(Refiles to correct day in first paragraph to Thursday from Wednesday)
* Core profits top estimates, net results slip
* RBC, TD raise dividends
* Capital markets profit falls
* TD profit hit by litigation reserve
* Shares of both banks rise
By Cameron French
TORONTO, March 1 (Reuters) - Canada’s two biggest banks surprised the market with dividend hikes on Thursday as record earnings from their domestic bank networks helped them turn in better-than-expected quarterly profits.
Analysts said the first-quarter results from Royal Bank of Canada and Toronto-Dominion Bank showed dour predictions for sluggish revenue growth in the Canadian banking sector have yet to take hold.
“It seems to be that at today’s low level of interest rates there’s additional capacity for lending to households, and that the banks are looking to fill it,” said Peter Routledge, an analyst at National Bank Financial.
The results helped push up shares of both banks in early trading even though their net profits were down in comparison with the year-before quarter, when results were lifted by blockbuster capital markets revenue.
Net income at RBC, Canada’s largest bank, eased by 6 percent to C$1.88 billion ($1.91 billion), or C$1.23 a share, from C$2.00 billion, or C$1.31 a share, a year earlier.
The result excluded results from RBC’s U.S. retail bank, which it agreed to sell last year. That deal is expected to close on Friday, RBC Chief Executive Gordon Nixon said on a conference call.
Excluding special items, profit was C$1.25 a share, topping analysts’ forecasts for a profit of C$1.13.
At TD Bank, net income was C$1.48 billion, or C$1.55 a share, down 5.1 percent from C$1.56 billion, or C$1.67 a share, a year earlier.
Hurting the result was a C$171 million litigation reserve set aside to cover costs related to a $1.2 billion Ponzi scheme run by Florida lawyer Scott Rothstein.
TD was ordered to pay $67 million in January after losing a Miami verdict related to its involvement in the case, and then settled a separate lawsuit in February.
Excluding that charge and other items, the bank earned C$1.86 a share. Analysts on average had expected C$1.76, according to Thomson Reuters I/B/E/S.
Royal Bank’s Canadian banking income rose 7 percent to a record C$994 million, helped by higher lending volumes and credit quality, but offset by narrower interest margins.
Analysts and bank executives had warned of slowing consumer loan growth due to several factors, including record levels of consumer indebtedness, a slowly recovering economy, and warnings from government officials that borrowing is hitting dangerous levels.
Royal said loan growth was “across the board”, but acknowledged that consumers are becoming more cautious, particularly with their credit cards.
Some analysts have warned a drop in borrowing could trigger a housing market collapse, but Nixon said the bank was comfortable with its loan portfolios. “We do not see any major cause for concern in the Canadian housing market,” he said.
Royal’s results were hit by a 30 percent drop in capital markets income to C$448 million, as trading revenues weakened following an abnormally strong period in early 2011. However, the results were stronger than during the fourth quarter and were ahead of analysts’ modest expectations.
The overall strength allowed the bank to boost its quarterly dividend by 6 percent to 57 Canadian cents a share.
“This was a surprise and could indicate that the board is comfortable assuming that higher run-rate contributions from capital markets could continue,” Barclays Capital analyst John Aiken said in a note.
TD, Canada’s No. 2 bank, also boosted its dividend payout - by 6 percent to 72 Canadian cents a share - a move that had been predicted by some analysts, but was hardly a consensus view.
Aiken pointed to strong cost controls at the bank as a reason for the profit beat.
Income from the bank’s flagship Canadian banking unit rose 11 percent, helped by lending growth, particularly on the business side. U.S. retail banking income from TD’s 1,300-strong branch network climbed 6 percent to $165 million.
TD Chief Financial Officer Colleen Johnston said the result reflected a better-than-expected recovery in the U.S. financial sector.
“I wouldn’t characterize it as a buoyant recovery, I would characterize it as a slow mend, but I think all of us thought it was going to be tougher,” she said.
TD’s capital markets-related income slid 17 percent to C$194 million from the abnormally strong first quarter of 2011.
In early trading, RBC shares were up 1.9 percent at C$56.75, while TD shares were up 1.2 percent at C$81.80, among the strongest performers among Canadian financial stocks.
Smaller competitor Bank of Montreal reported slightly stronger-than-expected results on Tuesday. BMO’s profit gain was based largely on lower loan losses.
$1=$0.985 Canadian Reporting By Cameron French; Editing by Peter Galloway