Royal Bank of Canada - Earnings Call 2014-8-22 FS000000002168554302

Company Name: Royal Bank of Canada
Company Ticker: RY CN Equity

Date: 2014-08-22
Q3 2014 Earnings Call
Company Participants
A. Douglas McGregor
Amy Cairncross
FINAL
David I. McKay
George Lewis
Janice R. Fukakusa
Jennifer Tory
Mark Hughes
Other Participants
Derek A. De Vries
Doug Young
Gabriel Dechaine
John C. Aiken
Mario C. Mendonca
Meny Grauman
Peter Routledge
Robert Sedran
Bloomberg Transcript
Sohrab Movahedi
Steve Theriault
Sumit Malhotra
MANAGEMENT DISCUSSION SECTION
Operator
Good morning, ladies and gentlemen. Welcome to the RBC 2014 Third Quarter Results
Webcast Call. I would now like to turn the meeting over to Amy Cairncross. Please go
ahead.
Amy Cairncross {BIO 6674169 <GO>}
Good morning and thank you for joining us. Presenting to you this morning are Dave
McKay, President and Chief Executive Officer; Mark Hughes, Chief Risk Officer; and Janice
Fukakusa, Chief Administrative Officer and CFO.
Following their comments, we will open the call for questions from analysts. The call will
be approximately one hour long and will end at 9:00 AM. To give everyone a chance to
Page 1 of 23
Date: 2014-08-22
participate, please keep it to one question and then re-queue. We will be posting
management's remarks on our website shortly after the call.
Joining us on the call are George Lewis, Group Head, Wealth Management and Insurance;
Doug McGregor, Group Head, Capital Markets and Investor & Treasury Services; Jennifer
Tory, Group Head, Personal and Commercial Banking; Zabeen Hirji, Chief Human
Resources Officer; and Bruce Ross, Group Head, Technology and Operations.
FINAL
As noted on slide two, our comments may contain forward-looking statements which
involve applying assumptions and have inherent risks and uncertainties. Actual results
could differ materially from these statements.
I will now turn the call over to Dave McKay.
David I. McKay {BIO 15435549 <GO>}
Thanks, Amy, and good morning, everyone. RBC had a record third quarter with earnings
of over CAD 2.3 billion, which after you exclude the loss related to the closing of RBC
Jamaica this quarter and a tax item in the prior year were up 10% from last year and 10%
from last quarter.
We reported record earnings in Canadian Banking, Capital Markets, Wealth Management

and Insurance; and had solid quarter in Investment (sic) [Investor] & Treasury Services. Our
results reflect strong revenue growth, solid credit quality and positive operating leverage
across most businesses. We maintained our strong capital position with a Common Equity
Tier 1 ratio of 9.5%. And I'm pleased to report that this morning we announced a CAD 0.04
or 6% increase to our dividend, bringing our quarterly dividend to CAD 0.75 a share. On a
year-to-date basis, RBC has generated over CAD 6.6 billion with a return on equity above
19%. And we remain on track to meet or exceed our performance objectives.
These results truly demonstrate the strength and agility of RBC's market-leading franchise
as our diversified business model can capture growth by adapting to the changing needs
of our clients, and also adapt to different market conditions. Our results also reflect our
focus on clients and our proven ability to manage costs and capital effectively. As another
testament to the strength of our businesses, RBC was recently awarded Global Retail Bank
of the Year by Retail Banker International. And I'm very proud of this tremendous
achievement.
Let me now make a few comments on our businesses. Our Canadian Banking business
had a record quarter, reflecting solid volume growth of 4% over last year, a relatively
stable credit environment, and strong growth in fee-based revenue. In fact, it was our
eighth consecutive period of double-digit growth in mutual fund revenue. A key driver of
our success in fund sales is the strength of our multi-channel distribution network, which
includes our in-branch financial planners and our mobile investment retirement planners.
It also includes Direct Investing, our online investment channel, where we had double-
digit growth in new accounts this quarter due in part to our new campaign, which is
targeted to the next generation.
Page 2 of 23
Date: 2014-08-22
In recent years, we've been strengthening our capabilities including investing in our
channel strategy to position RBC for changes in technology as well as shift in client needs.
For example, from borrowing to savings and investments, our performance this quarter
reinforces the strength of our approach.
I'm also pleased with the continued momentum we have in our deposit businesses where
we had 10% growth in core checking balances over last year. Our clients often begin their
relationship with RBC by opening a checking account and over time, we aim to deepen
FINAL
and extend that relationship by offering our full suite of products. Additionally, these
deposits help support our margins and increase our leverage to a higher rate
environment.
On the business side, the rate of loan growth improved over last quarter. We are gaining
market share and are encouraged by some early signs of increased activity across a range
of industries. While competition for new business remains tough and we are being
selective in the deals we pursue, we continue to differentiate and strengthen our offering.
For example, we were the first financial institution in Canada to offer a mobile app for
business owners on all major platforms. Our July launch was successful with over 1,000
subscribers in the first 30 days as clients take advantage of having digital access to real-
time information and being able to conduct business quickly and conveniently. This new
app is a great example of how we are investing for the future in areas like technology and
product innovation. At the same time, we remain focused on managing investment spend
in order to continue delivering positive operating leverage.
Turning to the Caribbean, we closed the sale of our Jamaican banking operations in June.
We remain committed to our core markets and continue to make progress in our
restructuring efforts, notwithstanding a very challenging credit environment.
Turning to Wealth Management, we had record earnings up over 20% from last year,
reflecting higher average fee-based client assets across all businesses. These results are
largely a testament to the continued momentum in several businesses including global
asset management. This quarter, we continue to lead competitors in retail asset growth,
driven in part by the strength of our Canadian Banking network referenced earlier, as well
as by RBC Wealth Management and external channels, allowing us to capture 16% of the
market's fund sales.
On the institutional side, we continued to have positive fund flows in both the North
American and European markets, with strong growth in our BlueBay business. RBC Global
Asset Management is among the fastest-growing asset managers in the world and we are
continuing to invest in the business to drive long-term growth.
Turning to our Canadian Wealth Management business, we continue to extend our

number one position in the high-net-worth market by collaborating across RBC to deepen
client relationships. For example, we are leveraging RBC's strong commercial banking
franchise and our market leading private bank to deliver tailored products and services,
Page 3 of 23
Date: 2014-08-22
including providing advice on business succession planning and generational wealth

transfers.
In our U.S. and International Wealth Management businesses, we continue to focus on

building deep client relationships, driving advisor productivity and strengthening our
overall competitive position for the long term.
FINAL
Moving to Insurance, we had a record quarter, reflecting favorable actuarial reserve

adjustments and improved claims experience. Insurance is a good business for us which
complements RBC's overall product offering. And to increase collaboration across our
businesses, we have been able to achieve growth in creditor insurance that exceeds
underlying lending volumes.
Turning to Investor & Treasury Services, we had a solid quarter. We remained diligent in
identifying opportunities to optimize efficiencies across the business and driving top-line
growth by focusing on new mandates and deepening existing client relationships. For
example, this quarter, we renewed a multiyear contract with a long-standing global
financial institution client to manage their shareholder services in Luxembourg.
Capital Markets had an exceptional quarter with record earnings of approximately CAD
640 million, which greatly exceeded our expectations. These results reflect the success of
our strategy to focus on traditional, client-driven corporate and investment banking and
origination activities. It also reflects our ability to strengthen client relationships by
providing ancillary products and services.
As a testament of the progress we've made in extending our global capabilities and the
success we've had achieving building a client-focused franchise, Capital Markets was
recently named the most trusted investment bank in the world by The Economist and was
ranked second globally in terms of expertise and skills.
Overall, we saw a very strong result this quarter across almost all our businesses, and we
benefited from robust equity and debt markets as well as favorable credit trends. Our
trading businesses performed exceptionally well, reflecting our focus on origination
activities which have nearly doubled over the past two years, driving a significant lift in
secondary trading.
We also had a couple of outsized trade this quarter, which contributed to the results. It's
worth highlighting that our strong trading results also reflect our business mix. We are
more heavily weighted towards fixed income credit, equity and municipal businesses, all
of which benefited from improved market conditions. We also have relatively less
exposure to the interest rates and foreign currency trading businesses, which have been
most affected by macroeconomic conditions as we have seen in the reporting of some of
our U.S. peers.
Overall, it was an outstanding quarter for Capital Markets. Clearly, a segment benefited
from a number of factors, which are likely to be repeated to the same degree. But the
Page 4 of 23
Date: 2014-08-22
success of the repositioning of the business, in recent years, is undeniable and I remain
confident in their long-term strategy.
To conclude, I'm very pleased with the quarter. Our record results reflect the strength of
our diversified business model and our leading market position. Our ability to drive
efficiencies and manage capital effectively positions us well to execute our planned focus
strategy and to continue to invest in our business to deliver long-term sustainable growth.
FINAL
With that, I'll turn it over to Mark Hughes.
Mark Hughes {BIO 1486400 <GO>}
Thanks, Dave. Good morning, everyone. Turning to slide 7, our overall credit quality
remained strong this quarter. Our credit trends are near historic lows, reflecting a
supportive economic backdrop in Canada and our strong risk management practices. The
North America economic environment continues to rebound from a weather-related
slowdown in the first quarter. And while there are still some economic challenges in
Europe, conditions have improved somewhat compared to last year.
Provisions for credit losses on impaired loans this quarter were CAD 283 million or 26
basis points, up CAD 39 million or 3 basis points from last quarter. The increase was
mainly driven by higher provisions in Caribbean and Canadian Banking, partially offset by
lower provisions in Capital Markets.
Let's look at our credit performance in a little bit more detail. Provisions in Canadian
Banking were CAD 230 million or 26 basis points, up CAD 26 million or 1 basis point from
last quarter, driven by higher provisions in the commercial loan book and our personal
loans portfolio. Within our commercial portfolio, we had a few small provisions that were
uncorrelated. And while we would expect to see some variability from quarter-to-quarter,
we remain comfortable with the portfolios' overall credit quality.
In Caribbean banking, provisions on impaired loans were CAD 54 million, up CAD 27

million from the previous quarter, largely related to higher provisions in our commercial
and retail portfolios, reflecting the ongoing challenging economic environment in the
region.
With respect to capital market, this quarter we had provisions of CAD 1 million, compared
to CAD 13 million in the prior quarter. And the loan book continues to perform well.
Turning to slide 8, which focuses specifically on our Canadian Banking retail portfolio, our
credit card provisions remained near historical lows at 246 basis points, down 23 basis
points sequentially, largely due to seasonal trends that impacted the second quarter.
Our Canadian residential mortgage portfolio, which makes up 64% of our retail portfolio,
continues to perform well with provision this quarter of 1 basis point. This continues to be
consistent with our historical performance.
Page 5 of 23
Date: 2014-08-22
As you can see on slide 9, our mortgage portfolio is well diversified across Canada. We
continue to actively monitor our loan portfolios for early warning signs of credit
deterioration and perform ongoing stress testing for numerous scenarios, including
increases in unemployment and interest rates and a downturn in the real estate market. At
this time, we are very comfortable with our stress test results. We do not see signs of
deterioration. And the overall credit quality of our retail portfolios remained strong.
Turning to market risk, in the third quarter, average market risk VAR, value at risk, was CAD
FINAL
26 million, down CAD 10 million or 28% compared to last quarter as the data used to
calculate our value at risk has been rolled forward and the related market volatility of
spring 2012 that resulted from European sovereign debt concerns are no longer included
in the data set.
The decrease in value at risk was also driven by lower equity risk and the adoption of IFRS-
9 last quarter, whereby changes in our fair value on our liabilities are now recognized in
other comprehensive income instead of through the income statement.
Our third quarter average market risk stress bar was CAD 87 million, down CAD 16 million
or 16% from last quarter. There was one day of net trading losses this quarter and we had
one day of sizeable net gains primarily related to the sale of a legacy asset.
With that, I will turn the presentation over to Janice.
Janice R. Fukakusa {BIO 5884970 <GO>}
Thanks, Mark and good morning. As Dave mentioned, we had record results this quarter
with earnings of over CAD 2.3 billion, up CAD 93 million or 4% from the prior year and up
CAD 177 million or 8% from the prior quarter. Overall, we had a clean quarter with only
one item of note which was the previously announced loss of CAD 40 million related to
the sale of RBC Jamaica, which closed in June.
Excluding that item and the CAD 90 million favorable tax adjustment we recorded last
year, net income was over CAD 2.4 billion, up 10% from last year and 10% from last
quarter. Our results were driven by record earnings across a number of our businesses.
Turning to capital on slide 12, our common equity Tier 1 ratio was 9.5%, down 20 basis
points from last quarter as higher risk-weighted assets more than offset strong internal
capital generation. The increase in risk-weighted assets was driven primarily by an update
to the risk parameters in our corporate and business lending portfolios, resulting from the
model review that I noted last quarter. The increase also reflects business growth.
The parameter updates this quarter were largely reflected in revised loss given default
rates, and they were predominantly in the commercial portfolio in Canadian Banking and,
to a lesser extent, in the loan book in Capital Markets. Excluding these updates, the
segment mix of our risk-weighted assets is largely unchanged from the last quarter.
Page 6 of 23
Date: 2014-08-22
Let me now turn to the quarterly performance of our business segments starting on slide
13. Our Personal & Commercial Banking segment earned over CAD 1.1 billion, down CAD
29 million or 2% from last year on a reported basis. Canadian Banking reported record
earnings of over CAD 1.1 billion, up CAD 34 million or 3% from last year, reflecting volume
growth of 4% and strong growth in fee-based revenue largely driven by higher mutual
fund fee. This growth was partially offset by higher provision for credit losses which Mark
noted. Sequentially, Canadian Banking earnings were up CAD 75 million or 7% primarily
due to additional days in the current quarter, volume growth across most businesses, and
FINAL
higher mutual fund fee. Our net interest margin in Canadian Banking was relatively stable
at 2.73%, down 4 basis points over last year or up 1 basis point on an adjusted basis and
down 1 basis point sequentially.
Our overall favorable funding mix continues to be offset by competitive pressures and the
low interest rate environment. We delivered positive operating leverage in Canadian
Banking of 2%. I would point out that our results last year were impacted by a few items
related to the acquisition of Ally Canada, which impacted both the revenue and the
expense line. Factoring in those items, our operating leverage is just over 1%, which is well
within the target range for this business. Canadian Banking continues to progress towards
its target of driving an efficiency ratio in the low 40s, reporting 43.7% for the quarter, a 90-
basis-point improvement over last year.
Turning to the Caribbean, we are making progress in our restructuring efforts. We've
reduced cost and we've seen improvements in top line growth from our re-pricing
initiative. However, the operating environment remains challenging.
Looking at Wealth Management on slide 14, we had record earnings of CAD 285 million,
up CAD 52 million or 22% from last year, reflecting higher average fee-based client assets
across all businesses from capital appreciation and net sales. We also continue to
generate positive operating leverage.
Sequentially, net income was up CAD 7 million or 3%, mainly due to higher average fee-
based client assets. Growth in assets under management and assets under administration
were up 18% and 14%, respectively, over last year. And pre-tax margins were just under
25%, an improvement of more than 200 basis points from last year.
Moving to Insurance on slide 15, record net income of CAD 214 million was up CAD 54
million or 34% from last year and up CAD 60 million or 39% from last quarter. This
increase was mainly due to favorable actuarial adjustments reflecting management actions
related to our efficiency management program and assumption changes. In addition, we
benefited from lower net claims costs.
Investor & Treasury Services earned CAD 110 million, up CAD 6 million or 6% from last
year, reflecting higher funding and liquidity revenue and increased net interest income on
growth in client deposits. Sequentially, net income was relatively flat.
Turning to Capital Markets on slide 17, we had a very strong quarter with record earnings
of CAD 641 million, up CAD 225 million or 66% over last year. Sequentially, net income
Page 7 of 23
Date: 2014-08-22
was up CAD 134 million or 26%. Trading and origination activity improved compared to
both prior periods driven by strong equity and debt markets and increased activities from
our client-focused strategies. We also saw higher loan syndication activity and growth in
our loan book relative to last year and last quarter.
If you recall, our results in the third quarter of last year were negatively impacted by
challenging market conditions and this quarter our trading business benefited from a
couple of outsized trades which added approximately CAD 100 million to revenue.
FINAL
To wrap up, we're very pleased with our performance this quarter. We have a diverse and
strong portfolio of businesses, and we're confident that we remain well-positioned to
continue delivering sustainable earnings growth.
At this point, I'll turn the call over to the operator to begin the Q&A portion of the call.
Please limit yourself to one question and then re-queue so that everyone has an
opportunity to participate. Operator?
Q&A
Operator
Thank you. Our first question is from Steve Theriault. Mr. Theriault, your line is now open.
Please state your company and proceed with your question.
Q - Steve Theriault {BIO 6755287 <GO>}

Thanks. Bank of America Merrill Lynch. Janice, just a quick follow up. I had a question for
Dave on the buyback. But you mentioned tax. You didn't get the positive impact from your
usual tax review this Q3. Just wondering if that's timing or something else?
A - Janice R. Fukakusa {BIO 5884970 <GO>}

Yeah. What the tax impact (21:45) relates to is that every year, we are audited by CRA. And
in the last two years, actually, those audits were completed in Q3. CRA has extended an
audit period. And so, we don't have the benefit of having a (22:02) year, and that's why we
didn't make the adjustment. So, it is a bit of timing, but we can't really predict when they'll
be done.

Can you predict the direction? Do you expect it to be another positive number?

Well, I can't really predict the direction because it's generally just the volume of audit work
and a lot of the work CRA is doing.
Page 8 of 23
Date: 2014-08-22
Okay. Okay, thanks. So, Dave, it's been a few consecutive quarters where you've been
quite on the buyback versus expectations and I think that at the outset of the program,
you'd – it'd be somewhat active. So, I guess the question is, would you link it back to the
risk parameter review? Is it a changing in your or the regulatory's thinking on capital
return? Do you need to be at closer to a 10% core Tier 1? Just interested on your thoughts
going forward on buybacks.
A - David I. McKay {BIO 15435549 <GO>}

FINAL
Thanks for the question, Steve. I think maybe I'll answer the question broadly, when we
look at our ability to deploy marginal capital, our first priority is to deploy that organically,
and we still see good opportunity to deploy capital organically.
Our second strategy, as you know, is to return capital to shareholders. And as you've seen
this quarter, we've increased our dividend by CAD 0.04. And we're very happy with that.
So, that certainly fits within our overall strategy of returning capital to shareholders. Share
buybacks, obviously, remain an important part of returning capital to shareholders, and
we'll obviously consider that going forward. But those are certainly the top two strategies.
And the third one is just selectively make acquisitions that enhance our existing customer
franchises. So, when we look at all three of those, I think we've demonstrated strongly first
– certainly with the first two that we are acting on that, particularly with the dividend
increase you saw today.

Do you need to get capital higher in order to activate the buyback or not necessarily?

It's hard to comment. We're managing our capital very closely. As you see, we've got our
regulatory requirements. And as we look at organic growth and capital return to
shareholders, we take all that into consideration. So, I think, it's something that obviously
management looks at very closely.

Okay, thanks very much.
Operator
Thank you. Our next question is from John Aiken. Mr. Aiken, your line is now open. Please
state your company and proceed with your question.
Q - John C. Aiken {BIO 6329080 <GO>}

Good morning. I'm with Barclays. I guess the reward for such an exceptionally strong
capital markets this quarter is going to be questions around the sustainability of this going
forward. But in conjunction with that, Dave, I was hoping that you might be able to provide
some insight as to the discussions that the board is having around the contribution of
Page 9 of 23
Date: 2014-08-22
capital markets to the overall bank, particularly in light of the article that came out
yesterday from The Wall Street Journal.

Sure. I'm not surprised with that question. First, let me say how exceptional the results are
and how happy we are with the capital market franchises, the core business growth. And
while there were some one-time trading items and some very, very strong markets for us,
our overall franchise and our client-centric franchise has grown nicely, and the business is
FINAL
doing very well.
As we think about our strategic guideline, as I like to think of it, of 25%, that we really
believe fits into an overall diversified business model. We do look at the strength of our
other businesses. In Wealth Management, you saw our record results. You saw our record
results in Canadian Banking. You look at our opportunities to grow in all our businesses,
and we remain confident that we can continue to grow Capital Markets and still remain
within our longer-term strategic guidelines. So, I think while we went slightly over this
quarter, it was an exceptional quarter, we're just slightly over our long-term strategic
guideline. I think all things being considered, we look forward and remain confident of
being able to balance or diversify them all.

Yeah. If I can paraphrase, so the 25% is not really a hard line and this isn't going to cause
any drastic changes in strategy in the near term just because you've crossed that line.

We've crossed the 25% periodically over the past year. So, it's something that we've done
before, but over the long-term, we look forward and we say, can we keep this in balance
and we feel we can. So, I think it's not a cap and I think some people refer to it as a cap. A
cap to me connotates drastic action as you said. I think the business ebbs and flows have
seasonality to it, have strong quarters, have sometimes challenges in front of it. So, I think
as we look at the ebbs and flows of the business, we feel confident we can maintain the
balance of our business model.

Great. Thanks for the color.
Operator
Thank you. Our next question is from Sumit Malhotra. Mr. Malhotra, your line is now open.
Q - Sumit Malhotra {BIO 15031903 <GO>}

Thank you. Good morning. First point is just a clarification with Janice. So, you had, as far
as the RWA is concerned, you had the retail portfolio review during Q2 and then let's call
it the business lending review during Q3. I know these things can be ongoing over time
Page 10 of 23
Date: 2014-08-22
but just wanted to get an update on where you think the RWA methodology for Royal is
and whether there's any other reviews that you're contemplating at this time.

Good question, Sumit. And I think we did have – we just finished off two fairly intensive
reviews where we looked at all of our assumptions.
We review all of our assumptions though on an ongoing basis and at least annually, so it's
FINAL
part of ordinary course. Some of the adjustments you've seen over the past two quarters
are ordinary course adjustments. Some of them reflected more detailed assumptions
reviews going forward. While we recognize that we constantly review the metrics, we're
fairly comfortable with where we are with respect to RWA. But as you know, as we
continue to grow our balance sheet, we'll continue to grow our RWA.

That I fully acknowledge. When I think about the CET1 right now being below the year-end
2013 level, three quarters of the way in to what's been a very strong year. From your seat
right now, is there anything, what I would call, more-than-normal course in the business
that you would contemplate on the RWA line or are we now to the point where the
refinements are not likely to be the driver in the interim?

From our perspective, we think that, as far as this fiscal year goes, the refinements that
we've made are basically the major ones that we were working towards doing. With
respect to our capital accumulation and deployment, we should be back to more business
as usual in terms of our earnings growth, funding our dividends, and also getting some
capital accretions. And so, that's why Dave talked about our strategy around deployment
being funding organic growth and then looking at rewarding the shareholder, and then
looking at longer term growth in earnings as the three prongs of our strategy.

All right. My actual question was for George Lewis in Wealth. And looking at a couple of
things on revenue. It looked like transaction revenue was down on the quarter and the
international and U.S. segment was down as well. I just wanted to ask you, when you think
about operating leverage in this business, outside of aggregate market conditions, is
there anything that the bank is thinking through on the expense side that could lead us to
better operating leverage without necessarily having yet another uptick on the revenue
side or the market side?
A - Mark Hughes {BIO 1486400 <GO>}

Great. Thanks for the question. I think, overall, we were very pleased with the quarter,
record earnings. It was a clean quarter. We had double-digit growth in AUM and AUA. And
I guess the flip side of your question on transaction revenue in the U.S., which I'll come to
in a moment, is the growth of our fee-based revenue, which for the first time, reached over
CAD 1 billion this quarter. So, that now represents two-thirds of our segment revenue, up
Page 11 of 23
Date: 2014-08-22
from around 50% in 2007. So, both the quantity- and the quality-recurring nature of our
earnings continues to improve.
With respect to the transaction activity, there is definite seasonality in the business in terms
of the summer quarter being a slower one, particularly in our U.S. business. So, that, I
think, accounts for the quarter-over-quarter change in terms of transactional revenue.
FINAL
In terms of expenses, we do have a strong focus on NIE. At the same time, we are
investing for growth, particularly in our global asset management business, which is our
highest-margin business. And we are making investments, particularly in our international
wealth business to strengthen our controlled environments.
So, I think we're pleased with our progression in both revenue and expense and
generating positive operating leverage of I think 2.3% this quarter, and we expect that to
continue.
Operator
Thank you. Our next question is from Doug Young from Desjardins Capital Markets. Please
go ahead.
Q - Doug Young {BIO 5640851 <GO>}

Hi. Good morning. First question, just on the capital market side, I guess, really two-
pronged. You had exceptional loan growth. I'm wondering if you can give a little bit more
detail where that loan growth is coming from, segment or whatnot? And then can you give
– I know you said CAD 100 million of outsized trading gains, is that something that falls to
the bottom line, and how should we think about that in terms of the earnings impact in the
quarter?
A - A. Douglas McGregor {BIO 1413612 <GO>}

Okay. Starting with the loan growth, the loan growth has been stronger than actually we
anticipated it would be at the start of the year. If you look at the slides, a lot of loan growth
has been coming from our real estate business. We identified an opportunity a couple of
years ago with some major clients to finance some activity in Europe. And we've been
doing that and the results have been very good from that. But I would say, overall, away
from those activities, the loan growth is really focused in the U.S. I mean, the opportunity
to lend to corporations in the U.S. is still quite good. The margins are certainly acceptable
and the business that comes with the loan growth has been very good.
So, most of the loan growth has been in the U.S. The European loan growth has been
more focused on the area I described. I would say, going forward, we're seeing some
slowing and that's fine. We're certainly not going to push it. But we're certainly happy with
what we've done so far this year. In terms of the trades, one was the legacy asset, in fact,
that we had from – on our books for several years. We've written it down substantially. It
was secured on an asset that actually was performing quite well. We've restructured it and
sold it. And so, there was a pre-tax gain there.
Page 12 of 23
Date: 2014-08-22
And the other was a client trade here in Canada that affected the securities finance and
equity side of the business. And in Janice's remarks, she mentioned that it was about CAD
100 million pre-tax. And we identified those because we look at them and say – it's
reasonable to say it's non-recurring.

Great. And then just – I'm not sure if you could give any color or whatnot. On the Insurance
side, you talked a bit about the actuarial – the positive impact from actuarial adjustments,
FINAL
and I'm going to assume that's on your life insurance book of business. And just
wondering if you can give any color as to what drove that. Were there assumption
changes that were pushed through and what that was? And can you give any
quantification of what the impact was from that?
A - George Lewis {BIO 17973904 <GO>}

Sure. It's George Lewis. Thanks very much for the question. I think in terms of the actuarial
adjustment this quarter, as Janice mentioned in her remarks, related to our ongoing
efficiency management program, so it didn't relate to an annual process that we do
typically in the fourth quarter which will recur this quarter, where do a complete scrub of
our actuarial assumptions, morbidity, mortality claims lapse (34:48), et cetera. So, that is
yet to come.
It was a very strong quarter for RBC Insurance. I think I mentioned last quarter that our
earnings in Q2 was at the lower end of a typical range for the business. This quarter, we're
certainly at the – from the underlying business itself, driven by improving claims
experience, particularly on the disability side. We also had better claims experience in
Home and Auto.
Strong creditor premium growth, to Dave McKay's comments, drove us to the upper end
of that range of a typical quarter. And then the actuarial judgment – actuarial adjustment,
rather, took us above that.

And you haven't given any quantification what that adjustment was?
A - George Lewis {BIO 17973904 <GO>}

No.

No? Thank you.
Operator
Thank you. Our next question is from Gabriel Dechaine from Canaccord Genuity.
Q - Gabriel Dechaine {BIO 15404312 <GO>}
Page 13 of 23
Date: 2014-08-22
Thanks. Good morning. Just a quick one, I apologize if I missed this one. But do you have
a target capital ratio? Is it 9.5%, 10% for the core Tier 1 ratio? And then I've got a follow-up
on the cards business.

Hi, Gabriel. It's Janice. I think that if you look at where we're maintaining our ratios, we
think that we're maintaining a pretty strong capital ratio. We're in the mid-9%, so we
ended up at 9.5% and we're pretty comfortable with being in that vicinity.
FINAL

Okay. Thanks. And then on the credit cards, I noticed you have pretty good average
balance growth, 4% quarter-over-quarter. That's encouraging in this environment. Just
wondering if you believe to maintain that level of growth or maintain your market position
or grow it. Preferably, you need to do any tweaks to the Avion portfolio, whether it's more
accelerators or enhanced benefits, something of that nature? And then also, on the
interchange regulation, where do we stand with that and what's the – are we going to hear
anything soon on potential regulation?
A - Jennifer Tory {BIO 7082836 <GO>}

Thanks, Gabriel. It's Jennifer, and I'll take the first part of that question. We continue to
benefit from all of the recent activity in the credit card space, and our new account growth
continues to be significant, up, in fact, 19% year-over-year. And we're also seeing great
utilization of our cards. We are very happy with our Avion card and the position that it has.
Clients love it and continue to give it very high ratings for customer satisfaction because
the points are easy to redeem and they don't expire. So, we're very well positioned in the
credit card space. Interchange, Dave, do you want to take that?

Yes, Gabriel, it's Dave here. It was also noted in the federal budget that the government
would be moving forward. So, we do expect to see some changes as far as interchange in
Canada. It would be premature, I think, now, to try to spectate or comment on what those
are going to be. I would say that there is a significant amount of dialogue among all
industry participants through the Government of Canada. I think the goal is really to
promote a long-term ecosystem that supports the Canadian economy but, at the same
time, really fosters leading edge payment capabilities and service to Canadians. So,
there's a lot of stakeholders to balance, there's a lot of issues to balance, there's a
dialogue and we'll see what comes out of the Minister of Finance and the federal
government.

Have you ever quantified the contribution of interchange to your revenue and earnings?

It's certainly a large component of being in a large purchase business.
Page 14 of 23
Date: 2014-08-22

Yeah.

But as interchange changes, there's many variables that an issuer can use to manage any
type of reduction if there was a reduction in interchange. You can reduce your cost base,
you can look at your credit profile and you can look at the value of your points program. I
FINAL
mean, all of those ultimately affect customers in one shape or form or another. But the
issuers have a lot of tools at their availability to manage any type of change to the system.

Thank you.
Operator
Thank you. Our next question is from Meny Grauman. Mr. Grauman, your line is now open.
Q - Meny Grauman {BIO 15238080 <GO>}

Hi. Good morning. Just a broader question about domestic loan growth and mortgage
growth of 4% year-over-year, pretty (39:31) much in line with the previous quarter. And I'm
wondering what the outlook is for mortgage growth, in particular, but domestic loan
growth, in general, has there been any change in your view on that? And do you think the
current pace – more importantly, do you think the current pace is sustainable or could we
see another slowdown coming?
A - Jennifer Tory {BIO 7082836 <GO>}

Thanks for the question. We feel good about our mortgage business. Our volumes were
up just over 4% from a strong Q3 last year. And in fact, I think everyone knows that we got
off to a slower start in the spring housing window because of the weather, but we saw
strong June and July, and actually our pipeline for the fourth quarter also looked strong.
As far as consumer loan growth, obviously, you can see it from our results notwithstanding
the good growth that consumer loan growth has slowed. And our expectations are for
consumer lending to moderate to mid-single-digit 3% to 4% growth rate.
And that's why in Dave's comments, he commented on us really looking to position to

meet our customers' needs, including shifting a lot of our capability as well to making sure
we capture the significant investment and deposit opportunity.
Q - Meny Grauman {BIO 15238080 <GO>}

Great. Thank you.
Operator
Page 15 of 23
Date: 2014-08-22
Thank you. Our next question is from Derek De Vries. Mr. De Vries, your line is now open.
Q - Derek A. De Vries {BIO 6181608 <GO>}

Great. Thanks a lot. It's Derek De Vries from UBS. And my question then is in regard –
there's been a lot of regulatory change and consultations going on at the moment. And I
guess, in that context, I wanted to ask you a little bit about your CoCo issuance. And so,
I'm curious why you went for this type of instrument? And was that in response to an
FINAL
expectation for change in the regulatory environment? And I'd also be curious on the
breakdown of the buyers between retail and institutional and domestic and international,
if you've got that?

Hi, Derek. It's Janice. By CoCo issuance, you mean our non-viable contingent capital? I'm
assuming...

Correct. Yes.

And so, on the pref, we did two pref share issues, and they basically were requirements in
order for us to issue preferred shares that we put in the non-viable contingent capital
trigger. Those two instruments, by the way, are recovery tools. So, at the option of our
regulator, if they believe that that any sort of a bank instability can be solved by enhancing
the capital, they can trigger. With respect to the distribution, because there were pretty
healthy yields on that pref, I think that where we ended up was about 70%, 75% retail and
the balance, institutional. And that's a little bit unusual based on what the splits we've had
on our previous pref share issuance.

Okay.

For sub debt, same thing, non-viable contingent capital with the trigger. And that was a
requirement in order to have that qualify as sub debt in terms of the capital treatment. So,
that, too, is a recovery instrument. When you look at the overall context of the white paper
that's come out on the bail-in regime, the difference between those instruments in bail-in
are, of course, bail-in is a resolution instrument. So, with respect to the sub debt, of course,
it's a little bit of a more complex instrument and it was all institutional.

Right. So, if I'm understanding what you're saying correctly, this is going to be the norm,
going forward, for the Canadian banks. Is that right?
Page 16 of 23
Date: 2014-08-22

Yes, that's right.

Understood. That's what I was getting at. Thank you very much.
FINAL
Operator
Thank you. Our next question is from Mario Mendonca from TD Securities. Please go
ahead.
Q - Mario C. Mendonca {BIO 2450557 <GO>}

Good morning. If we could go back to interchange for a moment. When AMIA (43:31)
reported their Q2 2014 results last week, the CEO specifically referred to changes and said
that industry participants could voluntarily implement reductions and/or cap interchange
rates. What I'm getting at here is, how does that square with you? Is that a plausible
outcome that we could rather than seeing a hard and fast regulatory change, instead see
the banks voluntarily reduce their cap interchange rates?

I think the answer to your question, Mario, was banks don't control the setting of
interchange. That's controlled by the networks exclusively, Visa and MasterCard. So banks
are recipients of the revenue stream from that interchange, but we have absolutely no
control whatsoever of the setting of those rates. So, I don't see how we would be able to
do that. That's purely in Visa and MasterCard's control. So anything negotiated between,
say, Visa and MasterCard and the federal government would apply to us and we don't
have control over it.

Okay. Do you contemplate any – is it conceivable that you could see changes in honor-roll
(44:34) cards? Or is that something also you don't think is inside of – not part of your
control?

That is again a network regulation. It's been a critically important part of building an
overall effective and efficient payment system over the last 50 years. Our customer has to
have the confidence that when they go to have a point of sale online or physically that
their card will be accepted. So, it's been the foundation to building a global payment's
network. There has been discussion between all parties whether that rule should exist
going forward. The issuers and the networks would say it's a very important part of our
franchise. But I think all the rules are under negotiation at the same time. So, I would hope
to see that a core part for our customers' sake and confidence, and using their payment
vehicle is a foundational element, and we would encourage that stay in place.
Page 17 of 23
Date: 2014-08-22

Right. But you're saying that's on the table as well?

It's been discussed, but I think I would expect all participants to understand the need for
consumer confidence and presenting a payment card that's accepted, so I think we're
playing with the foundation element, and that is – received a lot of discussion. There are
FINAL
many different ways we can go, but I wouldn't rule it out. But I would be very disappointed
if we did go down that direction.

Okay. And the growth in the wholesale loan book, clearly, we see it in real estate, as you
highlighted. Can you talk about financial sponsors and whether that they played a role in
growing that loan book as well?

Yeah, sure. I think we disclosed separately the leverage loan segment of the loan book,
and it's about 8% of the loan book. So, the sponsor business is about half of that book, so
while significant, not a large component of the loan book, and that's because in the
sponsor business, basically, we're typically underwriting to distribute the term loans and
high-yield, for instance, we take out in a capital market.
The sponsor business has been pretty vigorous over last several months we're
participating, and we're participating at roughly our market share in other businesses. So,
we'd be neither 10 in private equity financing, which is where we are in most of our other
businesses.

Okay. Thank you.
Operator
Thank you. Our next question is from Sohrab Movahedi from RBC Capital Markets (sic)
[BMO Capital Markets]. Please go ahead.
Q - Sohrab Movahedi {BIO 6288784 <GO>}

It's actually BMO Capital Markets. I hope that wasn't a Freudian slip. Just to follow-up on
Mario's point a little bit. I mean, outside of the exceptional trading revenue in capital
markets, you had, obviously, very good results in your NII and fee income tax stream as
well. What's the outlook on that, Doug, is that sustainable?

Yeah. A lot of that fee revenues in the U.S., I mean, the U.S. is roughly half of our overall
revenues now, and it's almost double our revenues from Canada. So, you can see where
Page 18 of 23
Date: 2014-08-22
we have that nice year-over-year and quarter-over-quarter growth in Canada, and we

certainly want to continue that track. And a lot of the growth is in the U.S. and it is right
across the board. It is equity new issue. We've really been emphasizing that we want to
lead equity deals in the U.S. and we're making a lot of headway there.
We're about fifth or sixth in the convertible new issue league tables, we're outperforming
there; high yields, same thing; loan syndication. It's really spread right across the products,
and it's really about raising capital for customers. So, as long as you have good credit
FINAL
markets, the markets we've been in, you can distribute loans, and you can distribute high
yields quite easily, frankly. And so, as long as credit markets are good, then there's an
opportunity there, so we're trying to grow those businesses. If you get into less receptive
markets, then it'll be more difficult.

And I mean, it looks like this quarter, the spread was richer than the prior quarters. Was
there something unique this quarter?

Spread in the wholesale loan book?

Yeah.

No. I don't think so. I mean, I pointed to some growth in the real estate segment. There
was – there's an opportunity there that we've been taking with some strong clients, and so
we've been earning some good spread in that business, but I think it's been fairly
consistent.

Okay. And if I can just have just one additional one, maybe for Dave. I mean, Dave, these
are obviously very good results and your hurdle has been set. The question really is,
though, if in Canadian banking, 3% to 4% loan growth is what you're hearing up for and
you're really relying on organic growth to a large extent to accommodate the growth, let's
say, for the capital markets business. So where is that organic growth going to come from?

Well, I think you've seen while the mortgage business has slowed as expected, given the
regulatory and consumer change and preferences, I would highlight the agility of our
business model as loans – as growth in consumer demographic shift to deposits and
investments, we have the top franchises in those areas, number one and number two
franchise, and we're able to capture that growth irrespective of where it occurs in the
Canadian economy.
Page 19 of 23
Date: 2014-08-22
So, I remain very confident about the agility of our business model and its ability to
capture disproportionate share of growth irrespective of where it occurs in the customer
segment or in a business. So, I think that is a really important part. And you've seen that
with our investment growth numbers, you've seen that with our core deposit growth
numbers, and we remain very confident in those franchises. I think if you look at the
Canadian economy and expect an improvement whether it's Bank of Canada forecast or
own internal economic forecast, we are expecting modest improvement in economic
growth next year and that will hopefully drive some more organic growth and deployment
FINAL
of marginal capital. So, I think we are confident of capturing growth and expect to see a
little bit better environment going forward.

Okay. Thanks very much.
Operator
Thank you. Our next question is from Peter Routledge from National Bank Financial. Please
go ahead.
Q - Peter Routledge {BIO 22589697 <GO>}

Hi. Thanks. Just – I'd like to come back to the mix question. If I look at Canadian Banking
which is 50% of the earnings, pre-provision income grew about 3.8%. That's before the
interchange headwinds that are probably going to hit over the next little while. Now, if I
look at Capital Markets, they've got a 15-year track record of growing earnings at a pretty
repeatable level and avoiding the asymmetric losses that I've heard so many of your
peers. So, you have clear risk return superiority relative to peers in that business. And that
business has a great growth outlet. So, how can you not allocate more capital and be
more aggressive in growing Capital Markets given those dynamics?

I think as we look back, the balance that we've achieved in our diversified business model
has produced very well and all those strengths in Capital Markets, we fully acknowledge
and we're very proud of the consistent growth. It's a very well-managed business and a
business that has attractive opportunities.
But as we balance all our stakeholder needs, sticking to that diversified business model is
important. It's been a quarter of success in the past and our strategic guidelines remain a
guideline over the medium to longer term. So, I think we have opportunities in all our
businesses. You saw record results, at the same time, in our wealth management business,
and we've got definitive demographic shifts in our economy in North America and in
Europe and in a number of markets. So, all our businesses have attractive growth
opportunities, and that, we feel, will keep – allow all businesses to grow and keep the
existing ratio of our diversified model roughly the same.

How – just on Canadian Banking – and there's exogenous factors. You're performing well
in this segment. I'm not critiquing the performance. It's more there are exogenous factors
Page 20 of 23
Date: 2014-08-22
that are going to slow earnings growth there. And a risk to me for Royal seems to be 50%
of your earnings are coming from a business that faces some pretty material headwinds.
Do you think I'm alarmist in that concern or not?

On the retail side, you're saying?

FINAL
Yeah, Canadian Banking.

Well, I think you are being alarmist. One, as I responded to, I think, Mario's question, the
previous question, we were having – and on interchange, specifically, we have a number
of levers if interchange is reduced by legislative action or regulation. We have a number
of levers through cost, through credit profile, through managing our reward programs to
deal with that. It will impact consumers in Canada across the board, but we have the
option to manage that. You look at the types of tailwinds we would have in our retail and
in our wealth management business, particularly from a higher rate environment, as
you've seen disclosed in the industry, in North America, are quite material. So, combine
that with the outlook for better core economic growth, and I would say you're being quite
alarmist. But there certainly are some very positive opportunities and potential tailwinds.
So, I think they certainly offset any type of headwinds that we might receive from a
deteriorating (54:51) credit environment, through a cycle or any type of regulatory change.

Okay. Hey, thanks for the frank answer.
Operator
Thank you. Our next question is from Robert Sedran from CIBC. Please go ahead.
Q - Robert Sedran {BIO 7496521 <GO>}

Hi. Good morning. Doug, I'm not sure if your comments about some of the unusual items
during the quarter covers my question, but I note a pretty significant uptick in European
revenue as well and against the backdrop of some mix, let's call it, between the UK and
the continent in terms of the economic backdrop. Can you comment a bit on the
European outlook and whether that unusual item affected Europe this quarter?

One of them did. One of them was on our books in our European sub. And so, slightly less
than a half of the 100 occurred in the UK. I would say away from that, one of the things that
we have been focused on is improving the European business, so that we've done more
hiring in Europe than any other geography over the last year.
Page 21 of 23
Date: 2014-08-22
And our operating committee came to the conclusion, this is an opportune time to
improve our platform in Europe. And most of our – many of our businesses, especially in
the trading side, are under new leadership in Europe, and we're actually very pleased with
the results that we're getting under that new leadership. We're hiring and upgrading
people, and, yeah, we're going to improve that business. You're starting to see some
results of the efforts and the investment we're making.

FINAL
Have you grown more comfortable putting capital into Europe then?

Well, we've got a small loan book in Europe. I mean, we would have about 160 borrowing
customers. It's actually in Europe where the corporate business is really focused in the UK,
Germany and France, and it's mostly – it's largely investment grade, which really supports
FICC origination, new issue origination of the FICC business. We're going to continue to
lend, but we're going to really focus on those economies. And so, we have some loans
elsewhere, but I would say, it's really focused to those three places.

Thank you.
Operator
Thank you. We have no further questions at this time. I'd like to return the meeting back to
Mr. Dave McKay.

Thank you, operator, and thank you, everyone, for joining us this morning. This was a great
quarter for RBC, a testament to the strength of our diversified business model and our
strong capital position. We look forward to presenting to you again next quarter. Thank
you, everyone, and have a good weekend.
Operator
Thank you. The conference call has now ended. Please disconnect your lines at this time.
We thank all who participated.
This transcript may not be 100 percent accurate and may contain misspellings and other
inaccuracies. This transcript is provided "as is", without express or implied warranties of
any kind. Bloomberg retains all rights to this transcript and provides it solely for your
personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have
no liability for errors in this transcript or for lost profits, losses, or direct, indirect,
incidental, consequential, special or punitive damages in connection with the furnishing,
performance or use of such transcript. Neither the information nor any opinion expressed
in this transcript constitutes a solicitation of the purchase or sale of securities or
Page 22 of 23
Date: 2014-08-22
commodities. Any opinion expressed in the transcript does not necessarily reflect the
views of Bloomberg LP. © COPYRIGHT 2023, BLOOMBERG LP. All rights reserved. Any
reproduction, redistribution or retransmission is expressly prohibited.
FINAL
Page 23 of 23

Royal Bank of Canada - Earnings Call 2014-8-22 FS000000002168554302

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Royal Bank of Canada - Earnings Call 2014-8-22 FS000000002168554302

Uploaded by

Copyright:

Available Formats

Company Name: Royal Bank of Canada

Company Ticker: RY CN Equity

Q3 2014 Earnings Call

MANAGEMENT DISCUSSION SECTION

Amy Cairncross {BIO 6674169 <GO>}

I will now turn the call over to Dave McKay.

David I. McKay {BIO 15435549 <GO>}

We reported record earnings in Canadian Banking, Capital Markets, Wealth Management

Turning to our Canadian Wealth Management business, we continue to extend our

including providing advice on business succession planning and generational wealth

In our U.S. and International Wealth Management businesses, we continue to focus on

Moving to Insurance, we had a record quarter, reflecting favorable actuarial reserve

With that, I'll turn it over to Mark Hughes.

Mark Hughes {BIO 1486400 <GO>}

In Caribbean banking, provisions on impaired loans were CAD 54 million, up CAD 27

With that, I will turn the presentation over to Janice.

Janice R. Fukakusa {BIO 5884970 <GO>}

Q - Steve Theriault {BIO 6755287 <GO>}

A - Janice R. Fukakusa {BIO 5884970 <GO>}

Q - Steve Theriault {BIO 6755287 <GO>}

A - Janice R. Fukakusa {BIO 5884970 <GO>}

Q - Steve Theriault {BIO 6755287 <GO>}

A - David I. McKay {BIO 15435549 <GO>}

Q - Steve Theriault {BIO 6755287 <GO>}

A - David I. McKay {BIO 15435549 <GO>}

Q - Steve Theriault {BIO 6755287 <GO>}

Q - John C. Aiken {BIO 6329080 <GO>}

A - David I. McKay {BIO 15435549 <GO>}

doing very well.

Q - John C. Aiken {BIO 6329080 <GO>}

A - David I. McKay {BIO 15435549 <GO>}

Q - John C. Aiken {BIO 6329080 <GO>}

Q - Sumit Malhotra {BIO 15031903 <GO>}

A - Janice R. Fukakusa {BIO 5884970 <GO>}

Q - Sumit Malhotra {BIO 15031903 <GO>}

A - Janice R. Fukakusa {BIO 5884970 <GO>}

Q - Sumit Malhotra {BIO 15031903 <GO>}

A - Mark Hughes {BIO 1486400 <GO>}

Q - Doug Young {BIO 5640851 <GO>}

A - A. Douglas McGregor {BIO 1413612 <GO>}

Q - Doug Young {BIO 5640851 <GO>}

A - George Lewis {BIO 17973904 <GO>}

Q - Doug Young {BIO 5640851 <GO>}

A - George Lewis {BIO 17973904 <GO>}

Q - Doug Young {BIO 5640851 <GO>}

Q - Gabriel Dechaine {BIO 15404312 <GO>}

A - Janice R. Fukakusa {BIO 5884970 <GO>}

Q - Gabriel Dechaine {BIO 15404312 <GO>}

A - Jennifer Tory {BIO 7082836 <GO>}

A - David I. McKay {BIO 15435549 <GO>}

Q - Gabriel Dechaine {BIO 15404312 <GO>}

A - David I. McKay {BIO 15435549 <GO>}

Q - Gabriel Dechaine {BIO 15404312 <GO>}

A - David I. McKay {BIO 15435549 <GO>}

Q - Gabriel Dechaine {BIO 15404312 <GO>}

Q - Meny Grauman {BIO 15238080 <GO>}

see another slowdown coming?

A - Jennifer Tory {BIO 7082836 <GO>}

And that's why in Dave's comments, he commented on us really looking to position to

Q - Meny Grauman {BIO 15238080 <GO>}

Q - Derek A. De Vries {BIO 6181608 <GO>}

A - Janice R. Fukakusa {BIO 5884970 <GO>}

Q - Derek A. De Vries {BIO 6181608 <GO>}