TORONTO -- Royal Bank of Canada hiked its dividend and delivered a five per cent bump in quarterly profits despite "challenging market conditions" that weighed on some divisions and higher loan losses due to a "fallen angel" in the U.S. utility sector.

The Toronto-based lender's earnings for its financial first quarter met street expectations on solid earnings from its personal and commercial banking, and insurance arms, but RBC saw flat results from wealth management and lower results in capital markets and investor and treasury services after a sharp selloff in equity markets at the end of 2018.

RBC's chief executive Dave McKay said Friday it was a "strong start to the year" where the bank's diversified business "really shows through in a quarter that had significant volatility, particularly in December."

"Underlying all of that is significant client momentum, market share gains and great core activity that we're able to earn through," McKay told analysts on a conference call. "We feel, as we pointed out, very good about the activity levels in our business and the momentum our business has heading into the rest of the year."

Canada's biggest lender by market value reported quarterly net income of $3.17 billion, up from $3.01 billion a year ago as it raised its quarterly payment to common shareholders by four cents to $1.02 per share.

The bank's net income for the three-month period ended Jan. 31 amounted to $2.15 per diluted share, compared with $2.01 one year ago. After adjustments, RBC earned $2.19 per diluted share, matching the $2.19 per share expected by analysts, according to Thomson Reuters Eikon.

RBC was the first of Canada's biggest banks to report earnings for the financial first quarter, traditionally the strongest period of the entire year.

And while the bank's core retail banking arm continued to benefit from higher deposit spreads after a raft of interest rate hikes, the volatility on equity markets at the end of 2018 became a headwind for the lender. North American markets saw a sharp selloff at the end of last year amid political tensions including a trade battle between China and the U.S., but saw a recovery in January.

RBC's personal and commercial banking division earned net income of $1.57 billion, up 3.3 per cent from the same period a year earlier, mainly due to volume growth and higher deposit spreads. RBC's insurance arm reported net income of $166 million, up 31 per cent from the prior year period.

Its wealth management arm delivered earnings of $597 million, flat from the same period a year ago, due to factors including higher costs related to business growth and "lower transaction volumes as uncertainty impacted equity markets."

Earnings for RBC's capital markets division totalled $653 million, down 13 per cent from a year earlier, largely due to higher provisions for credit losses and lower revenue in corporate and investment banking and lower issuance activity.

RBC's investor and treasury services arm saw net income drop 26 per cent to $161 million, primarily due to lower funding and liquidity revenue, higher costs in support of business growth and lower revenue from its asset services business due to challenging market conditions and lower client activity.

RBC's rising loan losses highlight potential risk for Canadian banks' earnings growth

Robert Wessel, managing partner at Hamilton Capital, offers insight and analysis of Royal Bank's quarterly earnings and any clues as to what to expect for the rest of Canada's biggest banks.

Meanwhile, the bank's Canadian residential mortgage portfolio rose to $269 billion, up from $258 billion a year ago, as homebuying activity slowed in the greater Vancouver and Toronto areas.

The bank's common equity tier 1 ratio (CET1), a key measure of financial health, was 11.4 per cent, down from 11.5 per cent during the previous quarter, but up from 11 per cent a year ago.

RBC's provisions for credit losses, or money set aside for bad loans, in the latest quarter increased 54 per cent to $514 million, compared with $334 million a year earlier, "mainly due to a higher provision on impaired loans in capital markets taken on one account in the utilities sector," the bank said.

McKay referred to the account as a "fallen angel" in the utility sector during the conference call.

The bank did not name the particular company, but it is assumed to be Pacific Gas and Electric in California, or PG&E, said Robert Sedran, an analyst with CIBC Capital Markets.

PG&E recently filed for bankruptcy as the U.S. utility faces billions of dollars in potential damages stemming from wildfires in California. Its equipment has been blamed for starting some of the destructive blazes in recent years.

Still, RBC delivered "good overall results considering the backdrop," said Sedran in a note to clients.

"The higher loan losses do not appear to be systemic, as underlying delinquency trends remain stable, and we expect market-sensitive areas to settle back down somewhat."

While RBC's earnings per share for the quarter was in line with expectations, the bank's results were of "lower quality," said Scott Chan, an analyst with Canaccord Genuity Capital Markets, in a note to clients.

"In the context of (RBC)'s share price appreciation heading into the quarter, we view these results as underwhelming," Chan wrote.

The lender's latest earnings come one day after the City of Philadelphia filed an anti-trust class action lawsuit against seven major banks operating in the U.S., including RBC, for "conspiring to inflate the interest rates" for a type of bond known as variable rate demand obligations or VRDO's.

RBC declined to comment on the lawsuit.

The legal action was filed in a U.S. court against banks including Bank of America and J.P. Morgan Chase on behalf of the city and other VRDO issuers, largely state and local public entities such as municipalities and hospitals, according to court documents.