The RBC Royal Bank of Canada logo is seen in Halifax on Tuesday, April 2, 2019. THE CANADIAN PRESS/Andrew Vaughan

TORONTO - Royal Bank of Canada increased its dividend as its third-quarter profit rose by five per cent to hit a record, but the lender's latest earnings missed estimates as challenging market conditions weighed on its capital markets division.

Earnings from its investor and treasury services arm also fell, but strength in personal and commercial banking, wealth management and insurance compensated for these weaknesses to reach a new quarterly high.

"This is a record quarter for RBC at $3.3 billion, driven by really strong client volumes, revenue from our retail businesses... We've had a couple of challenging outcomes, in investor and treasury services," RBC's chief executive Dave McKay told analysts on Wednesday.

"But overall, we feel good about the momentum and feel ready to challenge the headwinds that are coming at us."

RBC was the first of the Big Six banks to report its financial results for the quarter ended July 31, setting the tone for the sector as it contends with trade uncertainty and geopolitical tensions.

Canada's biggest bank by market capitalization reported $3.3 billion in net income for the quarter, up five per cent from $3.1 billion a year ago.

The bank's diluted earnings per share was $2.22, up from $2.10 a year ago. On an adjusted basis, RBC's diluted cash earnings per share for the third quarter of its financial year amounted to $2.26, compared with $2.14 during the same quarter in 2018.

That fell short of the $2.30 expected on average by analysts, according to financial markets data firm Refinitiv.

RBC also said Wednesday that it will now pay a quarterly dividend of $1.05 per share, up three cents or three per cent.

"Overall, the results came in below consensus largely owing to lower trading revenue and rate headwinds in the investor and treasury services business, with several other areas — including Canadian banking — showing well," CIBC Capital Markets analyst Robert Sedran said in a note to clients.

RBC's personal and commercial banking division saw net income of $1.66 billion, up 10 per cent year-over-year due to volume growth and higher spreads in Canadian banking.

Its wealth management arm, which includes Los Angeles-based bank City National, reported net income of $639 million, up 11 per cent from the year prior, largely due to higher average fee-based client assets and an increase in net interest income. City National saw loan growth of 17 per cent year-over-year during the latest quarter, RBC said.

The bank's insurance division saw net income rise by 29 per cent to $204 million during the quarter.

However, RBC's capital markets division saw net income drop by six per cent year-over-year to $653 million, amid lower client activity in global equities.

Its investor and treasury services division reported third-quarter net income of $118 million, down 24 per cent from the same period in 2018, due to lower client deposit margins, lower revenue from its asset services business, and lower funding and liquidity revenue.

The bank's key measure of financial health, called the common equity tier 1 ratio (CET1), was 11.9 per cent as of July 31. That's up from 11.8 per cent during the previous quarter and 11.1 per cent during the third-quarter of 2018.

Total provisions for credit losses during the quarter rose by $79 million or 23 per cent to $425 million, due to higher provisions in capital markets, wealth management and personal and commercial banking.

RBC's chief financial officer Rod Bolger said the bank's net interest margins — the profit it makes on loans — was flat from the previous quarter but could potentially drop as much as four or five basis points over the next year if the current interest rate outlook and market pricing holds.

Net interest margins are the difference between the money banks earn on the loans they make and the interest they pay out to savers. The banks had been benefiting from rising rates which resulted in higher deposit spreads. However, the U.S. Federal Reserve recently cut its key benchmark interest rate by 24 basis points, the first reduction since the financial crisis, while analysts foresee the possibility of the Bank of Canada cutting rates as early as next year.

"Rising geopolitical risk and trade tensions are having an impact on both business and market sentiment worldwide," McKay told analysts. "This uncertainty is manifesting itself in downward trends in global interest rates. While there are risks to the outlook, current economic conditions in our core North American geographies remain solid."

RBC also announced Wednesday that its group head of RBC Capital Markets and RBC Investor and Treasury Services Doug McGregor will retire on Jan. 31 after 37 years at the bank. McGregor joined RBC in 1983 and held progressively senior roles at the bank. He became its capital markets CEO in 2008, and assumed responsibility for investor and treasury services in 2012.

The bank's global head of investment banking at RBC Capital Markets Derek Neldner, has been appointed as group head of capital markets effective Nov. 1 when McGregor will become chairman of RBC Capital Markets through to his retirement.

RBC's group head of wealth management and insurance, Doug Guzman, will assume leadership for investor and treasury services. Also effective Nov. 1, Mike Bowick will be appointed as president of RBC Capital Markets.

Companies in this story: (TSX:RY)

Note to readers: This is a corrected story. An earlier version incorrectly stated the percentage increase in the bank's net income and the analysts' estimate.

News from © The Canadian Press, 2019