Royal Bank of Canada (RY) 2003 Q3 法說會逐字稿

All participants, please stand by. Your conference is about to begin. Good afternoon, ladies and gentlemen. Welcome to the Royal Bank third quarter earnings release conference call. I would now like to turn the meeting over to Miss Nabanita Merchant (ph), Senior Vice President, Investor Relations. Please go ahead, Miss Merchant.

Thank you. Good afternoon, everyone, and thanks for your participation in this call. The first 15 to 20 minutes will be devoted to remarks by Gordon Nixon, CEO, on the highlights of our performance, Jim Rager, on his segment results, by Peter Currie, CFO, providing further details and by Suzanne Labarge, Chief Risk Officer on credit trends.

We'll then take your questions. The other members of our group management committee are here as well to take your questions. Peter Armenio, Chuck Winograd (ph) from RBC Capital Markets, Marty Lippert from global services and Elisabetta Bigsby, head of human resources and public affairs. Our VP of fitness Janet is also here.

Please note our comments in this call may include forward-looking statements that are subject to risks and uncertainties. In that regard, I draw your attention to the cautionary statements which is the first slide of our quarterly results slide document. With that, I'll turn it over to Gordon Nixon.

Thank you, Nabanita. Good afternoon, everybody. We realize this is a busy day, and we appreciate that, and therefore, we'll try to talk quickly. We're pleased this quarter to have generated record results, despite ongoing weakness in the economy, in the economies of North America, as well as the significant strengthening of the Canadian dollar relative to the U.S. dollar, which resulted in lower translated value or U.S. dollar denominated earnings.

As shown in Chart 4 and 5, our third quarter net income under U.S. gap was up $54 million or 7%from a year ago. Diluted earnings per share were $1.14, up 12 cents or 12%. Under Canadian GAAP, net income was $783 million, up 12%, and diluted earnings per share were $1.16, up 17%.

As shown in chart 6, the 12.3% appreciation of the Canadian dollar relative to the U.S. dollar since the third quarter of 2002 reduced our net income by $25m, diluted earnings per share by four cents and ROE by 50 basis points compared to a year ago. I’ll leave it to Peter and Suzanne to discuss our revenue and expanse and asset quality performance in a few moments.

Chart 8 shows our performance during the first nine months relative to our objectives for the year were strong in the areas of portfolio quality, expense management and capital ratio, with the provision for credit loss ratio below the target range, expenses flat from a year ago, and capital ratios above our medium term goals.

However, revenue growth remains weaker than our target, reflecting the weak capital market environment during the first six months of the fiscal year, as well as the significant strengthens of the Canadian dollar this year, which lowered the translated value of our U.S. dollar denominated revenues by approximately $275 million.

The performance of our business segments is shown on Charts 9 to 17. In the interest of time, I will focus only on Chart 9 which shows four of the five business segments recorded record earnings. Please note that the strong ROEs achieved in RBC Banking, RBC Insurance and RBC Global Services and the improved ROEs at RBC Investments and RBC Capital Markets reflecting the pickup in the capital markets in the quarter.

Jim Rager will discuss trends at RBC banking in just a few moments. I just noticed in my comments I said record earnings. I meant to say record earnings growth. We recently added a new strategic priority to the organization, superior client service experience. This new priority is consistent with our new vision statement, all earnings the right to be our clients' first choice, and it reinforces our commitment to client satisfaction, retention and growing our share of our clients' business.

We spent considerable time looking at how we can better meet the needs of our client, and in this regard, we're in the process of transforming our processes to be more simple, flexible and efficient.

Turning to our U.S. operation, you'll note from Chart 18 that our U.S. operations generated 27% of total revenues in the first nine months of 2003, unchanged from the same period a year ago. However, U.S. net income of $291 million during the first nine months accounted for 13% of total net income, up from 144 million or 7% during the same period a year ago.

Our priority in the U.S. continues to be to improve our operating performance of our U.S. acquisitions, RBC Centura, RBC Dain Rauscher and RBC Liberty Insurance. As shown in Chart 19, net income from U.S. acquisitions increased by $14 million despite the strengthening of the Canadian dollar, due to strong results from RBC Dain Rauscher, whose net income more quadrupled to U.S. $26 million. The significant improvement in Dain Rauscher's results was due to strong brokerage in the income division as well as lower expenses in the declining compensation costs. Earnings at RBC Centura were down only $2 million U.S.

Net income at RBC Insurance was negligible compared to U.S. $4 million a year ago, due to costs relating to the acquisition of business insurance company of America on May 1st of this year. We're continuing to focus on enhancing the operating performance of our U.S. acquisitions threw a variety of initiatives designed to grow revenues and improve operational efficiency. Chart 21 shows the retention compensation costs falling in this quarter. Chart 22 shows our expectations of further reductions in the future.

While we are pleased with the progress we have made in extending our banking, insurance and wealth management businesses in the U.S., we recognize that we must continue to execute our U.S. expansion strategies in a disciplined shareholder focus manner to meet our goal of being recognized as the best in class provider of personal through business financial services in the United States.

To this end, we announced two acquisitions in July. First, that of the Florida operation of prove dent Financial Group for. U.S. $75 million and the assumption of $30 million of liabilities.

This acquisition which significance which is expected to close in the fall of 2003, will add 13 branches to RBC Centuras existing 11 Florida branches, acquired in January, with the acquisition of (inaud) ban corps. Also in July, RBC mortgage announced the signing of an agreement to acquireSterling Capital Mortgage Corp. Company for U.S. $100 million.

This acquisition which is expected to close in the fall of 2003 will be accretive to earnings per share in the first year. It adds 110 branch locations in 16 states. To RBC mortgages existing operations. It will place it among the top ten mortgage originators in the United States, and also revenue diversification, since most of it comes from new sources. I'd now like to turn it over to Jim Rager, who is going to make brief comments on the results of RBC Banking.

Thanks, Gordon. Good afternoon. I'll briefly review RBC's banks Q3 2003 performance focusing on earnings, revenue, market share, expense answer provisions for credit losses. Overall, it's been a good quarter for us. In fact, our best one this year. As you can see on Chart 11, Q3, 2003 net income after-tax was up 5% over the same quarter last year, and 19% over Q2, 2003. Return on equity at 22.6% was also up considerably over both periods.

Up over 270 basis points from a year ago, and up 380 basis points over Q2. Total revenues were up 4% over a year ago, and 5% over the previous quarter.

I'll first focus on our Canadian results, as shown on chart 12, domestic revenues were up 5% over a year ago, and 8% over the second quarter of this year. Residential mortgage revenue was up 14% over the third quarter of last year, due to higher volumes and wider spreads.

Personal lending revenues including student loan, which as you know, are running off, were up 9% over the same quarter last year. The double digit growth in royal credit line and indirect lending volumes, combined with an improvement in spread. Business lending revenues were up 5% over a year ago. We witnessed tremendous growth in our small business application volumes with approval rates up as a result of our revised startup policy and credit scoring improvements. I'd like also just for a few minutes here to discuss our Canadian market shares as shown as slide 13.

The numbers are as of May, 2003, the latest date at which we have this information, and discuss the changes over January, 2003. Our personal deposits market share was up eight basis points, reflecting strong response in both registered and non-registered deposits to some of our recent product initiatives.

Our market share in residential mortgages was up nine basis points since January, as a result of a very competitive offering. This was not done at the expense of spreads, which were up from a year ago. The mortgage market continues to be highly competitive, and we remain the number one provider in the country.

Personal loans and credit cards market share increased eight basis points, with strong growth in the number of Avian cardholders and Avian purchases and cash advance, significant growth in our security Royal credit line offering and good market response to our consolidation loan processes made possible to better scoring without sacrificing quality.

Overall, our Q3 net interest margin rose to the highest level in 2003. Our net interest margin is amongst the highest of the big five banks in Canada, in line with our strategy of competing on advice and not solely on price. However, on a tactical basis, we will occasionally compete on price to protect our market position. As our best rate mortgage pricing introduced in Q2 exemplified.

Returning to Slide 12, you will see that Q3 USA revenues denominated in U.S. dollars was up 13% over a year ago, but in Canadian dollars was flat, due to the appreciation of the Canadian dollar this year. RBC mortgage revenues were up strongly from last year due to continued strong growth in volumes.

Turning now to costs and back to Slide 11. Our 59.3 efficiency rate to Q3, the best level in three quarters improved by 240 basis points over Q2. It was up 60 basis points from a year ago, largely due to costs associated with higher mortgage origination volumes in the U.S., $14 million higher pension and post retirement benefit costs, and the 450 sales people in Canada that we added into the network earlier this year, and all of whom are delivering results.

Taking a longer view, our efficiency ratio has improved by almost 880 basis points since the first quarter of 1999, when we embarked on a major cost control program. This has been through a continued reinvestment of growth cost savings into ongoing initiatives such as straight through processing and process reengineering and leveraging economies of scale through centralized environments such as in-service, contact centers and resources.

Our objective is to reduce it to the low 50s over the medium term to save control on expenses and a lower rate in revenues. Our provision for credit loss declined for last quarter and a year ago particularly with small business and small to medium-sized enterprises through concerted focus on strengthening our scoring and underwriting capabilities. Taking a longer view, one of RBC's strength is the past business cycle, we have had no big surprises.

In conclusion, our performance in RBC Banking in Q3 was the strongest so far this year. It's good momentum with volume growth across a broad spectrum of product categories and we have substantial new business in the pipeline.

In the U.S., we continue to expand our branch network in the southeast, and are growing our national businesses as the recently announced acquisition of Providence Financial branch network and Sterling Capital Mortgage Company. I'll now turn it over to Peter Currie.

Thank you, Jim. Good afternoon, everybody. Turning it our revenue performance, Chart 24 the total revenues were $3.97 billion, up $106 million or 3% from –

I'm sorry for the interruption. Is it possible to get a little bit closer to the microphone and to restart what you just said, sir? I'm sorry, the sound is very bad. Thank you.

Is that better?

Oh, that's much better sir, sorry.

Just out of interest, operator. Have they all been difficult to hear?

No, sir, the sound is perfect.

Okay, it's Peter Currie here, and good afternoon, everybody. Turning now to our revenue performance, you'll note from Chart 24 the total revenues were $3.97 billion in the third quarter, up $106 million or 3% from a year ago.

Non-interest revenues were 56.1% of total revenue, compared to 54.4% a year ago. As shown in Chart 25, were it not for a $150 million decline in revenues due to the appreciation of the Canadian dollar versus the American dollar, revenues would have been up $256 million or 7% from last year, and revenues would have been up 1% from the same period in 2002.

Turning to the net interest margin, you'll note from Chart 26 that it was down 18 basis points from last year and two basis points from last quarter due to higher amounts and funding costs of low interest yielding assets such as securities. The net interest margin in RBC Banking actually widened by three basis points over the second quarter.

As shown on Chart 27, third quarter non-interest revenue was up $125 million or 6% from a year ago, largely due to $103 million or 23% increase in trading revenues. Compared to the second quarter of this year, non-interest revenues were up $173 million or 8%, mostly reflecting a $99m or 25% increase in capital market fees and a $62m or 13% increase in trading revenues.

Chart 29 shows that excluding U.S. acquisitions, revenues would have been up 3% from the third quarter of 2002, and further excluding the Canadian dollar/U.S. dollar exchange rate change, revenues would have been up 4%.

As shown as Chart 30, non-interest expenses were up $66 million or 3% from last year's third quarter. A $19 million decline in retention compensation costs was more than offset by the $24 million increase in stock compensation expense. Mostly due to a $15 million stock appreciation right of expense recovery in the third quarter of last year.

We mentioned on Page 10 of our earnings press release that the factors behind the higher expenses or the acquisition of the insurance company of America this quarter, costs relating to higher mortgage origination volumes in the United States, a $15 million increase in pension and post retirement benefit costs and salaries associated with the expansion of the retail sales force in Canada earlier this year.

Chart 31 shows that were it not for the stronger Canadian dollar, non-interest expenses in the third quarter would have been up 7% in the first nine months up 3%.

As shown on chart 32, excluding U.S. acquisitions and the currency impact, non-interest expenses would have been around 5% over the third quarter of last year. Moving on to the balance sheet, we'll see from Charts 33 and 34 that we registered strong growth in consumer loans over last year of 9%.

With residential mortgages up 9% total personal loans up 3%, and credit cards up 18%. Business and government loans declined by 11%, reflecting our deliberate effort to reduce the size of our corporate loan book and save our lower risk consumer loans.

As shown on Chart 35, compared to a year ago, our tier 1 capital ratio increased by 50 basis points to 9.6%, and our total cap ratio was unchanged at 12.7%. The increase in our tier 1 capital ratio reflects our sizeable internal capital generation of CAN$1.8b since 2002 and that's shown on chart 36. During the quarter, we repurchased a total of 5 million common shares, 2.7 million of which were repurchased under the old program that expired in June and 2.3m were repurchased under our current share repurchase program which also commenced in late June of this year.

Total cost of $296 million, leaving a balance of $22.7 million shares available for repurchase up to the expiration of the current share repurchase program on June 23rd, 2004. In terms of our quarterly common share dividend as chart 37 shows we have a history of dividend growth and we announced this morning we'll be increasing our quarterly common share to 46 cents in the fourth quarter of this year. Our dividend payout ratio is 37% during the third quarter and that's in line with our 35% to 45% payoff target. That concludes my summary of remarks. I'll now turn it over to Suzanne Labarge.

Thank you, Peter. Good afternoon, everyone. We'll now take a few minutes to provide you with an update on RBC financial groups asset quality. Chart 38 provides you with a current breakdown of the portfolio by sector. Consumer lending represents 65% of the loan book and the 35% in business and government loans, down from 37% last quarter, remains well diversified.

On Charts 39 and 40rk you can see non-accrual loans declined by a further of $264 million in the quarter and are now at their lowest levels since 1 thou. Improvements are noted in virtually all areas this quarter. Domestic consumer non-accrual loans declined by 4% in the quarter and now 16% lower than the same period last year. The decrease in domestic business non-accrual loans included the resolution of a significant North American land transportation account, as well, non-accrual loans in the U.S. continued to decline as there were no new impaired loan this is quarter.

As shown on Chart 41, the provision for credit losses in the third quarter was 167m, compared to 211m last quarter. Consistent with the decrease in non-accrual loans, our provision for credit losses declined across our consumer and business portfolios. Chart 42 provides the impact of credit derivative gains and losses realized on accounts in default.

Year-to-date the bank realized gains of $14 million, compared with $33 million last year. Chart 43 provides you with an update on the current level of credit protection that the bank had purchased and sold by sector.

As of July 31st, we have bought credit protection totaling $810m, and sold protection totaling $223m. Chart 44 demonstrates the stability of our Canadian consumer lone portfolio as provisions had been between 35 and 40 basis points for the past five quarters. Chart 45 shows that during the quarter, net charge offs were $227 million, virtually unchanged from last quarter and down from $349 million a year ago.

Charts 46 through 49 provide an update on our exposures to the more sensitive sectors. As you can see, power generation distribution loans declined by 11% for the quarter to $1.5 billion. Virtually all of this decline was in the non-investment portfolio.

Telecommunications and cable loans also decreased in the quarter by 15%, non-investment grade telecommunications loans outstanding as of July 31st was $491m. Airlines and aerospace loans declined in the quarter by 7% and that impaired it by $20 million. Loans outstanding in hotels, restaurant and entertainment increased by 5% in the third quarter. As you may recall, this sector has a large component of non-investment grades as much of our exposure is small business and smaller commercial clients, but as you can see, credit quality remains sound. Charts 50 and 51 attest to our continued positive trading performance.

In conclusion, the capital market non accrual loan portfolio continues to decline and remains well provided for. Exposure to sensitive sectors continued to be reduced. The consumer lending portfolio remains stable, and our trading perform remains solid. At this point I'd like to turn the call over to the conference operator so we can begin the question and answer period.

Thank you. We'll now take questions from the telephone lines. If you have a question, please press star one on your telephone keypad, and to cancel your question, you may press the pound sign. At any time, can you press star one. The first question is from Mr. James Keating from RBC. Please go ahead. Mr. Keating, your line is now open.

Thank you. Good afternoon, everyone. Good quarter. I just wanted to ask a couple of hopefully not technical questions. Number one on average assets, the comparison to period end assets is obviously stronger on average assets. I assume that's the impact of FX translation, Peter? I was just wondering if that's true, could we comment on if there's any hedging, what the program would be there, to the extent there is one or what the impact might be on income, the balance sheet and ultimately on the retained earnings and capital account?

Jamie, are you looking at the Canadian GAAP, Pages 17 and 18?

Yes, correct.

Were you comparing the CAN$403b on a spot basis on Page 17 with the average number on the next page, which is 397?

Yes, I was actually focused on the loan book, to tell you the truth, but yes.

Sorry.

See, the loan book period end you know, speeds up significantly different than where the average assets -- average loans were going. I assume it's an FX impact. It seems to be the opposite of where it usually sits.

By and large, you will find that the average amount would be lower than the bottom amounts would be, because obviously, the average is the average of, you know, the progression over the course of the three months of the quarter. Generally, you will find that the spot number is higher than the average number, and the FX would also have an impact. You're absolutely right, because the Canadian dollar did strengthen and ended the quarter at quite a bit higher level than it did at the end of April.

Is there or can you comment on what hedging techniques might be in place here, to the extent there are for the U.S. numbers?

Jamie, for a not too technical question, you've got a lot of searching going on along the table. If you're asking about the outsets, they're all funded with U.S. liabilities.

So everything's matched to that degree and there's no effort --

Yes.

James Keating-- no effort to hedge capitals?

Yes.

Could I also perhaps ask -- this may be for Peter Armenio and/or Chuck. Could we talk to your sustainability and sources on some of the numbers?

Chuck, you want to go first?

Well, in terms of businesses -- again, it's hard to say, because we've really got suggest, and August is never a good indicator, because it tends to be a seasonally low period. I think that, you know, what happened in the quarter is that in terms of underwriting and in particular, the new issue business picked up, and I think that when we get into September, as long as markets continue, that that will continue. It's not as if it's at a great take.

So we're optimistic about the remainder of the year in the underwriting business. I think the other parts of the business are, you know, are going to shift -- there's a shift going on between debt and equity, and that just is typical of the cycle, and it appears to be happening over the last month or six weeks.

Jamie, just on our end, there's a couple of things I guess. One is we're positive on our run rate numbers as far as expenses go, generally, and now with the up tick, which we've been sort of waiting for a little while T starts to really kick in, and we feel that the trading volumes, if they remain where they are, is going to be a real blessing for us longer term, but we do feel very comfortable that we have a good sense of our cost side of things and that the run rates that we're now looking at are very positive for us on a go forward basis.

Thanks very much.

The next question is from Mr. Steve Cawley from TD Newcrest. Please go ahead.

The first question is related to Page 7 of your press release. It discuss supplemental discussion Canadian GAAP, and in there, you make a comparison as it relates to accounting guideline 1.

Are you talking about RBC Banking?

I'm talking about RBC Banking where I believe that you write here that under the adoption of ACG 13, that there was an $18 million positive increase year over year in net income as it relates to that new guideline, and so the number I'm looking for is, what was the actual positive effect in the quarter of the accounting guideline?

Hi, it's Janice speaking. We adopted this guideline this quarter so it was the $18 million that was the actual GAAP effect.

Okay, would you say that this isn't really an operating earnings number, because my concern would be, let's say if it was a negative number, would you be asking us to pull that out of your process figure? Because it doesn't really impact the economic value of the firm?

Well, it's a mark to market adjustment. So to the extent it is an accounting adjustment, then I would say that it does relate to the underlying business, in that it relates to the type of mortgages that we have positions on and what we have at the time of the portfolio.

I think that -- this is Jim Rager speaking. That is judgment was made last year.

The FIN 46 adjustment was made last year. It's an accounting time difference because of at adoption of the hedging and GAAP guideline, but it does reflect the underlying business states.

Okay, and the $18 million, so there was basically no impact in the year earlier quarter?

Yes there was. 13 was adopted at the beginning of this year.

Yes. It was adopted after this quarter.

You're not going to give us what the impact was in the year earlier quarter? Can you give it to us what it was last quarter?

Every quarter, Steve, we have a slide in our chart presentation that shows the reconciliation between the U.S. and Canadian GAAP and gives you the impact -- I think it has given you -- I don't have my chart from last quarter, but I think it has given you the impact off ACG 13.

Maybe I'll just ask the question after the call, because I think it's a little more complicated than that.

Yes it, is very complicated. We started to implement it in the first quarter of this year, but there was some impact last quarter as well, which we have footnoted in the supplementary. I'd be happy to pick it up with you after the call.

Maybe one more question and I apologize, this question is maybe a little bit complicated. On Page 9, where you have discussion on the other division the income in that area, net income was down 49m from the same period a year ago, and the explanation is that the decline is largely attributable to refinements to the rates used to attribute earnings on capital our business segments.

This might not be a change, but do you mind humoring me and telling me exactly what that means?

Steve, it's Janice speaking again. It relates to the allocation of capital to the underlying business in the change that we made in allocating or refining that actual allocation to encompass the business diversification.

And so, does this mean that we should expect relative to your previous -- previously, we should expect the lower contribution from other? How should I view this change?

Steve, it's Peter Currie. What we're trying to do is take as many elements out of other that, in fact, connect with the businesses and align them with the business.

Okay, that's good.

To the extent that this element were the ohm thing going on in other, yes. As you know, other tends to capture a lot of other activities. No pun intended.

I apologize for one more technical one, but it's of interest, the variable interest entities. You say in the notes, the financials that you do not expect to consolidate the assets and liabilities of your multicellular VIEs when you take on accounting guideline 15. I just think, actually I guess it's here, U.S. accounting guideline you'll be putting it in. That's pretty interesting. You do have 25 billion in VIEs. That will not have a balance sheet impact?

Yes, that's correct.

That's our option, yes.

Okay, that's interesting. Thank you.

Thank you, Mr. Cawley. The next question from Mr. Rob Wessel from National Bank Financial. Please go ahead.

Good afternoon. My questions are actually quite easy. On Slide 19, you note that from quarter over quarter, total U.S. acquisitions have, you know, profitability has gone from 58 to 76. It's done well. If I go to the supplemental, I think profitability is down 1 million for the U.S. overall. Something has gone down, but isn't attributed in the U.S. to acquisitions that you've made. Can you just give a little more feedback as to what or why it went down?

I think that's the equity derivative?

Yes, a little bit of it would be in (inaud) investments. Chuck?

The equity derivative which is primarily a U.S. business route is down in the quarter.

That would be the bulk of it.

Okay, and the second question I have has to do with Rabobank partial settlement. Are we to infer from this that you're making no statement as to whether or not you'll receive all of it, there's no change in the bank's view? You still expect that the litigation will be 100% successful?

It's Suzanne Labarge. You're right, there are two separate transactions, one is the litigation with a bank and the other was the underlying transaction. We don't think it changes anything with the litigation with Rabobank.

Hence no reserve being booked?

Other than reducing the amount.

Okay, thanks very much.

The next question from Mr. Ian de Verteuil from Nesbitt Burns. Please go ahead.

That's the best pronunciation I've ever heard. Good afternoon. Slight 12 of the pack, it's a question for Jim. Jim, domestic revenues were up five. Everything you've shown here is up more than five. What in the domestic book is down? And then, can you sort of broadly talk about where you think trends are heading on spreads over the next couple quarters?

What has continued to be down in the domestic business is the deposit revenue. We still have some, you know, pretty aggressive pricing, and, you know, compression in that respect. Even though our volumes are up 7.5%, and we've changed our mix somewhat toward more transaction accounts, we're still, you know, we're still kind of biting the bullet there in terms of revenue growth for deposits.

The other thing -- it's not down but it continues to be a disappointment, even though we are seeing some improvement, that's the commercial loan volumes. Our business banking lending is, in fact, trending upward. Five months in a ROE we've had increases in balances, but the commercial book is still a struggle.

We're writing a lot of business, a lot of business in the pipeline. The borrow something not yet occurring to see the kind of growth we would like to see. You know, we've improved our spreads. In particular our Canadian spread has increased both over the last quarter, as well as over last year.

We've, you know, our strategy here is to, you know, use tactical moves to protect our business, but not lead with price. We're going to focus on our spreads as much as we have been doing, but we will respond when the market dictates. So, you know, where they all go depends on the competitive situation, and you know, movements in the bank rate.

I would say, Ian, this is Gordon, that The same holds true across the corporate book as well, where by and large, activity levels are just not as high as one would expect. There's not a lot of business spending and investment going on and therefore draw downs are not what we would hope them to be.

Just a distinction. You said the commercial book isn't come back but business lending and PNC is up 5%. Can you sort of delineate the two for me?

What we call business banking includes very small businesses. You know, those that borrow less than $100,000 or maybe up to $1 million, in fact and up to $5 million we call business banking. Beyond that, are our commercial markets.

Ian de Verteuil; Thanks.

Thank you. The next question from Quentin Brad from CIBC World Markets. Go ahead.

Good afternoon. A couple of questions, just first on the credit derivatives purchased and sold, there was, it looks like, Suzanne, there were some large movements on the sold side. Do you just get a sense of what is happening there?

Why those movements occur quarter on quarter, and then secondly, were there any -- you note that there were no credit, there were no impacts from credit derivatives on credits that are in default, but given ACG 13, are you experiencing, I guess, any net income hits and/or gains as a result of your credit derivative portfolio, which is largely investment-grade related?

I'll let Chuck Winograd answer that second one, because it would have been reflected in his income.

With respect to the sold, I mean that really is just a demand of a question of when things run off, some of it gets sold off or when we've decided to free ourselves up and it depends on demand. So there's not a particular strategy around that one. It's a question of what our opportunities are, what, you know, the demand is at any time and how much we want to participate.

So those would have been rolling off and not being renewed because clearly, you can't cancel them? They would have a finite life and they happened to expire this quarter?

That's right. Or we restyled something for an equal period. That's really it. It's not an active business at this stage.

Okay.

And I would just add in terms of what I would create the accounting conversion, we would hurt much more in the second quarter than in the third quarter. I think there's a small impact in the third quarter. There was a larger plus in the first quarter, a larger negative in the second quarter and I think quite a small negative in this quarter.

Okay, thank you, and then to Jim, I guess, in terms of comments that Gordon made in expenses and getting into the low 50s in terms of the mix ratio, just looking at expenses to revenues, excluding Canada dollar, excluding acquisitions, it looks like there is a positive expense gap or negative expense gap where you're outpacing your revenues. In light of where you want to get to on your next ratio, I guess what additional efforts might there be going on to try and change that and reorient it towards revenue growth so it's stripping expense growth?

I think if you look at the sequential growth in non-interest expense, Q3 of this year over Q2 of this year was 1%. To get a kind of picture of what is the actual run rate, because of the addition over last year of pension costs and benefits and, you know, the additional FTE and those kinds of things, it's 1%.

So if you adjust that for the three extra days, we're pretty much flat on a run rate basis. If we keep that spread of five to one, we'll hit that low 50s over a period of time. Noytion which, we are -- we're going to -- we talked about this a little bit the last couple of meetings we've had with you, you know, straight through processing kinds of initiatives that will help us with our cost structure and get a little more efficient in the way we deliver some of our back office things, I think will help us as well.

And I would say for across the whole organization the same would hold true. I would say that a combination of technology initiatives, which includes straight-through processing initiatives across not just our retail banking business, but all businesses, and a lot of the cross enterprise initiatives that we've talked about in the past, we believe that, between -- the combination of those two provides us some good room across the organization to keep achieving efficiency gains as we move forward, although there's always a timing issue with respect to technology initiatives.

Great, thanks, guys.

Thank you, the next question from Heather Wolf from Merrill Lynch. Please go ahead.

It's Heather Wolf. Two questions. First on U.S. acquisitions, Gordon you were very candid with us last quarter with respect to the amount that you could afford on balance sheet and that you were willing to do in issuing. I'm curious if you could update as to size appetite and also maybe a little bit of color on the M&A market in the States.

Second question, with respect to the retail investor at the Dain Rauscher presentation, somebody commented that they thought it would probably be a year or so before they saw the retail investor really getting back into the markets, and certainly seemed the Dain Rauscher results would indicate otherwise, is the company sort of revising its view on when the retail investor will come back?

Okay, thanks, Heather. I'll answer the first one and then defer to Peter Armenio to comment in the second one. I think, Heather, my answer would be fairly consistent with previous presentations or quarterly comments.

You know, we continue to look for opportunities that are attractive to our strategy in the U.S., which is primarily focused on personal and commercial businesses with a primary geographic focus on the southeast, although, you know, not exclusively with respect to either of those, and we've continued along our path of making sort of small investments that are complimentary and the two that I mentioned earlier, the branches in Florida and the mortgage business that should close a little bit later on in this year are good examples of that, and as you know, we have lots of capacity to continue to do those types of acquisitions.

We also have the balance sheet capacity to make a larger acquisition if, and it's a big if we found an asset that we felt was attractive to us in terms of our strategy, in terms of the cultural fit, in terms of the valuation as well, and you know, we continue to look at that U.S. marketplace in terms of how -- trying to find ways where we can grow more quickly, but we're not going to sort of step off the curb and do something that doesn't make sense in our view at least from a shareholder perspective.

We think with patience and what's going on in the U.S. marketplace that there will continue to be opportunities for us to grow that business, and in the interim, if there are not larger acquisitions that make sense, we continue along our program of opening branches. We've got a program in the Atlanta area. We've got a program in the Florida area. And we're looking at smaller acquisitions that are complimentary to that strategy.

With respect to the U.S. marketplace in general, again, I would say there hasn't been a dramatic change with respect to valuation. I think the big question mark is there's this expectation that consolidation will occur at some point in the United States at the upper end of the marketplace. We think that would be a positive in terms of providing investment opportunities from us but we just haven't seen that kind of activity level yet at the upper end of the marketplace. But certainly, you know, expectation and a lot of people who follow that market feel that it is something that is going to occur in the near future.

Heather, just from the retail side of the comments made earlier, I general comment I would make based on our conversation we had in June when we did the presentation, obviously we try to look at our business from a conservative view. We run on average volumes and when the trade volumes get better, you know, we end up enjoying those. So generally speaking, we kind of project out somewhat more of a conservative view and hopefully when things get better we also enjoy the up-tick.

Specific to Dain, most of the positive change at Dain, the trade volumes at Dain were also good, the ones from Canada from the retailer investor, most of it came from the strong results of fixed income and the lower expenses we've had in the retention costs that have come down and that's where the significant change in quarter over quarter has come from.

Okay, so you're not seeing a significant shift in the retail investor?

You know, I think of it as a general comment, I think the same holds true with respect to RBC Capital Markets. You know, we certainly feel these businesses are positioned well to provide leverage. You know, if and when we start to get a significant pickup in that marketplace, but we certainly have seen some positive signs over the last quarter, but you know, we remain very cautious in terms of having you know, any expectations of, you know, the kind of performance that we were able to experience in the latter half of the 1990s, and 2000. We certainly feel that the, as I said, we have the ability to leverage a significant improvement in that marketplace, but right now, we remain fairly cautious in terms of our expectations.

Okay, great. Thank you.

Thank you. The next question from Miss Susan Cohen from Dundee Securities.

Do you see any risk to the bank's portfolio resulting from the BC fires from the agricultural problems out west?

No. At the moment, we don't. We've done a full review of our portfolio. The good news is, many of our clients are not in the affected area.

The few that are, it's a small part of their operations, and they look as though they will survive this with some pain, about you not an effect on our credit portfolio again, the same thing is true with respect to cattle industry in Alberta. We've got a well diversified portfolio. They seem to be weathering this problem fairly well, and again, we're not predicting any impact, any significant impact on our credit quality.

Thank you.

A second question, if I may, on your subpack, Page 14, in the LDC and securities market value surpluses, the debt securities have fallen very sharply this quarter to 147 million. Can you comment on what's happening there?

Susan, it's Peter Currie. What you see there is a snapshot of our portfolio, and you need to realize that's heavily weighted towards bonds and debentures. Over the quarter, as interest rates have increased, the yields have decreased upon elements of that portfolio, which impact the market value and securities holdings. So the mark to market values are lower during the quarter than last quarter, and certainly the previous few, that reflect the lower market value of these securities.

Thank you very much.

Okay.

Thank you. The next question from Michael Goldberg. Please go ahead.

Thanks very much. You mentioned there was resolution of a line transportation account during the quarter. How much impact on net NPLs would that have had? And also, what about the impact of any other meaningful resolutions, and how much NPLs were sold during the quarter? Thanks.

In terms of that one account, it would probably -- it probably represents about 60% of the amount of the decrease in NPLs. It was a very -- it was I believe $120 million in terms of the resolution of it. There are no other significant impact.

The rest is really sort of spread over a very large number of accounts, where there were either recoveries or pay downs, and again, any trading has been relatively insignificant. You're talking, you know, under the $20 million mark in terms of loan sales. So it's not a large activity. The biggest item is that one account, which was a repayment under the restructuring.

Thanks very much.

It's Peter Currie. I'm just going to go back to Susan Cohen's question on the debt securities. I want to expand on that just a little bit. There's more to that, Susan, in terms of the, where I explained, of course, the one side of the balance sheet, and on the other side, there's a swap transaction as well.

So what we'll do is, I'll formulate a more complete answer on that and get back to you directly. I know you're already queued so you can only hear me. We can go on to the next question, operator.

The next question from Jim Bantis from credit Swiss office. Please go ahead.

Good afternoon. Question for Susan with regards to the specific provisions. While the bank's done a good job in terms of working down the impaired loan book T looks from a forecasting perspective, Susan all provisions have come down below expectation, which is a good sign. But we were already at, it looks like trough levels in terms of 2000, 1999, in terms of the specific provisions as of average loans in the 30 to 40-basis point range. Is there still a structural shift that's occurred in the corporate loan book particularly in the U.S. that would allow us to slip below the trough levels that we're seeing right now?

I mean, it's hard to tell, because what we've had, which I think has been, we've had a wonderful run on the Canadian business loans in particular, where we've had more recoveries there than we've had losses over the last five quarters. So that, you know, that's likely to change as the economy picks up, and as you get back into a normal pattern. So it's very hard to predict at what point.

We obviously keep working on it but also don't want to put ourselves out of business in terms of getting the right risk return. I think we've done a fairly good job.

There may be a little flexibility but it's hard at the moment to exactly pinpoint, given our growth plans, exactly where that would be. I think we've done a good job shrinking and cleaning up our U.S. portfolio so there wouldn't be much pickup left in that portfolio.

Okay, got it. When you talked about the growth plans, does that tie into the pickup in risk related assets this quarter? Are they related to the acquisitions that were made?

I'll let Peter Currie answer that.

Sorry, come again on the [question] I was thinking of something else.

Peter, I just want to follow up. There was a tick-up in terms of the risk related assets this quarter. You know, the bank has been working very hard in bringing those down. I just wanted to see if they were related to the recent acquisition.

No, the recent acquisitions in the quarter, the ones we completed were not really all that significant.

I didn't think so.

To be honest with you, I hadn't noticed a substantial up tick in risk related assets in the quarter.

If I may ask Nabanita Merchant, on Page 20, some of that relates to the balance sheet assets and there's been fairly good growth in the balance sheet during the quarter particularly in the loan categories that Jim Rager spoke about. There was a comment to the off balance sheet financial instrument and that's largely commitments to extend credit over a year. That essentially is where it's coming from.

Okay, got it. Primarily coming from the domestic business on the on balance sheet side, on the retail side?

It's Peter Currie. I guess what I was looking at, Jim, the trend over the last eight quarters and it's been in the 168 to 170 range, you know, oscillates a little bit but not much, in that range.

Great, thank you.

Thank you, Miss Merchant, we now have the time of 1:58. I would now like to turn the meeting back over to you.

Okay, well thank you very much for your participation. I know that you have a call with another bank at 2:00. We didn't want you to get late for that. So we thank you very much again for your participation, and we look forward to speaking to you later, if you have any follow-up questions. I know you'll be busy over the rest of the afternoon, but I will be here through a good part of the evening. If you want to give me a call I'm at 416-955-7803. Thank you very much again. Bye-bye.

The conference has now handed. Please disconnect your lines at this time. Thank you for your participation and have a nice day.