TORONTO -- Royal Bank (TSX:RY) increased its first-quarter profit as Canadian banking and trading operations showed growth, but the bank cautioned that tough economic conditions pose challenges for the industry.

"While we are pleased with our first-quarter results, recent changes in the macro environment created some headwinds," chief executive Dave McKay said after the company reported its results.

RBC raised its dividend Wednesday as it said its first-quarter profit grew 17 per cent from a year ago to $2.456 billion or $1.65 per share.

Despite posting what analysts described as solid results, the bank said it is stress testing its loans to see how they will perform if oil stays at $45 a barrel, the unemployment rate climbs by almost three percentage points and home prices drop by as much as 25 per cent.

"As expected, we are seeing some clients drawing on their (credit) lines given the environment," said the bank's chief risk officer, Mark Hughes. "We have identified names that could be under pressure if oil prices remain at current levels for a further sustained period and we're closely monitoring those companies for early warning signs."

All of the country's top lenders are keeping an eye on the price of oil, which is hovering at around half of its highs of last summer.

Analysts had been expecting investment banking revenues to fall during the quarter as business from the oilpatch dried up, but RBC managed to buck the trend. Its capital markets business, which includes investment banking and trading, posted a profit of $594 million -- up $89 million or 18 per cent compared with the same quarter last year.

The Bank of Montreal (TSX:BMO), which reported its earnings Tuesday, saw its capital markets revenues drop by 20 per cent from a year ago, but analysts said the decline was not as dramatic as they had predicted.

RBC is also bracing for the possibility that the Bank of Canada may cut its key interest rate next week, putting pressure on commercial banks' lending margins. The central bank reduced its overnight rate by a quarter of a point in January to ease economic pressures stemming from the oil price decline.

"Within a low rate environment we will have to be even more diligent about managing costs and driving efficiencies," McKay said.

Meanwhile, RBC is waiting for a judge to decide whether charges should be brought against its Bahamas unit in a money laundering and tax fraud probe. The bank says it "strongly contests" a French prosecutor's recommendation that the bank be charged in France in relation to a trust for which RBC Bahamas serves as a trustee.

RBC's first-quarter revenue totalled $9.64 billion, up from $8.46 billion a year ago.

Its Canadian banking arm earned $1.22 billion in the quarter, up $83 million or seven per cent from a year ago, thanks to strong growth in fee-based revenue.

The bank managed to return its struggling Caribbean banking business to profitability in the quarter. RBC has spent two years restructuring the business, including selling its Jamaican banking business at a loss last year.

The bank said it will pay a quarterly dividend of 77 cents per share, up two cents from the previous quarter. Based on the bank's stock price Wednesday, it will have an annual yield of nearly four per cent.

Royal Bank shares closed up $2.75 at $77.80 on the Toronto Stock Exchange.