Royal Bank of Canada (RBC) on Wednesday reported a modest drop in fourth-quarter profit, as bigger provisions for potential loan defaults and weaker underwriting activity overshadowed gains from higher interest rates.

Banks have had to rely heavily on their lending business that got a boost from the central bank's aggressive rate hikes this year, while fewer deals due to inflation and the hawkish monetary policy, squeezed growth in their markets-focused units.

The largest Canadian bank reported net income of C$3.88 billion ($2.87 billion) for the three months ended Oct. 31, compared with C$3.89 billion a year earlier.

Net income from RBC's personal and commercial banking, its biggest business that offers loans and credit cards, grew 5%.

On Tuesday, the lender agreed to buy British bank HSBC's Canadian business for C$13.5 billion, looking to expand its footprint in the domestic retail market.

($1 = 1.3540 Canadian dollars) (Reporting by Niket Nishant in Bengaluru; Editing by Shinjini Ganguli)