David Friend, THE CANADIAN PRESS

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TORONTO - Royal Bank of Canada (TSX:RY) says its third-quarter net income fell 10 per cent to $1.26 billion from a year ago as writedowns and provisions for bad loans offset gains in RBC's domestic banking business.

Profit at Canada's largest bank was impacted by writedowns, which reduced income by $263 million after tax or $498 million before tax, and by increased provisions for bad loans at its U.S. banking business, RBC announced Thursday.

Diluted earnings per share were worth 92 cents from $1.06 a share.

Shuffling out one-time charges, earnings per share were worth $1.14 for the period, above a forecast of $1.05 per share averaged out from 10 analysts by Thomson Financial.

Shares in the bank rose nearly six per cent in afternoon trading, up $2.65 to $47.95 on the Toronto Stock Exchange.

RBC Capital Markets accounted for about two-thirds of the quarter's writedowns. That part of Royal's business saw its net income fall by 25 per cent to $269 million, down $91 million from a year earlier.

Royal's international banking arm was in the red. Its net loss was $16 million, down $103 million from net income of $87 million a year ago.

The bank attributed the loss at its international banking arm to higher provisions for credit losses and to a writedown of $53 million before-tax ($33 million after-tax) on the investment portfolio in its U.S. banking operations.

Royal's provision for credit losses was $334 million, nearly double the $178 million recorded a year earlier but down slightly from the $349 million set aside in the second quarter ended April 30.

"We continue to see these asset writedowns dribble out quarter after quarter," said Craig Fehr, a financial services analyst with Edward Jones in St. Louis.

"My expectation is that until we see some substantial improvement in capital markets, that's likely going to continue to be the case, although I don't think we see any outside writedowns going forward."

On a brighter note, RBC Financial says its Canadian banking business did well. The domestic retail banking had net income of $709 million, up 19 per cent from the third quarter of 2007, thanks to strong growth across all its business lines and cost cutting.

The bank's wealth management business also grew its profits. Wealth Management net income was $186 million, up five per cent or $9 million over last year on higher fee-based revenue, including the contribution from recently acquired Phillips, Hager & North.

Royal's relatively new insurance division had net income of $137 million, up 33 per cent or $34 million over last year mainly due to actuarial adjustments.

The bank decided to keep its dividend rate unchanged at 50 cents per common share.

"Our ability meet our objectives has been impacted by the writedowns as well as higher provisions for credit losses in U.S. banking. However our capital position remains strong," said RBC president and chief executive Gordon Nixon in a conference call.

Overall revenue was $5.9 billion, up from $5.48 billion in the third quarter of 2007 and up from $4.95 billion in the second quarter ended April 30.

Nixon also said that the bank hasn't ruled out acquisitions in the United States.

"We look at the U.S. with a tremendous amount of caution given the current operating environment," he said.

"But we also want to be positioned to take advantage of opportunities, which sounds a little bit wishy-washy, but I think it's very consistent with where we've been for quite some time."