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Royal Bank of Canada's earnings rise despite weak capital markets

* Q1 EPS C$2.19, in line with market forecasts

* Net income up 2 percent to C$3.17 billion

* Capital markets net income down 13 percent (New throughout, adds comment from CFO, analyst, updaes share price)

By Matt Scuffham

TORONTO, Feb 22 (Reuters) - Royal Bank of Canada on Friday said first-quarter earnings rose in line with market expectations, as growth in personal and commercial banking offset lower earnings at its capital markets division.

Canada's biggest lender by market value said earnings per share grew by 7 percent in the quarter to Jan. 31 to C$2.15. Adjusted earnings per share were C$2.19, in line with the average analyst forecast according to IBES data from Refinitiv.

Net income rose by 5 percent to C$3.17 billion ($2.40 billion), the bank said. That included growth of 3 percent at its personal and commercial banking business, helped by increased sales and improved margins thanks to higher Canadian interest rates. Like other Canadian banks, RBC has benefited from the Bank of Canada raising rates five times since July 2017.

However, net income at the bank's capital markets division declined by 13 percent due to an increase in funds set aside to cover bad loans and a decline in revenue from corporate and investment banking due to challenging market conditions. Global stock markets declined during the period due to investor concerns about rising interest rates and escalating trade tensions between the U.S. and China.

"This quarter the markets were choppy, weak in the first half of the quarter and strong in the second half of the quarter," Chief Financial Officer Rod Bolger said in an interview.

Shares in the bank have underperformed the Toronto Stock Exchange's banks index so far this year, partly due to concerns over the outlook for capital markets, which make up a higher proportion of its earnings than rival Canadian banks.

Shares in RBC were down 1 percent in mid-morning trade, underperforming the TSX banks index which fell 0.1 percent.

"We don't believe that these result will drive any catch-up versus peers in the near term," said Eight Capital analyst Steve Theriault.

Net income at the bank's wealth management business was unchanged from a year ago, RBC said, with increased sales offset by higher costs and increases in funds set aside to cover bad loans. Net income at the bank's insurance business rose by 31 percent from a year ago, partly reflecting lower claims costs.

RBC was the first of Canada's big banks to report first-quarter earnings. Its largest rival, Toronto-Dominion Bank , reports first-quarter earnings next Thursday.

($1 = 1.3209 Canadian dollars) (Reporting by Matt Scuffham Editing by David Goodman, Kirsten Donovan and David Gregorio)