Royal Bank of Canada said on Friday that quarterly profit rose 10 percent as strong domestic banking offset losses in its big U.S. operations, but the results were not as impressive as rivals have reported.

The results were solid, as one would expect from Royal, but the problem being that several of its competitors reported quarters which stood out much more, Barclays Capital analyst John Aiken said in a note to clients.

Canada's largest bank said core cash earnings were just over C$1.06 a share, matching the average analysts' estimate compiled by Thomson Reuters I/B/E/S.

The headwinds were just as expected: RBC set aside more money to cover bad loans as consumers and businesses struggled to repay debts amid the recession, especially in the United States, and trading revenues cooled from the red-hot pace of previous quarters.

The amount of money set aside to cover bad loans rose to C$883 million from C$619 million, mostly due to credit woes in the company's big U.S. retail banking group, which is concentrated in the recession-hit U.S. Southeast.

But once again, RBC's strong domestic retail banking operation, with branches in nearly every city and town in Canada, muscled past the obstacles, pushing net income up 6 percent from a year earlier.

While provisions for loan losses in Canada were up from a year earlier, they declined from the third quarter as the bank set aside less money to cover bad business loans. The sequential drop in loan losses suggests credit woes may be beginning to ebb, at least in Canada.

International banking had a net loss of C$125 million, continuing a string of weak results this year.

We are working hard to address the challenges in our U.S. banking operations by improving our operating model and building efficiencies to ensure that we are well positioned when the environment improves, Chief Executive Officer Gordon Nixon said in a statement.

But the U.S. operations are not the only concern to analysts. After huge trading gains through much of 2009, RBC's big capital markets operations saw income fall C$23 million to C$561 million, in part because the 2008 results included gains from Enron-related litigation.

Trading results were once again stronger from a year earlier, but were down 20 percent from the third quarter -- a downward trend that is expected to continue as financial markets stabilize.

Without the outsize boost from capital markets, the price of Royal's shares -- they closed Thursday at C$57.48, close to a 52-week high -- may start to look hefty.

While it is very difficult to argue with the strength of its domestic franchises, our issue with Royal remains its absolute valuation levels, Aiken said. On a relative basis, although Royal's earnings were quite strong, particularly in context with the current economy, we note they lack the 'standout' quality that some of its peers reported this quarter.

By the numbers, RBC's net income increased to C$1.24 billion, or 82 Canadian cents a share, in the fourth quarter ended Oct. 31 from C$1.12 billion, or 81 Canadian cents a share, a year earlier.

Core cash income, which excludes securities-related losses, restructuring charges and amortization of intangibles, was C$1.6 billion, or C$1.06 per share.

The bank also ended the year with huge capital levels. Its Tier I ratio rose to 13.0 percent, among the highest in global banking. While the big capital position detracts from potential earnings, it puts RBC in a good position to make acquisitions as weaker international rivals recover from the financial crisis.

Our capital ratios remain at historically high levels and provide us with a competitive advantage along with substantial flexibility, Nixon said. We have tremendous opportunities to invest in our existing businesses and toward other opportunities consistent with our strategy.

Nixon has previously said the bank would like to increase its global wealth management business and build on primary dealing in U.S. Treasuries.

($1=$1.05 Canadian)

(Reporting by Andrea Hopkins; Editing by Lisa Von Ahn)

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