Royal Bank of Canada (RY) 2005 Q4 法說會逐字稿

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

Thank you. Welcome, everyone, to our fourth quarter results conference call, scheduled to run for an hour. Just a reminder, our disclaimer regarding forward-looking statements that may be made during the presentation and during the question-and-answer session can be found on slide two of the presentation package. We will start with Gordon Nixon, our CEO, providing a high level overview of our fiscal 2005 performance. That will be followed by Barb Stymiest, our Chief Operating Officer, who will comment on the fourth quarter financial results, including asset quality and capital trends.

Then you will hear from our key business segment heads. Jim Westlake, with RBC Canadian Personal and Business segment, Peter Armenio, of our RBC US and International Personal and Business segment, and Chuck Winograd of RBC Capital Markets. After the presentation, we will field your questions. Also joining us today are Marty Lippert, Head of Global Technology and Operations, Elisabetta Bigsby, Head of Human Resources, Janice Fukakusa, our Chief Financial Officer, and Morton Freed, our Chief Risk Officer. I will now turn it over to Gordon Nixon. Gord?

Thank you, Nabanita. Good afternoon, everyone, and thank you for joining us on the call. We are pleased to report our record net income of 3.39 billion that was delivered in 2005. And that's notwithstanding, as you're well aware, the sizable impact of the reserves that have been taken for both the Enron litigation and for hurricanes Katrina, Rita, and Wilma which all occurred in the fourth quarter. These results, record results reflected, I believe, the significant progress that we've made with our Client-first Initiative, including accelerating revenue growth as well as good cost management. Each of our business segments showed solid underlying results. Following strong performances compared to our objectives for this year, we've established what we believe are fairly aggressive but good financial objectives for '06 and I will comment on these a little bit further along in my comments. You can see our substantial performance improvement in 2005, both before and after the Enron litigation reserve of 591 million, or C$326 million after tax, which is shown on slide five.

Diluted earnings per share were up 21% before and 33% after the reserve. Revenues were 8% higher, while non-interest expenses were up 5% due to the litigation reserve and they were flat if we exclude that reserve. Over the last 10 years our revenues and net income have risen at compounded annual growth rates of 10.4% and 11.5% respectively. The major items that affected our results in 2005 as well as 2004, including those two that I've just mentioned, are shown on slide six. We made good progress in achieving our three strategic goals this year. In Canada we strengthened our number one or number two market share position in most key Personal and Business products. We were also recently ranked number one by Canadian business owners for client loyalty and recommended more than any other bank. And RBC Capital Markets inroads in the Canadian debt and equity businesses were acknowledged by Euro Money which gave them two awards of excellence, Canadian Debt House of the Year and Canadian Equity House of the Year.

We built on our strong strengths in Banking, Wealth Management, and Capital Markets in the United States. As an example, RBC Centura significantly improved its financial performance as it continued to implement its strategies. RBC Dain Rauscher successfully increased its fee based assets by 24% during the year and RBC Capital Markets grew its U.S. municipal finance business, ranking number five in the U.S. Municipal Finance League tables. We also made strides in enhancing our position in selected global financial services. For example Global Private Banking was ranked by Euro Money as the number one provider of trust services in the United Kingdom and number six worldwide. RBC Capital Markets continue to grow its global debt and structured products business, ranking number 11 in global debt underwriting. And the announced RBC Dexia joint venture, expected to close early in fiscal '06, should rank us well within the top 10 global custodians.

Now, as outlined on page 14 of our consolidated financial statements, which provides a breakdown of our earnings by geography, we had earnings from continuing operations of C$200 million in the United States and C$463 million in other international. However, excluding our reserve for Enron and the hurricanes, the aggregate of our net income outside of Canada this year was in excess of C$1 billion. These and other accomplishments led to strong performance in our business segments. You can see that on slide eight, that RBC Canadian Personal and Business segment grew its earnings by 14% to a record 2.3 billion. The RBC, U.S. and International Personal and Business segment grew its net income by 63%, to a record 395 million, despite the impact of the weakening U.S. dollar. While RBC Capital Markets net income was down, its earnings would have reached a record 1 billion for the first time if you exclude the Enron litigation reserve, a substantial increase from a year ago. You will hear more detail from each of our business heads shortly.

Over the last year our shareholders have benefited from a 31% increase in our common share price and from three dividend increases since the fourth quarter of '04, resulting in a total shareholder return of more than 35%. Over the last 10 years the annualized total shareholder return has been 22%. As you can see on slide 10 we performed very well compared to our financial objectives in 2005. I've already discussed earnings, revenue, and expense performance. Barb Stymiest will review our credit quality and capital with you next. But in short, our strong risk management and relatively benign credit environment resulted in good portfolio quality performance. In addition, we strengthened our capital position this year to remain comfortably above our objectives while achieving a dividend payout ratio of 45%. Our 2006 objectives are based on the expectation that the Canadian economy will remain strong, while the U.S. economy may slow, but only moderately, partially in response to higher interest rates.

We expect retail lending to slow marginally this next year, but business lending to grow at a similar pace to what we saw in 2005. Overall, we expect the economy to remain strong next year. Compared to our 2005 objectives, we've made changes in the areas of ROE, expense control, portfolio quality, and capital management. We've raised our ROE objective to 20%-plus from 18% to 20%. And replaced the expense control objective with an operating leverage objective as we believe it is more meaningful to look at expense growth in relation to our revenue growth. We have also increased the portfolio quality, that is our specific provision ratio, objective to what we believe is a more normalized range of 40% to 50%. While we don't currently see any significant signs of deterioration in the credit environment, we believe it is prudent to go to what we believe is a more normalized range. Meeting these, as well as our revenue growth objectives, would once again put our earnings per share growth well through 20%.

In addition, we've set a floor for the tier one capital objective of 8% and removed the total capital ratio objective. We've narrowed our medium term objective down to one overarching goal to generate top quartile shareholder returns. We expect to continue providing financial objectives on an annual basis and, needless to say, these objectives will be set to continue to consistently generate strong returns for our shareholders. Before turning it over to Barb, I would like to say that this has been, I think, a very pivotal year for RBC, marked by significant change and a significant cultural evolution across the organization. I think the organization has become stronger, more disciplined, and more innovative and, most importantly, more client-focused. We intend to continue along that path, finding innovative solutions for our client's needs and meeting our key strategic goals in Canada, the United States, as well as globally. And with that I will turn it over to Barb?

Thanks, Gord, and good afternoon, everyone. Our fourth quarter results and comparisons to the same quarter a year ago reflect a number of items that are shown on slide six, that Gord referred to a moment ago. In addition to the Enron litigation reserve and the charges for the estimated net claims from hurricanes Katrina, Rita, and Wilma, there were business realignment charges in the fourth quarter of 2005. As well, in last year's fourth quarter there were also business realignment charge and a goodwill impairment charge. The amounts involved are all shown on that slide. Now, turning to slide 14, you can understand that the growth rates in earnings and ROE are heavily impacted by these items. Revenue growth was a solid 5% and non-interest expenses were up due to the Enron litigation reserve, as Gord noted, excluding that, they would have been flat. Turning to slide 15, you can see that net interest income was up 10% over a year ago and non-interest revenue was up 3%.

The very strong growth in net interest income reflects strong loan growth and wider margins in our RBC Canadian Personal and Business segment. And total revenues were up 5% over last year's fourth quarter, but excluding the impact of the stronger Canadian dollar relative to the U.S. dollar, revenues were up 7%. As you can see on slide 16, the growth in non-interest income was broad-based for both Q4 of this year, as well as compared to year-over-year. Now, slide 17 shows that our non-interest expense growth in the fourth quarter was due to the Enron litigation reserve, as I mentioned earlier. Excluding this, expenses were flat, which is very commendable given that our variable compensation costs were in fact higher due to revenue growth and we've increased the number of sales and service people and incur higher advertising and new program costs to support our business growth. And this attests to the success of our cost management efforts.

Slide 18 shows the 5% operating leverage in the fourth quarter, excluding the Enron litigation reserve, and also shows the 8% operating leverage for the entire year, excluding the Enron litigation reserve. Our balance sheet continues to show good growth in assets, loans and deposits as shown on slide 19. And slide 20 depicts that assets under administration and assets under management continue to rise despite the fact that assets in U.S. dollars and British pounds depreciated in terms of their value in Canadian dollars. The next three slides show that our asset quality remains strong. Slide 21 shows a further reduction in our growth impaired loans in both absolute and percentage terms. As shown on slide 22 and 23, the specific provision for credit losses in the fourth quarter also declined in both dollar and percentage terms. And the specific PCL ratio was comfortably below our objective of 35 to 45 basis points. Now concluding with our capital position shown on slide 24, our tier one ratio of 9.6% at the end of this quarter is up 70 basis points from a year ago.

We have substantially strengthened our capital position and in the fourth quarter we successfully launched a C$1.2 billion innovative tier one transaction. And we repurchased 1.95 million shares for C$163 million. All in all, I would say that we've delivered solid underlying results this quarter, considering the two sizable reserves that we've referred to. And now, Jim Westlake will speak to you about the results of the Canadian Personal and Business segments.

Thank you, Barb. The Canadian Personal and Business segment performed well in the fourth quarter, although results were impacted, as we mentioned a few time, by a 203 million charge in our global insurance business relating to estimated net claims for hurricanes Katrina, Rita, and Wilma. Even with this charge, net income for the quarter was up 15% over a year ago, with most of our business lines showing strong volume and revenue growth. In the fourth quarter, we continued to successfully execute our distribution, product, and client strategies. As you can see on slide 26, revenues increased 12% over last year's fourth quarter, largely reflecting higher lending and deposit volumes in Personal Banking and Business and Commercial Banking, higher full service brokerage volumes and strong mutual fund sales in Wealth Management. And higher balances and purchases volumes in Card and Payment Solutions. Our non-interest expenses were up only 2% over the fourth quarter of '04, resulting in an excellent 10% operating leverage.

Our provision for credit losses increased 24 million from a year ago, mostly due to higher volumes in our credit card and credit line products. Generally, our PCL continued to reflect the strong credit quality of our portfolio and a good credit environment. Slide 27 shows that our net interest margin was stable versus the third quarter as our net asset position continued to benefit from rates that remained low and stable for most of the quarter. Slide 28 shows the solid product volume growth in Canada. The decline in GIC largely reflects clients transferring funds to mutual funds. Slide 29 highlights the actions we took during the quarter in areas of strategic focus. Most noteworthy was the realignment of our national customer and sales management structure to put senior leaders in closer contact with clients and employees. Our priorities for 2006, shown on slide 30, are consistent with those in place during '05. We are determined to continue to build on our strong position in Canada.

As a final topic, I thought I should comment briefly on several insurance-related matters. In respect of our property reinsurance business, we have decided to significantly reduce our full blown exposure in 2006. In general, we intend to limit our overall single event exposure to no more than a single quarter of earnings of our insurance business. In addition, as a result of certain actuarial studies and the review of various actuarial assumptions during the year, we made reserve changes in our life and health business, resulting in a net reduction in reserves in C$54 million in 2005, as detailed in note 13 of our 2005 financial statements. Finally, we have provided much more disclosure on our insurance financials to provide a clearer picture of our Banking and Wealth Management businesses. I will now turn it over to Peter Armenio to discuss the U.S. and International Personal and Business segments.

Thanks, Jim, and good afternoon, everyone. Our U.S. and International continues to make very good progress in improving the performance of all of our businesses. This is evident in the results of the fourth quarter, which I will now briefly review with you. I should also note that all my comments are going to be in U.S. dollars. Turning to slide 32, net income of 111 million for the quarter improved 242% over a year ago. This quarter was positively impacted by a $13 million before and after tax accounting adjustment related to the intangible assets, also lower provisions for credit losses at RBC Centura, as well as $6 million in year-end tax adjustments. Also, last year's fourth quarter included business realignment charges of $19 million or 12 million after tax. However, even with these factors aside, net income was up very sharply from a year ago, with strong growth in all businesses, especially RBC Centura. Revenues in the fourth quarter increased 13% over last year's fourth quarter.

Wealth Management revenues rose 12%, driven by higher investment management and other fee income at RBC Dain Rauscher and Global Private Banking. While our banking revenues improved 16% from strong loan and deposit growth at RBC Centura and the Caribbean banking. Slide 33 provides some additional detail on how the execution of these strategies contributed to this growth. For full year 2005 our net income of 326 million increased 76% over last year, again, driven by strong revenue growth, coupled with good cost control. Looking forward, we are determined to build on these results by executing on our 2006 priorities, which are shown on slide 34. RBC Centura will focus on its customer strategies and local accountability model which empowers local market and branch managers. Caribbean banking will use its improved sales management to deepen client relationships.

RBC Dain Rauscher will continue to execute on its primary financial advisor strategy, a strategy which is focused on increasing share of client wallet by matching financial consultants and Wealth Management solutions with specific client segments. We will also focus on hiring and retaining financial consultants, while the Global Private Banking will grow by adding additional distribution and expanding its product offering. And finally, we're very excited about our acquisition of Abacus Financial Services Group that we announced earlier today. The deal solidifies Global Private Banking's position as an international leader in Wealth Management. With Abacus we strengthen our British Isles capability by adding a business with a strong reputation for client service, almost 400 employees and six offices, and total assets under administration of 24 billion pounds sterling, or approximately $41 billion U.S. The deal is expected to be virtually neutral to RBC's earnings in 2006 and slightly accretive in 2007. With that, I will turn it over to our last speaker, Chuck Winograd.

Thanks, Pete, and good afternoon. As you have already heard, there was a big drag on our performance in Q4 '05 from the Enron litigation reserve of 591 million pre-tax Canadian and 326 million after-tax. The net income reductions of 132% from the fourth quarter of 2004 and of 127% from the third quarter of 2005, that you see on slide 36, reflect this reserve. Excluding the Enron litigation reserve, net income would have risen significantly compared to the prior year. For all of 2005 our earnings fell 76 million, or 9%, due to the Enron litigation reserve. Excluding this reserve, our earnings would have reached C$1 billion, as Gord mentioned, a substantial increase over 2004. The market environment continues to be affected by reduced equity market volatility, a flat yield curve environment, the effects of southern U.S. hurricanes on the financial markets, and uncertainty regarding the tax treatment of income trusts. You can see our revenues by business line on slide 36. Revenues for global markets were down 15% compared to a year ago, primarily due to weaker trading results in a challenging market offset by stronger global debt origination activity.

In Global Investment Banking and Equity Markets revenues increased 8% from the fourth quarter a year ago, despite relatively flat equity markets, on higher equity origination activity in Canada and stronger loan syndications in the U.S. IIS revenues increased 17% from the fourth quarter a year ago, primarily due to higher securities lending activity and higher foreign exchange revenue. As you can see on slide 37, we continue to make inroads in enhancing our positions in Canada, the U.S., and globally. I am particularly pleased with the progress in the U.S. municipal finance, structured products, and global debt businesses. For 2006, as you can see on slide 38, we want to continue to build our position in Canada, grow in the U.S. mid-market, invest in proprietary trading, structuring and derivatives businesses, as well as build a strong global fixed income business. At this point we will turn the call over to the conference operator to begin the question and answer session. Operator?

Thank you, we will now take questions from the telephone lines. If have you a question, please press star, one on your telephone keypad. If you are using a speakerphone, please lift the handset and then press star, one. If at any time you wish to cancel your question, please press the pound sign. Please press star, one at this time if have you a question. The first question is from Jim Bantis of Credit Suisse First Boston. Please go ahead.

Hi, good afternoon. A couple of questions, please. One, with respect to the U.S. strategy. We've had a year under our belt now with respect to improving revenue environment, good cost control, and overall operations have been improved under the new structure and the release of the mortgage business. And I wanted to get management's view with respect to looking at doing an acquisitions in the U.S. into 2006. Most pundits kind of view 2006 as maybe an opportunity given the margin compression and some of the challenges that banks are having. And it could be an environment for buyers. And I've got a follow-up question for Chuck as well, please.

Okay. It is Gordon Nixon speaking. I think with respect to -- and then Peter can jump on if he would like to add anything to it. I think if you look at across our U.S. businesses, we are, as you mentioned, making good progress. I think on the banking side we have made it clear that for a period of time, certainly through this year and early into next year, we want to keep very much focused on the improvement and potential improvements that we see with respect to the operations at RBC Centura. And we are making some good ground on that front. And certainly the momentum, their momentum is moving in a positive direction at the same time as I would say the banking market as a whole in the United States is suffering somewhat from the flat yield curve and other stresses. So, that's something that we're going to continue to remain very focused on.

And I think as we look out longer term, as that trend continues, if that trend continues, we will look for opportunities. But I think in the short-term, we are going to remain very focused on operational improvement, because we think there is still good opportunity on that front. And I think Scott Custer and his team are making good progress. I think on the Wealth Management side, we've continued to look to add to our IA count and we are continuing to do so. We would love to make smaller or acquisitions in that marketplace, if we could find the right opportunities. They are not in abundance but we are going to continue to pursue growth in that business, as we have throughout the past year. And then of course, on GPB, which is outside of the U.S., but we have announced the acquisition this morning and I think we'll continue to see more of the same on that front. Pete, do you have anything you want to add?

Nothing else to add. I can only echo your comments. But there is no question we are quite encouraged with Centura's progress to date and it would not be unreasonable to look out a couple of quarters to see if the business is still doing what it is doing, that there would be acquisitions on the radar screen.

Great. Thank you.

You have got a second question, Jim?

Yes, I did, thank you. Just for Chuck. I wanted to see if you could get a little bit more specific with respect to the trading losses. You don't provide the bar chart any more with respect to wins and losses during the quarter and I wanted to find out if there are any substantial losses, perhaps pierce the VaR. And maybe you can give some details in terms of was there a particular product area, commodities, that may have caused this and is it somehow tied into the reversal of fortunes in terms of the securities portfolio going from an unrealized gains of 363 million to, I guess, losses now of 143 million?

Janice would know more about that. But I don't think that any of our trading book would be included in that total.

That's an accrual.

That's an accrual book. But basically, first of all, I believe that, and I don't know whether to give you the information, but I think we had five days where we did not, and I use the word make money advisably, because traders consider revenue profit. I don't. But that is a revenue table. But there are five days where we didn't have positive revenue in the quarter, which is versus the one or two that we would usually have. So it was a tougher quarter. And again, it isn't that we had a large number of areas with trading losses, because we didn't.

I think the two most difficult areas were just generally trading equities in the fourth quarter, this was probably the most difficult quarter in three years, when you take a look at hedge funds and things like equity long-short performance, long performance and event-driven performance in terms of hedge funds. And we suffered some of the same issues. And then we had some, and have had some difficulties over the course of the year in the commodities derivatives businesses, which were better in the fourth than they were in the third, but we were still having it -- a bit of a rough time in that business. Those would be the two that I would isolate. We also had a couple of things that were unusual and didn't really -- and didn't relate to real trading performance. But again, it doesn't change the base that it wasn't a good quarter from a trading standpoint.

It is Morton Freed. Maybe I would just add one comment to your question. In terms of VaR limits, we have remained within VaR and stress limits for the full quarter, so that has not been a source of any other performance.

And Jim, it is Janice Fukakusa, speaking. We will get back to you on your question with respect to the swing in the securities market value surplus quarter over quarter.

Great. Thanks very much.

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

Yes, hi. First question, Gord. There is, from what I could tell, there was some confusion as it related to slide 11 of your presentation on your earnings growth objectives. From what I can see consensus estimates for next year are C$6.41, yet if I take 513, which is your base for 2005 diluted EPS growth, and if I just take on 20% to that, it only equals to 6.15 which is a far cry from 6.41. Can you just talk a little bit about using 513 as a base?

I think the way I would address it is more the earnings growth number is not 20%. It is 20%-plus. And that was the same number we used last year. And you know, we're not -- the math is -- it should be done by you guys, but the -- we put in our revenue growth range, and our operating leverage range, and our portfolio quality range, and if you look at that and you look at those objectives, if we meet those objectives, as I said in my comments, our EPS growth, which we left the same as last year, would be well in excess of 20%, which is why we just put it in as 20% plus. So does that answer your question?

Kind of. But I guess I was hoping for more.

Well, you probably are hoping for what our earnings per share forecast is.

So on the portfolio quality, 40 to 50 basis points, you did go into that a little bit in your initial presentation and it is a big jump from where you are right now. And just to make sure I heard you right, there is nothing that you can see right now that would realistically push that to 40 to 50 basis points?

There is nothing that we see imminently. Although, I will let Morton comment on the overall perspective on the risk side. But I would just emphasize that when we do our -- when we set our objectives, and remember this isn't guidance, these are the objectives that we establish for the organization. And our view is that when we establish our [porfore] quality objectives, that we're more comfortable using what we believe to be a more sort of normalized range. We have been in an extended period here of very positive credit results and we're not sure when that is going to change. Hopefully, it won't. But in terms of our objectives and our planning process, we just feel more comfortable at that. But in terms of the current credit environment, Morton, do you want to make a comment?

A couple of things. I guess number one, if the current environment doesn't change, we should outperform our objective. We are poised for a reduction or a downturn in the environment. But I should emphasize there are no signs at the moment that it has turned. Secondly, the level of recoveries that we've seen in the last year is unlikely to continue into this year or next. And so that would also contribute to somewhat of a change in what our performance is. ut again, there is nothing in today's environment that would have us immediately move to the kind of levels set out in the objective.

And on the recoveries, by how many basis points have recoveries assisted this year's PCL rate?

I don't think I have it in basis points terms, but if you look at in '04 -- if you look at our performance for the year, our new PCL formation is at all-time or near all-time lows.

Okay. Maybe I will follow up with that one. One for Peter Armenio. It looked to be what really drove the earnings in the U.S. operation was the much lower level of expenses. And I was hoping you could talk to the sustainability of that expense level.

Well, overall, there was very good cost control. There is no question, Steve. And that was very important, as we moved along for the year on sort of a fix-it program. Ultimately going forward, sustaining those NIE numbers at relatively flat numbers, not looking at the volume growth or commission-based side of things, sustaining them at relatively flat levels is going to be a part of the strategy going forward as well. So I think you could look for '06 to still have a pretty strong cost control environment in our business.

Okay. Great. And there is a lot of talk about broker departures in the quarter. I think American Banker was talking about it because handcuffs had come off. Can you just quickly discuss what the level of your IA force is today and whether or not you had net outflows or net departures?

Right. The '05 was very intense in terms of people that we hired, people that had left us. Ultimately, we actually were net down in terms of people. But the encouraging part of all that was in terms of the productivity of the folks that we picked up was more than double the folks that had left us. So in total revenue, we are actually up, but in physical count, we were down. Next year there is a tremendous focus that is going to be put on retention of our people. And we've got several strategies on the go in terms of how we're going to try to do that. But it is a very tough environment, no question about it.

Thank you.

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

Thanks. I had a couple of number questions to start out with. In talking about the Enron charges, you referred to a variable comp contra-item. How much was that before and after tax?

With respect to the -- it's Janice Fukakusa speaking, Michael. With respect to the Enron litigation reserve, we have the Enron litigation reserve pre and post-taxes, in U.S. and Canadian dollars. So there was no reference at all to any other adjustments in that number. So which charges are you speaking of that we make that reference?

What I'm referring to, just a second, on page nine of your press release, you said there was the Enron litigation reserve and then there was 29 million for recognition of claims against the Enron bankruptcy estate. And then taking both of those, as I assume, that partially offset by lower variable compensation.

Michael, that is a reference to overall lower variable compensation for Capital Markets.

So it is not anything to do with Enron?

That is correct. What it has to do with is that it is an explanation for why non-interest expense when after the largest item is the Enron litigation charge, then we had an additional C$29 million of expense for recognition of claims of Enron, then we also offset that from the fact that we had lower variable comp charges overall in Capital Markets.

Okay.

Part of which would be related to the Enron.

Right. Yes.

Okay. And turning to insurance for a minute, what was the C$75 million disability experience gain net of the change in investment return assumptions? Could you give us a little bit of color as to what was behind this and what that amount might have been after tax, also?

It is Jim Westlake, Michael, and there were a fairly large number of changes in the reserves. What we wanted to highlight was the, in particular this quarter I believe it was 54 million, as the difference net of all of those reserve releases that we did in Q4. So that would have flowed through earnings and we wanted to highlight that.

Michael, just to clarify a little bit Jim's explanation, the net charge for the full year was C$54 million. For the types of reserve adjustments Jim spoke about, a variety of changes in assumptions and experience on the life and health portfolio, for Q4 that adjustment was C$74 million. So we had C$20 million of other activity in those reserves throughout Q1 to Q3. So the C$75 million amount you see in Q4 references to change from Q3 to Q4, as opposed to the 74 million, which is the change from Q4 '04 to Q4 '05. With respect to the tax rate on that, you can assume that that would be taxed at our normal effective tax rate. It would be going through mostly the Canadian tax rate.

Okay. And why is there no tax relief on the hurricane-related charges?

The exposure is in a very low tax jurisdiction, so the pre and post-tax is almost the same.

Okay. Turning back to the Enron situation, has Bill Lerach's office contacted either Royal Bank or its counsel yet?

It is Barb Stymiest speaking. We don't speak of the details of litigation matters.

Okay. And one final one. Having both a large bank and a sizable insurance operation, both complex businesses in their own right, it seems to me that combining both adds geometrically to the complexity. What can you do and what will you do so that it can also add to value? Are you at all concerned that some investors, particularly non-Canadian investors, who have lots of other choices are simply going to conclude that it is too complex and not bother with their time?

The answer is absolutely not. We've never experienced that, period, in terms of any perception from investors. I mean I think that the -- our business is a complex business. The financial services business is very complex for all of us. But certainly we think the complimentary nature of insurance, particularly as it relates to Canada, which is where the vast majority of our insurance is focused, particularly in terms of growth, makes a tremendous amount of sense for us strategically and in particular for our customers who want to buy integrated financial services. It is a very complimentary product. It is very consistent with our strategy. And most of our emphasis in terms of insurance growth is going to be focused in growing our life and our P&C business in the domestic marketplace.

And in fact, as Jim said, we are going to reduce our activity and our exposure in our non-Canadian reinsurance business. So no, I think our investors very much like the fact that our insurance focus is on -- is very related to our brand and our strong distribution network in Canada, where we can really leverage that distribution network. And Jim, you might want to make a comment, but one of the things we're seeing with respect to bringing our Canadian businesses in Canada together is an ability for that insurance business to be levered across the distribution network.

Thanks, Gord. And we're getting some great experience through just the first few adjacent branches that we're opening. We're seeing that. We have the market-leading position in many of the businesses. And yet it is still a business in Canada that we think has a lot of runway in front of it for growth. So I think it is a very positive thing, Michael.

Okay. Thanks.

Thank you. The following question is from Andre Hardy of Merrill Lynch. Please go ahead.

Thank you. One quick question and two bigger ones. Professional fees are up a fair bit in Q4. Can you let me know where that came from and what division that was allocated to? And secondly, on this Abacus acquisition, correct me if I'm wrong, but it looks like you're increasing assets under administration in that business by 50%. Are we comparing apples with apples? And if so, how do you manage that culture risk when you're growing that fast? And lastly, for Chuck, on the structure products front, on page seven you mentioned that you became a significant player in structured products business. I was under the impression that was a pretty mature business. Can you -- maybe I'm wrong and let me know, but if it is indeed a mature business, can you let me know what you do bring to the table at this point of time?

Andre, why don't I start. It is Janice Fukakusa. With respect to your question number one on professional fees. Professional fees expensing increased in the quarter to reflect some spending on initiatives to support our revenue growth and also on future compliance projects like Basel. So the spend would be distributed across our business lines and reflects all of the revenue growth and compliance initiatives that we have undertaken in order to fund our future growth and to comply with the regulations.

The biggest one would be Basel.

The biggest one is Basel and so they would be really spent proportionately across the different business platforms.

With regards to the second question, around Abacus, Andre, just as a clarifying point first, when you look at assets under administration, Abacus is basically not a bank, so when you look at GPB, you have to look at it as a bank. And so it is really assets under care for them that count. And when you look at assets under care versus the Abacus numbers, it is roughly 35%, not 50%. As far as the rest of the numbers go, revenue and other numbers that we use, the metrics are going to sort of fall somewhere between 20% and 25% of GPB's business overall. In terms of the culture and the focus around that, there is no question that the deal represents for us an excellent fit on the strategic, cultural and economic basis. And we're pretty excited about it. There is a critical market for expansion that is now there for us, as we look at taking the sales force that we've got and focusing on a stronger client base. Culturally these two organizations fit very, very well. They talk the same language.

They were fierce competitors prior to this because they had very similar value propositions. So we look really forward to putting the two organizations together and coming at it as a single unit. I would say, as far as execution goes, the transactions that we have done in our Global Private Banking would show you that our experience with regard to executing on these kinds of transactions has been very positive. You might remember back to the days when we did buy the Ernst and Young business, which was a very similar business to this one, and the returns on that and the progress on that has been very positive. So we look forward to the same kind of experience on this particular deal.

And with respect to the structured product, I'm not exactly sure which, I've got a number of page sevens in front of me. But basically, I don't think that we became, in particular in 2005, a big or small in the business. It is a business we've got a large commitment to and there is tremendous opportunities. I think probably a better word might be customizing products and structured products, in the traditional sense, but particularly, looking at the demand for people who can customize products for retail and institutional investors to take care of specific needs. To me, that's one of the most attractive and the fastest growing parts of our business. It is also one of the least commoditized. So it is an area where we've put in a lot of effort over the last number of years and I wouldn't describe us as large from a Global Investment bank standpoint, but we're certainly growing and it is an area that we feel is very attractive over the long term.

Okay. Thanks. No, you should check your presentation, it says became a large player. So that's what confused me.

Thank you. The following question is from Jamie Keating of RBC Capital Markets. Please go ahead.

Thank you very much. And while Chuck's got the floor, my questions are directed there as well. Chuck, two lines of questioning. One relates to the trading revenue line, which as you highlighted is off quite a bit here. I was wondering if you could address in a little more detail some of the push/pulls on getting that line back to normal or what normal might be. And specifically, you mentioned equity volatilities being one lever or driver. Can you perhaps talk a little more as well about the yield curve or other factors? Curious to know if you feel it's remediable within '06. Another just easier question perhaps, perhaps an update on the underwriting and M&A pipeline's outlook.

First of all, it is very difficult to define what normal is in trading since it is business that has just got inherent volatility within it. But basically, the single largest factor in the reduction of our trading book has really been the U.S. dollar. I mean that has been a very substantial factor. And that is something that really cannot be controlled in looking over a period of time. Secondly, clearly the yield curve has played a role, although surprisingly we've had more difficulty, or at least we probably not lost money but basically lost some revenues in the U.S. market where there have been new systems that have made markets more transparent which have just made margins slimmer. And again, a lot of these things are things we've dealt with in the past and you just keep coming back.

This has been happening in this business over the last 40 years and will continue to happen. And there are times where it is tougher and times where it isn't tougher. I think the most immediate issues for us though, are the issues of equity volatility in getting -- equity markets that are more volatile and getting some of our equity products. As you can see, that's where the bulk of the changes come and the second area of the changes come. And again, we're working hard at that. But you don't want to work too hard at it. And secondly, some of the areas of the derivatives business is in foreign exchange, where we've again taken a lot of steps to improve that business and it will come over a period of time. But you want to be very careful about how hard you push trading businesses because they just come. And I don't think there is a normal in trading.

Thank you, Chuck. That's helpful. On the underwriting pipelines?

The underwriting pipeline is a lot better today than it was a week ago today, that's for sure. The income trust side clearly has perked up things and so it is just getting going. I've got to tell that you for a period it died. And now you can just -- you walk around our Capital Markets desk and you just see activity and it is very pleasing to see. The M&A side is very strong. And again, in Canada it is hard to have a statistical sample, but we're involved in a number of the real attractive deals. And of course, there is always execution uncertainty in them, but basically it is stronger than I've seen it for four or five years. In the U.S. the equity pipeline is pretty good. And we're pleased with the progress we've made there. And the M&A product for us is not as strong in the U.S. as the equity product is, but basically, it is also coming along. But as I said, things are a lot better this week in Canada than they were last week.

Thank you, Chuck.

Thank you. The following question is from Ian de Verteuil of BMO Nesbitt Burns. Please go ahead.

The question relates to slide 11 of the presentation which -- and I guess this is for Gord. Gord, these targets, these objectives you define as the aggressive financial objectives of 2006, is this how team executives, senior executives get measured?

Ian, the answer is yes. Our senior executives are measured based on a formula, on formulas that very much result, or sorry, relate to our objectives, not targets, our objectives for 2006. So the answer is yes.

So as I look at this, the seven targets here, one would allow your portfolio, your PCLs to double, because I think you were at 21 and you can go to 45. Your tier one ratio can go from nine and change down to just over eight. Your payout ratio, which the board determines because it sets the level of the dividends, those all look, Gord, as if you can get there.

Ian, just to clarify, we don't pay our senior executives based on all of these individual objectives. We pay based on the earnings results and the financial performance of the organization. So we would never pay people based on meeting a dividend payout ratio or a capital ratio, et cetera. So it is really based on the earnings performance.

That's great to hear. Which gets us to the first point, which is the 20%-plus earnings growth. You at 5.13, which is after, I think you've defined as C$0.81 of charges which include a hurricane charge and an Enron charge, which we would expect not to be repeated. So that would see the earnings this year really close to C$6.00. So to go from from close to C$6.00 to anything over 6.15 doesn't seem like -- doesn't seem as if you're really spreading your wings here a lot, Gord.

Sorry, the 20% objective, though, is part, partially because of -- sorry, firstly, it is not a 20% objective, it is 20%-plus. And I emphasize that -- and again, coming back, we are compensated based not just on our objectives, but on our business plan, which would have an earnings per share specific objective that the board would be aware of and that we're aware of but is not -- we don't provide, obviously, to the marketplace, because these are objectives. We don't provide that kind of granular targeting.

Right.

And so the earnings growth of 20%-plus is there partially as a result of the fact that the Enron litigation did occur this year. And again, if you get into the disclosure issue, et cetera, we want to provide the objectives based on our statutory results, not based on certain things coming in and certain things coming out. So the earnings per share growth would not necessarily be the same if Enron reserve had not been taken this year.

In other words you're telling me I actually have to do some work on forecasting here, Gord.

I'm glad you said that, Ian.

[ Laughter ] The second line of questioning is for Jim Westlake. Jim, if I look at the 5.15 earned in this quarter you've indicated there was C$203 million of hurricane relief charges and the C$75 million reserve recovery, which I think Janice says I should think of as 15 million after tax, roughly. It doesn't look as if Q4 Canadian business earnings were higher than Q3. And I think of an environment where we've had great asset growth, where spreads with a couple increases in prime, I would have thought that you could have even had some growth Q4 over Q3. Is there anything I'm missing in that analysis?

Well, I think that most of our measures were pretty good. I will look at Janice to look at the Q3 versus Q4, but our volumes were very strong right across all of our businesses. We felt very good with our market share. More specifically, we felt very good that we have maintained a very strong revenue number off of those flows so that we certainly in terms of our net interest margin and our revenue against the amount of volume we did is very strong. So I must admit that I look more at the quarter over quarter in terms of the number of days and the cyclicality that we get in some of our businesses. So I think that most of those numbers I would be very pleased with the quarter if we could net out the insurance activity.

Okay. I was just looking at the -- I think in the third quarter you earned 6.88 and when I ex-out the hurricane and the insurance issues, it seems as if it was down a bit from there.

Ian, also in Q3, we had some unusual items, like the catch-up equity earnings pickup on an investment that was attributed to Jim's platform. So if you're going to normalize the Q4 numbers, you should probably normalize the Q3 numbers, too, and then you will see that there is quite strong growth quarter over quarter on a core basis.

Thank you. That's very helpful, Janice. I will go back and check.

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

Good afternoon. Gord, just to follow on Ian's reasoning with respect to page 11. The earnings growth off the base, the base is all in, so as you said, you don't pick and choose what charges you would take out. It is just as reported. So on a going forward basis, we would expect, however, that your measurement of management is based not on items that could come in, i.e. Janice just highlighted one in Q3, that might come in in 2006 and give you a boost to earnings that would be construed and you identify as one time. Is that a correct assumption? Or should the assumption be that all charges positive and/or negative get baked into your objectives?

This is Elisabetta Bigsby. Our standard approach to setting target for measurement of essentially all members of our staff are based on stretch goals, based on NIBT growth, appropriately inclusive of stretch from whatever base we're coming from, which are approved by the board.

And the other thing that I would emphasize with respect to this year, I'm not sure whether it is included in your question or not, Quentin, but with respect to the management compensation, senior compensation, the Enron -- I mean the numbers do include Enron and the hurricanes in terms of senior management compensation. So there is no backing out of specific items, if that's what you're -- I don't know whether you're getting at that or not.

Okay. And then secondly, I guess for Peter, if you could just touch on the rebranding initiative in the U.S. of the Dain platform, just what you hope to accomplish and the key goals of that. And perhaps whether you think there is inherent revenues, synergy benefits from using the RBC branding versus what you have currently, or had.

Quentin, maybe just as a clarification point and then I will turn it over to Chuck, but we moved our fixed income business over to the Capital Markets world. In the previous world, it was called Dain Rauscher, but in today's world Chuck has now got it under the Capital Markets group and I believe you're referencing that particular rebrand.

Right, sorry.

Basically, that has been part of trying to -- of integrating the area into what is, I think, one of the most exciting opportunities we have, which is having a global fixed income business. To be global, you have to have the U.S. Dain presents a very interesting addition to our fixed income business, not a lot more opportunity even than the Hambros opportunity that we had in the late '90s. And so we're trying to bring this into a global package where we basically are using it to distribute domestic and Canadian and European product. And basically we're adding all of the manufactured product that we've got and use in Canada and Europe into the U.S.. And it is more of a Capital Markets format and we've had a great deal of success introducing product into that area. And it is a different business than it was two years ago.

And certainly I would add there is no change in terms of the relationship between Dain Rauscher and RBC Capital Markets in terms of how we work in the U.S. I mean there is a lot of exciting things going on between the two platforms and, obviously, is still very much front and center for us.

And then final question for Jim. Just in terms of paring back the amount of exposure that you're going to write in the property-cat business, could you give us a sense of A, the amount of premium that you've driven through that business that we would have seen historically and/or the profitability, because I think the bank has asserted that this business has been profitable, notwithstanding this type of major loss that you just took in the quarter. So I'm just trying to understand the model, if I look back historically, as to what you've been earning off of this business and now, what we might expect given your reduced to your risk exposure?

Well, it is a business that has a fair amount of volatility, not normally as much as this year. But I think that in our numbers we reported about C$80 million of premium. I don't think we disclosed how much profit off of that, but you probably could use industry norms and in a no tax jurisdiction. That wouldn't be a bad approximation of it. I think that in the coming year, given where we expect premiums to go, we think that we can do almost as much premium and substantially the same profit off of a much lower risk profile as we have done in previous years.

And that's obviously given the very -- very much the hardening of prices, not which may be short-lived or not, but -- .

That's right. And that's what we will evaluate as we go to adjust the levels.

Thank you.

Thank you. The following question is from Mario Mendonca of Genuity Capital Markets. Please go ahead.

One fairly straightforward question. Core deposits, if you compare your presentation this quarter to last, I guess what you call core deposits plus the GICs market share down a little bit, but I suspect that really relates to the shift from the GIC to mutual funds or has something happened on the core deposit side or demand deposits?

Our Personal core -- it's Jim Westlake, Mario. Core Personal deposits is up about 2%. Our GIC is down about 1%. So if you add them all together, the total deposits, we're pretty flat. On a volume side, flat volume translates into a slightly lower market share. That is exactly back to the comment that some of those, particularly the personal investment GICs, we have been actively trying to move those into a mutual fund world and other products rather than go to the high interest savings and give away margin. We are pleased that -- and you see it reflected in our various -- in the NIM that we have and in our revenue, that we've managed to keep the revenue fairly strong. And even though the volume has been relatively light increase, the revenue growth has been consistent with our other businesses.

So the trend we see, or at least what we see this quarter, is consistent with this NIM stability that we've seen throughout the year.

Yes.

There is no reversal here then?

No.

Also, very quick question about Abacus. Perhaps I just need to understand this better, but how is it that acquiring something with C$40 billion in AUA, U.S. dollars, could not be at least somewhat accretive in the first couple of years after you do a deal?

Well, you have you to remember, Mario, we're looking at a situation -- well, it is accretive. And we talk about it being slightly accretive, because we're talking in the context of RBC. Obviously, if you talk in the context of our GPB business, our Global Private Banking business, it is obviously a very different picture and that's not what we're talking about here nor do we usually talk about that stuff specific to GPB. But there is, in those assets, another clarifying point maybe, is that there are -- so 50% of them are private client assets and 50% of them are institutional assets, of which, on the private client side, 70% of that is part of our revenue and there is only about 30% of our revenue that comes from that, from the institutional side. So as much as the assets are very important part of the exercise here, there is a revenue picture is a little bit different.

Wouldn't the private client necessarily have better margins than the institutional?

Yes, they would. I mean in terms -- I could try to -- I mean basically, what we've done here is we've put it in the context of RBC. We haven't sort of put it in the context of Global Private Banking. Specifically we do have our Wealth Management business and we do have our banking business in the U.S., and we report our numbers accordingly and so we have taken it sort of to the top shelf in terms of the actual impact that it has overall on RBC versus specifically GPB.

I think we have time, Nabanita, for one more question.

Thank you. The final question will be from Michael Goldberg of Desjardins Securities. Please go ahead.

Thanks. Gord, you and others -- you commented a number of times about an improving trend in earnings from Centura. Could you give us an idea of what slide 46 would look like excluding RBC Capital Markets? And specifically, what the trend in earnings from Centura alone is? And also, you also commented about capital. This quarter there was some deterioration in tangible equity. Do you have an objective for tangible common as well as tier one?

We actually don't disclose a specific tangible common equity ratio because there are varying definitions. What we've attempted to do is to disclose all the components of the definition, of any definition, so that you can figure out what it would be. So I think that we have not set a specific target there.

And Michael, we disclose our geographical earnings and we disclose the earnings based on the Personal and Business platform, so we don't provide a specific with respect to Centura, other than the reports that are filed and are accessible, but the increase in our U.S. geographical earnings certainly versus Q3, if you exclude Enron, it mainly is the improvements in earnings that have delivered by our banking and Wealth Management business as part of our US&I Personal and Business platform. So in terms of the improvement geographically, the bulk of it comes from those businesses and a large percentage of that would be Centura.

Can I just follow-up on one question on the Centura, because what I'm really getting at is back when you had a presentation on the U.S. operations, the message from Peter was out of your roughly 270, 280 branches in Centura, half of them were profitable but in slow growth markets. The other half were basically flat and in moderate growth markets. And only half of that half really looked like they were in a good growth markets, but they weren't making any money. So could you bring us up to date on what that situation is like now?

Well, Michael, as far as segmenting the different businesses, we've done a lot of work this year in making sure we understand our traditional markets versus our emerging markets versus the metro markets that you talked about. And there is a lot of focus that's being put on emerging and metro markets going forward. I guess the leading indicator would be how we're doing on our de novo strategies. And frankly, we're very pleased with the results of our de novo strategy. As a matter of fact, we're looking at breakeven numbers now that are closer to 19 months versus some of the more traditional numbers that you see out there. So we're very pleased with that. We're pleased with the strength that we have as we go into some of these markets. And frankly, we're going to continue to look for strong revenue growth, keep a good quality control on our credit, and keep solid cost controls.

Those are the key component parts of what we're going to try to figure out in '06. We have segmented the business in a way so that we can take advantage of things as we go forward, so that we can have a value proposition against each one of these marketplaces. But quite encouraged over the progress we've made in '05 and look to do good things again in '06.

And Michael, I would just say from a macro perspective, we established what we thought was a realistic but ambitious business plan for Centura this year and we're pretty much right on plan in terms of where we felt we could get to at this point.

Thanks a lot.

I think that brings an end to our call and we thank you very much for your participation. If you have any follow-up questions, please give me a call. Bye-bye.

Thank you.

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