Royal Bank of Canada (RY) 2004 Q4 法說會逐字稿

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

Thank you. Good afternoon, everyone. Welcome to our fourth quarter results conference call which is scheduled to run until 3:15 p.m. Before we begin, I would like to bring to your attention that our presentation and remarks, as well as the question period that follows, may contain forward-looking statements which involve inherent risks and uncertainties. There are a number of factors that could cause our actual results to differ materially from what is expressed in these statements as described in the second slide of the presentation package you all have.

Our call today will begin with a 20 to 25-minute review of our performance in the quarter and in the year. You will be hearing from Gord Nixon, our CEO; Peter Armenio, Group Head U.S. and International, effective November 1; and Barbara Stymiest, our Chief Operating Officer who joined RBC also on the first of November. Gord will begin with a high-level overview before turning it over to Peter to discuss our U.S. banking performance. Bob will then provide some details on our financial results and asset quality strength. Following the formal remarks, we will open the floor to your questions. Joining us today also are Jim Westlake, Group Head, Personal and Business Clients Canada; Chuck Winograd, Group Head, Global Capital Markets; Elisabetta Bigsby, Group Head, Human Resources; Marty Lippert, Group Head, Global Technology and Operations; Janice Fukakusa, our CFO; and Morten Friis, our Chief Risk Officer.

With that, I would now like to turn it over to Gord Nixon. Gord?

Thank you, Nabanita and good afternoon, everyone. In 2004, we delivered solid earnings growth in 4 of our 5 businesses, improved credit quality, and grew market shares in key products in Canada. We also took strong action in the fourth quarter via the Client First initiative announced on September 9th to better realign our Company around client groups in Canada, the U.S., and internationally in order to achieve better efficiency and revenue growth, and to create long-term value for our shareholders and clients. We took business realignment charges of $192 million in the fourth quarter, and also recognized the goodwill impairment charge at RBC Mortgage of $130 million. And we have a clear focus on improving the performance of our U.S. operations and I will briefly cover these points over the next few minutes.

In 2004, as you will see on slide 6, net income was $2.8 billion, earnings per share $4.25, and ROE 15.9%. The business realignment and goodwill impairment charges had a substantial impact on those numbers. Revenues grew 2% and non-interest expenses grew 8%, this is despite significant strengthening of the Canadian dollar and the provision for credit losses declined, reflecting strong credit quality. Barb Stymiest will discuss our revenue and cost performance, as well as asset quality, balance sheet and capital in greater detail later on.

4 of our 5 business segments, RBC Capital Markets, RBC Global Services, RBC Investments and RBC Insurance, all recorded significant earnings improvement over 2003, which is shown on slide 7. RBC Capital Markets showed good performance in investment banking and related activities. Higher returns from private debt and equity investments, and a lower provision for credit losses. RBC Investments benefited from stronger performance in the U.S., and Canadian brokerage business, and the Canadian asset management operations. RBC Global Services showed strong revenue growth and good cost management. RBC Insurance had higher earnings, in Canadian life and health which now include UnumProvident and the home and auto business, as well as in the United States. RBC Banking's earnings decline reflected lower earnings in the United States, which more than offset a 5% increase in earnings in Canada, on the back of strong loan and deposit growth, including mutual funds. I will discuss the U.S. earnings shortly.

As a result of the quarter's realignment charges, fourth quarter net income was $504 million, earnings per share was 76 per share, and ROE of 11%, as is shown on slide 8. Revenues were up 4%, and non-interest expenses 8%. Both impacted by the strengthening of the Canadian dollar, relative to the U.S. dollar compared to a year ago. The provision for credit losses declined by 40 million, partially due to a $25 million reversal of the general allowance.

As you will note from slide 9, 3 of our 5 business segments, RBC Capital Markets, RBC Insurance, and RBC Global Services, recorded higher earnings in the fourth quarter compared to a year ago, as well as strong ROEs. Nearly 3 quarters of RBC Banking's earnings decline was due to the $130 million goodwill impairment charge at RBC Mortgage, and business realignment charges of 49 million after tax. In addition, expenses rose faster than revenues and we wrote down our investment in AOL Canada by $40 million after tax, of which $20 million was reported in RBC Banking and the remainder in the other segment. RBC Investments earnings performance largely reflected gains of 13 million after tax recorded a year ago on the sale of an investment, and the business realignment charges of $11 million after tax.

As shown in slide 10, we recorded strong volume growth in Canadian consumer products in 2004, with mortgages, personal loans, credit cards, and mutual funds in particular, all rising at double-digit rates. And we further strengthened our market share leadership in a number of products as is shown on slide 11. As shown on slide 12, we also continue to focus on innovation in our retail products to meet the evolving needs of our customers. Our earnings in Canada were up 3% during 2004, while those outside of North America rose 11%, as is shown on slide 13. Our U.S. operations were responsible for earnings -- the earnings reductions during the year, reflecting the Rabobank settlement costs in the first quarter and a net loss of $183 million in RBC Banking. Peter Armenio will discuss our U.S. banking operations in greater detail in just a moment. Reprofiling the business and enhancing its returns is one of our most important objectives in 2005.

I would like to end my remarks with a few words about the business realignment, our 2005 financial objectives, and medium-term goals. The analysis of our structure and operations conducted earlier this year culminated in the Client First realignment announced in September. It took effect on November 1st and its objectives, as is shown on slide 14, are to serve clients better to generate stronger revenue growth and improve cost management and productivity. We are realigning our 5 business segments into 3 customer-focused and geographically orientated segments which will allow us to better understand and meet the clients' needs, and generate incremental revenue. We are also combining all systems and operating capabilities to better leverage our technology platforms and related expertise.

During the fourth quarter, we eliminated a number of executive and senior management positions, commenced streamlining resources, and took actions to close down redundant premises. The realignment charges of 192 million included 166 million of employee-related charges as is shown on slide 15. Relating to approximately 1,660 position eliminations, largely in head office and support roles, made redundant by the realignment of our 5 business segments into 3, and the ongoing consolidation of our ops and technology platforms. These actions position us for stronger performance in the future. As a result, we have established more aggressive objectives for 2005 for ROE, earnings per share, revenue growth and cost control, than we had in place for 2004. And this is shown on slide 16.

We have made 3 changes to our medium-term goals this year, which are shown on slide 17. Raise the earnings per share growth goal to 15-plus, from 10 to 15. Introduced a new goal for expense management, which is to control expenses no more than half the rate of revenue growth. And raise the portfolio quality goal in light of the more meaningful measurement methodology we are adopting. Our senior management is being held accountable for the aggressive revenue and cost control targets.

Our top priorities for 2005 shown on slide 18 are to achieve the aggressive financial objectives we have set for ourselves, continue to successfully roll out the various initiatives that are part of our business realignment, and significantly reprofile our U.S. operations and increase their returns. We intend to regain our valuation leadership and in that regard announced a dividend increase this morning of 3 cents per share or 5.8%.

I will now turn it over to Peter Armenio to talk about our U.S. banking operations. Peter?

Thank you, Gord. And good afternoon, everyone. I'm going to speak to you briefly about our U.S. banking operations performance in the fourth quarter, and then touch on our business realignment and other activities that will position us for better performance in the future. As you can see on slide 20, our U.S. banking business recorded a net loss of 175 million this quarter, compared to a net income of $1 million a year ago. This decline largely reflects the RBC mortgage goodwill impairment charge of 130 million, and the business realignment charges for RBC Centura and RBC Mortgage of 28 million or 19 million after tax.

RBC Centura's loan growth in the fourth quarter compared to a year ago accelerated to 15%, a very strong performance, with growth balanced between consumer and commercial credit. However, as you will note from slides 21 and 22, overall revenue at RBC Centura declined 39 million or 16%, 11% on a U.S. dollar basis. There are 2 reasons for that. First, a $21 million gain on branch sales in last year's fourth quarter; and second, low net interest income from the investment portfolio. This lower net interest income was caused by higher funding costs as interest rates increased, and by lower yields as the portfolio was reinvested into higher quality but lower yielding instruments at the end of last year. RBC Mortgage had a tough quarter. As declining origination volume, which is an industrywide phenomena, and tighter pricing continued to negatively impact revenue as shown on slide 23.

Now, turning to our business realignment and operating improvements. As shown on slide 24, RBC Centura has done a number of things to kick start improvements in performance. We took a $13 million charge this quarter for planned staff reductions in 2005, mainly in our support areas. We also plan to consolidate 10 low return RBC Centura branches from its network of 275 branches, and we've put the brakes on branch openings until we achieve stronger financial performance. As for the investment portfolio, we're continuing to increase the proportion of investment grade mortgage-related instruments. This will lead to a pick up in yield in future quarters, which should help migrate any increase in funding costs. We also have plans to enhance loan and deposit volumes and mix.

I must say that I'm very encouraged with the speed at which our new management team at RBC Centura is embracing the cost management and revenue growth initiatives to improve profitability. I should also note that from a day-to-day management perspective, the RBC Centura folks are now going to be totally focused on their own business. As RBC Mortgage is no longer reporting into Centura, but reporting directly to me. Bottom line, we're very confident that we will record significant improvement in profitability in 2005.

As shown on slide 25, we're taking a number of actions to improve RBC Mortgage's performance. We took a $15 million charge at RBC Mortgage for consolidating the Chicago headquarters into the Houston office and for closing 38 of its less profitable branches. At this point, the further 9 branches are expected to close later in 2005. These steps will not only generate cost savings, but will also improve the effectiveness and control as the dual head office is closed. We've also taken steps to reduce earnings volatility by migrating sales of adjustable rate mortgages to a flow basis, from the bulk delivery. Meaning that the loans that are sold -- as the loans are sold as they close, and the hedging risks transferred to the investor. We've also completed a rollout of Sterling's loan origination technology which will lead to better control and management of loan pricing.

Turning to slide 26, I just want to end by saying that we recognize that the market dynamics in the United States are very different than those of in Canada. Our new structure which has been placed -- which has placed all of our U.S. consumer businesses under 1 segment, with 1 leadership, will allow us to better focus on the U.S. consumer business and consumer segment, and to leverage our capabilities and working together and to maximize returns. It is also going to increase the accountability and some flexibility to manage our various businesses.

And finally, I just want to say I'm very enthusiastic about the opportunities facing us in the United States, I'm convinced about the potential that we've got there, and look forward to reporting on our performance in future quarters. While my remarks today are focused on the U.S. banking operations, I will likely speak to you about the remaining U.S. consumer businesses over the next few quarters.

I will now turn it over to Barbara Stymiest. Barbara?

Thank you, Peter. I would like to begin by reviewing our revenue performance. On slide 28, you will see that revenues grew in the fourth quarter over Q4 '03, as well as for the full year over 2003, despite a reduction due to the strengthening of the Canadian dollar against the U.S. dollar. The revenue increase was due to strong growth in average loans and deposits of 14 and 8% respectively. Reflected in higher net interest income and higher revenues from RBC Insurance, RBC Capital Markets, and RBC Global Services. If we exclude the impact of the stronger Canadian dollar, you can see that the quarter's revenue growth would have been 6% over a year ago, and the full-year growth of 5% would have met our revenue growth objective of 5 to 8%.

Turning to slide 29, we can see that the fourth quarter's net interest margins and RBC Banking started to stabilize, ending the year at 3.15%. Compared to a year ago, the decline was mostly due to spread compression on mortgages and deposits in Canada, and lower returns from RBC Centura's investment portfolio that Peter spoke about. Compared to last quarter, the decline reflected a spread compression on mortgages in Canada. On the next slide, however, we can see that the net interest margin for all of RBC continued to rise, particularly as short-term interest rates increased.

Slide 31 shows that non-interest income was up 16 million over last year's fourth quarter, with good growth in insurance, mutual fund, and mortgage banking, offsetting lower trading revenues in investment management and custodial fees. For the full year, shown on slide 32, non-interest income was up 297 million, with growth in most categories other than trading and mortgage banking revenues.

Moving on to non-interest expense on slide 33, you can see that the non-interest expenses were up 8% from last year's fourth quarter, and for all of 2004. This was mostly due to employee-related expenses, as detailed on slide 34. The increase in benefits reflected higher pension, post-retirement benefits, and employee savings plan expenses. The variable compensation increase reflected higher revenues. And salary increases largely related to an increase in the number of employees due to acquisitions conducted over the past year. As Gord mentioned earlier, steps to control overall costs are well under way.

Turning now to the balance sheet, you will see on slide 35 that we had solid loan growth across all categories compared to a year ago, reflecting the low interest rate environment. I should point out that for the purpose of a meaningful discussion, we excluded the multi-seller conduit assets that we had consolidated in the third quarter, since we are no longer required to consolidate these assets in accordance with FIN 46-R. This is non-GAAP information, and we have included slide 58 of the appendix in order to reconcile such information to the corresponding GAAP information.

The growth in residential mortgages of 5.3 billion was after the securitization of 5 billion of residential mortgages during '04. Likewise, the growth in business and government loans of 5 billion was after the securitization of half a million of commercial mortgages during 2004. And was due to the growth in securities borrowing activity. Moving on to slide 36, we see that our non-accrual loans continued to decline in the quarter, down 163 million, or 11%, to just under 1.3 billion. The reduction largely reflects the continued improvement in the credit quality of our business and government portfolios. On the next slide, compared to Q4 '04, non-accrual loans -- sorry Q4 '03, non-accrual loans decreased by 486 million, or 28%, due to the combination of fewer new impaired loans during the year and the favorable resolution of a number of problem accounts in the business and government portfolios.

As shown on slide 38, there continued to be a decline in the specific PCL, as the continued strong credit quality in the consumer and large business and government portfolios more than offset a slight deterioration in the small business portfolios in the U.S. and Canada. With respect to our objective for specific PCL, you can see that we are well below the 2004 target of 35 to 45 basis points, as a percentage of average loans acceptances and reverse repos. The total provision for credit losses of 347 million for 2004, are on slide 39. Compared favorably to the prior year's 715 million provision. We reversed a total of 175 million of the general allowance in 2004, due to improvements in our internal credit loss estimation process, as well as a reduction in the corporate loan book.

Slide 40 shows our capital ratios according to the guidelines issued by OSFE. Both our Tier 1 ratio of 8.9% and our total capital ratio of 12.4% continued to remain above our medium-term goals. The decline in our Tier 1 ratio from a year ago was primarily due to a $16 billion increase in risk adjusted assets. Our common equity to risk-adjusted assets ratio was 9.5% in the fourth quarter, which compares well to the other Canadian banks.

Slide 41 shows that in Q4 we continued to repurchase shares under our 1-year normal course issuer bid, as part of our capital management activities. We repurchased 4.7 million common shares for 289 million, at an average price of $60.79. During the year, we repurchased a total of 14.6 million common shares for nearly 900 million. With respect to our common share dividends, which are illustrated on slide 42, we had a history of uninterrupted dividend payments, and 5 increases since the first quarter of 2002. And as Gord mentioned earlier, we announced this morning a 3 cent per share increase in our common share dividend in the first quarter. The Q1 increase will make it our sixth in 3 years.

I would like to conclude our formal remarks by reemphasizing that the actions we've taken to realign our businesses and focus on improving results in our U.S. operations will position us well for growth in 2005 and beyond. Thanks for your attention and I'd now like to turn the call back over to Stephanie to begin the question-and-answer period.

Thank you. We will now take questions from the telephone line. If you have any questions, please press star 1 on your telephone key pad. If you are using a speaker phone, please lift the handset and then press star 1. If at any time 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 the participants register for questions. Thank you for your patience. The first question is from Jim Bantis from Credit Suisse First Boston. Please go ahead.

Hi, good afternoon. I have 3 quick questions. In regards to the realignment charges, can you quantify the cost savings that will be generated from this into 2005? Second question, with respect to RBC Centura, Peter, perhaps you can detail what the contribution was, if you back out the charges that were included in the quarter? And third question, was there a goodwill impairment test done for RBC Centura as well? Thanks very much.

I will take the second and third questions, if you would like, and then maybe turn it over to -- on the realignment to Janice. But as far as Centura's contribution, when you back everything else out, Centura was profitable for the quarter. And specifically they had a $13 million net number. As far as goodwill for Centura, we have not done a corresponding valuation of goodwill on the Centura numbers, on the Centura business.

Yeah, it is Gord Nixon. I would just add to that, all the goodwill testing is done at the year-end and it is done for all of our investments, with the auditors in place. So there was goodwill testing done across all of our investments, Jim. And with respect to the cost savings that result from the realignment, we of course have generated those numbers internally, they have all been embedded in our 2005 objectives, which we've outlined and we will be monitoring against these objectives as we move forward. So we're not going to provide a specific number with respect to the job reductions, but they are all embedded into the objectives we've provided. Next question, Stephanie?

The next question is from Rob Wessel from National Bank Financial. Please go ahead.

Hi, good afternoon. I just have 2 quick questions. One is, I know everybody, you know, some of the key members of the management team sort of just started so this question may seem premature, but should we presume that after some of the new management members or team members get sort of their bearings and have been there for a little bit of time that we will get some, you know, perhaps new direction, or perhaps we will get some sort of announcement or some sort of indication as to where they sit or what sort of differences they may have from where the bank has been in the past? Will there be some sort of new information coming forward? And if so, is there a time line for that?

I'm not sure that you will expect to see a lot of new information coming forward, as new people get into their jobs from a management perspective. I think what we will certainly do in the very near future is have those executives provide far more regular and detailed reporting and performance to the marketplace, meeting with the marketplace, et cetera. Where we will be able to continue to articulate our strategies around their particular businesses. So, you know, I think the short answer to your question is, yes, you will see a lot more of that in the future, as people get settled into their new roles.

I guess, because I have sort of a follow-up question, I guess I was wondering why the bank keeps repurchasing shares in such a -- you know, it is not huge, but it is noteworthy, I guess I was -- I guess I would have thought that maybe until sort of the strategic direction had been sort of solidified, particularly as it pertains to the U.S. and any possible future acquisitions, that perhaps, you know, maybe in order to keep the flexibility to make more acquisitions, on a more shareholder-friendly basis, that maybe the buy back would sort of be held back or ceased until, you know, until some, you know, greater decisions had been made. So am I on the wrong track there?

Rob, it is Barb speaking. I think the straight-forward answer around the repurchases are, first, we're always careful to mitigate the impact of the dilution caused by the exercise of options that have been granted in previous years. And secondly, that, you know, we also have strong internal cash -- internal capital generation as you can see from our results, and that has also allowed us to continue to repurchase the shares and redeem some of our outstanding capital instruments, many of which do have maturity dates as are you aware. I think our overall philosophy around capital management for 2005 and beyond is that, you know, we are actively managing our capital to manage between maintaining strong capital ratios and high debt ratings, with the need to provide the returns to shareholders.

Sure. And I know I said 2, but I do have a third one. For the PCL guidance of between 35 and 45 basis points, should we read from that, that range or lower, or should we read from that, or should we read from that that you assume or that you forecast or expect that your provisions for next year will fall within that range? Which does not settle, the difference.

This is Morten Friis speaking. The expectation for next year is that we will see a return to a more normal credit environment. Some growth in retail portfolios and probably the end of recoveries of our commercial and corporate portfolio, which should land us in the 35 to 45 basis point range.

Great. Thank you very much.

Thank you. The next question is from Raphael Bellow from Citigroup. Please go ahead.

Thank you. Good afternoon. Maybe, Peter, if you could elaborate a bit more about specifically, how do you think that your mortgage origination business in the U.S. could improve, particularly considering the very, you know, strong competitive environment in this country? And likewise, if you can also comment about some of the things that you think you're bank is going to do different than your competitors in what relates to that particular mortgage origination and RBC Centura, in general?

Raphael, it is Peter Armenio. As far as the mortgage business is concerned, I mean one of the things that we're very encouraged by is the way Sterling, one of our recent acquisitions, was doing the business. Their model has proven to stand the test of time, and what we're very encouraged about is that we've now converted our business in full to their particular model, and feel very much that the sort of sales focus that they continue to have around the network and their version of the technology that they've got out there, which is in power and a lot of the other things that they are doing sort of makes them pretty aggressive competitors out there on the street and we're very encouraged by the management there. And so they now have full control given that we have moved our head office from Chicago. No longer have this confusion around the different offices. We've obviously closed the less profitable branches and so streamlining all of that. So at the end of the day, I think that the management at Sterling, which now has taken on the leadership of the organization, I think will hold us in good stead in terms of the competitive environment.

As far as Centura, just very generally, here again, you know, we feel that we are doing a lot of the right things, maybe there was too many things that they were trying to do, in the past. We've now aligned that properly. Mortgage is no longer a part of that organization. We've got the new CEO whose taking charge and has started to look aggressively at some of the cost initiatives that we've got on the go, is repositioning the organization from a revenue perspective, and a lot of the things that they're working on are very interesting. Repositioning overall the whole loan and deposit volume mix. So I'm quite encouraged with the attention that management has taken to not only the cost initiatives, but also the revenue drivers for the business. And in both case, feel optimistic about their future.

Great. Thank you.

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

Yes, good afternoon. A couple of questions just in terms of the goal setting, Gord. In terms of the growth expectations, could you give us a sense perhaps of how much is organic acquisition and then perhaps buyback, so organic with respect particularly with your revenue expectations, given our view as revenues are going to be tough to come by, and then buyback to try and then get into the growth on earnings? And I guess specifically, on your growth on earnings, 20-plus percent, I've been told that that's against $4 and, I guess, 23 cents using Canadian GAAP. I think you're using U.S. GAAP, but I used 4.23. Is that the base to run the 20-plus percent? And is 27.15 the book value to create the ROE goals also?

Yeah, the answer is yes to that question, Quentin. It is one of the reasons, obviously, that the number is very high; because we are off the lower base, and you can easily calculate what the number would be off of a more normalized number, if you back out the sort of restructuring charges, and so forth. With respect to acquisitions, there are really none baked into that -- those numbers, with the exception of the fact that we will have the full-year impact of UnumProvident next year where we only have partial impact this year. I think our objective is really based on, you know, firstly, that, you know, we fully expect to have a significantly -- a significant improvement in our U.S. banking operations in 2005. Which obviously, you know, had a very, very negative impact in terms of the performance this year. So, you know, that is clearly a big opportunity, and one that we fully expect. Our client source initiatives are focused on driving revenues. We're seeing strong volume growth as we exit 2004 in many of our products so our jump-off point we feel pretty confident in. Canadian economic growth and interest rates, you know, we think will be moderately higher in 2005. And our expectation is for other businesses like capital markets to continue to improve modestly. But, you know, a lot of it I think will be driven by a turn-around with respect to the U.S. and in addition to that, a lot of the initiatives coming out of our restructuring, which will start to kick in early in the year, and start to build even more so as we get into the back half of the year.

But if I -- you mentioned the momentum in the fourth quarter, but if I take, Gord, for each group, the best net income number out of the past 9 quarters, or even just in the past year, A, none of the operating units obviously given the charges in the fourth quarter had their best quarter and even if you back out those charges, I think you can find other quarters, and if I just add up all those best quarters, I still only get to about a 4.87 earnings number which obviously falls below your 5 and change of expectations. So I'm just -- is there a particular area that we should focus on that maybe the restructuring activity is going to be most beneficial to? Is it that retail just will, you know, really take off on the back of this, or as you say, you really think it is the U.S. platform that's going to be doing the heavy lifting for 2005?

Well, I think it is a combination of the 2, Quentin, but I mean if you look at the -- if you look at the cost savings combined with the revenue growth initiatives, and the turn-around in the U.S., you know, that would account for a big portion of our expected improvement, as you look '04 versus '05.

Okay. I will requeue. Thank you.

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

Hi, BMO gave us some good disclosure on reversals and recoveries and gave us the number by quarter and for the full year. Can you give us that?

We will get back to you on that. We're just looking into it, Steve, and we will attempt to get back to you later on in the call if we can, if not --

Yeah, that would be great. Just one area of clarification. Did you say that the AOL charges were this quarter and they were 20 million in both RBC Banking and in other?

Yes, we did.

That is correct.

Okay. Great. And so that would explain part of the reason of non-interest expenses going up in the retail bank. What was the reason for some of the other increases in that division?

The AOL write-down was not recorded in non-interest expense. It was in non-interest income, Steve.

Okay, great. So then maybe you can tell me why non-interest expense has popped up.

Referring specifically to the banking segment are you, Steve?

I am.

Yeah, it is Jim Westlake. There were a number of things in there. A lot to do with advertising. I'm sure that you've seen a lot of our AVION ads, and there was some other Olympic advertising from earlier in the year that spilled into that. Another large portion of that was in professional fees. I would say those are the 2 biggest categories that would account for that.

And the professional fees, did they relate to this restructuring? Or is that something that is going to ongoing? Because I did note that the number was a lot higher.

Those will not be ongoing expenses. There were also some increases in benefit costs in there that was fairly substantial in banking, it's the third one.

And is that severance related?

Sorry, I didn't get that.

And that was severance related?

No, these were increases in pension and benefit costs year-over-year.

Which should moderate in 2005.

Okay. Definitely. Okay. And maybe just one quick one, ACG 13, its impact on the quarter?

With respect to ACG 13, this is Janice Fukakusa speaking, Steve, we have actually adopted ACG 13 as of last year, so the impact in the quarter is not a discrete number. In other words, that it is -- it has been in our results for the last 4 quarters.

So there was no major discrepancy. Okay, thank you.

Thank you. The next question is from Andre Ardie from Merrill Lynch. Please go ahead.

Thank you. This question is related to the U.S. Do you feel that there is businesses that you have enough scale to successfully compete in the long term? So in other words, assuming your restructuring goes well and you improve profitability next year, what comes next?

I think it is -- it is Gord Nixon, answering and Peter is welcomed to jump on afterwards. I think one of the things that we have said as a result of this restructuring is that we are looking very carefully at our assets everywhere, but particularly in the United States, to determine where we want to invest capital going forward. Where we believe we have competitive advantage. Where we can compete. And where we want to disinvest capital, and you know, an example of that would be the recent announcement of our sale of Liberty Insurance Services. Not a large significant transaction, but clearly a business where we just feel that it is not in our competitive sweet spot with respect to U.S. growth. So I think all of our assets we're looking at very carefully in terms of where we want to deploy capital and invest in the future.

Thanks.

The next question is from Susan Cohen from Dundee Securities. Please go ahead.

Thank you. You showed some nice improvements in consumer market shares. What do you basically attribute this to? And is there any risk that you're taking on additional credit risks going forward? Or, you know, affecting competition in a negative way?

Susan, it is Jim Westlake. Taking part -- the credit part, no there is not a credit element, although there would be a higher proportion on the credit card side where you would just expect a normal higher run rate, but that wouldn't be of a great concern. I think that we have been gradually turning up our volumes over the last few months and certainly this quarter, if you look on both slide 10 and slide 48, you can see that there are a number of various products in different areas that we are showing that. It is not just in 1 area. It is across the board in terms of credit cards and in terms of loans, in terms of mutual funds. So we feel very good about those going forward. We have well over 100 initiatives identified in this Client First initiative with specific dollar targets assigned to each. And we're not going to comment on each one of them specifically at this stage, but they cover a very broad range of initiatives and we feel that this will keep us going next year.

Great. Thank you.

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

Thank you. The -- my first question relates to slide 20 of the slide deck. Which shows the -- which is Peter's section, which talked about U.S. banking earnings. The net loss in the quarter was 175 million. And that was after 2 items, I think the write down of goodwill, and the business alignment charges. So if I add those back, it looked as if the U.S. banking business lost 26 million. And I think, Peter, you said that Centura made $13 million in the quarter. So did the mortgage business lose 40 million? Or is there something else in there that I am missing?

No, that's about right. And basically, at the end, when you go through the exercise, RBC's losses were -- a bunch of it was due to the origination volumes declining, our origination volumes has gone down 26% from last quarter. Our volumes have declined right across the -- you know, the volumes declined right across the industry, this making pricing very competitive for us, so that was very much part of it as well. Putting a lot of pressure on our margins. Net interest margin on our warehouse was also declined as funding costs increased. But what is more important is that we're very confident that the steps that we've taken now to look at generating profitability in our U.S. operations going forward, will negate some of these negative surprises into the first quarter.

So I guess maybe trying to quantify that a little bit, Peter, because I mean the loss exceeded the revenue, it looked like. Is there something in the quarter that we should remove, you know, previously there had been problems in the warehouse that seem to be fixing themselves? Is there, you know, could you -- is there something we should take out of this as being unusual?

There are a couple of unusual items, some of them sort of negate and whatever else. But I would suggest that the -- you know, we continue to sort of have a few ins and outs in our secondary marketing side of the business. Whether it was the cost of loan, mispricing that's what happened sort of in some of our fourth quarter numbers, or some of the issues around hedging, but nothing specific that was big, it was just a bunch of smaller things that have come together into this number. Which, you know, again, I want to underline the fact that ultimately because we've moved away from the bulk type of business to flow, we feel very comfortable that as far as secondary marketing is concerned going forward, this is no longer an issue for us. And we feel very comfortable with our operations business, with the operations of our business overall. And so while the quarter was disappointing, net-net, we feel much more encouraged about the, you know, the next quarter going forward.

Thanks. The second question relates to the general allowances and the reversal. It looked -- I guess is a question for Morten, it -- you are having very good growth in risk-related assets, I mean in many ways you are doing far better than all the other peers in terms of bringing on assets, you know, your corporate loan book is growing, and, you know, the risk rates were up, it looked like about 9% year-over-year, and yet your general -- you've, you know, you released 150 million generals in Q1 and you released another 25 now, so I would have thought that the generals would track alongside risk-weighteds [ph]. Is there something I'm missing there, Morten?

Well, I guess a couple of comments. One being the growth in the risk-related assets is in part, some of it you may see on the market risk side or on the credit risk side growing in the credit products business. I don't know if that's part of what you are picking up. The release of the general allowance in the final quarter is a simple function of applying the methodology for looking at expected losses in the portfolio. And it is the number that comes out of that methodology.

So looking at general as a percent of risk-related assets, because I think with these reversals, Royal Bank has far lower generals as a percent of risk-weighteds [ph], even if we exclude the market risk component. Is that too sort of blunt an object to look at, is it that the quality of the book is different, even within the risk-weighteds[ph]?

The short answer I think is that it is slightly too blunt a way to look at it. When you do it on an adjusted basis, we're actually in the same range as the other Canadian banks.

Okay. Thanks.

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

Thanks. Had a few questions. First of all, on page 15 of the Canadian sub pack, under other other revenue, it is very big number this quarter. Part of that number there, I understand that part of it relates to a mark-to-market on derivatives. Can you give me some idea how much that would have amounted to on a pre- and post-tax basis? And whether there is anything else that might be considered a little bit unusual in that number?

Michael, it is Janice Fukakusa speaking. In the other other revenue, that line that you're looking at there, that line contains all of our derivative mark-to-markets on our hedging ineffectiveness. So there is a portion of that that reflects the volatility quarter-over-quarter in that mark-to-market. We don't disclose the individual details of each of those marks, but the amount of the mark really depends on our foreign currency and our interest rate positions at the end of the month.

Thank you. The next question is from James Keating from RBC Capital Markets. Please go ahead.

Thank you all. Looks -- we've got some aggressive targets here it looks like in the medium term. Intrigued and applauding the medium-term 15%-plus EPS target I believe it is. And I was wondering if you can speak to is that kind of each and every year you're hoping to get 15% plus and maybe we could just road map out a little bit about what you're thinking there, Gord.

Well, Jamie, the way we tend to drive our targets is based on our -- for 1 year, and our mid-term plans and objectives that we build up. So they really are built bottom up based on what we would expect and a lot of those will come from the improvement that will be generated from a number of the initiatives that come out from our Client First initiatives going forward. So, you know, I think 2005, a portion of that number results from the base off which we're leaving 2004, and I think going forward, we would expect to continue to see ongoing improvement as a result of some of the Client First initiatives. Beth on the revenue side and the cost side.

Okay. Thank you, Gordon. I wanted to just -- small technical question. It is a follow-on to Ian's question regarding underlying profit and I guess trying to synthesize what is happening in the U.S. with the mortgage banking and so on and then bring it back all the way to RBC Banking. When I was kind of normalizing RBC Banking in the sub pack, I was coming up, maybe up to $320 or $330 million of the AOL added back, and now I guess -- I think what I'm hearing -- I'm on page 3 of the Canadian GAAP package, if I add back as well some mortgage losses, does that get me more in the range of what this provision typically earns? It just seems I work hard to get it backup to $375 to $400 million range, if that is a reasonable run rate. Is that a fair question?

Jamie, it is Janice Fukakusa speaking. Are you -- just to clarify what you're trying to do is to get a normalized income level and you're estimating that if you add back AOL and add back some of the RBC Mortgage losses, that we come to a normal run rate, and I would say that is the right direction. And given Peter's comments around our activities in the mortgage business, and the fact that some of the problems we had with respect to the hedging, we don't expect to reexperience because we are flowing those mortgages in the interest rate risk to the investors, I think that that would be a good start in looking at your calculation of the more normalized run rate.

Thank you, Janice.

Thank you. Once again, please press star 1 at this time if you have a question. The next question is from Quentin Broad from CIBC World Markets. Please go ahead.

Couple of quick questions if I could. In terms of credit card impact, with both BIMO and TD had to take some charges with respect to usage of the card programs, and given you guys had some -- have had some good growth in terms of AVION, were there any charges into these numbers reflecting that? Or any adjustments that we should be aware of given your competitors charges?

We didn't have any. We didn't have any, Quentin.

And we don't expect to have any?

A lot of the charges are a function of the actual redemption rates of the programs, so they are program specific. So -- and we didn't have any this quarter.

Okay. Looking just at the U.S. revenue base again, if I could, perhaps for Peter, looking at Centura, in the quarter, quarter on quarter, so sequential page -- or slide 21, and I understand this is U.S. GAAP, but if I look at U.S. dollars, obviously slide Q3 into Q4, I don't think you've explained kind of the sequential quarter drop on a U.S. dollar basis, if you can touch on that? And then secondly, what in terms of customer first activity is going to help Centura I guess start to ramp that specific number up? Because I assume that that is the bigger -- that's the number you're focusing on and you're allowing costs to grow in concert with that number at 50% of the growth in that number.

[Inaudible], Quentin, basically when we look sequentially, the things that are driving the performance sequentially, one on the positive side is the positive loan growth that we have had. On the negative side, has been the sort of lower net interest income that we had from the investment portfolio, as we -- and we had higher yielding products but sort of also had higher funding costs, and lower volumes generally. So the investment portfolio. We had also some security gains, in the previous quarter that were not in this next quarter, so that was a problem as well. And a little bit of FX. So those would be the 3 main drivers on the negative side. Loan growth was positive. But those were the 3 main drivers on the negative. And I would suggest that on the Client First side of things, the focus has been very much on the NIE, and we have taken action, specific action around staff and those kinds of things to reduce head office and streamline the initiatives so that we have more accountability in the front office. Both in Canada and definitely in the U.S.

Sorry, Peter. If I can -- on a U.S. dollar basis, we -- revenues fell at Centura from 176 to 159, an I'm -- so are you saying on a sequential basis, from Q3 to Q4, that you had a decline in yielding on your portfolio and higher funding costs? And those caused your net interest income to drop? Is that --

Those are two of them, yeah. And then the other quarter also had a securities gain. That's not, you know, obviously not in this particular --

Not repeated. Okay.

Quentin, it's Nabanita, if you look at slide 22, I think it actually highlights the impact of each of those items. Now mind you that this is not in U.S. dollars and there is an FX impact which would likely impact each of those numbers above, but it gives you a sense of the order of magnitude of each of the elements.

Right. No, I wanted to understand the U.S. dollar backing of Canada. So if I allocate the 13, we will be able to get there.

Right.

And then finally just for Gord in terms of getting a premium multiple, you suggested you would like to get back there and part of the reason that your graghed some goals was to get there. Just your thoughts, the 20% ROE, your competitors clearly are running in the high teens, on a much larger base, or at least a base that is equal to if not superior to the royal in terms of equity capital. Just your thoughts in terms of running this lower A, equity capital, and B, Tier 1 capital, in terms of the other flexibility you have available to you, including, you know, buybacks, and dividends. Just putting it all together in terms of creating that premium-valued bank. Do you see yourself at any disadvantage, I guess is the point, given the capital levels that you're running on right now?

Quentin, I don't think we see ourselves at any disadvantage. I mean our capital ratios are -- our Tier 1 ratios are a little lower for a couple of reasons, one of which is because of the goodwill component that is on our books. If you look at our common equity related to risk adjusted assets, we're pretty much in line with the other institutions. I think as we go forward, I don't think that that will impact our ability to -- with respect to return on equity, and our ROE target, and in fact, you know, the -- you know, the higher the equity component, I mean if anything, that has a diminishing impact on return on equity. But I think we're -- you know, we certainly don't see it in terms of our ability to grow assets or to continue to expand the organization. We try to manage our capital around dividends, and share buybacks, and internal growth and to the extent that there is opportunities to grow businesses, you know, we have the ability to adjust areas like our share buybacks. So I don't think we see it as a disadvantage with respect to our ability to hit our ROE targets going forward.

Thank you.

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

Thanks. I'm just -- a question about the realignment of segments, and I guess some other information that's out with this data. Why is the U.S. insurance operation included in domestic consumer rather than U.S. international segment? And my understanding of at least part of the original rationale for the U.S. insurance business was to be able to cross-sell the U.S. mortgage originations. Have you essentially given up on this idea? And what are you trying to achieve in U.S. insurance operations now?

Yeah, it is Jim Westlake. First, I think in terms of why it is -- we have very much run the insurance organization as a global business, both the U.S. and the reinsurance group which is international, are highly connected to the Canadian operation so we have kept that as a separate discrete group, and since the much larger portion is the Canadian portion, we've kept that anchored inside the Canadian consumer group. With the sale of LIS, what we have in the U.S. is really a number of businesses that are all around distributing product. We still sell variable and traditional life products. We've also established ourselves in the creditor business linked off of our Canadian model, and likewise expanded the Canadian travel insurance business into the U.S. So they are very much extensions of that. And we are going to focus on driving profitability on those businesses.

I have another one. Relating to my previous question, the derivative mark-to-market seems to be a sizable source of volatility. Why can't you tell us how much the impact was? Isn't this equivalent to other mark-to-markets that would otherwise be included in trading revenue?

It is Janice Fukakusa, Michael. The derivative mark-to-market is the accounting volatility, associated with some of our businesses that are accrual-based. The actual mark-to-markets in -- on the trading side, in the capital markets side, are reflected in various different income lines, but what you see here is specifically related to our hedging ineffectiveness and the accounting impact of that volatility. So it is specifically in just a few of our businesses that are not capital markets based.

It seems to have elevated your other revenue quite significantly, though, this quarter. I'm just trying to get some kind of feel for the magnitude of the impact.

We don't really disclose those numbers, but the mark is related to both foreign currency movement and interest rates. So that's why you're seeing that sort of volatility, given where the Canadian dollar is, and how interest rates have been volatile on the short end.

Okay. I have one other question, if I could. I have been told that goodwill testing is on a segment rather than on an entity basis. So can you explain how the goodwill charges, specifically against RBC Mortgage, and will there be any subsequent impact of the new segment realignment that goes into effect for fiscal 2005 on any other goodwill valuations?

Michael, it is Janice Fukakusa again. The goodwill testing that we perform routinely at the -- in Q4 does relate to the identification of certain segments of business that are within our business platform. When we are realigning the segments, we are again going to be testing the goodwill on that new basis, and in fact in the realignment of those systems, when we were testing the goodwill and we were looking at the assembly of the U.S.A. platform, knowing the issues that we have had around RBC Mortgages, and the way that we're managing that particular entity, we specifically looked at the goodwill testing for RBC Mortgage on a stand-alone basis and the results of our testing is what you see in terms of the charge. In terms of the other segments going forward, we haven't finalized our reporting structure or our accounting structure, and we will be doing so in the first quarter.

Okay. Thank you.

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

Thank you. With Centura making 13 million in the quarter and given that it is going to be a fairly substantial contributor to the targets you have for 2005, I wonder, Peter, if you can just tell us what you expect from Centura in 2005, if you can be so granular? And finally, another question as well on the currency impact with respect to targets, Gord, are you -- and given the big number we're seeing in the other other, non-interest revenue, are you now hedging or are you considering hedging some of the U.S. dollar exposure?

Just on the first part, Darko, and a very sort of general comment on a look forward, you know, we have put a lot of plans in place to restore profitability to a much more normalized level, and so we expect reasonable profitability in the first quarter with improvement as the year progresses. Gord?

Yeah, I think that the -- with respect to the hedging of the investments, we hedge a portion of our foreign investments, but do not hedge our strategic investment, as you know. It is something that we will and do review from time to time, and, you know, we will continue to do so, but there is certainly no plan to shift at this point our hedging strategy around our foreign investments. And one of the reasons for that is because we like to ensure that we manage around our capital ratios as well. So there is a natural balance between risk-adjusted assets in foreign currencies and capital ratios, an that's -- that has tended to be how we looked at our strategic investments in the past. So there is no immediate plan, Darko, but it is something that we will review.

And if I can just follow-up on that, then, Gord, if the Canadian dollar were to go to par, you would still want to hit 20% EPS target growth for 2005?

So, EPS growth, well, sorry, with respect to our objectives for 2005, we have assumed a currency of 80 cents, so there would be an impact with respect to those objectives, depending on what happens with the U.S. dollars. The impact with respect to earnings is not immaterial, but it is not a significant number with every cent increase in the Canadian dollar, but it is something that we are going to have to manage around as we go forward.

Great. Thank you. If I may just have 1 last question. Peter, funding costs you're saying have risen at Centura, and you've lost some deposit market share at Centura. I'm just wondering what your outlook there is on the deposit side for costs going forward? And how you intend to increase market share and deposits?

We are -- Darko, we are looking at a bunch of different ways to sort of look at deposits. Obviously, new growth in deposits is our key focus as we move forward and that will be where we pay most of our attention. We are also looking at ways to leverage some of our other affiliates in the U.S. in terms of things that we do at Dain versus what we are doing at Centura, and so there is a lot of effort in terms of trying to figure out good ways to get key funding for Centura down the road, but new growth in deposits is a key driver, as well as some of the thing we're looking forward to doing with Dain.

Okay. Thank you.

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

The first one, on the -- there was investment security losses this quarter. Is there some sort of year-end purging that happened? I was just surprised by the timing of that.

It is not -- it's Nabanita, Steve, are you looking at the Canadian GAAP?

Yes, I am. Negative 26 on page 15.

That reflects the AOL write-down.

Okay. Great. Second question, Jim Westlake, I find it interesting that former head of insurance is now also the head of Canadian retail, you've been growing on the insurance side substantially over the last years in terms of sales specifically of UL products, and I was wondering what sort of synergies or what sort of different perspective do you think that you can bring to that division? Do you think that you can meld, I guess, your 2 strengths together in terms of getting more insurance sales out of the -- out of RBC Banking?

Well, thanks for that question, Steve. You know, I think there are a lot of things that we're trying to do in our new retail business. Pretty much on the infrastructure side, we are considering it that we are merging very much our -- the Canadian portion of our old wealth management group, the retail banking, and the insurance side. And as we've talked about with Client First, we have a lot of initiatives that are both infrastructure related to create more efficiency, and we have a lot that are client related that we think we can bring to bear. If you relate it back to the insurance group, there are now over 5 million retail customers in the insurance group, and so that's just another add-on that we can have to try to bring all of our products to each of our retail customers in Canada.

We've been waiting for a Goodall [ph] to come out with some commentary on the merger front. What about in terms of the bank act, in terms of selling insurance through branches? Have we made any progress there at all?

I think that -- I mean the short answer is no, we haven't made a lot of progress thus far. It is certainly something that we have continued to push very aggressively for and would be a very significant opportunity for the banking -- the banking industry, and I think particularly with respect to our organization. I think that -- I don't know whether we're making progress or not, it is hard to tell around these issues, though I think with the concern around the pricing of insurance products, et cetera, and the benefit and value that we believe the consumer will derive, if the distribution of insurance products is opened up, certainly significantly increases our argument and lobbying efforts around the distribution of insurance products through the branch system. So I would say that we are more confident that we're going to make progress on this issue, you know, whether it is in 2006 or not is hard to know, but it is certainly one that we're pushing very aggressively on, and we view as something that is likely to ultimately happen, and would be a great opportunity for us.

Thanks.

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

Thank you all very much for your participation. Before ending, I just wanted to address the question raised by Steve Cawley where we said we would try and respond to you. On page 26 of the Canadian GAAP document, we do show the recoveries for the quarter, and for the year, so I think hopefully, Steve, that addresses some of our concern or some of your interest. And again, we thank you very much for your participation. And if you have any follow-up questions, do give me a call.

Thank you.

Bye-bye.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation. And have a nice day.