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RBC investors shrug off dividend increase

Royal Bank of Canada boosted its dividend for the first time in nearly four years on Friday, but the thaw on payouts after a lengthy freeze wasn't enough to soothe investors, who punished the bank for its lacklustre earnings.

RBC made $1.51-billion in the second quarter, up 13 per cent on the year before. But an unexpected drop in profit at its capital markets division, caused by unexpectedly sluggish trading revenue, pushed RBC's shares down by 3 per cent.

The drop was significant in light of the dividend increase, which could have been expected to give the bank's shares a lift. Instead, RBC helped to weigh down the S&P TSX 60 index on the Toronto Stock Exchange, contributing to a sluggish day in the markets.

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"The market shrugged off the 8-per-cent increase in the dividend," Barclays Capital analyst John Aiken said in a research note to clients Friday.

The problem for RBC was the surprise nature of the earnings. After posting unexpectedly strong trading revenue in the first quarter, analysts and investors came to expect a similar performance.

RBC "failed to meet heightened expectations," Mr. Aiken said, noting that the selloff was overdone in his eyes. However, the bank has been criticized for the volatility of earnings at its capital markets division.

The $1.51-billion profit was equal to $1 a share. That compared with profit of $1.33-billion, or 88 cents a share during the same quarter a year ago. Revenue rose 2 per cent to $7.13-billion, the bank said Friday. Analysts, on average, were expecting RBC to make $1.11 a share in the quarter.

Profit at the capital markets division dropped 19 per cent to $407-million as bond markets slumped. "In global markets, challenging trading conditions arising from the events in the Middle East and Japan, and continued uncertainty in Europe, impacted our fixed-income business, particularly in Europe," RBC chief executive officer Gordon Nixon said.

The bank's profit was fuelled by RBC's large personal and commercial banking division in Canada. Earnings for the retail banking operations in Canada rose 16 per cent to $851-million, owing mostly to lower loan-loss provisions and higher lending volumes. Meanwhile, the bank boosted its quarterly dividend to 54 cents, an increase of 4 cents a share. It was the first increase for RBC since Canadian banks began conserving capital during the economic downturn.

Mr. Nixon also said Friday that he is committed to turning around RBC's struggling U.S. retail banking operations.

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Speaking to analysts on a conference call, the CEO addressed recent reports that RBC is seeking to partner with another U.S. bank on the operation by combining its branches with a larger regional player, or potentially sell the assets. Though he refused to comment on the possibility of a deal, Mr. Nixon told analysts the bank is trying to fix the business.

The network of 420 branches in the U.S. southeast, including Florida, Alabama and the Carolinas, has struggled since RBC expanded into the U.S. personal and consumer banking market in 2001.

Some analysts peg the value of the business at roughly $3.5-billion. RBC wrote down the value by $1-billion two years ago as the U.S. bank was hit hard by the economic downturn.

"We do remain focused on turning around these operations, and we are making good progress," Mr. Nixon said.

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