Royal Bank of Canada and Toronto-Dominion Bank provided more evidence Thursday that Canadian banking companies are still coming to grips with the challenges posed by U.S. credit quality.

The companies' U.S. operations suffered from significant spikes in provision expense and problem loans in the fiscal 2008 third quarter, and their results for the period offered little hope that the credit problems would go away anytime soon.

Provisions in Royal Bank's international banking business, which includes RBC Bancorp (USA) in Raleigh, rose nearly tenfold from a year earlier, to $133.9 million, in the quarter, which ended July 31. Impaired loans in the United States totaled $1.13 billion, versus just $167.9 million a year earlier.

Royal Bank's international unit swung to a $15.6 million net loss, compared to $81.6 million in profit a year ago. The quarter included $51.8 million in writedowns on alternative-A residential mortgage-backed securities and agency preferred stock. Credit costs overshadowed a 19.4% increase in U.S. banking revenue from a year earlier, to $338 million.

Gordon M. Nixon, Royal Bank's chief executive, said during its earnings conference call that U.S. credit issues "remain manageable" for a company of its size. "We are focused on having a good earnings recovery when the credit markets improve," he said.

Toronto-Dominion's U.S. personal and commercial banking unit reported a 140% rise in provisions from a year earlier, to $74.3 million. It said there was "continued softness in real estate markets" but that overall asset quality remained "solid." Impaired loans rose $101.6 million from a year earlier, but mainly because of loans obtained in the March purchase of Commerce Bancorp Inc. of Cherry Hill, N.J.

Toronto-Dominion reported that earnings for its U.S. operations rose 133% in its third quarter, to $238.4 million, though that also is skewed by the Commerce acquisition. The results included $28.4 million in expenses tied to the purchase. Revenue rose 121% from a year earlier, to $1.01 billion.

Brad Smith, an analyst at Sun Life Financial Inc.'s Blackmont Capital Inc. in Toronto, said Royal Bank of Canada is "being the most proactive" in tackling credit issues. "U.S. banking remains a relatively small element," he said. "They can afford to be aggressive with provisioning, since it really has a muted impact on overall results."

Morten Friis, Royal Bank's chief risk officer, said during its earnings call that 13% of its loan portfolio is in the United States. Despite some weakness in home equity and residential lot loans, he said, "we have not seen widespread issues in our general U.S. commercial and retail portfolios." The company also increased its exposure to commercial real estate with its February purchase of Alabama National BanCorp.

Profit at the $622 billion-asset Royal Bank rose 6.1% from a year earlier, to $1.23 billion. The quarter's loss in the international segment was roughly 1.2% of that amount.

Toronto-Dominion's profit fell 7.3% from a year earlier, to $954.6 million, weighed down largely by its wholesale banking unit. The $497.2 billion-asset company's U.S. business accounted for about 25% of its bottom line, compared with 10% a year earlier.

Edmund Clark, Toronto-Dominion's president and CEO, addressed doubts over its credit quality during an earnings conference call Thursday.

"I know that the market continues to struggle with the fact that we … are not recording big loan losses" in the United States, but a Northeast orientation, conservative loan mix and underwriting, and an aversion to third-party originations are what set the company apart, Mr. Clark said. "That is our triple play," he said. "When you consider these factors, it is really not surprising why we're confident we will continue to be a positive outlier on asset quality. We cannot outrun the U.S. environment, but we can do better in that environment."

Canadian bankers for the most part sound hesitant to increase their U.S. exposure despite a value window that may closing with the recent resurgence of the U.S. dollar. Mr. Nixon gave analysts what he admitted was a "wishy-washy" response to their questions, saying he views the U.S. market "with a tremendous amount of caution … but we also want to take advantage of our options and pay attention to what is going on."

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