% to $204 million from $168 million due to volume increases and higher Canadian business loan losses. RBC Capital Markets net LLP recoveries declined to $5 million versus $78 million a year earlier.

• Our 2007 and 2008 LLP estimates remain unchanged at $600 million or 0.26% of loans and $700 million or 0.30% of loans, respectively. RY LLPs at 0.33% of loans compares with TD at 0.39% of loans, with BMO's LLPs extremely low at 0.14% of loans.

Loan Formations Increase Slightly

• Gross impaired loan formations were $363 million versus $311 million in the previous quarter and $262 million a year earlier. Net impaired loan formations were $227 million versus $237 million in the previous quarter and $180 million a year earlier.

Tier 1 Ratio Declined to 9.3% - RWA Growth

• Tier 1 capital declined to 9.3% versus 9.5% a year earlier due to a 16% increase in risk-weighted assets to $243.8 billion. Market at risk assets increased 27% to $8.4 billion.

• The common equity to risk-weighted assets (CE/RWA) ratio was 9.0% unchanged from the previous quarter but down from 9.4% a year earlier.

Share Buybacks

• This quarter RY repurchased 2.9 million shares at an average price of $54.83 per share for a total of $159 million.

Recent Events

• In Q2 the bank announced and completed several small acquisitions primarily benefiting its U.S. & International and Wealth Management businesses.

• On April 17, 2007 RY announced a joint venture agreement in which RY will acquire a 50% stake in Fidelity Merchant Bank & Trust in the Bahamas. The transaction is expected to be completed within the next few months. On April 30, 2007, RY announced an agreement to acquire Seasongood & Mayer, a public finance firm and leading underwriter of municipal debt with $1.5 billion in assets. On May 18, 2007, RY completed the acquisition of J.B. Hanauer & Co. previously announced March 13, 2007. In addition, RY acquired 39 AmSouth branches in Alabama.


• We are trimming our 2007 earnings estimate to $4.37 per share from $4.50 per share based on this quarter's weaker earnings. Our 2008 earnings estimate remains unchanged at $5.00 per share. Our 12-month share price target remains unchanged at $75, representing 17.2x our 2007 earnings estimate or 15.0x our 2008 earnings estimate.

• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on strength of franchise and operating platforms, particularly retail banking and wealth management, higher than bank group ROE and no valuation premium.
TD Securities, 28 May 2007

RBC reported Q2/07 EPS of $0.99, in-line with our estimate and consensus of $1.00, respectively. Despite results being negatively impacted by higher credit losses and lower profitability from the bank’s global insurance business, RY grew its year over year EPS by over 15% and recorded an ROE of over 23%. We believe this was a very good quarter for the bank, which is demonstrating excellent underlying growth in its important domestic retail businesses. We believe investors should be patient, as we expect superior relative earnings growth to return next quarter.


Neutral. We are increasing our 2007 and 2008 EPS estimates to $4.30 (from $4.15) and $4.70 (from $4.65) respectively, reflecting superior operating leverage and growing retail share in both banking and wealth. We are maintaining our 12-month target price of $67.00 and we reiterate our Action List Buy recommendation.


Canadian Banking results were below our estimates, with operating cash earnings of $620 million, but still up 18% year over year. In our opinion RY’s domestic fundamentals remain very strong demonstrated by another quarter of 'above average' revenue growth (up 10.8% yoy). Growth was primarily driven by an expansion in net interest margins, industry-leading asset growth across multiple product categories, and continued efficiency gains (the bank sported an impressively low 42.0% efficiency ratio). Also, the bank maintained its leading market share position in important product categories.

While we were slightly surprised at the magnitude of credit losses in quarter, we note that higher credit losses are to be expected at this point in the credit cycle. Nevertheless, most of the uptick experienced in the quarter related to some deterioration in the business loan portfolio (due to increased impairment and lower corporate recoveries). However, we believe that rising credit losses are also a reflection of growth in the business loan portfolio (business loan balances grew 9% yoy, a positive trend that we believe will continue).

Importantly, volatile insurance earnings (down 27% yoy) offset what would otherwise have been viewed as a good quarter. Management points to a slowdown in disability claims resolution time, which will be resolved. Management guided towards a sustainable earnings level roughly $40 million higher than reported this quarter. Wealth Management results were above expectations, as mutual fund momentum carried over from Q1/07. Perhaps most impressive this quarter was the 21% growth in cash net income, driven by strong growth in AUM and improvement in full-service brokerage productivity. Superior distribution capabilities, unmatched size and scale, and international growth opportunities provide further growth opportunities going forward. In our opinion RY owns the 'best-in-class' wealth franchise in the group and will be hard pressed to relinquish this leadership position anytime soon. Management implied that further actions will soon be taken in order to further pressure the competition.

U.S. & International Banking results were solid. The drivers for the quarter were expanding net interest margins, solid balance sheet growth (albeit the results include the affects of M&A activity), and a strong contribution from RBC Dexia (which grew AUA by 15.7% yoy). We believe that the division will generate improving results through a combination of international M&A, product enhancements, organic growth, and further recruitment. Management noted that roughly $20 million in M&A related non-operating expenses were incurred during the quarter

RBC Capital Markets results were inline with our expectations, reporting operating cash earnings of $350 million. Although we were slightly disappointed with the bank’s wholesale results (given the solid showing by peers already reported) we note that strong results from investment banking were offset by lower trading revenues (which are unpredictable) as well as a materially lower contribution from investment securities gains (even more unpredictable).

Justification of Target Price

Our $67.00 target is a product of adding 50% of the $67.84 value derived from our 2008 P/E valuation of 14.4 times to 50% of the $67.42 value derived from our 2008 price-to-book valuation of 3.40 times.

Key Risks to Target Price

We believe the four key risks are: 1) unfavorable interest rate movements; 2) a downturn in the credit cycle; 3) additional US acquisitions at premium valuations; and 4) trading volatility.

Investment Conclusion

Given the material under-performance in RY’s shares on Friday, investors were clearly expecting the bank to significantly exceed consensus earnings estimates. Without considering the earnings build-up generated by the bank’s fast growing assets and assets under administration we can easily count $0.07 of EPS that will be added to Q3/07 earnings. We believe the headline reaction today provides long-term investors with a GARP bias an excellent opportunity to buy one of Canada’s best companies. RY’s scale and momentum in domestic retail operations is tremendous, US retail operations are demonstrating decent growth in a difficult environment, and the wholesale operation is growing into a global player. We believe the collection of these businesses is deserving of superior valuation, yet the bank is now only trading at a slight premium to the group. We re-iterate our Action List Buy rating.
Financial Post, Duncan Mavin, 26 May 2007

There is just no satisfying some investors, as shown by yesterday's reaction to Royal Bank of Canada's robust $1.3-billion second- quarter profit.

Despite remaining on target to be the first Canadian bank to amass earnings of $5-billion in a single year, RBC's results were marginally short of expectations, $1.79 was slashed off its stock price and almost 11 million RBC shares changed hands.

The bank suffered because the bar has been raised too high, said Dundee Securities Corp. analyst John Aiken.

"Our biggest concern regarding Royal related to lofty earnings expectations, of which we ourselves were guilty," Mr. Aiken said in his research note, a rare mea culpa from the analyst community.

"The drop in the stock price was absolutely nothing that Royal did wrong at all," Mr. Aiken said in an interview later in the afternoon. "Far from it, it was a pretty solid quarter, but Royal's share price had no room for imperfection in the quarter."

In particular, RBC's results suffered by comparison with those of Toronto-Dominion Bank and Bank of Montreal, which both reported earlier this week and which both beat expectations.

Before yesterday's earnings release, RBC's stock price had run up 12.5% since the previous quarter to $60.62, its highest close ever. The latest love-in for Canada's biggest stock was partly on the back of the strong results from its two rivals.

"When TD reported a good set of results, the market assumed that RBC was going to report a similar blow-out number way above expectations," said Bruce Campbell, of Campbell & Lee Investment Management Inc. "What they really reported was a very good number, but built into it was that the earnings were going to be great and they weren't."

"The bank didn't set the expectations so you can't blame them, but investors are just trying to get a jump and buy in early," Mr. Campbell said.

RBC's reported earnings of 98? a share compares with an average of analysts' forecasts of $1.02 a share.

The results were "good, but disappointing," said Credit Suisse analyst Jim Bantis, as if to prove how difficult it is for the bank to please these days.

In fact, the bank's earnings were up 14% compared with the same period last year. Total revenue increased $547-million, or 11%, to $5.67-billion.

The results were helped by strong earnings from domestic retail banking and wealth management, which were up 21% and 22% respectively.

"The core domestic personal and commercial and wealth businesses appear to be running well and underpin one of the better platforms in the group," said UBS Investment Research analyst Jason Bilodeau.

The main weak spots were in insurance and capital markets.

Profits in the capital markets group of $350-million were down $64-million or 15% from last year. Softer trading results following a strong 2006 was "a bit of drag," Mr. Bilodeau said.

Earnings from insurance fell 22% compared with last year to $46-million as a result of poor disability claims experience.
The Globe and Mail, 26 May 2007

Royal Bank of Canada's profit rose 14 per cent from a year ago, despite being nicked by lower trading revenues because of the U.S. subprime mortgage market.

But investors punished the bank's stock as the second-quarter financial results fell slightly short of analysts' expectations.

Shares of the country's biggest bank dropped 2.95 per cent on the Toronto Stock Exchange yesterday.

While RBC's key Canadian personal and consumer banking operations and its wealth management business appear to be running well, its U.S. and international operations seem to have some potential growth problems, UBS analyst Jason Bilodeau wrote in a note to clients.

And RBC Dominion Securities, the investment banking arm, saw profit fall by $64-million, or 15 per cent, on the back of lower trading revenues in the fixed-income business. The fixed-income business dragged the bank's trading revenue down $149-million, or 21 per cent, from a year ago, despite higher trading revenue from equity, or stocks. Total trading revenue, a figure that includes all income related to trading, was $544-million, down 7 per cent.

The bank said it had net trading losses on seven days during the quarter, and one day in the quarter on which it pulled in trading revenue of $57-million.

On a conference call with analysts, RBC's head of investment banking Chuck Winograd said his division's flat revenue picture, compared with last year's second quarter, was mainly a result of problem fixed-income trades in the U.S. subprime market.

Those trades resulted in "a few percentage points" of lost revenue in the quarter, he said, and most of that was from a single structured transaction.

As it was setting up that particular deal, Mr. Winograd said, the bank found itself with subprime loans on its trading book just as the market weakened.

"Liquidity dried up, and we recorded mark-to-market [paper] losses." Some of the losses were recovered as the bank completed the transaction, producing a "decent outcome," he added.

Subprime mortgages are risky home loans, some of which were packaged by investment banks and sold as high-yield bonds to hedge funds and mutual fund investors. When U.S. house prices dropped in value earlier this year, these loans quickly lost value.

Considering that the investment banking group had a "near record" quarter a year ago, the lack of revenue growth in the second quarter of this year was actually a positive result, he said.

This is the first quarter that RBC has reported its financial results under its new business structure, having carved out a wealth management segment so that the bank has four divisions rather than three.

The bank's total profit came in at $1.279-billion, up $161-million from the same period last year, in what Credit Suisse analyst Jim Bantis summed up as "good, but disappointing results." Profit per share of 98 cents was 4 cents below the consensus forecast, Mr. Bilodeau noted.

The bank put aside more money for bad loans this quarter, with its provision for credit losses rising by $64-million or 52 per cent from a year ago, partly because of growth in its personal loan and credit card portfolios.

Meanwhile, insurance-related revenue dropped 1 per cent, excluding the favourable impact of an accounting change. RBC said the drop in insurance revenues was mainly due to lower sales of annuities in the United States.
Bloomberg, Doug Alexander, 25 May 2007

Royal Bank of Canada said second- quarter profit rose 14 percent, missing analysts' estimates for the first time in almost three years, as trading revenue fell and earnings growth slowed in the U.S.

Net income for the period ended April 30 climbed to C$1.28 billion ($1.18 billion), or 98 cents a share, from C$1.12 billion, or 85 cents, Canada's biggest bank said today in a statement. Revenue rose 11 percent to C$5.67 billion.

Profit from the U.S. unit rose 8 percent, trailing growth in Canada, as expenses rose for acquisitions and new branches, and after the Canadian dollar gained against the U.S. currency.

``You've had the currency dragging that down'' in the U.S., said Gavin Graham, chief investment officer for Guardian Group of Funds in Toronto, which oversees about $5.3 billion in assets including Royal Bank shares. ``It's not a good place to be for a commercial bank.''

Excluding some items, profit was 99 cents a share, trailing the C$1.03 median estimate of nine analysts surveyed by Bloomberg News, the first time in 11 quarters that earnings lagged analysts' expectations. Profit growth was the slowest in six quarters.

Royal Bank fell C$1.79, or 3 percent, to C$58.83 at 4:10 p.m. trading on the Toronto Stock Exchange, the biggest drop since Aug. 27, 2004. The stock has risen 6 percent this year, beating the 4.5 percent gain for the nine-member Standard & Poor's/TSX Banks index.

``After much stronger-than-expected earnings last quarter, Royal was the best performing Canadian bank stock over the past three months,'' Desjardins Securities Inc. analyst Michael Goldberg said today in a note. ``With these results and its relatively full evaluation, that strong relative performance is unlikely to continue.''

Consumer banking profit in Canada rose 21 percent to C$618 million and posted a 29 percent return on equity, a measure of profitability. Mortgages, personal loans and credit card balances rose in the period. Earnings at that unit were tempered by a slump in insurance, as operating profit fell 27 percent to C$43 million on higher claims and other expenses.

``Some of the businesses where they did disappoint are ones that are more volatile in nature anyway,'' said Juliette John, who helps manage about C$19 billion at Bissett Investment Management in Calgary. ``The strength that we've seen on the retail side as well as the wealth management side are still the more high-quality businesses.''

Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, rose to C$67 million, with a return on equity of 7.4 percent.

Costs in the U.S. rose 18 percent as the bank expanded through acquisitions and new branches. Royal Bank bought 39 branches in Alabama from AmSouth Bancorporation and acquired Flag Financial Corp. in the past year, helping to add another 70 offices and 2,267 employees. The bank had C$20 million in one- time costs in the period to integrate its acquisitions.

Royal Bank set aside C$188 million for bad loans, up from C$124 million a year ago and the highest in at least nine quarters.

Profit at RBC Capital Markets fell 15 percent to C$350 million. Trading revenue fell 7.2 percent to C$544 million on lower revenue from fixed-income, including a trading loss from high-risk, or ``sub-prime'' mortgage loans in the U.S. Revenue from equity trading almost doubled.

The bank lost ``a few percent of our capital markets revenues'' from investing in sub-prime securities, with a large portion of that coming from one transaction, RBC Capital Markets Chief Executive Officer Charles Winograd said in a conference call with analysts.

By comparison, Bank of Montreal, which lost C$680 million this year from trading natural-gas contracts, had a C$10 million trading loss in the period.

``In terms of the specific business that the other bank had an issue with, clearly the size of our business in that area is significantly smaller that what they had,'' said Morten Friis, Royal Bank's chief risk officer.

An increase in new stock issues and a surge in sales of Canadian-denominated Maple bonds helped increase underwriting fees, after the bank helped manage a C$2.5 billion sale for Morgan Stanley in February, the largest corporate bond sale in Canada.

The wealth management group's earnings rose 22 percent to C$194 million. Mutual fund sales climbed 25 percent to C$2.8 billion from the previous year as stock prices rose and the bank sold more funds through its branches. Fund industry sales hit a nine-year high last month, with Royal Bank and Toronto-Dominion Bank leading net sales in Canada.

Royal Bank is the third Canadian lender to report second- quarter earnings. Bank of Montreal said May 23 that profit rose 3 percent to C$671 million as higher investment banking fees and mutual funds offset losses from commodities trading. Toronto- Dominion Bank said yesterday that profit rose 19 percent to C$879 million. Both banks' profits beat analysts' estimates.