Royal Bank of Canada (RY) 2005 Q1 法說會逐字稿

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

Thank you, Shannon, and good afternoon, everyone. Welcome to our first-quarter results conference call, which is scheduled to run for an hour. Please note that our slides and remarks as well as the question period that follows may contain forward-looking statements which involve inherent risks and uncertainties. A number of factors could cause our actual results to differ materially from what is expected in these statements, as described in the second slide of the presentation package you all have.

Our call today will begin with a 20-minute or so review of our results in the first quarter. You'll hear first from Gord Nixon, our CEO, who will provide a high-level overview of our performance. Then Barbara Stymiest, our Chief Operating Officer, will give you more details of our financial results, including asset quality and captive trends. Our 3 business segment heads will also briefly discuss their segments' performance -- Jim Westlake, Head of our Canadian Personal and Business segment, Peter Armenio, head of the U.S. and International Personal Business segment, and Chuck Winograd, head of Global Capital markets. Following their remarks, we will open the floor to your questions. Also joining us today are Elisabetta Bigsby, head of Human Resources, Marty Lippert, head of Global Technology and Operations, Janice Fukakusa, our Chief Financial Officer, and Morten Friis, our Chief Risk Officer.

With that, I'd like to turn it over to Gord Nixon. Gord?

Thank you, Nabanita, and good afternoon, everybody.

I'm pleased to say that we delivered very good results this quarter in each of our 3 business segments, leading to record net income of 1.04 billion or $1.58 per share. Our heightened efforts to grow revenues and control costs are beginning to show some results.

As you will see on slide 4, net income and earnings per share were both up more than 30 percent over a year ago. Return on equity was just under 23 percent. Revenue and cost performance were both strong with our efficiency ratio improving to 57 percent from 66 percent a year ago. In addition, the provision for credit losses remained low, although they were up $160 million from Q1 '04, which reflected $150 million general allowance reversal which was taken in that quarter a year ago.

You can see, on slide 5, that each for 3 segment registered double-digit earnings growth from the first quarter of last year. Returns were strong in each of our businesses and reached over 20 percent in our U.S. and International Personal and Business segment if one excludes goodwill and intangibles. The significant improvement in the U.S. and International Personal and Business earnings came largely from U.S. banking, where net income was up $27 million from a year ago to 29 million, most of which was RBC Centura. Peter Armenio will elaborate more on those areas during his remarks.

Our Canadian Personal and Business segment accounted for 63 percent of earnings, global capital markets, 24 percent, and the U.S. and International Personal Business segment, 10 percent.

Slide 6 shows that we earned $92 million from our U.S. operations this quarter, compared to a loss a year ago and last quarter. A year ago, we had the Rabobank settlement costs and last quarter the goodwill impairment charge at RBC Mortgage as well as the business realignment charges. But we're pleased to start seeing the improvement we are getting with respect to our U.S. earnings, which as I think you are all aware is one of our top priorities for 2005.

Slide 7 shows significant items in last year's first and fourth quarters that affected the results in those periods, as well as our growth rates. Q1 '04 contains both the large general allowance reversal as well as the Rabobank settlement, while Q4 '04 included sizable goodwill impairment and realignment charges. There were no comparable items or special items this quarter.

As you can see on slide 8, our performance compared to our 2005 objectives was very strong in most areas. Earnings per share, ROE, revenue growth and expense control all succeeded our objectives. Our capital management efforts helped strengthen our tier one ratio to 9.2 percent from 8.9 percent in the fourth quarter and our capital ratios, as they were, continue to be ahead of our objectives.

Despite an increase in our common share dividend to 55 cents from 52 cents in the first quarter, our dividend payout ratio was below our 2005 objective in light of the strong earnings that we had this quarter. However, we have not changed our objective for the full year.

I am particularly pleased with the 15 percent operating leverage achieved in Q1, as shown on slide 9, which reflected strength on both revenue as well as the cost front. The 11 percent revenue growth reflected higher loan and deposit volumes in both Canada and the United States, higher volumes in our disability insurance business, which now includes the UNUM Provident business in Canada, wider margins and better mortgage product pricing in the United States. The growth also reflected better equity underwriting, mutual funds, rebuilt foreign exchange and credit card revenues. As you'll see later, marketshares in many of our key products continue to rise.

On the cost front, the aggressive activity taken towards the end of '04 to reduce our expenses has started to show results. Barbara Stymiest will provide more details about our revenues and expenses shortly.

Our top priorities for '05 are shown on slide 10. There are 3 of them, improving revenue growth, enhancing efficiency and effectiveness, and generating better returns from our U.S. and International Personal and Commercial businesses. I hope everybody is still online! We've made good progress on all fronts in the first quarter and intend to continue to roll out initiatives to meet our 2005 objectives.

Now, before turning over to Barb, I'd like to say that, as you know, we have undergone some significant changes in our structure recently. This was the first quarter we presented our results under the new structure. We recognize that there could be questions arising from this, and we're certainly available to take them over the next few days.

I will now pass it over to Barb for a review of the financial and asset quality performance.

Should we just (indiscernible) to make sure everything is okay -- operator, is everything okay? We did hear a dial tone there.

The sound quality is fine.

Okay, Barb, over to you.

Thank you, Gord, and hello, everyone.

This quarter, revenues, as shown on slide 12, increased 471 million or 11 percent from a year ago, and that was despite a 3 percent reduction due to the strengthening of the Canadian dollar against the U.S. dollar. About 25 percent of the revenue growth occurred in net interest income and the balance in non-interest income. The net interest income increase was largely driven by higher loan volumes in both Canada and the U.S.

Slide 13 shows that our overall margin of 153 basis points remained flat from last quarter and was up 1 basis point from a year ago. Jim Westlake and Peter Armenio will discuss the margins for their segments shortly.

You'll note from slide 14 that non-interest income was up 353 million over a year ago and accounting for this strong increase was growth in the disability insurance product lines, which now include UNUM Provident, better pricing in our U.S. mortgage business, increased equity underwriting and advisory activity, growth in mutual fund assets due to strong sales and capital appreciation, as well as higher securitization, retail foreign exchange and credit card revenues.

Along with topline growth, you can see, on slide 15, that non-interest expense decreased 4 percent from a year ago and that contributed to our higher operating leverage this quarter. The decrease largely reflects the Rabobank settlement costs incurred in the first quarter of last year, as well as the $60 million decline in expenses due to the appreciation of the Canadian dollar against the U.S. dollar. These factors more than offset slightly higher variable compensation expenses resulting from higher revenues and the expansion of our sales forces.

On slide 16, you can see that our expenses were down virtually across the board compared to Q4 '04, resulting in an overall 4 percent decline.

Turning to our balance sheet, slide 17 shows the strong growth in our consumer loans over a year ago.

Moving on now to our credit quality, as shown on slide 18, our nonaccrual loans continue to decline and the nonaccrual loans ratio as a percentage of total loans and acceptances dropped to 57 basis points.

You'll note from slide 19 that three-quarters of the $743 million decline in nonaccrual loans versus a year ago occurred in the Canadian business and other international portfolios. Compared to the previous quarter, the majority of the decline was in Canadian business in the United States. A number of nonaccrual loans were resolved via repayment, restructuring and sales, and there were few new impairments over this quarter.

Slide 20 shows that the total provisions for credit losses was 108 million, and that compares to a recovery of 28 million a year ago, when we reversed 150 million of the general allowance. The allocated specific provision for credit losses of 53 million this quarter compared to 122 million a year ago. The reduction is attributable to improvements in agriculture, small business and commercial loans. The 53 million is the net result of 105 million of allocated specific provisions being partially offset by a transfer of 52 million from the allocated specific allowance to the allocated general allowance. The transfer resulted from the alignment of our accounting treatment for the allowance for credit losses across the enterprise.

Moving on to slide 21, you can see that the specific PCL (ph) ratio was 11 basis points before and 23 basis points after the $52 million transfer of the allocated specific allowance to the allocated general allowance. This was well below our 35 to 45 basis points objective for 2005.

Our capital ratios at the end of the quarter are shown on slide 22. Our solid earnings this quarter as well as the issuance of 300 million of Preferred Shares, which was completed in January, contributed to an improvement in our capital ratios over last quarter, although they were down slightly from a year ago. We will continue to review our capital position and manage it dynamically to ensure that we exceed our objectives.

Slide 23 shows the steady increase in our dividends. The strength of this quarter's earnings led to a 34 percent payout ratio, despite a dividend increase in the first quarter. As Gord said, we expect that will meet this objective for the full year.

I will now pass the floor over to Jim Westlake.

Thank you, Barb.

The Canadian Personal and Business segment includes Canadian Banking and Investments and global insurance operations. As slide 25 shows, 78 percent of our revenues in the first quarter came from personal clients and 22 percent from business clients.

On slide 26, you can see personal revenues grew 13 percent and business revenues grew 1 percent over a year ago, resulting in a strong 10 percent increase in total revenues. This reflected strong growth in personal and business loans and deposits, growth in disability insurance, and strong sales and capital appreciation in our mutual fund business. We also recorded higher retail, foreign exchange and card revenues.

We are pleased with our 3 percent overall revenue growth over last year's fourth quarter, which also reflected volume growth in personal loans and deposits and higher brokerage revenues due to new issue activity in the quarter and higher client-trading volumes at the start of the RFP season. Business loan and deposit volumes rose but narrower margins led to a decline in business revenues from Q4 '04.

You can see, on slide 27, that our net interest margin remains stable for the quarter. However, with interest rates remaining low in a competitive pricing environment, margin expansion was limited.

Our earnings, shown on slide 28, increased $80 million or 14 percent from a year ago, benefiting from the strong revenue growth I just mentioned. Our cost-containment efforts resulted in expenses rising 4 percent, which was due largely to the addition of branch and other sales staff and higher marketing costs to support our business growth. While the total provision for credit losses was up 56 million due to a 76 million reversal of the general allowance a year ago, this specific provision was down $20 million. We benefited this quarter from our revenue and cost initiatives and from low interest rates, strong employment levels and higher consumer confidence, all of which spurred volume growth.

The next 2 slides depict our strong volume growth in Canada and market share increases in most key products, despite competitive pressures. We are pleased with our results and particularly the volume and market share gains, which suggest we're serving our clients' needs. We have every intention of further enhancing our client offerings and contributing to customer and shareholder value.

I will now turn it over to Peter Armenio.

Thanks, Jim, and hello, everyone.

As you may know, we brought our U.S. and International Personal and Business operations together in 1 segment, recognizing that each of them is quite distinct from our operations in Canada. This structure has increased the accountability while helping us to be more focused. The new structure is also allowing us to manage these business more dynamically and leverage each other's products, distribution and strengths where it makes sense.

Going forward, the strategic focus of our U.S. International and Personal and Business segment will be on banking and wealth management. We believe these sectors have the most opportunity for growth and present the best potential for RBC in light of our competitive strengths and capabilities.

As you can see on slide 32, that our banking businesses, which include RBC Centura, RBC mortgage, and our Caribbean operation, made up 45 percent of this segment's revenues, while our wealth management businesses, which consist of RBC Dain Rauscher and Global Private banking, contributed 55 percent.

I'm pleased to say that our banking operations delivered much stronger performance this quarter. As shown on slide 33, which presents revenue in both Canadian and U.S. dollars, banking revenues in the U.S. dollars increased 15 percent over a year ago despite a gain of $35 million pretax from the sale of RBC Centura's merchant acquiring card portfolio a year ago as well. We're up 27 percent over the fourth quarter. The increase was mainly due to better pricing in our mortgage origination businesses as well as volume growth in loans and deposits and wider spreads. Our wealth management revenues in U.S. dollars increased by 7 percent over a year ago on the strength of improved fees in the RBC Dain Rauscher and wider margins in Global Private Banking.

On a quarter-over-quarter basis, stronger equity markets led to higher brokerage commissions and investment management fees, resulting in a 6 percent increase based on U.S. dollars in the wealth-management revenues over the fourth quarter '04. Revenues in Canadian dollars were impacted by the strengthening of the Canadian dollar against the U.S. dollar. However, all of the growth factors just mentioned more than offset a $52 million reduction in our segments' total revenues from quarter 1 '04, due to the currency impact.

Slide 34 shows that our net interest margin widened by 5 basis points over the previous quarter and by 17 basis points over a year ago, reflecting interest rate increases in the United States. Our earnings, shown on slide 35, increased by $36 million from year ago with U.S. banking, specifically Centura and Mortgage, having earnings up $27 million to $29 million. Mortgage was a small part of that total number.

Expenses declined in the period as a result of cost-containment initiatives. Although the closure of the Chicago headquarters of RBC Mortgage and the transfer of its operations to our Houston office will be completed in the second quarter, we have already started to realize some benefits from that, as well as from closing the 38 less profitable Mortgage branches in the fourth quarter and an additional 10 low-performing branches in quarter 1 of '05, for a total of 48 branch closures. Favorable economic conditions and higher levels of secured lending resulted in a lower provision for credit losses.

Some of the reasons for our improved banking returns this quarter are shown on slide 36. This includes strong growth in Centura's loan and deposits, and we continue to focus on growing Centura's commercial lending business and our very stable Caribbean businesses, and just focusing on cross-selling new products to its client base.

On the wealth management side, as shown on slide 37, RBC Dain Rauscher and Global Private Banking groups teamed up to start offering GPB lending solutions to Dain's clients and we will continue to focus Dain Rauscher on a solid wealth management approach, which includes providing solutions for both sides of the clients' balance sheets. We have also focused on our distribution capabilities, by offering global capital markets' structured products through GPB and by developing specific product for Dain clients. GPB is refocusing on high net worth segment by launching a new relationship-management model across the platform.

Finally, our U.S. brokerage and wholesale businesses have historically used different technology platforms but there are sizable benefits to integrating these systems, and so that process has started. We are also implementing a common operating platform across GPB. I believe these efforts will put a very solid footing, both at Dain and GPB, going forward.

We are pleased with the improvements in our results this quarter and are determined to continue to grow and enhance returns of this segment. With that, I'd like to turn it over to our last speaker, Chuck Winograd.

Thanks, Peter.

I will keep this short so we can get onto questions. We have shown you revenues on slide 39 in line with how we've restructured our global capital market segment. The 3 key areas are global markets, global investment banking and equity markets, and other, which includes a number of groups described in the footnotes at the bottom of the slide. These accounted for 58 percent, 24 percent and 18 percent of our revenues, respectively, in the first quarter.

Slide 40 shows that our segments' revenues was up 8 percent over a year ago and 11 percent over last quarter. Global markets' revenue increase reflected stable returns in our trading businesses year-over-year with higher foreign exchange and equity trading results, largely offset by lower fixed-income returns. Compared to last quarter, foreign exchange trading continued to perform well and fixed-income returns improved, while equity trading returns slightly declined. We also saw higher returns in our structured transactions businesses and our private debt and equity portfolios and higher debt origination volume.

The growth in global investment banking and equity markets reflects stronger equity underwriting in Canada. The Other group had higher returns in custody and administration services, as well as in commercial banking last year-over-year. However, this was partially offset by lower returns in the non-strategic lending group, which were intentionally running off.

Onto slide 41 -- you can see that net income was up 32 percent from a year ago. In addition to the 8 percent revenue growth just discussed, NIE declined largely reflecting the Rabobank settlement costs a year ago. The provision for credit losses remains low, reflecting the credit cycle and a low level of problem loans.

Finally, I'd like to talk about some of the new initiatives that we have been undertaking and that have been gaining some real momentum. These are shown on slides 42 and 43. The fixed-income groups for Dain Rauscher and Capital Markets have been integrating and are beginning to leverage opportunities. Our structured products group is growing with the Tokyo trading platform already established. A new London-based team is already trading in precious metals, including gold. A new San Francisco-based team is already originating and trading convertible securities. A new Sydney-based investment banking unit will work with our sales and trading team, who now have a license to trade and clear on the Australian Stock Exchange, in order to take advantage of the growing mining sector there. Finally, we are now focusing on 340 high-value commercial clients transferred over from the Banking segment. With these and other initiatives already underway, you can say that I'm pretty excited about future opportunities.

Now at this point, we will turn this call over to the conference operator to begin the question-and-answer session.

Thank you. The first question is from Steve Cawley, TD Newcrest.

A few quick ones -- first, on the business realignment charges, you've got a liability balance of 178 million of the original 192 that you set, out, does that mean that only 7 percent of the annual expense savings that you will achieve have been achieved so far? Is that how to look at that?

It's Janice Fukakusa, and I'll answer that question for you. No, that $17 million represents the amount of the accrual we drew down, which is associated with the actual severances that took place. A lot of the severances are occurring over the next year and so, as we spend the accrual to fund the severances, that's how we're drawing it down. So, there's not a direct correlation between the drawdown of the accruals and any future savings.

But Steve, I think to get to your question -- it's Gord -- it represents the fact that, although a number of people have been -- positions have been eliminated, many of those people are still on the payroll of the Bank because of the way our system works in terms of severance and bridging and those types of things, because you remember, there are a lot of senior executives.

Could you quantify what percentage of your expense-cutting initiatives are actually reflected in these quarterly results?

Well, very little because I think you've interpreted the numbers correctly. We've taken a realignment charges which relates to people, and I'll just talk about the people issue, because remember, there were other issues relating to technology investments, etc., but with respect to people, we have taken -- of the restructuring charge, we've taken -- I think the number is 17 million, Janice?

Yes.

-- of that charge, with respect to people who are no longer on our payroll, so that percentage would be about right in terms of the people savings that should be in place by the end of the year. Did I explain that correctly?

Yes, I will follow up I think maybe as well later on.

The second question -- on the insurance business, there was mention that, at year-end or it wouldn't have been -- yes, I guess it would've been year-end -- that there was an actuarial assumptions change. I was hoping that perhaps Jim could talk about the magnitude of that.

Yes, I think, Steve, well, most of the difference between the U.S. and Canadian GAAP could be accounted for by the actuarial reserve changes. It was a large number of items that were involved, having to do with some normal changes. We also had the UNUM block that went to its first year-end, and changes particularly reflecting interest rate movements. So I would say that we had an extremely good quarter in U.S. GAAP and a pretty good quarter in Canadian GAAP.

So what -- on a Canadian GAAP basis, what was the benefit of the change?

Well, no, the difference between the 2 would have been about $60 million.

So -- but that didn't benefit your Canadian GAAP -- (multiple speakers)?

No, no, it took down the Canadian GAAP from U.S. GAAP.

Okay, so basically, because of low interest rates, you increased some of your reserves?

Right.

I got you. Finally, just one quick one as well -- on slide -- on Page 20 of your Canadian GAAP supplement, the impaired loan formation of -38 is net of reversals and recoveries. Can you tell me what the gross impaired loan formation was in the quarter?

It's Morten Friis. The gross PCL formation in the quarter was 163 million, down from 193 in Q4. We had reversals of 13 and recoveries of 45 for the net number of 105.

Okay, great. Just one last just statement -- I guess I was hoping, this quarter, to get a lot more granularity on the various divisions that we've gotten here in the disclosure. I guess, from your benefit, just -- if you guys, Gord, gave us more disclosure, I think, as good is these numbers are, it's hard to really interpret them. Relative to the other banks, I think you are a lot harder to model now, and I think you are a lot harder to value. So that's just my 2 cents. I just hope that, in future periods, maybe, say, a division like Canada where you've got so many divisions there, I would think it would make a lot of sense for both parties to give us a little more disclosure.

Yes, I think that's a fair comment and I think, as I said at the end of my starting remarks, you know, you have to appreciate that converting from the 5 business units to the 3 business units, there has been a tremendous amount of energy and effort in terms of restating the various business units. We think, actually, the disclosure that we now provide and the way it's provided are (indiscernible) the numbers, the MD&A is actually even clear and in very good shape. In terms of granularity, we take your comments and that something that we will certainly work towards. In terms of the model issues, I would say we will certainly be available over the next number of days, Janice, Nabanita, Barb and myself, others, to the extent that people need some help.

Thank you. The next question is from Jamie Keating, RBC Capital Markets.

Good afternoon, all. I have to say, great results, everyone. The question I have is related to both slides 26 and slides 30, maybe for Barb or for Jim perhaps, specifically. Can you help us just understand the impact of acquisitions on the revenue growth, if there is 1, just to confirm, either way? That's for slide 26, revenue growth. My apologies. I'd like to get a handle as to what the organic underlying might have been.

Well, what you would have is simply 1 quarter of revenue from UNUM Provident would be the only effect that would be in there. That would be, you know, a relatively small portion of the total for the business.

So not really relevant, or not really material, Jim?

Well, I wouldn't say it's huge, no.

It would be tidier for us if we could clean it up just a bit. I think you've beaten everyone on this number. We just don't know by how much, because we don't know what the underlying is.

Another quick one, Jim, perhaps on Slide 30, you highlight how well the Bank has done on business deposits, but it seems conspicuously absent on the business loans. Can you describe -- that area appears to have become much more competitive according to one of your competitors.

Yes, well actually, on the business loans, our volumes have been very good. In the comments, what I mentioned is that so many of our business loans are taken off of time and the spreads narrowed about 10 basis points if you go year-over-year, so that's why the revenue wasn't there but in actual volume, we've had a pretty good quarter in there and it's just tough to translate that into revenue in the current interest rate environment.

That part is fair. Jim, I'm just curious. Do you have a working sense as to how your marketshares are holding up in that segment?

Well, yes. I don't have all the latest numbers for the end of the period but I think that we're probably up. If I look Q1 '05 over Q4 '04, our volumes on business loans were up 1.3 percent, and Q1/Q1 year-over-year would be up 5.8 percent on the volumes.

Those are pretty good, okay. Thanks very much.

Jim Bantis, Credit Suisse First Boston.

Good afternoon. What do they say -- you missed it by that much! (LAUGHTER). A couple of quick questions regarding sustainability and maybe, Chuck, you can take me through world markets. Seasonally Q1 is very strong, your capital markets. If you can take us through which businesses you think are going to continue to run quite strong over the next 2 quarters, based on what you're seeing, and which businesses you are seeing where, Jim, you have to recognize that we're very frothy? Particularly November and December are very strong underwriting months. Have you seen any change with respect to your calendar?

You are right, and I don't think November and December are very busy months for us, but we also had a real run -- and I won't call it good luck -- but basically a lot of people that we've been doing a lot of work with happened to come to market and it really worked out well for us.

I don't think that anybody can expect a run like that to continue. From a backlog standpoint, I think that we have to also remember that there wasn't that much of a backlog in early fall. I mean, what's happened to these markets is that there's so much opportunistic financing that is going on and people that are deciding to come, that it really is not anywhere close to as predictable or is pipeline driven as my memory of the past used to be. But I think the point with respect to the Canadian fixed income -- sorry, the Canadian underwriting business particularly is there.

On the trading sides, again, you can't even -- you can't look at a year any more because you have periods in a year. Right now, there is no question there is volatility and the last couple of weeks, it has been down from what it was in the period of the first quarter, the foreign exchange market isn't as volatile as it was just generally, and you know, credit spreads have come in even further. So you know, as of today, it probably is a little bit tougher in markets, but again, it's very hard to project and I don't even try to because these markets have been changing so quickly that, looking back, you are looking at periods of quarters as opposed to years that tended to take (ph) what's going on.

Thanks, Chuck.

I'm not trying to be evasive, just honest. I mean, it's just not happening the way it used to.

Are you feeling more comfortable with respect to your U.S. platform, in the context of taking advantage of the pick-up in equity markets with respect to your mid-market client base? I know last year was a bit of a transition year from a headcount perspective, resources and just overall coordination. Do you feel that most of that reorganization has been put behind you and this is a year where you can take advantage of this?

Well, first of all, we've got 2 midmarket businesses in the U.S., 1 that we're just starting to work on hard, which has been well-developed by the Dain Rauscher side. We're doing a lot of work in that business, more from a how are we going to use it as a platform to do other things and add product and distribution to it, and so there's a lot going on.

There is less going on in terms of headcount-cutting and other things in the U.S., and more going on with respect to upgrading of individuals. We're still far from satisfied with the results from that business. Having said that, we are very happy about a number of things that have been happening, particularly in the underwriting side. There's a lot of things that are going on in terms of research buildup that have worked, but it's going to be a long-term work in progress in terms of getting it going. I think this year should be better than last year but you know, we've got a period of time to work on that business before it gets to where I'm going to be satisfied with it.

It's Gord. The first part, just for clarification, of Chuck's response relates to the fact that we've integrated the fixed income business, or ficum (ph) from RBC Dain's platform into RBC Capital Markets. That's the leverage that he's referring to on that front, which is a sales force, Chuck, of about how many?

A couple of hundred -- 200.

200 or so people on the fixed-income side.

A very interesting business and business opportunity for us in terms of the way we're going to build our fixed-income business and fill in the U.S., which has been a hole for us for a long time.

Rafael Bello, Citigroup.

Yes, thank you. I just wanted to see if you could comment on the competitive environment in the U.S. Certainly, it's very encouraging to see that your operation is turned around and it's very impressive to see what you have accomplished so far. Could you comment, particularly on the mortgage side, what is your expectation, what do you think the competitive pressures are going to be in that particular business, and also in your other lending businesses? How are you prepared to go in terms of this competitive environment?

Rafael, hi. It's Peter Armenio. I guess, from the mortgage perspective, there's no question that just, overall, there's a lot of pressure on origination volumes coming down but our mortgage business is quite competitive; it's in an environment -- as a matter of fact a true testament of how competitive they have been in the last little while -- has been how well they performed in this first quarter of the new year. Their volumes around originations have not dropped to any degree from the fourth quarter, and really usually the third quarter and the fourth quarters are pretty good. So competition is always fierce, as usual, but at the end of the day, these people seem to not only stabilize the business but we've also had a good run at keeping our origination volumes going steady.

As far as the commercial lending, we're just lending generally on the banking side of things. You know, we compete every day with some huge organizations but ultimately, our value proposition is around the service end of it, the idea of being a big operation, at the same time having a lot of service to the business we do is a strong small-business focus which is also something that is a bit of a differentiator for us. So that's how we are competing today.

Thank you.

Quentin Broad, CIBC World Markets.

Yes, good afternoon. Nice numbers. Gord, just in terms of the comments you made about the expenses and how you anticipate they are still really working into the system through 05, I'm trying to find it again but I think somewhere in this subpack you show a headcount reductions --.

455, Quentin.

Okay, and if I remember and if you had the page -- it looked like U.S. headcount down 1,300, growth in Canada up 500 and growth in -- or other up 180, if those numbers --?

Okay, it's important not to mix apples and oranges with respect to the 1600 employees, because there has been a bunch of things that have gone on away from the restructuring, such as the sale of the insurance processing business in the United States, which was about 800 people who are now off our payroll, but that was not baked into our restructuring plan. There's also been some other issues, things like closure of the Mortgage operations, those types of things that weren't baked into the plan as well.

The 1,600, which is the one we will -- (technical difficulty) -- we will constantly report on -- I'm sorry -- someone has got black ray (ph). The 1,600 that we will be reporting on relates to parts of our initiatives, Client First initiative. Of those, there's been 455 employees that have been severed by January 31, '05. There's actually been slightly more position eliminations, and that's why we use the word 'position-eliminations', because we have tried to redeploy people as we've eliminated their positions. So the 455 people, slightly more positions than that -- I think it's around 600-ish in terms of positions that have been eliminated. The difference is that many of those employees that have been severed are still on our payroll and that gets back to the question that was asked earlier in terms of 17 million only being used, because a lot of those people under our programs continue to be under our employment contract, and that usually rolls off over 2 or 3 months or so.

Okay. To turn to I guess Peter in terms of the U.S. business, I guess a couple of items -- if I look at subpack (ph) on Page 9 and look at the loans and acceptances balances declining sequentially, I guess I'm trying to understand whether that's Centura, whether that's wealth margin loans or whether that's the Caribbean or some variation thereof. Then, at the same time, I'm trying to understand the U.S. revenues year-over-year, on Slide 33, which, if I look at 317 to 104 and 337 Q1 '05 -- but then you show mortgage revenues in the subpack at 51 million in '05 and 2 million in '0Q4. So if I back that out, it looks like revenues declined year-on-year for the rest of the business. So I'm -- I guess more confusion with just trying to figure out what these numbers are as you've brought them together. So, help on that would be appreciated, given the NI line, net income line ,moved from 2 million to 29 million.

Quentin, I was having a hard time trying to follow your question, actually.

Let's do the first one first, which is declining loans and acceptances.

Declining loans, that seemed relatively flat, if I'm reading this thing right.

It's the currency.

Oh, the currency, yes. I guess the currency.

So it's all currency running?

Yes. The second one then?

So, on the second one, if I look at your Slide 33, revenues in Banking were 337, up 20 million from Q1, '04, which would suggest Q1 '04 was 317.

Right.

If I then use Mortgage revenues, which you report in the Subpack, 47 million in Q1 -- I'm sorry, 47 million in Q1, '05 and 2 million in Q1, '04 -- and back those out of your revenue numbers just to see what the other businesses were doing, it looks like therefore your revenues are declining outside of that significant growth in Mortgage Banking revenue.

Well, if you're talking on Canadian, yes, you're right. I mean in the sense that's all exchange, that's what I was talking about earlier. There is about a $52 million revenue swing because of the exchange. (multiple speakers) your question right. (multiple speakers) -- that is predominantly that. I mean, our revenues in the U.S. -- let's put it this way -- there's no one our businesses where our revenues went down. All of our businesses' revenues were up; Dain Rauscher was up 7 percent; we were all up everywhere. (multiple speakers) -- in U.S. dollars, so while I don't get your question totally, I think it's really (inaudible).

Quentin, 1 thing -- what we will do is we will try to drill down on that and get back to you I think is the best. If there is anything there, we will make sure it's put out.

Ian de Verteuil, BMO Nesbitt Burns.

] Thank you. What a great quarter! The stock is reflecting that.

It wasn't as good the fourth quarter of last year, so we're not -- the first quarter of last year, so we're not going to crow about it.

Well, you've been hollered out a few times, Gord. You should bask a bit in the glory! (LAUGHTER). Congratulations. Just -- the MBS gain in the quarter, I saw it sort of mentioned in the narrative. There was an MBS gain which is your selling off presumably up some of the mortgage-backs off of the Sterling business. Can you tell me what segment that comes through? I think it's corporate. Could you just confirm that? Does it come through the securitization line, or the mortgage revenues line or other? Where does that gain come through?

It's Janice Fukakusa. That gain is actually the result of us securitizing some of our Canadian mortgages. There's a central housing trust that we do that for funding, and so the gain that you see is simply putting the mortgages that are fixed-rate into the securitization and taking up the gain there. So that's why that particular revenue flow through the Corporate Resources segment becomes part of our corporate treasury -- (Multiple Speakers) -- activities.

Okay, so that's great. It's in incorporate. On the income statement, the non-interest income, where would it flow through? Does it flow -- (multiple speakers)?

Securitization revenues.

Securitization revenues, okay. So the gain -- I think you mentioned there was also an equity pretty gain; that presumably is the gain or loss in investment securities.

Right. A portion of our discretionary investment portfolio -- the small gain in Corporate Resources, yes.

Right, so the 47 million -- Quentin had mentioned this -- the Mortgage Banking (ph) revenues that we see, I think it's 51 in U.S. GAAP, 47 in Canadian GAAP. That is (indiscernible) just the mortgage business back to sort of a normal level of -- to the extent you can talk about a normal level of originations -- and moving stuff quickly through the warehouse?

That is entirely related to the United States and as Peter mentioned in his remarks, the margins and the pricing on this business and improved significantly. (multiple speakers).

But Ian, your interpretation is correct.

The other question I have -- and please forgive me for all the detail; I think we are all a little bit rocked over a couple of days of back earnings here. Page 17 of the Canadian subpack -- it looks as if you have reallocated some of your loans from what you used to call loans into other things, like on Page 17, there's this liquidity facility is less than 1 year without general market disruption, which is tying up 2.5 billion of risk-weighted. Can you talk about what that is and what the reallocation of the loans from the loan book to the repo book was?

We will have to get back to you, Ian. (multiple speakers).

Okay.

In the notes to the supplementary, we do have a discussion of the various reclassifications that occurred during the quarter.

I saw that. Maybe I'll get back to it later on. Thanks.

Michael Goldberg, Desjardins Securities.

I want to just pursue the question about one of the first comments about U.S. banking being up 27 million year-over-year to 29 but that's mostly Centura, so it sounds like the contribution from RBC Mortgage is still subpar. A more general question -- when Royal Oak (ph) first got into both the U.S. mortgage origination and insurance businesses, I got the sense that a key part of the rationale was to sell credit or life when mortgages were originated, and that hasn't worked out. So my question is, is it still feasible? Does it still justify the rationale for both businesses? Does the mortgage business in particular still fit in, going forward?

It's Jim Westlake, Michael. I can answer part of that. I think, initially in the insurance business, there was really no play at all from a mortgage standpoint. We did announce that we did a deal with a company called Ellie Mae, which is the technology link whereby mortgage brokers are connected to their funding. That would represent the bulk of our mortgage opportunity and anything through either RBC Mortgage or RBC Centura would be very, very small in comparison to the broad market that we deal with there.

Just on the mortgage side, Michael, I mean while the first quarter was relatively a small contribution to the overall U.S. banking number that we've showcased, ultimately the bigger challenge for us in this particular quarter was getting it fixed and getting it to a point where operations are much more stable. You know, we are happy to say that we feel a lot more comfortable with the Mortgage business going forward in that regard.

I said earlier the origination volumes have been pretty good. The business is a good business. We're looking at all our businesses to see whether they ultimately fit in our strategy overall, but we believe we do need more of these solutions in our platform and as we speak today, that mortgage business is very much part of our overall portfolio.

I have just a couple of other questions. First of all, should we interpret the comments about still evaluating goodwill -- the door is still open to the possibility of another impairment charge?

No, not at all Michael. It's Gord Nixon speaking. That really relates to the accounting issue of attribution of goodwill when you restructure an organization and the accounting rules are very -- (LAUGHTER) -- yes, Chuck's word is 'Byzantine', but it's really something that's being driven by the accounts (indiscernible). Janice may want to mention it but it's something that is still in flux, but it has nothing to do with respect to -- (multiple speakers).

It's not the quantum of the goodwill; it's the allocation between the segments that's under review.

Just one other question -- with the high level of Curis (ph) sales and repayments in the first quarter and the saying that there is now a low level of problem loans overall, should we be looking more toward a lower level of Curis (ph) sales and repayments going -- (technical difficulty) -- than maybe a more normalized level of net formations?

Well, it's hard to predict where the future will go in that regard. I mean clearly, our nonaccruals are down, the outlook is for eventually a return to more normal levels of PCL formation and new impaired (ph) loan formation that might bring us more into the range that we are predicting for '05. But the level of recoveries and reversals I can't really comment any further on.

Well, are there still a number of loans that are still in the process of being rehabilitated?

There are always a number of loans in our workout group that may eventually result in provisions being reversed or in recoveries. But you know, that's hard to predict. The volume, as you can see, of impaired loans that we're working with is down and the number of files where there are possible recoveries is shrinking, but you know, every quarter, there are new loans being brought in, new provisions taken, and so there is an ongoing process. But the base that we're working off of is a much smaller number.

Michael, one of the ways that I try to gauge our loan book going forward is that Ephraim Day (ph) (indiscernible) runs our special loans group, I try to monitor his stock (ph) count. It's been stable for quite some time but fortunately it's stable at a fairly low number, so --.

It's stable and actually shrinking slightly.

Thanks very much.

Andre Hardy, Merrill Lynch.

2 questions, the first is big picture. It doesn't sound like much of the sequential decline in earnings is related to the realignment that you took in Q4. Correct me if I'm wrong, but if I'm right, is there a lot of timing issues (sic) here where those expenses would be down temporarily, or is this something more structural?

Secondly, another question on the Mortgage operation -- Peter, a lot of your competitors have seen spreads really collapse in the last 3 to 4 quarters and are expecting further pressure. What is it that you're doing differently that has actually allowed your spreads to go up?

It's Barb. I will answer your first question around -- I think you meant the sequential declining in expenses. Although the expenses were down year-over-year, we did point out that we had the Rabobank settlement in Q4 of last year. We also benefited from the change in the exchange rate, which caused a decline in our expenses. So if you ignore those 2 factors, our expenses were almost flat year-over-year.

Talk about the sequential decline, please?

The sequential decline, it was not that significant but does reflect the fact that we're focusing, as Gord said in his comments, on streamlining all of our operations as part of our client-first initiative. We're beginning to see some of the results of that. We've talked a lot today about the beginnings of seeing some of their results from the headcount reductions, the sale of Liberty Insurance will have impact, and the reinsurance services. So, we are seeing some decline in the expenses and we expect to see that going forward.

Are you willing to you quantify how much costs you will be able to take out? I mean, we're looking at over 100 million of sequential declines. Like, how much can there be?

We are not -- you know, Andre, I keep moving back to the fact that what we've tried to do is lay out our objectives for the year in our annual report in terms of both revenue and costs. You know, we're not really moving off the objectives that we've set for ourselves, so it's not something that we're going to quantify and report against.

On the Mortgage business too?

Yes, Andre, it's Peter Armenio. On the pricing issue that you talk about, I think it's more a question of what we were doing wrong in '04 versus what we're doing right in '05. Because what happened, in '04, we had basically 2 business models going at it and the old RBC Mortgage business was not really pricing the mortgages properly. Sterling, which is the model that we have adopted on a go-forward basis, which is the Houston-based organization, is a lot more disciplined around pricing and has much more structure around their technology and everything else. At the end of the day, the improvement was really coming from the fact that we're doing it more efficiently today than we were doing it in the past.

You now expect your margins to move in line with the industry going forward, I presume?

That's right.

That's a better way to look at it, Andre.

Susan Cohen, Dundee Securities.

Thank you. Another question on the U.S. Banking -- in the past, one of the weak spots that you mentioned was a very low yield on Centura's portfolio. Has that issue been addressed? Are you able to generate a higher yield on that portfolio? Was that something contributing to the better earnings? Furthermore, is there more leverage to potentially come from an improvement in yield there?

I was just going to say -- Susan, it's Barb speaking -- that we have been able to slightly improve the yields as some of the instruments that we have had in our investment portfolio have been maturing and we have been replacing them with higher-yielding instruments. So we -- go ahead, Peter.

I was going to say, suffice it to say, though, it remains relatively flat.

Relatively flat, yes.

There hasn't been a big pickup in this quarter -- (multiple speakers) -- around the investment portfolio, so it's been driven primarily from the retail business and the businesses that are sort of (indiscernible) organic.

I think both Barb and Peter are right in that what has happened is the yields have gone up but the funding costs have gone up as well. So net/net, the yields, net of the funding costs, if you look at the net return, hasn't changed that much.

We still do think, over a period of time, though, that we will be able to generate higher returns from our portfolio but it will sort of stage in over time as the portfolio is restructured.

Thank you very much.

We're still will below industry standards.

Final question, Shannon, if there is one more question, we can take that.

The last question is from Jim Bantis, Credit Suisse First Boston.

Very quickly, just looking at slide 26 and looking at the, again, the personal revenue growth of 13 percent -- and I just wanted to get some color or a little bit more guidance with respect to how much of that growth was really a pick-up in the equity markets with respect to the brokerage business, mutual fund fees? I mean, I'm basically asking what was the retail growth and what was the wealth-management growth, but if you can kind of give me a sense on that, that would be really helpful.

Nabanita Merchant? Did you mean sequentially or did you mean over a year ago, Jim?

Nabanita ,a year ago.

Okay.

Well, Jim, you've got that.

Well, yes, you are (indiscernible) interested in our full-service brokerage are you? Is that the question, Jim?

And asset management.

Well sure, on the full-service brokerage, on a year-over-year, we are up about 12 percent in revenue. On the asset-management, which would include mutual funds as well as some other pieces in there, about 10 percent revenue growth Q1 to Q1.

So pretty much in line with the rest of the business.

Yes.

Okay. I think that's it. We are in a snowstorm in Halifax, so hopefully we will get back to Toronto sometime this evening. As I said at the start of my remarks, recognizing that there's been a lot of restatements this quarter, given our new business structure, we will make people available next week to all of you who have questions, and you can go through Nabanita. We thank you very much for your participation.

I do want to add that I'm going to be on transit back to Toronto. I will be picking up voicemail messages, so feel free to drop me then and also touch base with my clients -- I'm sorry, my colleagues in Toronto, who might be able to help you out as well in my absence. Thank you. Good-bye.

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