TORONTO - Royal Bank of Canada on Wednesday reported a bigger-than-expected decline in fourth-quarter profit and said it was trimming back a key financial target, sending its shares lower.

RBC said earnings per share fell to $1.65 from $1.74 the year before, reflecting a decline in profit at its capital markets division and an increase in funds set aside to cover bad loans. The earnings were below the $1.71 average analyst forecast, according to Thomson Reuters I/B/E/S.

Shares in RBC, Canada's largest bank, were down 1.9 per cent in early trading.

Speaking to analysts on a conference call, Chief Executive Dave McKay said the bank had decided to revise its medium-term target for return on equity (RoE), a key measure of how well it uses shareholder capital to earn profits.

RBC is now aiming for RoE of at least 16 per cent, compared with 18 per cent before, a level which is still higher than the majority of large banks around the world.

McKay said the decision to lower the target was made because of "the pressure on returns in the market including persistently low interest rates and uncertainty on regulatory capital requirements."

"This new level continues to give us flexibility to grow our business including abroad," he said.

McKay said RBC would continue to pursue smaller acquisitions in the United States to help expand Los Angeles-based City National, which it bought for $5 billion last year.

"We will look for selective, small, tuck-in opportunities to grow City National in the U.S.," he said.

RBC said its overall net income fell by 2 per cent to $2.54 billion. Earnings at its capital markets business fell 13 per cent, which the bank said was partly due to it benefiting from a lower tax rate the year before.

RBC set aside $358 million to cover the cost of loans that borrowers cannot repay, up from $318 million the previous quarter and $275 million the same quarter a year earlier. The bank said its gross impaired loans totaled $3.9 billion, up $1.6 billion from a year ago, largely due to higher impaired loans to the oil and gas industry.

Like other Canadian and U.S. lenders, RBC had seen an increase in delinquent loans to oil and gas companies due to declining energy prices. Although oil prices have partially recovered since falling to a 13-year low of $26 a barrel in February, they remain well below 2014 highs.