Canada's biggest bank reported a third-quarter profit of nearly $1.4 billion Friday, but said it has $1.1 billion at risk in the collapsing U.S. market for securities backed by junk mortgages.

Royal Bank CEO Gordon Nixon says he is pleased with third-quarter results, and exposure to fallout from the U.S. subprime mortgage problem is 'minimal.'
(Adrian Wyld/Canadian Press)

Even though the profit was higher than analysts expected,  Royal Bank of Canada's share price slipped 43 cents to $55 on the Toronto Stock Exchange, perhaps because it failed to match a 39-per-cent profit increase reported Thursday by TD Bank Financial Group.

Earlier this month, Canadian Imperial Bank of Commerce said its exposure to the U.S. subprime market is as great as $1 billion US. CIBC said it will take a $290 million Cdn pre-tax charge against earnings.

Although RBC's exposure is similar, the larger bank announced no such charge.

RBC also said it has:

• "Minimal" exposure to hedge funds, another recent problem area.
• "Nominal" exposure to a Canadian trouble spot involving asset-backed commercial paper.
• "Minimal" underwriting commitments to leveraged buyouts.

"As at July 31, 2007, we had a $1.1 billion net exposure to the U.S. subprime market, representing less than 0.2 per cent of our total assets," the bank said in a report to shareholders.

The exposure is mainly in the form of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), it said.

CEO Gordon Nixon said in a statement: "RBC has prudent risk management practices designed to proactively manage exposures and control risk. We have a comprehensive framework for managing liquidity and funding, and our current liquidity and funding position is sound."

RBC three-month chart

He said the bank does not lend in the U.S. market for what are called subprime mortgages, meaning home loans to people with poor credit.

"We do not originate U.S. subprime loans, and have minimal exposure to U.S. subprime residential mortgage-backed securities and collateralized debt obligations."

Nixon said he was pleased with the third-quarter earnings, and he had reason to be: The profit was about 25 per cent of revenue and 24 per cent of common equity, the part of the bank's assets owned by the shareholders.

The profit was also better than analysts predicted. It came to $1.06 a share, compared with a street consensus of $1.03.

RBC said it will increase its quarterly dividend by four cents to 50 cents a share in the fourth quarter.

The bank's revenue for the three months to July 31 was $5.48 billion, up from $5.21 billion a year earlier.

Its profit was $1.395 billion or $1.06 a share, up from $1.117 billion or 90 cents.