Canada's RBC, CIBC post bigger-than-expected profits on capital markets strength

By Nivedita Balu and Manya Saini

TORONTO (Reuters) - Royal Bank of Canada (RBC) said on Thursday the investment banking environment looked promising after the country's biggest bank surpassed profit expectations, driven by its capital market business.

Canadian Imperial Bank of Commerce, the country's fifth-largest bank by asset value, also beat profit expectations on capital markets strength and as it set aside smaller than expected funds for potential loan losses.

The resurgence in merger and acquisition activity after a long lull as interest rates soared, has helped Canadian banks' capital markets businesses in recent quarters, even as loan loss provisions limit profits.

The results round out a mixed earnings season for Canada's big six lenders, which have been looking to diversify in the U.S. as domestic competition intensifies.

RBC and CIBC shares rose about 4% and 5% respectively, lifting the broader TSX finance index.

"We continue to think the environment will remain quite constructive if we look at the fundamentals for investment banking," said Derek Neldner, head of RBC Capital Markets.

He said, however, that banks face a seasonal slowdown in merger activity in the second half of the year and uncertainty about high interest rates and global elections, including in the United States.

"If we're in a higher-for-longer scenario and financing costs remain a little elevated, combined with... uncertainty as we look at a range of global elections underway, we think that will likely moderate activity," he said.

RBC's capital markets segment recorded a 31% rise in net income in the quarter.

The top six Canadian banks, which together control more than 90% of the country's banking market, have struggled amid high interest rates that strained consumers' wallets as monthly mortgage payments, credit card bills and living costs rose.

Provisions for credit losses at RBC came in at C$920 million ($673.45 million), higher than analysts' forecast of C$880 million, according to LSEG data.

CIBC recorded lower loan loss provisions in its commercial banking segment in Canada and the U.S., a market where it was previously hit due to its exposure to office real estate.

RBC's quarter highlighted "manageable credit costs, and a solid capital position" following the acquisition of HSBC's domestic unit this year, KBW analyst Mike Rizvanovic said.

"A solid quarter overall," he said on CIBC's performance.

RBC's profit climbed 7% to C$3.95 billion. On a per-share basis, it earned C$2.92, beating the average estimate of C$2.75.

CIBC earned C$1.75 per share, topping the estimate of C$1.65 per share.

($1 = 1.3661 Canadian dollars)

(Reporting by Nivedita Balu in Toronto, Manya Saini and Arasu Kannagi Basil in Bengaluru; Editing by Shilpi Majumdar, Shinjini Ganguli, Andrew Heavens and Rod Nickel)