Royal Bank of Canada (RY) 2006 Q3 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon, ladies and gentlemen, welcome to the RBC third quarter earnings release conference call. I would now like to turn the meeting over to Ms. Janice Fukakusa, Chief Financial Officer. Please go ahead, Ms. Fukakusa.

Good afternoon and welcome everyone. Presenting today will be Gordon Nixon, our CEO, who'll provide an overall summary of the quarter's results, followed by Barb Stymiest, our COO, who will discuss our financial performance in detail.

Our three business segments heads will then briefly review their respective segment's performance; 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. We will then wrap up by taking your questions. Also joining us today are Marty Lippert, Head of Global Technology and Operations; Elisabetta Bigsby, Head of Transformation and Human Resources; Morten Friis, our Chief Risk officer; and Dave Mun, Investor Relations.

Please note that our comments made today may contain forward-looking statements which involve applying material factors and assumptions and which have inherent risks and uncertainties. Slide 2 of today's presentation contains our caution regarding forward-looking statements, which describe a number of factors that could cause actual results to differ materially from what is expressed in these statements. I will now turn you over to Gord.

Good afternoon everyone and thank you for joining us for this call. I am pleased to report said after two very strong quarters so far this year we continue to sustain our momentum in growing all of our businesses. And we delivered record results for the quarter, as you can see on slide 5. Our earnings of 1.18 billion, $0.90 cents a share, an increase of 20 and 22% respectively from a year ago. Our return on equity was 23.1%, and revenues again reached a record level of 5.2 billion, rising 6% from the strong third quarter that we had a year ago.

This was an excellent quarter, and there were no specified items that are noteworthy. All three of our business segments contributed to our strong earnings growth this quarter, which you can see in the next slide. RBC Canadian Personal and Business delivered record earnings, driven by strong growth in our Wealth Management and banking businesses. In fact our Canadian Wealth Management banking businesses, when you exclude the onetime special item in the third quarter of last year, and our insurance business, our core banking business was up over 20%, which Jim Westlake will address in his remarks.

We're also very pleased with the progress made in the United States and international businesses as net income from continuing operations grew 39% despite the negative impact of the strengthening of the Canadian dollar. In U.S. dollar terms its earnings were up over 50% from a year ago, driven by solid revenue growth in both Wealth Management and banking.

RBC Capital Markets had another great quarter with strong results -- trading results and other results in a number of broad categories supporting a 29% increase in its income from a year ago.

Our performance reflects the strength and diversity of our businesses. And I'm pleased that we continue to make progress in the third quarter to achieve our strategic goals to enhance our leadership position in Canada and to grow our business in the United States and abroad.

Some examples, our initiatives and recognitions are also provided on slide six. For instance, we're proud to have been named the most valuable brand in Canada by Interbrand, and also that RBC Capital Markets won the Euromoney award for Best Canadian Debt House, Best Canadian M&A House, Best Canadian Equity House. This is the first time that we won all three of these in one year.

In the United States you heard a few weeks ago that RBC Centura intends to acquire Atlanta-based Flag Financial Corporation. While there have been few acquisition opportunities that certainly we wanted to consider in the Southeast, Flag, we believe, is an excellent strategic fit with RBC Centura for many reasons. It allows us to quickly strengthen our position in one of our key markets, which is the Atlanta area. And it brings a seasoned management team and a very productive salesforce and local market expertise. Peter Armenio can elaborate on this transaction during his comments.

Internationally, we also continue to expand our business and broaden our product capabilities. For example, Global Private Banking added almost 100 client facing professionals so far this year, of which half came from Abacus. And RBC Capital Markets recently opened an office in Edinburgh to strengthen our presence in Scotland following Global Private Banking's acquisition of Abacus last November, which had an office there.

On slide 7, you can see that we are on track to meet most of our objectives for 2006. Diluted earnings per share growth, ROE, revenue growth, portfolio quality, and Tier 1 capital ratios are all meetings our objectives. Operating leverage remains flat, and Barb will discuss the reasons for this in her comments, but I can assure you that our core expense base is in very good shape. In addition, in light of the high-level of earnings this year our dividend payout ratio of 39% is just slightly below our target range for payout.

Our shareholders benefited from a 22% total return over the past 12 months, including 19% increase in our common share prices, as shown on slide 8. Our medium-term goal is to generate top quartile shareholder returns, and we remain focused on achieving that goal. Our common share dividends are up 18% from a year ago. And this morning we announced an additional $0.04 increase to our quarterly dividend to $0.40 in the fourth quarter.

What those comments, I will turn it over to Barb.

Good afternoon. Looking first at slide 10, our revenues continued to grow reaching a record 5.2 billion in the third quarter, as Gord said. The 6% growth over the prior year resulted mainly from stronger trading results on improved market conditions, and strong volume growth in our Wealth Management and banking businesses. Excluding the impact of the stronger Canadian dollar relative to the U.S. dollar, revenue growth would have been 9%. Compared to the second quarter, we experienced a 2% increase, largely from growth in our corporate and retail banking businesses, partially reflecting the three additional days in the quarter.

Our net interest income was up 6% from a year ago as shown on slide 11. RBC Canadian Personal and Business' net interest income rose 11% from the third quarter last year, mainly due to strong loan growth and improved deposit spreads. In U.S. and international personal and business, the impact of the stronger Canadian dollar reduced net interest income, but in U.S. dollars it grew 6%, reflecting strong loan and deposit growth in the platform.

RBC Capital Markets' net interest income remained low this quarter, primarily due to higher funding costs related to certain equity trading strategies. Slide 12 shows our year-over-year growth in noninterest income. You'll note that the growth in the third quarter came mostly from trading, investments, and banking-related revenues. The decline in other revenue that you see on this slide is primarily due to higher mark-to-market losses on derivatives relating to certain economic hedges, and lower private equity gains in the current period compared to the prior one. The decrease also reflected a 37 million favorable accounting adjustment related to an investment recorded last year.

The decline in insurance-related revenue was primarily due to lower investment income on equity backing the Canadian universal life policies, lower revenue from our U.S. life operations due to the negative impact of the strong Canadian dollar, and lower annuity sales.

On slide 13 you can see that total trading revenues in the third quarter were 537 million, an increase of 43% from a year ago, reflecting stronger trading results, primarily in our equity businesses on improved market conditions and business expansion. As you can see on the bottom graph, trading revenue as a percentage of RBC's total revenue continues to be in line with our historical average of approximately 10%.

Moving on to slide 14, our noninterest expenses grew 5% versus Q3 '05, largely due to variable compensation reflecting stronger business performance and higher costs in support of our growth initiatives.

The next slide, slide 15, provides a more detailed look at our expenses. Excluding the growth in variable comp, expenses as a whole remain flat. Although we incurred higher expenses for our growth initiatives, such as increased staffing levels in our distribution network, and some higher professional fees in marketing and advertising costs, our cost management efforts in other categories largely offset those expenses.

Our operating leverage of 1% in Q3, or 0% on a year-to-date basis, has been impacted by several factors, and we provide more color to you on this on slide 16. The operating leverage in Canadian Personal and Business of negative 2% in the third quarter, or positive 2% on a year-to-date basis, has been affected by a decline in insurance revenues due to items which are largely offset in the insurance policyholder benefits, claims and acquisitions expense line. These items include lower income from investments backing certain life policies, which is recorded in both revenue and policyholder benefits for accounting purposes, and the impact of a weak U.S. currency on our U.S. life operations. Excluding global insurance, the operating leverage would be 3% or 5% year-to-date, as shown in the bottom table.

In addition, RBC Capital Markets revenue was affected by consolidation of certain variable interest entities, which includes revenues related to other equity investors, which are offset in noncontrolling interests. Using RBC Capital Markets revenue on a taxable equivalent basis and excluding these items, RBC's total operating leverage would have been 3% for the quarter and 2% for the nine months year-to-date.

Our key balance sheet items continue to grow consistently as illustrated on slide 17. And if you continue to slide 18, you will see that our assets under management and assets under administration also continue to trend higher.

On the following slide you can see that the credit quality of our portfolios continues to be strong. Growth in impaired loans remain stable. And our specific PCL ratio continues remain low at 18 basis points. Our capital ratio, shown on slide 20, remains well above our objectives. And I will now pass it over to Jim Westlake.

Q3 was a record quarter for RBC Canadian Personal and Business with revenues reaching 3.39 billion, and net income growing to 742 million, 9% higher than Q3 '05. The earnings growth was driven by our Wealth Management and banking businesses and lower PCLs. Our earnings growth was 9%, despite the fact that the prior year included a favorable accounting adjustment of 37 million both before and after-tax related to an investment. Excluding this amount, our growth would have been 16% on an after-tax basis.

On a pretax basis our total growth over the prior year was 13%. To give you a better sense of the strong growth in our banking and Wealth Management businesses, if you adjust for the 37 million accounting adjustment, and you exclude our global insurance pretax earnings of 81 million in Q3 '05 and 63 million in Q3 '06, our earnings growth for our banking and Wealth Management businesses would have been 21% on a pretax basis.

Noninterest expense was higher mainly due to variable compensation because of our stronger business performance, increased staffing levels in our distribution network and higher spending on marketing and advertising costs to help for our businesses.

Turning to slide 23 revenues increased from last year's third quarter in most of our business lines. We saw strong volume and client asset growth and improved spreads on personal investments in our Wealth Management business; strong loan growth and improved deposit spreads in our banking businesses; and strong growth in our cards business with higher client spending and balances, partially offset by higher customer loyalty reward program costs. In aggregate, revenues grew 4% over Q3 '05, 9%, excluding insurance, which I will discuss in a moment. Versus Q2 '06, revenues increased as a result of three additional days in the quarter, improved margins, and solid growth in our banking business.

Our lower insurance revenues this quarter versus the previous year largely reflect lower investment income on equities backing Canadian universal life policies, and the negative impact of the translated value of our U.S. dollar-denominated U.S. life operations. These impacts are largely offset in policyholder benefits and expenses, which were also down 8% from the previous year. Revenues have also been impacted by reduced exposure in our property catastrophe reinsurance business.

As reported in our supplementary financial information, our lower reported earnings before tax and global insurance in the last two quarters has largely reflected less favorable claims experience, and impacts from reduced exposure in the property catastrophe reinsurance business. As you can see on slide 24, most product balances grew at double-digit rates over last year. And slide 25 shows that our net interest margin widened further from the second quarter on improved deposit and mortgage spreads. Slide 26 shows how we are continuing to open new branches, launch new products, and execute on initiatives to sustain our momentum. I will now turn it over to Peter Armenio.

Good afternoon everyone. Please note that all my comments will be in U.S. dollars and based on our results from continuing operations. As shown on slide 28, RBC U.S. International had an excellent quarter with net income of 99 million, which was up 52% over a year ago. The improved results were driven by strong revenue growth of 11%, with solid contributions from both Wealth Management and banking, as well as improved credit quality in banking. Our noninterest expense increased, largely reflecting the inclusion of Abacus and higher variable compensation in Wealth Management due to stronger revenue.

Turning to slide 29, it shows you and provides a little more detail on our revenue growth in both businesses. As seen in the two graphs at the bottom, Wealth Management revenue rose 13% from last year's third quarter, mainly due to the inclusion of Abacus, high securities brokerage commissions, and Global Private Banking, and growth in clients' fee-based assets at RBC Dain Rauscher. This was partly offset by a loss this quarter compared to a gain last year on the mark-to-market of securities held to hedge RBC Dain Rauscher's stock-based compensation plan.

Banking revenues grew 8% on solid growth in loans, deposits and fee-based activities. On a LTM basis Wealth Management revenues rose 14% and banking improved 9%, leading to a total revenue growth for our segment of 12% over the prior 12 months.

Slide 30 shows some of our most recent progress in executing our growth strategies. I won't speak to all of them, but I would like to build on Gord's earlier comments about our announcement to acquire Flag Financial Corporation. For us this deal really hits a sweet spot, and makes perfect sense strategically.

First off, Flay is the largest community bank headquartered in Atlanta, which is a key growth market for us. It comes with a strong core deposit base and a small-business client focus, which is an excellent fit with RBC Centura's strategy to serve businesses, business owners and professionals. We also like the people and the culture there. Their seasoned management team leads a highly productive salesforce with local market expertise.

One of the exciting things that we've got on the go is that Flag adds new business lines that can leverage across RBC Centura's footprint, including their payroll solutions and their Smart Street division, which offers cash management services for community associations and managing companies. We like the people, the strategy and the products, and there is also substantial cost synergy opportunities for us.

Over the last two years, we have made great progress at RBC Centura building on the foundation necessary to support a larger business, and are now in a position to successfully execute on the integration of our Flag acquisition.

With that, I will now turn it over to our last speaker, Chuck Winograd.

RBC Capital Markets had another great quarter with earnings of $329 million, up 29% from a year ago. We continue to have higher trading results across our broad product categories, due to improved market conditions and business expansions. We also benefited from continued strong M&A activity, and a lower effective tax rate.

Our expenses increased as our strong business performance and business expansion drove our variable compensation higher. Credit quality remains strong, although we saw lower corporate credit loss recoveries this quarter compared to previous quarters.

Slide 33 shows our revenues by business line. Compared to Q3 '05 global markets revenue was higher as a result of strong trading, though partially offset by lower private equity gains and debt origination activity. Global investment banking and equity markets revenue also improved with higher M&A activity and increased client trading volumes, largely due to strong demand for Canadian resource-based equities, partly offset by lower equity origination revenues.

RBC Dexia benefited from solid market activity, which provided strong foreign exchange revenue and high deposit volumes resulting from strong market activities. On a latest twelve-month basis, we recorded solid revenue growth in our major businesses over the prior 12 months.

As you can also see on slide 34, we continue to make progress in enhancing our position in Canada, the U.S. and globally. Now I would like to turn the call back to Janice.

Just a word of what we have been advised. We have been advised that some people had difficulty getting onto the webcast, and they have missed the first portion of this call. So we will be putting the call on transcript online right after the call. So apologies for that difficulty. And I will now turn the call over to the conference operator to begin the question and answer session.

(OPERATOR INSTRUCTIONS). Michael Goldberg with Desjardins Securities.

I have a few questions. Although your variable comp is down from last quarter, it looks like it is quite higher in relation to your total brokerage underwriting and trading revenue. Is there anything anomalous that happened in the third quarter? There were comments about the hedge in Dain Rauscher upon stock-based comp. Can you also elaborate on that? That is my first question.

It is Janice speaking. With respect to the variable comp, the variable comp -- movement in variable comp on a sequential quarter, you're asking about?

It is on a sequential and also on a year-over-year basis. Just in relation to total brokerage underwriting and trading revenue it seems to be quite high.

Our variable comp relates to variable comp paid in all of our businesses. And if you look at the total, what you'll see is that year-over-year there is a slightly higher percentage of variable comp as a percent of revenue. And that reflects the business skew, and the fact that we've had solid performance in our Capital Markets and Wealth Management businesses, which are on more of a direct drive program. That would be the reason that year-over-year as a percentage of revenue variable comp would be higher.

With respect your question on stock-based comp, there is one program that is the Dain's [WAP] program that is still recorded in stock-based -- the hedge is still recorded in stock-based comp and in revenues. And so there was some movement in that hedge year-over-year, which would have been reflected in the guaranteed expense. All of the other stock-based comp that relates to World Bank shares is hedged. And the hedge is netted against the expense. So there should be relatively little movement beyond the actual growth in our stock-based comp.

My second question has to do with loan quality. Your consumer gross formations have been trending down, even as your lending has been increasing. What accounts for this positive trend?

It is Morten Friis. It is primarily some stabilization of some slight negative trends in a couple of pockets of our unsecured consumer portfolios. It is generally across the board better management of our scoring, collection and monitoring programs. Nothing beyond that. And it is a very strong environment.

My last question. Your volume growth, measured by risk-weighted assets, continues to surge ahead. Is this pace of increase going to continue?

With respect to the risk-weighted assets, the increase in risk-weighted assets reflects solid volume growth on the retail side in some of our core loan products like mortgages and personal loans in part. And it also reflects some of the additional risk-weighted assets we've taken on as a result of our higher trading volumes.

We manage our risk-weighted assets and our capital very -- we manage it very proactively. So to the extent that we have done some securitization, which we have this quarter -- social mortgages and some other asset classes. We're using that do actually manage and monitor the growth. So as long as our businesses are growing and generating very positive returns, we will continue to manage the risk-weighted assets along with our capital.

Jamie Keating with RBC.

My first quick question for Jim relates to the insurance segment. I'm just curious. I think I understand why the insurance business is slowing down a bit. I'm just wondering if there was anything remedial worth trying there or whether it is basically waiting out the equity markets a bit and waiting for the --.

I hope you are on a cell phone, because I would hate to think that our phone system doesn't -- is that weak. But for those that didn't hear, I think the question related to our insurance business. And I think asking Jim to elaborate a little bit on why the results have slowed down in that sector. Is that right, Jamie?

Essentially yes. I'm just wondering if there's anything proactive that is -- Jim, is worth trying.

We heard that part. You have obviously switched phones or hit a better cell area.

Thanks. I think that when you look at our insurance business there were a number of adjustments. And of course a lot of it was netted out. Also we reduced our exposure considerably in the property catastrophe business. The underlying core businesses in insurance are operating quite well.

The other thing is that we are particularly exposed under the standards of practice in the Canadian life insurance to doing what amounts to a mark-to-market on thirty-year rates, which dropped considerably in the last two weeks of July. And even though not really from an economic standpoint on an accounting basis accounts for much of the difference this quarter.

I guess, Jim, we're going to look at whether there are ways to hedge some of that interest rate --?

Yes, we're looking to see if we can't take some of the variability out of the interest rate that is being mandated.

That is helpful and compelling. Another quick question, while I've got you, Jim, relates to the marketshares. And I noticed in the appendix the marketshares are listed again, which look like they're pretty good. I wonder if you could just provide us a bit of color as to which product areas you are more encouraged about and/or where you would be just as happy to lose market share perhaps? I am just curious about how you're managing that business.

I'm really thinking hard of any where we want to lose market share. I can't think of one. Loan loss, as Gordon says. We are certainly focused on all those product areas. We were very pleased from a volume standpoint with where everything has gone. We continue to focus very heavily on the deposit areas, one that we would like to grow our market share. And certainly maintain the momentum that we have on the loan side across all of the -- whether it is home equity or personal loans -- in cars, we are very focused on that.

What is your -- how is your appetite for GICs, for example. I guess I'm just sort of looking around.

We would like all the GICs we can get at spreads that we appreciate. We really focus on moving a lot of that type of business into short-term mutual funds where we think we've done a better job for our clients and achieved a better spread for the organization. We really look at those together, but that has been a very conscious program to move that money. If we see an expansion in rates and more people wanting to lock, we're happy to do as much GIC business as we can.

Thanks Jim. I just want to thank Barb for that slide 16, the breakdown in the operating leverage. Janice and Barb, that was a big help. Thanks guys.

Steve Cawley with TD Newcrest.

First, let's maybe touch on margins. In Canada yesterday, Jim, one of your peers was saying that perhaps in Q4 to expect a slight reduction in margins related to increased competition on the loan side. Can you maybe talk a little bit about what you're seeing in regards to that?

I'm not going to comment on what might happen next quarter. I can tell you that in this quarter we probably saw a little bit less competition in total across the loan portfolios, particularly in the mortgage book. And I think that some of that could be because of the movement upward in interest rates. We are not certainly forecasting much of a change right now. And our rates have been fairly stable over the last period, with a little bit of cyclical change.

In the U.S., I didn't catch quite everything in the introductory statements, but was there any mention of margins and why there was a follow off in the U.S. operation?

On the overall U.S. operation or the (multiple speakers)?

I don't have it in front of me, but it looks like it was at least a double-digit follow off or so?

As far as the overall US&I NIM, there's a couple of reasons for that. Basically the numbers are -- we're running at 275 now in Q3 of '06. And in Q3 of '05 we were at 289. There is a better than 11% dip in terms of -- or 11 bips in terms of change.

There is two main factors for that. The first one is that we have added a lot of low yielding assets in the Wealth Management business. There is a significant amount of deposits that came from the Abacus clients, so we internalized a lot of their banking business. As well as a lot of new business that we've gotten from the Channel Islands overall. So the margin that we earn on those balances is narrower than the overall US&I margin, and these are sizable.

The other thing is that we've also done a BOLI investment at the beginning of June '06 at Centura. This is the bank-owned life insurance business and investments. Those two things basically impacted our overall numbers. Bottom line though, excluding those two factors, our NIM has been very stable compared to last year, and a very good performance in terms of considering the Flag yield curve that you've got and the competitive pricing in the U.S.

Second question. I know you guys in TD are loath to talk about this. It just seems that there has been so little news on the Enron front, has there been any movement whatsoever that you can bring out in this conference call?

No, there isn't. And we are loath because we're told to be loath. That is just the way it is. There's not a lot you can do about it.

Ian de Verteuil with BMO Nesbitt Burns.

I would like to follow-up on Michael's question on the credit performance, because it is clear on the consumer side it looks excellent. Morten, is it safe to say that when you think about a consumer book, which is highly fragmented, and where you can score cohorts or groups of people, that when we see declines in net formation the way we have that it tends not to be short-term, it tends to be almost structural?

It is Morten Friis. Trends tend to be, you are right, somewhat stable and medium term. It is hard to see what trends will come out next quarter, but to the extent that negative or positive trends are associated with specific cohorts, and the life of the book is not all that short, that tends to drive stability. The improvement we have seen in the last quarter is a reflection of an apparent stabilization of a couple of pockets were there have been some deterioration with some cohorts going back some quarters.

So if I look at page 20 of the sub pack -- and is it a sense that were a number of quarters where, because of growth in the books, you were running through a period of higher net formations, and that really we're back to you being more in control, so that it should continue from here? What I'm really trying to get at is whether the current level of loan losses, given the current environment, that the current level of loan losses is sustainable in retail?

If you look back over a number of quarters, we have had some -- we did have some deterioration in some pockets of our unsecured consumer book. And that was commented on and it was also evident in the supplementals in previous quarters. What you see here is evidence that those places that the trends have now stabilized, and we're at a level where it looks like things will continue at current levels. But looking forward it is hard to say what comes next.

That's helpful. The second question is also for you Morten. The previous page, page 19, it looked as if you have a gross impaired loan to government. I was wondering, other than the government of Botswana, how you could have an impaired loan formation on a government loan?

Without getting into the specifics of the (multiple speakers).

Nothing against Botswana, by the way.

We don't have any exposure to Botswana. But in terms -- it is a Canadian -- in the Canadian market to the extent that you have business with government-related entities, you do occasionally end up with these becoming nonaccrual because they -- there are temporary issues around how they get serviced. What is very clear -- what is driving the number here is that the ultimate risk of loss is reflective of the fact that it is government risk, but the specific loan has some servicing issues that has caused it to get put in that category.

Technically it is classified, but the actual risk is minimal?

Without commenting on specific situations, that is right. But that is typically what you would have behind numbers showing up in that category.

Andre Hardy with Merrill Lynch.

Just a put question on the taxes. How come we didn't see a onetime item related to the present valuing of changes in the tax rates?

This is Janice. We did make an adjustment to our net deferred tax balance. You have to remember that our deferred tax asset represents deferred tax across all of our operations. The tax change was only in Canada. When we look at the tax rate change we also look at the timeframe in which the deferred tax asset will roll over. I would say that it was not significant, but we did make adjustments.

(OPERATOR INSTRUCTIONS). Mario Mendonca with Genuity Capital Markets.

First a question for Jim Westlake. You referred to the requirement to mark-to-market the reserves because of the lower interest rates. Perhaps you can help clarify something for me. The new standards of practice, are you referring to any communications from [Cliffer] requiring the use of a lower long-term interest rate or ultimate interest rate or something, because I am just not familiar with any changes in that respect?

There are a number of changes. That one hasn't changed yet. We hope it will. But right now you're obligated under Canadian GAAP to use an ultimate interest rate that reflects a thirty-year bond rate. And the way that we have chose to apply that is at a spot basis at the end of the quarter. That is what has caused some of volatility. And that is not reflective of what we actually carry in our investment portfolio, so that relates to my comment that the true economics would be against our own investment portfolio. But we put in the thirty-year bond rate as the ultimate rate on the reserves, and that causes that calculation.

But you said you hope that Cliffers -- you're talking about the averaging mechanism that would allow you to do this more gradually, is that right?

No, actually, there is a proposal for a change to move up the ultimate rate that you would have to use for the thirty-year bond to more a fixed-rate.

That is the new Cliffer approach?

Yes.

A question then -- throughout the press release and in your commentary on several occasions you made reference to what are improved market conditions throughout this quarter, Q3 '06. It seems to be in the context -- particularly when you're comparing it to Q3 '05. It doesn't make a lot of sense to me, given that in Q3 '05 equity market is up about 11%. In this quarter, international equity prices were hurt, commodities dropped. TSX was in trouble there for awhile -- the biggest slide in two years. Why would you characterize this quarter as being improved? Is there something specific to Royal, I guess is what I am getting at?

I think the reason for that would be that -- it is Chuck Winograd -- that the volatility was better in this quarter than it was in the third quarter of '05. The yield curve was a little bit -- it was giving us more opportunity. And that was -- I think that would be what we would be referring to.

The reason I'm probably a little confused is your peers, or the other banks, have all referred to this being more challenging environment. So it is volatility then that you're pointing to specifically.

This is Gordon. I also think that the mix of businesses is quite different I think between the two and that are between the various organizations, and across our various trading books. There were some that were a little tougher, like the fixed-income side of the business was a little -- but across the various books, as Chuck said, the volatility certainly was helpful to the --.

The volatility was better. In addition to that, we have I think a broader geographical mix in our trading business on top of that. And of course this would be extra to the issue of overall market. I think we just did better than we did last year.

I'm just trying to make the distinction between Royal doing better and be allocating more capital, being more focused on this business, and (indiscernible) that and a strong environment. I see where you going on the volatility side.

Volatility is way better.

Pardon?

Volatility was much better.

A final question. The global VAR, up about on average 18 million this quarter, up from 14. You do a good job of explaining that relates to trading. It is there any connection between that and the I think five trading -- or five days of actual losses in the quarter relative like one in the first six months of the year? Is this more of the pattern, or was this just something unusual? There were just unusual conditions this quarter that would have led to those five trading losses?

No, I think we had a couple of businesses, smaller businesses that had bad days, and days where we didn't have a particularly good day. You'll see that they weren't really significant days one way or the other. They all revolve around the euro and revenues. It is just hard to distinguish between a losing day and a day that makes money when you're making 500,000 or you are losing 500,000 on opposite sides of the business.

Does it matter then there were five this quarter and one in the first six months?

It matters, but basically it matters only because you would like to make money every day. So basically I don't think it says anything about our trading business.

Or the overall structural risk the bank is taking on?

Absolutely not. We did review this when -- because you're right, it was a slightly higher number than it would be normal in the quarter. And I think it was viewed to be an anomaly. It is not because of any structural change in the activity.

Right. There is no substantial change in the trading business over the period of time. It just happens this way.

Ian de Verteuil with BMO Nesbitt Burns.

A question. I hope that is not too fine. On page 5 of the sub pack, the other noninterest income line is quite small this quarter. Is that -- can you explain why that was so low? It is 22 million, and it seemed to run about 100 every quarter. I know other is a catchall, but can you delineate that in any way?

It is Janice speaking. If you compare the 22 to last year, last year we had that $37 million accounting adjustment that we spoke about. We had some derivative mark-to-market in some of our hedging. Like the -- for example, the Dane WAP hedging flows through that line. So we had some of those mark-to-market adjustments, and this quarter the adjustment would have gone in the opposite direction.

So in fact, it is a lot of miscellaneous items that we have there that were not replicated this quarter. There's not one particular reason. And then looking on a sequential quarter basis, last quarter we had the penalty payment that we talked about in our cards business. We had the sale of the New York Stock Exchange shares. So there are those items that brought it up compared to (multiple speakers). So there was just nothing unusual that would be categorized there this quarter.

I guess that brings me to where I am going here. It seems as if there were a number of things that went against the bank this quarter. Yet you didn't specifically list anything that you thought the held earnings back. I think you mentioned mark-to-market losses. There seemed to be a number of things which went against the bank this quarter. Where these things offset somewhere else, and is that why you didn't sort of group some of these things?

Like I look, there is a $44 million noncontrolling interest in the subsidiaries which looks to be a netting off. What I am trying to get at is this, it seems as if some things went against the bank.

Well, let me talk specifically on the hedging. We, as a matter of course, slow our hedging gains and losses on ineffective hedging through. So to us that is normal course. It does have different movements, depending on where interest rates are.

The VIE deduction in noncontrolling interest would actually be -- the impact of the VIE accounting is zero on the bottom line. So (multiple speakers) grossed up the revenue, and we have a deduction there or we would have negative revenue and then income there on the noncontrolling interest line, depending on where the VIE is that we are consolidating.

Then we talked about that the accounting adjustment that was favorable last year that wasn't replicated this year. The other thing is some private equity gains and losses. That is normal course. Sometimes we get higher gains, and in some quarters they're not as high. I think that for us we look at it as normal course, and we don't like to pick out every single adjustment and flag it, because I think that all in all generally over time they balance through.

Okay.

The Chairman of our Audit Committee was very pleased that there were no specified items in this quarter. That is supposed to be our objective.

Steve Cawley with TD Newcrest.

Jim, you made a quick mentioned in your comments, I think, about the credit card customer Royalty Reward program and the expenses there being again a little higher. I think it was last quarter that there was a charge related to that. I was just wondering if that business is operating to the profit level that you are hoping it would?

Yes, our business is operating very well. What I was referring to there, last quarter we change the formula that we use based on a study that we had done of the appropriateness of the way we reserve for our Loyalty programs. We took the onetime charge, which brought us up-to-date on our book. And now what we're reflecting quarter to quarter would be the effects of using a higher rate of charge on an ongoing basis. That was the only comment I was making. But the business has been performing well. And we're just -- as it rolls through we are reserving at a higher level on it continually.

I see your market share there on slide 37. Did that change in the quarter? 515.94, did you get any increases in that in the quarter or is that roughly the same as it has been recently?

I'm just flipping to slide 37 here. I don't have the actual change. I think it was up ever so slightly, but so slightly that I think you would round it to flat.

Gordon, I can't help but ask about M&A in the U.S. It was certainly an interesting acquisition, one that surprised me. And it looks like it fits real well. Yesterday, on the call TD was alluding to that, while they won't be forced into making any acquisitions, there is in the back of everyone's mind there seems a realization that if they don't take into account the fact that the market is consolidating rapidly, that there is a fear that, say, appropriate targets won't be available in the, let's call it, in the medium-term. Does that enter into your thinking at all?

Not particularly. I think that the -- as I said on numerous occasions, there are not a lot of obvious targets to start with. We know our region pretty well in terms of small, medium and large size institutions.

We think that Centura has turned around. I think they are starting to gain in terms of new customers, market share. I think their game plan and their strategy as an independent -- at the Centura entity I think is well understood and well endorsed. I think that we would continue to only look at acquisitions if they are very good strategic fits.

This happened to be one where regionally it was very attractive. We built up a good operation in Atlanta. This fit in very effectively. It had a very positive deposit base, which fit very nicely with Centura's model -- small business model. It was very opportunistic as opposed driven by a desire to feel that we have to acquire to grow. I think we take a slightly -- at least, I take a slightly different perspective on that.

I think that there will continue to be opportunities in the United States I think for longtime looking forward. The challenge will be opportunities that are reasonably priced and strategically attractive. They are few and far between. And I don't think that is going to change dramatically. But we will look at things only if they fit that profile.

Does it make sense to consider a more aggressive DeNovo strategy?

Sorry, which?

Does it make sense to consider a more aggressive DeNovo branch expansion strategy?

I think there is pros and cons. But we have been opening some branches DeNovoly. I suppose you could argue it is a fairly conservative strategy. But Centura -- the size and scale of Centura's operations are such that we want to do it in a way we are able to maintain reasonable growth at all lines of their financial statement.

We will continue to look at DeNovo expansion, particularly in regions where we are less presented, and that is certainly part of the game plan and going forward. Peter might want to make a comment on that.

Just to add some numbers to Gord's comments. We have opened up 32 new branches since August of 2003. And we're looking at accelerating that going forward. Over the next 12 months we're going to be opening up anywhere between 12 and 16. Relative to Centura's size, that definitely is a strategy that is not maybe as aggressive as you might think, but obviously a good strategy over all.

Thanks guys.

The other comment I would make, which as I said before, is if you look at markets around the world today, and obviously our largest market is Canada, the U.S. operating environment is one of the more challenging ones. And the U.S. economic environment is one of the more challenging ones. I think we want to continue to grow patiently as opposed to grow aggressively, particularly when we look at other markets in which we operate and the relative growth prospects in those markets as well.

It is not -- it is a question of balance. And as I say, I think we want to move forward perhaps more patiently than some would want, but given the operating environment we think it is right course of action.

Global Private Banking was certainly the area that you seem to be holding out as a real expansion target in the future when you held your Investor Day. Thanks a lot.

Michael Goldberg with Desjardins Securities.

Jim, first of all I would like to get back to looking at the card fees again. This quarter you had $158 million, and last quarter, if I adjust for the $72 million adjustment that you talked about, you were at 119. That is a $40 million increase in one quarter. Was there anything anomalous in this quarter, or was there anything else anomalous last quarter that accounts for the difference?

No, the difference -- you're talking about the Loyalty programs?

I adjusted for the Loyalty program charge, adding that back. So adding it back you would have been at 119 million for the quarter, and now you are up 40 million this quarter.

Are you talking about revenue?

Yes.

Last quarter Jim talked about the difference in our Loyalty claims estimates. We also had the onetime breakage payment last quarter, which would have factored in there compared to this quarter. There were the two events.

Was the breakage payment that you're talking about, was that the $51 million charge last quarter that you talked about?

It was the item that we talked about in the specified items -- termination of an agreement.

Yes, income from a termination agreement. We also had a charge for the Loyalty program, which would have been -- both in the Q2 numbers. I think both revenue items.

They are both revenue items. The Loyalty program is an offset to revenues, so the revenue net. So those two items would have offset -- they didn't 100% offset but --.

To get to Michael's question, I think we have to go off-line. But if you just look at core revenue quarter over quarter the two numbers. I think that is what Michael is interested in.

Right. Maybe we can speak about that off-line.

Michael, I will give you a call.

Sure. And, Gordon, I had a question for you. It seems like TD is quite anxious to insure that where possible it has a top five position in its U.S. markets, where you seem to be less concerned about your position in any of the Centura's markets. Can you just explain why you're less anxious in terms of ensuring that you have strong market position in any of Centura's markets?

Sure. I won't comment on TD's perspective on it, but I will give you mine. Firstly, I think the definition of a market is important. We view Atlanta as a market as opposed to Georgia as a market. And certainly increasing in our core markets of -- if you look at our platform in the U.S., North Carolina, the state, Atlanta, and Florida are the three areas where we are most represented. And I think we want to continue to build in those three areas because we like the market, the demographics, etc., and we would like to continue to grow our relative position in that marketplace.

I think the issue around top five, I would say two things. Firstly, if you look at the economics, there is not market by market a correlation between relative market share and return. And we have looked at, and I've looked at a lot of different numbers on that, and you can make numbers look -- as you know as an analyst, you can make numbers point in a certain direction. But clearly there's not a direct correlation.

I think the key issue is, as we grow, the issue is how do you want to get there? If we could get to be a larger -- to have a larger market share and a top position in a marketplace in a way that financially and economically we felt was additive and attractive to our shareholders, we would certainly move more aggressively in that direction.

But as I said on past occasions, when you look at the overall environment, and you look at the valuations from an acquisition perspective, etc., you can add value getting to a top position or you can impair value getting to a better position. We want to make sure that we don't -- that we do the former as opposed to the latter. I'm not sure there is a view that we don't want to get to a top five position in those key markets. It is more a question of how and on what economic terms we get there.

Specifically with respect to Atlanta, let's say, taking Flag into account, where would you rank in Atlanta?

It wouldn't be in the top five. I can assure you, but it certainly moves us up in terms of our position, particularly in our area of focus. The only marketplace in which we would have a significant relative position would be North Carolina.

Thank you very much.

It is Jim Westlake. If I could just add a little bit to the credit card question. I had a chance to look at some numbers here. If I understood, it is quarter to quarter you're asking on the revenue?

That's right.

We were up 75 million. And there was a slight negative in the revenue line against those two adjustments we just talked about. In addition, we had three additional days in the quarter, continued growth of the Alteon portfolio -- we had a big advertising campaign. There is increased spending due to seasonality in the seasonal billing of annual card fees. All those added together would account for that difference.

Caller: Thank you.

There are no further questions registered at this time. I would now like to turn the meeting back over to Ms. Fukakusa.

Thank you operator. And thank you everyone. If you have any other questions, please feel free to call me or Dave Mun. Thank you.

Thanks very much.

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