Royal Bank Of Canada RY
Q3 2011 Earnings Call Transcript
Transcript Call Date 08/26/2011

Operator: Hello and welcome to the RBC 2011 Third Quarter Results Conference Call.

I would now like to turn the meeting over to Ms. Josie Merenda, VP and Head of Investor Relations. Please go ahead, Ms. Merenda.

Josie Merenda - VP, IR: Good morning and thank you everyone for joining us. Presenting to you this morning are Gordon Nixon, our CEO; Morten Friis, our Chief Risk Officer; and Janice Fukakusa, our Chief Administrative Officer and CFO.

Following their comments, we will open the call for questions from analysts. The call will be one hour long and we will post management's remarks on our website shortly after the call. To give everyone a chance to participate, please keep it to one question and then re-queue.

Joining us for your questions are George Lewis, Head of Wealth Management; Doug McGregor, Chairman and Co-CEO of Capital Markets; Dave McKay, Head of Canadian Banking; Mark Standish, President and Co-CEO of Capital Markets; Jim Westlake, Head of International Banking and Insurance, and Zabeen Hirji, Chief Human Resources Officer.

As noted on Slide 2, 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'll now turn the call over to Gord Nixon.

Gordon M. Nixon - President and CEO: Thank you, Josie and good morning everybody. As you know back in June, we announced the sale of RBC Bank in the United States. We're very pleased with this transaction as it enables us to sharpen our focus in the United States.

Given the challenges in the market and the U.S. economy and the continued weak profitability dynamics of the U.S. retail market, we're certainly confident we can better deploy that capital in higher return businesses.

The transaction is on track to close in the second quarter of next year and response to a couple of questions we received lately. I would like to emphasize that there is little price risk as the stock consideration under the deal terms has cash value up to $1 billion of PNC stock, but that were – is priced at the time of closing.

As you saw on our August 19th press release, the results from these operations have now been classified as discontinued operations that are not included in our continuing operations. We prerelease those results in advance of our third quarter to provide the historic breakout as we thought it was valuable information for our investors and the analysts to help them prepare for the third quarter release.

This quarter, RBC has earned $1.6 billion from continuing operations, which is up 13% from last year. Year-to-date, we have earned over $5 billion, which is an increase of 16% over last year. These results were driven by strong business growth in Canadian Banking, Wealth Management and our corporate and investment banking business and Capital Markets and solid performance in insurance.

Our ability to generate strong results against the backdrop of some pretty challenging market conditions is a testament to the strength of our businesses and the successful execution of our disciplined growth strategy.

As you know, global markets have been challenged spurred by uncertainty over the U.S. debt ceiling, heightened concern over the European sovereign debt crisis, and a weakening global economy.

Market conditions were particularly difficult towards the end of the quarter, driven by concern over the potential downgrade of the long-term sovereign credit rating of the United States by S&P, which had curbed subsequent to the quarter end. As a result, client volumes declined dramatically, market liquidity decreased, and margins tightened significantly in the quarter.

While trading conditions will remain difficult, we are committed to the markets we operate in and we are in a stronger position today to deal with these challenging conditions. We have taken steps over the past two years to enhance our liquidity position and de-risk specific asset classes. As an example, as you are aware, earlier this year we settled our claim with MBIA, continue to sell-down the underlying asset position.

We continue to reduce our Level 3 Assets, which currently stand at 1% of our total assets.

In the third quarter, we reduced risk in global fixed income portfolios by reducing inventory levels and certain securities and at the end of the quarter you can see we maintained our balance sheet relatively flat.

We have a strong risk management culture and have always taken a disciplined and rigorous approach to the clients and counterparties we deal with. As we have said in the past, our exposure to peripheral Europe is minimal.

With respect to large European countries, like France, Germany, and the U.K. we have stress tested our exposures under a number of different scenarios and continue to remain comfortable with our dealings in these European countries.

I would term what we are seeing in the markets today is a crisis of confidence, underpinning market reactions is a general fear that global economies could slow and the U.S. economy, in particular could slip into a double-dip recession. We are confident that the recovery (in) the global Capital Markets will occur once the fiscal policies and decisions around sovereign debt issues provide investors with more clarity about the state of the global economy.

However, in the (interim) period and the complex issues, that will take some time to work out. Markets will likely remain fragile and may continue to be volatile and we are seeing these forces currently at play.

As well banks around the world are facing other significant headwind such as a slowdown in consumer lending and the added difficultly of an operating in an prolonged low interest rate environment. The market turbulence is causing significant dislocation in the industry and many of our competitors are being forced to restructure or withdraw from certain markets and businesses, which we see as a good opportunity.

In the context of these economic and market related headwinds, I'm certainly pleased with where RBC stands both from a financial and competitive perspective and this is clearly demonstrated by our ongoing results including the third quarter.

Now, moving to the performance of our different business segments. Canadian Banking continued to underpin our results, generating 12% earnings growth from last year and accounting for over 50% of our earnings.

The double-digit earnings growth was achieved by extending our leading positions to win market share, cross-selling more products in our competitors while continuing to eliminate costs and reinvesting for future growth.

Volume growth was strong at 8% and we saw positive trends in commercial loans and year-over-year growth of 5%, making the third consecutive quarter of improving commercial loan growth. This is an area of focus for us as we continue to look to gain market share by differentiating ourselves through quality of advice and industry specialization.

Dynamics in the Canadian retail market are shifting. After years of exceptionally strong consumer loan growth, we are seeing consumer loan volumes moderating and saving rates on the rise. In this slowing environment, Canadian Banking can continue to grow and take a greater share of the market. Additionally, RBC’s diverse product offering positions us well for this shift in dynamics.

The Canadian housing market continues to fare well and we are not seeing any cause for concern. We are comfortable with our portfolio, which is well diversified across Canada. We uphold the highest underwriting standards and stress test our portfolios periodically under a number of scenarios encompassing both interest rate rises and housing price declines.

The portfolio can withstand dramatic shifts in these market parameters as the large portion of our mortgage portfolio is made up of fixed-rate product with an average loan to value on uninsured portions of just over 50%.

In this type of market, the two critical factors for outperforming the competition are driving top line growth and operating as efficiently as possible. Given our scale, we’re in a unique position to streamline processes and reduce costs. In addition, we can direct some of those savings into investments that buildup our capabilities, improve sales productivity, which will further expand the gap between ourselves and competitors.

From time-to-time, costs will increase in cases where we are deliberately taking advantage of opportunities in the marketplace. For example, we increased marketing spend this past quarter on HELOCs to capitalize on a price disparity in the market and we’re seeing great success with this campaign.

Although we have seen elevated cost over the last few quarters, we're continuing examining our reinvestment plans and our cost structure and are on track to achieve a targeted efficiency ratio in the low 40s over the next couple of years.

The current environment plays right into our strengths. We have scale and a proven operating model, which allows us to continue to outperform the market.

In Wealth Management, on an adjusted basis, earnings were up 22% from last year as we grew fee-based client assets and continued to drive net long-term fund sales. Our Global Asset Management and Canadian Wealth Management businesses both had very strong quarter driven by net inflows and the impact of our BlueBay acquisition.

In the quarter, uncertainty in the markets caused the decline in investor activity, putting pressure on transaction volumes. Fee waivers on our money market funds in the U.S. continue to impact on our business. Given the Fed’s recent announcement, we expect this to be the case for some time. Despite these headwinds, we are well on our way to building the leading Global Wealth Management and Asset Management business.

We increased our ranking from 7th to 6th in the world according to Scorpio Partnership, and achieved top ranking for investor satisfactions among full-service investment firms in the United States. We have strong distribution and manufacturing capabilities and are expanding our product offering by introducing new and sophisticated solutions for our clients.

For example, this quarter we launched the BlueBay Global Monthly Income Fund, allowing us to offer international expertise of BlueBay to our Canadian investors. Wealth Management remains a key growth area for RBC as long-term demographics trends point to growth in savings and investments, driven by an aging population focused on growing and accumulating wealth as well as continued growth in high net worth individuals in the emerging markets.

On October 21st, we will be hosting an Investor Day and George Lewis and his team will be speaking more about our Wealth Management strategy. We hope that all of the analysts will be able to join us.

Insurance continue to generate consistent earnings contribution and complements our retail product offering. As the only Canadian insurer with integrated manufacturing distribution capabilities, we believe we have an advantage over our peers. Our broad product line is capable of fulfilling client needs within our all major categories of risk protection and we have the ability to serve our clients through a variety of channels.

Going forward, we are very focused on increasing sales through our low cost proprietary channels, while continuing to identify opportunities to strengthen client relationships and improve their experience.

In International Banking, our Caribbean business had lower loan volumes since spread compression as well as higher PCL, primarily related to two clients. Long-term prospects in this business, Caribbean banking remain attractive as margins remain healthy. Our transformational initiatives provide opportunities for expense optimization and further efficiencies going forward.

RBC Dexia had a strong quarter expanding our customer base and winning new client mandates. We had strong growth in fee-based client assets and continue to enhance (and then broadened) our product, global product suite.

In Capital Markets, earnings were up 38% from the prior year, but 6% on an adjusted basis, as we had strong growth in our corporate and investment banking businesses, particularly in United States and Canada.

Revenue in this business, the investment banking portion, was up 16% from the prior year and 15% from the prior quarter, reflecting the strength of our client relationships, our industry expertise and our global reach.

These results also demonstrate the success of our targeted initiatives to remain the undisputed leader in Canada, to build our momentum in the U.S. and increase our presence in the U.K.

Some notable deals in the quarter includes advising Barrick Gold on their $7.4 billion acquisition of Equinox, acting as joint book runner on Teck Resources' US$2 billion bond offering for which we are the sole Canadian underwriter.

Advising Clayton Dubilier & Rice on their 3$.2 billion U.S. acquisition of emergency medical services and advising Charterhouse Capital Partners on their $580 million patent acquisition of a majority stake in Environmental Resource Management, a big step in broadening our European investment banking platform.

We're pleased with the momentum in this business. The pipeline for leveraged finance in M&A remains very strong and in keeping with our strategic goal of increasing the overall contribution from fee-based investment banking revenues.

Turning to trading, given the nature of our global business, results were significantly impacted this quarter by the macroeconomic environment I discussed at the outset. This resulted in declining client volumes and reduced market liquidity, particularly in our fixed income trading business in Europe and the United States.

As a market marker, we stood by our clients to provide liquidity. While this impacts us in the short-term, we believe this commitment positions us well to benefit when the trading headwinds begin to subside.

We recognize, however, that fixed income trading environment has changed both in the U.S. and Europe. Client volumes are moderating and margins have been reducing as competition stiffens and we need to scale our fixed income business in response to markets.

We are deploying capital and more traditional businesses that exhibit a more compelling risk return profile within the context of the current environment. We're expanding our investment banking business, growing fee-based revenues and building on that momentum.

We believe the long-term returns in Capital Markets will continue to be strong relative to other areas of financial services, and will provide us with effective earnings diversification. When I look at RBC today, I'm certainly encouraged by our competitive position both in Canada and globally.

RBC is a highly rated global bank with a strong capital base and a high quality and liquid balance sheet and in today's environment these strong financial footings represent a real and distinct competitive advantage.

We are well capitalized by global standards. Our capital position is strengthening and based on our current interpretations, we already meet the 2013 Basel III requirements.

Over the past year, we exited businesses like RBC Bank and Liberty Life that lacked the scale to meet our hurdle returns. Our Tier 1 capital ratio stands at 13.2% on a consolidated base, the loss on the announced sale of RBC Bank lowered the ratio by 10 basis points. However, on a pro forma basis as of July 31st, we expect the sale of RBC Bank to add and estimated 130 basis points which puts us well over 14%.

Our global funding platform is strong and having access to a multiple of global sources allows us to fund an optimal spread – more optimal spreads than our global peers. This is a real competitive advantage in today’s environment.

Additionally, the strong financial profile provides us with the flexibility at the time when other institutions are capital constrained. We also have rigorous operational discipline and in this slower growth environment, we're ramping up all activities to address our costs including undertaking a significant refresh cost management program.

The objective here is to make prudent selective choices that balance the investments required to strengthen our competitive position with the need to rein in discretionary spending and decrease the growth of our cost base.

This cost program will provide necessary levers so we can dynamically manage the trajectory of our expense growth against that of revenue growth while continuing to provide valuable advice to our clients in innovative products and services.

There are few companies with the ability to consistently earn their way through all points of the cycle including these uncertain times, we believe RBC is one of those companies. Our culture is built on taking the forward-looking long-term view of growth on behalf of our shareholders, all within the framework of a strong risk management discipline.

Looking around that investors and consumers like the quality and esteem the world holds for our country strength and stability, I have to say it is a great time to be a leading company in Canada. While others may be forced to retrench our strong capital position allows us to continue to build our franchise and win market share in what we believe to be high return business.

With that I'll turn the call over to Morten.

Morten N. Friis - Chief Risk Officer: Thank you, Gord. As Gord mentioned earlier, we announced on June 20th our definitive agreement to sell our U.S. regional retail banking operations to (PMC) and classify the results of those units as discontinued operations. We continue to manage our credit risk on a consolidated basis. Total PCL of $367 million was up slightly compared to the prior quarter, mainly due to higher PCL and our continuing operations which increased $34 million to $275 million. PCL from discontinued operations of $92 million declined slightly compared to the prior quarter driven by reductions in the retail portfolios.

PCL trends in the U.S. saw credit quality continue to stabilize over the quarter, and we would expect this stabilizing trend to continue unless there is a more pronounced slowing in the pace of the economic recovery in the U.S.

Turning to Slide 7 through 9, the rest of my discussion will focus on RBC’s continuing operations only. Over the quarter, we saw some sign of weakness from the Canadian and U.S. economics as the pace of growth slowed in the second quarter, calendar quarter due to decreased consumer spending and weaker manufacturing. Specific provisions were up $34 million over last quarter, primarily reflecting higher provisions in Caribbean Banking and a modest increase in our corporate and commercial portfolios.

Taking a look at our credit performance in the business segments, Canadian employment rates and consumer bankruptcies and insolvencies showed modest improvements over the quarter, although we saw an increase in business insolvencies over the same period. Specific provisions were up $7 million on the Canadian Banking platform from last quarter, a stable performance in our retail portfolios, including lower write-offs and our credit card portfolio was offset by marginally higher provisions in our business lending portfolio.

Taking a closer look at credit cards, we saw credit cards specific provisions as a percentage of average net loans and acceptance has decreased 27 basis points over last quarter to 352 basis points, again reflecting fewer retail bankruptcies.

Specific PCL in International Banking increased by $25 million over the last quarter, reflecting higher provisions in our Caribbean commercial portfolio related to two specific accounts. Caribbean economies continue to be challenged by slow tourism and high unemployment.

Going forward, improvements in the performance of our Caribbean retail and commercial portfolios will be linked to the rate of improvement of the economies in the region.

In Capital Markets, provisions were $8 million compared to recovery of $5 million in the prior quarter, reflecting a provision of a single loan in our corporate portfolio partially offset by recoveries.

On Slide 8, gross impaired loans were up slightly due to a modest increase in new formations this quarter, mainly reflecting the specific accounts we took provisions on in this quarter in Caribbean Banking and Capital Markets.

Again, this quarter we have provided disclosure on Page 21 on the report to shareholders regarding our credit exposure in certain European countries, which include loans as well as exposures (riding) from trading inventory and derivative positions.

Our direct exposures to peripheral Europe continues to be minimal. However, due to the size of our operations in fixed income and derivatives, (we do expose) to a range of better rated European sovereign, super-sovereigns and banks.

Our exposure to European banks is with well rated counterparties and is generally short term in nature or supported by collateral agreements. I want to emphasize that these exposures are manageable. We are comfortable with the risk profile and I would also say that we take a disciplined approach to our dealings in these issues both inside and outside of Canada and specifically here have reacted to market developments to reduce our exposures.

Turning to market risk, management VaR was down $6 million compared to last quarter as interest rate value at risk declined. During the quarter, we had a total of 20 days with net trading losses none of which were large and none exceeding the value at risk. The trading losses reflected continued deterioration in trading conditions.

The largest loss which totaled $13 million was primarily due to credit valuation adjustment related to wider counterparty credit spreads, and unfavorable movements in certain markets.

With that, I'll turn the presentation over to Janice.

Janice R. Fukakusa - CAO and CFO: Thanks, Morten. As Gordon mentioned, our consolidated earnings were impacted by a loss of $1.57 billion related to the announced sale of RBC Bank USA comprised primarily of a write-down of $1.3 billion of goodwill and intangibles, which are now classified as discontinued operations.

This resulted in a net loss of $92 million for the third quarter. On a continuing basis, you can see on Slide 11 that we reported third quarter net income of $1.6 billion, up 13% from last year. This quarter’s performance was underpinned by strong fundamentals. We grew our core earnings in Canadian Banking, Wealth Management, and the corporate and investment banking segment of capital markets.

Revenue growth was 2% over last year factoring out items such as the fair value adjustments in the insurance and revenue from Liberty last year as well as foreign exchange translation, and last year's loss on MBIA revenue growth was solid at 7%. This growth was driven by strong underlying momentum in our retail businesses with increased volumes in Canadian Banking and higher client assets in Wealth Management. We also had strong loan syndication, equity origination, and M&A activity in our wholesale business.

Although we had solid revenue growth this quarter, it was outpaced by our expense growth which rose 10% over last year. More than half of the annual increase – the quarterly increase was driven by HR spent largely related to higher staff cost due to business expansion and pension costs driven by the rise of pension expenses in our Canadian retail businesses.

As Gordon mentioned, we're monitoring the pace of expense growth and have ramped up a cost management program to address all aspects including discretionary and investment spend at both the segment and enterprise level. We're doing this on a very pragmatic, scalable and measured basis that fosters business growth and drives greater efficiency in our processes.

Moving to our segments starting with Canadian Banking, net income of $855 million was up $89 million or 12% from last year, driven by solid volume growth across our personal and commercial businesses and lower provision for credit losses.

Expenses up 10% from last year mainly due to increased staff cost including higher pension expense and increased marketing costs largely related to our home equity products. Net interest margin increased 4 basis points year-over-year reflecting higher spreads on deposits.

On a quarter-over-quarter basis, net interest margins were down 4 basis points as competition impacted pricing on mortgages and deposit products. Year-to-date efficiency is at 47.7% or 46.1% excluding the incremental cost of pension and HST, which represents an 80 basis points improvement over the same period last year.

On this same basis, our operating leverage jumped to 180 basis points, up from a negative 190 basis points. We continue to target an efficiency ratio in the low 40s as we invest in initiatives while reducing discretionary spend and transforming our cost base.

As we mentioned before, we have flexibility to adapt to changing market conditions with the ability to either accelerate or decelerate these investments in response to the growth environment. Additional areas to improve efficiencies include process redesign, streamlining workflow and simplifying transaction execution through automation.

Compared to last quarter, net income was up slightly. When you take into account the $20 million gain on the sale of Canadian Banking's remaining Visa shares last quarter, net income was up 3%.

Moving onto Wealth Management, net income was $179 million, down $6 million from last year and down $41 million compared to last quarter. There were a number of tax and accounting adjustments, which benefited the prior comparative quarters. Excluding these adjustments, net income was up $32 million or 22% from the prior year, driven by higher average fee-based client assets.

Compared to the prior quarter, net income was down $6 million or 3%, mainly due to lower transaction volumes reflecting challenging market conditions. We also incurred a loss this quarter compared to a gain in the prior quarter on stock-based compensation.

In Insurance, net income was $144 million, down 6% from last year driven by the timing of annual annuity reinsurance contracts and lower net investment gains. Compared to last quarter, net income was relatively flat.

International Banking net income was $31 million, down 14% from the prior year as higher average fee-based client assets improved transaction volumes and business growth at RBC Dexia were offset by lower business loan volumes, spread compression and higher PCL in Caribbean banking. Compared to last quarter, net income was down $14 million, or 31%, largely reflecting higher PCL in Caribbean banking related to two specific accounts.

Capital Markets net income was $277 million, up $76 million from last year. Excluding certain market and credit related items, net income was up $19 million or 6% from the last year driven by improved client activity. Earnings were down $130 million or 30%, 2% from the prior quarter as strong earnings in corporate and investment banking were more than offset by significantly lower fixed income trading outside Canada and in particular in Europe.

We continued to experience strong growth and improvement in our corporate and investment banking businesses resulting from higher loan syndication activity, improved debt origination in the U.S. and improved M&A activity in the U.S. and Europe.

As Gord outlined, our global markets business was severely impacted by the deteriorating trading environment, resulting in significantly lower client volumes and reduced market liquidity.

Expenses in Capital Markets were up 16% over the prior year as we continue to invest in core infrastructure to support our businesses.

At this point, I’ll turn the call over to the operator to begin the questions-and-answers. Please limit yourself to one question and then re-queue, so that everyone has an opportunity to participate. Operator?

Transcript Call Date 08/26/2011

Operator: Robert Sedran, CIBC.

Robert Sedran - CIBC: Question for Dave McKay actually, I noticed price increases on the variable rate mortgage side earlier this week. Can you give us some sense of why you finally made the move? Was it the bit of margin decline that you were seeing during the period? Or is this the start – are these kind of moves that start protect the margin rather than just a one-off to address that product that I guess was not economical for you.

David I. McKay - Group Head, Canadian Banking: Thanks, Robert for the question. A combination of factors in the price increase on Wednesday; one, there was a dislocation between the price of the fixed rate book versus the variable rate book which was encouraging, I guess, consumers to really move into a much, much lower variable rate book, which had very, very thin margins. At the same time, we're seeing a slight volatility in funding costs in the swap market. So, given the dislocation between fixed and variable the very, very thin margins, we felt we needed to move prices up in our variable rate book.

Robert Sedran - CIBC: Are there other products, where you're seeing these same pressures and that you might be changing pricing as well?

David I. McKay - Group Head, Canadian Banking: No. I think the fixed rate business is well priced and earning a fair return. I think there was an anomaly with the intense competition in the variable rate mortgage business, consumer preference being, I think, artificially driven there because of the price differential to fixed, we had to get it back and to have more even keel. So, I think those were (summative). Along with the funding volatility that we're seeing, we needed to make sure that this product earns a fair return for shareholders. So, we moved rates up.

Operator: Steve Theriault, Bank of America Merrill Lynch.

Steve Theriault - Bank of America Merrill Lynch: Sticking with Dave, if I could, I was a little surprised to see the efficiency ratio rise sequentially given the seasonal jump we usually see in Q2. Gord alluded to some initiatives here, but can you talk to how much flexibility you think you have to manage expenses down in this difficult margin environment. Can you talk to your outlook for efficiency in operating leverage for the next couple of quarters, especially in the context of your increased marketing spend, which I suspect will again be a feature in Q4. Also, I might have missed it during the opening remarks, but Dave, could you talk to – could you give us some additional color on the four basis points sequential margin decline and refresh us on your outlook for margins in the near term?

David I. McKay - Group Head, Canadian Banking: A few questions there. Let’s start with cost and then I can move into some margins. So the 9.5% cost increase that we saw year-over-year, as Janice referenced, roughly 35%, 40% of that or, let’s say, 4% of that was due to the pension and HST year-over-year increase. Another 1% to 2% of that is driven by we call one-time non-controllable costs, meaning we had some fraud that we absorbed into the portfolio this quarter that led to a year-over-year increase. So when you look at the core NIE increase year-over-year, you are really looking at closer to 4% plus NIE growth, which on a revenue basis 7% is very, very healthy. We added to that a tactical spend, as everyone saw in HELOCs, a significant tactical spend that we’re extremely happy with. You saw it continued throughout the summer into August. So that would push us up closer to 5%. So, again, that tactical spend we can take on or off quarter-to-quarter was significantly higher than last year, but we're extremely happy with the results that are produced in our home-equity book as you saw volume growth at 8% is a very, very strong number in today's marketplace. Revenue growth at 7% tracked very close to volume growth. So we're maintaining strong margins as we grow those volumes. So I think our operating leverage, when you look at the core growth of the portfolio was strong. We don't expect the fraud to recur in Q4, and in Q4 you'll also see the HST year-over-year impact roll off. So, we would expect to see a fair material decline from that 9.5% run rate in Q4, given those factors. As far as NIMs go, we talked in the last quarter, during this call I was asked the same question and my comments were, we expect to see some marginal decline in NIMs in Q3, which you've seen. That’s the result of the variable rate pricing competition and customer choice that we just talked about on the previous question from Robert. So, customer choice into a low margin variable rate mortgage really did drive down our NIMs quarter-over-quarter. Having said that, I think they’re up one basis point year-over-year which is quite strong. So, I think it's consistent with the guidance we gave in the last call. I would expect going forward, I'm sure I'll get this question so I’ll answer it how, similar types of – at the margin pressure, and creeping into the deposit book a little bit, there is – with a low rate environment and the (presence) of low rate environment and the flatness of the curves, you’ll start to see a little bit of pressure creeping into our deposit book at the same time. So, I think that’s the environment that we are looking at right now in a short term. Does that answer all your questions? I think I covered them.

Operator: John Aiken, Barclays Capital.

John Aiken - Barclays Capital: Gord, with the divestiture of RBC U.S. and with the new disclosure in terms of that volume to discontinued operations, we’ve got trading revenues running at about 20% give plus or minus on the last 12 months' basis. Arguably, this is a depressed trading revenue environment. How comfortable are you with this? Or are the plans to try to grow the other operations around this and try to drive down the revenues percentage of total – sorry – trading revenues as a percentage of the total?

Gordon M. Nixon - President and CEO: We’re very comfortable with the percentages and in fact, we have sort of two stated objectives with respect to our Capital Markets business. One of them is for Capital Markets in totality that represent between 20% and 30% of the overall institution from an earnings and revenue perspective, and the other is to move our investment banking and fee-based low capital businesses in Capital Markets up to 50% of that platform's overall earnings. As you see from this quarter, we’ve achieved those objectives in both cases, not necessarily the way we would want to get there and that because of the decline in the trading market activities. I think if you looked at the fee-based and investment banking side component, it's approximately 50% and of course, the overall contribution is closer to 20% to 30%. We're very comfortable with those numbers going forward and you know, it's built into our plan. Planning is never a perfect exercise, but when you look at our planned growth both in Canadian Banking and Wealth Management and Insurance and our International Banking businesses combined with our plans in corporate and investment banking going forward, we actually see that number into the future continuing to be well within the range with 20% to 30%. As I say when you look in today's difficult trading environment, we're actually being pushed down into a lower percentage which is not necessarily a good thing but certainly from an optical perspective gets us there more quickly. But in terms of our forward plans including the sale of the U.S. banking side, our expectation is we will be well within that range and probably closer to 25% going forward.

Operator: John Reucassel, BMO Capital Markets.

John Reucassel - BMO Capital Markets: A question for George Lewis. George, you put out a – or at least your quote is putting out a target of $1.6 billion of earnings out of the Wealth Management business over next four to five years. A, is that correct? I guess that's based on 2010 numbers, that's about a 24% CAGR. So, can you talk about how you're going to get there? How much is higher interest rates? How much is acquisitions organic? Can you just flush out that comment, that target a little more?

M. George Lewis - Group Head, Wealth Management: We are, as Gord mentioned, going to provide more details in terms of our five-year plan at our Investor Day in October, but this is a business, if you recall, we started in 2007 with a view that it would have a faster growth rate over longer term driven by demographics and emerging market wealth creation, a low capital-intensive business. So, it is one where we think it’s appropriate to be aggressive in terms of our growth targets. They are achievable and they're chunked down to the three main components. In terms of organic growth our Canadian Wealth business and our Global Asset Management business continue to gain share in the Canadian market. You see that in the slide with respect to our mutual fund business. We expect based on the quantity of our management teams, there are product launches to continue gaining share in our Canadian markets. So, our two largest businesses continue to grow well over the next five years. Our other two large businesses, our U.S. Wealth business and our Global Trust business, we think there are significant opportunities to continue to improve the operating efficiency of those businesses. So about half of our growth, we expect to come from our existing large businesses and the continued improvements there. Another large component is leveraging our BlueBay acquisition, which is off to a very strong start. We’ve launched the product here in North America, we seeded new funds for them and that’s a significant source of growth over the next five years and about 30% of our growth is expected to come and this is our planning assumption which we think is reasonable, but we do assume 5% to 6% normal market return. Clearly that’s not been the case in the last month, but that’s long-term return for the market and we do assume they will return to normalized level of interest rate. So, those three buckets – strong organic growth, leveraging our acquisitions, and then normal market in interest rate environment.

John Reucassel - BMO Capital Markets: So George, if interest rates stay low, obviously that target is a little aggressive. Is that correct from what I am hearing?

M. George Lewis - Group Head, Wealth Management: Yes.

Operator: Michael Goldberg, Desjardins Securities.

Michael Goldberg - Desjardins Securities: Gord so, clearly, the turmoil in Europe impacted your trading operations and I have I guess two things to ask about that. Last quarter you indicated $700 million to $900 million quarterly trading revenue could be sustainable and you missed the low end of this range by more than 50%. So, clearly, as we said trading continues to be very volatile. What should we conclude about what to expect from trading going forward and your stance towards these activities? Also, given the turmoil in Europe, what comfort can you give us about liquidity of European banks and what are doing to protect yourself from a possible liquidity event?

Gordon M. Nixon - President and CEO: Michael, I'll start off the answer to that question, and then I’ll ask Mark Standish and perhaps Morten might want to chirp in on the liquidity side of the European banking system. I think with respect to the guidance with respect to trading revenues, there is no question that if you look at today's environment, if trading markets continue to be as volatile and then as illiquid as they are right now, it’s going to be very difficult to meet those objectives. I think it’s very difficult to predict where we’re going to be a month or two out, but currently the environment remains quite challenged. I think in terms of what we're doing to deal with that, I mean, a couple of things. Firstly, we have been taking risk off in our various businesses. If you look at our activities, particularly in the fixed income market, we’ve taken a significant amount of risk off in those businesses. One of the good things about the trading businesses, and it's a little bit inconsistent with the liquidity rules from a regulatory perspective, because while trading businesses don't get particularly favorable liquidity treatment, they are businesses that have a fairly high degree of liquidity. So there is an ability to shift the nature of the business and to withdraw our capital from those businesses and we’ll make those adjustments accordingly depending on how markets unfold going forward. On the liquidity with respect to Europe, we feel very comfortable based on some of the comments that Morten made earlier, and I’ll ask him to elaborate further, but when you look at our business in Europe, most of our activity would be with the highly rated institutions in Europe or sovereigns in Europe, very little exposure to peripheral Europe, and a lot of are collateralized activities. So when we stress test against a liquidity crisis in Europe, we feel pretty comfortable but I might ask Morten to elaborate on that.

Morten N. Friis - Chief Risk Officer: Sure. I mean the reason, Michael, for my comments about saying that we are comfortable with the European bank exposure and that we feel that it's very manageable and if you look at our exposure there, it is entirely outside of what you see in our peripheral European disclosure. It's entirely with banks at the better end of the rating scale, those who will be hit by liquidity issues last in any crisis scenario and the nature of exposure is such that we can also dynamically manage this as conditions evolve. So we are actually, I think, very comfortable with that. In terms of liquidity issues, we’re dealing with institutions that I think are at the safest end of that spectrum.

Michael Goldberg - Desjardins Securities: Can you give us any comfort though about the possibility of a liquidity event actually happening, given there are a lot of concerns about this, it kind of feels like going into 1982 again?

Morten N. Friis - Chief Risk Officer: Well, I think to some degree, you’ve already seen a liquidity event happen, and I think what you're seeing and this is reflected and we see it in our funding and with our counterparty funding is what you’ve seen is a incredible bifurcation in the marketplace in Europe. Stronger institutions, international and even Europeans have not only access to liquidity, but have excess liquidity and institutions that are viewed to be weaker have virtually no liquidity and that's one of the issues. We are living through that and because of the nature of our petitions we feel very comfortable with that. So to some degree, I think we’re living that liquidity crisis in Europe, particularly with respect to the weaker banks and the weaker countries or those that are perceived to be weaker financial institutions.

Mark A. Standish - Co-Group Head, Capital Markets: This is Mark Standish. I just want to expand on Gordon and Morten's comments. I mean if you look at the VaR and the comments around reduction in VaR, what we've actually done is we've reduced the gross VaR in our client and proprietary businesses by approximately 30% through the quarter. We've actually increased the VaR slightly which has offset some of those reductions in our treasury management group. The other thing we did in the quarter is we accessed term funding in the market to roughly twice the normal planned access. So, we significantly improved our liquidity position. That liquidity has to be actively managed, and we managed that in the treasury management group consistent with some institutions, but not with a lot of others. We run that in a mark-to-market environment where we actively manage that liquidity. It's extremely high quality, it's extremely liquid and we feel very good because of this with our overall liquidity position, in particular in Europe.

Operator: Peter Routledge, National Bank Financial.

Peter Routledge - National Bank Financial: Just to follow along from Michael's question. Page 34 (you said that) gross credit exposure, and I understand it's growth not a measure of balance sheet risk necessarily, but your total other international is about $169 billion on $799 billion total. Of that $169 billion, what percent is in Europe versus say the Caribbean or other geographies that you're in? Can you give us some rough ballpark you think it was around there? Then two, I sort of interested in the comments on terming out some of your treasury funding. I didn’t see that in your corporate and other net interest income segment. I didn’t see a real rise in net interest income in corporate and others. So is that cost of funding in this segment itself or is it in corporate and other?

Morten N. Friis - Chief Risk Officer: Peter, in terms of the – I was trying to get your line on Page 34, but you are looking at the…

Peter Routledge - National Bank Financial: Total international gross credit exposure just down at the bottom right, 169 on the 799.

Morten N. Friis - Chief Risk Officer: Because in terms of the Caribbean loan portfolios, I mean they are in round numbers $6.9 billion out of the total.

Peter Routledge - National Bank Financial: I was talking more about the trading related exposures.

Morten N. Friis - Chief Risk Officer: What percentage is Europe?

Peter Routledge - National Bank Financial: I mean is that all Europe or is there other geographies in there?

Janice R. Fukakusa - CAO and CFO: There is other geographies.

Morten N. Friis - Chief Risk Officer: I mean it's...

Janice R. Fukakusa - CAO and CFO: it's all the geographies. Like Canada and U.S.

Morten N. Friis - Chief Risk Officer: It's all the geographies, right. They got Canada, U.S. and then rest is the rest of the world and in terms of the outside of the lending business, you’ve got a – Europe would be a reasonable proportion of – I don’t have the numbers at my finger tips, I am happy to take it offline.

Peter Routledge - National Bank Financial: But it’s a significant part.

Morten N. Friis - Chief Risk Officer: Yeah.

Peter Routledge - National Bank Financial: Then just on the funding, where are those – I mean presumably if you are terming out funding, the costs are greater and I don’t see that in corporate and other. Is that in Capital Market segment?

Morten N. Friis - Chief Risk Officer: You’ll find that, Peter, in the Capital Markets business. We allocate the cost of funding throughout the Capital Markets business and in the short-term we're managing that excess funding in the treasury business, as I said. Now if you look at Slide 18, you'll notice that Q3 numbers were down from Q2 even though we're managing more money in that area, and that is because we've been very defensive in where we keep that liquidity. Obviously, the highest quality, most liquid assets right now are yielding the least. So there is a short-term revenue impact to us, which as I said, we're observing in the overall trading numbers in treasury and funding.

Operator: Gabriel Dechaine, Credit Suisse.

Gabriel Dechaine - Credit Suisse: Just a follow-up on a few of the comments there that you’ve made about cost reviews across the bank. Could you put some numbers around that, like what does that really mean? Are you looking for any explicit cost reductions in 2012? Then Canadian Banking specifically, should we expect return to positive operating leverage and efficiency gains in 2012? Then just quickly on commercial lending volume growth, 8% annualized, are you happy with that or do you want to get to double digits?

Janice R. Fukakusa - CAO and CFO: Gabriel, its Janice speaking. Let me talk about our overall aspirations in terms of our efficiencies, and then Dave will take the question specifically on Canadian Banking. With respect to the sizing of the cost program, the whole focus is on getting our run rate of expenses down to where we've always targeted an operating leverage of 3% and you’ll note that, because we've had a large build up in investment in our businesses, we run that particular ratio on an annual basis. It’s been pretty tight. So our aspiration is to reduce the growth of expenses to within a manageable operating leverage, which we generally have always been sizing at about 3%. So it's a lot of activity and a lot of programs and there will be some fluctuations on a quarterly basis, but that would be what we're intending to do over the next three to five years and Dave will talk specifically about banking and then the commercial markets question.

David I. McKay - Group Head, Canadian Banking: I'll just build on Janice’s comments. Certainly, as Janice said, we ramped up investment and the expectation of a rising rate environment and margin expansion and revenue expansion. In the absence that role playing out, we are revisiting some of our investment plans and our growth plans to ensure that we match closely revenues and expenses and get back to positive operating leverage. The world’s changed on this a bit and we have to adjust accordingly.

Gabriel Dechaine - Credit Suisse: The commercial lending, 8% annualized growth, you happy with that or you want more?

David I. McKay - Group Head, Canadian Banking: I always want more. Never satisfied with any growth number. That's 5% though. It's a good solid trend year-over-year on the commercial lending growth and certainly, we see that continuing to grow as our pipeline is extremely healthy, but no we're not happy at 5%. We are very happy though with the 11% deposit growth, so certainly our commercial deposit engine is performing very, very well. That business is turning around though and starting to show some good momentum, but it's not yet where we want. It's going to take a couple of more quarters.

Gabriel Dechaine - Credit Suisse: The reason I ask is, everybody is targeting growth in commercial. Competitive cost pressures are in the mortgage side. I wonder when that starts creeping into commercial.

David I. McKay - Group Head, Canadian Banking: Yeah, it is a very competitive marketplace right now. We are the market leader and we've got very strong capabilities in our industry specialization and a vast network of clients and we’re going to continue to manage that the way we have in the past.

Operator: Sumit Malhotra, Macquarie Capital Markets.

Sumit Malhotra - Macquarie Capital Markets: My first question is for Janice. Janice, if we go back to Q4 a year ago, Royal and all of the other Canadian banks talked about reviewing pension liabilities as one of the factors that pushed up expenses. If I think about the move in the interest rate environment subsequently particularly in the last couple of months, is that an issue that first half only gets reviewed just once a year? Secondly, should result in another expense uptick for Royal in the fourth quarter?

Janice R. Fukakusa - CAO and CFO: That's a good question Sumit. The pension expense is only sized once a year and we size it in September for the next year, and so the interest rate environment at that point influences what the expense is going forward. So, there will be no specific uptick there related to a resizing of the expense because we only size it once a year despite the fact that interest rates went down. Going forward into next year, you need to remember a few things. First of all, we will be on IFRS accountings and so the pension expense won't be comparable because the amortization of the losses in the portfolio will be taken through the transition adjustment. So, there will be a significant downsizing simply because we won't have that component of the pension expense in our numbers going forward.

Sumit Malhotra - Macquarie Capital Markets: That was going to be (Part b) on the IFRS. I just wanted to know though if I'm correct, in Q4 last year I think the two issues that were talked about and most of it went through Canadian Banking this was the largest segment it was HST and – it was pension, right?

Janice R. Fukakusa - CAO and CFO: Yes, it was pension. It was the pension expense that we talked about on the trajectory going forward, yeah.

Sumit Malhotra - Macquarie Capital Markets: So, wouldn't we see at least for one quarter potentially something in Q4 for that or...

Janice R. Fukakusa - CAO and CFO: There will be (a bit) one month.

Sumit Malhotra - Macquarie Capital Markets: Obviously, you will – 'you will come up on the fifth quarter for HST' so that year-over-year decline should – or year-over-year increase should be somewhat more limited there and then you will have maybe one month of the pension?

Janice R. Fukakusa - CAO and CFO: That’s correct. I think what Dave – what you were saying in your answer to a question previously was that’s why we expect our expense trajectory to be moderating in Canadian Banking.

Sumit Malhotra - Macquarie Capital Markets: Then I’ll wrap up with one for Morten. Morten, if we just stay with the continued operations and I look at your provision for credit loss number, it seems to have actually picked up the last couple of quarters. I know you had Caribbean this time around and you’ve gone from reversals back to provisions in Capital Markets, maybe if we look at it on a full year basis or nine months basis, fair to say your provision ratio has been about 35 basis points. As you look across your three lending businesses now and your view of the economy where we headed, is 35 basis points as good as it gets for Royal and we should expect provisions to stabilize here in the near term? Or do you think you still have some room for that to move lower? Maybe I am wrong, maybe you think it is going to go higher? Just maybe a view on where we are going forward relative to that 35 basis point number we’ve seen so far this year?

Morten N. Friis - Chief Risk Officer: I guess, (indiscernible), first of all, the future is uncertain. So, you can see the rates move in either direction here, but if you look at the three main contributors to our PCL performance, Canadian Banking, the Caribbean operation out of International Banking and Capital Markets, I would say the Capital Markets loan book we’ve had, four or five quarters recoveries prior to this last quarter, expecting PCL for that business to remain in recovery position is unrealistic, but given the current environment, I would say the quality of the book is very good and you have a fair range of basis points coming out of that booking and it's large enough, but they will drive the total somewhat. The Canadian Banking portfolio, I think is performing extremely well. You’ve seen the commercial book had an uptick in PCL from 20 basis points to 35 basis points this quarter, but that is still I think very good performance and consistent with what we would see going forward if the economic conditions continue consistent with the current environment. The International Banking segment, I would say, we continue to hope for improvements in the PCL performance for that relative to the size of the loan book. I do think that that is a likely perspective to take. But again, the performance of that book will be driven very heavily by the economic conditions in the Caribbean. So, if you look at performance in the mid-30s from a PCL standpoint is consistent with a stable to good end of the cycle. We would not be targeting our business approaches to drive the PCL down from that level. If conditions are very favorable, you could see a movement in a favorable direction. But I will also say that given the mixed nature of the overall book, it doesn't take too much negative in either the commercial and corporate segment to drive the numbers up somewhat. So, without really having an answer to your question at all, that’s sort of the range of issues that I'm looking at.

Sumit Malhotra - Macquarie Capital Markets: So, 35 is a good base case, and it sounds like you’re risk guys. So I guess you’re going to be cautious. It sounds like you don’t expect too much – that’s the change too much in the near term?

Morten N. Friis - Chief Risk Officer: It sounds like a reasonable interpretation, yes.

Josie Merenda - VP, IR: Operator, we are almost at our time. We have time for one last question. It has to be one question and has to be quick.

Operator: Cheryl Pate, Morgan Stanley.

Cheryl Pate - Morgan Stanley: Just a quick question for Janice. When I'm looking at the corporate segment, I'm wondering if you can seize the benefit of the tax adjustment this quarter, and I just want to confirm where that's actually hitting in the segment. It looks to me to be in the NII line, but just wanted to confirm that.

Janice R. Fukakusa - CAO and CFO: The tax adjustments would be hitting in the tax line and this is basically related to the assessment, a successful assessment and we have this adjustment every year as we go through our tax assessments on an annual basis. So I think, last year in Q3 there was a similar adjustment. In terms of the seizing of it, most of the positive in that segment relates to the tax adjustment. There are some other mark-to-market adjustments and some funding adjustments there also, but a large portion of it is related to the tax assessment.

Cheryl Pate - Morgan Stanley: Is there anything in particular impacting NII this quarter that brought it down so much then?

Janice R. Fukakusa - CAO and CFO: Well, the NII adjustments in corporate support, it also has to do with the (TV) that we do in Capital Markets. So the Capital Markets' revenue are tax equivalent adjusted up and then we reduce it through there and then some funding cost. So we’ll look at that Cheryl and if is anything out, I don't think there is, but we’ll get back to you.

Operator: This concludes question-and-answer session. I'd like to turn the meeting over to Mr. Nixon.

Gordon M. Nixon - President and CEO: Thank you for your attendance on the call and we are certainty available for any further questions throughout the day, and we look forward to the call next quarter. Thank you very much.

Operator: Thank you. The conference has now ended. Please disconnected your lines at this time. We thank you for your participation.