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Royal Bank of Canada (RY - Snapshot Report) reported fiscal first-quarter 2013 net income from continuing operations of C$2.1 billion ($2.1 billion), beating the year-ago earnings of C$1.9 billion ($1.9 billion). This reflects a year-over-year increase of 11%.

Results reflect a rise in revenue, aided by higher net interest and non-interest income. Yet, the deteriorating credit quality and elevated non-interest expenses were the headwinds.

Performance in Detail

Total revenues in the quarter reached C$7.9 billion ($7.8 billion), rising 4% from C$7.6 billion ($7.5 billion) reported in the comparable prior-year period. Revenue growth was mainly due to higher interest as well as non-interest income.

Net interest income came in at C$3.3 billion ($3.3 billion), up 6.7% from C$3.0 billion ($3.0 billion) reported in the comparable prior-year period. Non-interest income stood at C$4.6 billion ($4.6 billion), almost in line with the year-ago quarter’s level.

For the quarter, non-interest expenses were recorded at C$2.1 billion ($2.1 billion), up 11.4% from C$1.9 billion ($1.9 billion) recorded in the prior-year quarter. The increase was marked mainly by higher human resources, occupancy and equipment expenses.

Credit Quality

Total provision for credit losses stood at C$349 million ($347 million) in the quarter, up 31% from the year-ago quarter, primarily due to provisions on a couple of accounts in the wholesale portfolio, partly offset by lower write-offs related to the credit card portfolio.

Capital Position

As of Jan 31, 2012, Royal Bank of Canada reported total loans of C$382.9 billion ($383.7 billion), up 8% from the prior year.

Moreover, deposits climbed to C$514.6 billion ($515.7 billion) up 5% as of Jan 31, 2012. Total assets were C$837.6 billion ($839.5 billion), up 3% as of Jan 31, 2012.

As of Jan 31, 2013, Royal Bank of Canada’s Tier 1 capital ratio came in at 11.5%, down 70 basis points (bps) from the prior-year quarter. Total capital ratio was 14.3%, down 2 bps year over year.

The company’s estimated pro-forma Basel III common equity Tier 1 ratio was about 9.3%, up 90 basis points compared with 8.4% last quarter, reflecting the delayed regulatory implementation of the credit valuation adjustment (CVA) capital requirements and strong internal capital generation.

Dividend Update

Concurrent with the earnings release, the company’s board of directors approved an increase in quarterly dividend of 5%, to 63 cents per share. The increased dividend will be paid on and after May 24, 2013, to shareholders of record at the close of business on Apr 25, 2013.

Our Viewpoint

Going forward, we expect Royal Bank of Canada’s strong business model, diversified product mix and sturdy capital position to boost its bottom line. However, a persistent low interest rate environment, weak economic recovery and stringent regulatory requirements will remain a drag on its financials.

Royal Bank of Canada currently carries a Zacks Rank #3 (Hold). Foreign banks that are performing well include Bank of China Limited (BACHY), Banco do Brasil S.A. (BDORY) and Credit Suisse Group (CS - Snapshot Report). Bank of China carries a Zacks Rank #1 (Strong Buy), while the other 2 stocks carry a Zacks Rank #2 (Buy).

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