* CEO says RBC can react quickly if situations materialise
* Funds set aside to cover bad loans decrease
* Earnings per share of C$1.72 edge past expectations (Recasts to add CEO comments from conference call)
By Matt Scuffham
TORONTO, Aug 24 (Reuters) - Royal Bank of Canada RY.TO , Canada's biggest bank, said it was closely monitoring home prices in Vancouver and Toronto after reporting slightly higher-than-expected quarterly earnings on Wednesday.
Canada's banks are facing heightened scrutiny of their mortgage underwriting practices as authorities try to tackle the potential threat of a housing bubble in the two cities, where prices have soared. Chief Executive Officer Dave McKay said the bank was watching those markets, although it has less exposure to Vancouver than rivals.
"We have prudent underwriting practices in place, with the necessary technology to closely monitor these markets and quickly react if situations materialise," McKay said.
He added that the bank supported the federal government's move to set up a working group to look at the issue.
RBC's earnings for the third quarter ended on July 31 benefited from rising oil prices that allowed it to set aside less money to cover energy companies' bad loans.
The bank's wealth management business performed well, offsetting weakness in insurance.
Like other Canadian lenders, RBC had seen an increase in delinquent loans to oil and gas companies due to declining energy prices.
Crude fell to a 13-year low of $25 a barrel in January but recovered by about 30 percent during RBC's latest quarter, providing relief to energy companies that had been struggling to repay debt.
RBC said its provision for credit losses had fallen 12 basis points to 0.24 percent of its total loans during the quarter, with most of the decline in the oil and gas sector.
Earnings before one-off items were C$1.72 per share, compared with C$1.66 a year earlier. Analysts on average expected C$1.70, according to Thomson Reuters I/B/E/S.
Shares of RBC were down 0.4 percent in morning trading.
Profit from the wealth management division increased by 36 percent to C$388 million, benefiting from the contribution of Los Angeles-based City National, which RBC acquired for $5 billion last year.
City National, known as Los Angeles' "bank to the stars" because of its ties to the movie industry and celebrities, gives RBC an opportunity to access high net-worth clients in the United States.
Earnings from RBC's insurance business fell 25 percent to C$129 million due to weakness in annuity contracts in Britain after the nation's vote to exit the European Union and to the impact of the Fort McMurray wildfires in Alberta.