Royal Bank of Canada (RY) 2004 Q1 法說會逐字稿

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

Good afternoon everyone. Welcome to this conference call regarding our first quarter 2004 results. The call will last until 3:15 PM to allow sufficient time to take your questions. We will begin the call with an overview of our results by Gordon Nixon, President and CEO, then a discussion of personal and commercial banking results by Jim Rager, Vice Chairman. Following that Peter Currie, Vice Chairman and CFO, will provide more details of our performance. And Suzanne Labarge, Vice Chairman and Chief Risk Officer, will discuss asset quality trends. We will then take your questions. Also with us here to take your questions are the other members of our group management committee, Elizabeth Bigsby, Senior Vice President Resources and Public Affairs, and the four Vice Chairmans responsible for the four remaining business segments, Peter Armenio from RBC Investments, Chuck Winograd from RBC Capital Markets, Jim Westlake, RBC Insurance, and Marty Lippert from RBC Global Services. Marty is also our Chief Investment -- Chief Information Officer. Our head of Finance, Jennifer is also with us here this afternoon. I will now turn it over to Gordon Nixon.

Thank you very much, Nabanita. And good afternoon everyone. I'm pleased to report another quarter of solid results reflecting improved credit quality and good performance from all of our businesses with the exception of our banking businesses in the United States, which Jim Rager is going to talk about during his comments.

As shown on chart 4 and 5, first quarter net income was 793 million, up 3 percent from a year ago. And diluted earnings per share were $1.19, up 8 percent. Under Canadian GAAP net income was 790, up 1 percent, and diluted earnings per share were up 5 percent at $1.18.

We also announced this morning that we are increasing our quarterly common dividend by 6 cents or 13 percent effective the second quarter. We're also raising our dividend payout ratio to 40 to 50 percent from 35 to 45 percent in recognition of the importance shareholders place on dividend income. We're also continuing to generate significant capital internally. And our capital ratios remain above our goals and continue to increase.

During our first quarter results -- turning to our first quarter results, you can see on chart 6 that we were impacted by two significant items. 150 million reversal of a portion of the general allowance for credit losses added $97 million to net income. Suzanne Labarge will discuss this in more detail later on.

Our results were also impacted by the previously announced settlement of the dispute with Rabobank relating to the US$517 million swap transaction, which net of related reductions and compensation and expense and taxes, reduced our net income by C$74 million this quarter.

As shown on chart 7, our results also included four other items, which in total reduced revenues by approximately $2 million. You can see from chart 8 that the 10 percent or 19 percent appreciation of the Canadian dollar relative to the U.S. dollar over the last 12 months reduced net income by $20 million and diluted earnings per share by 3 cents. Peter Currie and Suzanne Labarge will discuss our revenue expense and asset quality performance in a couple of minutes.

As shown on chart 10, our performance in the area of ROE portfolio quality and capital ratios was strong in the first quarter, with our 18.1 percent ROE at the midpoint of the target range, and allocated specific provision for credit loss ratio well below the target range for the year, and capital ratios above the medium-term goals of 8 to 8.5 percent for Tier 1 capital and 11 to 12 percent for total capital.

Despite strong growth in capital markets related revenue, our revenue growth after excluding the $240 million impact of the stronger Canadian dollar was only 2 percent below the targeted range as lower interest rates have further compressed margins. Expenses increased by 9 percent reflecting the Rabobank's settlement cost, higher pension and postretirement benefit costs, and higher variable compensation expenses.

The performance of our business segments is shown on chart 11 to 22. In the interest of time I will focus only in chart 11 which shows the very strong performance in four of our five business segments which recorded double-digit earnings growth in the quarter. The strongest earning growth was recorded in our Capital Markets businesses, RBC Investments and RBC Capital Markets.

Net income at RBC Investments increased by 35 percent from a year ago due to higher earnings in the U.S. and Canadian full-service brokerage business, Canadian self-directed brokerage and Canadian asset management operations, reflecting improved revenues from stronger equity markets and continuing focus on managing costs. Net income at RBC Capital Markets increased by 29 percent primarily due to a much lower provision for credit losses.

Net income at RBC Global Services and RBC Insurance grew by 19 percent and 13 percent respectively. As for RBC Banking the 4 percent earnings growth earnings reflects the weak performance in the U.S. Earnings in earnings in Canada rose by 76 million or 23 percent, reflecting the reversal of a portion of the general allowance for credit provision, higher volumes on deposits and loans, which were more than offset -- that more than offset the narrow interest margin, and lower of noninterest expense resulting from effective cost management.

As I said earlier, we are disappointed with RBC Banking's U.S. earnings of 6 million in the first quarter, which Jim Rager will talk about. He will also discuss some of the steps that we are taking that we believe will improve the performance of these operations.

Turning to our U.S. operations, as shown on chart 23, our U.S. operations generated 27 percent of total revenues in the first quarter of 2004, down slightly from the same period a year ago, reflecting a reduction in the translated value of U.S. dollar-denominated revenues due to the significant appreciation of the Canadian dollar relative to the U.S. dollar.

As shown in chart 24, three of our business segments recorded higher earnings in the U.S. despite the stronger dollar, which reduced the value of U.S. dollar-denominated earnings. RBC Investments recorded particularly encouraging results with earnings of 32 million, up 19 million from a year ago. The improvement was largely due to the stronger performance in the full-service brokerage business and a $12 million decline in retention compensation costs, as shown in chart 25. The decline in earnings at RBC Capital Markets largely reflects costs associated with the Rabobank settlement.

Our number one priority for the U.S. is returns, and expansion if any will be very focused and geared to improving distribution in what we believe are high-growth markets by a branch opening, as an example. I would now like to turn it over to Jim Rager who is going to discuss RBC Banking results.

As you can see on chart 12, net income in Q1 for RBC Banking was $429 million or up 4 percent from the same quarter last year and up 13 percent from the fourth quarter of 2003. Our return on equity of 24.5 percent was up considerably over both periods.

First of all, I would like to discuss the performance in Canada. As shown on chart 13, Q1 Canadian revenues were up 1 percent over a year ago. We had very good volume growth in just about all lines of business. Residential mortgages were up 10 percent with strong performance from our specialized mortgage sales forces, combined with new product offerings, and no down payment mortgage, and an offering making it easier for the self-employed to pay mortgages.

Personal loan volumes were also up 10 percent. Excluding the student loans in our portfolio that are running off, these personal loans were up 15 percent in large part due to continued success of our secured Royal credit line product.

Credit card balances were 16 percent higher, attributable to proactive credit limit increases, balance transfer programs, strong new account acquisition, and increased client awareness of the RBC Rewards Program and our Avion card. Small-business banking loan volumes for the first time in awhile were up 4 percent over a year ago, reflecting solid growth in our small and medium-size enterprise segment.

Finally, personal business deposit volumes were up 7 and 8 percent respectively, in part due to the success of retention efforts focused on registered investments, good response to our VIP Service package, and the new Business Essentials account.

Our Canadian market share position as of November 2003 is shown on slide 14. This is the most recent information available and as compared to our position a year earlier as of November 2002. Overall we made good inroads in strengthening our marketshares. Residential mortgage marketshare was up 14 basis points. Our personal loans and credit card marketshare was up 16 basis points. Our total personal deposits and mutual fund market share was up 27 basis points. And our business deposit marketshare was up 33 basis points.

As seen on chart 15, continued spread compression in the Canadian market largely offset the volume increases I just detailed for you, resulting in a net interest income increase of only 1 percent for our domestic banking franchise. Our Canadian net interest margin was down 20 basis points from a year ago and 2 basis points from last quarter.

RBC Banking's overall net interest margin in Q1 was down 21 basis points from a year ago due to the above-mentioned domestic spread compression, higher domestic mortgage breakage costs, and lower returns on RBC Centura's investment portfolio, as the proceeds of maturing investments were reinvested in higher quality, lower yielding instruments.

Our U.S. net interest margin was down 27 basis points from a year ago and from last quarter. Finally, with respect to NIE in Canada, our costs were down year-over-year reflecting very strong control of discretionary expenditures and the benefits of some of our straight through processing initiatives.

Turning to the U.S., as Gordon mentioned, we are disappointed. We continue to be disappointed in the U.S. banking results. And as I will discuss with you, we have identified the key reasons why the performance is not up to our expectations and we have taken concrete steps to improved earnings. We do anticipate better results.

First of all, let me look at the revenue performance in the U.S. As seen on slide 16, U.S. revenues were down 27 percent from a year ago reflecting the stronger Canadian dollar, significantly reduced RBC mortgage origination volumes which were down 52 percent from a year ago, lower returns in RBC Centura's investment portfolio, and the hedging costs in RBC Mortgage. If we eliminate the exchange rate impact, U.S. revenues denominated in U.S. dollars in Q1 were down 13 percent from a year ago.

During the quarter we saw the successful integration of Sterling Mortgage, the acquisition of 13 branches from Provident Financial, and the opening of 11 de novo branches. Organic growth in commercial loans, consumer loans and deposits on a U.S. dollar basis, excluding these acquisitions, was 9 percent for personal loans year-over-year and 4 percent for business loans. If I include the acquisitions, these figures were 19 percent and 9 percent respectively. Furthermore, revenues on a U.S. dollar basis were up $15 million over Q4 '03.

As indicated on side 17, we're taking a number of actions in our U.S. operations to enhance results. First of all, let me talk about RBC Mortgage. Overall the results this quarter for RBC Mortgage, while disappointing, reflected some progress in returning this business to profitability. Although origination volumes were down over cyclically high levels a year ago, profit margins per unit was up. We are continuing to clear the inventory backlog that had built up in our warehouse following the refinancing boom last summer.

As you know, as we talked about last quarter, we were unable to process and sell our mortgages into the secondary market quickly enough, and that created a large backlog resulting in additional hedging costs. Although we are disappointed, we are not able to clear that backlog as quickly as we had hoped last quarter. We are working very hard to do so, are making a lot of progress. And we expect to have that cleared prior to the end of the second quarter of this year.

Although RBC Mortgage is still incurring expenses from the turnaround of its warehouse portfolio, and we have made sure that we have enough resources available to do that, it has made considerable progress on NIE reductions despite the addition for a full quarter of Sterling's expense base. For instance, there was a 17 percent quarter over quarter reduction of RBC Mortgage full-time equivalent staff reflecting the slower level of activity. Were not for Sterling's Nielsen, expenses on a U.S. dollar basis would have fallen 16 percent over last year.

Overall, how do we expect to improve our performance in the U.S. going forward? First of all, we are undertaking cost reduction activities in both Centura and in Mortgage that are both in full force as we speak. We expect to have a positive impact of the Sterling, Admiralty and Provident acquisitions, as well as from the de novo branch expansion, and we are working very hard to insure that we do so.

RBC Centura is leveraging the recently launched Snowbird Package which includes an RBC Mortgage offering and is implementing a mortgage anchoring program to insure that we build on those customer relationships. Centura is also rolling out a home equity line of credit, or HELC program, throughout the Southeast. Personal loan growth as of -- during the last three months as a result of this roll out is up by about 4 percent. We are also repositioning the investment portfolio for higher interest income, still with a lower risk profile than RBC Centura had prior to the merger that we undertook with them.

Finally, continued loan growth and through bringing new branches on-line we think we can improve our revenue base even in this low interest rate environment. Increasing interest rates would enable us to accelerate this process.

As I said, our Canadian business is doing well. Volumes are strong. Our marketshares are up. And we are managing our costs very well. Margins remain a challenge in this very low rate environment, very competitive environment. And we hope to see some relief in that respect going forward. We're committed to the U.S. market. And improving our banking earnings in the U.S. is of critical importance to us. We have plans in place to do so. We expect to see some improvement.

It is Peter Currie here. Good afternoon everybody. Turning now to our revenue performance you'll note from chart 28 that total revenues were $4.2 billion for the first quarter. That is down $140 million from year ago. Noninterest revenues were 60.8 percent of total revenues compared to 60.5 percent last year.

Chart 29 shows that the significant appreciation of the Canadian dollar relative to the American dollar reduced the translated value of our U.S. dollar-denominated revenues by $240 million. Were it not for this, revenues in the first quarter would have been up 100 million or 2 percent from a year ago.

Looking at net interest margin, you'll see from chart 30 that it was down 20 basis points from last year, reflecting significant growth in low interest yielding assets such as securities at RBC Capital Markets, and deposit spread compression in RBC Banking in Canada due to even lower interest rates and lower returns from RBC Centura's investment portfolio, as has been mentioned previously.

As shown on chart 31, first quarter noninterest revenue was down $74 million or 3 percent from last year, with $180 million attributable to the stronger Canadian dollar. Capital market sensitive revenues were up substantially. Securities brokerage commissions rose $77 million. That reflects higher client trading volumes due to improved equity market conditions, as well as underwriting and other advisory fees which are up $51 million, again reflecting higher equity underwriting. Mutual fund revenues are up $33 million which displays higher assets under management. And investment management and custodial fees are up $22 million.

However, trading revenues were down $103 million as equity grew to trading revenues declined from the record levels a year ago, and money market trading revenues also declined. I would like to point out though that when you include trading revenues in net interest income, total trading revenues were only down $46 million.

The decline in other noninterest income is partially explained by the factors on chart 7, as well as the decline in the fair value of nontrading to revenues for which hedge accounting was not permitted.

As shown on charts 33 and 34, noninterest expenses were up $222 million or 9 percent from the first quarter of 2003. The increase was largely attributable to the costs associated with the Rabobank settlement, a $27 million increase in pension expense, and a $35 million increase in variable compensation costs. Partially offsetting these increases was a $28 million reduction in communications costs, and a $16 million reduction in professional fees.

Now we will move briefly to the balance sheet. As shown on chart 35, and in accordance with FIN 46R relating to the consolidation of variable interest entities under U.S. GAAP, of course, on January 31, 2004, we included in our consolidated balance sheet assets owned by certain multiseller asset-backed commercial paper conduit programs that we administer. To avoid overstating the growth in the loan categories impacted by FIN 46R, we have excluded these amounts in the analysis that follows on the following chart.

You'll infer from chart 36 that we registered strong growth in our consumer loans over the last year of 7 percent, with personal loans up 9 percent, residential mortgages up 7 percent, and credit cards up 4 percent. Business and government loans declined 2 percent, reflecting our deliberate effort to do reduce the size of our corporate loan book in favor of relatively lower risk consumer loans. We also registered gains in personal deposits which were up 4 percent from last year.

As shown on chart 37, compared to year ago our Tier 1 capital ratio increased by 10 basis points to 9.3 percent, whereas our total capital ratio increased by 20 basis points to 12.9 percent. Our Tier 1 and total capital ratios in the first quarter were reduced by 27 basis points and 33 basis points respectively for the two reasons noted on this chart. That is on chart 37.

You'll see on chart 38 that we generated over $480 million of capital internally during the quarter. We used a portion of this to repurchase our common shares. And as shown on chart 39, we repurchase a total of 1.5 million common shares at a cost of $94 million during the quarter. There is a balance of 17.6 million that can be repurchased up to the expiration of the current share repurchase program on June 23rd 2004.

In terms of our quarterly common share dividend, as Gordon Nixon mentioned, we announced an increase of 6 cents a share to 52 cents in the second quarter. Our dividend payout ratio was 38 percent in the first quarter, and our new payout ratio goal is 40 to 50 percent.

That concludes my summary remarks. I will now turn it over to Suzanne Labarge, who will discuss the loan portfolio.

Thank you, Peter, and good afternoon. I will now take a few minutes to provide you with an update on RBC Financial Group's asset quality. Chart 41 provides you with the current breakdown of our loan portfolio by sector. As you can see, total loans increased 181 billion this quarter, with business and government continuing to comprise 36 percent of the loan book, down from 39 percent a year ago, largely due to the strong growth in our domestic retail portfolio.

The large increase in our loan book is largely due, as Peter mentioned, to consolidation on our balance sheet of our Canadian securitization vehicles under the new accounting roles. Our business and government loan portfolio still remains well diversified with year-over-year reductions to sensitive sectors.

Turning to charts 42 and 43 you can see that nonaccrual loans increased by 51 million in the quarter and are down 578 million or 24 percent from a year ago. The quarterly increase is mainly due to two U.S. energy accounts that were classified as impaired in the quarter.

Domestic consumer nonaccrual loans declined by 2 percent in the quarter, and are now 13 percent lower than this time last year. A 5 percent decrease in domestic business nonaccrual loans is mainly attributable to the partial settlement of a Canadian transportation account. The 105 million increase in the USA was largely driven by the classification of the two U.S. energy accounts as nonaccrual this quarter.

Charts 44 and 45 show that our specific provision for credit losses continued to improve and is down $15 million compared to last quarter, and down $78 million from a year ago. This reflects the continued non-credit conditions, as well as recoveries from loans written off in previous periods. As you can see, the general provision reversal of $150 million in combination with the low level of specific PCL has resulted a net reversal of $28 million.

As shown on chart 46, the total general allowance decreased by 143 million in the quarter. This decrease is made up the 150 million reversal of the general allowances, partially offset by an increase of $6 million due to RBC Centura's acquisition of branches in Florida. The $150 million reversal mainly reflects changes in the composition of RBC loans portfolios and general improvement in the credit quality of all of our portfolios.

Chart 47 demonstrates the continued stability of our Canadian consumer loan portfolio, with provisions for credit losses to average loans holding at 34 basis points quarter over quarter, and up 1 basis point from a year ago.

Chart 48 also supports the improvement in our credit quality as the net charge-offs for the quarter were $118 million compared to 211 million last quarter and 140 million a year ago.

Chart 49 indicates that we held credit protection totaling 696 million and sold 447 million of credit protection as of January 31. The level of protection held has decreased by $400 million or 36 percent year-over-year.

Charts 50 to 53 provide an update on our exposure to more sensitive sectors. As you can see, we reduced our exposures in each of these sectors this quarter. Charts 54 and 55 attest to our continued solid trading performance.

In conclusion, nonaccrual loans continue to be well provided for. Exposures to challenged sectors continue to be managed and strategically reduced. The credit quality of our consumer lending portfolio remains stable. And our trading performance remains solid.

At this point I would like to turn the call over to the conference operator so we can begin the question and answer period.

(OPERATOR INSTRUCTIONS). Rob Wessel with National Bank Financial.

I just actually have three quick questions. The first is on Prism, or RBC Mortgage. When you bought this back in the year 2000, the year before you were generating about 7.7 billion, or the company before you bought it, 7.7 billion of mortgage originations for a year. And now you're doing 3.5 billion in the quarter, and you have done up to 8 billion or 7.7 billion in a quarter. I guess what I want to know is I am trying to get a sense for how successful this acquisition was since you bought it? Has it generated a significant amount of earnings because it looks like is maybe four times bigger than you initially -- it looks like it has grown by about 400 percent and now is getting back some of that growth. Can you give us a sense for how this acquisition has done since day one rather than say the last three months?

Sure. We bought this in the middle of 2000. And of course that first year we had acquisition expenses related to it. But if you look at the 2001, 2002 and 2003, up until the last quarter, and even including the last quarter, if we looked at the earnings that we generated there compared to the business case that we had for that period of time, even including putting the disappointing performance in Q4 of last year, we were meeting most of our business case targets.

Just a quick follow-up. You paid about 100 million or so, 115 million. Would you have recovered a significant amount of that purchase price over the three years, give it had such significant growth?

Yes.

Care to elaborate?

No.

Two more very quick questions.

As I said, until the fourth quarter of last year we were very pleased with this thing. It was performing well. There were operational issues there that we were trying to get to. We didn't because of all the volume growth, and that caught up with us. But it is, we think, once we get restored going to be a pretty good contributor.

It is Gordon Nixon. I think it is important that we acknowledge the good growth that we had was one of the reasons that we had operational issues. To a degree we let it almost grow too quickly because the market was so strong. And I think from an operational perspective it didn't ensure that we kept pace. And so the economic results -- we're looking spectacular in those early stages. But there's no question that we should have been more diligent in terms of ensuring that from an operational perspective we were where we should have been given that growth rate.

I'm a little confused on slide 24 in the investor presentation. The contributions from the U.S. RBC Capital Markets is down 71 million, or down to a loss of 71 million, and I just want to make sure I understood your comments earlier, Gord, which was that the decline was almost wholly related to the Rabobank. Are we to assume that earnings would have been roughly flat were not for Rabobank? It is a little unclear from --.

Roughly, Rob, and Chuck can elaborate on this. But this is the one business where it is very difficult to look at it purely on a geographical basis because we really -- we have tried to emphasize in the past, we really run these businesses on a global basis. So where business is executed, where business is booked, what the various trading books are has a big impact in terms of where profitability shows up from a geographical perspective. The answer to your question is roughly, yes. It would have been about that number.

Flat from the previous quarter? Not from Q1 '03?

Is that fair, Chuck?

Flat from the previous quarter. It is almost as if -- you know, we have told you what our Rabobank cost was. We almost pay no attention internally to the numbers that show up here because we don't run our business that way. We run it with many other issues in mind. And basically, it is just not a good way of running the business.

For example, the business where we have had difficulties in the past in the U.S., which is effectively the institutional advisory and underwriting businesses, that we have been working on for the last number of years, actually made money in the first quarter -- made some money in the first quarter. And so the first quarter was actually better in a number of business in the U.S., but it wouldn't necessarily show up in the books that way in terms of the way we run the business.

Fair enough. I just wanted to make sure there wasn't some other large item driving the earnings down. And the final question, sorry, just to be quicker. The provisions that you reported this quarter were well below your stated guidance. Some of the banks have brought their guidance down this quarter. Is there any contemplation for you guys doing the same thing?

Well, I guess we have never provided guidance in the past, so we will continue not to provide guidance in the future.

I thought your target range isn't essentially guidance, is it, between 35 and 45?

No, it is our target -- it is a target range. We have never provided guidance, and we have never shifted or changed our range during the year.

Steve Cawley with TD Newcrest.

A question in regards to the Canadian retail division. I prefer to look at your earnings X gains. And so if I X out the 35 million gain on the Merchant, and if I X out the general allowance release, I get to a Canadian division profitability for retail of 360, and that compares to 384 last quarter. Have I got these numbers right? And if I do, can you explain why there's a big discrepancy?

Yes. First of all the Merchant acquiring gain, as we refer to as the Moneris, was in the U.S. That was the business of Centura that was sold to Moneris. That gain was pretty much -- even more so, more than offset by a number of smaller onetime items that we also took in the U.S. that offset that gain pretty much equal -- on an equal basis. So that, I hope, clarifies the Moneris piece of what you said.

If you look at Canada, the growth in net income after-tax, including the reversal of the general, was about 22.5 percent. If we exclude the reversal of the general, then earnings growth in Canada was about 8 percent, 8.5 percent.

Are you saying year-over-year with that 8 percent?

Yes.

And quarter over quarter?

Flat.

And so that would mean then that U.S. retail, excluding the gain on sale, would have been something like -15?

If you don't expect that there were a lot of non-recurring negative items in the U.S. that we put against that gain on the sale. But I submit to you that there were those. Those are non-recurring. And we - in fact, they more than offset the amount of that gain.

It is Nabanita Merchant. If I may just jump in. We really don't disclose our Canadian earnings in any business segment. We give you the total earnings. We give you the U.S. earnings. In the case of banking, the difference -- a lot of it would be in Canada, but they do have earnings (multiple speakers) as well.

We have the Canadian in the Caribbean, yes.

If you turn to the disclosure in our press release on banking on page 8 of the earnings release, we mention that of the 76 million increase in banking earnings, 49 was because of the reversal of the general allowance. So the difference of $27 million is basically what it is. And it is hard for you to figure out what the percent growth is because you really don't know what the Canadian earnings are to begin and end with. But 27 million is essentially the net growth in earnings, bearing in mind there's been very good growth in volumes, but that has been largely offset by a reduction in margins, as Jim explained earlier on.

Jim, a second question for you. Last quarter the Sterling acquisition hadn't closed and I've got you saying here that contribution of revenue for Sterling was maybe 6 or 7 percent of the total. If I take a look at that 3.5 billion of origination volume in Q1 '04, how much of that would have been Sterling?

Sterling was about -- I think it was probably about 1.5 billion.

When you bought Sterling, were you anticipating this dramatic fall off in mortgage origination?

When we did our analysis of that acquisition we assumed kind of a 40 to 50 percent drop this year. Yes. Less important to Sterling, remember, because they're less involved in refinancing activities as opposed to new home purchase mortgages. So we thought that there would be some mitigation of what was expected to be a significant drop due to the refinancing volumes dropping off.

One last one. On the investment banking side of things, you don't seem to have had the leverage that some of the other banks, like certainly yesterday both banks had standing leverage to capital markets. You don't seem to have had it as much in this first quarter. Was there anything unusual beyond what you have announced in the quarter that would have reduced earnings?

No. I have only had a brief look at the others and our revenue growth and others seem consistent. I think the one issue that we have is that we have had very stable performance over a period time. So in terms of the markets we have been strong in, the fixed-income markets, we did very well in the first quarter. But we have been doing very well in them for a quite prolonged period.

Sorry, can I just clarify, Steve, the Sterling number was not 1.5. It was 1 billion in the quarter.

Quentin Broad (ph) with CIBC.

A couple of things if I could. First on the Rabobank settlement, if you can help me understand what the actual number was, as you have clouded it, I think, with the settlement before the reduction in compensation expenses. I would like to understand perhaps what the pure Rabobank number is and then what the expense is so that we can drive perhaps a better run rate for both of those numbers going forward? Because it impacts obviously the other expense line as well as the comp line it seems like.

Clinton, this is Suzanne Labarge. Unfortunately we've got a confidentiality settlement with Rabobank that would not allow us to float that information to you.

Then the $74 million that you're reporting in the other expense line on a go forward basis, we shouldn't simply be thinking of that on a pre-tax basis. We should be looking at it more. And then on your variable comp line that is to suggest that it would be higher in this quarter than you're reporting otherwise?

Again, I can't help you with the Rabo comment, but I can say that there was a variable comp increase -- there would have been a variable comp increase greater because we in fact made good money in other businesses X the Rabo impact.

The variable comp was higher this quarter for the business. The challenge I think, Quentin, is that the settlement is obviously confidential and there is some complexity to it. And clearly our conclusion was the best way to disclose it was to disclose what the impact was going to be with respect to our financial statements this quarter because there are complexities to it.

Sorry to put -- on the variable comp line, the line that you are reporting at 546, would be some number. And we can guess -- take guesses at what it might be, but some number higher than 546 without the Rabobank agreement.

Yes.

That's a fair statement.

Then secondly, just on credit derivative gains, I think I didn't find a commensurate table that you usually put in a slide pack showing the credit derivative gains over time. I'm trying to remember how in the past you have treated the concept of these credit derivative gains of 29 million.

We've only put them in when we have actually had a gain on that related to a credit loss. We have not had any where we have had -- none of the provisions we have taken now, none of those accounts have been covered by credit derivatives, so that is why there's nothing there this quarter.

So that was one that you sold protection for. That was a gain drive from selling credit protection to someone?

Quentin, if you look at the earnings -- it is Nabanita -- if you look at the earnings press release on page 14. That is where we lay out the provision for credit losses in the quarter, the previous quarter and a year ago. And that is, I think, where you would see the credit derivative gain. And you see a $14 million relating to the first quarter of '03, but there really isn't an amount for this quarter.

But you do report that there was a $29 million credit derivative gain, correct?

Where do you see the 29 --?

Sorry, then I picked up the wrong spot. Thank you. And then just finally on the U.S. side. In your comment, Jim, on how much Prism may have contributed over time, it looks like Centura, if Prism has generated effectively your investment, or some number slightly less than your investment over time, Centura looks like it is still struggling in a significant way to generate returns on capital that are adequate.

You talk about getting it back on the rails. But is there something that is going to happen, and perhaps this is the same question I asked on a number of occasions to get it more than back on the rails but generating a return on invested capital that is adequate?

We have to do a number of things. Quickly replace some of the revenues that we're losing from the way we have repositioned our investment portfolio. I think we're getting good organic growth that over time will get U.S. there, especially if spreads turnaround to some extent.

We have to get the mortgage business which is pretty integrated in many respects with RBC Centura, moving again so that we can get leverage off of that within the Centura footprint. We have to continue with the organic growth, HELC (ph), and that sort of thing that we have been -- that we really just started to launch.

Also we have to -- we're going to more tightly manage our costs there. We have had infrastructures to build. We've had to put in to our standards compliance and that sort of thing. We've got to make sure we stay focused on all of that, but have a tighter rein on the costs that we're incurring to directly lead Centura and in the way we support RBC Centura. I think a combination all of that, and a slight repositioning of that investment portfolio will get us -- then we got to really figure out how to grow it. That is when we will start to get the returns that you are looking for.

What type of time line do you think you will be able to get these things implemented? Is this a fourth quarter, a couple of year?

I remember the statement I made to you at the end of the last quarter, and I would rather not give you a time line at this point. I think we're working hard to get there as quickly as possible.

Let me give you a slightly different response. It is Gordon Nixon. Our top priority is operational execution. And we've had a business plan which has been revised and brought to our executive committee which will, again subject to proper execution, will start to show improvement in a shorter as opposed to a longer time frame.

So I think priority number one is to ensure that we start to meet the operating targets that we have set for ourselves, which I fully knowledge we haven't with respect to that. But I wouldn't take away from the fact that with respect to the areas of focus in the U.S. we are gaining some ground in terms of increased market share. We're growing our branch network. There's a cost associated with all of that. And unfortunately banks don't trade on patience when it comes to those dollars invested. I think longer-term, we think we're building an infrastructure in an attractive part of United States that is going to allow us to generate reasonable returns from those investments. But it doesn't take away our short-term responsibility, which is to make sure that we hit the operating targets.

Heather Wolf with Merrill Lynch.

Three questions for you. First, I am wondering if we can get more information on the investment portfolio? And specifically were there any securities in that portfolio or elsewhere there were used to hedge the decline in mortgage origination?

Heather, it is Peter Currie. The answer to that is no. This is a discretionary investment portfolio in Centura. The composition of the portfolio changed as investments rolled off at a relatively higher yield and they were replaced with lower yielding and higher quality assets. And that had an impact on the revenue generated by the portfolio. We're taking steps to revisit the balance of that right now, but entirely in line with our overall risk appetite.

Just a follow-up on that. I'm confused. Is it just the investment risk that is causing the strain, or did you purposely reposition for lower yielding, lower risk securities?

The answer, Heather, is both. We purposely repositioned it as we reinvested. So it wasn't coincidental. It wasn't two discrete decisions. They are tied together.

Second question. It looks as if Dain Rauscher was flat quarter over quarter, which seems to be different than some of the results that we're seeing coming out of the other Canadian banks, and specifically their U.S. operations. Can you comment on that?

Heather, it is Peter Armenio. Just as you might know in the U.S., in Dain Rauscher we have both the fixed income business and the private client business. And in reality what has happened is the shift between the two has made them look somewhat flat. But ultimately our private client business has grown the way it should be growing. And the fixed income business quarter over quarter was hurt in the investment banking side of things. It looks like it has leveled off, but the right businesses are sort of kicking in in terms of those volume businesses around the retail side of it, which is what you would be comparing to, I guess.

And the last question is on the suggested improvements that you have for the U.S., it looks as if you can divide them into four categories, which is cost and processing efficiencies, repositioning the mortgage business, repositioning the investment portfolio and then growth initiatives. It would seem to me that the growth initiatives won't hit for a little while yet. But in terms of the other three, I'm a bit confused in terms of how quickly you can get those into the bottom line? Can you give us any color on that?

The cost and the process improvements, we are full steam ahead in both of those areas, right now, both in Centura as well as in Mortgage.

So we could see those as early as next quarter potentially?

I hope so. The investment portfolio, I will turn it over to you, Peter, to respond to that.

As I mentioned, Heather, a minute ago we have taken steps to revisit the composition of that investment portfolio. I'm got not going to give you a time line in terms of when you see a turnaround from that, because it does take some time to get that done. But we're certainly treating it, as Gordon and Jim have both said, we're treating it on an absolutely urgent priority basis.

And then repositioning of the mortgage business to more purchase owned product, higher margin origination, better supported by the technology that Sterling had when we acquired them. There again the number one job in the mortgage business now is get the cost down and clear up that backlog. As we do that, we're integrating both sides of the business, mortgage with Sterling to that Sterling model.

And I would say that within the next six months we will have accomplished that. Then we have to see how volumes change, what happens to the interest rates in the U.S., how the refinancing may pick up or not to be able to predict where that will put our earnings. But we're going to get the platform set up and the cost down and improve the processes as quickly as possible.

Ian de Verteuil with Nesbitt Burns.

Just to be beat a dead horse here. Jim, the issue on clearing the backlog, I'm not as familiar with the U.S. mortgage book as maybe others may be. When you talk about you are having sort of 3.5 billion of mortgage originations in the quarter, do you still have like 3 billion on the books that still has to come off, or what do we mean by backlog, and what do you mean by that?

Let me see what we have here. We have about at the -- I'm not sure about the number I have here, Ian, so let me look at that, and we will get back to you in some way.

Because on page 19 of sub pack, they give these statistics on mortgage-backed securities retained and mortgage-backs sold. And it looks like is about 3 billion retained, and that looks unchanged over the past while. If I understand it, you generate these things. You put them into mortgage-backs, and then you have to get them off the balance sheet.

Okay so like in the first quarter -- sorry, in the fourth quarter of last year, we did about $6.5 billion of origination. A lot about is what we're talking about. That gets worked through the system and sold as we do another 3.5 billion in the first quarter of this year, which has to be processed as well. I'm not sure of the exact way that is flowing through and how much we have left, but I can find that out. Nabanita, do have some answer to that?

A couple of -- it is Nabanita, if I may add a couple of things. One, the page 19 sub pack that really has nothing to do with RBC Mortgage. That is really our own -- the securitizations that we're doing in Canada. If I may just try and explain a little bit the correlation between that $3.5 billion and what you are trying to figure out how much might be in the amount that is what we call in the warehouse, i.e., waiting to be sold. The way it works is we originate the mortgages. They generally stay on our balance sheet from anything from 30 to 90 days. At that point in time they're packaged and sold into the secondary market. The amount that is in the warehouse waiting to be sold really doesn't necessarily have a correlation with the 3.5 billion right now that we may have originated in the quarter, because it depends on when the quarter that was originated.

When in the quarter and how much is left from last quarter.

Right.

So I say there is -- it is tracked very closely by the secondary market people in RBC Mortgage. I just don't have that detail with us. We can get back to you with that.

Michael Goldberg with Desjardins Securities.

I have a couple of questions. And I guess I'm going to stick with the mortgage side for a second on one of them. In the fourth quarter you indicated that elevated hedging costs for RBC Mortgage reduced earnings by $40 million. Was that a factor again this quarter? And if so, by how much? And then I still have a question on slide 31, but why you cover this one off first?

I think last quarter we said that we had that cost in the business related to a number of things, most importantly hedging cost. But there were other things as well that have to do with reserve that you take in various parts of your portfolio, etc. This quarter there was significant improvement in all that so that we did better in the business in spite of the very much lower volumes that we originated. And in fact the hedging costs -- we call the roll costs -- if you don't sell the loans out of your warehouse by the time you expect to do that, you have to rehedge those amounts. And there is an additional cost there. So I would say that in this quarter that was about $10 million.

My other question has to do with slide 31 in the presentation. And it is about that other number that you ran over fairly quickly. This is where you've got $139 million sequential decrease in that line item, of which you said slide 7 items were a factor. And those look like they amount to about $32 million. What is the other 100 million roughly?

You're comparing to last quarter, Mike?

Yes.

I think we are going to have to look into that, Michael, and get back to you.

Michael, it is Peter Currie. We will give you a call back on that.

That's great. And I have one other question. I understand the retention program in Dain is now just about over?

Michael actually -- it is Peter Armenia again -- from our side of the business we're basically going to be over in the Dain Rauscher this year, and we're going to be over in the Tucker Anthony next year.

Have there been any effects in terms of attrition that have started occurring?

Actually no, not at all. It is quite encouraging. This is coming to the tail end of the retention so it becomes a little bit less of a factor at the end of the day, whether you're going to stay here or go somewhere else, but it has been quite encouraging. We've had quite a few net gains in terms of people coming over versus losing people. So it is good news for us.

Susan Cohen with Dundee Securities.

Perhaps if you would be kind enough to disseminate the other other number, not just to Michael, but perhaps all of us, that would be help. But secondly were there any write-ups of tax assets with the change in the tax rate in Ontario?

No. It is Peter Currie here. No. I know that that has come up in some of other bank results. And of course a number of the other domestic banks here in Canada have deferred tax assets. And because of the suspension of the previous announced and committed tax reductions by the current government in Ontario, it has an impact on the value of the deferred tax assets prospectively. But the change relative to RBC is not material. Of course, you're seeing that impact in terms of current taxes on the income statement every quarter anyway.

Jim Bantis with Credit Suisse First Boston.

Two questions please. One in the context of the retail full-service brokerage numbers. Peter, could perhaps detail the quarter over quarter improvement in its topline related to that business, that would be helpful.

And secondly, in the context of the payout ratio increased in terms of the range, in past conference calls when we talked about payout ratio range the Company has really said, we wouldn't be increasing this or visiting it in the context of having a balance between return on capital to shareholders yet maintaining capital for future growth. What kind of signal can we take in terms of the payout ratio going higher to the range that it is now, in the context of future growth particularly in terms of acquisitions in the U.S.?

Jim, I'm going to try to answer your first question. You're talking about the Canadian retail business where we would call it Dominion Securities business under our Canadian wealth management?

Yes, Peter. If you could actually give us the growth numbers both in Canada and the U.S., it would be helpful.

Okay, I got specifically the Canadian one. I will have to get back to you on the U.S. one, because I haven't split it up between the fixed income and the regular retail business. But in Canada quarter over quarter Dominion Securities is up 10 percent quarter over quarter and up 25 percent from last year.

Was the second question about the dividend payout ratio? Why we raised it? I'm sorry, Nabanita, was saying something to me. What we have said in the past (multiple speakers). It is Gordon Nixon speaking. We have said that one of our objectives with respect to managing our capital position is to maintain an appropriate balance between repatriation of capital and investing for growth.

Clearly when we look at where we are today in terms of the investments that we have been making and would expect to be making in terms of new investments or acquisitions, and when you look at the capital that we have been generating, we feel very comfortable that increase in the payout range to 40 to 50 basis points enabling us to increase our dividend was the best thing and the most appropriate thing to do in terms of returning capital to our shareholders.

And in addition to that, we also have outstanding in our share purchase plan about 19 million shares remaining for this year that we have the ability to repurchase as well. We've got a capital target ratio. We've got investment plans. And the balance we have said we are going to manage between payout and share repurchase. We felt comfortable when we looked forward in terms of the capital that we're generating that it was the best thing to do. And as I said, I think that has been very consistent with what we have been seeing over the past little while.

Typically when companies run at lower Tier 1 ratio, as well as expanding the payout ratio in terms of the dividend would signal the fact that growth in terms of acquisitions would be somewhat muted going forward. You're saying that is not the case?

No, it's not the case. Although as I say what we -- if you look at what we have done over the last couple years, our acquisition -- the acquisitions that we have made totaled closer to 5 or $600 million a year. And when you look at the capital that we have been generating as an organization the result has been that our capital ratios have been increasing.

When we look forward our view is that we will continue to invest in acquisitions, but they're going to be small, additive acquisitions, the types that we have been doing, which have been quite effective in terms of the results from those acquisitions. But the view was that we don't want to build up and hoard capital in anticipation of doing something larger. If there was an opportunity to do something that was very attractive to the organization both financially and strategically, our view is that we would get acknowledgment from that in the marketplace and have the ability, if need be to, to finance it on that basis. But there clearly is not anything on the horizon in our view that is going to result in that. So when we look at our plan going forward there is going to be continued increased internal capital generation.

Steve Dresno (ph) with Satellite Assets.

This question is actually for Jim. Jim, could you just walk us through some of the growth goals and plans you have for your U.S. operations? What you might expect to be doing over the next year or so?

Just in terms of in terms of what we will be doing to improve the performance of our U.S. operations, I think I laid those out. We've got to improve the mortgage business and I spoke to the different areas where we doing work to ensure that that takes place. We've got to continue with, we think, pretty good organic growth that we are having in the existing franchise of RBC Centura. We've got to make sure that where we are investing in new areas, de novo branch building and with the Provident and Admiralty acquisitions that we get as much growth, new growth, out of those operations as we can. And we have plans to do that as well. And at the same time, manage our costs a little bit better than we have to make sure that we're not spending money unnecessarily.

So it sounds like, Jim, you're going to work on the organic growth growth in the franchisees you currently have, and the acquisitions are somewhere 6 to 12 months down the road or something like that.

As Gord mentioned earlier on, we've got to get the operations of what we have going in a lot better fashion. We're going to keep looking for opportunities for sure. But they will always be the smallest things that we've done to date.

Heather Wolf with Merrill Lynch.

Just a quick follow-up on the mortgage hedging question I asked earlier. Is it conceivable that we could still see substantial declines in mortgage origination volumes from here if we see more interest rate increases? Are there any plans to hedge further declines?

To hedge declines by getting into other parts of the business? For example, before you have talked about servicing.

Either that -- I was actually specifically thinking about shorter term efforts like securities.

Those kind of actions will be taken as part of our treasury management activities that would be maybe related to that, but not necessarily directly involved with the Mortgage company.

Heather, I think the expectation -- the big declines in Mortgage has been a result of essentially a follow-up in the refinancing market. For there to be a continued significant decline, it is not going to come as much from refinancing. It would just be a decline in the overall housing market in the United States.

I think it will be mitigated by the clearance of the backlog as well.

Steve Cawley with TD Newcrest.

Just a quick one. On the U.S. net interest margin, one of the U.S. players seemed to have better net interest margin this quarter. Now I know there's lots of different things going on in your Company that would cause it to go down right now. But strictly from a competitive basis, what is the rate environment, or what is the pricing environment like right now in your markets on the retail side?

In the U.S. it depends on the market and where we are in the market. If you look at the kind of Heritage-Centura footprint they are competitive, but they are not buying -- they are not pricing that aggressively to get the success that they are having.

For example, year-over-year they had about, I think it was about 9 percent commercial loan growth with a 25 basis point drop in prime during that time of time. Their spread only dropped about 9 basis points. I think they have been pricing very well in that part of the Company. In some of these newer markets and in particular where we have done acquisitions and we want to hold onto the customer base, we're having to shift them from a certain way of doing business to a new one. We are a little bit more aggressively pricing just to make sure that we hold onto those customers. But I would say all in all they are not price leaders when it comes to aggressive pricing.

Jim, when we were down in Charlotte, which now seems like a while ago, since then you have added Sterling management to strengthen your mortgage origination and mortgage business, has there been any other management changes?

In the mortgage company?

In the mortgage company, just in the U.S. business overall -- Centura?

A lot. First of all let me talk about the mortgage company. We have the senior people, Jonathan Threadgill who was the CEO of Sterling -- Chief Financial Officer from Sterling who is a first class experienced mortgage CFO working there. From here we have sent a Chief Risk person to manage all the operational risks as we introduce new systems. As well, Marty Lippard sent one of his senior technology people down there to implement the roll out of the Sterling technology platform. And then John Legg who is one of our senior people here in Canada is the CEO of the mortgage business.

We have a significantly strengthened management team in place for RBC Mortgage. In Centura none other than the kind of normal turnover in people, as people get transferred, promoted and all of that. But we have had no what you would call change at the top of Centura.

But we bolstered the bench strength with the acquisition of Admiralty and (indiscernible).

More in market kind of people who are senior people there, yes.

Given that this seems to be such an issue on the mortgage front, I think it would be useful -- this just a suggestion -- if you spent a couple of hours in Toronto with a presentation with the mortgage business to talk about the various initiatives from those people. I think I would find it useful.

Be glad to do it. And I think we're setting that, in fact.

We had planned on it. And we're aiming for sometime at the end of March. And just as soon as we finalize the date and the time we will be back to you. But, yes, that was very much a part of our plans.

And if I'm a just come back to Michael Goldberg's question earlier on regarding the increase in -- the decline in the other other income. If we can turn to page 15 of the Canadian GAAP supplementary which I think is, Michael, where you are looking, there is a few things.

Firstly, I think you were looking at that slide off other income, our slide 31, where you had noticed quite a decline over last quarter and a year ago. If I can take you to page 15 of the Canadian GAAP supplementary, there was a decline as you can see in credit fees. I'm talking year-over-year here of about $13 million. And credit fees were included in that other category on the slide.

And if you also look at the little footnote 4 on the Page 15 of the Canadian GAAP supplementary it mentions that there was a gain on credit derivatives of $29 million a year ago. So you've got a $29 million decline because of the credit derivative gain a year ago. You have got a 13 million decline in credit fees. You've got the various items mentioned on page 7 which amounted to $32 million. So all of that adds up to about a $74 million decline.

I think the other thing is that if you look at that other amount a year ago, it was exceptionally high. So I have to go back and look at what that is, but the normal number for that line would be somewhere generally, give or take some around around maybe 80 to $100 million mark. So I think that that is about the bulk of the explanation for why that number went down so much.

We will elaborate and get back though.

Dardo Mahalic (ph) with Research Capital.

A question for Gord with respect to the entire U.S. expansion strategy. Are you losing patience with it? And do you think that it, in fact, would require perhaps a large significant acquisition to make it actually work?

The answer to the losing patience is no. I'm not losing patience with the overall U.S. strategy. And although as we have very candidly said, we're certainly not satisfied with the operational performance. I would note that part of the original strategy in the United States was very much to expand in the personal and small business areas. And that initiated the acquisitions of Centura and Liberty and Dain.

There has been various events that have resulted in us not achieving the kinds of returns that we had hoped to be meeting at this point in time. But we're very comfortable with where the various assets are in terms of their stage, particularly Dain and Centura, which are by far away the larger ones. We believe that Dain is well positioned in the market. It is a good sort of second-tier, if you will, retail brokerage operation. We think their performance has certainly improved significantly over the last little while. And as Peter said, I think from a business perspective, from a margin perspective, our ability to hire advisers, etc., we're quite comfortable with where we are positioned in the marketplace.

With respect to personal and commercial banking, I think that we would like to build a larger base over a shorter period of time than we have been able to. And as I say that is a number of factors, including the cost associated with acquisition or with aggressive expansion. But we think over time we're going to build a solid base of business in a high-growth marketplace. And that will provide us with an opportunity for growth in the future, which we think is pretty important at the organization.

I would say that to some degree the operational side there has been some disappointments, but we're not prepared to throw in the towel with respect to the ability for us to continue to grow in that sector.

And do you think that the larger acquisition was embedded in your previous plans, and now that perhaps evaluations have run away? Or do you think that the overall previous expansion strategy works on its own even as it is right now?

I think based on what it is right now, it can continue -- it can work. The challenge is the magnitude, if you will, of growth. I think with respect to a larger acquisition, we would love to find -- to have the opportunity to grow more quickly if we could do it in a financially attractive way.

But the reality is that larger acquisitions in the United States have very significant premiums attach to them for businesses that generate solid, sort of mid teen returns. And the ability to make an acquisition of that nature work, given relative pricing, etc., is just not at this juncture, in our view at least, an attractive proposition. And therefore -- we have said this over the last little while -- our view is that we're far better off in terms of creating value for our shareholders to invest conservatively and more slowly and build a good solid franchise in a high-growth marketplace. And we think longer-term that will add value for our shareholders.

Quentin Broad with CIBC.

Gordon, just to complete that thought for me, you had talked about doing more -- doing smaller, successful acquisitions like you have. Just from a return perspective, generating returns on investment capital that hurdle, can you give us a sense of which ones that you feel now are at that point where they are generating adequate hurdle rates? And then two, just remind us where those hurdle rates are for forward acquisitions you may undertake?

The smaller ones that I'm referring to are the ones like Tucker Federal, Admiralty, etc. If you look at where we are in terms of performance relative to the forecast that we had built at the time, in the case of the small acquisitions, we're right on or in some cases slightly ahead of our plans.

Again, just to keep things in perspective, these 100 to $150 million acquisitions. The materiality is not all that significant. I think in terms of the strategy, we're comfortable that in these -- with respect to these acquisitions, we're expanding in attractive regions. Atlanta is an example with Tucker Federal. We have had some good results. Florida, where we've got some degree of competitive advantage with the Snowbirds -- the Snowbird opportunities, etc.

And the results from the smaller acquisitions have been quite positive. The reality is they have been small investments relative to the overall dollars invested originally with Centura, etc. We think that we can continue to expand that branch network. And it will -- if we do it in the right regions, and we're able to grow our deposit base, etc., with respect to those acquisitions it will create value for the shareholder.

And the hurdle rate?

It is Peter Currie here. We're trying to find acquisitions. We try to undertake acquisitions that we can generate accretion and cash EPS in about three years.

But on an IRR basis?

Sorry?

Some 15 percent or --?

What we're trying to do, of course, is develop investments that are accretive to cash EPS and are accretive to overall ROE. So yes, you look at an IRR, as long as it is above your cost of capital it is relatively worth doing. so somewhere north of 15 percent. But you have to temper that with the strategic impact of various acquisition as well. So I am loath to give you a specific number on IRR.

I think one last question.

Jenny, we have gone five minutes over the time but Gord says that he's willing to take one more question before we have to close the call.

Ian de Verteuil with Nesbitt Burns.

The last word.

No, we get the last word.

I'll be careful. Slide 15, this is about Canada. As we look at it here you are facing what most of the banks are talking about here in Canada, which is some sort of spread compression. And pretty much the general sense has been with rate cuts, one in January and us maybe looking in the face of another one next week, is there anything you can do structurally to alleviate some of the pressure on spreads here in Canada?

Two things. First of all manage our costs. And I think we have been doing a very good job of that. They are, in fact, lower than they were first quarter of last year. Secondly, there are greater spreads in credit products so we are making sure that we are as aggressive as we can be in the way we are focusing on selling personal loans, mortgages, and business loans. I think that that is where there is more margin. And so we are paying a lot of attention to those product areas.

I will have the last word. We talk a lot about integrated financial services and some of our efforts around cross selling and increasing the product penetration per customer. And frankly in what could be a very extended period of low-interest rates, we think that is an opportunity for us to protect overall margin, notwithstanding low absolute levels of interest rates.

We have had some good results with respect to some of those initiatives that we're starting to see in some of our marketshare numbers, etc. That is probably the best defense against margin compression as a result of low levels of interest rates.

And along with that -- I'm sorry, Gordon -- but some of the segment strategies that we -- I think maybe Gord is referencing -- that we spoke to about what we did our presentations back in the summer, or in October, to get at more smaller group of customers where we do have some revenue opportunities.

There are no further questions registered at this time. I would like to turn the meeting back over to Ms. Merchant.

I want to thank you all very much for your participation on behalf of everyone here. And just as soon as we have a date fixed for the presentation on RBC Mortgage, we will communicate that to you. Thanks again. Bye-bye.