Royal Bank of Canada (RY) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the RBC second-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. Good afternoon, everyone, and welcome to our second-quarter results conference call, which 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 that involve inherent risks and uncertainties. A number of factors could cause our actual results to differ materially from what is expressed in these statements, as described in the second slide in the presentation package you all have.

Our call today will begin with a 20 minute or so review of our results in the second quarter. You'll hear first from Gord Nixon, our CEO, who will provide a high-level overview of our performance, and then from Barbara Stymiest, our Chief Operating Officer, who will give you more details of our financial results, including asset quality and capital trends. Our three business segment heads will also be (indiscernible) discuss their segment's performance. Jim Westlake, head of our Canadian Personal and Business segment, Peter Armenio, head of the U.S. and International Personal and 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 Marty Lippert, head of Global Technology and Operations, Elizabetta Bigsby, Head of Human Resources, Janice Fukakusa, our CFO, and Morton Freed (ph), our Chief Risk Officer.

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

Thank you, Nabanita. Good afternoon, everyone, and thank you for joining us for this conference call. I'm certainly pleased to say that we delivered another quarter of very strong results, which I think reflected good growth in our Canadian Personal and Business operations, continued improved performance in our U.S. and international Personal and Business segment, and consistent performance from our Global Capital Markets group, and that was despite a very difficult trading environment in the latter part of the quarter.

As you can see on Slide 4, our net income in the quarter was 907 million or $1.37 a share, and it has only been exceeded by the quarterly results last quarter. As you know, the second quarter had three fewer days than the first quarter, so a dip in second-quarter results is generally be expected. We have had the best six-month performance in our bank history, and our heightened efforts to grow revenues and contain costs continue to fuel these results.

As you can see on Slide 5, net income for the quarter was up 19% and earnings per share up 20% from a year ago. ROE was approximately 20%, representing improvement in excess of 300 basis points over the same period last year. Both revenue and cost performance were strong again this quarter, as we achieved 5% revenue growth while maintaining cost discipline, as evidenced by a 1% decline in non-interest expense.

The provision for credit losses were 116 million, reflecting a credit environment that continues to be relatively benign. Our six-month performance, as shown on Slide 6, was the best in our bank's history and exhibited the same positive trends shown in the quarterly comparisons on the previous slide. Six-month net income was up 22% from the first half of '04 and six months' diluted earnings per share were 2.87, up $0.54 or 23%.

Slide 7 shows that our net income growth for this quarter and the first half of 2005 stems from good performance delivered by each of our business segments. In addition to continued strength in our Canadian Personal and Business segment, as well as a Global Capital Markets segments, we have generated higher returns from our U.S. and international Personal and Business operations, was consistent with our stated priorities.

Lastly, you'll note from this slide that our Canadian Personal and Business segment accounted for 60% of earnings through the first six months, Global Capital Markets, 29% -- and that business now includes -- (technical difficulty) -- investor services and parts of commercial banking -- and the U.S. and international Personal and Business segment, another 9%.

Slide 8 illustrates the total earnings generated from the U.S. from all three of our segments. Our U.S. earnings of 126 million for the quarter were up from the first quarter. While the improvement was largely in the Global Capital Markets, our U.S. banking earnings from continuing operations also reported an improvement.

I would also like to bring to your attention that, following a strategic review of our U.S. operations, we determined that RBC Mortgage, our U.S.-based mortgage origination business, was no longer a core business that would positively contribute to our U.S. operations. Therefore, we had identified the company as discontinued operations during the quarter, and I'm sure, as you've heard, we announced an agreement this morning to sell certain assets of RBC Mortgage Company. Barb Stymiest will comment on that transaction during her remarks.

As shown on Slide 9, our stock-based compensation costs increased 59 million in the quarter, and that was largely due to the significant appreciation in our share price. But there were also positive items that offset this impact.

As you can see on Slide 10, we've met virtually all of our 2005 financial objectives so far this year. Earnings per share, ROE, revenue growth and expense control all met or exceeded our 2005 objectives that we established. Strong retained earnings in this quarter helped strengthened our tier one ratio to 9.5% from 9.2% last quarter, and our capital ratios remain ahead of our objectives. Only our dividend payout ratio fell short of our objective in light of the higher level of earnings in the first six months of the year. We announced this morning a $0.06 or 11% increase for our shareholders of record on July 26.

As shown on Slide 11, the operating leverage of 6% achieved this quarter and 10% over the first six months is ahead of our full-year 2005 target of 3 to 5%. I'm very encouraged by the continued strength we have exhibited in this important measure that captures our noncurrent priorities of driving revenue growth while successfully containing costs. I'll defer a more detailed discussion to Barb, who will speak to revenues and expenses in a moment.

Our top priorities for 2005 are displayed on Slide 12, and we've spoken to you of them frequently. They are to improve revenue growth, to enhance efficiency and effectiveness, and to generate better returns from our U.S. and international Personal and Business segments. To grow revenues, we are continuing to enhance our distribution channels, provide excellent product solutions to our clients, and enhance the client experience by simplifying our process and our operations. To improve efficiency and effectiveness, our business segments in corporate support areas have all identified and are executing on numerous cost initiatives with specific targets for which they are accountable. Finally, in the area of generating better returns from the U.S. and international Personal and Business segment, as I've already said, we have delivered significant profit improvement so far in 2005. Each of our business segment has refined its strategies and is to deliver better and more optimal returns. We've made good progress on all three of our priority fronts in the first half of 2005 and intend to continue to roll out the initiatives as we continue to focus on our 2005 financial objectives.

With that, I will now turn it over to Barb.

Thank you, Gord.

Before I commence speaking to the slides that follow, I'd like to make a brief comment on the sale of certain assets of RBC Mortgage to New Century, which, as Gord said, we announced early this morning. The transaction includes sale of the physical assets of the distribution network of RBC Mortgage, along with the transfer of all of the employees, and it reflects for us an exit from the national mortgage business, but we will continue to provide mortgages to our Centura customers within its footprint. Upon closing, we will retain the mortgages which are originated by the sales force, which will then either be securitized in the normal course or maintained on our books. It's not yet determined the combined financial impact of the asset sale and the line-down of the mortgage assets, which are anticipated to remain subsequent to closing, but we do not believe that the impact will be material.

Now, if you look at Slide 14, I wanted to comment for a moment on the steps that we've taken this quarter to enhance our disclosure. As announced in April, we have reverted to using Canadian GAAP as our primary basis of reporting, also the primary reporting basis for the other Canadian banks. Since Canadian and U.S. GAAP are converging, there are significantly -- (technical difficulty) -- and there is no longer the imperative for U.S. GAAP to be the primary reporting basis. Starting this quarter, we are providing a more detailed breakdown of revenues for the Canadian Personal and Business segment, our largest earnings contributor. We are also providing the Assets Under Administration and Assets Under Management for each -- (technical difficulty) -- segment.

Slide 15 indicates that total revenues increased 5% or 226 million from a year ago, reflecting higher volumes in our disability and group life insurance -- (technical difficulty) -- Canadian operations of UnumProvident since May 1 of '04, strong loan and deposit growth and higher mutual fund revenues. This increase was despite a reduction of 115 million in revenues due to the strengthening of the Canadian dollar versus the U.S. dollar and lower trading revenues.

Slide 16 shows that our overall margin of 163 basis points -- (technical difficulty) -- 7 basis points from last quarter with increases in all three of our segments. Jim Westlake and Peter Armenio will discuss the margins for their segments shortly.

You'll note from Slide 17 that noninterest income was up 21 million from a year ago. Accounting for this increase was the growth in our insurance business. As I indicated, it includes UnumProvident and mutual fund operations, partially offset by weaker results in our trading, foreign exchange and securities brokerage revenues, suffered largely as the result of a more difficult capital markets environment during the quarter.

(technical difficulty) -- on Slide 18 that non-interest expense decreased 1% or 26 million from a year ago, reflecting our successful cost-containment effort and the $65 million decline in expenses -- (technical difficulty) -- appreciation of the Canadian dollar relative to the U.S. dollar. These factors more than offset 59 million of higher costs associated with our stock-based compensation, primarily in light of the significant depreciation (ph) in our common share price and greater costs in support of the increase in sales and service staff here in Canada.

Slide 19 attests to the success of our cost containment efforts -- (technical difficulty) -- professional fees -- (technical difficulty) -- categories. (technical difficulty) -- was despite the negative pressures caused by the sharp rise in stock-based compensation -- (technical difficulty) -- and higher sales and service staff costs incurred just before -- (technical difficulty). The effects of these were partially mitigated by lower variable compensation costs.

Turning to our balance sheet, Slide 20 shows our robust consumer loan growth of 9% over Q2 of '04 -- (technical difficulty) -- percent over Q1 of this year -- (technical difficulty). This growth is net of the impact of securitization -- (technical difficulty) -- residential mortgage -- (technical difficulty).

Moving on now to our credit quality, beginning on Slide 21, our growth-impaired loans continue to decline and the nonaccrual loans ratio is -- (technical difficulty) -- another 8 basis points from last quarter to the end of the quarter at 49 basis points.

As shown on Slide 22, our total provision for credit losses was 116 million -- (technical difficulty) -- compared to 149 million a year ago. (technical difficulty) -- net recovery and reversals of allowances of 43 million, resulting from the favorable resolution of the corporate account -- (technical difficulty) -- classified as impaired -- (technical difficulty) -- in the Global Capital Markets segment. However, we also recorded a 17 million provision -- (technical difficulty) -- 50% share of a provision booked by Moneris. Specific provisions for personal loans increased largely due to higher provisions in our Canadian credit cards and personal creditline portfolios, reflecting portfolio growth. Meanwhile, specific provisions for business and government loans decreased, largely reflecting the aforementioned recovery of the impaired accounts in Global Capital Markets.

Moving to slide 23, here are specific (indiscernible) ratios for this quarter -- (technical difficulty) -- 1.23% (ph). For the first six months, the ratio was 0.17%, well below our 35 to 45 basis points objective -- (technical difficulty).

Our capital ratios at the end of this quarter are shown on Slide 24. (technical difficulty) -- earnings generation this quarter lead to another quarter-over-quarter increase in our capital ratios. The tier one capital ratio now stands at 9.5%, which, as Gord said, is comfortably above our target of 8 to 8.5%. This is a meaningful improvement in this ratio over the last two quarter. I believe we measure up well compared to our peers.

I will conclude with Slide 25, which captures our dividend payout. You'll note that we've steadily increased our dividends over the last two years. Our dividend to pay-out of 39% this quarter and 38% for the first six months of 2005 fell slightly short of our target for the year, due to our high level of earnings -- (technical difficulty) -- have increased our dividend per share by $0.06 effective the third quarter.

At this point, I will turn it over to Jim Westlake.

Thank you, Barb.

The Canadian Personal and Business segment performed well this quarter with earnings up 6% over a year ago and all of our business -- (technical difficulty) -- seen strong volume and revenue growth.

You can see, on Slide 27, revenue increased 11% this quarter and year-to-date from 2004 -- (technical difficulty) -- successful execution of our distribution, product and client strategies and supported by low interest rates -- (technical difficulty) -- unemployment levels and increasing home equity values -- (technical difficulty). The non-interest expense growth this quarter reflected higher costs associated with stock-based compensation, primarily from a rise in our share price (indiscernible) increase in the number of sales and service staff added to our front lines -- (technical difficulty) -- we are able to do because of our cost control efforts in other parts of the operation.

As a matter of fact, on the NID, if you look back to Slide 9, well over $60 million of the NID items were charged to Canadian -- (technical difficulty).

Our provision for credit losses increased 17 million from a year ago, mostly due to our 50% share of our provision bookings at our Moneris joint venture. We did see higher provisions for credit cards and personal loans as a result of increased volumes. These were mostly offset by lower student loan loss provisions -- (technical difficulty) -- of that portfolio. Similarly, our PCL continued to reflect the strong credit quality of our portfolio and a good credit environment.

Barb mentioned earlier that we are providing more revenue information for our segment shown on Slide 28. We had good growth across all lines of business compared to a year ago. Global insurance and investment management revenue growth reflected increases in our disability insurance product line, including UnumProvident, and the strong sales and capital appreciation -- (technical difficulty) -- that we continue to see -- (technical difficulty). I should point out that our mutual fund business achieved the highest net sales -- (technical difficulty) -- long-term funds in the second quarter -- (technical difficulty) -- dollars, which marks the sixth consecutive quarter -- (technical difficulty) -- the industry leader -- (technical difficulty).

(technical difficulty) -- Slide 29, you can see that our net interest margin widened slightly again this quarter, mainly due to -- (technical difficulty) -- growth in credit cards and residential mortgages. However, with interest rates remaining low and the pricing environment competitive, margin expansion was limited.

Slide 30 shows the solid product loan growth in Canada. Slide 31 depicts our market share leadership, which we are enhancing -- (technical difficulty) -- many key products despite the competitive environment.

Before I turn it over to Peter, I'd like to point you to Slide 32, which highlights some of the distribution, product and client strategies we're executing successfully to grow our revenue. Now, I will turn it over to Peter Armenio to discuss the U.S. and international Personal and Business segment.

Thanks, Jim, and hello, everyone.

As you know, we've spent the last few months reorganizing our U.S. and international segment and refining and implementing a strategy that will allow us to be a key growth engine for RBC over time while delivering high performance in all of our businesses. Both Gord and Barb mentioned earlier that today we announced an agreement to sell certain assets of RBC Mortgage. Accordingly, we've classified the company as discontinued operations for purposes of business segment reporting this quarter. In our MD&A and slide presentation, we've also shown the results of RBC Mortgage Company separately from our continuing operations just to try to provide a little more clarity around our results.

Turning to Slide 34, total net income of 77 million for the quarter was up 93% from last year in spite of a $9 million loss at RBC Mortgage Company and the impact of the stronger Canadian dollar, which reduced our earnings by $8 million. The decline in earnings at RBC Mortgage was largely due to lower mortgage originations and lower loans held for sale and net interest margin.

The second-quarter net income from continuing operations increased to $86 million, an improvement of 47 million, or 121%, reflecting a strong improvement at RBC Centura due to basically three things, solid revenue growth, ongoing cost-containment, and good credit quality. You should note also that the second quarter of last year was impacted by a $33 million pretax valuation allowance relating to certain mortgage loans that were believed to have been fortunately originated several years ago.

Our results for the first six months of the year also reflect significantly improved performance. However, when you look quarter-over-quarter, our earnings declined from the first quarter of this year to due to fewer days this quarter and lower brokerage commissions on softer U.S. equity markets. Overall, for our U.S. and (indiscernible) revenues from continuing operations were flat in the second quarter compared to last year but actually increased 8% in U.S. dollars.

Slides 35 and 36 provide details of our revenues by business line.

As you can see from Slide 36, banking, our continuing operations revenues ,improved 17% over a year ago in U.S. dollars, driven by strong loan and deposit growth and improved net interest margin at RBC Centura. Our Caribbean banking business also had strong growth on higher volumes.

Now, Wealth Management revenues increased 4% in U.S. dollars, mainly from the mark-to-market on our share-based compensation plan at RBC Dain Rauscher, partly offset by lower brokerage revenues, and once again reflecting the weaker U.S. equity markets.

I will now turn you back to Slide 34. I want to make a comment on NIM. Our non-interest expenses for continuing operations declined 10% in the second quarter compared to a year ago and 2% in U.S. dollars. The decline was due to the evaluation allowance last year, as I mentioned earlier, lower variable compensation as well from the weaker brokerage revenue, and our cost control efforts also had an impact, partially offset by the mark-to-market on the share-based compensation plan driven by the RBC share price increase.

Moving onto Slide 37, our net interest margin improved by 2 percentage points or 2 basis points over the previous quarter and by 13 basis points over a year ago, mainly reflecting higher short-term rates in the U.S., which more than offset the competitive pricing environment that we've been experiencing.

Overall, our management team is pleased with the progress that we've made in repositioning the business and our U.S. banking operations in particular. We'd like to thank all of our employees for having made a great effort in this regard. Now, looking forward, we believe that we can further improve our performance as we continue to implement our client-focused initiatives, which are summarized on Slides 38 and 39.

Thank you, and I look forward to providing an update next quarter. With that, I'd like to turn her over to our last speaker, Chuck Winograd.

Thanks, Peter, and good afternoon.

Despite lower revenues in the second quarter of 2005, which you can see on Slide 41, financial performance was sustained by a favorable PCL environment and lower non-interest expenses, largely due to reduced variable compensation, which reflected both business mix and weaker business results. We also had a $43 million net recovery resulting from the favorable resolution of a corporate account which has previously been classified as impaired.

The quarter started strong. However, rapid deterioration in market conditions in the last half of the second quarter adversely affected the performance of many of our businesses. This market environment ending the quarter was characterized by a rising interest rate, continued uncertainty over the U.S. economic recovery, continuing deterioration in the auto sector -- which in a way was a catalyst to a general widening of credit spreads -- higher oil prices and especially the impact of increased hedge fund redemptions on price volatility. Despite this, we saw net income increase by 25% over a year ago and by 11% from the last quarter.

Now, Slide 42 shows our revenue split by our three key areas. I should mention that there is a slide in the appendix that has a description of the businesses included in each area. Revenues for our Global Markets area were below the record results last quarter and also below second quarter '04. Trading revenues were down sharply, largely in our pure proprietary trading businesses. Foreign exchange trading also suffered from decreased exchange volatility in the foreign exchange markets and a weaker Canadian dollar as compared to quarter one, '05. Weakness in our structured credit businesses was also notable, although these declines were partially offset by strong North American and European debt origination and finance activities and some realized gains from liquidation of private equity positions.

In global Investment Banking and equity markets, we experienced a decline in M&A and advisory activity, while soft market conditions near the end of the quarter contributed to weaker equity origination activity. These declines were partially offset by increases in higher yield origination, where we have been making inroads.

Under our third group, called Other, revenues increased over a year ago, reflecting in large part positive mark-to-market adjustments on credit derivatives held in support of lending portfolios and increased revenues earned by our custody businesses resulting from higher transaction volumes and organic Assets Under Administration growth.

Before we take your questions, I'd like to point out some of our initiatives on Slides 43 and 44. I know some of these were discussed last quarter, but we made significant progress in all of them. To give you a couple of examples, we started trading in our Tokyo platform for our structured products businesses, and active trading has also begun (indiscernible) using our license on the Australia Stock Exchange. Our U.S. convertibles origination team, while starting in a difficult market, participated in several key transactions in the second quarter, including acting as global coordinator and joint bookrunner for Ace Aviation's 720 million concurrent offering of common shares and convertible notes, as well as a $300 million credit facility.

At this point, we will turn the call over to the conference operator to begin the question-and-answer session. Thank you.

Thank you. We will now take questions from the telephone line. (OPERATOR INSTRUCTIONS). Steve Cawley from T.D. Newcrest.

The first question is for Chuck. Chuck, I'm not used to seeing a lot of volatility from your trading businesses, relative to the other banks, and this quarter was an exception. You talked about it a little bit. This was the result -- you mentioned the auto sector and credit spreads, so you were holding on on your (indiscernible) to positions that went poorly for you. Can you talk about the magnitude of the losses?

Well, I can't tell you about the actual magnitude, although I think that I would make the point that, as I said, the changes were largely a result of what I would call pure proprietary positions, and the area where we had the most difficulty was convertible business.

I also would just point out to you that while we did have volatility in the quarter, certainly in a couple of comparisons, it wasn't all that different from what you saw in a couple of the other banks. If we had reported on a (indiscernible) basis, which we don't, it would have been -- (technical difficulty) -- closer to whatever that performance was. But it clearly was a more volatile quarter in (indiscernible) market.

Maybe I should know the answer to this question, but Slide 56 wouldn't reflect that volatility?

Slide 56?

Yes.

Well, that reflects all of the trading revenues. Yes -- (multiple speakers).

That's all of it?

Yes.

The second question I've got, and I don't mean this to be a softball question for you, Jim, but I'm hoping to get a really great answer from you. Relative to the other domestic banks, you've managed, one, to grow your market share and to do it -- and do it while sustaining your margins. Is there something unique that's going on there, or is it just that you are so good?! (LAUGHTER).

I will (indiscernible) answer the question there, Steve, and thank you for that!

I don't want it to be a softball, Jim!

Well, there are a number of things going on, of course, when you aggregate all of our numbers. Certainly, our volumes were up very nicely, particularly year-over-year, in all of our lending products, so mortgages, loans and our credit cards all have significant volume increases. (technical difficulty) -- fairly well on those. We've also had some very good results with our mutual funds. That's been a combination, of course, of strong distribution but very good returns -- (technical difficulty) -- there, so there aren't too many soft spots and I think when you aggregate that -- (technical difficulty) -- we're quite pleased to the results.

So there's nothing really special going on?

Just consistent performance across all of the pieces.

Okay. One last one maybe -- the credit reversal and recovery that you disclosed in the period, you typically don't disclose that number. Did you disclose it simply because of the magnitude of it? Were there other reversals and recoveries in the period apart from that 143 million?

It's Morton Freed (ph) speaking. The main -- of the reversals and recoveries, the one loan that was referenced was the main one. There were a few other minor ones, but that was the one significant one and hence the comment.

Generally in the last, let's call it four quarters, has it just been minor ones? Has it been continuous minor ones?

Well, they have been none of the magnitude of this particular one. There have been some north of 10, but yes, it's been a trickle of minor recoveries.

Okay, thanks.

Rob Wessel from National Bank Financial.

Good afternoon. I, too, have one softball-like question. I wanted to ask Gord about the dividend payout ratio. I thought it was interesting. You've had two very good quarters in a row of very high-quality earnings, so I was a little surprised to see that the payout ratio stayed below the lower end of your '05 objectives. I just wanted to know, is there a reason why you didn't go to 40% or above?

Thank you, Rob, and we do appreciate softball questions!

Well, you have to wait for the next one!

As you well know, we have tried to set a pattern with respect to our dividend increases of being -- having consistent, gradual, regular increases. We felt that $0.06 a share at this juncture was sort of consistent with that philosophy going forward, so we did recognize we were falling a little bit behind with respect to the payout ratio, but we felt it was just prudent, given the approach that we've taken to regular, consistent dividend increases on a -- usually every second quarter, I guess, if you look back historically. So it's certainly something that we will review and the Board will review later in the year, but we just felt, at this juncture, it was consistent with our approach. We did recognize that it put us slightly below the low end of our range.

So it's correct to infer that, should you meet that objective by the end the year, it's more likely that you will have met it by further dividend increases rather than falling earnings?

(LAUGHTER). That would be a fair assumption, Rob!

Okay, good. That's the assumption we're making. I have two other quick questions. First, can you -- maybe I should know this but can you explain why -- like I'm just looking at the bottom of Slide 10. You can you just us some color as to why you are adding to Generals the 52 million transfer of allocated specifics? Can you just give some color as to what that is? It's just very different from the other banks, which have been drawing down.

It's Morton Freed speaking. It's a reflection of the -- (technical difficulty).

I'm sorry, you're cutting out.

Morton Freed It's reflective of the -- (technical difficulty) -- for Centura, where on -- (technical difficulty) -- accounting practices -- (technical difficulty) -- allowances at the overall level and then -- (technical difficulty).

Can you hear me okay?

Yes.

I did not here, and I don't think anybody on the call heard any of that answer.

Can you hear me better, Rob?

Yes, I can.

Can you hear me now?

Yes I can.

The general number is a result of the allowance for Centura, where the total number is -- the allowance is held on a total basis -- (technical difficulty) -- on a regular basis -- (technical difficulty).

I'm sorry, I can't hear . I'm not sure if others can but, I know I cannot.

You are referring to that footnote -- (multiple speakers).

Yes, exactly, yes.

(multiple speakers) -- first quarter and not the second quarter, right?

Correct.

Did you understand? Did you get the gist of -- (multiple speakers)?

Actually, I will take it off-line, just in case other people can hear that on the call. But I didn't hear answer to either time.

But the last question I wanted to ask you about was -- and this I guess is for chuck and/or Gord, is the mark-to-market impact from the derivatives, can you give us an amount or per share impact? Can you reference to what it may have pertained to, whether it was hedging interest rate risk or whether it was hedging credit risk?

It was not material. I mean, it happened to be that we had some -- (technical difficulty) -- another business where -- (technical difficulty) -- the net impact was quite minor. It's just that, in a smaller business, which was other, it was one of the factors that contributed to the increase in revenues. But it was in credit, but it was not material or major in the overall sense of forgetting about the bank within our division.

Okay, that's great. I just should let you know that I'm getting flooded with e-mails from people who also can't hear. So I guess I'm not the only one.

Operator, is there a way for us to do a check here to see whether people are hearing us?

Yes, it seems that we are having difficulties hearing Barbara and Jim in particular.

Okay. That makes the whole table then because -- (multiple speakers).

Okay, we will attempt to speak very loudly into the various microphones, and if those asking the questions can't hear us, if you can let us know and we will try to add just. I think it's all we can do for the time being.

I have no further questions, by the way. Thanks.

Jim Bantis from Credit Suisse First Boston.

Good afternoon. Two quick questions -- more technical. With respect to net interest margin in the Canadian operations, I'd just like to circle back to that. Pretty impressive expansion of the margin considering fewer days, credit card securitization and in contrast to the peers as well, so I'm wondering if there's something beyond the growth in terms of volumes that contributed to this. Is there a one-time item, a timing difference of some sort?

Then the second question I have is with respect to value at risk and market risk, and it's for Chuck. Chuck, I guess the market risk that is embedded in the risk-adjusted assets is up 40% year-over-year; value at risk is up 25% year-over-year. Maybe you can give us some direction on where that risk is being assigned to in the bank, and will it add to the continued volatility in earnings, as gas been mentioned earlier?

It's Jim Westlake. Can you hear me okay?

I can hear you loud and clear.

Okay, great. I think the simplest answer I can give you on the spread is that primarily that would relate to a mix issue and that we get better spreads on certain products and even certain sub-products within categories, such as depending on the types of mortgages that are being sold. I think that our home line product, where it's a combination of a mortgage and a personal loan, it's the additional mix of cars and as well more of the unsecured versus secured credit lines. I think when you add up that mix, that would give further explanation of why the spread has widened against some of the others.

Great, thank you. I guess it appears that clients or customers are not running to fixed income products at this point. (multiple speakers) -- related?

(multiple speakers).

No, okay.

Chuck?

Answering the first question, the VAR question, I mean the VAR question is -- the VAR amounts are up and down but I don't see -- like, when you look at them over an ongoing basis, day-to-day, month-to-month, it may well be that there's something going on at the end of quarters (indiscernible) within quarters but you know, they went up, up; they went down; they went up a bit. It's really just depending on where we are and what the offsets are with respect to diversification within the system. I don't think there's a real difference in trend in terms of what's going on.

The issue with respect to risk-adjusted assets is more of an issue, not with respect to earnings because that in itself should not having an issue with respect to earnings. But it purely comes from building a credit derivatives business, as we are. As we seek to go through the regulatory hurdles and get relief, it doesn't reflect what I would call the risk in the portfolio, but it does reflect the fact that we are working through the types of issues you have to work through as you build out the business. So, that would be the issue there and while it has some capital ramifications, it does not have earnings ramifications.

That is, Chuck, relief hopefully that we will get down the road?

Yes, but you work through it and basically you just are where you are, and you aren't getting offsets for hedges. That's what's effectively happening there.

Thanks very much.

Quentin Broad from CIBC World Markets.

Good afternoon. I guess a question for Peter and/or Jim, perhaps. I just wanted to understand the decision around goodwill reallocations and attributing now $1.5 billion of Goodwill into Jim's business out of Peter's business with respect to the Centura purchase. Just I clearly don't understand the language used in the disclosure.

Quentin, it's Gord Nixon. I'm not going to let either Jim nor Peter speak to that question because that is pure and simple an accounting issue driven by the accountants, the outside accountants, etc., so I'm going to ask Barb or Janice to answer it.

That's too bad! (LAUGHTER).

It's Janice Fukakusa. When you have the goodwill in the old reporting segments, the five segments we have, and we moved to the new segments, the accounting rule is that if you have integrated those businesses in the old segment, you allocate the goodwill based on relative fair value as you break up the old segments into the new segments. The test of integration is fairly straightforward and pretty strict. It involves things like common HR policies, common risk policies, so under that test, we did have integration, so when we broke up the old segments, Centura was sitting in the banking segment along with the Canadian retail banking platform. So on a relative fair value, we took the goodwill that was in that segment, which mostly arose from the acquisition of Centura, and allocate it on a relative fair value so the bulk of it went in to the Canadian P&B business. Similarly for the goodwill that arose on the acquisition of RBC Dain Rauscher, the bulk of the goodwill went into the Canadian Wealth Management business at (indiscernible) Canadian P&B. So it's a pretty technical accounting treatment that's very strict. That's where we got to with respect to the reallocation of goodwill and the bulk of going into Jim's business from Peter's business.

If that answer is a tough one, Deloitte & Touche is who the next call should be to. The one comment I would make though is it's one of the reasons why we try to focus people's attention on the return on risk-adjusted assets, just to be indicative of what's going on in the different businesses.

So, to be clear, on that basis Gord, your notion of what adequate returns are would still be reflective on an economic basis to what you paid for that -- (multiple speakers)?

Absolutely, Quentin. Absolutely.

Okay. Then secondly, just staying in that space, and maybe Peter will be able to take this one. Am I to understand Centura's performance in the current quarter is reflective of its performance from the January to March timeframe?

Yes, I'm not sure I'm understanding his question (indiscernible).

I.e., you would not be -- it would not be Centura from February, March and April; it would be Centura from January, February, and March, as they would report their numbers into the fed?

(multiple speakers) -- same quarter as overall RBC.

February, March, April.

Okay, so there is a little bit of a difference from what they would report because I guess what I'm trying to understand -- so what I'm trying to understand is, in the March reporting, how much business sits outside of what Centura reports? Because it's showing $13.7 million of income in its first quarter on a $3 billion equity base, which doesn't -- still doesn't get me excited in terms of making a lot of progress there. Yet you are obviously reporting some good progress. So I am just trying to reconcile whether that means it's a great April and a poor January rolling off, or there's something that I'm missing.

It's Gord. It is more a reflection of the economic businesses run by Centura versus the statutory reporting as opposed -- (multiple speakers).

Chuck Winograd You're talking March being sort of what you're seeing as a legal entity reporting?

Correct.

Well, that's different. The legal-entity reporting and the management reporting are somewhat different. There is -- in the management reporting, there's also an organization called Apollo that is part of that overall business, but ultimately, by the end of the year, it's really going to be pretty much flat and the legal and management will pretty much be almost the same.

But the legal entity is reporting into the Fed. It doesn't look like it is still generating the kinds of returns you guys would like to see. So in Apollo, is that part -- I'm just trying to get a handle on what's going on in your businesses and what's really exciting you versus what we're seeing on this basis, which isn't so exciting, in my view.

I apologize for not having the numbers in front of me in terms of what looking at, but from our end of the world, there's no question that what's been going on at Centura is very positive. When you look at the loan and deposit growth over the last little while, you look at how expenses are coming down significantly; you're looking at their PCL being very good, so overall, our sense of momentum is that it's very positive and that we continue to do some very good things there. So, I'm just going to line it up with what you are looking at.

I will take it off-line.

Quentin, I think that's right. I think it's fair to say, in general, that we really don't look at the statutory reporting of Centura. We really look at the management reporting of Centura much more closely. I think what you're trying to do is reconcile the differences between the two and perhaps you could take that offline with Janice.

Yes, thanks.

Why don't you give us a call, Quentin?

Darko Mihelic from First Associates.

Thank you. Just a follow-on to Quentin's questions -- I'd also be very interested in being part of that conversation just because, with this equity reallocation, it does seem to make the ROE, at least for the U.S. international Personal and Business, it just doesn't make it a very believable number and not helpful in sort of assessing the returns out of the U.S. business.

Yes, Darko, just to cut that off at the pass, as I say, this was an accounting interpretation which is established; it is not indicative of how we are looking or managing the businesses going forward. But I would emphasize the fact and this gets a little bit to this issue of statutory accounts -- is that when we look at our U.S. business, you know, Centura -- there are parts of our U.S. consumer business, our Wealth Management side, etc., that, when you're doing apples-to-apples comparisons, would be incorporated in any U.S. equivalent entity. If you were to look at most similar-sized institutions in the United States, they would have banking; they would have mortgage; they would have brokerage or Wealth Management or assurance and other parts. When you look at our consolidated reporting of that business, it includes many of those parts. When you look strictly at the Centura platform, it is indicative of one component of that consumer business in the United States. So, it's not suggesting it shouldn't be looked that because clearly that's how we are driving our returns and expectations, but is a bit of an apples-and-oranges comparison when you're looking at it relative to other institutions, if you're just looking at Centura.

Well, I guess that's a fair comment, but I guess my retort to that would be, you know, U.S. $3.2 billion in Centura is another 609 million in Dain Rauscher. That's already U.S. 3.8 billion invested in the U.S. and we haven't even touched on the Global Private banking or the Caribbean operations. So maybe some thought could be given to like a return on investment kind of measure, because it sounds like you're agreeing with me that the ROE, the Marcane (ph) accounting number is not useful.

The second question then -- and again, I'd love to take on those questions off-line -- but the second question is, I wonder if -- and you may not have this information with you again, but I wonder if you can provide some sort of a sense for your hedge fund exposure.

It's Morton Freed speaking. I'll try to give it a shot. Can you hear me?

Yes.

Okay. We touch hedge funds in a number of different businesses, so you know, we are obviously -- in a sense, we will be affected by how hedge funds fare in a number of areas from the revenue standpoint. In terms of direct exposure, it really comes in in three different forms. On the trading side out of Chuck's business, we have unsecured exposure of about 180 million of -- the current mark-to-market is less than 50. Out of our custody business, we do have some secured derivative exposure measured in around C$500 million. Then we have lending exposure of approximately 400 million Canadian. These are secured loans. The vast majority of them are attached to the custody business for timing and settlement purposes with a very modest amount of more normal lending facilities.

Okay, thank you very much.

Michael Goldberg from Desjardins Securities.

Thanks, a few questions. First of all, is the low tax rate this quarter an anomaly?

No, it's not an anomaly. We are continuing to organize our affairs so that our earnings mix is weighted towards some of the lower-tax jurisdictions as opposed to the higher-tax jurisdictions. There was a small impact of the change in the Canadian rates that went slightly down this quarter.

So should we look for that 3% reduction, roughly, to be sustained going forward?

I think you should look towards our effective tax rates coming into the range of some of the other Canadian banks in terms of the fact that we were quite high vis-à-vis the other Canadian banks. As we are organizing our affairs and as we are expanding our lines of businesses throughout the world, we are moving that tax rate down to a lower level, along the lines of the other banks.

Hopefully taxes are coming down with it.

Right.

Absolute rates.

I have a question now for Peter. When most U.S. banks are suffering from a flatter yield curve, how did you benefit from rising short rates in the U.S., you know, with your margin widening there?

Thanks, Michael. From our end, what's happened is a couple of things. One, no question that our volumes just continue to grow on the loan and deposit side aggressively, and so that's been very good, but ultimately, we've been able to enjoy the benefits of higher rates on the loan side but have not had or have not seen the pressure on the pricing side for deposits, and our spreads just have continued to do well. Obviously, over time, a flatter yield curve will impact Centura if it continues that way, especially on the mortgages that they book. But at this point in time, we've enjoyed that spread and we haven't seen the pressure on the deposit side.

Okay. My next one, for Chuck now -- just about that credit mark-to-market -- is this an AcG-13? If it is, could you give us what the comparison is compared to prior periods?

It really is a small amount, Michael. It isn't worth talking about but it is -- I don't mean that in any pejorative sense. It's just basically it's not that large and it is as a result of accounting as opposed to anything else. We've got a hedge and the reason why it was mentioned is that we were looking in the Other category, which is our smallest category, for some of the things that made a difference, and it would only have to be a few million dollars to make a difference in that -- on a net basis in that category. I think it was slightly more than that, but it wasn't a big deal.

If you look, you know, you look at overall what happened in those types of circumstance -- because we have -- because our loans are in -- we allocate our loans to the businesses where they are put. We have that in a number of businesses, so the only way you can look at it from an organization standpoint is if you looked at the total organization and it was not meaningful.

So, just so I understand, it is an AcG-13 item but it is immaterial, and the swing from period to period -- (technical difficulty) -- immaterial also.

For the overall capital markets side, yes.

Okay. A question now for Morton -- you know, there's one major loan cured. Is there much in the way of interest rate capture in the latest quarter?

The answer is no. I mean, if you look at, in terms of our -- I'm talking in terms of impaired loan formation and recoveries, etc. I mean, we've got a total of about $280 million worth of new impaireds and the offset being return to performing or repaid or sold. There is relatively little in the way of interest recapture. I don't have the number right in front of me but it's a small number.

Mario Mendonca from Genuity Capital Markets.

Good afternoon, everyone. I want to sort of go back to some of those NIM questions because I still have a little difficulty. The higher NIMs, both year-over-year and sequentially, that's particularly true in the U.S. but maybe not so in Canada. A mixed explanation doesn't entirely work in terms of my understanding when you think about it sequentially. Are what we really seemed here is just the combination of the P&B business with the Wealth Management business and the growth in the Wealth Management business is just causing the NIMs to look like they are improving?

It's Jim Westlake. No. Because we've we constituted the numbers, both the year-over-year and the sequential would reflect the same relative mix in terms of the banking investments insurance, so any of the products we've gone back and re-created. But certainly, mix can make quite a difference because there's just a -- if you take secured versus unsecured credit lines, there's a wide difference in the margins from those two. We have had more business each quarter going along towards higher-margin rather than lower-margin lending products in particular.

Right, but I recognize that you went and reconstituted the numbers, but if the Wealth Management business is growing a little faster than the P&B business, or the typical -- call it core lending business, then clearly that's going to push the NIMs higher.

No, it will. I mean, it will help the net interest margins.

Okay, because that just doesn't quite follow. I mean, these higher NIMs, it's just so uncharacteristic of the environment. Just let's flip over just to one other thing. In response to Quentin's question about the goodwill allocation, more of a technical question -- maybe you might want to refer me to Deloitte & Touche on this one as well. When you think about Canada and Canada having a greater proportion of the goodwill, all future goodwill tests -- will that goodwill then be tested against the earnings from all of Canada, all of Canada P&B, earnings that were never gathered through an acquisition in the first place?

It's Janice Fukakusa. Yes, that will be the test because the goodwill will be tested against the earnings stream in the Canadian business.

Irrespective of whether it was actually acquired or not?

Right, yes.

So their very, very strong Canadian business now helps to support goodwill associate with an acquisition in the U.S.?

Well, effectively, the origination of the acquisition is really relevant from an accounting perspective. It's where it ends up, so effectively, yes, that goodwill will always be supported by the earnings of Canada.

It always did, from Day One. It's just, under the restructuring, it's harder to draw that connection I think is the way I would describe it. That's the way the accounting rules operate.

Okay, thank you.

The following question is from Ian de Verteuil from BMO Nesbitt Burns.

It sounds like we should send (indiscernible) inquiry. (LAUGHTER). My question -- (multiple speakers).

You don't want to get into a discussion of auditors!

(LAUGHTER). The questions I have mainly focus on the NIMs again. I guess the reason we are all having -- trying to understand is that your NIM trends are quite different than others. If you were to go to Page 8 of the supplemental pack, when I look at the -- you've given us very good detail on personal secured loans and personal unsecured loans. The personal secured loans are up 14% versus a year ago, and the personal unsecured loans are up 8% versus a year ago. So that would actually (indiscernible) margins, not better margins. So I guess I don't understand how mix is helping NIMs here.

It's Janice Fukakusa speaking. In terms of the mix, the issue is both the volume growth and the spreads on the product. In fact, the spread on the product between the personal secured and the personal unsecureds is dramatically different. It is much higher for the -- it's 2.5 times, right, Jim, approximately for the secured versus -- the unsecured versus the secured. So, if you look at it from a revenue-generation and mix perspective for Jim's business, that's where you get to the NIM improving in those sorts of products plus some of the higher spread parts like credit cards that are growing at a faster rate than some of the typically lower spread products.

In addition to, as was said earlier, to the growth in some of the Wealth Management products like mutual funds as well as some of the insurance products as well, so it is a combination, I think, of the whole product mix.

So part of the NIM stability is because of non-banking mutual funds and insurance NIMs?

Yes.

Yes, that would impact it.

Okay, so really, this isn't an apples-to-apples with a basic personal and commercial bank?

Well, it is with those that -- I mean, most of the Canadian banks have most of their Wealth Management business now included in their Canadian operations, so it would be, when you looked at those segments, relative to one another. Now, we've all got slightly different-sized businesses in different parts, but the groupings are, I believe, are pretty much the same across the spectrum.

Right. I guess coming back to Janice's point, it took me very conscious that the spreads on unsecured are twice what they are -- on unsecured (indiscernible) on secured as a good consumer -- but as I say, the secured, based on numbers you are presenting, are growing faster than the unsecured.

Yes, but they're both growing. We're doing a much higher volume, both credit cards and unsecured loans as well.

Okay. I mean, I'll circle back. I'm taking up a lot of time. Just a last question is on hedge funds. Morton, the prime brokerage business, is that what you talk about with respect to the custody business?

No, actually, it's mostly our international custody business in the channel (indiscernible) I'm referring to. The prime brokerage business in Toronto would be a minor portion of that.

I believe that you were building out a prime brokerage business in the United States as well. Can you talk to that? Presumably, that's reverse (indiscernible) kind of dealings with hedge funds. Is that a number that is material?

We're building it out very slowly, in this environment, and basically -- so, it's -- there is very little business. Most of our business in the prime brokerage side is a North-South flow. We would do business in the U.S., but it would be primarily Canadian business and done in Canada.

The U.S. exposure is a tiny fraction of the numbers I mentioned.

Thank you. Due to time restrictions, this concludes the question-and-answer session. I would now like to turn the meeting back over to Ms. Merchant.

Well, we thank you very much for your participation, and we've committed to get back to you on a couple of issues, which we will do. If you have any follow-up questions, please don't hesitate to call. So, on behalf of everyone here, again, thank you very much. Goodbye.

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.