Royal Bank of Canada (RY) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the RBC fourth quarter and 2006 results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Marcia Moffat, head of Investor Relations. Please go ahead Ms. Moffat.

Good afternoon, everyone and thanks for joining us. Presenting to you today are Gordon Nixon, our CEO; Barb Stymiest, our Chief Operating Officer; and our three business segment heads, Jim Westlake of RBC Canadian Personal and Business; Peter Armenio, of RBC USNI Personal and Business; and Chuck Winograd, of RBC Capital Markets. Also joining us are Janice Fukakusa, our Chief Financial Officer; Marty Lippert, head of Global Technology and Operations; Elisabetta Bigsby, head of Human Resources; and Morten Friis, our Chief Risk Officer.

Gordon will begin by summarizing our 2006 results; Barbara will then discuss our fourth quarter performance in more detail; and our segment heads each will briefly review their specific segment's performance; we will then take your questions. Please note that our comments 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 describes factors that could cause actual results to differ materially from what is expressed in these statements. I'll now turn it over to Gord Nixon.

Thank you very much, Marcia, and good afternoon, everyone. Before I begin I would like to formally introduce Marcia as the new head of Investor Relations for RBC. Marcia recently moved over from RBC Capital Markets investment banking division and we're certainly pleased to have her in this new role and I'm sure that everybody will enjoy working with her.

This has been a very exciting year for RBC. We delivered record earnings and revenues in 2006 and our success translated into top quartile returns for our shareholders. We also made significant progress on our three strategic goals. Very pleasing from my perspective is that contribution came from each of our three primary businesses. As all business activities performed well.

On slide 4, you can see that our earnings grew to $4.7 billion on strong revenue growth of 8% over 2005. Return on equity was also strong at 23.5%.

Slide 5 shows that the earnings growth in each business segment. Each of our businesses as I said contributed to our growth as they continue to build on their strong momentum that they've enjoyed throughout the year. Our performance in 2006 reflected growth strategies across all businesses as well as geographies.

As seen on slide 6, our business is becoming increasingly global. In 2006 about a third of our earnings over $1.5 billion came outside of Canada. And that compared to 25% in 2002. The diversity and strength of our businesses helped us meet or exceed all but one of our financial objectives as shown on the performance table. Our earnings per share growth, return on equity, revenue growth, and dividend payout ratios all met their targets. We exceeded our portfolio quality objective, we also maintained our solid capital position comfortably well above our objective. Our operating leverage was impacted by certain factors that Barb will comment on her results.

Moving on, our shareholders benefited from a 23% total return over the year or 30% U.S. dollars or 20% returns over longer horizons. Our long-term performance is amongst the highest of the largest global banks. This is partly due to our consistency in delivering superior performance and increasing dividends each year. For some time we have been saying that in our strategy that we would focus capital deployment on asset growth, acquisitions, dividends, and share buybacks. We have been doing exactly that. In 2006 we returned capital to our shareholders through $1.8 billion of dividend and 844 million of share buybacks. We used capital to [Inaudible] asset growth in each of our businesses while maintaining our tier 1 capital ratio at 9.6%. And we made a number of important acquisitions which I will discuss in a moment. Looking ahead, we remain committed to the same capital deployment strategy that we believe will help us generate top quartile performance for our shareholders over the medium term.

As shown in the table on slide 9, we set our financial objectives for 2007 which include EPS growth in excess of 10% to meet this overreaching medium term goal. We also remain committed to our three strategic goals. We implemented our client first approach at the end of '04 because we needed to energize our focus on clients, our employees, and our shareholders. Client first is by no means over. We continue to innovate and find opportunities that will help RBC grow further in both Canada and around the world. We made significant progress in 2006 towards our first goal, namely to be the undisputed leader in financial services in our home market of Canada.

For example as shown on slide 11, we extended our market share leadership in total personal loans and mutual funds where we led the industry in net sales of long-term funds for the third consecutive year. We advised on some of the largest M&A deals and our capital markets leadership in Canada was recognized by both national and international sources.

Our priorities for 2007 are shown on slide 12. For our personal and business clients we are focused on initiatives that will continue to improve the client experiences such as introducing new products and new services. And we will also extend our distribution strength in order to differentiate ourselves from peers. We also intend to increase our capital markets leadership by providing corporate institutional clients with the full breadth of our capital markets capability.

To advance our -- to advance our second goal of building on our strengths in the United States businesses, we accomplished a fair amount in 2006. We invested in RBC's Centura's infrastructure significantly to support future growth. We also opened 10 new bank branches. We expanded our wealth management distribution by opening 10 new RBC Dain Rauscher offices and we increased our investment banking and fixed income capabilities. In addition, we acquired or announced agreement to acquire a number of businesses that complement our organic growth strategies and are excellent strategic fits with our banking wealth management and capital businesses. Flag, which is headquartered in Atlanta has an attractive business model. AmSouth's 39 branches that will provide immediately scale and assets for our banking business in Alabama. AG&T, which will provide our U.S. trust solutions for some high-network clients. Carlin, which will give us a best in class electronic execution platform to serve the emerging hedge fund and professional trader communities. And finally, announced a week or so ago, Daniels which will bolster our presence in the U.S. midmarket investment banking area.

On slide 14 you can see that we will continue to focus on more of the same in 2007. Introducing new products and services, expanding our distribution, building our capability, and successfully integrating these acquisitions. For our third goal in 2006 we invested in global businesses where we could leverage our competitive strength. For example, we expanded our capital market strengths by focusing on select businesses such as foreign exchange, fixed income and infrastructure finance. We increased our scale in wealth management by growing our global private banking business organically and through the Abacus acquisition in the United Kingdom. We also enhanced sales management and client satisfaction in the Caribbean banking, resulting in strong revenue growth in that market. Finally, we expanded our presence in China and other Asian markets and were named a co-lead manager for the Industrial and Commercial Bank of China's IPO which is the largest in financial markets history.

Looking ahead, our focus will be on the same areas. In select capital markets, businesses such as structured products, fixed income, infrastructure, and project finance, energy, and mining. In the Caribbean through organic growth and operational improvement. And in global private banking with our value proposition and commitment to delivering high quality customized solutions. And finally opportunistically in other markets like China, but only in areas where we've got global competitive advantages. We are committed to making further progress against each of these three goals in the future. With that, I'll turn it over to Barb.

Thanks, Gord. The fourth quarter was another excellent quarter with no specified items of note. We recorded new highs in total revenue, which reached over 5.3 billion and in earnings, which were over 1.2 billion.

On slide 19 you can see our consistent growth in revenue with Q4 revenue increasing 12% over a year ago. And this growth came from all major business lines in each of our segments. Our personal and banking segments grew -- steadily grew their net interest income, RBC Canadian P&Bs net interest income is up 10%, reflecting strong loan growth and improved deposit spreads. RBC U.S. and international P&B delivered 6% growth in U.S. dollars through higher loan and deposit volumes.

Turning to slide 22, we look at net interest income and noninterest income holistically for our capital markets business. RBC Capital Markets net interest income declined because we reallocated capital to fund trading assets and support trading revenue growth.

Noninterest income is shown on slide 23. While you often hear about our trading and wealth management businesses, which is captured under investment, our insurance, banking, underwriting and other advisory also grew. The performance reflects the success of our growth strategies across the entire bank.

Slide 24 provides our noninterest expense performance. The performance of wealth management and capital markets in particular drove variable compensation higher, but their success contributed to our bottom line. We also increased staffing to support our growth initiatives and this is reflected in our human resources expense. Moving on, we've grown our balance sheet meaningfully this past year. In addition, our assets under management and assets under administration are increasing.

As shown on slide 26, our personal and business segments have grown AUM and AUA by over 20%. On the credit front, our growth impaired loans ratio remains low at 38 basis points. Though our specific provisions for credit loss has increased this quarter, this mostly reflects lower recoveries and increased provisions due to the growth in our portfolio. Our PCL ratio remains significantly better than our objective. Finally, our tier 1 capital ratio of 9.6% remains well above our objective of 8%. And we are well capitalized compared to our global peers as tier 1 ratios for Canadian banks tend to be higher than those in other major markets. Average tier 1 ratios in the UK and for the top 10 U.S. banks would run in the in the low 8% range. With our tier 1 ratio well above our objective, we maintain significant flexibility to undertake future opportunities as they arise. Jim Westlake will now take you through Canadian P&Bs results this quarter.

Thank you, Barb. In 2006, RBC Canadian, Personal and Business focussed on initiatives to help us achieve profitable revenue growth, top tier client loyalty, and deeper client relationships. We streamlined processes to make us more efficient and better able to serve our customers. We invested in client facing roles and expanded our distribution to reach more clients. We developed innovative solutions to complement our full range of high value products and services. The result has been a strong year for RBC Canadian, Personal, and Business. Best reflected by our stronger leadership position in most of our markets.

We delivered record earnings in the fourth quarter. We increased revenues across all our businesses and contained our expenses. Our 4% expense increase reflects higher spending to support business growth and higher variable compensation. PCL was up in Q4 due mainly to higher lending volumes, lower recoveries, and increased provisions in our small business portfolio.

Our net interest margin shown on slide 31 declined slightly from last quarter as improved lending spreads were offset by an accrual for a cumulative interest rate payment adjustment. Excluding this accrual as you can see NIM would have been up 3 basis points from the third quarter.

Our growth strategies are working and we continue to see double digit increases in most product balances over last year, which you can see on slide 33. While personal core deposit growth is flat and slightly below the industry average, we continue to focus on initiatives to improve. We're opening branches and leveraging distribution channels, we are investing in people and technology to make people dealing with RBC even easier. And we are implementing strategies to improve our marketing and our product line up such as the launch of the RBC no limit account in July.

In fact, we continued to do many things in the fourth quarter that helped us sustain our growth. A few of which are highlighted on slide 34. We will continue to focus on innovating and executing our initiatives to build on our momentum in Canada. I'll now turn it over to Peter Armenio to discuss the U.S. and international personal and business segment.

Thanks, Jim. And good afternoon, everyone. Please note that all my comments will be in U.S. dollars. RBC U.S. and international generated a very strong earnings growth across all our businesses in 2006. Reflecting the successful execution of our growth strategy. Earnings for the full year rose 23% over 2005 and grew consistently every quarter.

As shown on slide 36, we delivered record earnings in the fourth quarter. Our revenues increased 16% over the prior year driven by both our wealth management and banking businesses. This was partially offset by expense growth reflecting higher variable compensation on stronger revenue, the inclusion of Abacus, and higher stock based compensation. Also the prior year included the positive impact of a $13 million accounting adjustment relating to the amortization of intangible assets.

On slide 37, you will see the solid revenue growth across our businesses. The increase in wealth management reflected the inclusion of Abacus, higher brokerage commissions in global private banking, and growth in fee based client assets at RBC Dain Rauscher. In banking we continue to grow our loan and deposit volumes in fee based activities.

You'll see on slide 38 shows some of our most recent progress in executing on our growth strategies. Both through acquisitions and organic growth. While Gord mentioned some of our acquisitions earlier, I would like to underline that we've been investing in our infrastructure to grow our businesses and that we look at acquisitions only where it makes sense. We've been very selective. Flag, the AmSouth branches, and the AG&T are all excellent strategic and economic fits for us.

The last three bullets on the same slide highlight some of the examples of some solid, organic growth, as well. All in all, we're very pleased with our progress to date and look to sustain our momentum in 2007. With that I'll turn it over to our last speaker, Chuck Winegrad.

Thanks, Peter. 2006 has been a great year for RBC Capital Markets, a lot of things went right for us. Capital markets environment remained favorable, our trading businesses had excellent results and we advised on some of the largest M&A deals ever in Canada. We also had gains in private equity in the exchange of our NYSE seats for NYX shares as well as credit recoveries throughout the year.

As you can see on slide 40, the fourth quarter was no exception to our consistent strong performance as we generated higher revenues across most businesses. Noninterest expense was also higher as variable compensation rose and we spent more to support our global growth initiatives. We ended 2006 with record earnings of $1.4 billion, which attest to the success of our strategy to build a leading full-service, wholesale bank in Canada with a select, but diversified set of global capabilities.

On slide 41, you can see the double digit growth in our major business lines. I would like to add that RBC Dexia performed well reflecting higher deposit volumes and foreign exchange revenue.

While our record results are partially due to strong trading performance, slide 42 shows that trading revenue as a percentage of total RBC revenue continues to be in line with our historical average of approximately 10%. In addition, our VAR remains stable. We've steadily grown our businesses by adding people in different geographies and investing and diversifying our products and markets across the globe.

Our business has become truly global and on slide 43, you can see that the majority of our revenues come from outside of Canada. In a world where global perspective and product are becoming a condition to domestic leadership, RBC is one of the few Canadian banks acting on it. And it's becoming a clear differentiator for us domestically. We are winning large mandates in Canada and abroad.

Slide 44 provides a few examples, but I would like to mention one not on the slide. A few days ago, we closed the new star RBC hedge 250 index IPO listed in London. This is an innovative product that was distributed on a global basis with the help of global private banking who raised $80 million of the initial $115 million equity offering. We continue to collaborate across the bank and we'll look to accomplish more of these in the future. At this point, I'll turn the call over to the operator to begin questions and answers.

[OPERATOR INSTRUCTIONS] The first question is from Jim Bantis from Credit Suisse, please go ahead.

Hi, good afternoon, and congratulations on a good quarter. Just wanted to focus on a couple of areas. One with respect to the credit picture. Not many slides in terms of the outlook for credit in the foreseeable future. A couple of the other banks that have reported have actually been a little bit more pessimistic from the credit side. And in 2006 I think 23 bips was your credit cost relative to your objectives. And I want to get a sense if you see any ominous trends developing in Canada and perhaps some guidance with respect to provisioning, as well?

It's Morten Friis, if I could try to respond to that. Maybe, I think one of the best ways to look at this is if you turn to the supplementals and look at the impaired loans from Ace which is on page 20. You'll see at the top we're at 309 for this quarter, and there is a seasonal factor to this, the pattern here and we're actually below the same in both '05 and '06. Well, there is a little bit of an increase. So I mean, from a forward-looking standpoint, I would say that looking at these numbers it still remains the fact that there are no clear signs of a deterioration in the environment. If you look at the reasons for increase in provisions this quarter as Jim Westlake was saying in his comments, it's largely driven around increased provisions and I would add very modest increase, but noticeable nevertheless in the small business portfolio primarily in Central Canada and a modest uptick in some pockets of our consumer portfolio. While it's natural to worry about further deterioration, there is no clear sign of it in our portfolio as yet.

Okay. Thanks very much. The second question I've got is relating to the acquisitions. It seems like the management team has been fairly active, particularly over the last 90 days with acquisitions across the U.S. And while I do understand, the Daniels transaction and the mid market business and the American guarantee, I'm still trying to reconcile the amounts that have been spent towards the U.S. retail banking business. I think it was just under 500 million for Flag Financial and the AmSouth transaction, I know you haven't disclosed it but it seems to be a bigger franchise in terms of branches and deposits. Just under $1 billion U.S. for these acquisitions. And I'm trying to reconcile to the environment that we see in terms of margin compression, deteriorating credit quality, and slowing loan growth and management's comments earlier in the year with respect to, I guess it was at the investor day saying if there's going to be acquisitions in the U.S., it will likely be retail brokerage before it'll be retail banking. So I'd just like to see where this is going and maybe there's a clear strategy that's coming from Centura that you can talk about, Gordon?

Okay, thanks, Jim. I mean, I would say that part of it was coincidence to some degree. And we said we were going to be very cautious with respect to any U.S. banking acquisitions unless they were ones that were very attractive fits with respect to our overall operations. And I would say these two transactions were quite different from one another to some degree. And the one with the price was disclosed, the other one it wasn't. But it was not a major dollar, an amount. But both, I think strategically fit very well.

I think Flag was very consistent with our strategy of continuing to build out in higher growth M&As and of course most of its operations were in the Atlanta area where we already had a significant presence. It had a very attractive deposit asset mix and some products which were very attractive to Centura's sort of core growth strategy. So it was one that we had actually been monitoring and looking at because we felt it was a very attractive fit for quite some time. I would say that the AmSouth branch was more opportunistic than it was strategic in that it enabled us to do what we believe is an extremely attractive financial transaction in a marketplace, which is contiguous and consistent with a lot of the Centura footprint in terms of the customer base, et cetera. And has very good sort of dynamics around the acquisition.

So that -- the fact that there were two acquisitions in a short period of time was to some degree a coincidence because of opportunity more than -- more than targeting aggressive ramp-up. And as I say, I think that our management team at Centura is very confident in their ability to integrate these. I think both, for different reasons come very excited with respect to the opportunity that's provided. And it's enabling Centura who have got a very clear strategy around de novo growth, smaller opportunistic transactions to continue to roll out their strategy. We've got a lot of confidence in their ability to do so. I would emphasize that if you look at the aggregate dollar amount of these transactions while not immaterial, they are not huge dollar amounts.

Okay. Great. Thanks very much, Gordon.

Thank you. The next question is from Brad Smith from [Black Mound]. Please go ahead.

Thanks very much. Jim Westlake, this would be a question for you, I believe. In your residential mortgage portfolio, I was wondering if you could talk a little bit about where the sources of your mortgage inflows are coming from? What proportion are coming through your branches? Perhaps other channels such as your brokerage or perhaps independent brokers, could you give us some sort of color on that?

Yes, 100% of our mortgages come from proprietary channels, we don't do anything through brokerage. It's split pretty much between our branch network and our mortgage specialists. We have just under 1,000 dedicated mortgage specialists across the country who then anchor with our branches. There would be a small, small amount that comes direct from our call centers, but it's really split pretty much even between the other two.

You see any opportunity to expand those channels going forward, Jim or is it?

Well, we're opening new branches and we're increasing the number of mortgage specialists that we have. So we're focused on growing the existing channels that we have and we think that will drive more volume.

Terrific. And I'm sorry, how many specialists did you say you had and what is your target for that?

It's just under 1,000 and we're leaving it to our local markets to see what appropriate coverage is. I would think that we would grow 10 at a time, not hundreds at a time.

Okay. Terrific, thanks very much.

Thank you, the next question is from Ian de Verteuil from BMO Capital Markets. Please go ahead.

I guess my question is a three letter word called tax, which has been moving around at a number of companies. Janice, can you talk to tax rate this quarter? And what you think sustainable rates are. And specifically, I'm looking, I think you showed 21% effective tax rate on page 5 of the sup pack, but I'm not sure that's TEB, so could you give us a TEB in aggregate number and what you think a normal level is?

Thanks, Ian. For our tax rate, as you know it's dependent on mix and the extent to what the percentage of our profits are earned outside of Canada in lower tax jurisdictions than in Canada. So it does move around from quarter to quarter. With respect to our total tax rate and I think it's always better to look at the annual tax rate. If you look at the note in the financial statement that tax rate reconciliation, what you'll see there is that our Canadian statutory tax rate is 34.7%. And with our dividend trading, which is in Canada that would reduce the rate a couple of percentage points. And then you'll see about 9% that is a reduction due to the income that is earned outside of Canada. So if you look at our tax rate from that perspective, over the longer term where we've been trending is around the mid to lower 20s given -- but it's totally dependent on our earnings.

So when you think of this quarter, is there anything unusual on the tax rate? Or is it just the mix of business is what it is and the tax rate came out to be what it was?

Basically it's mix this quarter.

Thank you.

Thank you, the next question is from Jamie Keating from RBC Capital Markets. Please go ahead.

Good day, all. Couple of quick questions, easy I think. One hoping that Morten or maybe Chuck will comment on the prime brokerage business. Just wanted to understand if we could get our arms around how much exposure there might be there either in terms of loans or counterparty and what our philosophy is there? The second one's more simple, just for Jim Westlake. Let the other two warm up a second. But on the NIM line there's two things. I don't understand what a cumulative interest rate payment adjustment is, Jim. Just wondering if I could just understand that. And the other is, is there a mortgage prepay influence this quarter on NIM and retail? Just looking for a delta as much as anything there.

Okay. Hi, Jamie, I'll take the second one first. I'll say I'm always nervous when someone says here's an easy question. But anyhow, on the prepayment, no, there's no impact at all, we've been very consistent on that line over the course of the last year. So there wouldn't be any -- anything influencing our financials there. I--?

NIM.

Oh, NIM, yes, sorry, yes, the cumulative prepayment adjustment. What we had is we made an adjustment this quarter where we've been undercrediting a number of accounts for a very long period of time. And so it all showed up in this quarter. So if you, you'll put it all back where it should have been. It would have been a not even recognizable in any given quarter in our NIM. but doing the entire adjustment in one quarter it was and that's why we showed on the slide the effect of the total.

And Jamie, it's Morten. On the prime brokerage question, that is, the precise number isn't part of our disclosure. It's a modest size business within capital markets. It's -- as you look in supplementals, I guess all I will say is that it's a small portion of the total financial services assets that show up there. And it's a stable well-secured business with a from my standpoint very modest risk profile at this stage.

And typically profitable I suggest?

Absolutely. I don't know, Chuck, whether you want to comment?

Yes, profitable, but it's not -- again it's almost -- well, we do -- prime brokerage is a pretty broad net, basically it's primarily in Canada and it's not a significant portion of earnings at all.

Thank you, Chuck. Thanks, Morten.

Thank you the next question is from Darko Mihelic from CIBC World Markets. Please go ahead.

Great, thank you. A question for Jim. What should we expect for your global insurance division going forward? 110 million up from 63 million last quarter. Is that kind of volatility normal? and what do you think a good run rate would be?

Thanks, Darko. I can't comment, of course, or make predictions going forward, but I can give you a couple of comments on the last three quarters. And in how the business is running. Certainly it was a strong quarter for insurance in almost every respect and that was reflected in our numbers. I -- Q2 and Q3 by contrast everything that we had in there that could go the other way did go the other way. I -- if you want to look at the current quarter, over the 110, I think it would be reasonable to say about 90 of that was core run rate earnings. And in terms of the volatility, two things, you'll -- we've been changing our business mix. And as well we have the new standards of practice for insurance going into '07. So generally speaking, I would expect going forward to see less volatility quarter to quarter in our insurance earnings. More subject just to normal claims, fluctuations, and interest rates as opposed to other things coming in.

Okay. Great. That's very helpful. And I guess a question for Gord, with respect to RBC Capital Markets, maybe it's for both Gordon and Chuck. With respect to the capital and the earnings and we look at the earnings this quarter and the risk capital has declined, you go back a few quarters to Q2 '06 and there's a record quarter for you with high risk capital, what drives what? Is that capital, or do you have a target for the amount of capital you're willing to put aside for RBC Capital Markets or is it opportunistic and therefore needs capital. And we can expect that to bounce around. And with respect to business mix going forward, obviously you made some acquisitions here and there, which will obviously alter things. But given the state of the markets, like to know, Chuck, your opinion on how the first quarter's going so far and whether or not you would press, Gord, for more capital?

I'll let Chuck ask first and then I'll talk about capital.

So I'm supposed to talk about capital. In terms of capital. We've been growing our business on an ongoing basis and it's -- we do budget for asset growth. But fundamentally the market doesn't always act the way you budget for those types of things. What I would say is that we think we're going to -- we're not going to be capital constrained without having to go to Gord on bended knee. It's not a concern that we have. And I would just say that capital -- the earnings are not on a quarter to quarter basis driven by the capital. I mean, there is a whole number of reasons why you end up with the capital you end up with in a bank and it's almost a book.

And I would say that, from our over riding perspective, we tend not to look at it as much on capital allocation. We do look at sort of return on incremental capital. But you look at that business,they've done an excellent job in terms of driving their mix so that their assets have been growing, but their capital usage hasn't and part of that has to do with this reduction in lending activities versus other activities that has really been going on since 2000, 2001.

What we do look at is the aggregate sort of size of the business. And on that front we have said that capital markets, we're very comfortable in a range of 20 to 30% of overall bank contribution this year would be at the high end of that range because of the pretty solid year. And -- but certainly in that range depending on the cycle is a percentage that we're very comfortable with. So I would tend to look at it in terms of overall contribution to the bank. And the other thing which was mentioned in the, I guess it was Barb's remarks is that if you look at overall trading, i.e. balance sheet, that's a big part of our balance sheet in that business, activities. It's been fairly stable around 10% of overall bank revenues for quite some period of time.

So I think as you look going forward, we are going to continue to invest in that business, but I think on a proportionate basis, we're very comfortable being in a range of roughly 25% of our overall activities. And included, of course, in that 25% are some pretty stable traditional businesses like corporate lending, our national accounts business, RBC Dexia, businesses that have characteristics which are not as volatile with sort of stock and trading market activities. So I think 20 to 30% is a reasonably good range.

Okay. Great, thanks very much.

Thank you.

Thank you. The next question is from Mario Mendonca from Genuity. Please go ahead.

Good afternoon. A question probably for Jim. Deposit, the core deposit growth. You highlighted that it had been a little weaker over the last couple of quarters and perhaps even trending below the group. First, is this really a function of Royal's lack of participation at primary savings account? That's sort of the first question. And secondarily, Royal's domestic NIMs have always been a bit, they've almost confounded me how stable they are. And with deposit growth lagging so far below loan growth, how does Royal really fund this domestic deposit growth if the core, sorry this domestic loan growth if the core deposit growth isn't keeping pace?

Okay. Well, I'll start with just the first part of the question, deposits in general, while our growth has been lower, our deposits have been growing. I think that we have lagged a little bit generally against the industry although our transactional accounts have performed very well. It is on the pure savings side. So I think that backs into the second comment that you made and we have not today been a participant in the [HISO] market. And I do think that's where some of the difference has been and we're doing a number of things around our various product offerings that we think will allow us to compete more favorably in that market going forward. I certainly don't think that there is a funding issue in terms of our ability to fund the other side of the sheet where we're doing the lending. And I don't draw the direct parallel to that to the deposit book.

Where is the funding coming from if it isn't from the personal deposits?

It's Barb speaking, it's coming from the wholesale markets. And of course, the telemarkets business is also reliant on wholesale funding. So we have been active in the wholesale markets and as you probably have observed, you have seen us raising money at good rates and our name's well received and that will continue.

How is it then -- and that really goes to the crux of the issue, how is it with Royal having to go to the wholesale market. How is it that the NIMs and the domestic retail business can be so stable?

This is a marginal differential. You're -- it's not like there's a massive shift here. Yes, asset growth has been higher than deposit growth, but at the margin it doesn't have a big impact on the overall funding.

We've also had strong deposit growth in the business side.

Business loans, you mean?

Yes, business deposit strong. There's a lot of things go into the NIM and the flatness of the line belies the number of factors that go into that. But this year with some rising rates we have seen expansion of the spreads on deposits, certainly in the back half of the year we have seen wider spreads in the mortgage business. And so, those have all netted out and it does look remarkably flat but it is a wide number of variables that go into that.

So if you had to characterize the varying costs of funding you'd obviously put these core deposits as the lowest, the business probably second, and then wholesale third, is that reasonable order?

Yes, that's reasonable. And from the highest to the lowest, what will delta be in terms of basis points?

Well, Mario, it's Janice speaking. I don't think we can talk about the delta. As you know a lot of the core deposits are noninterest bearing period. So that would be the low not paying anything. But we raise funds in a variety of fashions. For example, the securitization market is extremely competitive now and the cost of funding is somewhere around BA minus 10 to 15. That would be representative funding. The way we fund is in total through our Treasury group, each of the divisions is not doing their own funding, we're basically aggregating the funding and doing it on a growth basis at the enterprise level. So we're able to go in and out of the markets whenever it's favorable and get the best pricing that we can.

Is there some sort of adjustment between say the domestic business and corporate such that the domestic business really wouldn't incorporate the higher cost of funding?

Do you mean Jim Westlake's business?

Yes.

All the assets and deposits are transfer priced out of Jim Westlake's business and they're held by corporate treasury. But the overall cost of funding for the organization is then transfer priced back into all of the business units. So all of our business units in aggregate have the -- reflect the total cost of the organization funds. We don't keep anything centrally related to the cost of funds.

That was helpful, thank you very much.

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

Thanks very much. A question for Jim Westlake, actually, no not this one for Jim Westlake. What I want to look at first, just a number question in your other revenue, there's a fairly big swing, which I understand is due to higher mark to market gains on derivatives relating to certain economic hedges. Can you quantify what that amount is this quarter? And does it go against the net interest revenue component of your trading revenue?

Michael, it's Janice speaking. In other/other, you're correct that the large portion of the change is due to some of the mark to market gains on some hedge accounting. That is in other/other, it's not in trading revenue because these are hedges that are undertaken for our structural book so they're not part of our trading operations. With respect to quantifying it as you know we don't quantify it. And with the new financial instruments accounting standards that are coming into play this quarter, we're looking at that whole area of where we're going with respect to marking to market on the different instruments and our own disclosure with respect to some of that information. But at this point we're not disclosing that particular mark to market on the hedging -- hedge accounts.

Okay. My next question, actually is for Jim. The commentary says that there was good disability experience and lower sales of annuities in the United States. Can you quantify the DI experience gain? And did the lower sales of U.S. annuities help or hurt earnings?

Yes, we don't go down into quantifying, at the DI level. The experience was generally favorable. The U.S. annuity really would have almost a zero impact on earnings, but under Canadian GAAP you get dollar for dollar into revenue. And so the combination of the dollar for dollar on the revenue plus the FX impact actually affects negatively our revenue line on insurance. But from an earnings standpoint it would be inconsequential.

Okay. I have another one for you, Jim. Everywhere else I'm told to expect more volatility as a result of 3855 and yet you said that we should see less volatility in insurance going forward. Can you explain?

Well, I think it depends on how you're structured and going into the year. Depends on what your business mix is and what assumptions you've made in your reserves going in. We are well positioned in terms of averaging down on the interest rate environment in particular on the 30-year for insurance and we are provisioned very appropriately in all aspects going forward. So we actually think that for our book it's going to mean less volatility rather than more. I don't know what other people are commenting on but it would be because they haven't brought it down, I suspect on the interest rate side as low as we have in our reserves.

Well, I guess the message that I'm getting is that any movements that effect surplus will have a magnified effect going forward plus or minus.

Not sure, maybe we can deal offline on that one, Michael, we can take a look at it.

Sure. Okay. Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] The next question is from Brad Smith from Black Mound. Please go ahead.

Yes, thanks very much. Just wanted to circle back on the funding questions that were brought up earlier. Just to be clear on this, the bank I understand has not pursued the high interest savings market aggressively and as an alternative has been funding in the wholesale markets. Is it reasonable to conclude from that that the economics are more favorable from the bank's perspective at this point in time in the wholesale market? Than in the ISO market?

I think the question is twofold, right, Brad? You're asking about the giving out of a high interest savings account if that is less funding effective than doing wholesale funding? Like securitization?

That's exactly what I'm asking.

I would say in today's environment, yes you're correct. Looking at where we are with respect to securitization, spread--.

Okay.

For example.

I see. Okay, thank you very much.

Okay.

Thank you. The next question is from Susan Cohen from Dundee Securities. Please go ahead.

Thank you. There's been a lot of commentary on the decline of housing prices in the U.S. Are you seeing any kind of impact of this on Centura's operations?

Maybe I should comment. We have one portfolio that could theoretically be affected by that and our building finance business out at Centura. We have seen very modest impact on that low level of impaired loans and small provisions. And while we're watching the market carefully because of the impact on the portfolio it's really imperceptible at this stage.

Thank you.

And that portfolio turns over very quickly.

That's a 12 to 18 month turnover of the portfolio.

Great. Thank you.

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

Hey, again. Hopefully this question is less taxing than Ian's was, but it's on the same subject. I just got to believe that the stock is responding a little weakly today and not so well to, I believe two things. One might be the tax rate, perhaps the other is unknown items and sides. Either securitization gains and/or the the ACG 13. I was just wondering if you had any transparency around those just to try and compartmentalize how much they added to earnings in your view this quarter? . Perhaps for Janice or Barb?

Just for the record, what we were told by our trading guys it was more profit taking, but well go ahead.

Okay, fair point, Gord.

Jamie, you kind of faded out at the end. Are you saying that you want to--?

Do we know what the ACG 13 gains are worth, Janice? I don't know, I haven't seen them, but maybe they're there.

You want to know what the ACG 13 gains are?

What the delta might have been, yes. Is that a material offer in the quarter?

We don't, as you know, Jamie, we don't disclose those numbers and we are reviewing all of our disclosure because of the new accounting pronouncements we have to put in. But basically if you look at what we said, the bulk of the delta would be due to that in terms of the quarter-over-quarter.

Didn't quite understand that. Most of the delta in the other revenue?

Other/other revenue.

Okay. And then is a fair characterization of the tax situation that there was basically a 3 point trueup and aside from that pretty much business as normal?

Yes, I mean, I would say pretty much business as normal. As I say, I think the mix impacted at the margin. It's been pretty consistent with where it's been the last -- a few quarters. And reiterating that the marginal rate in Canada remains at 34.7. And we pay pretty close to that in the domestic marketplace. And I think if you look at the mix elsewhere it's not inconsistent with where it's been of late. And as Janice said I think as you sort of look forward we would expect somewhere in that sort of low to mid 20 range is quite reasonable.

Okay.

Particularly if our international operations continue to perform.

Got you. Thanks, Gord. I guess only comment might be that with an $0.08 or more positive variance to consensus, I think Janice, you're right I think that disclosure might help people get a read on how much of it the market wants to pay for rather than react the other way unless it's just pure profit.

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

Thanks. Yes, I'm following-up on that question also, I guess, which I raised initially. Maybe another way to put it, even if you don't disclose the amount is that it -- is it fair to say that while that -- that hedge doesn't technically qualify as a contra item. You said it related to your structural position. And that in effect you really benefited from the positioning of interest rates during the latest quarter?

It's an accounting adjustment, Michael, and in fact, it's a hedge, so from an economic perspective we're actually hedging the interest rate volatility. So it's simply an accounting adjustment. So as rates move up and down, the hedges in and out of the money. It's a mark to market on a hedge. It doesn't reflect any positioning.

But, Janice, it seems to be getting a lot of attention. This is not a material number in terms of its -- it represents the delta on the other/other income, but it's not--.

So that delta is about $100 million quarter to quarter.

Well, I was talking about the year-over-year, I thought that's what we were referring to?

No, I'm talking about quarter-over-quarter.

So the quarter-over-quarter--.

It went from 22 to 120 million.

Right. There are other items in that amount that relate to things that you've heard about before like the Dain[Inaudible] and the mark to market on that compensation expense. That of course, has been offset. The other side of it is sitting there in HR expenses. There are things like that are also buried in that quarter-over-quarter -- the quarter-over-quarter number. But Michael, why don't I call you later and we can get back to you. But it's the same sorts of things that have been there every quarter. The biggest difference would be the hedge accounting adjustments on our structural book.

Sure. Why don't you give me a call, that would help.

Okay.

Thank you, there are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Nixon.

Okay. This is one of the few times we've ever been finished early. But I would like to thank everyone for being with us today and just reiterate that we are very pleased with the results and certainly I think our results and ongoing investments in the business, I think continue to position us very well for as we look into 2007. I would just conclude by an announcement, which is not a disclosure announcement. We are -- we did announce after the Board meeting, excuse me, a slight change to our group executive. Excuse me, that I would like to note. And it has a, I think it's very positive on both counts. We did announced the retirement of Elisabetta Bigsby, excuse me, it's not tears -- although it is very upsetting, Elisabetta has chosen to retire after about 30 years with the bank. She's been a terrific member of GE, she's been head of HR, but she's done a lot more than that for us. And she will be stepping down effective January 31. In addition, we're pleased that Janice Fukakusa is going to move on to our group executive. And we look forward to the addition of Janice on to the group. And it's onward and upward, but to both of those individuals our congratulations and you'll be hearing more from them. I don't think Elisabetta's received a lot of questions from the analysts over the years, but she's been here for every conference call. And with that, I think I'll turn it back to the, oh, there we go, my voice has come back. I'll turn it back to the operator.

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