UPDATE 4-Royal Bank of Canada profit tops estimates; watching energy borrowers

(Adds interview with CFO)
By John Tilak
TORONTO, Dec 2 (Reuters) - Royal Bank of Canada RY.TO
posted an 11 percent rise in fourth-quarter profit that topped
market expectations on Wednesday as gains in retail banking and
capital markets more than offset bad loans in the oil and gas
sector.
For the year, the lender, Canada's most valuable company by
market capitalization, recorded C$10.03 billion ($7.49 billion)
in earnings, the first time a Canadian company has topped C$10
billion in a fiscal year.
Shares of RBC rose in the morning session but were down
slightly in afternoon trading.
Canadian banks have managed to largely shrug off a soft
domestic economy, concerns about the housing market and fallout
from an oil price slump.
But Barclays (L:BARC) analyst John Aiken cautioned he expects RBC's
domestic operations to come under pressure next year because of
a weak outlook for the Canadian economy.
"When we look into 2016, it doesn't dissuade our thesis that
there will be ongoing challenges," he said.
The oil price slump has had a mixed effect on Canadian bank
results. Bank of Nova Scotia BNS.TO reported a rise in bad
energy-sector loans for the quarter, while the number was
essentially flat for Bank of Montreal BMO.TO .
RBC's gross impaired loans in the oil and gas sector slipped
to C$156 million in the fourth quarter from C$183 in the third,
though the number was sharply higher than a year earlier.
The lender has been conducting stress tests on energy
companies that have borrowed money and added eight new companies
to its energy watch list in the quarter for closer monitoring.
"We saw some deterioration in some borrowers, so we reduced
credit availability," said Chief Financial Officer Janice
Fukakusa, adding that about 1 percent of RBC's oil and gas
portfolio is on the watch list.
However, a pickup in merger-and-acquisition activity in the
energy sector could offset the broader weakness, she said in an
interview.
RBC is seeing early signs of stress in Alberta and noticed a
slight increase in auto and credit card delinquencies, Chief
Risk Officer Mark Hughes said on a conference call.
RBC's net income rose to C$2.59 billion, or C$1.74 per
share, for the quarter ended Oct. 31. Excluding special items,
earnings were C$1.77 per share. Analysts, on average, expected
C$1.64 a share, according to Thomson Reuters I/B/E/S.
The latest quarterly results were also supported by a lower
effective tax rate that the company attributed to favorable
income tax adjustments.
($1 = 1.3398 Canadian dollars)