Royal Bank of Canada (RY) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Royal Bank of Canada third-quarter earnings release conference call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Miss Nabanita Merchant, Senior Vice President, Investor Relations. Please go ahead, Ms. Merchant.

Thank you, Mary, and good afternoon, everyone. Welcome to our third-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 expressed in these statements as described on the second slide of the presentation package you all have.

Our call will begin with about a 20-minute or so review of our results in the third quarter. You will hear first from Gord Nixon, our CEO, who will provide a high-level overview of our performance, and then from Barb 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 briefly discuss their segment performance -- Jim Westlake, head of our Canadian personal and business segment; Peter Armenio, head of our U.S. and international personal and business segment; and Charles Winograd, head of global capital markets. Following the remarks, we will open the floor for your questions.

Also joining us today are Marty Lippert, head of global technology and operations; Elisabetta Bigsby, head of human resources; Janice Fukakusa, our CFO; and Morton Freed, our Chief Risk Officer. With that, I will now turn it over to Gord Nixon. Gord?

Thank you very much, Nabanita, and good afternoon, everyone. And thank you for joining us. I know it's been a long week for the analysts in particular. And it's coming to an end quickly, though.

Commenting on results, I'm pleased to say that our strong earnings momentum continued in the third quarter. And we delivered, in our view, very good results overall. As you can see on slide 4, our total net income reached the first quarter's level of 979 million. This was up 32% from a year ago. Net income from continuing operations, which excludes the results of our discontinued operations, RBC Mortgage Company, reached a record $1 billion this quarter. Diluted earnings per share were $1.48 in the quarter, and $1.51 from continuing operations.

The quarter's results included a $31 million, or US$25 million, cost to settle our part of the megaclaims (ph) bankruptcy loss brought by Enron against us and a number of other financial institutions. This amount, as you know, was announced on July 28th. There were a number of other items also impacting our third-quarter results, but these together with the Enron charge in total had little impact on our third-quarter net income.

Turning to slide 5, you can see that net income and diluted earnings per share both increased 32% from a year ago (ph). ROE was 20%, which was up 4 percentage points over the same period last year.

We're benefiting from the successful execution of our strategies in our various businesses and markets and also from a strong North American economy underpinned by low rates, a solid business base and household balance sheets and strong employment level. This continues to support loan demand as well as good credit quality.

We had strong performance from all of our business segments, as you can see on slide 6. Our Canadian personal and business and our global market segments both grew earnings by over 30% from a year ago, and also saw strong growth in the first nine months. Our U.S. and international personal and business segment's earnings based in U.S. dollars increased 8%, and were up 27% excluding tax provision related to the disposition of RBC Mortgage Company. This strong underlying performance reflects our continued focus on improving the results of our U.S. operations, which has been one of our top priorities as we articulated as we exited 2004.

I'm pleased that RBC Centura is continuing to make great progress. It generated solid loan growth. Its net interest margin was up over a year ago. And it has done a good job in controlling expenses. Staffing levels are down 3.5% from a year ago, despite the strong loan growth and the opening of 11 branches.

We continue to make solid progress in meeting our strategic goals, as is highlighted on slide 7. Our first goal is to be the undisputed leader in financial services in Canada. We have a very strong franchise in Canada, with the most extensive distribution and leading marketshares in many products. We continue to build on that leadership by expanding our sales forces and introducing new products and services in businesses where we have good marketshares as well as where we see growth potential -- businesses such as insurance, credit cards, asset management, brokerage and capital markets businesses. In insurance, as an example, we opened our first multiline outlet adjacent to a retail branch in order to provide clients a more convenient way to meet face-to-face with an insurance adviser. The results of this new approach have been positive. We also introduced the new RBC Cathay Pacific Visa platinum card for our personal and business clients. In capital markets, our clear leadership position in Denmark business continues, thanks to the ongoing investment that is being made in people, delivering systems and products like the new structured commodity-linked notes that we introduced this quarter.

Our second goal is to build on our strong banking, wealth management, and capital markets businesses in the United States. Each of these businesses continue to implement client-focused initiatives. For example, RBC Centura enhanced its suite of mortgage products in the quarter, while RBC Dain Rauscher launched a new process to help financial advisers develop solutions for clients in their preretirement years. And global capital markets proved its strength in municipal finance with its best midyear debt range -- sixth place overall for senior managed, negotiated and co-managed deals, and first place overall for the number of issues in both of those categories.

Our total earnings from continuing operations in the United States were $121 million in the third quarter and $338 million in the first nine months of this year, which is up 25% and 162%, respectively, over the same period of 2004.

Our third strategic goal is to be a premium provider of selected global financial services. And we took steps in this quarter to help us get there. As you will know, we already have strong positions in the institutional investor services, global debt markets, and global private banking business. During this quarter, we reached an agreement to combine our top-rated institutional investor services business with Dexia. This joint venture will rank among the top 10 global custodians in the world, offering a complete range of investor services to institutions globally.

We're also continuing to build a top-tier global fixed income business. This quarter, we led a deal that reflects our skill and scope in this area, where we were the lead manager in a highly successful oversubscribed $1 billion debt issue for Germany's largest development bank, KWB. Also this quarter, we topped the Australian bond league table, showing the increased depth of our activities in global debt markets. We established a new international client group in Vancouver during the quarter, which combines the resources of our global private banking group in Asia and our Canadian-based international banking group to enhance wealth management and banking solutions for high net worth Asian customers.

Our functional areas in global technology and operations have been providing excellent support to our businesses in continuing with their success. And we are streamlining our processes to improve service and reduce cost, as we've outlined in our Client First initiative.

As you can see on slide 8, successful execution of our strategies and strong financial performance have resulted in us outperforming both of the S&P/TSX Composite Index and the bank index for the first nine months of the year in terms of total returns to our shareholders. This total return includes common share dividends, which is shown on slide 9.

In the third quarter, our dividends were 11% higher than in the second quarter, and our dividend payout ratio of 41% was within our target range. In the first nine months of this year, our dividends were 14% higher than the same period of '04. But as a result of the very strong earnings growth, our payout ratio fell below our target. This morning, we announced a dividend increase of $0.03.

In conclusion, we're pleased with our results. And I'm comfortable that each of our three operating platforms is successfully executing with a clear and focused strategy. In addition, we're making progress on the Client First initiative, which is enhancing our revenue growth, and in particularly, our operating leverage.

With that, I would like to turn it over to Barb Stymiest to discuss our corders results corders quarters results in more detail.

Thanks, Gord, and good afternoon, everyone. We showed strong revenue growth this quarter of 10% over last year's third quarter, as you can see on slide 11. This was largely due to higher loan and deposit volumes, and increasing revenues from insurance and investment activities, full-service brokerage, mutual funds, and investment management, all in our Canadian personal and business segment. The 10% revenue growth was achieved despite an unfavorable Canadian/U.S. dollar FX movement that accounted for a $125 million reduction in our revenue versus Q3 of '04. Net interest income was up 1% over a year ago, largely driven by the higher loan and deposit volumes in both Canada and the U.S., partially offset by increasing funding costs from proprietary equity trading.

Slide 12 illustrates the changes in most components of non-interest income, which was up 14% over a year ago. Insurance-related revenues were up significantly due to higher volumes in all businesses. Securitization, underwriting, foreign exchange, and mutual fund revenues were also up substantially. A $101 million increase in trading revenue included in non-interest income was more than offset, however, by a decline in trading revenues included in net interest income. So total trading revenues were actually down from a year ago as shown in our supplementary financial information on page 5.

Switching to expenses, slide 13 highlights our continued success in containing costs. Whereas revenues grew 10%, non-interest expense was up only 66 million, or 3%, with higher stock-based compensation costs and an increase in variable compensation costs due to stronger business performance. In addition, 31 million, or U.S. 25 million, of the non-interest expense increase was attributable to our agreement announced on July 28th in regard to the megaclaims bankruptcy suit brought by Enron, which Gord commented on. The appreciation of the Canadian dollar relative to the U.S. dollar reduced our non-interest expense by 70 million from a year ago.

As you know, we remain a defendant in several Enron-related lawsuits, including a class-action lawsuit that has been consolidated with the main Newby class-action, for which we have booked no reserves during this or any prior quarter. Accounting principles require a provision for a contingent loss to be accrued if it is likely that a future events will confirm that a liability had been incurred and the amount of the loss can be reasonably estimated. At this point in time, we do not have sufficient information to assess the likely outcome of the Enron litigation, nor do we have sufficient information to determine the range of a potential loss, if any.

As you know the Enron litigation is extremely complicated, and each defendant's situation is unique. Therefore, it is not possible to use any settlement to date as a basis for estimating any loss we may incur. Our external auditors are in complete agreement with our accounting treatment.

Now, as you can see on slide 14, our strong revenue growth and solid cost control, both of which are above our objectives, have resulted in a solid 7% operating leverage. And as shown on slide 15, in the first nine months in 2005, we have exceeded or comfortably met all of our profitability objectives, including EPS growth and ROE, which Gord referred to a moment ago.

Slide 16 shows strong asset growth supported by solid deposit growth, as well as a strengthening of our shareholders' equity over the past year. Total assets have increased 10% from a year ago, largely in securities and loans. Securities have risen 14% as a result of of an increase in our trading businesses to take advantage of market opportunity. Total loans have increased 9%, with growth in residential mortgages, personal loans, and business and government loans. A 10% increase in deposits over the past year has been driven by growth in business, government, and bank deposits. Shareholders' equity increased 8%, reflecting our strong earnings generation, which was partially offset by a higher dividend payment.

Slide 17 shows good growth in our assets under administration and assets under management over the last few quarters. Assets under administration were up 11% over the third quarter of 2004, reflecting growth in our institutional investor services business. Assets under management at both Dain and here in Canada increased 9% due to growth in our full-service brokerage and mutual fund operations.

Onto our credit quality performance, starting with slide 18 -- gross impaired loans in both dollar and percent terms continue to remain low in the current favorable credit conditions. As illustrated on slide 19, the total provision for credit losses also remained low, with little growth over a year ago. The increase over last quarter largely reflected lower corporate recoveries and higher commercial loan provisions.

As shown on slide 20, our specific PCL ratio for this quarter of 28 basis points is unchanged from a year ago and, given the current favorable credit conditions, remains comfortably below our 35 to 45 basis points objectives for 2005.

Moving on to regulatory capital, our Tier 1 capital ratio increased another 20 basis points over Q2 '05 to reach 9.7% at the end of the third quarter as shown on slide 21. Since the end of 2004, our Tier 1 capital ratio has risen 80 basis points, and we have been narrowing the difference between our ratio and the average of the other five Canadian banks. Our ratio also remains well above OSFI's mandated target of 7% and our own objective of 8 to 8.5%.

On that note, I will pass it over to Jim Westlake.

Thank you, Barb. The Canadian personal and business segment performed very well this quarter, with earnings up 31% over a year ago, and all of our businesses lines showing strong volume and revenue growth. In the third quarter, we continued to successfully execute against our strategies.

As you can see on slide 23, revenues increased 13% over last year's third quarter and 12% for the year-to-date. Our non-interest expenses were up only 1% over the third quarter of 2004, resulting in 12% operating leverage. The noninterest expense growth reflected higher variable compensation due to strong operating performance and higher stock-based compensation. Also, advertising and new program costs increased in support of our business growth, while other support costs declined due to our cost-containment initiatives. Our global technology and operations group, headed by Marty Lippert, is also helping us reduce cost through more streamlined operations and better technology support.

Our provision for credit losses increased 35 million from a year ago, mostly due to provisions related to an impaired commercial account compared to recoveries on commercial accounts a year ago. Higher personal loan and credit card provisions, which are a result of increased volumes, were partly offset by lower student loan provisions reflecting the runoff of that portfolio. Generally, our PCL continued to reflect the strong credit quality of our portfolio and a good credit environment.

Revenue information for our segment is shown on slide 24. We had double-digit revenue growth across all of our business lines compared to a year ago. Global insurance revenue growth reflects strong results balanced across all of our insurance businesses. The growth in investment management revenues reflect the strong sales and capital appreciation that we continued to see in our growing mutual funds business.

Slide 25 shows that our net interest margins have been fairly stable in the past year. The slight increase from the second to third quarter is due to a change in product mix, including an increase in demand deposits, which have lowered the cost of funding, and an increase in card balances. In addition, we have collected higher prepayment penalties in connection with residential mortgage refinancings. Our mortgage block is weighted more towards fixed-rate mortgages.

Slide 26 shows the solid product volume growth in Canada, and slide 27 depicts our market share leadership across a broad range of products. Slide 28 highlights some of the key initiatives that we're currently undertaking across our banking, insurance, and wealth management activities to support our strategic priorities.

I will now turn it over to Peter Armenio to discuss the U.S. and international personal and business segment.

Thanks, Jim, and hello, everybody. For the U.S. and our international segment, this past quarter was really one of continued progress in executing on our strategies and improving underlining (sic) financial performance across all of our businesses. With that in mind, I would like to sort of briefly summarize our results from continuing operations for the third quarter. I should also note that my comments are all going to be in U.S. dollars.

Turning to slide 30, net income of 65 million for the quarter increased 8% over last year or 27% excluding the $11 million pretax provision this quarter related to the disposition of RBC Mortgage Company. This growth reflects strong improvement in all of our businesses. Our results for the first nine months of the year also reflect significantly better performance. Revenues in the third quarter increased 10% over a year ago.

Slide 31 provides details on our segments' revenues. Here you can see wealth management's revenue increase 15% from last year's third quarter, benefiting from the positive impact of our marked-to-market of derivatives and securities held to hedge our stock-based compensation plan at RBC Dain Rauscher. Even apart from this, RBC Dain Rauscher had a strong revenue growth, driven by higher managed accounts and mutual fund fees in line with its strategy to reduce reliance on client trading activity, which continued to be soft this particular quarter. Global private banking, which is part of our wealth management business, also had strong growth from a stronger loan and deposit balances and improved spreads. Banking revenues improved over a year ago, driven by strong loan growth at RBC Centura and our Caribbean banking business, and by improved spreads, partly offset by some security gains recognized in last year's third quarter.

Now turning back to slide 30, non-interest expense has increased 7% over a year ago, largely driven by the higher stock-based compensation at RBC Dain Rauscher. But apart from this, we were successful in keeping our expense growth to a modest level through our cost control efforts, especially at RBC Centura.

Moving on to slide 32, our net interest margin improved by 14 basis points over a year ago, reflecting strong loan growth and higher short-term rates in the U.S., but declined somewhat from the previous quarter, due to the changes in distribution of certain assets for management reporting. Overall, though, product spreads within that business remained stable quarter-over-quarter. Finally, we're encouraged by our progress to date on executing our strategy initiatives, which are summarized on slides 33 and 34.

I now would like to turn it over to our last speaker, Chuck Winograd.

Thanks, Peter, and good afternoon. I'd like to point out that starting this quarter, net interest income, revenues, and net income before taxes are reported on taxable equivalent basis in global capital markets. We believe these tax equivalent basis results, while being non-GAAP measures, increase the comparability of revenues and related ratios across taxable and tax-exempt sources, and they enable a more meaningful comparison with other financial institutions. Slide 49 provides reconciliation to GAAP.

When we look at our results in this quarter and compare them to prior periods, several items affect the comparison, including the Enron megaclaims bankruptcy settlement in Q3, PCL recoveries in both Q2 and Q3, insurance proceeds received in Q2, and smooth (ph) costs for our London trading for them in the third quarter of 2004. Despite challenging market conditions through much of the quarter, we continued to report topline revenue growth, due in part to increased traction from several new initiatives.

As seen on slide 36, net income increased 33% compared to Q3 '04 on improved revenues, recover of PCL, and lower effective tax rates as we continue to focus on our tax-advantaged trading strategy (ph). However, net income declined 13% from last quarter, despite growth in revenue, mainly due to last quarter's large PCL recoveries resulting from the sale of a previously impaired loan and higher expenses mainly related to the Enron bankruptcy settlement.

The weak market conditions from March continued into quarter three, largely impacting trading opportunities. However, the third quarter improved as it went along, and ended on a stronger note.

While market conditions improved, they remained below the levels experienced during the first four months of the year. The market environment continues to be affected by rising interest rates, relatively flat equity markets, continued uncertainty over the U.S. economic recovery, higher oil prices and continued weakness in the hedge fund sectors.

Slide 37 shows our revenues. Revenues for global markets were comparable to Q3 '04. We saw higher private equity returns and U.S. debt origination activity this quarter. This was offset by lower performance and certain trading-related businesses, mainly fixed income and money market, and particularly foreign exchange trading.

In global investment banking and equity markets, revenues increased 19% from a year ago, despite relatively flat equity markets on higher equity and debt origination and stronger loan syndication activities. We continue to make inroads on our debt origination businesses resulting from some increase in focus on our non-investment-grade sector. Our other revenues also increased 19%, in part due to higher securities lending fees in IIS and because of the gain on transfer of an Enron claim to a third party.

Before we take your questions, I would like to point you to some of our initiatives on slide 38 and 39. I know some of these were discussed last quarter, but we made significant progress on several of them.

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

(Operator Instructions). Jim Bantis, Credit Suisse First Boston.

I just want to circle back on the Enron matter with respect to the Newby lawsuit. I can appreciate that there are circumstances and restrictions on setting up reserves, but we still need to kind of determine or classify Royal with respect to these exposures. And I'm wondering if either Chuck or Gord could help characterize RBC's relationship with Enron. We still have a couple of the other banks do that to kind of better understand potentially what the exposure might be. And you know, I guess I'm looking for -- was Royal classified as a second-tier institution with them; is there equity research coverage; were the transactions and that Royal was involved in -- were they restated -- things of that nature.

Well, I will make a brief comment, and then Chuck may want to add with respect to some of those specifics to the extent that we can, because obviously, in a situation as complex as this, it's very difficult to get too specific.

The one thing that did come out, as you know, in the quarter was when we settled the megaclaims settlement with the Enron bankruptcy. We were not -- it was stated in their press release that we had the smallest amount of activity with Enron of any of the banks that (ph) part of that settlement, and that our settlement was the smallest of the banks, and those were his words -- or their words in the press release. Clearly, our status as a lender with Enron would be classified when you look over that period as not one of their main banks. And I don't believe, Chuck, we participated in any of the (multiple speakers) underwritings or the special-purpose companies.

Having said that, you know, we really can't comment in more detail with respect to the case or the potential liability, which is why we have made the decision -- and in fact, our accountants have made the decision that a reserve would not be appropriate, because given the uncertainty of the system and the process in the United States, it's just very difficult with any degree of precision to estimate what kind of range would be reasonable. So that is sort of as much flavor as I can provide. I think -- Chuck, is there anything more (multiple speakers)

Well, the only thing I would say is that we were not equityholders in any of the special-purpose vehicles. There was -- because you specifically mentioned, we did have some research coverage, I believe, in Dain Rauscher for part of the period. I can't even tell you how long that part was. But those were the only two matters of fact that I can think of from what you mentioned.

I appreciate that color; thank you. I just wanted to follow also on the expansion initiatives (multiple speakers) announced in Q4 relating to the client focus. And to what extent have the expense initiatives -- I know you haven't given a number to us yet, Gord, that have impacted the financials this quarter. Are you halfway through with respect to the process? Are there significantly or material termination severance costs that are still built in the expense line? We just want to get a better sense of where this is going with respect to the first half of '06.

I think that the business realignment has already contributed on both the revenue side and the cost side. On the cost side, to date, we have reduced our staff count and provided severance for about just under, I guess, 1,235 people, which relates to the adjusted total we provided last quarter of 1,590 -- and against the original employment-related accrual of 166, which we took at year-end as you know, we have committed at this point approximately 129 million. So that sort of provides an indication on the cost side in terms of where we are in the process.

As you know, the Client First initiative was about both revenues and cost. And as we said, it really was divided pretty well 50/50 between the two. And I think what we're starting to see reflected is some of the impact of those initiatives as you look at the ongoing operating results. And that's something that we have built into our plans as we move forward into '06 and '07. And the way we try to articulate that to the marketplace was by providing -- setting a target for ourselves at the beginning of the year. And we're pretty well in line with most of those -- objectives, I guess, not targets -- most of those objectives, which we outlined in our annual report at the end of last year. I think we are making reasonably good progress against the various initiatives.

I appreciate that, Gord; thanks for the color. And just the last question perhaps for Janice or Nabanita, the accounting adjustment in the retail division of 37 million -- what was the bottom-line after-tax impact to the contribution of the retail division this quarter in Canada?

The $37 million, Jim, is the bottom-line impact, because we have recorded it on an equity pickup business, consistent with the way that we record our equity pickup. So 37 million is in revenue but that is the after-tax amount.

James Keating, RBC Capital Markets.

Congratulations -- nice way to start the weekend here -- those results. I have a question for Jim, if I may. And it goes back to a subject we discussed last quarter, Jim. It relates to the twofold benefit of having these volumes pick up so much and, at the same time, having spreads rising. And I think you provided a bit of color on how perhaps some of the deposit accounts may be helping and so on. But maybe just describe a bit more about product-by-product, what you think may be contributing may be contributing to that rise? And specifically, is there any influence on that number in your view related to the fact that wealth management division is in there? I'm just trying to reconcile it to the others. I've got a follow up on the Avion in a second, Jim.

Two very separate things there. First of all, if you're talking about the net investment margin, there is not an effect from the wealth management division in that. When you look at those numbers, relative to a year ago, we are really pretty stable. We had a little bit of a dip, and have come back to what I would think of as more normal.

The increase -- and I talked about it earlier, but there's really increased card balances, certainly the lower funding from our demand deposits, the higher prepayment penalties in mortgages -- those would really be the things that have contributed mostly to the net investment margin. From a volume standpoint, I think it's really our focus on the distribution side combined with a combination of performance on the credit card side -- certainly, our home line products have been very important in driving home equity volumes. We have had very good investment management and mutual fund returns. So really right across the board would be the volume, but quite separate from what's driving the NIM.

And Jim, just as a quick follow up, maybe if you could comment on two things -- one is how the Avion marketshare looks like it's unfolding to you; I'm just curious about whether we are accelerating or holding our own on that? And secondly, a couple of the other banks helped with some color on the prepay just in terms of magnitude. Could you just give us an indication of what the mortgage prepay dollar amounts are this quarter and last quarter just to give us a hand on that?

Okay, well, I will comment -- I may have to look at a number. I will get Janice to do that while I -- I'll comment on the credit cards.

We've had good increases. Our volumes are up year-over-year about 11% credit cards. And I don't have a breakdown right here on the Avion, but that would certainly be the lead product that would account for substantial amounts of that 11.3%. And we're very pleased with the way that that product has gone. I'm just going to look over at Janice and see if (multiple speakers)

While you're doing that, Jim --

(multiple speakers) number on the prepayments.

(multiple speakers) With respect to the prepayments, first of all a little bit of color. Our particular mortgage book has more fixed-rate products than some of our competitors. And the actual amount of volume of prepayments has increased slightly. But the reason that you see that significant of an impact this quarter is because of that increase. In addition, there is a nuance with respect to an accounting treatment and amortization of breakage costs that also is contributing to that net margin. So I would say that in terms of prepayments, it may be increased about -- Nabanita (ph), 10 or 20%? Not significantly.

And Janice, you mean 10 to 20% of the delta, or the actual in-quarter change quarter-on-quarter?

Right, and the actual in-quarter change, quarter-over-quarter.

Could you just ballpark it? Are we talking about 30 or $40 million roughly? Is that reasonable?

Yes. Yes, that is right, Jamie.

My last question -- on the cards, Jim, market share of purchase volumes versus what's going on on receivables -- going up in concert, or are you going getting more on one side or the other?

I know we have the volumes here. But I think both sides are moving up. Certainly, I would think that the spend rates would be in excess of the volumes.

Steve Cawley, TD Newcrest.

You're getting some breathing room here. And the performance is coming out. Just wondering strategically whether or not anything has changed, and if not in terms of the direction you want to take this bank, let's say, in the next couple of years -- you can just say, no, things are the way they are, and I will drive onto the next question.

Well, I would elaborate a little bit more than that. But I would say that we articulated at the beginning of this year a very focused strategy around Canada, around the United States, around the rest of the world. And a lot of it was in parts of the world was getting our operations more streamlined, being more focused in specific areas, and improving our performance, particularly with respect to our banking business in the United States. And Canada related very much to the Client First initiative. And on the U.S. -- sorry, on the international side, it involved a number of things. And I would say that we are now nine months into the year. And we remain very focused on those initiatives. And we don't want to start moving off those strategies until we are very comfortable with respect to execution. So I think you're going to continue to see more of the same (multiple speakers)

More of the same in allowing the capital ratios to build up?

Well, that's less of a strategic issue. I think that's an accounting issue. But the accounting -- I mean, clearly -- I would say we feel more comfortable being in the top banks with respect to that capital ratio as opposed to being at the lower end of the range, which is where we were in the end of 2004.

One question for Peter. I've tried to make some adjustments -- just one for the general allowance, in terms of just trying to get to what I think is a core number. So it looks to me as if the U.S. retail bank had higher loan losses than we had seen in the past. And I was just wondering if I am calculating that correctly. And if I am, can you talk about it?

There was one -- I think generally speaking, the loans were -- there was one particular loan I'm trying to remember which was about an $8 million situation. And that was part of Centura. But that's all I can think of that was really of any size. But overall, our numbers remain quite stable.

Actually, Steve, it's Nabanita -- if you look at the provision for credit losses for the U.S. and international segment, it actually declined by 4 million compared to a year ago. Compared to last quarter, it was up a slightly. It was up $3 million.

Yes, there was one particular loan I remember that was (multiple speakers)

One real estate-related file (multiple speakers)

There was a real estate-related file that was related to Centura. And that was about it.

Okay. And for Jim Westlake, there was a big movement on the insurance side this quarter -- the fee income spiked up big-time. And there was talk in the press release about new reinsurance arrangements as well as equity gains. I was speaking with IR before the call, and they were telling me that there were expenses. And you can see it in the statements as well -- expenses increased almost as much. And so there really wasn't much of an impact there. But I still wouldn't mind a little bit of color of what exactly was causing the volatility in the insurance results.

Yes, I wouldn't call it volatility. There was really, if you look, almost a switch. The net premiums came down and the fee income went up. It was due to a restructuring of several reinsurance treaties in our Barbados operation. And effectively, the income stayed the same. But we reported more of it as fee income, and it reduced the premium. So there was really no substantial change there. There's an offsetting amount as well in the policyholder benefits. So net net, there really is not much there. But it looks a little funny because of that reinsurance transaction.

Ian de Verteuil, BMO Nesbitt Burns.

Two questions. First relates to Enron -- I just want to make sure I understand the accounting that came through this particular quarter. The megaclaims settlement -- that was expensed. The incremental amount I think to free up the claims -- that was not expensed. That was deferred. And there was a gain on selling some exposure to Enron. Are those the three things that came through the income statement?

Ian, it's Barb. You're absolutely correct on the first two. And you are correct on the third one as well.

So you had gains pretty much to offset what the megaclaims payment was, and you deferred the last piece, presumably under the belief that when you liquidate those claims, you may not have to take that charge?

Let me answer that. First of all, the liquidation of the claim wasn't necessarily related to the megaclaims. But basically when we liquidate our Enron securities, we will take care of the charges that have come from Enron. (multiple speakers)

In other words, what Chuck is saying is the third component that you mentioned has got nothing to do with the megaclaims settlement. The two component parts of the megaclaims settlement was the 25 and 24. And the 24 will be offset by the disposition of securities.

That's right, but if you add up all the Enron securities we held prior to the megaclaims, and you then play out and sell all the securities, we will take care of all of the claims, those that we wrote off and those that we deferred.

Right, so Ian, the $24 million -- the second 24 is a deferred expense. It hasn't flown through our income statement. We will recognize that expense when we liquidate the balance of our Enron securities.

And was Chuck saying -- but he expects gains and other things to offset that?

Basically, the actual write-off we took was not offset by claims because we didn't sell enough securities that we had to offset those. But we will be in a position to do that in the fourth quarter.

Okay, I will follow-up off-line, because it sounds as if there was -- if I add up all three things that are related to what I would call Enron, they number zero.

No.

No.

(multiple speakers) The answer is yes, but not necessarily in the third quarter.

I will follow-up off-line. Sorry about that (multiple speakers)

(multiple speakers) look at it over the third and fourth quarter.

In the third quarter, there was a 31 million Canadian expense. The 24 U.S. has been deferred because we expect to realize some benefit from that $64 million of claims that we had unfrozen. And so the impact in the third quarter though was a negative $31 million.

That is correct.

So there was no gain on Enron on the transfer of a claim --?

No, no; nothing in the third quarter.

I will follow-up off-line. Sorry, guys. The second question hopefully is a little bit more tangible -- more fungible. Marketshare in Canada, Jim, was just a great revenue numbers and excellent volume numbers as well. When I look at things like -- you know, share in personal deposits, share in business deposits, share in full-service brokerage, I'm seeing a trend that I don't normally associate with the Royal Bank, which is declining share. Can you talk about why your share is down -- looks like 20 basis points in quarter in personal deposits, specifically?

Yes, and I think that you've got to look broadly across the categories. We're seeing a lot of movement right now in the way that we're seeing some reporting. I think a lot of the HELOC business is doing that depending on where it is reported on the loan side.

When I look at our personal deposits, our core personal accounts and GICs as kind of a total deposit number -- we would be off 8 basis points over a year ago. But on mutual funds, we are up 51 basis points. And we very much decided not to play in the high interest savings market and erode our margins. And we've moved more money into short-term mutual funds where necessary. So when you look in total, all of the money in, if you will, the short-term mutual funds and the total deposits, we feel that we are up slightly from where we were a year ago.

Similarly, in total loans, as we are getting the -- what I think is very much a changing credit environment, particularly as home equity loans grow and replace balances on cards and other types of loans -- if I add up the three of residential mortgages, personal loans, and cards as total loans, we're up about 19 points in marketshare over the last year. So we feel pretty good that across the board in those key banking products, both the lending and across all of the money gathering devices we have, that we are even and up and maintaining an increasing margin. So we feel pretty good.

On full-service brokerage, it looks as if you are down about 100 bp's (ph) versus last year (multiple speakers) just to hear (ph) the full-service the way you disclosed it -- the AUA (ph) --

Yes, on AUA, down slightly over a year. Yes.

The point on that is it's the way the marketshare -- it's not in either (ph) here, Ian. The way the marketshare is computed, the total for the industry now includes four additional brokerage firms. And so really -- so the pot has grown, so to speak. And our trend in marketshare probably wouldn't be very different to some of the others as a result of the inclusion of those four additional firms.

Mario Mendonca, Genuity Capital Markets.

I want to get a better understanding of what's happening on the personal lending side. The increase in revenue -- just sequentially $100 million, up about 15% in one quarter. The personal assets -- personal secured loans, personal unsecured, up about 3% sequentially. I imagine there are a few things in there. One would be the prepayment -- you referred to the prepayment income -- let's call it 30 or 40 million as you suggested. Is there anything else in there, like that 37 million you referred to earlier?

Our volumes are up substantially. Residential mortgages year-over-year were up 12%. Personal loans, 9.8, and credit cards, 11.3. If you balance that out for volume, we are up 11.4% overall.

What I was referring to was sequentially -- the assets up about 3% and the personal lending revenues up about 15% sequentially. I'm just trying to figure out if there's more going on there than just the prepays.

Yes, Mario, so there's the volume. And there's also the margin. As Janice said, some of the margin expansion related to the credit cards. It related to mortgages, both of which -- if you're looking at slide 24, they would be included in that personal lending revenue.

The 37 million accounting change you referred to a while back, where would that have gone through -- the business markets or through personal lending?

Some of it -- Mario, it's Janice speaking -- some of it went through on the business markets. And some of it went through on the deposit side. So basically it was allocated amongst a couple of the business lines.

So this 15% increase sequentially -- it's volume; it's prepays; it's a portion of that 37 -- the portion is mixed. So it's just a variety of things that causes the sequential to increase by 15%, even though the assets are up by about 3. Is that a reasonable characterization?

Yes, yes, yes.

I look at it -- that's the right (ph) characterization.

And not to go back to a question that came up on the last call, but I need to understand this better. Jim Westlake, you explained that the 5% basis point increase -- this is on slide 25, the spread -- the margin -- up 5 basis points. And you said that didn't have anything to do with wealth management. When you say it has nothing to do with wealth management, are you suggesting that you've excluded the effects of wealth management in calculating that NIM?

No, the wealth management margins and balances have remained relatively flat from the previous quarter. And so I'm just saying they didn't have any significant impact on the entire segment margin. We don't not count margin that would be from the wealth management group.

You're just saying that that wasn't an important effect (multiple speakers)

It's a wash in terms of margin.

Got it. Thank you very much. Good quarter.

Susan Cohen, Dundee Securities.

I was wondering if you could perhaps add a little more color about Centura specifically. Perhaps if you talk a little bit more about the operating environment that you're seeing down there, and perhaps what your current view is with respect to acquisitions?

Just with regards to the environment generally, Centura is enjoying a strong loan growth environment, good deposit growth. Its net interest margins are improving quarter -- over last year. They've had a significant increase in their net interest margin. They've gone up 32 basis points, now running around 3 24. Their credit quality remains very strong. And they've got really some good cost-containment initiatives on the go.

Their management team is now solid in terms of the changes that they've made, relatively speaking, around Scott Custer and his operating committee. And now progressing towards execution of all of our strategies that we've laid out. So we feel pretty good overall about the organization and what it is doing and how it is executing.

I would say just on the acquisition front that at this point in time, really what's most important for us is a focus on our financial results and our improvement around those. Organic growth is very much a significant part of the future for us, and that is something that we are executing on. But as acquisitions may or may not come down the road, it's a subject that at this point is not on our radar screen.

Rafael Bello, Citigroup.

Probably just along the lines of the previous question, if you could just give us an outlook of your profitability for the U.S. business? If you look at the quarter-over-quarter, you have a flat profitability. It's encouraging to hear that there are a lot of good things going on. But could you give us an idea of your expectations regarding improving or higher profitability, and over what period of time could you expect that to be achieved?

Rafael, it's Peter again. But I don't think -- you know, obviously, I can't project in terms of what we may or may not do into the future in terms of our profitability. But there's no question that each one of our businesses is performing well. And within the specific segments in the U.S., we've had a couple of situations where it looks flat because of some of the one offs that we've had. But ultimately, we are very pleased with the overall results year-over-year in each one of our businesses. And each one of our businesses has had significant growth relative to net income, relative to revenue.

So overall, we are encouraged with where we are going. But to sort of project this specifically or make any other comments at this point I think would be the wrong thing to do.

Rafael, it's Nabanita. If I may just add to Peter's point, there was a 13 million tax provision in the quarter that we referred to in our discussion in the press release and MD&A. So if it hadn't been for that tax provision, there would have been quite a significant improvement in performance over the previous quarter and the year ago.

And the U.S. dollar affects as well. So those two things together if you actually looked at that and these the one-offs that I was talking about, you actually do end up with a very strong performance year-over-year (multiple speakers) 27%

(multiple speakers) 27% growth in earnings, as Gord had mentioned. (multiple speakers)

And if I may just sort of advertise for Centura in terms of their own growth, quite significant contribution to that number.

Michael Goldberg, Desjardins Securities.

A couple of questions, starting just with a number question. How much were gross formations in the quarter?

It's Morton Freed speaking. In terms of -- assuming you are speaking of impaired loans, the impaired loans formation was $295 million, which is one of the lowest quarters in the last couple of years.

295?

Yes.

And now -- I want to go to slide 6 in the presentation. And the sequential numbers aren't in there on that slide. But if I were to put them in, I would say that earnings from continuing operations were up $85 million, but almost double that amount of increase came from personal and business.

So I guess there's a couple of points that I want to ask about. First of all, what accounts for the earnings strength in the Canadian personal and business? And would you think it's going to plateau at this level, or is there more of an uptrend yet to come?

It's not -- Jim?

Well, a bunch of us could jump in here. I will say that it is really a very broad-based quarter. I think that there are several things in here. We have been very much focusing on the expense side as evidenced by the 1% increase in expenses year-over-year. That's following through with all of the efforts in our global technology and operations, and our functional groups taking out costs along the way, merging our banking insurance and investment back offices. So there's been that. We've had very good volume growth right across the country in all of our products. We're getting a very strong response to the focus on increased sales and distribution.

So if you are just looking at where does it come from, it's right across the board. It's very hard to point to one or two things that say what's going on. Certainly, PCL is at a very low ebb as well.

In terms of looking forward, I can't talk about earnings, but certainly we feel that we have a lot of momentum going. We're continuing to add resources in the field. And we think the economy is going to stay strong and be with us on that. So we're very positive about our ability to continue to conduct business at that level.

Michael, It's Gord, too. I think you have to be careful about looking at sequential, because remember, there were three extra days in the quarter compared to the prior quarter. And so our revenues were up 7%, and volumes were higher, as Jim articulated, in a number of products like credit cards, insurance, and mutual funds -- we continue to perform very favorably. But it is a different quarter with three extra days in the quarter.

And the other thing which I would highlight is the operating leverage that we're getting from some of the initiatives that Jim talked about that are going on -- not only in his platform, but in Marty's platform as well, because non-interest expense in the quarter in that platform was down slightly quarter-over-quarter as well. So the operating leverage in that platform is pretty positive as well. So it's slightly different quarters.

Okay, just one final question. On the mortgage prepayment number, up 30 to $40 million sequentially -- would all of that, other than tax-related, fall down into the bottom-line?

Michael, it's Janice speaking. Yes, it would. It would be of course tax impacted, but taken into income when we receive the payment.

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 sorry if you had any remaining questions left. I would be happy to take them when I go back to the office in about 10 minutes or so. You have my number -- 416-955-7803. Thank you very much. Bye-bye.

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