Source: The Canadian Press

Royal Bank’s chief executive delivered a restrained outlook for the bank’s U.S. business Thursday, telling analysts that stateside operations remain under pressure amid continuing economic uncertainty.

President and CEO Gord Nixon told listeners on a conference call that Royal’s “historical business mix” in the United States — which is weighted towards commercial real estate and residential builder finance — has put a pinch on results in the near term.

Many businesses have stuck to caution this year, limiting expansion of their operations or any other capital intensive initiatives.

However, Nixon reassured analysts that the bank will stick it out.

“Our footprint in the U.S. southeast encompasses some of the hardest hit areas in the recent economic downturn, including Georgia and Florida,” he said.

“We are not a distressed seller of assets as we believe our strategy of working out problem loans over time will result in a better economic outcome.”

Royal Bank (TSX:RY) announced an 18% drop in third-quarter earnings Thursday in a report that showed a major erosion of profits in its capital markets division and continued losses for its international operations.

Canada’s largest bank said it earned $1.28 billion in the three months ended July 31, down from a record $1.56 billion in the same period last year.

Cash earnings were 87 cents per share, falling short of analyst estimates of $1.02 per share, according to Thomson Reuters.

The bank reported diluted earnings per share dropped to 84 cents from $1.05, while return on equity — a broad measure of bank efficiency — fell to 14.3% from 19.4%.

In its other divisions, profits from Canadian retail banking jumped 14% to $766 million, driven by strong volume growth and a lower provision for credit losses.

Wealth management net income rose 10% to $185 million, while insurance profits fell 8% to $153 million.

The international banking operations tightened losses to $76 million in the quarter from $95 million last year, reflecting improved credit losses at its U.S. banking division in the southeastern United States.

Meanwhile, the bank’s capital markets net income fell to $201 million from $562 million a year ago, largely reflecting a decline in trading revenue from record levels last year.

Skittish investors have kept stock market trading restrained in recent months as economic uncertainty — particularly in Europe — wore down their confidence and often left returns at a minimum.

Nixon said the bank’s overall broad operations and strong retail banking presence helped offset weaker capital markets businesses, but that lower trading margins — particularly in Europe — weighed on results.

“If you go back to 2009 and the early part of 2010 there were exceptional positives with respect to trading revenues,” he said, noting that on the flip side the past quarter experienced “exceptional volatility.”

He suggested the capital markets business will right itself, rather than sink back to the dismal levels seen last year.

“I think from a run-rate perspective we’re quite comfortable that it’s not likely to be where we (were) in 2009 but it certainly feels better, and should feel better, than where we are this quarter,” Nixon said.

Royal shares were off 3%, or $1.57, at $49.12 on the Toronto Stock Exchange in late-day trading Thursday.

Royal is one of four big banks to report third-quarter earnings this week. Bank of Montreal (TSX:BMO) missed expectations on Tuesday, while CIBC (TSX:CM) outperformed analyst estimates Wednesday.

National Bank also announced third-quarter results Thursday, reporting net profit fell to $271 million from $303 million for the same period last year. The Montreal bank says it earned $1.56 a diluted share for the third quarter ended July 31, down from $1.78.

All the banks have disclosed erosion at their capital markets divisions, which trade and invest in bonds and stocks and help underwrite company financings, mergers and other transactions.

Barclays Capital analyst John Aiken wrote in a note that despite declining provisions for credit losses and a strong performance in Royal’s domestic retail banking, the weaker capital markets profit was his focus.

“Needless to say this came in well below our expectations and will likely still be a surprise to the market, even after BMO’s poor results,” Aiken wrote.

“While we believe that much of the lost trading revenues will be recovered in future quarters at a higher run-rate, this will mean little in the near term.”

Royal Bank is the country’s largest bank by assets and market capitalization, and has 77,000 employees serving more than 18 million personal, business, public sector and institutional clients. The bank has operations across North America and 52 other countries.