Royal Bank of Canada (RY) 2006 Q1 法說會逐字稿

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

Good afternoon, everyone, and welcome to our first-quarter results conference call. Just a reminder -- a disclaimer regarding forward-looking statements that may be made during this presentation and during the question-and-answer session can be found on slide two of the presentation package.

Gord Nixon, our CFO, will start by giving a high-level overview of our quarterly results, followed by Barb Stymiest, our Chief Operating Officer, who will comment on the quarter's financials. Then our three business segments -- Jim Westlake of RBC Canadian Personal and Business; Peter Armenio, of RBC US and International Personal and Business; and Chuck Winograd of RBC Capital Markets will talk about their respective businesses. We will then conclude by taking your questions. Also joining us for today's call are Marty Lippert, Head of Global Technology and Operations; Elisabetta Bigsby, Head of Human Resources; Janice Fukakusa, our CFO; and Morten Friis, our Chief Risk Officer. Gord will now take [the podium].

Thank you, Nabanita, and good afternoon, everyone, and thank you for joining us. Given the fact that many of you, at least, heard a detailed report at this morning's AGM, we'll keep our comments fairly short and leave lots of opportunities for questions.

We are very pleased that we started 2006 on a very strong note, generating record net income in the first quarter of $1.17 billion or $1.78 per share, as you see in slide four. As is shown on slide five, net income increased 20% and diluted earnings per share rose 19% from what had been a very strong quarter in the first quarter of last year. All of our business segments contributed to this growth. Our return on equity was up 200 basis points to 23.9%.

Specified items included in the first-quarter results are shown in slide six. They relate to a favorable resolution of an income tax audit; reversal of a portion of the general allowance; additional hurricane-related charges, which was largely for Wilma, which occurred at the very end of our year ended October of 2005; and charges associated with the transfer in early January this year of our institutional investor services business to RBC Dexia, which, as everyone is aware, is our joint venture which we have a 50% interest. And because of their calendar year end, we only have two months of earnings in our numbers. The net impact of all these items was a positive 34 million or $0.04 a share.

I think we certainly are pleased with each of our business segments. The record results that were produced in the first quarter is shown on slide seven. Canadian personal business banking operations were very strong, earnings up 12% over a year ago, reflecting solid underlying performance in banking and wealth management and in our insurance operations away from the hurricane reserves.

RBC US and International Personal and Business segment -- net income was up 3% but 9% in US dollars, which is really how we look at that business from a year ago. And that was even though expenses were impacted by some specific items that Peter will cover in his remarks.

And finally, RBC Capital Markets had record earnings of $330 million, up 25% from a year ago. These results attest to the success of our efforts to grow our business in Canada, the United States and globally, some of which are highlighted on slide eight.

A number of nonfinancial achievements were also achieved and listed here, which include us being recognized as Canada's most respected Corporation for the fourth year in a row, something that we are very pleased with, including best long-term investment prospective -- a number of other categories, as well. Also, our brand was ranked tops in Canada for the second year in a row.

Our shareholders have benefited from about a 45% total return over the past 12 months, including a 41% increase in our common share price, as well as dividend increases which are up about 16% [from] a year ago. And of course, this morning we announced an increase of $0.08 a share in the quarterly dividend, to $0.72 in the second quarter or $0.36 on a post-stock dividend basis. The stock dividend, which has the same effect as a two-for-one stock split in our common shares, was also announced this morning.

With that, I will turn the podium or the mic over to Barb.

Thanks, Gord. Starting with slide 11, you can see that we earned revenues of just under 5 billion this quarter, which was a record. Net interest income, non-interest income and total revenues all increased by 4% over Q1 of last year, largely reflecting strong volume growth in our banking, wealth management and insurance operations. The stronger Canadian dollar versus the US, however, reduced our revenue by 60 million compared to last year.

Moving on to non-interest income on slide 12, you'll notice that insurance-related revenue was up the most, as a result of volume growth across all product lines and higher investment income on equities which back the universal life policies. Revenue from mutual funds, brokerage and investment management and custodial activities rose strongly, reflecting strong net sales and capital appreciation in our mutual fund business and higher fees in our investment management businesses. We also generated higher transaction volumes and growth in client assets in our full-service brokerage business, underwriting another advisory revenue decline from Q1 of '05, due to lower equity and debt originations, which were partially offset by higher M&A activity.

Slide 13 shows that, net of the Enron reserve last quarter, expenses have remained largely unchanged over the past three quarters. The stronger Canadian dollar reduced expenses in Q1 of '06 by 35 million relative to Q1 of '05.

Taking a more detailed look at the costs on slide 14, you'll notice that the change in NIE over Q1 of '05 was due to higher variable and stock-based compensation expenses, partially offset by lower salaries, reflecting lower staffing levels. Other components of NIE were largely unchanged in aggregate. The increase in variable compensation reflects strong business results and some final adjustments to certain annually calculated bonus plans, which increased expenses in the current quarter and reduced expenses in the prior year. The increase in stock-based compensation was due to the significant appreciation in our common share price and the accelerated recognition of amounts related to employees who are eligible to retire.

You can see on slide 15 the very strong operating leverage in our Canadian Personal and Business segment, which, of course, is our largest segment. And Peter and Chuck will explain the revenue and expense performance of their segments in a moment.

On to slide 16, where you can see strong and consistent growth trends in our total asset, loans and deposits. Our balance sheet growth has reflected solid increases in securities as our trading businesses have grown, and strong growth in residential mortgages, personal loans and business and government loans. Total shareholders' equity has also recovered nicely from the impact of the Enron litigation reserve and the hurricane-related reserves in the fourth quarter of '05.

Assets under management continue to rise, as you can see on slide 17. You will note that assets under administration previously in our institutional and investor services business and capital markets have now been transferred over to RBC Dexia Investor Services. We have shown solid growth in our brokerage operations, assets under admin in Canada to. And in the US and International segment, RBC Dain Rauscher's assets under admin have grown, and there has also been a sizable addition to assets under admin from the Abacus acquisition this quarter.

Turning to slide 18, you can see that our credit quality remained strong and, starting with growth-impaired loans, our growth-impaired loan ratio of 0.4% is consistent with last quarter. As for provisions, there was a 50 million reversal of the general allowance in the current quarter, resulting from the continuing favorable credit environment and the strengthening of our loan quality.

You will also note from slide 19 that the specific provision of 102 million in Q1 of '06 was close to the Q4 '05 level, but up from a year ago, as we recorded a $52 million transfer from the specific allowance to the general allowance in Q1 of '05. And, as a result, the specific PCL ratio remains low at 20 basis points, which you can see on slide 20.

As shown on slide 21, our Q1 capital ratio was 9.5% at the end of the quarter, and the inclusion in our risk-adjusted assets of 3 billion for RBC Dexia Investor Services, which represents our proportionate share of the joint venture assets, reduced our Q1 ratio by 15 basis points.

Now, I will turn it over to Jim.

Thank you, Barb. This was another solid quarter for the Canadian Personal and Business segment. You can see on slide 23 that net income came in at 669 million, 12% higher than in Q1 '05. We continue to deliver good growth in our lending, deposit, wealth management and insurance businesses as a result of a number of revenue growth initiatives resulting in 10% higher revenues. We are pleased with the 4% operating leverage over the same quarter last year.

On the expense side, variable compensation did increase, and that is tied to strong revenue growth we achieved, as well as final adjustments made to certain annually calculated bonus plans. Looking at the revenues for each our business lines on slide 24, they all showed excellent growth over Q1 2005. Compared to the previous quarter, insurance and wealth management were particularly strong, while personal banking revenues were down, reflecting competitive pricing pressure and lower prepayment interest penalties in the mortgage business. Last 12-month revenues in each business line were up in a range of 7 to 16%.

You can see on slide 25 the strong volume growth in our loans, mutual funds, brokerage assets and business deposits. Capital market appreciation, investor preference and our actions to grow the business continue to drive higher mutual fund assets. Our net interest margins shown on slide 26 remain stable at 3.19%. Compared to Q4 '05, lower mortgage spreads due to competitive pricing pressures and lower mortgage prepayment interest penalties were largely offset by improved spreads on deposits and GICs. Our stable margin, combined with volume growth, has led to record net interest income.

On to slide 27, where you can see how we've continued to execute on our three key priorities over this quarter.

I will now turn it over to Peter Armenio.

Thanks, Jim, and good afternoon, everyone. Please note that all my comments will be in US dollars. As you can see on slide 29, RBC US and our International business net income of 88 million for the fourth quarter was up 9% over last year. These results reflect solid growth, revenue growth of 10%, which I will discuss shortly, and improved credit quality, partly offset by non-interest expense, which was up 13% over a year ago.

The increase in expenses reflects higher stock-based compensation at RBC Dain Rauscher, the Abacus acquisition and higher variable compensation. The Abacus acquisition, which closed on November 30th of 2005, contributed modestly to earnings this quarter.

Slide 30 provides more detail on our segments' revenues. Wealth Management's revenue was up 17% from last year's first quarter, reflecting the positive mark-to-market of derivatives and securities held to economically hedge the stock-based compensation plan at RBC Dain Rauscher, which was largely offset in non-interest expense. Revenue growth was also driven by higher investment management and custodial fees from the Abacus acquisition and growth in fee-based assets and RBC Dain Rauscher. On an LTM basis, revenue improved 13% over the prior 12 months.

Banking revenue was flat from last year's first quarter. We saw higher net interest income, driven by stronger loan and deposit growth at RBC Centura, and this was accomplished while maintaining net interest margin in a difficult rate environment. However, this was partly offset by lower underwriting fees in our housing tax credit syndication business, which is part of our US banking operations but is separate from RBC Centura.

In addition, revenue was impacted by a $5 million write-down of an investment at RBC Centura, which had no impact on net income, since there was a related tax credit for the same amount. On an LTM basis, Banking revenue was up a solid 10% over the prior 12 months. Overall, we remain very focused on our strategies to deliver growth and stronger returns. And in that regard, we continue to make progress as shown on slide 31.

And with that, I'd like to turn it over to our last speaker, Chuck Winograd.

Thanks, Peter, and hello, everyone. As you can see on slide 33, RBC Capital Markets had record earnings of 330 million in the first quarter, up 25% from a year ago, attesting to the success of our strategy to structure and build a diverse full-service investment and wholesale bank, while limiting the volatility of earnings. In general, market conditions have been improving over the last few quarters.

The increase in net income was due to a variety of factors, including higher merger and acquisition activity, higher earnings from subsidiaries in lower tax jurisdictions and improved credit quality, where we benefited from a $50 million reversal of the general allowance. These record earnings were achieved despite incurring costs of $19 million after tax associated with transferring our IIS business to the new joint venture, RBC Dexia IS, and including only two months of results for IIS, as one month of earnings from the joint venture was not consolidated, since its results will be included in ours, with a one-month lag, starting next quarter.

Revenues increased from last quarter but declined from the very strong levels in the first quarter of 2005. You can see our revenues by business line on slide 34. Global markets revenue is up substantially from the fourth quarter, but is down from the strong quarter a year ago, as trading revenues, although the highest in four quarters, were lower, partly due to US dollar weakness and a flat yield curve.

In global investment banking and equity markets, revenues increased 9% from the first quarter a year ago, as M&A activity was at its highest level in a number of years. Activity is higher mainly in Canada, but the US also showed good results. In addition, loan syndication activity in the US was higher, while commission revenues were also up. In our Institutional and Investor Services business, revenue was generally consistent on a monthly basis, but the decline you see in the fourth quarter was due to the inclusion of only two months' revenue in the current period, as I mentioned earlier.

Gord mentioned some of the recognitions that RBC Capital Markets received during the quarter. And as you can see on slide 35, we continue to make inroads in enhancing our positions in Canada, the US and globally.

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

(OPERATOR INSTRUCTIONS). Steve Cawley, TD Newcrest.

First question relates to stock-based compensation. It was up about $60 million in quarter, and the US Personal and Business line was up in expenses about 60 million as well. What I'm hoping for is a bit of a split, in terms of where that $86 million gets divvied.

With respect to that particular expense line, the stock-based comp relates to two different aspects. One of the aspects is a mark-to-market of the RBC stock. And as you know, we had strong performance. For what you see in the US & I platform is specifically the major impact of that mark-to-market, where we have hedged that compensation. But the hedge, because it's not a perfect hedge, is actually picked up in revenue as well as increasing expenses. And the rest of the increase in the expense would be related to the fact that we have a performance-deferred share plan where, as performance increases, we accrue the increases there. And the third component has to do with this one-time accounting adjustment that we made for eligible-to-retire employees, where we picked up the stock comp on an accelerated basis for employees that are eligible to retire currently. So that particular adjustment would have occurred mostly through the Canadian operation.

You're making it, still, hard to pretty much model what's going on in this division. What would be the underlying expense level in that US business? Because it sounds as if -- well, your stock is doing extremely well right now. But it sounds as if the underlying expense levels are considerably less than 594 million, and I'm just trying to get a sense of what that level is.

Back to your first question, Steve, in terms of the wealth accumulation plan at RBC Dain Rauscher, on an expense basis that's about 35 million -- so when you think of the whole number.

The 35 million is what?

Is the NIE on that wealth accumulation program. US dollars.

That would be the increase in the expense (multiple speakers).

Yes. The revenue side of it was 37 million, so there comes Janice's point that at the end of the day, the actual difference is not a lot.

Because that 1-to-1 ratio skews your efficiency ratio upwards?

Yes, that's right. Yes.

Just another one for you, Peter, while I've got you. How satisfied were you with the quarter, with the -- I know you've got some loans still peeling off the books. How would you characterize your bank's ability to grow this quarter?

The quarter was a solid quarter. I'd like to see our expenses tighten up a little bit, but in terms of our revenue growth in banking, when I look at this insured numbers and the strong volume growth that they had there in terms of loans, which were up 12%; deposits, which were up 8%; and our Caribbean business, which has been very strong as well, have generated very good revenue and solid growth in volumes -- overall, I feel pretty good about the quarter.

I need to go back on the Wealth side, to back out some (multiple speakers). Sorry?

The other comment I was going to make as well is that if you take a look at the Centura filings, you'll also see some very positive momentum in that regard.

I've got to back out some of the numbers on the US Wealth side. If I did, would it look that that's having a very good quarter as well?

On the Wealth side, basically, we did have a good quarter. We did get -- our revenue was flat, because of the transaction -- in quarter over quarter was flat relative to where we were last year. But the quarter was a good quarter; it was a solid quarter.

And how about the broker levels? I remember reading in American Banker that there were some defections, once the handcuffs came out. How are your broker levels at this point?

Actually, we have been very successful in the last quarter in that regard. We have hired, I guess, just to put it in numbers, [15] US [feeds] in the quarter. And last year, all together we had hired about 103. So the momentum has been with us, in particular, this particular quarter. But also what is very good about the whole thing is the recruiting effort is allowing us to increase our productivity. Each one of the people that we hire is actually running at around 550,000 in production, as compared to something less than 300, in terms of the people that we have been losing over the last year. So we have been relatively good in that regard.

One last one for Gord. I think it was about a year, not quite a half ago, that you came out with your three-year plan. And already, you have had considerable earnings momentum. I think, if we took that 1.76 adjusted today and times it by 4, we get to over $7 a share. My first question is, is it right to take this quarter's number and annualize it in terms of what is sustainable? And number two is, can you give me a comment on where you think you are on your plan to get Royal Bank exactly where you want it to be a year and half ago?

Well, the first part of the question, Steve, you know I can't answer. But I think that I am very pleased with where we are at this point, if you will, in that three-year plan. We were a little bit ahead last year, and I think things continue to perform well, as is evidenced by this quarter's results. I think that each of the businesses has made a lot of change, both in their cost base as well as a number of new initiatives. And some of those are now starting to kick in, which we think is about where we should be.

I think one of the things that we are trying to do is remain very disciplined to the approach that we laid out, as you say, about a year and half ago. We had some real priorities around reducing our cost base, around finding new revenue growth opportunities that we could and should be investing in. And each of the platforms is doing that.

And then, the other priority, which was to get the US back to a relatively -- to a strong operating performance so that we could move forward with confidence and take advantage of opportunities. I think we are about where we had hoped and expected to be, and I think in any business, if you get to where you expect to be, that's usually pretty good.

So there are still visible opportunities for improvement, then?

Yes, absolutely. We are expecting to continue to move forward with our three-year plan, and our objectives for the future are pretty much as we have laid them out to be, which still leave lots around for improvement.

Quentin Broad, CIBC World Markets.

I guess for Peter, just to follow up on Steve's question with respect to the efficiency ratio in the US -- so if I were to take, on a US dollar basis so we don't have the currency, back out the 37 on the top line, back out the 35 on the noninterest expense line, we get a mixed ratio of about 79.5%. And, Peter, you said that you wish that expenses were lower. But beyond wishing, what is going to drive this to a more effective, efficient platform? Obviously, embedded in there it's got Wealth, which carries higher expenses. But just generally, what should we look for across the next four to six quarters, as you try and bring those expenses down or keep them stable while you grow the revenue?

I guess one of the things also that is affecting the numbers in terms of expenses is the Abacus numbers that we're also including both on the revenue and on the expense line as well. So you've got to take note of that.

Generally speaking, our efficiency ratios from the banking perspective is [insurer-specific] -- still have to come down. We are running on sort of the low 70's, and we're looking to get to the low 60's. Some of the things that will help us around that is continuing our scale efficiencies in terms of our technology, in terms of some of the things that we are doing out in the field as we change our business models there. And we are quite encouraged that over the next little while, we will be able to continue to get the efficiencies that we need in an effort to get closer to that low 60 versus the low 70. So at this point, remaining very positive about our efforts going forward around the expenses.

I think you mentioned use of the statutory, and I know historically, in previous conversations on conference calls, you guys have cautioned about the use of Centura's statutories to see how things are going on. Has there been something that now it's fine to look at those, and that's reflective of Centura's performance?

No. Actually, I've never been cautious about it. I've always said you have to be careful because of the fact that it has a calendar quarter versus a fiscal quarter like we have. But ultimately, as now, we start to see more stabilization in some of the numbers. Because you guys were sort of a couple of months back, in terms of the performance as the momentum continued to grow. We are feeling pretty good about the reflection of the three months sort of as we move forward, and it's getting closer to how we feel we are doing in terms of the overall organization.

So these reports remain a very good indication of Centura's performance, especially the holding company filing, because of the -- both the holding company and the bank are included in our US&I results. So I think, from my perspective, there is a timing difference at Centura with the most recent filings. But ultimately, you're seeing some -- the trends that you should be seeing from that, and hopefully that give you a sense of the momentum.

But Quentin, where I would be cautious is that we look at this business as one business, and when you look at the filings you're just looking at the basic banking business. And what I've always said, and you have heard me say it, is you have to be cautious in drawing comparisons with institutions that have their wealth management platform embedded in their filing results, or they have their insurance business embedded in their filed results, because you're comparing apples and oranges. And that's sometimes what occurs is, if you look at Centura and draw a comparison with a similar-sized back in the Southeast, you've got a very different business mix. We may have that same business mix, but it's not in the banking legal entity.

And then, just finally, slide 41, maybe I just haven't paid attention to it. But it seems to me that revenue may be new disclosure. But even if it's not, just what is this revenue? Is this inclusive of everything that is US but would not include -- so it would be wholesale, personal, commercial but wouldn't carry anything outside of the US? Is that what this slide tells me?

Yes. It's all of the revenue we earn across all of our businesses in the US. That includes -- it's capital markets, it's the global insurance operations that operate in the US plus the segments of US&I that are in the US.

So it would capture across all operating divisions?

Right.

Right.

But we have always provided (indiscernible) supplementals.

On the revenue side?

On the revenue, right.

And the earnings.

Well, no, I'd seen the earnings; I just hadn't seen the revenues. And could you just tell me, is the impact, let's say Q2 '04 to Q1 '06, of the Canadian dollar? What might -- because obviously this is showing flat. What might that have made a difference in percentage terms?

We don't have that number, but (multiple speakers) we can get back to you.

We have the earnings number, don't we?

Right. The earnings without foreign exchange. (multiple speakers). We'll get back to you.

Jim Bantis, Credit Suisse.

Good afternoon and congratulations on a good quarter. It's interesting; the first couple of questions are focusing on a business that contributes less than 5% of your earnings. And I guess, really, investors and analysts want to know what will the next step be with respect to Centura? It was certainly going to be the foundation for the US banking strategy when acquired in 2001. And I just want to get a sense of what's the next step with Centura? It's clear that the domestic business is overshadowing US operations because of its strong momentum. But maybe you can address maybe some of the longer-term objectives. And I've also got a question for -- the retail question as well.

So you are going to buck the trend. You're just going to have to make us answer another one on the US first.

Yes, absolutely.

And I don't mean to sound the same as we've said over the last little while, but we continue to feel that the base of business that we have in the US, which includes Wealth Management and Capital Markets, which is a fairly integrated business, even though we market under RBC Dain Rauscher and it's part of Peter's platform and capital markets is part of Chuck's platform, it's a fairly integrated business. We are currently building a consolidated back end to that business that will integrate those businesses further, and I think each of those businesses is continuing to look to invest, to add manufacturing and trading capability and to continue to add distribution capability. And as Peter said, we've certainly ramped up our recruitment and retention efforts, and I think we want to be opportunistic in terms of those businesses going forward.

With respect to Centura, we have made good progress. We still are not where we believe we can get to, and we want to keep our head down and keep focused on improving those results. And Scott Custer and his team are very focused in terms of increasing their market share. They have been focusing their efforts on specific segments like professional, small businesses, areas where they have traditionally been strong. But I think that we probably took our eye off the ball a little, and there's a real refocus. And they are making some good headway, and we think that as we move forward, we can continue to strengthen that platform.

And if we have three solid platforms in the US, which is tough to achieve in that marketplace, we think from a long-term basis, if we can have a lot of confidence in our operating capability, that it will give us the flexibility to take advantage of opportunities if, as and when they arise. And it's a big if because, to do something in that marketplace, you have got to have a strategy that works, investment opportunities that make sense, not just from a strategic sense but from a valuation perspective and a shareholder perspective as well. And our focus is really to get ourselves in the position where we have got maximum flexibility and a lot of options in front of us. And each of those business platforms in the US is investing and growing and really focused on improving their core businesses. And if, as and when we get to a point where there's a good opportunity that we can take advantage of, we wouldn't hesitate to do so. But at this point in time, the focus is really on operational performance, because we think there's lots of room left.

That was perfect, and I just want to echo something here, in terms of what we are looking at today. And today, really, while it's not a big part of RBC, ultimately big is not necessarily what we're looking at; successful is what we are looking at. And as we strive to build these businesses that Gord mentioned, what we are looking at is what the success means for each one of these businesses. And frankly, we feel pretty comfortable that we are moving in good stead towards success metrics that would make us all very proud of those units. So, I mean, that's the first goal.

Another way to look at it is we do think that we will grow more quickly in the United States and internationally, if you look at our future plans. But the speed at which we get there will be dictated by operating performance and opportunity, not by just a burning ambition to expand outside of our home marketplace. And with that, I'll let you move to our home marketplace.

No, that's great. Thank you very much for that answer. I just wanted to ask Jim Westlake, with respect to the retail operations, you're seeing some of the other banks starting to go into fringe markets, in terms of sub-prime mortgages and auto lending, different distribution channels. Maybe you can talk about Royal's ambitions to get into other French markets. And I know (indiscernible) Jim, the last time we spoke about home and auto insurance, One Call Does It All, I think, was the logo. How is that going, if you can give us a bit of an update on that as well?

I think, when we look at the lending side, whether it's mortgages, whether it's used autos, whatever, you have really got a near-prime segment and then down below that. In each case, we are taking a look at what do we want to take advantage of by way of distribution, and what elements would we like to keep on our balance sheet? We have been very active in the sub-prime mortgage market. We just farm them out and we don't keep them on our balance sheet, but we do get the fee income on the way through. Certainly, we think that it's a market that we want to be in and around, but we don't see the need to go out and acquire additional resources in it at this time.

In terms of the home and auto insurance, it's going very well. We can now accept and add new customers completely online, without any other experience. So even while you're sitting there doing this call, for example, you could buy an auto insurance policy. But we are making good progress in it and getting a lot of different delivery mechanisms, whether it's through our adjacent branches on the Internet or through our call centers.

Susan Cohen, Dundee Securities.

With respect to your PCL ratio of 20 basis points, it still remains significantly better than the 40 to 50% objective. Can you comment on why you're keeping your objective at 40 to 50 basis points right now?

I'll answer that, and then, if you want Morten to make a comment on PCL in general from a risk perspective, I'll ask him to jump in.

We have said -- and we knew we were entering this year with a pretty good credit environment in front of us. I think what we have always struggled with and, I think, what the industry struggles with is how sustainable is that? And is it going to turn? And if it's going to turn, when? And we made the decision that from a business planning perspective, we will plan with a more normalized PCL ratio. And we would rather overperform relative to a normalized range than underperform relative to a very aggressive range. And as we look into the future, we just question whether these very low PCL ratios can sustain themselves. And so far, so good. But it certainly would be uncharacteristic of our industry for the credit environment not to shift at some point in time.

In terms of what we currently see, it remains quite positive. But Morten, perhaps you would make a comment?

Just to reinforce a couple of those comments, the current performance is continuing to be extremely good. There are actually no signs of deterioration in the portfolio. The target range really reflects the fact that we're anticipating, at some point in the near future, a return to more normal performance in the credit markets. But the actual portfolio conditions continue to show continued stable to improving trends in the overall portfolio.

And I would just add that we have set annual objectives and do not amend them throughout the year, so that's why you're not seeing us shift any of the objectives.

With interest rates rising, can you perhaps comment on what you expect to see with respect to margins and, perhaps, consumer behavior in the domestic banks?

Sure. As rates rise, you would expect that you might see a little less demand. We are not seeing that at this point in time. We have seen no reduction generally in credit demand across all of our lending products. And certainly, as it rises, we would expect to increase our spreads on deposits and GICs. So we would see that as generally favorable.

Mario Mendonca, Genuity Capital Markets.

A question that may be most appropriate for Janice -- Janice, on slide 40, this is something you and I have talked about in the past. Centura, their investment portfolio and higher yields on the investment portfolio -- I think, in 2005, Centura was going through a process of perhaps extending duration, or maybe even just changing the credit profile of their investment portfolio. Is that what we are seeing again in 2006?

What you're seeing in 2006 is some of the rebalancing that we did in one fell swoop a year and a half ago, so that the portfolio isn't subject to the same amount of downswing that you see in other regional banks. And you also see very solid performance on the loan side, in terms of maintaining margins in the lending business, despite the fact that margins may be coming in at the competitive level.

I'm not sure I followed your explanation for what's going on with Centura.

Right. With respect to what I am saying --

The securities.

With respect to the securities portfolio, about two years ago, we actually rebalanced the portfolio and reinvested it in 18 to 24-month duration securities so that, as we move it out, as we have a profile with securities maturing and reinvestment, that's not typical of what you see in a regional bank, because we did wholesale rebalancing in line with our asset liability management activities about two years ago.

So, as those securities mature, you're investing them in what? Higher-risk securities, longer-term --?

No, higher-yielding.

Higher-yielding, like mortgage-backed.

I follow you.

Like since '05, we had over 700 million of low-yield maturities, and we have reinvested it for 300 to 370 BPS higher in yield since that time.

Is there much more to go in this regard?

Absolutely. It will just continue to go as we get more of these maturities retiring. It's a $5 billion portfolio.

Going back to the domestics NIM side of things, it seems like the banks are falling into a couple of different groups. I won't name any, but Royal specifically -- good loan growth, relatively stable NIM, so not all that different from what we saw in 2005. Could you just speak to what the differences are, again, Royal relative to your peers, perhaps without referring to your peers? Or maybe just talk about what's different about Royal.

Well, we are focused on what I think is the difficult task of trying to drive both volume and spread at the same time. We are focused on product mix and on trying to retain as much spread as we can on the products and hold our pricing. I think that even in a tough market, we have been relatively successful in doing that and have maintained a fairly -- it really hasn't gone up much, but it has been fairly stable on the NIM. And what we haven't done is gone out and tried to buy a business by lowering our spreads. I think that there are other competitors who are putting a little more pressure on the market by lowering prices.

Also, Jim, your business mix is a little bit less NIM-sensitive, because we have had very good growth on the mutual funds and other products like that. And so business mix.

Anything you can refer to on the deposit side that will also help explain this?

There's two things there. You'll notice that while our GIC volume was down, we managed to really keep the spreads. And what we've done is been very aggressive at moving a lot of the money that might show up there into mutual funds, where we think it is a more stable stream of income.

With an investment profile more similar to GIC by sort of thing combining GIC and mutual fund products together.

And still very strong core deposit growth, on the business side and on the [retail] side.

Core deposits.

Jim, you felt it on your mortgage business.

Absolutely. If you look at the mortgage side, there's no doubt there's pressure on the spreads on that business.

Michael Goldberg, Desjardins Securities.

How much did low tax jurisdiction business contribute to income in the first quarter of pulling down your tax rate? And how sustainable is this type of income?

It would be the effective tax rate that we exited '05 was around 27%, so that would be the effective tax rate in Q1 of '06. And then, we had that tax [recovery] that pulled it down to 22%.

And it's probably a fair -- somewhere in the range, for an ongoing basis, is sustainable.

Sustainable. Right.

So does that mean that your tax rate is always going to be lower because of this income?

No.

No, so what I mean is how much -- so in a sense, there was an extra amount of income in there this quarter? Is that correct?

What it is, Michael, is that we think that the 26%, around there, tax rate 25, 26% is a sustainable tax rate because of the business mix, where we have effectively shifted some of our trading activity and are earning more in some of the lower income tax jurisdictions. So the 22% tax rate that we have in Q1 is the result of continuing our strategy around the lower income tax jurisdictions. And in addition to that, we have that 5% reduction due to the favorable tax assessments.

You've got the 86 million, I think it is, of stock-based comp in the quarter. And you do have hedges against it. While the hedges are imperfect, from an accounting sense, they are real. And I'm just wondering if maybe we could get, on an ongoing basis, what the hedge revenue impact is, so that those of us who are not accountants and can break the rules can actually subtract that revenue from the expense to figure out what the real impact is?

Sure. The major impact is, as we said before, in US&I. And so, that information, if it is significant, we will be disclosing it as part of our regular disclosure in terms of looking at the net changes.

So is it only the 35 or 37 million that I think you indicated was hedge revenue?

That was in US dollars. And that was the amount in this quarter that Peter gave you.

Right. But would that be the only hedge offset to the expense, or --?

Well, we have hedged all of our expense. It's just that the offset is netted against the increase on the expense line. It's there for US&I where it flows through both the expense line and the revenue line. So we are not saying that the whole increase in stock-based comp is due to this. There are other increases in stock-based comp that don't have anything to do with this impact of having the hedge on the share price appreciation.

Maybe I should just speak to you after the call.

Okay, that's a good idea.

Ian de Verteuil, BMO Nesbitt Burns.

My questions relate to page eight of the supplemental pack. If I'm correct, the insurance business, the incremental charges associated with Hurricane Wilma are in here, are in the Canadian Personal and Business. So the insurance operation here, which earned 90 million, actually earned -- if I was to remove the impact of that, actually earned 151 million in the quarter. Is that correct?

That's correct, if you remove the impact of the hurricanes. Because on a pretax basis, we are talking about on the [supps] the net income loss before taxes of 90 in Q1 '06. And you're saying the impact of the Hurricane Wilma would be in this insurance policyholder benefits, claims and acquisition expense. That's where the expense is.

And I accept what you said. Obviously, we had a very unusual hurricane season. But if I accept that that should be removed, which I think is a valid point, is this insurance business actually operating now at a run rate of 150 million of net contribution?

There were some other actuarial adjustments in other businesses, notably our Canadian Life. And I think when you net-net everything that's included in the supplementary, it's about $29 million, would be about the number excluded from run rate.

So if I was to look at that 669, which is Canadian Personal and Business, if you were to, say, remove hurricane impact plus a variety of other unusual insurance issues, I might want to bump that $29 million?

That would be correct.

So when you looked at the summary comments, the specified items, and we took off -- we said there was $0.09 impact of hurricane charges, there was probably another $0.05 or $0.06 going the other way that related to insurance?

There's always going to be some of those adjustments that are in there, that we typically detail what the adjustments are.

So it was a particularly -- this run rate of sort of 900 million of revenues and, let's say, 100 million-odd of quarterly earnings out of insurance, that's sort of a good solid rate of the business that's growing?

Yes, that's correct.

Jamie Keating, RBC Capital Markets.

I think this is for Morten, slide 19. I just want to review the gross impaired loans again, if I can, just on the consumer side. And I may have missed some of your commentary before, so I apologize. But the number is up a bit; it looks like it's up about as high on a [GIL] basis in consumer since Q2 '04. So is there any [lip] factor in there, Morten, or is there anything we should know about what's developing in the portfolio?

I can make a comment just on the number. Up year over year -- it's really the anomaly is Q1 last year, where we had recoveries and some one-time items. So sequentially, if you go along the quarters, we have actually been very consistent in our PCL, like we have been 148, 142, 144 and 142. So the big increase over the same quarter last year has to do with the first quarter last year.

Maybe if I can direct you to page 20 of the supplementals -- we don't have the continuous information on PCL, but on there, you use the the gross impaired formation, which actually happens to be a pretty good parallel to the PCL formation. And you see that we are, I think, the second-lowest quarter since the beginning of '04.

So in terms of PCL performance, this actually continues to be very strong. There is, if you look in the consumer portfolios, a slight bump up from the previous quarter. But it is highly localized in a couple of small portfolios, and something that is not assigned a broader deterioration.

Quentin Broad, CIBC World Markets.

Just quickly, then, Morten, so 354, up from 305, which I think Jamie was referencing -- you're saying that was a bunch of small portfolios that generated the consumer GIL increase?

On the consumer portfolio, where there is a slight uptick, it's a localized effect in some of our unsecured consumer portfolios. But it's basically two cohorts in the unsecured portfolio there, where there has been a slight deterioration. And it's highly localized to those, and we don't see a broader impact from that.

And those cohorts are on a year basis?

Well, basically, there were two campaigns in late '03/early '04, and the effects of that are slowly moving through the portfolio. It's a very manageable and modest impact, but it is big enough to show up in the numbers.

And then, just perhaps to go back to Gordon -- your comment about the US and growth -- and I apologize for staring at the trees instead of the forest, but if I adjusted the US revenue growth for currency, I think it's about 5% CAGR. And if I back out the US revenues from the Bank's revenues -- because I can't really get to, I don't think, just pure Canada -- but the Bank as a whole, ex of those US, is about 12%. So obviously, there's a huge amount of growth, actually, outside of the US operations, and yet I think you said you see the US as being a big part of the growth opportunity. So I'm just trying to reconcile -- is it because you've had great growth elsewhere and you think that's going to stop, and the US is going to bump up? Or is it because you've made the decision to get into the US, so you've got to continue down that path, notwithstanding the fact that it's been a slow grower?

No, it's a bit of both. I think that firstly, we don't subscribe at all -- and if you were at the annual meeting or listened to it, the question came up to the fact that growth in Canada is not going to continue to be reasonably strong. We see lots of opportunity for continued growth.

I think, though, the point that I was making, Quentin, is that if you look longer-term at the organization, it is highly likely that our growth rate will be higher outside of Canada than it will be inside of Canada, particularly if at some point we start to -- whether it's through acquisition or other businesses, simply because the relative scale and size of our operations outside of Canada are much smaller on a relative basis.

So that comment is not indicative of a massive strategic shift or anything else. It's really just recognition that if you look at our plans short-term and our mid-term and our long-term strategic plans, longer-term I suspect our operations outside of Canada will grow at a slightly faster rate than within Canada. It's not reflective of slow growth rates in Canada; it will just be reflective of opportunities and where we are at today.

But you would hazard a guess that the Canadian or the ex-of-US growth will slow? Because to take the US growth out past the 12% CAGR would be fairly -- even on the smaller base, it would still be fairly significant, unless you did it through pure acquisition.

Yes, I think that's a fair comment.

Trevor Bateman, CIBC World Markets.

Just earlier this week, Standard & Poor's restored its outlook on your AA- credit rating back to stable from negative. And it seemed part of the rationale for that was their comfort or more comfort over your outstanding Enron litigation. Is there anything that you can comment on that may have changed over the last couple of quarters?

We can't make any comments on the Enron situation, other than what we have said in the past or provided in the disclosure documents.

(OPERATOR INSTRUCTIONS). Michael Goldberg, Desjardins Securities.

I just wanted to follow up on Ian's question, because I was a little bit confused in it. Actuarial adjustments boosted the insurance contribution by how much, pre-tax? And after-tax, the adjustments that you were referring to, Jim?

I'm not sure I've got pre-tax and after-tax. I think the after-tax total effect of all actuarial adjustments, including the additional hurricane reserve, was about $29 million to the bottom line.

So the hurricane reserve was 61 million, so ex that, we're talking about $90 million?

No, the other way.

The other way.

So we had positive adjustments on our Canadian Life book and a negative adjustment on the reinsurance book, the net of which was about 29. And what I was saying is that it would be unreasonable to add $60 million to our run rate if you said we wouldn't have any hurricanes, because there were other positive offsetting one-time adjustments.

And those are after-tax. Do you have an idea what the pre-tax was? The revenue impact or the expense?

I don't, off the top of my head. But we can get it for you, I assume.

There are no further questions registered at this time.

Well, on behalf of everyone here, thank you very much for your participation. And if you have any follow-up questions, please give me a call. Thank you. Bye-bye.

Thank you.

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