Royal Bank of Canada (RY) 2003 Q1 法說會逐字稿

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

Good afternoon, everyone. Welcome to this one-hour conference call. We will spend between 10 to 15 minutes discussing our first quarter results and then take your questions. Gordon Nixon will provide the highlights of our performance. Peter Currie will give more details about our results and then Suzanne will outline trends in our asset quality. The other six members of our group management committee are available to take your questions.

The five vice chairman responsible for banking, Chuck for Capital Markets, Marty from Global Services and Elizabeth, Senior Executive Vice President Human Resources and Public Affairs. Our finance Janet is with us. With that I will now turn it to Gordon Nixon. Gordon?

Thank you very much, Nabanita. Good afternoon, everyone. Welcome to this quarter's conference call. Just highlighting our earnings for the first quarter of 2003, we did report record earnings despite difficult capital markets and political uncertainty and weak demand in some of our business, particularly full-service brokerage and equity sales and trading.

As is shown in chart three, first quarter net income was a record $767 million, up 4% and earnings per share was $1.10, up 6% from a year ago. This reflects our diversified business base, prudent cost and risk management and increased earnings contribution from our U.S. businesses. Chart six shows the strength of our performance in the area of portfolio quality, expense management and capital ratios.

The provision for credit loss ratio was below the target rate for this year. Expenses were down 2% from a year ago and capital ratios well above our medium term goals. However, revenues were weaker, largely due to weakness in equity markets and our planned reduction in that portion of our corporate loan portfolio largely outside of Canada that has had low returns and limited strategic value. That number, I think, was down about $5 billion quarter over quarter, a little over $5 billion.

In the face of these dynamics, we are maintaining a strong focus on our cost management and accelerating programs to enhance profitable revenue growth. The performance of our business segments is shown on chart 7 to 12. In the interest of time, I'll focus only on chart 7, which shows that excluding our capital market-sensitive business, namely RBC Investments and RBC Capital Markets, the remaining business segment ROE's were in excess of 20%.

We're confident that the mid to long-term prospect of RBC Investments and Capital Markets are good and will benefit from an improvement in the Capital Markets which hopefully will materialize in short order. You will note that RBC investments net income was up 18% despite the weak brokerage environment we're currently in. This is the result primarily of higher earnings at RBC Dain Rauscher. Earning to our U.S. operations, you'll note from chart 13 that our recent U.S. operations generated 29% of total revenues in the first quarter of 2003, up from 27% a year ago. And U.S. net income of 109 million accounted for 14% of total net income up from 4% a year ago.

Our priority in the U.S. has been to enhance the performance of our U.S. acquisitions. Namely RBC Centura, RBC Dain Rauscher and RBC Liberty Insurance. And we're pleased with the results of that front in the quarter.

As shown in chart 14, net income from U.S. acquisitions increased to 81 million from 53 million a year ago. Accounting for 85% of earnings growth this quarter and highlighted the benefits of our geographic diversification. This increase reflects continued improvement at RBC Dain Rauscher which realized cost savings from the integration of Tucker Anthony Sutro and lower retention compensation costs, as well as, strong results in fixed income operations. These are all things that we had expected and talked about in the past. As shown in chart 15, retention compensation costs fell significantly in the quarter and should decline even further as indicated on chart 16.

I'm pleased to report that we announced an increase in our quarterly common share dividend of 7 1/2%, from 40 cents to 43 cents effective the second quarter. I'd now like to turn it over to Peter Currie who's going to provide you with further detail on our first quarter financial results. Peter?

Thanks, Gord. Good afternoon, everybody. Turning now to our revenue performance, you'll note on chart 18 that total revenues were $3.96 billion in the first quarter, down 2% from a year ago as referenced by Gord, while non-interest revenues were 54.5% of total revenues, up from 54% a year ago. As shown on chart 19, our first quarter non-interest revenues were down $25 million or 1% from last year, largely as $105 million or 21% decline in capital market fees more than offset an $88 million or 19% increase in trading revenues.

As shown in chart 20, excluding decline and capital market fees, non-interest revenues would have increased 5% and total revenues by 1% versus a year ago. Turning to the net interest margin, you'll note from chart 22 that it was down 8 basis points from last quarter and 21 basis points from last year. Largely due to a higher amount of low interest yielding assets, such as securities.

As shown on chart 23, expenses were down 2% compared to last quarter and a year ago, reflecting cost savings at RBC Dain Rauscher through the integration of Tucker Anthony Sutro in last year's second quarter and a decline in retention compensation costs associated with the acquisition of both RBC Dain Rauscher and Tucker Anthony Sutro. The benefit of lower stock compensation expenses, including the costs of the expense in stock options, which we commenced this quarter, was more than offset by higher pension and post retirement benefit costs.

As shown in chart 24 and effective this quarter, we've adopted the fair value method of accounting for stock options applied on a prospective basis. The expected impact of stock option expense on EPS remains minimal and is the same under U.S. and Canadian GAAP. Looking now at the balance sheet, total net loans increased by $2.3 billion or 1% from last year. While total consumer loans were up by $6.5 billion or 6%. Business and government loans declined by $4.3 billion or 7%, reflecting our deliberate effort to reduce the size of our corporate loan book in favor of lower risk residential mortgages.

Turning to slide 26, we hold leading market positions and total deposits which are comprised of personal deposits and mutual funds and in residential mortgages. Our recent retail banking initiatives have been paying off as shown by the increase in our personal deposit market share.

As highlighted on chart 27, our capital ratios rose substantially from a year ago, reflecting our sizable internal capital generation of about $1.8 billion since the first quarter of 2002, and that's shown on chart 28. We used a portion of this capital to repurchase common shares. During the quarter, we repurchased a total of 900 million common shares at a cost -- I'm sorry, 90 million common shares at a cost of $50 million. Since the commencement of the current one-year program on June 24 of last year, 2002, we repurchased 10.7 million common shares leaving a balance of 9.3 million shares available for repurchase.

Let me clarify my notes. The repurchase in the quarter was .9 million common shares, 90,000 common shares. I just about repurchased more than our common share flow which would have been interesting. Chart 29 shows our dividend history over the past three years. As Gordon mentioned, we announced today an increase in our quarterly dividend payment from 40 cents per share to 43 cents per share effective next quarter. This quarter's dividend payout was 36%. That concludes my remarks. I'll now turn over the microphone to Suzanne Labarge to discuss our loan portfolio.

Thank you, Peter and good afternoon, everyone. I'll take a few minutes to provide with you an update on RBC financial group's asset quality. Chart 30 provides you with a current breakdown of our loan portfolio by sector. Consumer lending now represents 62% of our loan books, and a 38% in business and government loans is well diversified.

Turning to charts 31 and 32, you will see that nonaccrual loans increased by 86 million in the quarter due to the impairment of one U.S. energy account which we conservatively classified as performing nonperforming. In addition, one European energy account and one U.S. media cable account became nonaccrual in the quarter.

With respect to both our domestic consumer and business loan portfolios, nonaccrual loans declined by 4% and 5% respectively over last quarter. Nonaccrual loans and RBC Centura decreased by 13%. Nonaccrual loans are now 339 million or 12% below the peak levels reached in Q1 of last year.

As shown on chart 33, provision for credit losses in the first quarter was $200 million, compared to $235 million last quarter and $286 million in the first quarter of last year. Included in this quarter's provision was an additional provision relating to a European energy account classified as nonaccrual last quarter, which was partially offset by a 14 million mark-to-market gain on a related credit derivative .

As you may recall, last quarter's provision of $235 million included a provision on the same account that was partially offset by a $13 million mark-to- market gain on a related credit derivative . The Q1 provision for credit losses when adjusted for the net impact of these credit derivatives would have been $186 million compared to 222 million last quarter.

As shown on chart 34, we have recorded a noninterest revenue credit derivative gains of $129 million over the past five quarters compared to credit derivative losses of 69 million. Chart 35 provides you with a status report on the level of credit protection the bank has purchased and sold by sector. As of January 31st, we have bought credit protection totaling $1.1 billion and sole protection totaling $363 million.

Chart 36 shows the credit quality in the Canadian consumer loan portfolio continues to show improvement. The quarterly provision for credit loss is on this portfolio which includes residential mortgages but excludes student loans has improved by 11 basis points since the first quarter of last year. Chart 37 shows that during the quarter, net charge offs were $140 million compared to $330 million last quarter and $234 million a year ago. The level of net charge offs slow in the quarter as the bank had significantly written down telecommunications and energy exposures, as well as, older fully provision accounts last year.

An update on our current exposure found on slide 38. Despite the previously mentioned new impaired loans in this sector, overall exposure was reduced by $341 million in the first quarter. Slide 39 provides an update on our current exposure telecommunication company. Noninvestment grade telecommunication loans outstanding as of January 31st was $773 million and down a further 10% from last quarter. Impaired loans net of charge offs taken to date are $41 million and are well provided for.

Chart 40 provides an update on our exposure to airlines and aerospace. Total loans of $1 billion was reduced by 9% in the quarter. Charts 41 and 42 attest to our continued positive trading performance. In conclusion, there's been some increase n international nonaccrual loans in the first quarter. The capital markets nonaccrual loan portfolio remains well provided for, exposure to challenge sectors continue to be reduced and trading performance remains solid.

Our Canadian portfolio remains in very good condition, continuing to benefit from a number of changes we made in credit practices over the past couple of years. Our Q1 specific provision for credit loss ratio of 36 basis points is well below the target range of 45 to 55 basis points we have set for our 2003 objective. Despite the continued uncertainty caused by the current geopolitical climate, we remain comfortable with the target range of 2003. 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, Miss Labarge. If you have a question at this time, please press one on your telephone key pad. The first question is from Jamie Keating of RBC Capital Markets. Please go ahead, sir.

Good afternoon, everyone. I wondered if I could ask Peter a question. Is it possible that the noninterest expense dividend, I'm curious that the situation I think is occurring across the field at banks. I notice that the human resources costs seem to have a reasonable sequential up kick, and yet, the rest of the cost lines are being managed very tightly. Could you just discuss sustainability around the salaries and benefits line and also about around some of these other occupancy and equipment communications lines just to understand how this shift in expense trend is occurring?

Sure, Jamie. It's Peter Currie here. And you will have seen in our disclosure a trend up in human resource costs. That's a function of several things. One of them, of course, is ongoing progression that you are going to see in the organization. We are not growing the organization a lot year-over-year in terms of total people, but as people become, to use a phrase reskilled, there is some upward adjustment in compensation. That's not huge.

The biggest driver on the compensation costs in total is going to be the benefit costs. And not surprisingly, we're seeing ongoing upward pressure on nonpension benefit costs, those being helped and other programs, health care and dental care and that sort of thing. But certainly pension costs are also being adjusted upwards. Now it's a combination not surprisingly of changes in the performance of various pension plans that are causing some compression or some impact, rather, on the accounting funding of those plans, and also as a result of the performance of the plans and the performance of equity markets themselves.

Trend-wise, I think actually, we're exerting pretty good control over our human resource costs. We're evaluating people against objectives on a regular basis, as you know. As you also know, we have a comprehensive program in place where compensation of individuals tracks very closely to performance. We have virtually everybody in the company on some form of compensation program where the base programs are adjusted minimally and the performance drives the increase in any variable compensation which is connected to overall company performance. Those are some comments on that topic, Jamie. If you'd like more, if you could expand, I'd be happy to do so.

Really, just a very brief follow-up, Peter. Some of the other lines occupancy equipment and so on, are we seeing a nice sequential drop in some of those. Should we try and hope for those to continue for the balance of the year?

I'm sorry, I didn't quite catch your question.

Sorry. When I look at occupancy, and equipment, yeah, the rest of the lines, they seem to have done pretty well. Is that sustainable?

I think well, as I've said in the past, I caution people about extrapolating for the balance of the year off the performance of one quarter. What I can tell you is that we are focusing on cost containment very strenuously within the company. Gordon mentioned and I think I mentioned that revenues are performing not quite as strongly as we would like, and in reaction to that, and actually accentuating our programs, we've tightened our cost control processes, we've deferred discretionary spending in a number of areas.

Certainly, you can see those activities continuing for the balance of the year. On a line-by-line basis, Jamie, I would be reluctant to say, yes, you can extrapolate any variance year-over-year and multiply by four based on the first quarter performance. Certainly, we remain committed to the objectives we've outlined to you in our annual report.

Thanks for the comments, Peter.

Thank you, Mr. Keating. The next question is from Heather Wolf of Merrill Lynch. Please go ahead, ma'am.

Hi. Good afternoon. One quick question for Suzanne and one potentially for Jim. Suzanne, you had mentioned in your comments that despite the lower than expected PCL this quarter that you probably won't change the target for the year. I'm curious if you can give us some more details surrounding why that is. And just a quick question on the margins. I'm curious if you can give us some color on what you're looking for for margins for the rest of the year?

Okay, Heather it's Suzanne Labarge. The issue that we have around looking at credit -- the credit situation right now is the geopolitical environment. It has, as you know, a major overhang on the economy, and could seriously impact a number of sectors. So Frankly, it's the lack -- I mean, we'd like to think that this quarter was a trend, but in today's environment, there are so many uncertainties out there. We're comfortable we can live with the range we said, we are comfortable we can meet the goal that we set for ourselves but would be very, very uncomfortable in -- because of the geopolitical uncertainty of going any further than that today.

Can you elaborate on which sectors those might be?

Well, there are a couple of things. One is you obviously have the whole tourism, depending on what happens in the case of a war with Iraq. You have obviously the tourism sector that would be badly hit. But more than that, there's a question of what does it do to the overall level of economic activity. We've seen a large number of our clients are not borrowing. They are not investing. They're waiting to see what things -- what happens before they commit investment dollars into either the U.S. or Canadian economy.

I mean, that obviously if that continues for a long period of time, has a flow-through effect that affects the general economic environment and a number of weaker companies just never, can't survive another year of that kind of uncertainty. So it would be a broad-based one depending upon what happens. And as I say, I would hesitate to speculate on what's going to happen.

I would just add one point, Heather. It's Gordon Nixon. Firstly, just to reiterate Suzanne's point, that what we're seeing a lot of with our client base is, which is positive from a credit perspective, is they're basically running their balance sheets very conservatively and they're not drawing on loans to grow and expand. Good from a credit perspective but not so good from an economic perspective because they're not investing and whether it's in plant equipment or acquisitions or growth.

So I mean, there is a concern with respect to the investment in the marketplace just because of the lack of confidence.

The other comment I just reiterate is that, you know, we do publish our objectives in the annual report each year, and that's exactly what they are. They are annual objectives that we measure ourselves against throughout the year. They're not -- they're not ranges that we're going to adjust on a quarter to quarter basis.

Okay, great. Thanks.

Thank you, Miss Wolf. The next --

would you like --

The next question is from Darko Mihelic of Research Capital.

I think Jim Rager had an answer to Heather's other question on margins. Jim?

Thanks, Gord. Thanks, Heather. Our net interest margin dropped Q4 to Q1 about 11 basis points as you can see. We, six or eight months ago, decided that we needed to dig in a little bit more and protect our market shares in some of our retail product areas in particular. As you can see from one of Nabanita's charts there that we have improved in deposits and for the last five or six months, the last five or six months have been pretty much flat in our mortgage business as well. But the entire reduction in net interest margin has come from those two areas just in order to protect our position.

We've had to get a little more aggressive on the pricing front. And that's cost us. On the other hand, we've also done a lot of work in our personal lending area and credit cards and started to see some pretty good improvement there, which as that being higher margin products, as that continues, we should from that, see some improvement. The other area, though, where we have not done as well as we would like to do is in our business lending commercial and small business. Our portfolio's down about $2 billion year-over-year, and as we bring that back, and we are doing a lot of work. We have been for some time. We think we're seeing signs of improvement.

As that comes back, we should get some better net interest margins as well. The remainder, though, will be up to what happens really with the Bank of Canada. And if they move rates, you know, we should see an improvement, but we're not counting on that. We're looking to grow in more just through better product performance.

Thank you, sir. The next question is from Darko Mihelic of Research Capital. Please go ahead, sir. Mr. Mihelic, please press one on your phone key pad at this time, sir.

Hi.

Please press one at this time, sir.

I pressed one a couple times.

Please go ahead, sir. Your line is now open.

Thanks. Sorry. I have a somewhat technical question, if I may, for Peter. This quarter looks like you provided more information than your U.S. GAAP statements with respect to perhaps consolidating some off balance sheet items back onto the balance sheet. They look like fairly sizable amounts. I am just wondering if you've done any work with respect to the Canadian exposure draft and if the regulators, if this would sort of impact your assets and therefore your capital ratios as well?

Could you repeat the last part of that question, Darco?

Yeah, would it impact your capital ratios if you had to consolidate these back on? Would they have risk waiting assets?

You are referring to the special purpose entities?

Yeah, exactly.

Our view, and we have taken a look at that rather carefully. Our view is that most of our special purpose entities can probably be restructured in such a way that they will not be required to be reconsolidated on our balance sheet, so therefore, they should not be a material impact on our capital ratios.

Great, thanks.

Thank you, Mr. Mihelic. The next question is from Ian Diverti from BMO Nesbitt Burns. Please go ahead, sir.

Thanks. I'm referring to page 15 of the Canadian GAAP supplemental package. When I look at risk-weighted assets, there aren't a lot of surprises except for one thing. The amount of capital and -- or the amount of risk-weighted assets being tied up in general market risk is up quite dramatically. Can you detail, is this a new strategy on putting more trading businesses into the bank? Is it mismatched? It doesn't look as if they -- the actual bar is that different. I was wondering if you could explain that?

It's Suzanne speaking. I'll take a cut out of it. Most of that has to do with our credit derivative book, and because on the credit derivative book, we don't do our calculations by use of models. It's much more the standardized approach. So as we've grown that business, it has a fair demand on capital and therefore risk adjusted assets.

So it's the nature of the business that's causing if and the methodology we're using for calculating capital that has that impact. As I say it would not, as a result, show up in bar because all of our bar stuff is the model-based mechanism.

So is that why you had the best trading revenues you've ever had because of the expansion in the credit derivative business?

No. We had a quite reasonable -- it's Chuck Winograd. We had a quite reasonable quarter in credit derivatives. The overall explanation, it wasn't a record quarter by any stretch of the imagination in credit derivatives, but we do have a much more regular business than we had two years ago. It's been building. The explanation for our trading revenues is really that virtually every area had a reasonable or a good quarter. We didn't have any real weakness anywhere.

I mean, I exclude the equities business, which is more, you know, which is only partly a trading business, but if you look at our proprietary trading businesses or structure trading businesses, going through all of the product ranges, as you see, we had good months everywhere. I think there was only one area where we had a record month, and it wasn't a -- a record quarter, rather, and it wasn't a record by a long shot. It was just a little better than we had done. It's really again, we're trading a lot of things. We were firing on a lot of cylinders.

Don't mean to beat a dead horse here, but the increase in the general market risk of about 4 billion with the risk-weighted assets, so that's going to tie up sort of 300 million of capital. You must believe you can earn 20% or 30% on that. Is that sort of the right math to think about that we should be -- there's going to be 100 million more of it out of trading, after tax out of trading because of the additional market risk?

I think that you could look at it as something we're going to work very hard to get models involved. And try to constrain the amounts of capital we use. You can make reasonable returns, but on this amount of capital in those businesses, 30% is a high return. A very high return.

Thanks very much.

Thank you, Mr. Diverti. The next question is from Michael Goldberg of Desjardins Securities. Please go ahead, sir.

Thank you. In prior periods, you've provided a breakup of the operating revenue and operating noninterest expenses from recent U.S. acquisitions. I was wondering if you could give us those numbers for the first quarter this year?

Michael, we used to disclose those numbers. The reason for that was we had made acquisitions halfway through 2001. So to have an apples to apples comparison, we had to show the impacts of our U.S. acquisitions from a revenue and expense acquisition through 2002. We're now in a situation where if you compare this quarter to a quarter a year ago it's really apples and apples.

The acquisitions are all dead pretty much. [INAUDIBLE] at the end of the quarter and besides that's very small so we really no longer see the need to disclose that level of granularity of our U.S. acquisitions. We are showing you the bottom lines of our U.S. acquisition impact and we are showing it to you by segment. So the intention is not to continue to show the revenues and expenses by U.S. acquisitions.

Well, the one thing that the other disclosure enabled me to do was to break out an operating profit contribution before losses and gains in the U.S., and I would find that helpful to be able to continue to do that.

Michael, it's Peter Currie. I understand your request. I will only reiterate what Nabanita said that given where we are with our acquisitions and the fact that we're really operating these businesses on a continental basis, on a platform basis. So we think it's relevant to demonstrate how much we're making on a net basis from each of these businesses, but doing it line by line is not the way we operate the business necessarily and we don't think it would really help in you reaching the right kinds of conclusions about our effectiveness and integrating and building our platforms.

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

No, that one wasn't answered, so no thanks.

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

Good afternoon. Just a couple questions. First, going back to the trading revenues that Ian brought up. Obviously, still exceptionally strong 62% of RBC capital on average over the last ten quarters or so. Could you just give us a sense of how that drills down into the ultimate profitability of RBC capital? I would think it has a higher profit content than some of the other lines and if you could just give us a sense of what that might be? It's Chuck Winograd. We do drill down and it is presently the major product contributor because part of the, you know, part of the residual of that comment is that we are not doing well in what I would call our lending businesses because we've got, you know, we've got loan losses that are substantial. So it is much more profitable.

I might also add that our quarter in the investment banking side was also very weak. So the margins in the trading business were very strong, and in fact, if you look at our overall trading businesses, they contribute the full amount, you know, and again because of the lending business and particular parts of it, they were our profitability in the quarter.

When you say your provisions are exceptionally high, the 77 million capital markets left in the quarter on a PCL basis for, I guess, full cycle PCL's, it doesn't appear to be that much. I mean, maybe it's 15 million too high. Is that right, Suzanne? I mean, it doesn't look extraordinarily elevated.

For me, it's high.

It's Suzanne Labarge. I would say through the cycle given the mix in our books, it is high, and we would expect to see that shrink over time and I think by more than $5 million to $10 million. I think it highlights the lack of margin for error in the corporate lending business because of the nature and the spreads in that business.

And that's one of the reasons that we've been, you know, pursuing that strategy of reduction of noncore lending for quite sometime because there is very little margin for error in those books. I would just also add that Chuck, correct me if I'm wrong, but I think from a profitability perspective, because your business has gone to one bonus pool essentially that the margins with respect to the various businesses in terms of what flows to the bottom line are all the same.

Well, there are a few bonus pools around, but fundamentally it's all one bonus pool. A lot is determined retrospectively by how we allocate bonuses which generally go to the more profitable areas.

Right. Okay. Second question or maybe the third one. Just on the new capital allocation models, can you just take us quickly through what is underpinning your decision to reallocate and, two, how you think about the 2 billion that you stuck into other -- would you consider that a freely distributable chunk of capital available to dish out to shareholders through dividends, buybacks and/or make acquisitions?

It's Peter Currie. The way you phrased the last part of that question makes it hard to respond to constructively I guess. Dishing out to shareholders isn't really in our vocabulary. We reallocated the capital to more accurately reflect the risk associated with each of the business clients. The residuals reside in the other category. Yes, if you draw the conclusion that we have more capital than is required to fundamentally underpin the business, you are correct.

It is available for distribution or for reinvestment to grow the business. I mean, we have a share repurchase program under way right now. And we're actively pursuing that. You know, that's about the only way I can respond to your question. It's -- yeah, we're generating more capital than 're using right now.

Peter, would you also say that 2 billion is a freely available piece of chunk of capital that you're modeling, they're modeling, you'd both conclude that stuff that's available for you guys to use --

One way you might look at it, this is Gordon Nixon speaking. We provide our capital goals both annual and midterm goals. I think if you look at our current levels and our capital generations based on our forecasted growth, you can back into a fairly substantial number of free capital available for the three areas you've mentioned with this share buyback dividends and acquisitions. So the answer to your question, I think, Quentin, is, I think the way you're looking at it is reasonable.

Great, thanks. Good quarter.

The other thing, just as, Peter Currie again. One last thing I want to add. You've seen our position on risk adjusted assets. You've seen it remain relatively flat overall for the last few quarters. Should that grow, should markets pick up, it's going to require more capital underpinning. Some of that so-called surplus could be deployed to support revenue growth, but at a point in time, Quentin, I think your position is a reasonable conclusion.

The other point I'd just make, because I think it is very important in terms of how we run the organization, and I think how financial institutions should run is the capital allocation methodology is absolutely essential to our decision-making because, you know, to misallocate capital will cause inappropriate decisions to be made. We spend a lot of time and energy over the last really couple of years trying to ensure that our capital - internal capital allocation methodology is, you know, properly reflects the risk in the various businesses, not just the regulatory capital requirement so that we can make, you know, hopefully the right decisions with respect to the businesses we want to invest in.

Thank you, Mr. Broad. The next question is from Jim Bantiff from Credit Suisse First Boston. Please go ahead, sir.

Hi. Good afternoon. Two questions regarding the U.S. acquisitions of Centura and Dain Rauscher. In Centura, perhaps, Jim, you can give us color on the competitiveness and environment. Recently, there was a transaction done with BBT expanding with First Virginia Bank. Does that imply any additional opportunities or pressures within that marketplace for Centura?

And second, the question regarding Dain Rauscher. Clearly it's a tough time in terms of the equity markets and transactions are down and volumes are down. Even if there's, I imagine, a rebound in equity markets over the next 30 days, the retail customer does lag a bit in terms of coming back.

Even if there is a rebound in the markets in the next 30 days, the retail customer does lag a bit in terms of coming back, can you maybe talk about the business model at Dain Rauscher in terms of going from more an asset-based commission structure as opposed to a direct transaction oriented commission where we can see perhaps revenues picking up faster than what we'd normally see? And if that's not the case, maybe we could talk more about the cost structure in the U.S. operations. I know the number has been coming down nicely in terms of the noninterest expenses, but is there more room to do there given how tough the conditions are right now? Thanks very much.

Hi it's Jim Rager here. In terms of Centura, we are looking to grow, expand Centura in the same disciplined way that we have been doing so far. Through a combination of smallish acquisitions in the markets we picked to grow and de novo branch expansion. So you can expect to us kind of more or less along the lines that we have done so far continue in terms of opportunities for acquisitions of those types of institutions, there are many out there and we're -- we have an ongoing program of discussions that's just to make sure that we would pick the right time in terms of prior activities being well integrated and being able to deliver on those before we moved to the next step.

And then identifying the right opportunities in terms of chemistry, fit and valuations and all of that sort of thing. So that particular transaction you talked about really, I don't think, has thrown us off of our goal there. That was a larger one, and, you know, we're trying to stay a little bit smaller at this point in time.

Great. Thanks.

Thank you.

We have about a second answer of that question is Ray McKie.

Hi, it's Reay Mackay. I think one of the things that you should bear in mind, you know, before I sort of deal with the two specific questions, is that the volatility of revenue in the retail business doesn't necessarily go in sync between the U.S. and Canada. If you look at Q1, '02 versus '03, for instance, you would find that the Canadian business was better than the U.S. business from a percentage point of view.

If you look at Q4, '02 versus's Q1 '03, you'd find just the other way around, the U.S. business is better than the Canadian business. So one of the things that makes it difficult to get a handle on exactly what might be the case from a U.S. commission point of view is that it doesn't always run in sync to what you think it will do, and it doesn't always run in sync with what happens in Canada. The more specific answer to the question is that I would not anticipate that we will be able to do the conversion in the U.S. business to a fee-based business as quickly as we have been able to do in Canada.

And therefore, I think that the -- one of the things that will continue to happen and will be a key part of our business strategy, assuming markets stay the way they are, is that we will continue to take costs. And I think what that will mean is that the leverage, if and when revenues start to come back will be that much greater and I think that will be what will happen over the next few quarters.

Thanks very much.

Thank you, Mr. Bantiff. Once again, if you have a question at this time, please press one on your telephone key pad. The next question is from Steve Collie of PD [INAUDIBLE]. Please go ahead, sir.

Hi. Bank of Montreal provided us with a reclassification of their U.S. business this week, and one thing we discovered was that the underlying earnings weren't perhaps as high as we'd thought and there were proprietary gains and structural gains on the treasury side which helped boost earnings significantly in 2002. Can you tell us for Centura, are you including some of your proprietary treasury gains into those results, and if not, are they all in the corporate business or in the corporate segment?

It's Peter Currie here. Let me answer your question this way. First of all, every one of the banks is going to manage their business and display their business, report their business slightly differently. As we have expanded into the United States, we've acquired essentially free-standing businesses. Every one of them has had free standing infrastructures. As we've acquired them, we have attempted to migrate a them into a common infrastructure servicing the North American business.

We don't plan to divulge or disclose the elements of the income statement for each of our U.S. operations. I can tell you that in the case of treasury that we don't bias. We don't, if you will, engineer returns into our various divisions on a geographic basis. And we are migrating treasury to a north American basis that will service the whole company. That's as detailed an answer I can give you because that's not the way we look at our business. In terms of Centura, what you see there is the result of the deposits that they take and the loans they make. I mean, we really don't have -- it's a customer-related business that we're building there, and the earnings that we are reporting are earnings related to the retail and the business and commercial banking products that we sell to those customers. There is, you know, there are a -- there is a little bit of marketable securities portfolio in there, but not much in terms of the overall results of the business.

Peter, back to all of Canada, and I think the focus was maybe there in the U.S., is it possible that some of your treasury activities supporting the Canadian retail business are included into your retail results in Canada or are they included in the corporate segment?

Largely included in the corporate segment. Since we use it to service the entire business, it gets reflected through the funding costs of the business units themselves but really you are seeing it through the corporate segment.

It is the corporate sector other than the funding transfer costs that exist between the operations, which has been -- which doesn't change. So it's in the corporate sector.

Second question on Centura. Obviously, the mortgage business did extremely well for you in 2002 and I suspect it will continue to do well for you in this quarter. Is there any way you can give us a sense of how important the mortgage business has been to the bottom line?

Obviously that is a big contributor to the bottom line right now because of, you know, it's just a lot of activity there. We're taking advantage of it. We're glad to have it. But other than that, the personal loan portfolio, other than mortgages for Centura has been growing at about an 18 to 20% rate.

The small business loan portfolio has been growing at about that same rate. Commercial and industrial loans are growing at about 20%, 18% to 20%. The overall loan growth, though is about two because of the way we're reducing the real estate exposure in that market. So the parts of the business that we are concentrating on building so that we do, in fact, have a balance to the importance of the mortgages is -- are contributing very well.

You don't want to give a percentage, do you, in terms of the bottom line? You don't want to give a percentage in terms of the bottom line impact on mortgages relative to Centura?

I don't -- I will just say that there is enough diversification in there right now that if we had a drop in mortgage earnings that we would be able to -- it wouldn't be that material in terms of the overall results of Centura.

Okay, thanks. One last one, I don't know if Jim Westlake is there. I was surprised obviously translating U.S. GAAP, the GAAP creates all sorts of lumpiness. The profit growth in the insurance business was a surprise for me and I was hoping for additional explanation as it relates to that.

Yeah, thanks. This is Jim Westlake. We had a good quarter in all of our businesses. Particularly in the insurance side. So in the U.S. GAAP, it was a, I would call it just a solid quarter across all of our businesses. In so far as the Canadian U.S. GAAP, there was a much narrower difference this quarter largely because there wasn't as much movement in the Canadian GAAP numbers and since their market way just didn't move as much and reflect that status.

Is this a sustainable run rate on the profit side here, Jim?

Well, I think that it's a solid quarter. We don't make forecasts but we certainly expect to continue to grow the insurance business.

And your position right now is increasing, let's say, another spot given the transactions that have been announced to date. Is this an opportunity for to you grow as there's been perhaps some confusion amongst the distribution forces? Or how do you envision the Canadian market at this point in time?

On the individual side which is where we primarily focus our attention, we were number six this year. We were ahead of Canada life so we would remain 6 with either manual life or great west life. I don't see one transaction in that marketplace making that much of a difference in the competitive position, but certainly when there are fewer competitors, it's always better to acquire distribution.

Okay, good quarter, thanks.

Thank you, Mr. Collie. The next question is from Susan Cohen of Dundee Securities. Please go ahead, ma'am.

Thank you. You mentioned that at Dain Rauscher, part of the strong results were due to the fixed income division. Can you quantify that and talk about whether perhaps there are any more gains to come from those operations?

I'll answer the second part first. I think that with the acquisition of the small fixed income shop that we did in New Jersey, we obviously feel that we will still continue to have leverage in the fixed income business. As we continue to grow it and the New Jersey acquisition really is a bolt-on tight acquisition. As far as breaking out the numbers, we don't break out the numbers, and we don't intend to break out the numbers in terms of the fixed income business itself.

Just because there's been a couple of questions relating to product profitability in the U.S., we don't break out product profitability in any of our businesses, including Canada.

Thank you.

Thank you, Miss Cohen. The next question is from Ian Diverti. Please go ahead, sir.

Thanks. This is a general question for Gord, I think. You know, Royal Bank shares have done well. You are generating a lot of capital, and you are a couple of years into some of your acquisitions, and why isn't the Royal Bank more aggressive when the time is right, when the time is probably better to do deals in the U.S. at this current stage?

Well, the, I think, the comment when the time is right is very appropriate. I think we have to feel that the time is right, and, you know, there's a couple of issues around that. The first one, of course, is Canadian bank mergers, which I'll leave alone for the moment and let someone ask the question. But until the clarity around Canadian bank mergers is made a little more clear, there is an overhang, I think, with respect to all companies in terms of more aggressive expansion outside of Canada.

We do think that there will be greater clarity on that issue over the next couple of months. The other issue is while it is a better time with respect to share valuation today from an acquisition perspective, when you look at our real targeted market, multiples have not really come down that dramatically, and a good example of that would be the BBT acquisition of first Virginia, which one of the analysts referenced earlier.

If you look at that transaction, and it was clearly a transaction of a size and nature that we could have managed and from a proximity perspective was also quite complimentary, but there's no question, when you look at the economics of that transaction, it would have been very difficult for us to have maintained our fundamental targets. I think even with the numbers that were provided to the analysts by BBT, you know, very significant cost takeouts were going to result in, you know, modest accretion over a very long period of time.

So we want to make sure that we're very cautious in terms of acquisition that we don't stretch a valuation perspective. There really hasn't been a significant reduction in valuation. I think the common issue in the merge of Canada and regional banking valuations in the U.S. have not convinced us that the time is right or an opportunity out there is right from our perspective.

We continue to look, we continue to have discussions, and we're continuing to invest generically in our branch network in the southeast. Particularly in Atlanta and Florida. You know, we've got some pretty aggressive generic growth plans. We think we're positioned to take advantage of opportunities when they arise, but we're going to continue to be cautious. It's certainly not an economic environment where one shouldn't be cautious as well.

The -- Gord, you've picked the PNC acquisitions which certainly still look as if the pricing is quite high. But certainly pricing you would not say that if you were to look at brokerage acquisitions where prices are probably now quite a bit lower than when you fist went down there. What is the reluctance to expanding on the brokerage side if prices are actually down?

Well, the -- I think when you look at where we are today in the brokerage side, we are further down the road in terms of our strategy with respect to full service brokerage in the United States. We had originally targeted to grow in the United States, to get up to roughly 2,000 investment advisors in that marketplace, and we're about there today with the Dain and Tucker Anthony acquisitions and some of the smaller add-on acquisitions we've made.

We're continuing to grow generically in that market. We're very comfortable with our position in that market today. We think we're an attractive size. We think both in the U.S. and on a North American bases with about 3500 brokers that we've got, you know, we've got enough scale and critical mass to be very efficient and we think we're from a size perspective well positioned relative to sort of the bulge bracket terms on one end and the more regional boutiques on the other end. We think we've got good operating leverage in that business if, as and when the markets turn around.

So we'll continue to look for attractively priced tactical acquisitions in that sector. But strategically, we would like to increase the relative size of our personal and commercial banking franchise in the U.S. Clearly that's our first priority. It doesn't mean we'll ignore the other priorities. That is where we would like to grow. And it's a business where, you know, we feel very good about our platform and our competitive position, but we would like to get it on a relative basis slightly larger compared to our other U.S. operations.

And I have no question on bank mergers. Thanks very much.

Thank you, Mr. Diverti. The next question is a further question of Quentin Broad from CIBC World Markets. Please go ahead, sir.

I'll stay away from the bank mergers for you, Gordon. If you could outline some of the concrete areas of expense savings that you are looking at right now as you survey the revenue side and determine that it's a little weaker. Can you give us a sense beyond focus and tell us where specifically you are targeting to reduce expenses whether you have particular goals in mind lower those cuts?

I would say each of the individual platforms have a number of initiatives under way on that front. I think I'll deflect this one to Peter to make a more general comment on the common sense side.

Okay, Quentin. It's Peter Currie here. Certainly, I'd ask my colleagues in the businesses to comment if I missed something. What we're doing in terms of expense management. When we moved into 2003, one never goes into a year without some contingency plans. So revenues are a little softer than we originally hoped.

So what we're doing is deferring some new initiatives within each of the businesses. Not canceling them, but looking at them hard and long and saying if it doesn't generate near-term revenue or expense savings, we'll push them out a few quarters until we see revenue firming up. I won't tell you specifically what they are because a lot of them are confidential. We are also cutting back on capital expenditures substantially this year. Again that's not an absolute cut it is a deferral until we see revenues firming up.

We've launched new initiatives through our efficiency and effectiveness task force within the company under the leadership of Elizabetta Bigsby our senior VP of HR. They are really across the organization. We're consolidating call centers. We've been doing that for a couple of years and are continuing to do it. We're looking at outsourcing various activities. Not on a large scale because we've already done some. For example, [INAUDIBLE] for merchant acquisition in our cards business and Simco Services for our item processing.

It's activities of that nature. It's less for us a fire drill now than it is a continuation of disciplines that we really brought to before in 1999 and are just continuing as part of our culture. But before I leave the question, I will ask if any of my colleagues have comments they want to make in this area on specifics.

I'll jump in first. It's Gordon again. I would also emphasize the importance we think technology will bring us in terms of continuing to increase our efficiency. We have a number of initiatives under way particularly as it relates to straight-through processing that we think will have a dramatic impact in terms of our cost structure and efficiency going forward.

And the e-squared committee that Peter referred to, I think, has now in excess of 50 sort of cross divisional projects under way both on the cost side and the revenue side. But over 50 projects underway to really ensure that we're maximizing the efficiency between the various business. It's a major initiative for us. We've talked about it in the past. And we think it provides very good potential both on the efficiency side but also on the revenue generation side. We're starting to see good results on the revenue side from that as well.

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

That's good, thank you.

The hour is almost up. We'll take our final question from Michael Goldberg. Please go ahead, sir.

Thank you. What I'm confused about is your reported U.S. net income from the fourth to the first quarter was up from 55 to 108 million dollars. But the contribution from Centura Liberty and Dain for the earnings were essentially flat in the quarter. When I calculate an increase in operating profit, it was up about 78 million, also. So what I'd like to know is the three Centura Liberty and Dain, did they contribute to that $78 million increase in operating profits in the quarter or were they flat on an operating profit basis with all of the increase coming from the incumbent businesses? Thank you.

Michael it's Peter Currie. You are referring to first quarter this year versus first quarter last year?

First versus fourth.

Well, they contributed to some extent. Obviously as we saw a reduction in some of the compensation, that becomes -- retention compensation that becomes part of operating profit. But the so-called incumbent businesses really did perform well on a Q4 versus Q1 basis, yes.

So would there have been any contribution to that overall operating profit growth from the acquisitions?

I'm reluctant to go on too long because there would be in certain of the businesses, but other of the businesses had a somewhat flatter period if you follow my drift.

Michael, how were you defining operating profit?

Yeah, what do you mean?

Revenue minus expenses excluding gains and losses. That's why I asked you the first -- the original question because I know that it's a number that, you know, I calculate self.

And by gains and losses, you mean any sort of unusual items in the quarter?

It's before investment gains and provisions for losses. It's before strategic gains. It's before restructuring charges, so you know when you were providing the other information, it gave a clear picture, you know, of the trend in operating profit for the acquisitions in the United States that's not visible at this point.

It's Gordon Nixon. I think that, I don't want to leave you disappointed having felt that you've had two questions that you haven't gotten the right answer to. I think that we will get back to you either Nabanita or Peter to try to have a better understanding of exactly what you are looking for because we're running the risk here of giving you the wrong information because I don't think we really have -- fully understand what you're looking for. So I will commit to getting back to you and obviously to everybody if there's information that's important from a broader perspective.

Thank you very much, Gord.

Thank you, Mr. Goldberg. At this time there are no further questions registered. I would like to turn the meeting back over to you, Miss Merchant. Please go ahead.

Thank you all very much for your participation. If you have any follow-up questions, please leave me a voice mail message at my office in Toronto. I will be picking up my messages and calling you back in the next couple of hours. Thank you very much. Bye-bye.