* Commercial clients would be challenged if NAFTA fails -CEO
* CEO says bank talking to governments on both sides
* CEO defends banks' sales practices after investigation
* CEO says too early to assess impact of new mortgage rules (Adds CEO comment on regulatory investigation)
By Matt Scuffham
TORONTO, April 6 (Reuters) - Royal Bank of Canada Chief Executive Dave McKay said uncertainty over talks to update the North American Free Trade Agreement was a concern for the bank's customers but he remained hopeful a deal would be reached.
The United States, Canada and Mexico have been in talks for more than eight months to revamp NAFTA after U.S. President Donald Trump threatened to abandon the pact unless it was reformed to his liking.
McKay said that so far, the bank's clients and financial markets had been "working through the uncertainty" and the bank was engaged in talks over NAFTA with officials of governments on both sides.
"We are in close dialogue with governments and our customers and remain hopeful of a good outcome for both sides," McKay told shareholders at the bank's annual meeting.
As well as being Canada's biggest lender, RBC has substantial operations in the United States where it generates 23 percent of its revenue.
Questioned by shareholders about the possible impact of failure of the NAFTA talks, McKay said the bank's commercial clients would be "challenged" but that RBC estimates a reversion to regulations set by the World Trade Organisation would only have a 10 basis point impact on Canada's economic output.
McKay acknowledged the agreement needed modernising.
"There's so much mutual benefit to maintaining this agreement but there are some very difficult changes that are being proposed that need to be resolved," he said.
McKay defended the bank's sales practices after Canada's financial watchdog said last month it is investigating the potential breach of market conduct obligations by banks following a year-long review of sales practices at the country's six biggest banks.
"I think the binary conclusion from the FCAC investigation is that there are no systemic problems in sales practices across the country's banks," he said. "We are constantly evaluating our sales practices as markets and customers change."
Speaking to reporters after the meeting, McKay said he wasn't aware of RBC being under investigation.
"We would be concerned but if it's an isolated area then sometimes these things happen," he said.
McKay said the bank was seeing "more balanced pricing" in Canadian housing markets following the introduction of a range of measures by Canadian authorities to cool markets in Toronto and Vancouver.
He said it was too early too assess the impact of tougher mortgage lending rules introduced in January.
Reporting by Matt Scuffham; Editing by Bernadette Baum