* RBC books 9% loan growth, at TD up 3%
* Provisions jump at RBC, TD, weigh on shares
* RBC shares down over 2%, TD trims early gains
By Aparajita Saxena and Bharath ManjeshR
May 23 (Reuters) - Royal Bank of Canada RY.TO and Toronto-Dominion Bank TD.TO , Canada's two largest lenders, beat analysts' estimates for quarterly profit on Thursday as strong loan growth boosted interest income, but a spike in provisions for soured loans spooked investors.
Canadian lenders are faced with a sharply slowing economy, a cooling house market, with a record high household debt-to-income ratio stoking concerns of loan losses. Both banks posted double-digit growth in money set aside for such losses in the second quarter.
On Wednesday, smaller rival Canadian Imperial Bank of Commerce CM.TO estimated zero earnings growth, sending its shares down for a second straight day on Thursday. quarter's higher provisions seemed to be an anomaly, but with Q2 also higher, we think it could be the beginning of an overall weakening," Chris Kuiper, senior analyst at CFRA Research, said.
"The first time, it was easy to give them a pass as a "one-off" but with the second quarter also showing higher provisions it seems like this is becoming more of a trend," he added.
RBC blamed losses in personal and commercial banking for a 55% rise in quarterly provisions. On a post-earnings call with analysts, bank executives said that some of their oil and gas clients had come under pressure due to a fall in crude prices.
Provisions at TD rose 14% to $633 million from a year earlier due to increase in money set aside to meet future losses in the banks' personal lending portfolios.
RBC also said it expected net interest margin or NIM, a key measure of profitability, to be relatively flat over the next several quarters, given the outlook for interest rates.
RBC shares were down 2.4%, while TD shares rose 2.2%, helped by a stronger earnings beat, and relative share price underperformance ahead of the earnings.
MORTGAGE IN FOCUS
The Canadian central bank and U.S. Federal Reserve have paused interest rate hikes after raising them multiple times since July 2017.
In the reported quarter, higher rates in Canada and the United States helped improve NIMs at the banks, as they earned more from loans than they paid out on deposits.
Total loans at RBC jumped 9% in the second quarter, while at TD, they rose 3%, with home, personal and business lending showing growth. CIBC , which is most exposed to Canadian economy, reported negligible quarterly loan growth on Wednesday.
Residential mortgage loan growth has been a focus for investors following stringent regulatory changes that require borrowers of uninsured mortgages to be stress-tested to check their ability to repay.
"Regulatory changes have helped some of Canada's major housing markets stabilize, particularly in Ontario and to the East. Western Canadian markets remain under downward pressure," said RBC Chief Executive David McKay.
Loans grew not only in the domestic markets, but also in the United States, where both banks have sizeable businesses.
"RBC is showing decent domestic loan growth and strong growth south of the border," said John Aiken, an analyst with Barclays (LON:BARC). At TD, "underlying retail loan growth remains strong on both sides of the border," he added.
TD's net income, excluding special items, rose to C$3.27 billion ($2.43 billion), or C$1.75 per share, in the three months ended April 30, from C$3.06 billion, or C$1.62 per share, a year earlier. [https://reut.rs/2whvJDj ]
Analysts on average expected earnings per share of C$1.67, according to IBES data from Refinitiv. rose at RBC on "improved market conditions and increased client activity," while it fell at TD due to "challenging market conditions and reduced client activity."
Top U.S. investment banks reported huge declines in equities trading in the most recent quarter due to the U.S.-China trade war.
RBC's adjusted earnings per share of C$2.23 beat analyst estimates of C$2.21, while TD's C$1.75 per share profit beat estimates by 8 Canadian cents. (https://reut.rs/2JXVLU9) ($1 = 1.3474 Canadian dollars)