Royal Bank of Canada (RY) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Royal Bank's fourth quarter earnings release conference call. I would like to turn the meeting over to Nabanita Merchant, Senior Vice President of Investor Relations. Please go ahead to Ms. Merchant.

Good afternoon, everyone. Thank you for participating in tis conference call. I'm joined today by the nine members of the management committee, President and CEO, Gordon Nixon, Vice Chairman and CFO, Peter Currie, Vice Chairman and Chief Risk Officer, Suzanne Debarge, the five vice chairmen responsible for our business platforms Jim Rager for RBC Banking, Jim Westlake for RBC Insurance, Reay Mackay for RBC Investments, Chuck Winograd for RBC Capital Markets, Marty Lippert for RBC Global Services, and Irving Weiser, CEO RBC Dain Rausher. Our Senior Vice President Finance John Merriam is also with us. We’ll begin the call by remarks by Gordon Nixon, Peter Currie and Suzanne Lebarge. They will report the charts from our quarterly results slide presentation available on our web site. We will then take your questions. I'll turn it over to Gordon Nixon.

Thank you, and good afternoon and welcome, everybody. I'm pleased to report another quarter of solid results and also record earnings for our fiscal 2002 which we're certainly pleased having achieved in a challenging environment marked by ongoing concerns about global economic growth, financial market uncertainty and a lot of geopolitical tensions. In that environment, we continue to adjust our businesses to meet our performance objectives while also taking action to position ourselves for long-term growth and success.

As is shown on chart three, our fourth quarter net income of 732 million was up 66% and earnings per share $1.05 up 75% from a year ago. Also excluding good will expense a year ago, which is detailed on chart seven, coordinate income rose 34% while earnings per share were up 38%. ROE was 16.3%. The solid perform as reflected a lower provision for credit losses, good cost control and higher earnings from our U.S. acquisitions.

For the year, we delivered record results with net would be income of 2.9 billion, up 30% from 2001.And earnings per share of $4.12, up 27%, excluding special items which was largely the sizeable gain from the sale of RT Capital Management a year ago. This reflects higher earnings from our U.S. acquisitions and solid costs and risk management. Our strong financial performance this year also rewarded our shareholders with a 16% increase in our share price.

Turning to chart six, it's worth noting that there is a 10 cents difference between our U.S. and Canadian GAAP core EPS numbers. As the reconciliation shows the difference arising from U.S.-U.S.-Canadian GAAP differences in accounting for insurance transactions and derivative financial instruments.

You will note from chart eight that we met almost all of our financial objectives for 2002.In terms of our 2003 financial objectives, we have increasing our earnings per share growth target to 10 to 15% from 5 to 10% and reduced our revenue growth target to a more realistic 5-8% from 7-10% this year. When we benefited from a full-full-year revenues at RBC Ventura which was acquired in June of 2001.These changes reflect our expectations that the capital markets will pick up somewhat in 2003 and cost containment will allow expenses to grow at a lower rate than our revenues.

As shown in chart nine, we have also modified some of our medium term goals. We have raised our dividend payout goal from 35 to 45% from 30-40% fully underscoring our commitment to reward our shareholders. We've raised our tier one capital ratio goal to 8 to 8 1/2% from 8% to make our capital ratios more comparable to those of other well capitalized North American banks . Finally we've raised our specific provision for credit loss ratio goal to 35 to 45 basis points from 30 to 40 basis points in recognition of the economic uncertainty and growing Canadian and US consumer loan book which has loss ratios above the earlier goal range.

The performance of our business segments is shown on charts 11 to 17.In the interest of time, I would like to simply point out that one of our major strengths in our businesses is diversification by business line and geography which helps to stabilize our returns and reduce earnings volatility.

As is shown on charts 11 and 12, despite continued economic uncertainty and weaknesses in capital markets, four of our five business platforms recorded double digit earnings grout in both the fourth quarter and full year and excluding our market sensitive businesses namely RBC Investments and RBC Capital Markets the remaining platform ROEs were in excess of 19%.

As is shown in chart 18 our recent acquisition generated 28% of core revenues in 2000, up from 20% a year ago. One of our important objectives for 2002 was to enhance the performance of our recent U.S. acquisitions. As is shown in chart 19, net income from recent acquisitions with 80 million this quarter up from a loss of 2 million in the fourth quarter of 2001.For the full year net income increased from a loss of 23 million to a profit of 232 million in 2002. In fact, close to 40% of our core earnings growth in 2002 came from U.S. acquisitions, which is demonstrating some of the benefits of geographic diversification. This improvement reflects a full year of results and stronger performance at RBC Centura, benefits of further integrating Tucker Anthony Sutro,into RBC Dain Rauscher, strong results from RBC Dain Rauscher's fixed income operations and the cessation of goodwill amortization this year. RBC Dain Rauscher generated a full-year profit of 3 million in 2002 versus a loss of 73 million in 2001.

As shown in chart 21 Dain Rauscher's retention compensation expense will fall again in 2003, further aiding its performance. With respect to corporate governance we're proud of the standards that our organization has established and we remain committed to maintaining the best practices in this area. The public scrutiny and debate this past year has provided our board of directors with the opportunity to reinforce and refine our corporate governance standards. The foundation of our corporate governance process includes an independent board with an independent chairman and knowledgeable, well informed directors. All of our board committees are comprised exclusively of non-management directors and our audit human resource and corporate government committees will be made up exclusively of independent directors.

In addition, the following changes are formally approved at our board meeting this morning. As we previously announced, effective November 1st, 2002, all stock options will be accounted for in our income statement. The CEO, other named officers, and group management committee members have agreed for a 12 month period following the exercise of stock options, they will hold bank common shares with the value equivalent to the after- tax gain realized through the exercise of these options. Effective November 1st, we have further reduced the use of options in our long-term incentive plans, replacing them with a performance deferred share program. Under this program, 50% of the deferred shares are subject to both upside and downside based on the relative total shareholder return compared with 15 North American competitors that we benchmark ourselves against.

In aggregate, we will grant in 2003 approximately one-third of the options that were granted in 2001 and our aggregate dilution from options will be well below 5%. We have increased our minimum share ownership guidelines for executives. Whereby the chief executive officer will have to maintain a minimum share ownership equal to six times annual salary and GMC members at four times. Our directors' options plan that was previously approved by our shareholders will be eliminated and replaced with a restricted share plan that results in directors receiving a dedicated annual board retainer paid in RBC shares or deferred stock units that must be held until retirement from the board. In addition, we have increased the minimum share ownership guidelines applicable to directors to 300,000 from 180,000.Finally, our audits human resource and corporate governance committees will be chaired and comprised of 100% independent directors.

Detailed guidelines of our corporate governance practices and procedures and refinements will be outlined in our management proxy circumstance circular which we encourage our shareholders to read. I'd like to turn it over to Peter Currie who will provide you with further details on our fourth quarter and our full year financial results.

Good afternoon, everybody. Turning now to our revenue performance, you'll note chart 23, total core revenues which exclude $313 million before tax gain that Gordon referenced from the sale of RT Capital Management a year ago with $3.9 billion fourth quarter up 5% from last year. Our [inaudible] interest revenues were 54% of total revenues up from 52% a year ago. This was despite losses on securities, totaling $98 million this quarter, compared to 36 million -- compared to $36 million last year through a $50 million write- down to [knee] business investments and write- downs in specific merchant banking and venture capital investments. The U.S. acquisitions made in 2001 have driven our top line growth.

As shown on chart 24, fourth quarter core non-interest revenues were up $151 million or 8%. Despite the security losses I just mentioned. Notable revenue increases were 98 million dollar or 25% increase in trading revenues. And 50 million dollar or 13% increase in capital market fees. Full year core non-interest revenues were up 11%.

Turning to the net interest margin, you'll note from chart 26, down slightly from last year quarter paired compared to a year ago declined 14 basis points largely due to narrower core prime deposit spread. As shown in chart 27 our operating expenses which exclude special items cost stock appreciation rights and attention compensation associated with recent acquisitions were down 1% in the fourth quarter and up 8% for the year. During the quarter, there were $77 million of reversals of accrued expenses largely due to reversals and compensation accruals to reflect lower expected payout levels. Referring to chart 28, when you further exclude non-interest expenses pertaining to recent U.S. acquisitions our fourth quarter operating expenses fell by 7%, full year operating expenses were down 5%. Chart 30 shows that whereas there had been a $20 million recovery of SAR or stock appreciation rate expenses in last year's fourth quarter, the recovery was only $1 million in this quarter.

Moving on to the balance sheet, chart 31 highlights changes in size and composition of our loan portfolio. Total net loans increased by a billion dollars or 1% from a year ago while total consumer loans were up by $6 billion or 55%, business in government loans declined by $5.1 billion or 8%.The decline in business and government loans reflects our very deliberate effort to reduce the sides size of our corporate loan book in favor of lower risk residential mortgages. As shown in chart 32, our capital ratios improved substantially from a year ago reflecting our sizeable internal capital generation of $1.8 billion shown on chart 33.We used a portion of this capital to repurchase our common shares. During the quarter we repurchased a total of 7 million common shares at a cost of $370 million. And during 2002, we repurchased a total of 14 million shares for $764 million. Since the commencement of the current one-year program, on June 24, 2002, we've repurchased 10 million shares, leaving a balance of about 10 million available for repurchase. Chart 34 shows our dividends were raised twice this year. Our total increase is 10% over 2001.As Gordon mentioned our payout ratio is 37% in 2002 and we raised our medium term payout goal %to 35 to 45%. That concludes my summary of remarks and I'll turn it over to Suzanne Labarge so discuss the loan portfolio.

Good afternoon. I will take a few minutes to provide you with an update on RBC Financial Groups' asset quality. Turning to charts 35 and 36 you will see non-accrual loans have continued to decline for the third consecutive quarter. The 83 million decrease from last quarter was largely due to write- offs in the business and government local portfolio exceeding new non-accrual loam loan formation. With respect to both our domestic consumer and business loan portfolios, non-accrual loans declined by a further 4% and 6% respectively over last quarter. International loan accrual loans excluding RBC Centura remained flat and non-accrual loans in RBC Centura decreased by 3%. Non-accrual loans are now $425 million or 16% below the peak levels reached in Q1 of this year.

As shown on chart 38 the provision for credit losses in the fourth quarter was $235 million compared to 216 million last quarter and 425 million in the fourth quarter of last year. Lower provisions in RBC Royal Bank were offset by additional provissions taken in RBC Capital Markets. Included in this quarter’s provision was an amount relating to a newly impaired European energy account. It was partly offset by a $13 billion gain on a related credit derivative. The Q 4 provision for credit losses when adjusted for the net impact of these credit derivatives would have been 222 billion as compared to 267 million last quarter.

As shown on chart 39, we have recorded a non-interest revenues, credit derivative gains of $115 million and credit derivative losses of 69 million for a net gain of $46 million for the full year. Under U.S. accounting principles, these mark to market gains and losses are recorded in non-interest revenues and are not directly netted against the provision for credit losses. The specific provisions for credit losses ratio, net of the credit derivative gains and losses with 48 basis points for the full year and just below the midpoint of our 2002 objective of 45 to 55 basis points.

Chart 40 shows the credit quality in the Canadian consumer loan portfolio continues to show improvement. The quarterly provision for credit losses on this portfolio which includes residential mortgages but excludes student loans has approved by 10 basis points since the first quarter. Chart 41 shows during the quarter net charge-offs were $330 million or . 74% of average loans, compared to 349 million last quarter and 349 million or .78% a year ago. The level of net charge-ffs remain stable, quarter over quarter, as the bank continued to write down telecommunication and energy exposures as well as older, fully provisioned accounts.

An update on our current exposure to power generation is found on slide 42.At year end our exposure to the sector was $2 billion of which 48% is investment grade. Net impaired loans of $74 million is comprised of three accounts. Slide 43 provides an update on current exposure to telecommunication companies. Non-investment grade telecommunication loans outstanding on October 31st was $855 million, down 13% from last year.

Impaired loans charge-offs taken to date are $97 million and are well provided for. Total [select] exposure net of allowances is 62 million. Charts 44 and 45 attest to our positive trading performance.

In conclusion, there's been an improvement in non-accrual loans for the third consecutive quarter. The capital markets non-accrual loan portfolio is well provided for and our trading performance remains solid. Our Canadian portfolio remains in very good condition benefiting from a number of changes we made in credit practices over the past couple of years. Heading into a new year, we have set our 2003 objective for the specific provision for credit loss ratio at .45 to .55% which is unchanged from 2002.This objective recognizes the continued economic uncertainty that we face as well as the ongoing shift in portfolio mix. At this point, I would like to turn the call over to the conference operator so that we can begin the question and answer period.

Thank you. We will now take questions from the telephone lines lines.If you have a question, please press one on your telephone key pad. If you're using speakerphone lift the hand set and press one. Please press one at this time if you have a question. There will be a brief pause while the participants register for their questions. Thank you for your patience. The first question is from Jamie Keating of Merrill Lynch. Please go ahead.

Thanks very much and terrific results, everyone. The -- I've got a two-parter maybe for Suzanne, I'll throw it out there for you guys. We discussed reducing wholesale capital allocation in past meetings by I think about $700 million and I wonder if I could get an update as to what the progress and/or of prognosis is on that program and how it might affect things. Also curious about the medium term credit guidance here, going up a notch. And as I understand it, the explanation is related to consumer credit which I think I can understand where you're coming from that but on the other hand your numbers seem to be getting better and better each quarter. Is there any way to reconcile those two points of view in terms of your changed objectives?

Jamie, Suzanne Labarge, I’ll pass the question on reducing wholesale capital to Chuck in a minute but when you're talking about credit guidelines , I think one of the things you have to recognize is that the ongoing losses on a basis point -- from basis point perspective is always higher in the consumer loan portfolio, we have a higher risk of return in that one as well, we get a larger spread but the more we increase our consumer loan portfolio the more you'll see that number going up. It's not necessarily a bad sign, it's just a question of the mix of our portfolio. And that's how you'd reconcile the two. I'll ask Chuck to talk about the wholesale capital.

From the standpoint of wholesale capital, our capital at the beginning of the year went up as a result primarily of credit capital but there's also some increases for operational capital. From that base, we've probably come down, we set a target of 700 million, we've probably come down just over half of that amount thus far this year, in fact it's been over just half that have amount and we expect to work off the remainder in 2003. Now, of course this is not a -- just a simple one-liner, because effectively, in some cases, as a result of the deteriorating credit conditions, the way our model works is we have continuing increases in capital allocation as -- as credit conditions deteriorate. So we've had to more than make up for the 700 -- the -- you know, we've actual actually reduced our capital by more than the 350ish million that we've reduced on a net basis because we've had some increases on an ongoing basis.

Thanks. Gotcha. I'll queue back up for some more. Thanks very much, everyone.

Thank you, Mr. Keating. The next question is from Steve Collie of T.D. Newcrest. Please go ahead.

Hi, there. On slide 28 I think it demonstrates that this year you had no growth in revenues, excluding the acquisitions, but you did a very good job of managing your expenses. You have now set a target for 2003 of revenue growth of 5-8%. Could you go a little further in terms of the assumptions that you're using to get to that 5-8% growth? Could you maybe talk about your assumptions for capital markets, margins, asset growth?

Hi, Peter Currie here. Let me take a crack at this and I'm going to ask one of my colleagues Jim Rager to answer this too because the retail bank is a big part of our revenue story perspectively. Your comment is accurate relative to 2002.In fact we had been anticipating and signaled that our growth in revenue 2002 would largely come from the acquisitions that we had undertaken. And as we look forward into 2003, we're taking certain steps in our retail bank in Canada in particular to improve revenue growth here. But we've also made a couple of albeit smaller but interesting acquisitions in the retail bank in the USA that we think it will help us. You'll notice that we've been somewhat conservative in our guidance for 2003 indicating it should grow between five and 8%, that reflects a couple of things, both the more mature nature of the market but also the fact that interest rates remain at a very, very low level. Jim, you may want to make a comment on retail banking.

Just before he does that, Gordon Nixon speaking, couple dynamics this year, first the spread compression certainly had an impact on our performance as a result of the decline in interest rate. I think you asked, with respect to other businesses like Capital Markets, et cetera, I think we've taken a reasonably conservative outlook with respect to economic performance over the next 12 months which is why we have revised our revenue growth forecast down somewhat. We are anticipating an improvement in the equity capital markets in particular because that's the sector which has been the worst performing. But it's a -- you know, it's an improvement from a very low base as opposed to a return to very strong, robust equity capital markets. So I think we've tried to build our forecast based on an economic scenario of reasonable growth, but a fairly conservative. And Jim, you might talk, as Peter said, a little bit of the initiatives on the retail side on the revenue front.

First of all, just before the U.S., Peter mentioned, you know, to the extent that we did some smaller acquisitions, that would help us on the revenue growth side. But remember, we're also going to be opening new branches in the southeast through de novo expansion and that will contribute some revenue growth during the year. But we're starting to see, you know, we've been doing a lot of work in our Canadian business to improve both market share as well as revenue and starting to see encouraging signs in the fourth quarter. You know, our revenue in Canada was down almost 5% in the third quarter, that's dropped to about 1% in the fourth and our market shares have started to stabilize if not pick up in just about all of our product areas. So we're encouraged by that. You know, we have a lot of initiatives under way in terms of new business growth as well as retention. And improved pricing where we started to see some benefits as well. So as we think about that going into the first quarter and through the year, we can expect and also expecting that the spread compression will at least kind of stabilize if not turn around, then we could have some expectations of a lot better revenue growth during the year.

How much of the 5 to 8% would you expect would come from the U.S. retail side?

Well, 5-8% is for the whole company.

Right. How much -- let's say for the whole company comes from the U.S.

Marginal.

Total company basis.

I'll move to Suzanne, please, I was interested to see that this quarter you actually put the power slide before the telecom side slide. Does that reflect, perhaps, a greater level of concern as it relates to power than it does to telecom? Maybe just talk a little bit about what your views are on these two groups right now.

Just for the record, Suzanne doesn't put the slides together.

Okay.

Alphabetical.

But it is an interesting perspective. I think the one comment I would make is if we take a look at our telecom loans and the impaired, those from the face amount standing there actually 95% provisions, so there's hopefully very little down side left on the telecom industry. In terms of the power generation, we've got a fairly mixed book in there. I think it's not so much -- if I had any concern, it's not about power generation per se. But it tends to be more around companies that may be in this area but that have had power trading activities, simply because of what's been happening in that industry. So, I mean, it's an unpredictable industry because of liquidity issues so it's one we're walk watching fairly carefully. In terms of the portfolio we've got we have revel relatively few impaired loans in that industry and fairly solid portfolio.

You mentioned three accounts, can you tell us what the gross impaired loans are?

If I remember correctly, it's approximately 110. But I can get back on that one.And the reason being, two of the loans are in Latin America. And one of them is a performing -- what we have as impaired but it's a performing one so there's no provision against it. And the other one is very small. So it's, as I say, barely over $100 million. 100 to $110 million.

Okay, thank you.

Thank you, Mr. Collie.The next question is from Melanie Ward from RBC Capital Markets. Please go ahead.

Thanks very much. I had a couple of question, one for Jim Westlake because I know on the business segmented basis it's down a bit for RBC Insurance, can you provide flavor on that.

Hi, Melanie, it's down on a Canadian GAAP but up on a U.S. GGAAP basis and on the notes on page 36 it talks to that. There was a significant difference in those two measures. We do our planning and primary reporting in U.S. GAAP which geared toward income statement reporting. The Canadian GAAP is very much a solvency measure, highly affected by interest rates and deferred acquisition cost and realized gains in the investment portfolio . So on a year over year we're actually up on the U.S. GAAP with you a large differential to the Canadian.

Second question has to do with the line item. I know Peter Currie you had mentioned about the security losses in your comment but could you just elaborate a little bit about the line item of 112 million that we see in other income there? And kind of break that down for us, please?

Which line are you looking at, Melanie and which chart?

Non-investment grade, it was in your supplemental for -- affiliated with the trading accounts, 112 million last quarter, you would have had 15 million, slide 10 on your Canadian GAAP. Loss on sale of securities.

It's -- Melanie, the discussion in our press release, we were referring of course to the US GAAP numbers the equivalent number on the U.S. GAAP was $98 million. You can see there there's a little bit of a difference there between the two GAAP's but not a very significant amount and we had attributed that to the write-downs of any business investment of $50 million and other selective write-downs in the merchant banking and venture capital portfolio.

Melanie it's Peter. What we did is that we evaluated the relative value of a whole series of investments as we do on a regular basis and we just adjusted those values at the end of the year and that's the aggregate of the amount in Nabanita just referred to.

And the size of the merchant banking portfolio?

About 400, just over $400 million right now.

Thanks very much.

Thank you, Ms. Ward. The next question is from Heather Wolf of Goldman Sachs. Please go ahead.

Hi. Good afternoon. Two questions for you. First, you talked briefly about interest rates rate sensitivity and that's one of the reasons for your reduced revenue forecast. I'm curious if you can give us some kind of measure of that sensitivity, both in the U.S. and Canada. And then the second question is with respect to credit. I'm curious if Suzanne can walk us through where the biggest pockets of risk are in this power generation chart.

Suzanne, why don't you go first.

Okay.

Have to think about the other one.

All right. Actually, I mean, I think it -- it more or less shows by virtue of the diversified generation slide or the slide that says diversified generation, diversified utility and largely because these are companies that say where in the mix of those we have a -- a series of companies that are also involved in trading activities. And therefore they have had liquidity issues. But as I said, a lot -- I would be -- if you really want to know, I think there are some other companies that aren't in power generation or distribution that -- that are in the energy business that have different risk profiles. But as I say, right now my view would be it's in the diversified generation, diversified utility where you've got a -- the weakness showing at the moment.

Okay.

This is Jim, Heather, if I could just talk about RBC Banking. We -- we have a large floating rate loan portfolio in both personal as well as our business banking and commercial lending activities as well as even in our residential mortgage portfolio. So we have been trying to position all of that for a rising rate environment. We've focused a lot on our transaction accounts, our core deposit accounts and had very good growth in those balances, 10% in the fourth quarter, in fact. So that as rates move up, assuming that we are able to move prime, we will be sensitive in a positive way to that rising rate environment. The rest of our portfolio, though, the GIC book and the fixed rate loans are transfer price, so it's a question of how we manage that interest rate position within our corporate treasury. In the U.S. it's pretty much the same. We've been -- we've been focusing a lot on -- on opening new accounts with core deposit balances as opposed to CDs and had some success in Centura with that. At the same time we've been doing that, though, we've been reducing our real estate portfolio in Centura, even though we've had good growth in other CNI lending and personal lending, we still have a pretty large investment portfolio there that's -- that's kind of hurt our net interest margin for the time being.

Yeah, and Heather, I would back into it. I can't give you a specific number. But if you look at the net interest margin reduction, that would -- that would be explained by spread compression.

Also, if you look at the very last page of our supplementary document, Heather, on page 21, where we show our GAAP position, interest rate sensitivity position.

Canadian GAAP.

On the Canadian GAAP, yeah, we show you the 1% impact, the impact on our earnings of a 1% increase on rates and 1% decline in rates, you can see that we are positioned, as we've been saying all year, for -- for a rise in interest rates to some extent.

Okay. Thank you very much.

Thank you, Ms. Ms. Wolf. The next question is from Jim Bentis of Credit Suisse First Boston please go ahead.

Good afternoon. With the two-one ratio continuing to grow 1.8 billion in terms of free capital coming from this bank moving up the dividend payout ratio, clearly there's a position where the bank could be more aquisitive in 2003. Could you give us a sense of in terms of what your budgeted appetite is for acquisitions in the U.S. going forward is?

Yeah, when we do our budget, you know, we look at reasonable investments which are, if you will, additive to the existing platforms. We don't build a budget where we assume anything of significant size. I think as we have said for quite some time now, you know, we're trying to manage very carefully the trade-off between our fundamentals and investing in growth. We recognize that we certainly have the ability to invest well in excess of a billion dollars in terms of growth next year without impairing our fundamentals, given our cash generation. Our current cash generation. And -- and -- but we're -- we certainly will only invest in opportunities that we believe are attractive from a -- from a fundamental perspective. And when you look at more significant acquisitions, as we look at the landscape currently, particularly in the personal and commercial banking business in the United States, which is our primary target for investment, there are not a lot of significant investment opportunities that we believe are attractive from a shareholder perspective. We want to maintain the flexibility to take advantage of it but we just don't see that. So our intention is to continue to invest in smaller acquisitions, in adding to our existing platforms, de novo expansion, to grow our branch system and our asset base in the United States. But we certainly have not built into our plans for next year a major acquisition which would have a material impact on our capital base.

Great, thank you. Perhaps I can ask Suzanne in terms of the loan loss provisions, I think people were anticipating perhaps a little bit lower guidance in the respective -- the percentage of loan loss provisions relative to assets and you'd indicated that the retail book is really what's been driving that guidance. What type of asset growth are you forecasting on the retail book and is it inclusive of acquisitions.

I'm going to pass the growth on the loan book on the retail side to Jim Rager.

I think the five day percent is just a general comment but the point here is as we reduce our corporate book just the relative percentage of retail assets, the total will grow and that's why that guidance has gone up.

Got it. Thank you. And just a last question, very difficult capital markets environment that we've just gone through this quarter and trading revenues were quite resilient, in particular the fixed income side showed to be pretty robust. Can you give us a bit of color in terms of what type of transactions were involved in the higher fixed income business and did it translate to the -- you know, the pickup in the Dain Rauscher earnings this quarter?

Yeah, I'll try to answer that. I think as was said, the -- the Dain Rauscher fixed income business was very strong but from the standpoint of our business, we had a strong performance really in credit products, a bit weaker performance in rates, but it was good performance in international bonds. Really, again, we have a large number of trading spots and there's variable performance but I would say that the strongest part of the fourth quarter was the credit products.

Well, I think, as Gordon mentioned in his opening remarks, the fixed income business was very strong but it's not all trading, it's pretty generally evenly spread between trading, commissions, and investment banking. So no question, the fixed income markets in the U.S. were extremely strong and we benefited from it.

The fixed income numbers related to Dain's fixed income business, remember, are part of the retail wealth management in the United States. The numbers you're looking with respect to trading revenues relates specific toy specifically to the capital markets business.

Got it. Thanks very much, guys.

Thank you Mr. Bentis. The next question is from Michael Goldberg of Degarde Securities. Please go ahead.

Thank a lot. I have a couple of questions. First of all, on the power side, it looks like you had about $350 million of fallen angels during the quarter and I'm just wondering if any of those credits were classified, if that European credit that you classified was among those. And I also have a question about the increase in your planned payout ratio. Can you give us, you know, some thoughts on why you're increasing the payout ratio?

First, on the -- on the power side, I mean, we've unfortunately had fallen angels in almost every industry we've been over the last quarter. The European one I believe was non-investment grade before it just happened to unfortunately fall completely off the radar screen in the quarter.

Michael, it's Gordon. With respect to the dividend payout ratio, I think if you look at -- at our internal capital generation, we're very comfortable with increasing the range from the 35 -- to the 35-45%.If you look at where we have been over the last year, we've intended to be at the upper end of the -- of the 30-40% and now it puts us closer to the midpoint. You know, we've done a lot of work on the benefits of -- of dividend distribution versus share buyback versus investment. And we're quite comfortable, as is the board, and as you know, the dividend is at the discretion of the board, with a range which is slightly higher than we have been -- we have been operating with. Certainly, we feel very strongly as a group that if we need capital for investment, if we run the organization effectively and the acquisition that makes sense, that we have the ability to raise capital or to use our currency in the form of acquisitions. So rather than continue to build up incremental capital, we want to keep a proper balance between distribution and buyback and investment and we think that range is just more appropriate given where the institution is today.

Was this a fairly long-term increase that we're looking at as opposed to just a temporary increase in the payout ratio?

Well, we've established it as a midterm goal so it's certainly a range that we would expect to be in place for a midterm time frame which is certainly the next few years.

Okay.I have just one other question, a number question. In your non-interest expenses, I'm looking at the other -- other item, you know, which it looks sort of anomalous. Now when I look at the third quarter of 159 million bracketed by numbers around 220 million in the second and fourth quarters, could you explain what was going on there?

Michael, it's Peter Currie, which non-interest expense are you looking at for the entire company?

Canadian GAAP page 11 of the supplementary package.

And just to help me calibrate here you're looking at 159 million --

And then 229 in the -- and 220, and most other quarters above 200 also.

Total other line.

Yeah, I see that. I'm going to ask actually we have our Senior V.P. of Finance, John Merriam. John, do you want to make a comment on the other other category?

Yes, Peter there's nothing in there that's very significant on its own. Peter, it's basically every other type of administrative or operating expense you'd expect to have in a large company that does not get separately reported above.

Mr. Goldburg, did you have a further question, sir?

Well, I'm just wondering, it just looks a little strange being so much lower in the third quarter than all the other periods –

Well, Michael, it's Peter, I think I want to be careful not to draw too much of a trend line in this category because as John indicated, it ends up gathering other un-attributed costs from other categories. So there really isn't a trend quarter to quarter, it's kind of like looking at the tax rate, the tax rate in the quarter depends upon the nature of the business in the quarter as opposed to forming some kind of long-term continuum.

Okay. And how much did you say the reversal of accruals had been?

$77 million.

Thanks very much.

Thank you, Mr. Goldburg. The next question is from Neil Matheson of Standard Life Investments. Please go ahead.

Thank you, it's for Suzanne, it's just with the guidance for loan losses in fiscal 2003.Can you provide a breakdown, either percentage or dollar wise between retail and wholesale of how you expect to see it at any rate.

No, I don't have it by that level of provision -- of specificity.

Okay.

We do build it on that basis but –

What can you -- can you give us a ballpark of where you think it will come out? And how that would look like versus this year, or is it in fact very similar to this year?

No, I think -- I mean, it will be a couple of basis points only because it's a mix and we'd have to go back and do the mix but let's put it this way, I would expect to see a -- an improvement in the -- or a holding in the corporate loan book, but probably some deterioration in the Canadian commercial loan book which performed outstandingly this year where there was a large number of recoveries as well. So I think in actual fact that you'll find the basis points should be about the same for the various portfolios. As I say, it's a mix and that's why there's a 10 basis point spread is it's very hard to be very, very precise in terms of where that's going. But as I say, what we're expecting to see is a -- a stabilizing in the corporate portfolio, possibly some weakening in the Canadian commercial and some strengthening in the retail but on the other hand, a growing retail book as a percentage of our portfolio.

Okay.

I guess just a comment, I always get a little skittish when people use the word ""guidance." I mean, we provide short-term and midterm targets that we believe based on the way we operate the business and build our forecast are reasonable targets and when you look at the mix of our business, and I think this is very important, when you look at the mix of our business and the shifts and changes that we've tried to put in place over the last number of years, we believe that this is a target which is appropriate for us as we look into 2003.

Hearing you what I'm -- I'm hearing is it has more to do with mixed shifts and less to do feeling strongly or negatively about the environment.

Yeah.

That's fine. Thank you.

Thank you, Mr. Matheson. The next question is from Ian Daverti of BMO Nesbit Burns.

Thank you. I just had a couple questions regarding the widening gap between U.S. and Canadian GAAP statements. First of all it's made our job easier because I can always say you hit my earnings number. I guess that the issues I have, though, is first of all, why should we focus on U.S. GAAP when the vast majority of your shareholders are Canadian? Your regulators Canadian and the majority of your businesses are in Canada. That's the first one. And second of all, if you do think we need to focus on U.S. GAAP should shouldn't you realize gains out of the insurance company the way that U.S. insurers strip out realized gains?

Okay. Ian it's Peter Currie. I'm going to try to answer your question on why you should focus on U.S. GAAP or why we do and I'm going to ask Jim Westlake to talk about the realized gain situation in insurance. We shifted U.S. gawp in fact producing our statements under both principles a few years ago for a couple reasons. First of all, we wanted to recognize and -- that we're increasingly thrusting into the United States market, we wanted to make our statements more easily understood by observers in that marketplace and we also want to also make our results more comparable with our peer group. Now, we have a peer group of we'll call it 15 on average major global companies, of which four or five are Canadian. And the bulk are U.S. And we thought it was kind of inappropriate to have our results continually reconciled to the majority of the peer group. When you look at our results you can look at them either way, Canadian or U.S. We think U.S. is frankly a little more relevant these days. And we provide our results, therefore, on both bases. And I've had a number of discussions with investors in the United States who frankly we have much more constructive conversation now that we can talk on a basis when you look at RBC results and they're comparable to Wachovia or U.S. Bank Corp. or JP Morgan Chase or others. Jim, do you want to make a comment on the insurance?

Yes, I did make some comments earlier to a question from Melanie Ward so I won't repeat that. I do think that you have to pick one basis in the insurance base basis. You have to plan around it, you have to work around that. I think that the U.S. GAAP has a much higher level of transparency to it in terms of the income statement. The Canadian gawp is much more based on actuarial both in the liabilities and the assets side of the sheet. I realized gains , you know, it's easy to report those separately, it's a few million dollars, it's not all that terribly significant. But it is a fact that under U.S. GAAP, you're required to report those immediately into earnings. And not in Canadian GAAP. I can tell you that if interest rates turnaround and start to -- particularly in a fast rising environment we would very quickly have higher returns on the Canadian GAAP results than on U.S. GAAP.I don't think it speaks to the fundamentals of the business. Over time they're going to work out the same. But it will be in the true fullness of time.

Peter Currie again. Let me expand on what Jim has said for a moment because he responded to your question relative to part of the difference between U.S. and Canadian GAAP. The other part, of course, is that the ongoing reconciliation we've been giving as a result of the adoption of FAS-133 in the United States, accounting for derivative instruments. And of course in Canada we have accounting guidance, principle 13, which is coming into force in 2003, where we're in fact early adopting that with our first quarter. That will take away about half the reconciliation difference between U.S. and Canadian GAAP right out of the box for us in the first quarter and as I say RBC is already adopting that.

It's Gordon Nixon, the cynic in me would ask the question why is it that we have differences between Canadian, U.S. and international GAAP with respect to these statements that should be the real question and I would love to hear the answer.

You're not going to get it here, Gordon.[LAUGHTER]

Thank you.

Thank you. The next question is from Quentin Broad of CIBC World Markets. Please go ahead.

Thank you. I guess a question, couple questions for Suzanne. The mikes migration that Michael talked about or asked you about in terms of the investment grade and non-investment grade movement in the power sector. I thought that was actually one name. Can you give us a sense whether it was one or a number of names that were involved in that migration and if it was not one name, a sense of the size of that credit in your book, it would look to be a little large if it were a single A level credit.

I'm sorry, I don't have the details of what were the names that my -- but my recollection is it's certainly more than one name but I don't have the details by sub-sector to be able to give it to you right now.

It was more than more than one name that moved from Q 3 to Q 4?

We've had a number of names in the energy sector that moved from Q 3 to Q 4, it's been a fast moving landscape.

You gave us some sense of your credit protection across your entire portfolio. Could you give us a sense of what credit protection you might have still remaining on your telecom and your energy book?

On telecom and media we've got 240 million of protection. And on our energy we have 200 million. And we have a total of a billion 42 in terms of the amount that we've bought and we've sold 282 million in protection.

Okay. Thank you. And then just to, I guess, a question in terms of acquisitions in the U.S. In the latest year we -- from slide 19, under U.S. GAAP, $232 million of net income from U.S. acquisitions and if I read all the notes that's excluding that which is in RBC Capital markets. If we back out all of the comp costs, retained comp costs, that would rise to 329.On what basis base of acquisition cost would that 329 be relevant to, i.e., how much have you spent to get the 329 or the 232 of actual contribution?

Roughly five -- roughly 5 billion.

U.S.?

5, U.S., yeah.

But this is 232 Canadian.

This would be liberty, Dain, and Centura, the vast majority of it.

And eagle.

That's small.

Going forward, to get further expense energies off of the spend of, you know, over 5 billion U.S., can you do it off of a small pocket-type acquisition program versus having to go deeper and bigger to get true expense synergies and make these acquisitions spend work?

You know, if we think about -- it takes longer to do it in had this way but we think that in, you know, in a suspending through de novo expansion and smaller acquisitions which suggestions, you have more control over your capital and what you do with it. If you just look at the Atlanta market, for example, or Florida where we would expect to get to 60 or 70 branches in both areas within a -- kind of a three-year period, any earnings that we would expect to get from that, you start to see reasonable returns on capital, you know, overall, in what we've done in the U.S., much more -- much more quickly, in fact, if you do it in that way than if we did a number of, you know, additional acquisitions to get to the 70-branch figure. So it does take a little bit longer to get your earnings up to that level but the overall impact in terms of return to -- return on equity, given the capital underpinning required for good will ends up being a lot better.

Okay. Jim, just on RBC Centura , the change quarter over the sequential number, 57 million versus 49, one would have thought that a prism had a very good quarter and yet if you look U.S. GAAP mortgage banking, there's no change quarter over quarter. Canadian GAAP there's a material change. Could you give us a sense of just what prism and perhaps even more importantly the large refinance activity going on in the U.S. has helped contribute to do what you've seeing in Centura.

The large re-fi activity has continued, we expect it to go into the first, even the second quarter. They're what they call their lock set they did in October and they're putting on the books in another. Really, you know, at the same levels as they've experienced all year. We cleaned up some things in the fourth quarter in prism that had been kind of hanging around, just as we did in a number of other areas of our business. And that's the reason that you see kind of flat earnings. It's not because business origination has slowed down or anything else.

Okay. Thank you.

Thank you. The next question is from Robert Russell of National Bank Financial. Please go ahead.

Thank you, good afternoon. I just actually have with you with one question on the press release on page 8 when you speak about RBC investments you do break out the incremental revenue growth and expense growth from RBC Dain Rauscher. But if you move forward to RBC Capital M arkets, that breakdown is not given and I guess my question is sort of twofold. The first is, A, would you give that sort of breakdown if you have it now, and the second is, can you at least comment -- if not, can you at least comment in a general sense as to what sort of contribution RBC Dain Rauscher is giving on the wholesale side?

This is Peter Currie, let me tell you a little bit about how we're organized.First of all, in wealth management, RBC investments, RB Dain Rouscher is a relatively independent platform in the United States, it operates as a stand alone entity and as a result we track its performance as you see it in the press release. RBC – or Dain Rouscher has been fully integrated into RBC Capital Markets so tracking it or trying to track it on a stand alone base would be an entirely synthetic excercise.I'll obviously let Chuck Winograd make a comment if you want to but before I do that I'll ask Irv Weiser to make a comment on Dain Rauscher and the excellent year it had in 2002.

I didn't hear the question earlier but I'll talk about Peter's question. Again, as Peter Currie mentioned, we do at Dain Rauscher have a very unique platform. We don't really share customers with Canada very much. We have done a lot of things with Centura and across platform basis, we've taken over their operations in North Carolina, securities business, we are working on the asset management side and will work on that one as well. If you'll look at the numbers and if you take out the retention payments and if you take out some of the acquisition costs, we actually had a pretty good year, not a great year and not even a good year but a pretty good year. But we have, I think, seen a lot of benefits from the Tucker Anthony acquisition. And again, our numbers are -- include the fixed income business in the U.S. which is tied to the wealth management business. Public finance bills extraordinary, a lot more opportunity once the retention costs run off. Chuck?

From the capital markets side, as I say we're fully integrated, so I look at it nor more as U.S. investment banking and equities platform. This year was clearly as -- as you know from just taking a look at the business a very difficult year in those businesses and we had a tough year that was in many expects respects accentuated by the fact that we had still large retention costs. We had some substantial guarantees from 2000 and 2001 but mostly 2000 which ran out this year. And other costs. So it was a difficult year in those businesses. I would say, though, that if you took a look at our existing levels of business and what we would think is our mark to market compensation costs and in today's marketplace, that, you know, that we're not far from break-even in those businesses.

Right. Okay, thank you, but I guess what I am wondering is what how do you sort of feel going forward about what level of contribution let's ee even sass a as a percentage of net earnings coming from the U.S. wholesale? Like you have a 100 million net income coming this quarter, it sounds like not much came from the U.S. or a small percentage I should say and perhaps, you know, that's accentuated by retention payments, but going forward what sort of contribution do you expect coming from the U.S. or just –

Just to give you an order of magnitude, if you took a look at our -- at the equities business, the equities business in the U.S. is more than twice the size of our Canadian equities business. The investment banking business is not there yet, but we certainly would see that over a period of time, we would build it to be a much bigger force than our Canadian business. But already our equities business is considerably larger. So we do see some very substantial income potential. Having said that, these are very difficult markets in the U.S. equities business. And we've got -- you know, we've got a lot of work to do there and we're doing a lot of work to both position ourselves and in some respects reposition ourselves from the standpoint of where we stand.

Rob, you should also be careful, too, because we run this business on a global base basis, while the U.S. equity business has been tough other parts of our U.S. business are -- U.S. fixed income business, derivatives business, et cetera, has made a positive contribution. So there has been contribution from the U.S., it's just it's, again, a mix depending on which sector.

Great. I'm actually just a very quick question on [rabble] bank is there any new this quarter any new investments that -- developments we should know about?

None at all.

Great. Thank you so much.

Thank you Mr. Mr. Russell. The next question is from Susan Cohen of Dundee Securities. Please go ahead.

Thank you. Your tax rate was fairly low this quarter, below 30%.Can you just talk about why it was that low and perhaps what a reasonable level to assume next year might be?

Susan, this is Peter Currie. First of all, I guess I would approach it as a -- from a different perspective. In my view, the fourth quarter of 2002's tax rate was up because it was up versus the fourth quarter of 2001. As I pointed out before, it's difficult to -- and kind of dangerous to kind of extrapolate tax rates on a quarter-to-quarter-to-quarter basis. In the fourth quarter of any given year you're going to have a true up of tax positions for any transnational company. Ours is no different. If you look at the trend year over year from '97 through 2002, you'd see a reduction in the tax rates and, you know, I'm not going to give you a forecast what it could be but the trend is certainly in a positive direction. And, you know, I would encourage you to take a look at that and draw your attention your own conclusion but I should you should not assume necessarily that the 29 and change percent rate that you saw in the fourth quarter of this past year is a rate that you would build in for future periods.

Our annual rate this year –

Our annual rate was just over 32.

Which is about the middle.

That's a good point, Gordon. If you look at our tax rate versus domestic Canadian competition, we're about the middle of the field in terms of effective tax rates and again, it's hard to draw comparisons company-to-company because we all have a different mix of businesses. But, you know, with -- within a percent either way you're probably in the right range.

Thank you.

Thank you, Ms. Ms. Cohen. The next question is from Gary Chapman of Guardian Capital Incorporated. Please go ahead. Mr. Chapman, your line is now open.Please go ahead, sir. I'm hearing no response. The next question is from Pat Chapel of is a Sonoma Capital. Please go ahead. Mr. Chapel, your line is open, please go ahead.

He's getting some coffee.

And hearing no response, the next question is from Jamie Keating of Merrill Lynch, please go ahead.

Hi, again. A couple of questions, if I may. One is for Gordon. It's a difficult situation with the on again-off again merger activity . I'm just wondering Gordon on how on earth do we plan around this and can you give us insights on what you might feel updating us on in that regard re the Senate depositions and other activities going forward.

I thought we were going to get through this conference call without a question. I think that we will be tough to find before the Senate finance committee on Monday so I certainly wouldn't want to provide any indication as to what we might say. I think the he reality for planning is very tough. I think it's -- it's very difficult for investors, for analysts. It's exceedingly difficult for management of organizations as well when you're trying to plan around a -- an environment of uncertainty. And I think that, you know, one of the messages that we will certainly deliver is that uncertainty is just not a -- a positive -- a positive thing to have for shareholders, for employees, for customers, et cetera. And hopefully what will come out of this Senate and House of Commons review process will be a much greater -- a much -- a clearer road map as to, firstly, whether mergers and consolidation can occur and secondly on what basis it can occur so that there's much greater transparency in the system and that the various constituents including shareholders have a much clearer picture as to -- as to whether certain transactions make sense or don't make sense. So it's a bit of a wishy washy answer, Jamie but, I mean, there's so much uncertainty in the system it's exceedingly difficult for anybody to plan or for management to make decisions.

Gordon, you guys have done a good job of forging ahead regardless of what's going on there and I'm just curious how comfortable you are with, you know, the possible scenario where you might not want to be involved or not get involved and how that would impact your relative competitiveness, do you feel sufficiently, you know, in a competitive position that you could go it alone down the road if you chose to or can you comment on that?

I think it's very difficult to comment on, although the one thing that I would say is that, you know, we would only entertain doing a transaction that we felt was attractive to our organization strategically and from a shareholder value creation aspect. I mean, I don't believe that we have to do a deal for the sake of doing a transaction. But, you know, clearly if there is an opportunity to participate in consolidation in a fashion that was consistent with our strategies and would provide us with the scale, the critical mass, the value, the incremental value to grow for more quickly then we certainly would want to take advantage of that. But clearly it would have to be in our interest. And, you know, that's -- as we go into this process, clearly that's the perspective that we're viewing it from.

Gordon , thanks for that. Could I ask a quick technical question of either Jim or Peter? The head office cost savings of Centura or the domestic retail bank look like they're under way, I believe, unless I've missed it in the write-up, could you give us an update, I believe it was $180 million over I’m guessing three years or some period of time. Could you update us?

The initial number was 70 million and we have accomplished that. We had that pretty much in place within the first six months or so. But we've gone beyond that now and tried to identify -- you know, those synergies were more synergies that we could create -- that were available within the U.S. and we did that right away but we've gone beyond that. You've heard Irv talk about how we are putting together, you know, the related businesses between RBC Dain Rauscher and RBC Centura. And that will give us some cost savings. But we've also gone into a north-south kind of integration analysis as well. And we've integrated some of our call centers, our main frame -- our main frame now we operate the Centura main frame up here, but we also now are -- are looking at some of our operational activities and systems, S and T activities and the way we manage those on a North American basis. They're right now in the midst of doing process reviews to figure out what that's all about.

I should say, Jamie, that's consistent with what we're doing in each of our other businesses as well, we're looking at ways to take advantage of cross border efficiencies.

Well, something's working so good job, thanks.

Thanks.

Operator?

Yes, ma'am.

That brings us to the end of our calls. Can -- can -- can the participants hear me?

Yes, they can.

On behalf of everyone here thank you very much for your participation of, I wish we could take your questions long her but I'm afraid some of the people have another meeting to go to. I thank you once again very much, if you have follow-up questions 416-955-7803.Thanks again.

Thank you.

All participants, the conference has now ended. Please disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.--- 0