Royal Bank of Canada (RY) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the 3rd quarter earnings release conference call. I would like to turn the meeting over to Ms. Senior Vice President, Investor Relations. Please go ahead Ms. Merchant.

Thank you Jenny. Good afternoon, everyone. And welcome to our 3rd quarter results conference call which is scheduled to run until 3:00 p.m.. Well devote the first 20 minutes or so to a review of our performance in the quarter. Gordon Nixon our CEO will begin with some highlights of our results. Following that, Jim Rager head of our largest business segment RBC Banking, our personal commercial banking division will say a few words about the results of that division. Peter Currie,CFO, will provide more details about our results. And finally, Suzanne Labarge, Chief Risk Officer, will discuss asset quality strength. We will then open the floor to your questions. Joining us here in addition to Gord, Jim, Peter and Suzanne, are the heads of our other 4 business segments, Peter Armenio, from RBC Investments, Chuck Winograd from RBC Capital Markets, Jim Westlake from RBC Insurance and Marty Lippert from RBC Global Services as well as the Head for Human Resources and Public Affairs Elisabetta Bigsby and our Special Services Janice Fukakusa. With that, I'd now like to turn it over to Gord Nixon. Gord?

Thank you Nabanita and good afternoon, everybody. Our performance this quarter reflected continued strong asset quality growth with declines in provision for credit losses and nonaccrual loans, solid growth in number of our product lines, including loans and deposits, and higher revenues from insurance and mutual funds. Our results also reflected continued spread compression on deposits and higher than we would like costs, particularly as it related to benefit costs. Now, if one looks at chart 4 and 5, 3rd quarter net income was $768 million. Diluted earnings per share were $1.15, up 1%, and under Canadian GAAP net income was 746 million and diluted earnings per share were $1.12. As can you see as you look at chart 6, a 2% appreciation of the Canadian dollar relative to the U.S. dollar did reduce earnings only marginally by 3 million, revenues by 35 million and noninterest expense by 25 million from the 3rd quarter 2004. Now in a few moments, Peter Currie will discuss our revenue and expense performance and as Nabanita mentioned, Suzanne our asset quality in the quarter.

If one turns to chart 8, our 9 month performance has met objectives in ROE, portfolio quality and capital ratios, relative to our 2004 objectives. We posted ROE of 17.6% which is within the target range, and allocated specific provision for credit loss ratio much better than that targeted range for the year. And capital rations above our medium term goals. Revenue growth of course of 2% reflected a stronger Canadian dollar which did reduce revenues by over 400 million or 3%. And clearly we're not where we would like to be or should be with respect to our revenue target. An 8% expense increase for the year-to-date largely reflects higher variable costs due to greater capital markets related revenues and the higher benefit costs which I mentioned earlier. As well as the cost of this settlement for Rabobank that was disclosed in the 1st quarter. The performance of our business segments are shown on chart 9-30. In the interest of time, I will only focus on chart 9 which shows that 3 of our 5 segments recorded double-digit growth in net income from a year ago. Which we think is quite encouraging. Net income at RBC Insurance was up 32% reflecting earnings contributions from the May 1 acquisition of UnumProvident together with stronger contributions from the home and auto and reinsurance businesses RBC Global Services net income was up 22%, reflecting higher transaction volumes. Earnings were up 12% in RBC Capital Markets, reflecting better results from the United States and other parts of the operation. At RBC Investments, earnings were essentially flat, mutual fund assets and revenues rose sharply and brokerage fee based assets and associated revenues rose as well.

However, commission-based trading volumes in the brokerage business declined and our costs, human resources costs in particular were higher. At RBC banking, loan volumes were up sharply and market shares in Canada rose as well. However, continued spread compression deposits, higher benefit costs and other compensation costs combined with lower mortgage origination volumes, narrow margins and a revenue deferral at RBC Mortgage contributed to a decline in net income. Jim Rager will say a few words in a moment about RBC banking results. Turning now to our total U.S. operations. If one looks at chart 31, they generated 26% of total revenues in the first 9 months of 2004 down slightly from the same period a year ago. This largely reflected lower mortgage origination volumes at RBC Mortgage and a decline in the translated value of U.S. dollar denominated revenues due to the appreciation of the Canadian dollar relative to the U.S. dollar.

In one looks at chart 33, U.S. net income was 78 million in the quarter, again, down from a year ago, when our mortgage volumes were exceptionally high because of the refinancing boom. Compared to last quarter, net income was a significant improvement in RBC Banking. Which more than offset a decline RBC Capital Markets. we are certainly encouraged by the sequential improvement in bankings earnings, but we also recognize and believe that we can achieve and will achieve better results in the U.S. as we move forward in the quarter. And with that, I'd like to turn it over to Jim Rager who's going to make some brief comments.

Thanks Gord and good afternoon. Slides 11 through 22 of Investor Presentation cover RBC Banking's performance for the 3rd quarter in a fair bit of detail. So I'd just like to briefly point out some of the highlights, reiterating some of the points that Gord made. Starting with Canada, product growth rates and sales activity continue to be strong in the 3rd quarter. Mortgages, personal loans, credit cards, business deposits and mutual funds all posted double-digit growth in balances over last year, as well as small business loans were up over 6% and commercial loans up over 3% during the quarter. We're especially pleased with this performance in light of the processing disruption that we had during the quarter. This really speaks volumes about the quality of our front line staff as well as the support groups who brought us through the recovery. However, in spite of these volume gains and 5% higher fee income, Canadian revenues in the 3rd quarter increased by only 1/2 of 1% from a year ago, largely due to continuing spread compression on deposits. In the U.S., third quarter earnings improved to 17 million Canadian dollars, our best performance so far this year. RBC Centura had a better quarter, reflecting solid growth in a loan and deposit book with a year-over-year growth in loans and deposits of 11% and 8% respectively.

As you'll note on slide 17, revenues in Centura by 12% in the 3rd quarter over the 2nd quarter, net of a one-time securities gain. RBC Mortgage continues to struggle as tighter loan pricing across the industry, product mix and a one-time revenue deferral from the SAB accounting 105 - - SAB 105 accounting change impacted revenues. On a positive side RBC Mortgage has made good progress in addressing the operational issues that arose last year. So in summary, we believe that our strong sales performance in Canada should position us well as interest rates rise. We're encouraged by the financial results in RBC Centura and are determined to continue to improve the overall performance of our U.S. business. I'll now turn it over to Peter Currie.

Thanks Jim and good afternoon to everybody. If you turn now to our revenue performance, you'll note from chart 34 that total revenues were 4.4 billion in the 3rd quarter and that's up $103 million or 2% from last year. Noninterest revenues accounted for 61% of total revenues during the quarter. Chart 35 indicates that the appreciation of the Canadian dollar relative to the U.S. dollar reduced the translated value of our U.S. dollar denominated revenues by some $35 million. Were it not for this, revenues in the 3rd quarter would have been up $138 million or 3% from last year. Turning to the net interest margin, you can see on chart 36 that it was down 14 basis points from a year ago, due to spread compression on domestic deposits resulting from lower interest rates and competitive pricing pressure. And also due to lower returns from RBC Centura's investment portfolio. Compared to the 2nd quarter the net interest margin widened, reflecting higher net interest income in RBC Capital Markets.

As shown as chart 37, 3rd quarter noninterest income was up $31 million or 1% from a year ago, despite the $31 million reduction due to the appreciation of the Canadian dollar relative to the American dollar, the acquisition the quarter of UnumProvident, higher other noninterest income, largely due to an increase in mark to market gains on derivatives. And higher mutual fund revenues which reflected higher net sales and appreciation in the value of the mutual funds more than offset lower trading and mortgage banking revenues. As shown as charts 38 and 39, noninterest expenses were up $139 million or 5% from the 3rd quarter of last. Largely reflecting higher benefits and occupancy costs. Now if we move over to the balance sheet, we can see on chart 40, in accordance with FIN 46R, which relates to the consolidation of variable interest entities, since January 31, 2004, we've included in our consolidated balance sheets assets owned by certain multi seller asset backed commercial paper conduit programs that we administer. To avoid overstating the growth in the loan categories impacted by FIN 46R we've excluded these amounts from the analysis on the next chart. That next chart is chart 4 1 and you can you see there we registered strong growth in our consumer loans over a year ago of some 9%, with personal loans up 14%, credit cards up 12%, and residential mortgages up 6%. Business and government loans are up 8%, largely due to growth in the securities borrowing activity. Chart 42 shows that our Tier 1 capital ratio was 9.1%. And our total capital ratio was 12.7 at the end of the quarter. These compare well with our goals of 8% to 8 1/2%, and 11 to 12% respectively for Tier 1 in total capital.

The decline in our Tier 1 ratio from a year ago is due primarily to a $13 billion increase in risk adjusted assets and the deduction of Treasury Stock in the calculation of the Tier 1 capital ratios. Which started in the 1st quarter of this year. You'll see from chart 43 that we generated 420 million of capital internally during the quarter. We used a portion of the capital to repurchase our common shares. As shown on chart 44 we repurchased a total of 4.6 million common shares in the quarter at a cost of $273 million. As announced earlier, we renewed our share repurchase program during the quarter in fact on June 23. In terms of our quarterly common share dividend it remained unchanged for the second quarter, our dividend payout ratio was 44% in the quarter and that's the mid point of our payout ratio goal of 40%-50%. In addition, we announced today, the implementation of a dividend reinvestment program which will be available to our registered common shareholders who are shareholders of record on October 26 of this. That concludes my summary remarks. And like to turn it over to Suzanne Labarge to discuss our loan portfolio. Suzanne?

Thank you, Peter, good afternoon, everyone. I'll now take a few minutes to provide you with an update RBC's Financial Group's asset quality. To get started, I'd like to point out some of the key highlights for the quarter. Overall, credit quality continues to remain very strong with all key portfolios having solid improvements, both year over year and quarter over quarter. These improvements largely reflect the current business environment of low interest rates, strong housing markets and healthy economic conditions in both the U.S. and Canada. As previously mentioned we experienced strong growth across our domestic loan portfolios in the quarter. The growth was well balanced and diversified across the consumer and business portfolios. Nonaccrual loans decreased across all portfolios. The reduction was largely driven by successful collection efforts and favorable market conditions. The strong credit quality of our business and government portfolio continued to contribute to the low specific PCL in the quarter and enabled the specific PCL ratio to remain well below our medium term goal. As can you see on chart 47 our portfolio grew by $15 billion or 8% over the period a year ago.

The portfolio mix remains stable during this period as growth was balanced across the portfolios. It's also important to note that we strengthened the credit quality of the business and government portfolio over the period by increasing exposures in key sectors such as government and financial services, while strategically reducing exposures in sensitive sectors including power generation and telecommunications. Charts 48 and 49 show that our nonaccrual loans decreased by 216 million in the quarter and 477 million or 25% from a year ago. The reduction was due to fewer new impaired loans and the favorable resolution of problem accounts across most portfolios. As shown on chart 52 the total provision for credit losses of $125 million compares favorably to 152 million in the last quarter and 167 million a year ago. The decrease in the consumer divisions was mainly attributable to improvement in student loan portfolio while the decrease in business and government was due to the same factors affecting nonaccruals. In line with the reduction in the nonaccrual ratio the specific PCL loss ratio declined to 21 basis points, significantly below our medium term goal. Chart 53 shows that we bought 750 million and sold 740 million of credit protection as of the end of the quarter. The level of protection held decreased by $60 million year-over-year consistent with the general improvement in the credit quality and composition of our portfolio.

Trading revenues declined slightly in the quarter, largely due to lower revenues in equity trading and derivatives. Our global trading value at risk increased toward the end of the quarter, reflecting an increase in proprietary positions in the equity portfolio. At this point I would like to turn the call over to the conference operator to begin the question-and-answer session.

Thank you. We'll now take questions from the telephone lines. If you have any questions, please press star 1 on your telephone keypad. If you're using a speaker phone, please lift the hand set and then press star 1. If at anytime you wish to cancel your question please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause while participants register their questions. Thank you for your patience. The first question is from Jim Bantis from Credit Suisse First Boston. Please go ahead.

HI good afternoon. A couple questions maybe to Peter in terms of the hedging costs relating RBC Centura - - or sorry RBC Mortgage. Booked into the other segments, 13 million after tax. Were previous charges related to hedging included in the other segment or had they been in the retail operations? And I just want to make sure that the 17 million that you're showing us in terms of contribution from U.S. retail operations is an apples to apples comparison.

Jim, it's Peter Currie, this is a consistent treatment to how we treat similar types of costs notably in our Canadian business as well. It's been tracked into the other segment because it's, in fact overseen by our Corporate Treasury Group as opposed RBC Mortgage. So we thought from a representation point of view it made more sense to line it up that way.

Okay. Thank you. The second question is, it looks like this quarter we've ended a string of dividend increases. Sorry, your line is clogging up. It looks like this quarter you've had a string of dividend increases every other quarter. I guess the payout ratio obviously moved to 44%, but in the wrong way. Gord are you - - I guess basically you're sending us a message that the earnings at this level will perhaps remain at this level and that dividend increases - - are they temporarily on hold at this point?

No, the answer to that is we're not sending that signal at all. I think the last quarter we increased our dividend. Or the last dividend increase was a fairly significant increase. It's something we review on a quarterly basis. And we felt with the results this quarter we were in the middle of our - - or close to our targeted range, and it's something we will of course review as we move towards the 4th quarter. So I think as much as anything, it reflected a significant increase that was provided the last quarter.

Jim it's Peter Currie, let me just amplify the question you asked - - the answer to the question you asked me a moment ago on the adjustment books for the other account. I just wanted to explain that that entry relative to hedging and effectiveness which is in other is in fact accounting timing. And it will flow back likely over the next quarter. But it will show up - - that recovery or that revenue will show up in the 4th quarter in all likelihood in the other categories. So it's a timing issue as opposed to a permanent change.

Great, thanks, Peter. I appreciate that.

Thank you. The following question is from Michael Goldberg from Desjardins Securities. Please go ahead.

Thanks a lot. First to start out with, I think you mentioned about 3 times the impact of deposit spread compression in RBC Banking Canada. I assume it was significant. Can you quantify what the impact was?

The - - first of all, let me see it. Do we have it in one of our charts?

We have that Michael in 16, where we show a breakout of the net interest market in banking between Canada and the U.S.

In dollars?

Oh, you meant it in dollars?

Yeah.

Hold on. The - - let me just say, give me a second here, I have that information, I just need to look for it. The - -

Let me go on to another question I had in the meantime.

Go ahead let me just.

Your FTE this quarter is up about 3,000 people. Are most of those associated with the UnumProvident acquisition?

Up 3,000 people quarter over quarter or year-over-year?

Quarter-over-quarter.

It's Peter Currie, Michael. A large portion of those associates - - there are 3 things coming into play here. The first one is acquisition of UnumProvident, which is about 600, there are about another 800 or so or 900 or so associated with various marketing activities new product intiatives and service initiatives that we have primarily in the Canadian marketplace and in retail banking. And the balance is a seasonal factor relative to the fact that we bring on folks during the summer to compensate for vacation periods of our regular employees. So that shows up in the headcount as well.

Okay. That's all my questions for now. Thanks.

Michael I'll just say that the - - without quantifying, this is Jim again, that our deposit revenues in spite of both business and personal deposits growing in the 6% range were lower than they were last year.

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

Good afternoon just I guess a few housekeeping questions. In terms of the size of the securities in gain in Centura on a before and after tax basis, if I could get that?

That was U.S. dollars $5 million pretax.

Just use the tax rate at Centura Jim?

Yeah, yeah.

Okay. Secondly, just in terms of slide 18, I think it is, we no longer have the breakout between refi and purchase money. Perhaps could we get how you've been able to change, if at all the origination volumes?

Yes, I can give that to you. In fact the last quarter I think we were mistaken in our answer to that question. But this time we - - just let me see here to make sure. The - - 56% of the origination volume was purchased versus 44% refinance. Last quarter that was 49% purchase versus 51%. So we've swung the balance in favor of purchase origination this quarter.

Great. Thanks, Jim. One final housekeeping in terms of breaking out your capital markets revenue it appears that you've taken away the disclosure with respect to retail, institutional and self directed. And you've restated. Could you give us just some sense of what happened there Peter and perhaps what the trends might be in those three groups? Or maybe it's been located somewhere else and I just haven't seen it.

The reason we've removed that table on the breakout of the securities brokerage commission between retail, institutional and broken out retails between full service and discount is because the fee-based revenues from Peter's medium platform are becoming very significant. And those aren't captured in those numbers. And so the feeling was that it really wasn't representative of what's happening in terms of generating revenues from Peter's platform. Peter do you want to talk a little bit?

Yeah. Just to put it into perspective a little bit. 40% of our revenues in this particular quarter came from fees which were not in the transaction business. And relative to the transaction business which had significant volume changes, you know the fee based business stays stable. So it doesn't really show a true picture of what, you know, how things are, and that's why we took it out.

But it would get - - so you're saying the trend on institutional, the trend on self-directed, those trends weren't worth looking at historically?

I mean, the trend on the self-directed, as far as transactions go, this particular quarter sequentially was down 40%.

Okay.

39%. And year-to-date it's up, relative to last year, it's down 10%.

Okay. And then finally - -.

Personally I don't know, who might have the institutional business?

Well the institutional business was down the 3rd quarter. It was down - - and again part of the the institutional business is commissions part is trading. But is basically it was dow more than 10%.

Yeah.

As far as the wealth management business, the full service was down 20% sequentially and action direct the discount business was down 40% sequentially and then both were down about 10% from last year, quarter over quarter.

Great. And then just finally for Gordon, in terms of the expense gap, it looks materially negative, whether you use adjusted or unadjusted. Is there something that you've kind of laid out for the senior management team or perhaps reiterated of late in terms of trying to get this mixed ratio down, expenses under control? If they're not already under control.

We've had a fairly significant initiative underway across the organization In terms of looking at our businesses, looking at our structure and looking at ways to attack efficiency. And there are a number of initiatives and projects that are almost built up, that we believe will position us for significant improvement in productivity as t we move forward regardless of what happens in the overall business environment on the revenue side. So there are a number of initiatives underway. As you well know in an industry like this those initiatives - - you know take - - they take time and so forth to work through the system. But there are a number of initiatives underway.

Okay. Thanks.

Thank you. The following question is from Raphael Bellows from CitiGroup, please go ahead.

Thank you. Good afternoon, I wonder if you could comment a little bit or elaborate a bit more in general in your U.S. business? I think that you mentioned that you expected to see a better performance or hope to see a better performance. I wonder if you could point out a few things you're looking at in terms of the perspective that you see for that business? And some particulars of what we should we be looking in terms of trying to get some guidance as to how you're going to be performing your businesses in the U.S.?

Okay. Well, it's Gord Nixon speaking. And I'm going to turn it over to Jim Rager to make a comment on the personal and commercial banking business in the United States. Because that has been the area where we've have underperformed relative to our forecasts and our expectations to the biggest degree. And I said in my opening comments we have instituted a number of things and are starting to gain some benefit from that. But those things do take time. But there are a number of positive things that are occurring. So Jim, do you want to make a comment?

Overall in terms of banking in the United States, I'm pretty encouraged by the improvements in Centura as I mentioned. They're getting very good growth in both loans and deposits. The revenues are picking up there, we've contained expenses at the kind of 2% growth rate level. We are rolling out our De novo branches and there are all on target. So that side of the business is encouraging at this point in time. And starting to overcome some of the issues that we have - - that confronted us over the past couple years, related to the investment portfolio and other things. So I think - - I am reasonably confident that we will continue on that track with that sort of improvement in Centura. Mortgage is still disappointing. I think that we have fixed the issues that were our issues in terms of the operations, the controls, the throughput and the backlogs and those sorts of things that we had. We're now just kind of into this industry - - set of industry issues having to do with lower margins, having to do with lower volumes and those sorts of things. So we're working our way through that. And as we do, I cautiously say that, you know we should kind of get beyond that and start to see some better performance of mortgage and that will contribute to the overall performance of banking of the U.S. as well.

I would just emphasize that getting mortgage back to a normalized run rain consistent with what where it was prior to our challenges is something that's extremely important. And I would just emphasize that you know getting mortgage back to a normalized run rate consistent with where it was prior to our challenges is something that's extremely important. And the other comment just to emphasize is if you look at the yield on the securities portfolio at Centura compared to the rest of the industry: and remember in the U.S. securities portfolios generally represent anywhere from 20%-30% of the assets of most of the banking institutions. And the yield on that investment portfolio, on our investment portfolio is clearly below what the industry average would be. And it does take time. And part of that is because of the way we've positioned it given our views on interest rates, but it does take time to get yields back to those more normalized levels. But certainly that is something that we would expect as we move forward in terms of meeting industry returns.

If you were going to take the next 12 months view with the assumption of an increasing interest rate environment in the U.S., assuming that the Fed continues to tighten, are you positioned positively, in other words, do you expect that that increase in interest rates in the U.S. could benefit your operation? Have you taken action with that scenario?

Yes, we have.

The only caution that I make, and I say this every time is that rising interest rates will provide some margin relief and do some certain things that should be positive for the organization and the industry, provided they're not rising because of industry - - or sorry because of economic reasons that result in, you know, a significant decline in real estate prices or the overall economic activities. So, you know, slightly rising interest rates is a positive from a margin perspective, economic performance also has a very significant influence on the industry performance.

Right, thank you very much.

Thank you. The following question is from Darko Mihelic from First Associates. Please go ahead.

Hello hi good afternoon, question on the supplemental page 15, the other income. I'm wondering if you could describe what is in there please?

Sorry, Darko we didn't hear you well. Could you speak up please?

Supplemental on page 15, other income explanation.

Sorry, is that better?

Yes, it is.

Yeah, page 15, please, the other income, I wonder if you could just describe what's in that line item?

There's usually a number of things that go into that line Darko. The largest of which would be the mark to market gains on FAS 133 adjustments mark to market for derivatives. So there is that element in there.

Okay. If you can also turn to page 3 - - sorry page 4 of the supplemental. This is Canadian GAAP. Just looking at the large quarter over quarter increase in assets at RBC Investments. I wondered if you could talk to that a little bit?

In terms of overall assets, most of the asset increases have come from our mutual fund business. We have had increases also within our full service brokerage businesses as well. Our mutual fund business in terms of assets was up $6 billion or 17% over quarter 3 of last year. So that's a significant number and overall a gain as well so.

So the quarter-over-quarter difference from 16.9 billion to 20.6 billion is all mutual fund assets? I wouldn't think that was on your balance sheet.

No, an earlier fixed income. It could be. I don't know.

Sorry, the mutual fund balances are you saying - - ?

Those are mutual fund balance.

It happens to coincide with a big drop in your net interest margin as well in the RBC Investments. And the same could be said actually on page 3 when you look at the RBC Banking. You have a large quarter-over-quarter change in earning assets of about 6 billion. And it also coincides with a drop in the net interest margin. And I'm just wondering what's going on in these 2 business segments that you have such a large increase in assets. I mean I guess - - I suppose we can guess, but I'm hoping for an explanation.

Well in the - - as far as banking's concerned, our increase in assets is due to growth in balances that I spoke of. Mortgage is growing year over year at least almost 11%, good growth in personal loans, business loans are starting to pick up. So that's all loan growth in that comparison. On the other hand, we have had a as I mentioned, a year-over-year 30 basis point reduction in our net interest margin. That's more on the deposit side - - you know the deposit compression that occurred. So the spread difference is mostly spread due to spread compression on deposits as opposed to loans.

On the, it's Gordon Nixon, on the RBC Investments, I think the best thing to do is to get back. It may well be fixed inventories in the retail business in the United States. But we'll investigate what that difference is and get back to you.

Okay. Thank you. And one last question. Has the hurricane had any impact on your insurance operations?

Hi, it's Jim Westlake speaking. We expect that it will have a relatively minor impact. The numbers for total loss keep going down. The last one I heard from the modeling people was about 6 billion which would make a relatively small event for our high end portfolio.

Okay thank you. And actually if I could just sneak one question in here. I apologize. I think last quarter you gave us how much of an idea of how much of a drag, and earnings drag the De novo branch expansion initiative was. Could you provide that number again this quarter please?

It's about $4 million a quarter.

Okay, great. Thank you.

Thank you. The following question is from Susan Cohen from Dundee Securities. Please go ahead.

Thank you. Can you just give us some color on your decision to reinstate the dividend reinvestment program?

Sure, Susan. It's Peter Currie. We've received over time a number of queries and requests from, mostly individual, but sometimes institutional shareholders who look upon the dividend reinvestment program as an opportunity to reinvest in the Company in a fairly painless manner. Now, we all know that you could always do that through your broker if you want to make those arrangements. We've instituted the program because we wanted to be more directly involved in it ourselves. And we also frankly did it in response to requests from shareholders. The cost is absolutely diminimous. And we think it makes very friendly to individual shareholders and in some cases, institutionals.

Okay. And secondly, with respect to consolidation in the U.S. banking industry, are you seeing any of that consolidation impacting Centura's operation, either positively or negatively?

I think, Jim Rager speaking, the impact so far that we've experienced has been positive. We are able to recruit some very good people from some of these consolidating entities as well as branches are divested, you know, we look at those. And the kind of customer fallout that comes from that as well has created some opportunities for us. So we're keeping our eye on that, in a kind of positive way and really haven't noticed so much of a competitive impact on it so far.

Thank you.

I think that Janice, do you have an answer to that question with respect to the fixed income balance sheet?

All of the asset growth in RBC Investments relates to growth in the fixed income balances and that's why the net interest margin is depressed. Because it is fixed income placements on the short term side.

Thank you.

Thank you. Once again, please press star 1 at this time if you have a question. The following question is from Ian de Verteuil from BMO Nesbitt Burns. Please go ahead.

Thanks. The questions relate to page 16 of the suppac, Canadian GAAP. In the narrative, the - - there's been a lot of reference to the escalation and benefits costs. And as I look at this, it previously had perceived most of this to have been pension related. But it looks as if there are other costs kicking in as well. Can you talk a little bit about these one time. I mean do you think the escalation is going to slow down. I was just - - it seemed as if that ran a bit higher.

The - - this is Elisabetta Bigsby. The total change from the same quarter last year, which is 58 million is for half of it due to the amortization of the expensing of the deficit coverage for the pension funds of the group in 2002 and 2003 and to the decrease of 50 basis points in the discount rate which of course increased the value of liabilities. So in reality, half of the increase would be easily reversed by continued stable performance of capital markets and by an increase in interest rates. The remainder of the increase is not dramatically high and is line with what's happening in the industry.

The - - cause what I'm doing is I'm taking out the pension expense which you detailed, even if I stripped out the pension there's a 17% increase in benefits costs. Is that cause - - maybe I'm missing some acquisitions and other things like that that are bumping that?

I think that's right Ian I think it's because of the increase in staff count.

Yeah.

Thanks.

Thank you. The following question is from Michael Goldberg from Desjardins securities. Please go ahead.

Thanks. Your $566 million variable comp this quarter looks either somewhat high relative to your total brokerage underwriting and trading revenue, or else your brokerage underwriting and trading revenue looks low relative to the number. Can you explain what's happening here? Because the numbers indicate that the revenue line might be $50 to $100 million lower than - - you know I might otherwise expect for a level of 566 variable comp.

Michael on a quarter-over-quarter basis it doesn't smooth out easily. Because basically what ends up happening is that even though your revenues may drop, as far as the way the commissions get paid out, that's taken out - - there is a good creep, if you wish, and it takes a quarter to sort of get through. So, whenever markets come down, the compensation to some degree is higher than it should be. And then the reverse is happening on the other side as well. So it does take a quarter to sort shakeout.

So aside though from the overaccrual that you're talking about, was there anything else that might be happening in this, you know that would have affected this measure that I'm looking at?

In the capital market side, the variable compensation has tracked profits and revenues to the extent it's supposed to. I don't know what else might be there.

I don't think there is anything, Michael.

Okay. Thanks a lot.

Thank you. The following question is from Steve Cawley from TD Newcrest. Please go ahead.

Hey Gord, with recent consolidation activity that's going on this week, I'm just curious to see where you stand on things again? And specifically on First National Bank shares that was bought by Fifth Third. I wanted to get your reaction on those valuation multiples?

Yeah, I think that I continue to remain very cautious with respect to being a buyer at the kinds of multiples that transactions are occurring in this marketplace. And I think we've been fairly consistent for well over a year, in that while we continue to grow our platform and we are divesting into De novo branches and we are adding people and focusing on deposit growth and loan growth, et cetera, we're very hesitant in today's environment to pay the kinds of premiums that banks trade out in the marketplace. I just don't think that the growth in industry is going to be such that earning the premiums back is going to be possible. And particularly when we would lack the same kind of synergies that some other buyers might have with respect to acquisitions in the U.S. given the size of Centura. I guess if there's a - - it's nice to see the valuations of banks remain at very high levels in the marketplace. But as looking to expand and grow our operation, it creates a very difficult environment. And we're going to continue to be very patient and see how the market unfolds. But I think the valuations are extremely high and very difficult to earn premiums back when banks trade at 3 and 3.5 times book value.

You said in the past that you were going to hold off on expansion until you saw a meaningful recovery in your existing operations. That's not a direct quote, but close enough.

No, that's accurate.

you're at $17 million this quarter so we're starting to see a slight turnaround here. Is it a sign of things that things have completely turned around when we get back to the $40 to $50 million? I think that's what you said in the past. Is that right?

We'd certainly feel a lot more comfortable, I would, when we got back to a run rate, where our returns are much closer to the industry average which would be at those sorts of numbers, yeah.

How far if - - and I know this is forward looking Nabanita, but are we far away from those kinds of numbers?

I'm glad you asked Nabanita. As I he said in my comments, it's still - - is that we are making some improvements, there's some very positive things occurring. And if we can continue to move forward with some of those changes and we can get the mortgage business back to a more normalized run rate, it will certainly make a difference in terms of ur returns and performance in the U.S. marketplace. And I think will put us in a stronger position. But having said that, even though our returns may improve to more normalized levels, frankly, I still remain very cautious with respect to the prices that some of these transactions are occurring at. And as I say if you look at our marketplace, I won't comment on other regions or transactions, but if you look in the market in which we operate in the Southeast, whether it's been a fair number of transactions over the last 6 months or so, very difficult in those cases for us to make the numbers work. Unless we assume very aggressive revenue growth targets as a result of the acquisition. And I think in today's economic environment, you know, that's a very bold assumption.

And if somebody was to turn around and say to you, yeah, we'll buy your operations for 6 times tangible book, would you consider that?

You mean, U.S. operations or the whole Company?

The U.S. operations.

You know, I think that we still believe that there's an opportunity for us to continue to generate very positive returns from our assets in the U.S. I think we've also gone on the record and said that ensuring that our assets are very consistent with our focus and our strategies as we move forward, particularly as it relates to banking and wealth management, that's going to be the area of the focus. I would never say never with respect to anything, but it is certainly an opportunity in our view to continue to add value to this institution if we can find ways to keep growing our market share down there. And we think we can.

Thanks Gord.

Thank you. The following question is from Quinton Broad from CIBC World Markets. Please go ahead.

Thanks. Gordon, I almost would have hoped though as a shareholder that you would have said at 6 times book value I would sell it.

I did say anything is possible.

But just in terms of the getting it back to a normalized number, and 40 to 50 million, at 50 million is 200 million, it still sounds like that's about a 6% return on invested capital if we don't include the opportunity costs that's gone by the wayside. So that still isn't close to where competitors are at. And I guess my question is, given TD comments yesterday that they're at 6% with Bank North, and the only way that they can get it to 10% is to be more aggressive or to allow Bank North to be a little more on an acquisition, I'll use the word spree. You say you'd like to grow the platform, but I guess my question really is, do you have to grow the platform through acquisition? Because there really isn't a way De novo organically to grow into a 10% return on invested capital.

The first comment I'd make is getting back to that normalized run rate does not meet our targets or objectives. Our targets and objectives are much more aggressive than that. Having said that I - - clearly our top priority is to get back to those sorts of run rates more quickly. I think in terms of growth, no, I think we recognize that for the platform to add value, we have to continue to find ways where we can grow that business. Whether it's through the acquisition of branches and deposits. The question was asked earlier about the impact of some of these acquisitions. As a result of some of these acquisitions, there are investment opportunities that are available in terms of branch sales and deposit sales. And we will continue to look as we get back towards our growth through smaller acquisitions, et cetera, but we will be very patient in terms of chasing from a pricing perspective. And as you well know, markets change. And we could be in a very different environment a year from now, or a year and a half from now, than the environment that we're in today. But we're certainly at a peak today in terms of the cost of growth through acquisition. But, in terms of meeting our longer term returns we have to look for ways to grow that platform. We fully recognize that.

And just if I could get a clarification, I think Darko asked on page 15, of Canadian sup that the other income at 137 and I think Nabanita, you talked about includes gains on a credit derivatives and yet that's footnoted. And isn't footnoted specifically for this quarter, from what I can see. So I guess if we can get just a little more clarification as to what's in that number?

Just before, if we can get back on that again, I think we'd have to check to make sure the answer we have there is accurate. So we'll get back to you perhaps by the end of the call. But if not, we'll follow-up.

Great.

We'll get back whit more details Quentin, however, I do know that the explanations for the variance over the previous quarter isn't terribly different thatn what we talked about in the earnings press release. Where we attributed the other income to mark to market gains on derivatives. Now it's not - - I don't believe it's credit derivatives which is why we went off and footnoted it, but I do believe that a big part of it relates to market gains on derivatives. However, well look into it and let you all know.

So are those mark to market gains on derivatives, which division would they be running through then? Would they be through RBC Capital Markets?

They would be primarily Corporate Treasury I assume because I think in the RBC Capital Markets they would be embedded in the division results.

We'll get back to you very shortly with a more precise answer on that rather than speculate and give you partial answers this afternoon.

Great. Thanks.

Thank you. The following question is from Jim Bantis from Credit Suisse First Boston. Please go ahead.

Just focusing on RBC Capital Markets, Chuck you said the variable comp or the costs are pretty tight with respect to the revenues on a timing basis. But the next ratio did shoot up quite strongly this quarter to 70%, well above the run rate of the past 2 years. Could you give me perhaps a little bit more color in terms of some one-time items in here?

Yeah.

And perhaps in terms of your outlook for the 3rd quarter in terms of your pipeline and how you're feeling about your income trust product in the U.S. as well, sir?

Okay. Well first of all, there were really 2 items that really accounted for more than half of the NIE increase versus the 3rd quarter last year, they're really - - and that was basically we had to consolidate FIN 46 so that we had to include the costs of conduits in NIE which we didn't have in the third quarter of last year. And secondly we moved our London offices into new quarters and that was a substantial cost. I mean all of those are costs that are well above $10 million. So it had a substantial impact on our costs. There were also some legal costs and a settlement of a couple million dollars of an item, and you add those up, the rest of it was pretty well normal, what I would call normal cost increases. In fact compensation costs, actually went variable compensation costs were down a bit. So again I don't like any cost increases. But the cost increases that were generally there were from businesses that were growing.

And London Chuck was a one-time - -?

Yeah London was a one time. And we will have --

And FIN 46?

FIN 46 will continue unless we basically can get them off the balance sheet which we absolutely hope to.

Right.

That would be the element. In terms of the pipeline, I'm naturally a cautious person. But basically last quarter I thought the pipeline was better than it turned out to be, particularly in the U.S. Unfortunately, in terms of the investment bank business which remains in our pipeline, because a lot of things just haven't been done the last 2 months that should have been done. And I'm talking x EIS. With respect to EIS, essentially, as everybody knows, the American Seafood deal was pulled, and it was tough sledding, and I think the issues are whether this was a function of the market or the product. Was EIS - - I'm sorry was American Seafood the best product to actually - - best rather type of company to have to take for this product. And it's hard to say whether it was product or the market. We still believe that there's a market there. And after Labor Day, we're going to have another look at whether we're going to bring a deal. But clearly the risks of that market seem higher than they did 3 months ago.

Thanks, Chuck, that's very helpful.

Thank you. The following question is from Michael Goldberg, please go ahead.

Thanks. I'm intrigued by the earlier answer you gave me about the variable comp, indicating some overaccrual in RBC Investments. Could that overaccrual have been in the order of $50 million plus this quarter? Just to try to get some order of magnitude.

I'd have to get you.

Michael, can you just elaborate the 2 numbers that you're looking at?

It's actually it's a combination of a few numbers. It's your total trading revenue, $418 million; plus your brokerage and underwriting revenue in total of $475 million; that's the 262 plus the 215.

That's not all - - that's not RBC Investments.

No, it's not all --

I know that's not RBC Investments. And then I'm putting the variable comp as a percent of the total of those items.

That variable cost in - - if it includes capital markets it relates to just those 2 line items. So, Michael, I think the numbers you're looking at don't square with the variable comp number. I think what we should do is take it offline and we'll go through those numbers with you.

That's great.

Okay.

Thanks.

Thank you. This now concludes today's question-and-answer session, I'd now like to turn the meeting back over to Ms. Merchant.

Well on behalf of everyone here, we thank you very much for your participation, and if you have any follow-up questions, please give me a call. Thanks again, bye-bye.

Thank you.

Thank you. The conference has now ended. Please disconnect your line at this time. We thank you for your participation and have a great day.