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RBC profit falls 7% on Dexia buyout

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Profit at Royal Bank of Canada (RY-T) fell 7 percent in the second quarter, driven by a $202-million loss the bank took on the buyout of RBC Dexia Investor Services from its partner in April.

Canada's largest bank made $1.56 billion, or $1.01 a share, on continuing operations in the quarter, which was slightly lower than what analysts were expecting. That compared to net income of $1.68 billion, or $1.10 a share during the same quarter a year ago.

The results from continuing operations do not include earnings from the bank's money-losing U.S. branches, which were sold off last summer and would have impacted last year's second quarter.

Not including the loss RBC took on its purchase of the 50 percent of RBC Dexia it did not already own, the bank made $1.77 billion on continuing operations in the second-quarter, up 5 percent compared to the year before.

With the Dexia sale factored out, the bank said it made $1.17 a share in cash earnings, which was marginally lower than the $1.18 a share analysts were expecting, according to a poll by Thomson Reuters First Call.

"At a first glance, we would characterize the results as solid, if unspectacular," analyst John Aiken at Barclays Capital said in a research note to clients Thursday morning.

RBC announced in April it would purchase the other half of RBC Dexia from its European partner, Banque Internationale à Luxembourg SA. The $1.1-billion cash deal included a writedown on the assets, which the bank said at the time would impact the second quarter.

The stake went on the block when the parent company of Banque Internationale à Luxembourg, Dexia SA, was forced to jettison assets to stabilize its operations after being hit hard by the European banking crisis. Despite the loss taken on the acquisition, the stake in RBC Dexia Investor Services is among Banque Internationale's collection of profitable assets that were being sold to raise capital, RBC said at the time.

The European business advises institutional investors and administers large pensions and investment funds. Though it does not manage most of its funds directly, the business acts as a custodian bank for $2.8-trillion worth of assets, earning lending fees while also overseeing the movements of those investments.

Several other deals and unusual items affected RBC's second-quarter earnings.

RBC's core Canadian banking operations made $937 million, down 6 percent from the previous year due to higher credit losses in its commercial lending book. However, the bank noted its second quarter last year included a one-time gain on the sale of its shares in Visa. Without that gain, core earnings in the Canadian banking segment increased 7 percent in the second-quarter of 2012, RBC said.

RBC's large capital markets division made $449 million in the quarter, up 11 percent from a year ago, driven by higher trading activity.

The bank's wealth management division, which caters to high-end clients, made $212 million in the quarter, down 7 percent from the same period in 2011, when the bank reported favourable tax adjustments of $26 million. Excluding those one-time gains last year, profit in the division increased 5 percent, RBC said.

RBC's insurance division made $151 million, up 23 percent from the year before, while its international banking reported a net loss of $196 million, taking into account the $202-million loss from the Dexia acquisition.

"With RBC Dexia, we look forward to having a 100-percent ownership, as this is a strong business in an attractive sector where we can win additional business and drive growth," RBC chief executive officer Gordon Nixon said.

Provisions for credit losses, or the amount of money a bank sets aside to cover bad loans, were $348 million, an increase of $75 million over last year. The jump included an increase in losses in some of the bank's wholesale loans in the Caribbean, and corporate and commercial accounts in Canada.

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