Royal Bank of Canada (RY) 2006 Q2 法說會逐字稿

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

Thank you. Good afternoon, everyone. Welcome to our second-quarter results conference call. Please note that our remarks and comments made during the question period this afternoon may contain forward-looking statements, which involves applying material factors and assumptions and which have inherent risks and uncertainties. As described on slide 2 of today's presentation under the heading Cautions Regarding Forward-Looking Statements, a number of factors could cause actual results to differ materially from what is expressed in these statements.

Our CEO, Gord Nixon, will be first to present, giving an overall summary of the quarter's results. Barb Stymiest, our Chief Operating Officer, will follow and provide further comment on our financial performance. Our three business segment heads -- Jim Westlake of RBC Canadian Personal and Business, Peter Armenio of RBC U.S. and International Personal and Business, and Chuck Winograd of RBC Capital Markets -- will then briefly discuss the results of their respective business segments.

Following the presentation, we will take 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 Chief Financial Officer; and Morten Friis, our Chief Risk Officer.

I will now turn it over to Gord Nixon.

Thank you, Nabanita, and good afternoon, everybody, and thank you for joining us on this conference call. I'm pleased to report that we have had another very strong quarter, as is outlined in slide 4. Earnings of a little over 1.1 billion or $0.85 per share were up 23% from a year ago; return on equity, up 310 basis points to 23%; and revenues, up a solid 9% to over 5.1 billion this quarter.

Three items impacted our quarter results, as is shown on slide 5. It was a very clean quarter, although we did have three items which in aggregate did not impact earnings significantly, but we did receive a payment in the quarter related to the termination of an agreement.

We also recorded a gain from our broker-dealer subsidiaries, which were received with respect to the New York Stock Exchange shares in exchange for our NYSE seats.

And we also increased the liability associated with our credit card loyalty rewards program, and that was a result of refining our model assumptions to reflect the higher customer use of their RBC reward points. A bit of a double-edged sword -- disappointed from an economic perspective, but I would emphasize with my marketing hat on that people actually use our points, which is one of the reasons for that adjustment. The combined impact of these items, as I've said, on our Q2 earnings was very small.

I am particularly pleased that each of our three business segments delivered strong earnings growth, and that is shown on the next slide. Our Canadian Personal and Business unit increased its earnings by 16% from last year, and that was driven by strong growth in wealth management revenue, solid loan growth, solid deposit growth and good operating leverage.

Net income from our U.S. and International Personal and Business segment and continuing operations rose 29%, and that was despite the negative impact of the strengthening Canadian dollars. In U.S. dollar terms, our earnings were actually up 39% from a year ago, and again, driven by strong revenue growth in wealth management, as well as solid revenue growth and lower provisions for credit losses in our banking business.

RBC Capital Markets had a very strong quarter. The net income was up 47% over last year, and that was largely reflecting record trading results and greater merger and acquisition activity.

We continue to successfully execute on our strategic goals to enhance our leadership position in Canada, and we're certainly pleased with our business and our core Canadian operations, as well as to grow our business in the United States and outside of North America. And those highlights are provided on slide 7.

Moving to slide 8, you can see our six-month performance compared to our objectives for all of 2006. Diluted earnings per share growth, ROE, revenue growth, portfolio quality, Tier 1 capital are all meeting or exceeding our objectives.

Operating leverage, while flat for RBC due to the business mix -- that is the higher proportion of earnings from capital markets -- is positive for our two personal and business segments, which, frankly, are the most relevant with respect to that operating leverage measure. In addition, in light of the high level of earnings so far this year, our payout ratio is a little bit below, at 39%, our target payout ratio for the year.

In addition, our medium-term goal, as you know, is to generate top-quartile shareholder returns, and we remain strongly focused on that objective. And over the past year or so, our total return certainly puts us in that category and we are pleased with that.

With those brief comments, I will turn it over to Barb.

Thank you, Gord, and hello, everyone. Looking at slide 11, you can see that we delivered record revenues of 5.1 billion this quarter. And those revenues were fueled by the strong result in our wealth management, banking and trading operations. Revenue grew 9% over the same quarter last year and it was up 12%, excluding the impact of the stronger Canadian dollar relative to the U.S. dollar. And revenue growth versus Q1 of this year and for the year to date were also solid.

You can see on slide 12 that the net interest income in our Canadian personal and banking operations increased by 11% over a year ago. And this was due to the strong loan and deposit growth and improved spreads in deposits, personal investment products and credit cards.

The decline in RBC Capital Markets' net interest income is due to increased volumes and higher rates on funding positions related to certain equity trading strategies.

Moving on to slide 13, non-interest income grew 16% over the same quarter last year, with growth in all three of our business segments, but the most significant growth was reported in Capital Markets.

Slide 14 helps to explain that growth. In the past several quarters, our trading results have been somewhat muted, but this quarter, we delivered exceptional total trading revenues of 586 million, which reflected strong trading performance in all of our product categories.

Slide 15 shows that our non-interest expenses increased this quarter to 2.9 billion. And as you can see on slide 16, the increases over a year ago were mostly driven by business performance and higher costs to support our growth initiatives. Variable compensation, up largely in Capital Markets, was linked to its strong business performance this quarter. As for the remaining increase, it was mostly due to higher professional fees, staffing levels and marketing costs incurred in support of our business growth initiatives. Our other HR costs continue to be well-contained.

You can see on slide 17 that both of our personal and business segments generated healthy operating leverage in the quarter, as Gord said, a reflection of our focus on growing our high-return businesses while keeping expenses in check.

RBC Capital Markets' operating leverage was minus 5%. However, if you use revenues on a taxable-equivalent basis and exclude the amounts related to the variable interest entities, which are offset in the non-controlling interest line, RBC Capital Markets' operating leverage was up 4% in the quarter.

Slide 18 shows the continued strong and consistent growth in our key balance sheet items. You will note that our total assets are up 16% year over year, our deposits are up 14% and loans are up 11%.

While slide 19 shows similarly positive trends for our client assets under management and under administration, particularly in our Canadian Personal and Business operations and at RBC Dexia over the past quarter, you can also see that the numbers for the U.S. and International segment are impacted by the stronger Canadian dollar.

On slide 20, you will see that our credit quality continues to be solid. Growth-impaired loans remain relatively stable, and our specific PCL ratio remains low. And finally, our capital ratio remains strong and stable at 9.5%, as you can see on slide 21.

And I will now pass it over to Jim Westlake.

Thanks, Barb. The Canadian Personal and Business segment continues to perform very well. We grew net income by 16% over Q2 '05, as you can see on slide 23, reflecting revenue growth of 6% and successful cost containment, which resulted in a 3% operating leverage.

Revenue was solid at 3.2 billion on strong volumes and improved spreads in our businesses. The cost control was achieved despite higher variable compensation resulting from strong business performance, as well as costs incurred to support business growth such as increasing the number of our sales staff.

As shown on slide 24, our wealth management business had another great quarter, with revenues up 20% over a year ago, while the banking businesses continue to record strong volume growth. Each of the businesses generated meaningful revenue growth measured on a last-12-months' basis.

Most product balances grew at double-digit rates over Q2 '05, as you will see on slide 25. Our mutual funds continue to be extremely successful, with volumes up nearly 30%.

Our net deposit margin, shown on slide 26, widened from last quarter on better personal deposit and investment spreads due to rising interest rates.

Slide 27 shows how we are continuing to roll out initiatives to meet our three strategic priorities and further grow our businesses and earnings so we can sustain the positive momentum we have built.

With that, I will turn it over to Peter Armenio.

Thanks, Jim, and good afternoon, everyone. Please note that all my comments are going to be in U.S. dollars and based on our results from continuing operations.

As you can see on slide 29, RBC U.S. and International's net income of 92 million for the quarter was up 39% over a year ago, driven by strong revenue growth of 16% and improved credit quality.

We are also pleased with our 4% positive operating leverage this quarter. We were able to contain most of our expense growth to a few primary areas, namely the inclusion of Abacus in our results, project-related costs in support of business growth and higher variable compensation on stronger business performance.

Slide 30 provides more detail on our revenues. Wealth management revenue was up 23% from last year's second quarter, mainly due to three things -- the inclusion of Abacus, strong growth in fee-based assets at RBC Dain Rauscher, and higher securities brokerage commissions in global private banking.

Revenue growth in wealth management was also positively impacted by a $7 million net gain at RBC Dain Rauscher on the exchange of its NYSE seats for the NYX shares.

Banking revenues were up 7%, reflecting strong loan and deposit growth at RBC Centura and our Caribbean operations. On an LTM basis, wealth management's revenues rose 15% and banking revenues improved 8%, leading to a total revenue growth at RBC U.S. and International of 12% over the prior 12 months.

As you can see from slide 31, we continue to expand our product offerings and distribution to better serve our clients and grow our revenues and earnings.

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

Thanks, Peter. RBC Capital Markets had an excellent quarter, with earnings of $433 million, up 47% from a year ago, as shown on slide 33. This sharp increase resulted from record trading results, continued strong M&A activity and a lower effective tax rate.

We also recorded net gains on the exchange of our NYSE seats for shares in the Company, strong performance from the first full quarter of RBC Dexia and higher commission revenue, partially as a result of foreign demand for Canadian resource-based equity remaining very strong.

Our revenues included a 35 million negative impact related to our consolidated variable interest entities, which is fully offset in the non-controlling interest line, compared to a positive impact of 6 million a year ago.

Second quarter of 2006 particularly benefited from very favorable market conditions and the positive impact of the completion of a number of very significant transactions. Our expenses also rose, mainly due to increased variable compensation from the strong business performance and higher expenses incurred to support our business growth.

We had some recoveries of credit losses this quarter, but this was lower than previous quarters. For the first six months of the year, net income improved primarily from solid revenue growth, the release of general reserve in the first quarter and a lower effective tax rate.

You can see our revenues by business line on slide 34. Global Markets' revenue was up substantially from quarter two '05 due to strong trading results in a number of product categories. Global Investment Banking and Equity Markets' revenues also improved substantially from a year ago for the reasons I have already mentioned, including higher M&A activity, the NYSE gain and commission revenues.

RBC Dexia benefited from strong market activity. You'll also recall that quarter one '06 included only two months of results from our institutional and investor services businesses.

As you can see on slide 35, we continue to make progress in enhancing our positions in Canada, the U.S. and globally.

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

(OPERATOR INSTRUCTIONS). Jamie Keating, RBC Capital Markets.

Congratulations, guys, on a good quarter. I have a question for Gord, just to start. It relates to our esteemed competitor M Bank over there raising their dividend payout ratio last week. And just wondered if, Gord, you had any thoughts about whether other banks may need to consider such a move or if you have any thoughts you can share with us that you might have discussed with the Board, perhaps.

That is something we constantly review, Jamie, as you know. Ultimately, it is a Board decision. We have been pretty aggressive in terms of leading the way in terms of raising the payout range relative to the competition.

Bank of Montreal, as you mentioned, move to a 45/55 range. We are currently at 40/50. I think that decision will be very much driven in the future depending on a number of things, including the ability for us to deploy capital effectively. As you see, our capital ratio is fairly consistent year over year. We have been able to find investments that have met our return targets. We have been able to grow our assets in virtually all of our businesses, particularly in Canadian personal and banking, and expand our trading businesses.

So for the time being, we're certainly comfortable at the 40/50% payout ratio range. I think that what happens in the future, again, will be something that we will constantly review with our Board of Directors.

I wonder if I could just dig into two details with Jim, if possible. One, just looking for a little understanding around the insurance business this quarter. We've got the list of items that caused the decline -- the four items. Wonder if you could just give us a little color as to which are sustainable and perhaps to what degree each of those items really impacted the revenue, or more importantly, I guess, the pretax earnings?

There is a lot of noise in those insurance numbers. Unfortunately, there has been for the last three quarters. We really had three things with a lot of movement there -- all of the charges related to the property business with the hurricanes, movement to the new standards of practice in Canada, and as well as FX impacts on our U.S. business.

Although we don't disclose it, I can say that the after-tax changes are quite different than the pretax due to our reinsurance business being conducted in a number of low tax jurisdictions. And probably the revenue line is really a better indicator of the business performance.

But prior to the last three quarters, insurance had really been very stable and with the efforts that we have undertaken in the property business, I would expect that absent any other new events, we'd be back to that type of run rate next quarter and beyond.

Interesting, okay, thanks. Another quick question, Jim, just relates to looking at your divisional revenue growth. And I'm not complaining, certainly, because the revenue growth is spectacular, I'm just curious about trying to reconcile some of the volume gains with some of the revenue gains.

And I would have thought -- I am looking at your NIM, and I would have linked them up and thought it would be sort of a pass-through. And I'm not sure if I'm seeing it -- correct me if I'm wrong, but I'm seeing kind of 6 and 7% growth on the revenue side for cards and personal banking and so on. And yet I think the volumes are a lot higher. Can you explain what's going on there?

Yes, I have to look at all the numbers and go through them. I think that really in some of the core banking and wealth management numbers, the revenue growth is higher. We had a lot of noise in our cards numbers as well, which really showed flat revenue, that was affected by a number of events. [multiple speakers]

I picked up those, Jim. I think you are fair to say the noise is there. But I would think if you adjust for them, you kind of get -- well, maybe I should take it off-line. It just seems to be a bit of a disconnect between the two, and I can't quite get my arms around it. Maybe fee income is very flat in those businesses, while the NIM is actually cooking along pretty well -- I don't know if there's any generalization -- general comment you can make in that regard?

Okay, we can talk about that. I think that both the revenue and the NIMs, we're pretty pleased with, though, this quarter.

Rob Wessel, National Bank Financial.

Just want to know if I can -- I have a question for I guess Gord and Chuck. I'm just looking at slide 5 of the supplementary financial information, the revenue from trading activities. And I guess what I am wondering is we've started to see that move up. And the bank has experienced quite a bit of success more or less across all product lines.

And I guess I wanted to know if either or both of you could address the issue -- are we seeing just the benefits from a confluence of positive market activity or some upside volatility, I guess, if you will? Or are what we seeing here an expansion of trading operations?

So I guess what I am trying to ask is the increase in trading that is taking place -- is that primarily just from upsides volatility, I guess, or is it coming also from an expansion of trading books?

I will try, Rob, and then I will turn it over to Chuck, who I'm sure will put a more granular spin on it. But I think it is a combination of both. I think that there has been an investment in diversifying our trading books and our trading activities. And hopefully, that's something over the longer term that we will continue to benefit from.

But having said that, there was also -- I think to take Chuck's words and then he can use them himself is that it was a quarter where just about everything moved in the right direction. And normally, as we have talked about in the past with our trading activities, is that we think the diversification of our trading businesses is a real strength because you get certain areas that go into down cycles and the diversification provides a bit of an offset. And I think this past quarter was just one of those quarters where everything seemed to move in the right direction. Chuck?

Gord, I think, captured it. I would just, in adding some granularity, say that we had a couple of nice wins that had some impact. But there was in a couple of areas, particularly in the what we call our global arbitrage trading, that we have spent a lot of time over the last three or four years expanding not only from a product basis, but also from a geographical basis. We had a good quarter there, and it was nice to see.

I also think that another factor is we've had a couple of tough quarters and a couple of tough businesses over the last year. And this year, this quarter, rather, nothing went wrong. So I think you add all those factors in and you've got a pretty good quarter.

It is interesting and hard to define exactly why, but on a relative basis, I guess, the last quarter we underperformed relative to a couple of the Canadian competitors, and this quarter overperformed. And I think that's just the nature of the cyclicality of those businesses.

And just along those lines, for the component -- I guess two follow-up questions with respect to that, is that should we see or conclude, then, that it's a sustainable run rate for trading? I know the bank has done an excellent job, certainly over the past six or seven years, in limiting volatility.

But should we see maybe that or should we conclude that the run rate for trading revenue sort of on a prospectus basis is maybe 20% higher than what it is and then we can try to -- the analysts can take a stab, each of us, on trying to figure out what that is? Or should we see it as --

We just can't give you that kind of -- this is a business which is subject to a lot of variability and volatility. I think the diversification that we run is to try to minimize that. But I think it's very difficult for us to respond to that question.

How about this -- is there maybe a percentage increase in capital allocated to trading that we can then therefore try to relate on our own?

There isn't in terms of -- we basically have a VAR -- we don't use it all. And we hope that we are going to find opportunities to use it all.

There is a chart in there which summarizes VAR usage throughout the quarter. And I don't think there was a real spike-up in terms of VAR usage.

There wasn't.

And then one last question on this, not to flog it too much, but in terms of the expansion or the growth that's taking place, is there anything we should take from that in terms of the change in the fundamental character of the sort of global trading book? Is it, for example, are you adding exposure in Europe? Or is the expansion of trading activities to the extent that it is occurring in one particular product line? Is there any trends there that we should be mindful of?

No, as I say, Rob, I would be more focused on the fact we've been expanding for the last couple of years geographically and from a product standpoint. And we've got a well-diversified trading book. And if things didn't go -- really, most things went right this quarter.

Fair enough. This quarter aside, did you want to give some comment as to where and which products?

We've been spending -- we have actually on a global basis been expanding our trading business quite significantly over the last two or three years. And it is I think better diversified from a production and from a geographical basis.

And I mean, Chuck, it would be, again, from a product perspective across the spectrum probably a little bit more weighted towards the fixed income areas that we've talked about in the past. And a lot of that would be Europe and the United States.

Steve Cawley, TD Newcrest.

First question, margins -- maybe this one is for Jim Westlake. There seems to have been some different competitive movements. The Bank of Canada has basically said that they have cut -- that they have stopped increasing rates. You have bucked the trend, there is no doubt about it, by being a little bit different I think in terms of your ability to get credit cards on the books and other personal loans and do fairly well on deposits as well.

If you could look out a little bit, given the Bank of Canada is going to stop moving rates and maybe some of the changes that have gone on within the competitive framework, where do you think margins go from here, Jim?

Well, it's easier to talk about the past than the future, Steve. But I think that what we have seen it that within the increases that we have had, they have not been so much that they have impaired any of the demand for lending. That has stayed strong. Yet at the same time, it has opened up a little bit more margin on the deposit side.

So I would say demand is good. The competitive pressures on the loan side have been higher, but a little bit better spread on the deposit side. And with all of that, we were able through disciplined pricing to eke up the NIMs just a little bit. I think that if there is no changes, certainly we would expect that at least on the demand side it should stay fairly strong because the rates aren't high enough to hurt that.

No changes in the competitive environment, from what you can see let's say in the last month or so, couple of months?

Certainly, we've seen a couple of competitors actually come back up a little bit with a little less competitive pressure on some of the mortgage rates. But I think that generally, it is a competitive market out there. If you go to all of the individual markets across the country, we're certainly seeing a robust competition. But in a couple of key markets, there has been a little lessening on some of the mortgage side.

Next question, maybe for Chuck, it is a tough thing for us to really, I think, or certainly for me, to get a handle of what's going on in all these trading businesses. And my parent company is a case in point, trying to figure out what exactly has gone on in the UK derivatives business. And it is certainly costing our bank a lot of money.

Now, and I don't want you to point to TD specifically, but I'm using this as an example, so maybe not -- because I know you're not going to feel comfortable talking specifically about TD's problems, but let's say keeping stuff like that in mind, what are lessons that are to be learned when you hear about problems such as this one?

I think that first of all, it's hard to get a feel for the trading business because it is a complex business and there's just so many aspects to it.

But I think that in the trading business now, what you've got to make sure is that you've got a good platform and that you are prepared to invest the money in technology and compliance, and that you are prepared to go out and hire good people, and that you are prepared to have a proper scope -- and this isn't in relation to TD, this is what I worry about all the time -- that you've got a scope of business you're in because basically you're competing with large investment dealers, global investment banks, and you're competing with hedge funds.

And you've just got to make sure that you know what you want to and you're prepared to have a target that you're going to get to, and be prepared for that target to continually change because those markets are rapidly changing. So you have to be careful about just how big a pill you want to swallow and making sure you can do it properly.

But Steve, it is Gord. I would and we would, nor should we, nor would we comment on somebody else's issues. But I would emphasize in our case the issue of diversification. We don't have a derivative-centric trading business. We've got very active trading businesses in the cash markets -- fixed income, foreign exchange -- a lot of the derivative businesses that are associated with fixed income, foreign exchange, cash equities, equity derivatives.

But there's a lot of diversification and a lot of activities in those cash businesses. And you know, in the UK, just as an example, we would be a very large player in areas like not only Canadian and the Commonwealth currencies, but in sterling trading and a lot of those cash businesses.

So I would just, again, emphasize that there's a lot of diversification across these businesses. And I don't know, Chuck, what percentage is representative by derivatives, but it's not --

Well, in terms of the actual derivatives business, it's a very, very -- what I would call the structured derivatives business, like that credit derivatives, the structured rates derivatives and the equity derivatives. We have businesses that are growing each of these, but they are not a large portion of our trading revenue.

And I think those are the areas that you are referring to.

Yes, and this question isn't meant to be offensive at all, Gord, I'm just asking it outright like this -- do you feel confident that you fully understand each one of these trading businesses and that you know the limits that are in place and feel comfortable when you walk in the office every morning that there isn't going to be any kind of major blowup?

When you say you, are you asking me?

You -- you yourself.

Yes, I am going to defer that question, because it's a good question, to Morten, to a degree, because my answer is, I do, because we've got a risk management structure which is built around ensuring that we've got the right, as Chuck said, compliance and risk management and controls and so forth over those businesses.

That does not mean to say that we don't have operating risk. We do. And in fact, operating risk has grown, as we've talked about in the past. And we have had operating losses in these businesses from quarter to quarter, which we absorb in the normal course.

As I have said in the past, it is quite interesting -- if we have a significant credit loss, it's sort of normal course. If we have a significant operating loss, there is a significant almost grand jury-type investigation around those operating losses. So we watch them very carefully.

But I think that comfort can only be provided by the risk framework that we have as an organization. So I think it is more appropriate for Morten to respond to that.

So just to add a couple of comments, we do have a large emphasis on growing with the capital markets business in terms of our risk management infrastructure. So we have a fairly comprehensive approach to dealing with this full independence from the business and wherever the business launches on a new strategy an effort to grow our resources and our ability to manage the risk aspects alongside the businesses' emphasis on growing the revenues.

I would just add from a strategic standpoint that while, frankly, I worry a lot about these risks, I worry about a lot of businesses, and these are more complicated, so I worry more. But basically, strategically, when you look at the structuring part of the business, it is a key part of the future, in my view. And when you look at some of the difference we've made in the origination part of the business, it is because we have structuring capacity on-site. And we would not have that and we wouldn't be able to support it if we didn't also have a trading business.

Secondly, the trading business that are conventional are getting commoditized, and so are a lot of the derivatives businesses, but you've got to be able to be in products where you can make a higher return. And basically, to make a higher return, you've got to take some more risk.

That was good. Thanks, guys. And I'm going to leave you with one last question. AmSouth and Regions Bank -- what kind of implications does it have for Centura?

I think that merger itself is probably not significant -- maybe at the margin positive, just because any consolidation in the region is usually a little bit positive for those that are trying to grow their activities and businesses. And there is some degree of overlap, but not significant.

I think it is interesting just in that it is -- we're finally starting to get some degree of the consolidation that the analysts and investment bankers have talked about for the last two or three years. And that consolidation is happening at les-than-spectacular premiums, which, again, I think is indicative of the marketplace, where I think the prices still remain high, the operating environment still remains difficult, and that combination I think is leading to some transactions that are I would say structured a little bit differently than they might have been in the euphoric markets of three or four years ago.

So I don't think there's any direct implication necessarily on Centura other than it is a little bit of movement with respect to consolidation. And I think part of that is because of a perceived very difficult or more challenging operating environment in the U.S. than perhaps other markets like Canada and other international markets.

Susan Cohen, Dundee Securities.

Your tax rate again this quarter was fairly low at 24%. Do you feel that is a sustainable rate going forward? Or might we see it inching a little bit higher?

Susan, it's Janice speaking. I think that our tax rate has been consistently coming down because of a lot of the different trading strategies that we have now in place and a lot of our operations which are internationally diversified. I would say that at the rate it is at, it would be fairly sustainable, barring anything unusual happening.

Ian de Verteuil, BMO Nesbitt Burns.

I'm wondering if -- my first question for Chuck is if there are any job openings at RBC Capital Markets? I'm just kidding.

We're going to have to do something about that bonus pool number, Ian.

I know Jamie doesn't need any associates, so I guess I'll have to keep doing what I am doing. The first question is -- I think it is a Morten or a Janice -- page 17, which is your interest rate sensitivity -- as I look at it here, the bank is liability-sensitive over three months, liability-sensitive over the next three months, liability-sensitive over the next six months. Yet when rates rise 1%, it has a positive impact on net interest income. I was just wondering how you could have that?

From a liability sensitivity perspective, as rates rise, in fact, because of our liability mix and in particular the deposit mix, in the shorter term, as rates rise, because we have a lot of core deposits, it actually helps us in terms of our spread. And the opposite is, of course, the case -- as rates are coming down, it was hurting us more than sort of the average because of where we sit with respect to our core deposit base.

But that shows up in the non-interest-rate-sensitive bucket, doesn't it?

I think it shows up in both of the buckets. And I think that overall, when you look at the positioning, I think it is a mix issue.

So, Janice, maybe just to make it simple for me, should I just ignore all those buckets and just go to the 103 million of sensitivity to a 1% rise in interest rates?

Ian, I think that is appropriate -- It's Barb speaking -- because as we positioned the bank, we were clearly anticipating rising interest rates. So it is not surprising that we have a positive exposure to a rise in interest rates.

So that's the thing I've got to focus on -- forget all the buckets.

Yes, I think that is the best thing to focus on.

The second question is for Jim Westlake. Jim, I think we're four days away from the start of the next hurricane season. As a good West Indian, I am quite aware of that. If we had -- you said that there's been a lot of volatility in the insurance business and you would expect, significant events barring, you'd expect to get back to the run rate of sort of a year ago.

In the event of another awful season, what's the maximum risk that Royal Bank is prepared to take, or the maximum loss you are prepared to take on an event or a couple events?

Yes, relative to where we were before, Ian, we are well below 50% of the maximum exposure previously. And it depends on the zone and where it is and all that sort of thing. But it is all well below 50%.

So remind me what that means -- is that sort of 100 million of earnings?

Yes, less than that.

Less than 100 million in a single event?

Yes.

Mario Mendonca, Genuity Capital.

One quick question just to help clarify -- the spike in mutual fund revenues sequentially -- it's just not a business I'm accustomed to seeing move that dramatically from one quarter to the next. Is there anything you can offer in trying to understand that?

It is Jim Westlake. We are just looking at the numbers. But we were up about 30%, if I recall, on our volumes.

Year over year?

Year over year. And there is pretty good leverage in that business once you're at a certain size.

I'm actually referring to the sequential pop.

We're just looking at the number here.

I can give you a page reference -- 5 of your supplement.

Mario, this is Janice speaking. We are going to have to get back to you on that because we are looking at the numbers now and we will call you.

Perhaps if we could just move on to another issue. It is sort of going along the lines of what other people have asked about regarding NIMs in Canada. Again, Royal is certainly not following the same pattern as some of their peers. When I look at NIMs every quarter, a couple of things that stand out for me would be just the disparity in personal loan growth relative to personal core deposit growth. And historically, Royal has been sort of pretty good there, core deposit growth kind of keeping pace, unlike other banks.

This quarter, we're not quite seeing that. Is there anything you can highlight for us -- any loss of market share in personal core deposits -- any of that sort of premium rate savings, account competition, sort of kicking in and maybe affecting that business?

Mario, it is Jim Westlake. I think there's a couple of things I could comment on. First of all, I think we've had a lot of strength on our lending side that we have been very focused across all of our lending businesses and have done very well. So that certainly has had better growth.

If you really look at all of the ways that you gather in money, I think you've got your core deposits, you've got GICs, you've got mutual funds. And one of the things that we have tried to do is use the products that we have had that have been more competitive and that have slightly better spreads and tried, where possible, to steer money in that direction.

That has been into various mutual fund products. And I think that some of the significant growth that you have seen there, particularly in the short-term funds, has been trying to steer money that may have otherwise traditionally gone to GICs and core deposits. So we try to look at those numbers on several dimensions and have really made an active effort to work with our clients to get money to the appropriate spot.

Maybe you could just clarify something for me, then. If funds were diverted into mutual funds from GICs, for example, does that still constitute a form of funding for your loans, even if it were to go into mutual funds, which you've got to think of sort of off-balance-sheet?

No, not at all. We consider the products from a client perspective. So it is an alternate investment. But from our own balance sheet, if there is a diversion from GICs to mutual funds, we don't have that deposit funding available.

Is not deposit funded --

No.

And that's why I am a little confused, that shifting it from GICs to mutual funds -- how does that sort of help from a funding perspective? Or does it, I guess is the answer?

It doesn't from funding, but it does from a client perspective. If the client is receiving better -- we've taken the view that we want to make the best decision with respect to the objectives of the client. And what we have done internally is we haven't looked at loss of retail deposit to mutual funds as a negative from the branch or the retail perspective. We tended to look at it in terms of growing that overall mix of business, as long as we're doing it in what is in the best interest of the customer.

I don't want to belabor this, but I'm trying to understand why this is beneficial from an end perspective, and the mutual funds aren't really at all -- they don't aid you in funding the loans. Is the real point you're making that by getting it out of GICs and a product where you may not be content with the spreads, that in and of itself is what is benefiting the NIM? Is that an appropriate way to look at it?

That is a good way of looking at it because to the extent that the GICs are very low-spread products, then on balance it would help the NIMs, the remaining NIM of the other products, right.

I think I understand that.

It's not -- the mutual funds do not supply any funding at all. So I think it is a mix issue [multiple speakers] what you're looking at.

It is essentially to avoid a lower-margin product in and of itself.

Right.

I think I understand that. And I appreciate your help.

Michael Goldberg, Desjardins Securities.

My first question is for Janice. The VIE impact on trading revenue is quantified, but you also refer on page 9 of the shareholders' report to mark-to-market losses reducing other -- other revenue that I suppose could also be thought of as contra to trading. Can you quantify what those mark-to-market losses were this quarter, last quarter and let's say a year ago same quarter also?

The mark-to-market losses are the hedging ineffectiveness losses. So they are marked on the hedges that we take every quarter that don't qualify for hedge accounting treatment. In addition, in that category we eliminate some intercompany profitability with respect to some of the trading products -- you're right, some of it is in trading revenue, where we are self-trading, for example.

If we are hedging some of the exposure on behalf of Dexia and doing the swaps for them, that would constitute trading revenue, but on consolidation. As we proportionately consolidate Dexia, we would eliminate that profitability. We don't disclose the amounts of those actual mark-to-markets on a quarterly basis. But I think if you look at their impacts, from this year to same quarter last year, if you eliminate the impacts, then the other -- other income should be relatively consistent.

Because you do break it out on the VIE impact. I guess there is a lot of issues with respect to geography of reporting, things that should be netted or things that don't get netted. And this was another one that I thought would be helpful.

I think that on the VIE reporting, the reason that we've broken out those numbers specifically is because the VIE accounting has no economic impact to our bottom line. It's basically an accounting mark. So that one is strictly a consolidation accounting entry. These hedging gains and losses I am talking about are actually the accounting treatment for ACG 13 for ineffective hedging.

Right. Made we can talk about it off-line. I have another question for Jim. My read on actuarial assumption changes this quarter is that on a net basis it was neutral compared to relatively big benefits the past couple of quarters. Am I interpreting this correctly?

Yes, it was a very small amount.

(OPERATOR INSTRUCTIONS). Jim Bantis, Credit Suisse.

Just looking at your results with respect to what's being generated in Canada versus the U.S., when I think of the Canadian results, probably the breakup of earnings, you can correctly me if I'm wrong, but I am probably close saying two-thirds to 70% of the earnings in Canada are coming from personal and business banking, which obviously includes wealth management and the other businesses, and the remaining portion comes from capital markets.

And then when I look at your U.S. business or U.S. geographic results of 211 million, I think that is on slide 41, it is probably the reverse, where it is two-thirds to 70% coming from capital markets. And I guess my question, Gord, is when you think out two years or three years from now, how would you like the U.S. earnings profile to be made up in terms of retail wealth management versus capital markets?

I think, Jim, first, I think in Canada, you're probably even a little light. I think the domestic marketplace would be a little more than two-thirds, would be the personal and business, a little less on -- and I think on a normalized basis in the U.S., it would be a little closer to -- I would have to do the numbers, but I suspect closer to 50/50 as opposed to two-thirds/one-third. But this quarter, it was reflective of that.

I think over time, Jim, certainly we want to continue to grow all of our businesses. And I suspect that if there are opportunities, then there will be a tendency for the percentage of earnings from personal and business in the U.S. to grow relative to capital markets.

Having said that, as I have said over the last number of quarters, I think we want to be positioned to have maximum flexibility and optionality, and to take advantage of opportunities on the personal and business side, whether that is in wealth management or on the banking side. And we are going to continue to be very patient on that front while our capital markets business continues to grow.

So I think that while longer term, I would expect that shift to occur somewhat, you know, from a timing perspective, it will very much be driven by opportunity. I still believe today that the U.S. marketplace in the personal and business side is expensive, and I would say on a relative basis is a challenging operating environment.

And as I say, we would like to make sure that our operations are performing at a level where if shifts in the market do occur, we can take advantage of those opportunities. And if that materializes, then I think you will see that shift move to some degree.

I'm not sure that it will move to the same degree as our mix of business in Canada because we've got such a strong and diverse domestic personal and business platform. But certainly I think over time, I would like to see that shift occur, at least move in that direction. But it will very much be driven by opportunity.

So you really don't feel that there is a window of opportunity that is closing right now in the context of seeing some of the consolidation in the southeast? You feel that, I think your word was patience?

Not at all. I'm not suggesting there's not a window of opportunity now. I don't see it closing. And I don't see a huge amount of consolidation. We have seen a bit of a pickup over the last little while. But I think that relative to analyst and investment banking expectation, consolidation in the U.S. has been much, much slower than was anticipated. I think there is speculation that that is building a little bit. And you've had a couple of significant deals with Wachovia and Regions/AmSouth. But there's been speculation for quite some time that that consolidation rate is going to pick up momentum, and it has been very slow coming.

So I think those opportunities will continue to present themselves. And I think to some degree, it will be dictated by what happened in the U.S. marketplace, where things have been pretty robust. But if you look at the inverted yield curve, you look at real estate in the U.S. relative to Canada and other parts of the world, you look at some of the other fundamentals, I think that the operating environment and the prospects for the operating environment I think are a little -- I intend to be a little bit more pessimistic, perhaps, than others. And I think patience will provide opportunity. And that's the way that we intend to play it.

Jamie Keating, RBC Capital Markets.

I'm glad Morten is there. I just wondered if I might ask him a little bit about this product mix in the retail side and whether it's getting his attention in terms of managing the credit side. Specifically, the credit card portfolio is growing pretty quickly. Wondering how sanguine you're feeling about retail credit these days, particularly with the mix shifts and whether there's any changes you're planning on making to either accrual on the loan loss or otherwise as we go forward?

Well, if you look at the -- I think one way to get at it is if you look at the gross impaired loan information in the supplementals, you see, number one, on the consumer and a bit of a stabilization or reduction, actually, on a net basis quarter over quarter in the gross impaired and in the impaired loan formation, it's also a low number, which also reflects the PCL performance.

Speaking specifically to the credit card portfolio, from a credit quality standpoint, it is performing exactly to our expectations. We have in a very gentle fashion moved out to slightly more risk in that portfolio over the last couple of years on the strength of our confidence in our credit scoring methodology and our ability to both manage the risk and price for risk.

And that portfolio is performing to our expectations. Clearly, we are keeping a close eye on the overall consumer portfolios. But to date, they continue to perform very well and to our expectations.

Morten, one of the things that we have talked about in the past with some of the banks, when we have seen, for example, a huge demand for credit product but unreasonably low rates, a lot of the bankers were stress-testing their credit portfolios for much higher rates. I don't know if there's any theme going on in retail banking now that may also be relevant. Is there any way to talk through what scenarios you might be envisioning to protect yourself there in this seeming banking utopia?

With respect to the consumer portfolios and their interest rate sensitivity, the stress-testing clearly is something that's dependent a bit on the assumptions you use. But we have an ongoing effort to look at the sensitivity of the portfolio, to increases in interest rates. And our analyses continue to show that the ability of the consumer to withstand fairly significant increases in interest rates without affecting the overall quality of our portfolio in a significant way continues to be very strong.

Certainly a banking utopia.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Nabanita Merchant. Please go ahead, Ms. Merchant.

On behalf of everyone here, thank you so much for your participation. And please do call if you have any further follow-up questions. Thanks again. And have a good weekend. Bye-bye.

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