Royal Bank of Canada (RY) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the RBC 2007 first quarter 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 Gord Nixon, our CEO; Barb Stymiest, our Chief Operating Officer; Jim Westlake, of our Canadian Business segment; Peter Armenio, of our U.S. and international Business segment; and Chuck Winograd of our Capital Market segment. And also joining us today are George Lewis who is the head of our Wealth Management segment; Janice Fukakusa, our Chief Financial Officer; Marty Lippert, Head of Global Technology and Operations; and Morton Friis, our Chief Risk Officer. Gord will start off with an overview of our results which Barbara will then discuss in more details and our segment heads each will review their respective head 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 two of today's presentation contains our caution regarding forward-looking statements which describes factors that the could cause actual results to differ materially from what is expressed in these statements. I'll now turn it over to Gordon.

Thank you, Marcia and good afternoon, everyone. We're pleased to report our outstanding results for this quarter. We continue growing our revenue and earnings by executing strategies across our diverse set of businesses globally, and our earnings this quarter as you're aware were just shy of $1.5 billion. Revenue growth was strong at 15%, and importantly, all business segments showed great strength. RBC Canadian Personal and Business banking earnings were up 31% year-over-year. U.S. And international was up 48% and RBC Capital Markets up 27 and that's indicated on slide number five. Jim, Peter, and Chuck will discuss some of the drivers that contributed to their results during their comments.

I'm very pleased with the specific segment initiatives and the collaboration between our various businesses to offer new solutions to the clients has helped continue to drive good market performance. We need to continue working hard to adapt to the needs of our clients so as you heard a few weeks ago, we've realigned our businesses subsequent to the first quarter and have now created a new segment, Wealth Management, which George Lewis will report on at our next quarterly meeting.

We'll report under the new structure, from a financial perspective, in Q2, and we believe that the change -- this change positions us well to meet the growing global demands in Wealth Management and their products and services, and we'll certainly look to aggressively continue to grow this segment, building on our foundation of Canada's full service brokerage business which RBC Dominion Securities is the largest. RBC Asset Management which is the largest single fund management company and our leading trust and discretionary Investment Management businesses here in Canada and outside of Canada, RBC Dain Rauscher brokerage business and of course our global private banking business which is one of the world's leading private banks. So we're very excited about this new segment which will be led by George.

As everyone I think is aware, George headed up our Canadian Wealth Management Business. He's already joined our group executive. As of the end of the first quarter, Wealth Management had approximately $505 billion of client's asset under administration. $155 billion of assets under management, and over 3,500 financial advisors, which I think demonstrates good critical mass for this attractive segment going forward.

Wealth Management also complements our Capital Market segments which as I think you're aware this quarter completed the acquisition of Carlin Financial as well as Daniels & Associates. We've been working hard to maintain our overall leadership in Canada, but as well to grow in targeted areas in the U.S. mid market and as well as our global fixed income and structured products business. Our Wealth Management and Capital Markets business will continue to be key partners as they move forward as many of the products and services are increasingly in demand by advisors and high net worth individuals.

We think the overall Financial Services sector is going to continue to grow at a very good pace, forecasters expect it to quadruple by 2020 and we think we're very well positioned with this structure going forward. Our largest business segment, will be renamed Canadian Banking and will obviously continue under the leadership of Jim Westlake. In addition to Personal Banking, Business Financial Services, cards and payment solutions and global insurance, Jim will also continue to oversee our retail investment business in Canada, both in branch as well as online direct investing and of course these areas have been very important drivers of our Canadian business. During the first quarter, we improved our ATM network to maximize customer securities. We invested in our branches to better serve our clients.

The Canadian business segment, retail and business segment is certainly a core source of revenues and earnings for us and we intend to continue to implement the numerous initiatives that we have across this platform that will hopefully continue to allow us to differentiate. To do this, we'll leverage our already vast distribution network, continue to invest in localized sales cultures, and the geographic regions where we think there's good growth and we're certainly very comfortable that we end the first quarter at a very strong jump off point for this business going forward.

Our banking business outside of Canada are also very important to future growth. As Head of U.S. and International, Peter will continue to be responsible for our Caribbean operations, where we are a leader in most markets. He will also continue to be responsible for RBC Centura which continues to grow and to perform very well and add to its 300 branches in the Southeast with the 39 AmSouth branches which are expected to come into the fold I think mid next week. In addition, Peter will also now also oversee the RBC Dexia joint venture.

So, we, as I say, think this structure is a natural evolution for our businesses. I think it will create a more focused approach, particularly with respect to our Wealth Management and non-Canadian banking businesses, and we're certainly excited about it as we move forward. We focus on successful execution of initiatives and make changes to our business that we think will benefit our clients and shareholders.

As you can see on slide seven, our share price increased in Q1 partly due to the consistency and delivering strong performance as well as increasing dividends. As you I'm sure all know, we announced a $0.06 increase in our dividend to $0.46 a share this morning. So, we're certainly very pleased with that but our work isn't over. We still think that there's lots to be done and we'll continue hard to make sure that we sustain our sound performance over the mid and long term and with that I'll turn it over to Barb.

Thanks, Gord, and as you can see, on slide nine, total revenue reached $5.7 billion this quarter with all of the business segments growing revenue from a year ago. Net interest income improved in each segment as shown on slide ten. Both our business segments grew loan volumes and deposit spreads in the quarter. Our non-interest income is shown on slide 11. We experienced growth in most categories, particularly in the trading and Wealth Management areas due to the generally favorable market conditions and several significant fee events.

Our insurance business also did well but was impacted by several items including the new financial instruments accounting standards, so we'll show you the underlying performance in a moment.

The strong performance of our Wealth Management and Capital Markets business in particular drove variable compensation and NIE higher and their success contributed to our bottom line. We also increased staffing levels and added branches in support of our growth initiatives and had one additional month of expenses at RBC Dexia. There were several items that impacted our results this quarter and I'd like to highlight them on slide 13.

In aggregate, these items had an EPS impact of a few cents a share. As you know, we adopted the three new financial instruments accounting standards which are discussed in our report to shareholders and in the notes of the financial statements. The $22 million net impact to our bottom line wasn't significant. In addition, we recorded a favorable $40 million pre and post-tax foreign currency translation adjustment and this related to foreign investment capital that was reallocated from our catastrophe reinsurance operations which you're aware we exited. We also made a $30 million cumulative adjustment in our corporate support segment for losses resulting from fair valuing certain derivatives that did not qualify for hedge accounting.

Our operating leverage calculation is shown on slide 14, so that you can get a more accurate picture of our underlying performance. We're very pleased with this performance but we know this is only the first quarter and we have a lot of work to do to stay on track to meet our annual objectives of greater than 3%.

In slides 15 & 16, you can see that we continue to grow our balance sheet meaningfully as well as our assets under administration and assets under management. On the credit front, our gross impaired loans ratio and our specific PCI ratio remained at the same levels as last quarter at 38 and 29 basis points, respectively. Compared to last year, our gross impaired loans grew 10% reflecting higher impairment in small business loans, commercial and residential mortgage portfolios. In our consumer book, gross impaired loans remained relatively flat as higher impairment in residential mortgages and personal loans which partially reflected portfolio growth was offset by lower student loan impairment.

Finally, our Tier 1 capital ratio of 9.2% remains well above our objective of 8%. The decline from the fourth quarter is mainly due to an increase in risk adjusted assets as well as an increase in the goodwill reduction primarily with the result of acquisitions. Our 19% increase in risk adjusted assets is consistent with our 17% growth in total assets and supported the 15% growth in revenues that we delivered this quarter. And of course, our earnings growth outpaced the growth in our risk adjusted assets.

We're very comfortable with our Tier 1 ratio and pleased with the increasing returns we've been generating on our assets and risk adjusted assets. Our 9.2% ratio is consistent with our financial goals and exceeds the ratios of many of our large peers in both the U.S. and the UK. We will continue to manage our capital carefully to satisfy all of our stakeholders including our shareholders, rating agencies, and regulators. Jim Westlake will now take you through the Canadian PNB results.

Thank you, Barb. I'll start off with a few highlights for the quarter on slide 20. This quarter we opened four new bank branches and began upgrading another 55 branches as part of our larger program to expand and enhance our distribution network. We're very focused on good retailing principals, and look carefully at branch locations, how we staff, opening hours, how we drive traffic and so on. We'll continue to expand our distribution network building new locations with hours and staffing that make it possible for us to work more closely with our clients. In 2007, we plan to open 30 to 40 new branches and we're one year into a four year program to renovate almost half of our branches.

As we mentioned in previous calls, expanding our physical network of branches and ATM's is ongoing and we also serve more and more of our clients online. This quarter, we celebrated ten years of online banking and today served more than 3 million online customers.

Over the last 12 months, we added more client facing employees. Our employees and our sales culture are critical to our business. We spent a lot of time developing our people so that we can continue providing improved service to our clients and we focus on getting the incentives for our staff right in order to encourage the right behavior. We also provide flexibility to adopt the way we do business in different markets in order to enable our people to compete locally.

RBC Insurance opened three new branches, two in Quebec and one in Toronto bringing our total number of adjacent insurance branches to 13. Our insurance business is growing and we're adding market share. We continue to show leadership in our Wealth Management business, RBC Asset Management led the mutual fund industry in long term fund net sales for the 13th consecutive quarter and we're committed to improving the value we deliver to our clients. For example, we launched several new products and reduced management fees on international funds. We were also the first mutual fund Company in Canada to implement the new CSA requirements for fund governance.

Getting into the Q1 results on slide 21, we've grown our earnings substantially from a year ago. This reflects strong revenue growth across all business lines. Expenses rose, partly because of higher variable compensation, associated with our strong performance in Wealth Management. Also, we continue to invest in our businesses by hiring more salespeople, improving our infrastructure and increasing our marketing and advertising spend.

Continuing on to slide 22, overall spreads remain fairly stable over the last two years. Our NIM for the quarter is within our normal range and is identical to our Q1 NIM for each of the last two years. I'd like to mention that there is some noise in our Global Insurance results. On slide 23, we've highlighted a few items to provide a more meaningful view of our insurance performance. Barb already mentioned the first two and you know about the third. Net of these items, we grew insurance revenue by 4% and net income before taxes by 17% compared to Q1 of '06.

These underlying results reflect the solid performance of our insurance business as well as our favorable claims experience this quarter. The numbers you see are probably higher than what we would see in our run rate and there will be normal variation going forward depending on underlying claims experience.

Slide 24 shows the revenue growth of each of our business lines. Personal banking revenue increased by 12%, largely reflecting strong growth in home equity lending and improved lending and deposit spreads across all products. Business Financial Services revenue increased by 6% primarily as a result of growth in loans and deposits. Cards and payment solutions grew balances and transaction volumes increasing revenues by 6%, and Wealth Management revenues grew by 14%. This reflected the strong net sales and capital appreciation of mutual funds. Also, our full service brokerage business continues to grow fee based accounts and record higher volumes. Global insurance revenue rose 32 million or 4% if you exclude those items I mentioned.

The last slide show our product balances. We have grown most of our balances significantly over Q1 of last year. However, our personal deposits growth remains flat as I've mentioned in the past we're taking steps to address this. Peter, over to you.

Thanks, Jim, and good afternoon, everyone. All of my comments will be in U.S. dollars. Our segment had a strong first quarter as we continue to grow our earnings and make progress on our growth initiatives. Slide 27 shows examples of the progress that we've made. RBC Centura opened another five branches in the quarter and completed the acquisition of Flag Financial Corporation. Centura will continue to focus on being the bank for businesses, business owners and professionals in the Southeast U.S. By expanding our products and services. In addition we'll continue to grow our branch network through the novel expansion and acquisitions when they make strategic and financial sense.

RBC Dain Rauscher with the help of Global Private Banking increased distribution of credit products to their clients with approved lines under the RBC premier line of credit growing to $950 million U.S. We continued to aggressively recruit and add high performing financial consultants in the quarter, though competition in this regard remains intense. We also announced Dashboard, an innovative business development tool for our financial consultants to analyze and help their clients with better advice.

Slide 28. You can see that we've made significant year-over-year earnings improvement. Our earnings increased 45% on revenue growth of 13%. Expenses also increased largely reflecting our expansion in distribution and infrastructure to support our growth initiatives. In addition, variable compensation associated with our strong Wealth Management performance contributed to the expense growth.

Slide 29 shows the revenue growth in our two Business lines. Combination of our recruitment efforts and strong equity markets helped us increase fee based assets, client assets at Dain Rauscher, contributing to Wealth Management's 17% growth as compared to a year ago. Wealth Management also had higher client transaction volumes and Global private banking's loans and deposits continues to grow. I should note that a $14 million foreign exchange translation gain on deposits and the inclusion of an additional month of advocates as compared to Q1 '06 also contributed to this increase.

Our banking revenue rose as we added Flag Financial which increased our loan and deposit volumes and we continue to focus on fee based activities. I should mention here that this particular quarter, banking revenue had a negative, was negatively impacted by the restructuring of our RBC Centura investment portfolio which reduced revenue by $18 million. This was done to take advantage of market opportunities and growth in our balance sheet. We do expect our revenue to benefit going forward. And now I'll turn it over to our last speaker, Chuck Winograd.

Thanks, Peter. First quarter was another good one for RBC Capital Markets. We were kept busy with a number of significant transactions here and abroad and with initiatives to buildout selected global businesses.

Looking at a few examples on slide 31, in Canada we were named top deal maker in 2006 by the National Post. We led the largest bond issue in Canadian history for Canada Housing Trust. This 8.125 billion issue was distributed globally and shows the power of our global reach and teamwork.

In the U.S, we completed the acquisitions of Carlin and Daniels. With RBC Carlin, we will average 3.5 billion shares in monthly trading volume, ranking us in the top ten in the U.S. And RBC Daniels is an active U.S. mergers and acquisition advise or to the cable, telecom, broadcast, and Internet services industries.

We expanded our metals business by creating a desk in New York to complement the metals team we established in London a year ago. We also completed our first AIM transaction, advising Australian based Berkeley Resorts on its new listing on the London Exchange. In Asia, we continue to expand our structured products capability. In the UK, we completed several large transactions.

Now, as shown in slide 32, our earnings this quarter were 420 million, up 27% from the year ago. Earnings were driven by broad based revenue growth and a lower effective tax rate. Our expenses increased largely due to higher variable compensation with our strong business performance.

On slide 33, you can see the growth in our major business lines. In Global Markets we had several significant infrastructure finance trading transactions and our trading securities in certain equity trading strategies continued to grow. Debt origination in the U.S. was strong and the pipeline continues to build. In Global Investment Banking and Equity Markets we had strong equity origination activity in both the U.S. and Canada. M&A activity was off historical highs in 2006 but our pipeline remains robust. RBC Dexia performed well reflecting higher deposit balances and strong business activity. We had a couple of big wins including expanding our investor services outsourcing relationships with CI Financial by five years, a relationship that is the largest of its kind in the Canadian marketplace.

In addition, Q1 '07 had one additional month of results for RBC Dexia IS. Our assets under administration are growing as favorable market conditions continue and we acquire more business. While we did have a very good trading results, growth is in line with the overall growth for RBC.

Slide 34 shows that trading revenue as a percentage of total RBC revenue is not far off our historical average. In addition, our global trading VaR continues to remain stable. I'd like to finish off by saying that we continue to work hard to drive our business forward. We constantly look for ways to bring in more revenue and take advantage of market opportunities and we are adding people and investing in technologies to help us continue growing at home but especially internationally. At this point, I'll turn the call over to the Operator to begin questions and answers.

Thank you. [OPERATOR INSTRUCTIONS] The first question is from Jim Bantis from Credit Suisse. Please go ahead.

Hi, good afternoon. I've got a few questions and congratulations on the quarter. Just looking at the Tier 1 capital ratio, and Barb I know you talked about some of the reasons why the ratio has been dropping, and obviously the bank is driving it with respect to asset growth and capital management, but how low are you willing to take this ratio down to in terms of managing your capital and in terms of breaking away from the other banks in that regards and is it raising an eye brow with respect to the rating agencies?

Jim, we don't believe it is raising issues with the rating agencies. The point I made earlier is that the Canadian banks have been outliers compared to other banks around the world. We believed, and it was appropriate to bring down our capital ratio. We're looking for more stability going forward but as I said, we're very comfortable where we are versus our internal targets and it is certainly very, very consistent with our revenue and earnings growth.

The only thing I'd add to that, Jim, is that if you look at, I mean, asset growth was strong across all of our businesses. Certainly with respect to some parts of the balance sheet, particularly in the capital markets side, there's certainly an ability to shift those around because they tend to be more liquid than other types of assets, so just to reiterate, I think from a rating agency perspective, it's not an issue. I mean, I think they're much more focused on the strong results and the improving quality. I think with respect to going forward as Barb said, we're certainly very comfortable with respect to where we are in our plan for the year.

Thank you, no, I appreciate that but I just imagined the ratio will continue to fall given the strength of the markets and how your business mix is really favorable relative to whether it's--?

I'm not sure that's a fair assumption if we continue to grow earnings.

Okay, great. Sorry, the next question if Morten is there I just wanted to talk a little bit more about gross impaired loans. One of the other banks is raising the alarm belt, talking about 2007 as a point of inflection, and this is the first quarter we've seen notable pick up in gross impaired at RBC, specifically coming off the small business side. I wonder if you could just talk a little bit about that.

Sure. I mean, I think we're all anticipating at some point in 2007 we might see an inflection point. I would say that from looking at our portfolio, we're not there as yet. Overall, the ratio is stable at 38 basis points and if you look at new formations, as you noted, the pocket where you see some minor trend of an increase is in the small business and parts of our commercial portfolio. The consumer portfolios are actually below our nine quarter average and roughly stable.

So while -- if you start to look beneath the figures here a little bit, it's hard to discern any real pattern in the small business commercial and to the extent there's a geographic feel to it, that it's a little bit more concentrated in Central Canada but overall, I would say we've had another quarter where looking at the numbers in the portfolio, there are no discernible trends that show this as being the start of any real deterioration.

I mean, overall, you've seen -- we still got recoveries in the Corporate portfolio that are reducing and our anticipation is that there will be less to be had there this year than we had last year, obviously, and when it comes to the commercial and business portfolios, there are these minor negative trends but hardly anything that I would call an inflection point or any real sign of clear deterioration.

Thank you. I'll requeue.

Thank you. The next question is from Steve Cawley from TD, please go ahead.

Hi, guys. Yesterday in the BMO conference call, we gave them -- several of us gave them a hard time for building up risk weighted assets and doing a lot more commercial lending and doing a lot more trading. And for them, more than anything else, it's because maybe their revenues weren't growing to the degree yours are growing. But regardless, it does seem that you are taking on a lot of risk at a time when spreads are just so tight and it looks as if the economy in the U.S. is starting to show some weakness. When you're going -- maybe I'll just stop there and maybe if you can comment on that, either Gord or Chuck?

Well, Steve, I'll start. When you look quarter-over-quarter at the change in our risk adjusted assets, it was entirely related to volumes and it was around banking products, the loans and the mortgages. On the Capital Market side, it did include the lending activity that spoke there as well as some off balance sheet credit instruments and some broad based growth in our trading and as you reflected that was translated into revenue growth and earnings. It's quarter-over-quarter. Yes, there was -- we did take on some additional market risk, but we -- a gain that was related to volume growth and a bit of shift in the mix of our business and a gain where we look at the returns on a risk adjusted assets, they are increasing. So as I said earlier we're very comfortable with that.

The only thing I would say is basically in terms of Capital Markets, we did take on additional assets in the quarter but it was precisely because we saw good risk reward opportunities. I mean, I certainly understand that there are areas where the market is becoming more difficult and I'm not predicting what's going to happen in the future but just looking at it in terms of the recent quarter, it was precisely because we saw risk/reward driving the decision to take on incremental assets so we did it.

As we've talked before, Steve, it's Gord. I do take some degree of comfort in the liquidity of some of the assets that we are growing because I think from an overall risk perspective, it's, we believe it's the right direction.

Well, it's working so far. Second question, heck of a quarter, you've blown the estimates out of the water and you've certainly blown away your own internal targets, I believe what is it? 10%, I can't find the slide here.

It's not a target. It's an objective.

I know, you get upset every time we ask you this question. You say modeling is up to the analysts, that's my job, but considering by how much you beat or how much you grew your earnings this year, no reflection whatsoever in terms of saying, well, maybe we should bump this target?

Absolutely not, and for the precise reasons. I mean, we establish our objectives and there's a process for that that we go through at year-end. We use those objectives to measure our performance at year-end relative to those objectives and we do go out of our way to reinforce the fact that they are not a target. We don't, and will not provide that kind of targets, generally. There's no question that internally we make adjustments to our forecast and our planning process, et cetera, but in terms of public disclosure, we just do not. We will not update them regardless of where we are until the end of the year.

Figured I'd try but last one. Jim, the insurance business, lots of noise there and I only unfortunately had one ear on the call when you were talking there. So, just so that I understand this, there was a reserve release in the insurance business, there was also very good mortality, and because of the new accounting guidelines and because maybe the markets were strong you had very good mark-to-market of your portfolio under accounting guideline 3855. Is that roughly what happened?

Steve, it's Janice. Not quite. Let me explain what happened with the insurance business. With the new accounting guidelines, it was earnings neutral because we -- we actually fair valued the investments so revenue went down and then with the fair value as the policyholder benefits, claims and acquisitions that went down by a comparable amount.

What happened in insurance is that we had a foreign currency translation release on a take down of capital, an internal take down of capital in one of our subsidiaries that was a foreign subsidiary that had an embedded foreign translation gain. So that was 40 million. And then we had a reserve adjustment related to some actuarial adjustments that we did in the quarter and I think that that is also, wasn't disclosed at pre-tax 37 or some amount like that. So that's what happened to the insurance business. And the other thing to mention is that of course claims experience does influence the earnings quite a bit and we had excellent claims experience. So, Jim?

You can tell that wasn't me, Steve. That was Janice talking. It's Jim now. Yes, on the, I think the two numbers rounded out to 78 and I think the important one, the actuarial adjustments really are a reflection that for the past several quarters, we've understated our income a little bit because we were too conservative on reserving. The claims, not just mortality but of course we have home and auto claims, we have travel insurance claims, we have both morbidity and a large disability business as well as mortality. And right across-the-board our claim experience was more favorable this quarter than it has been the last couple of quarters.

Okay.

And the capital release Jim was a result of the exiting the reinsurance business.

Yes. The reason that we did that is that we had to take down the capital exiting that business.

And we're now out of that business.

Okay, so maybe the number is not as high as certainly you showed here but it's certainly not 100 million below is not the sustainable rate. It's a little better than that?

Oh, absolutely.

Thanks, guys.

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

Good afternoon. Jim, you referred to in answering, Steve, you said the sum of the two is 78 and I didn't quite catch what you were referring to there.

78 would be the pre-tax earnings number associated with both the release of the foreign currency account as well as the actuarial adjustment.

Got it the 40 and the 38. I'm with you now.

Okay.

Jim, you also said something, it sounded almost ominous, you said raising personal deposits or accounting for some deposits remains a challenge and we're going to take steps to address that. Could you share some of your views in that respect?

It doesn't sound that ominous when you say it back to me.

Well, okay.

I mean, we are not happy, that's the one number that we have from my business that I don't think we're happy with our market position. We made some adjustments to our account offerings and we intend to make some more over the next couple of quarters where we want to take steps to ensure that we continue to grow our share in that market as well.

You think there will ever be a day when Royal is out there with say Scotia and a few others with the premium rate savings account that's just as aggressive or do you feel that the Royal has sufficient structural advantages never to have to play in that business?

No. Never is an awful long time and I think that everybody has got to have an answer to that. Whether it is through a pure high interest savings vehicle or not. We have been using a lot of mutual fund cash accounts in the past to mirror some of that and that's why our short-term mutual funds has helped in that regard, but we're going to look at all aspects of it.

And do you have any, can you give us any sense of timing?

Oh, by the time we talk next quarter I'm sure we'll have some changes.

Just a very broad question, perhaps for Gord or Barb. The ROE, 27.3%, and this is just off the top of my head, but that's an enormous ROE for a Financial Services Company in Canada highly regulated with a lot of excess capital. Does that number not look strange for a bank? And what should we expect from Royal Bank over the long term? I mean, it does look strange, doesn't it?

Well, it looks pretty good to me.

Yes. It just doesn't look appropriate.

I mean, that's a very tough question to ask. I mean or to answer, I mean. We obviously have an ROE target which we publish and we're well through that target, although we put a minimum on it which is 20% plus objective, I'm sorry and we're through that. And part of that has come from parts of our business that we're growing which are very high return businesses. I mean, we've had a lot of growth in Wealth Management. We've had a lot of growth in some of our Capital Markets business where we've been able to earn very high returns at the margin with respect to the assets that we're deploying. So that part of it relates to the business mix as well as just solid performance across-the-board.

I think that one of the things that we are continuing to do is to invest a lot back into our businesses and I think you'll continue to see that trend moving forward. So could we compromise a little with respect to ROE to generate future business growth? I think the answer is yes, but as I say a lot of it is a result of some very high returns and some specific businesses where we've been growing very effectively and at a faster rate than I think some of the other financial institutions around the world.

You'd say then the 27 or so percent ROE is just a function of the macro environment, mix execution and all thee are coming together and that's what's driving what seems like an unusually high ROE?

That sounds like a good answer. I wish I'd said it that way. I think, yes, I think that's right. I think it's a function of mix where our business is growing, a very good environment generally for financial services. As I say, very good growth in specific businesses like the Wealth Management and some of the Capital Markets businesses where returns have been growing much, much more quickly.

We've had much bigger growth in terms of return on capital in our Capital Markets business than we have in some of our more traditional stable businesses, so that's a part of it. And clearly, with the interest rate environment and the overall macro environment, I think it's been a very positive environment for the industry and touch wood, we've outperformed the overall all industry. So I think it's fine generally, and we've been a little bit higher than the norm.

Thanks very much.

Thank you. [OPERATOR INSTRUCTIONS] The next question is from Ian de Verteuil from BMO Capital Markets. Please go ahead.

Congratulations on a wonderful quarter. The questions I have are for Chuck. Just fantastic trading results here. Can you provide some sort of color for us to get a sense on what worked in the quarter and what didn't? In my simplistic mind, I had thought that volatility, being a little bit light would have kept trading across the industry, down a bit, and it doesn't seem as if that happened. You seem to be the outlier, to have just a spectacular trading quarter.

Well, I think that -- we have a lot of trading businesses and we have a lot of them that are outside of Canada which is where most of our trading revenues come from. And I think it was really a matter if you look at both debt and equity which are two big trading asset classes, we had very strong results in all of them and the reason we had strong results in both is the breadth within the asset class was just as strong as the breadth within the asset classes.

We just for some reason had very good trading results from a large number of businesses without any individual business not -- without any individual business having a problem, and that just isn't what happens every quarter. I might also add that we also had a couple of what I would call good, creative trades in the quarter which helped the numbers, so you combine those things together and you had a very strong quarter.

And when, so when we look at the daily trading, those individual transactions would be structured product transactions where you get sort of a spike in a particular deal but it really is the accumulation of securities to complete the deal; is that right?

Actually, one was a structured transaction and then we had another transaction that was part structured, just part -- we basically had a view and we took it.

Is the acquisition of Carlin helping as well? I think Carlin is the one that is that dealt with the particular line of hedge funds or was that relatively small?

Well, Carlin is relatively small and Carlin was really only in for January, and is not a significant factor through the numbers. What Carlin is going to do hopefully is help us deal in the electronic trading side and direct market access to help our institutional business in the U.S. grow and be a broader business with greater sustainability. And it happens to be very strong in the -- with merger arbitrage clients because it has a very good product on electronic trading basis for that group but it wouldn't have been a factor in the first quarter.

That's great. Congratulations on a wonderful quarter.

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

Thanks very much. Had a few questions. First of all, for Jim, $38 million favorable experience in the first quarter in insurance. Could you just remind me what the comparison in the fourth quarter was?

Sorry, I'm not sure I'm getting that. We had a 38 million adjustment this quarter.

Okay, and it was a similar amount last year in the first quarter.

Right. Michael, it's Janice. We had the $38 million item was what Jim referred to previously which was an adjustment to our actuarial reserves because we were too conservative on the reserves.

Right.

A year ago, we had a similar adjustment.

Right. And so can you just remind me what the adjustment was in the fourth quarter, if there was one?

No. I'm talking about Q1 of '06, there was a similar adjustment.

No, I understand and I'm asking about Q4 '06.

I don't think that there was a significant adjustment in Q4 but I'll have to check. I don't recall it at all.

Okay.

I'll check that. We'll check that and if there is we'll get back to you.

Okay. Now, also, I'm just wondering, is it fair to say that most of your total $791 million of variable comp in the quarter goes against brokerage, underwriting, and trading revenue?

Well, in the variable comp, approximately 80% of the variable comp is with respect to our direct drive businesses which can are Capital Markets, Wealth Management, and the Wealth Management including the U.S. businesses Dain, GPB. So we don't, I can't do a direct match for you for variable comps on Income Statement lines, but if you can think about those being the major components of where we pay the variable comp, then they would be against those sorts of Capital Markets sensitive Income Statement line.

What I'm really getting at is you had a great trading quarter and you certainly had a strong Capital Markets quarter otherwise. But if I look at the increase in incentive comp, it looks like that increase ate up most of the strength in brokerage underwriting and trading. Am I looking at this correctly or incorrectly? Is that a reasonable or an unreasonable conclusion?

I think -- I don't think that the increase in variable comps ate away all of the strength on our trading side. I haven't looked at the brokerage category, but I think that there are other Income Statement lines associated with that earnings strength, with those groups. So Michael, why don't we look at that--?

Talk off line?

Yes, and we'll get back to you and with respect to the adjustments from insurance on the actuarial side in Q4, there were a few minor ones that didn't amount to nothing or anything right, Jim? Negative 0. So from that perspective, the adjustment comparator would be against last year, year-over-year.

Okay, and I have one other question, a more general question, following up on Mario's question. I'm certainly not complaining about a 35% ROE in Canadian, Personal, and Business, but can you comment on whether you think this high level of profitability invites the scrutiny such as what we're now seeing toward ABM fees and can you comment on this issue, how you deal with it and whether you have any concerns about other measures that could possibly happen that would reduce industry profitability?

I mean, again, firstly, you got to understand the mix of what is driving P&L, and if you look at traditional banking businesses, whether it's fees, whether it's mortgages, et cetera, there's been a declining margin in most of those businesses, not a growing margin. Businesses like Wealth Management, insurance, some of our Capital Markets businesses has been driving higher returns which is a good thing. It's a good thing for Royal Bank, it's a good thing for the country, it's a good thing for taxes. And these are not necessarily politicalized businesses although the overall results of the bank tend to get politicized. So it is important to look at the mix of where the returns are coming from.

To answer your question, it's something that is -- you can't deny the fact that profitability and the banking sector, those types of things are looked at and commented on in a political environment. I think what we've got to do is just make sure that people understand where growth is coming from, that growth is good for all of the various constituents and that we continue to enjoy a very, very competitive, low cost, highly efficient system in this country which is really, as I said earlier at our Annual Meeting, is really unmatched anywhere in the world.

If you combine interest margins with service fees and efficiency of the system, you can find pockets or products where it might be more effective or more efficient or cheaper, but by and large, when you look at them together, it really is a success story, I think for the overall system, and I think that's a message that -- that's the only message that we have to continue to reinforce.

Is this something that once you have your new Wealth segment, that it will be a little bit clearer as you pull that out of the personal and banking segment?

Absolutely and the other thing as well is remember that internal capital allocation, I mean, what really matters at the end of the day is the overall return that is being driven by the enterprise as opposed to the internal divisional allocation but it will certainly become clearer with respect to Wealth Management.

Thanks a lot.

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

Hi, good afternoon. My question is a little more general in nature, maybe big picture question for perhaps Gord and George. The new Wealth Management division, certainly unique. I was wondering if George, maybe you could give us, orient us a little bit as to what you aspire to be. Is there a company out there you think that you'd like to model this division after and you've been on the job for a month. Maybe you can just give us an idea of what's going on.

Well, I'll start off the answer and that will give George a few seconds to prepare his response. Unique, I mean, it's interesting. One of the things that the analyst community has been pushing us to do is to break out Wealth Management, so perhaps it's a bit of a response to that, but we do think that as I said in my remarks, I think this is a very much an evolution for RBC, and I think we have done a very good job in terms of linking our Wealth Management and our Canadian banking franchises together so that they really today are operating as one and that's going to continue going forward.

I think if you look at our growth outside of Canada, clearly we have three businesses. Banking, Wealth Management, and Capital Markets and I think this new structure creates a very positive environment in terms of the businesses being challenged to develop their strategies, to compete for capital, to find opportunities for growth, and I think each of those businesses now has enough scale, enough critical mass, enough capability to generate an independent strategy. And that's one of the reasons sort of from an enterprise perspective we made the shift. With respect to specifics, I'll turn it over to George.

Thanks very much, Gord. I guess, Darko, I'd just say three or four things that I'm focusing on right now out of the gate and they are really in terms of why this is such a good move from an RBC point of view. If you look at the Wealth Management segment globally, it's a very fast growing segment driven by growth in Wealth creation both in the developed world and the developing economies, but also demographics. As populations mature and we're seeing this in Canada, U.S, and globally, their demand for Wealth Management products and services not just to accumulate wealth but ultimately to transfer wealth goes up.

And secondly, to that point, we're very well positioned to meet that demand both from our perspective of our leading businesses here in Canada and Gord has commented about the strength of our businesses here and the partnership with Canadian banking, but also outside of Canada with respect to Dain and global private banking, gives us a unique advantage versus other Canadian based FI's in terms of having that capability.

Third point I would say is that the revenues and earnings growth from this segment tends to be fairly predictable and grow with our client success, if you will, in terms of growing assets under administration, and assets under management, and one that does not create any call or any strain on RBC's capital position or Tier 1 capital ratios.

And finally, to your point which is very an interesting one from my perspective is that for such an attractive industry globally, it still is very, very fragmented particularly with respect to affluent and high net worth clients, so I think the largest player might have 3 or 4% market share, so to your point, we're not modeling ourselves on any particular player because there is no dominant player. We have a great foundation and we're really seeking to grow this business aggressively outside of Canada but also to maintain our number one, in fact, extend our number one position here.

Okay, thanks very much for the answer, George. And I wonder if I can just follow-up on that with two quick questions. I guess the first one is what's your first priority? And I think the second thing is I notice you mentioned the partnership with the bank here in Canada. What about the banking aspirations in the U.S. And is there a partnership, is there not, do you think that the cross-sell will actually work from retail banking to your business?

Well, I think in terms of the first one, the objectives we have for this business as I mentioned is to aggressively grow our revenues and earnings outside of Canada and to extend our lead inside of Canada and we're beginning to get our management team and strategy teams together to identify specific tactics and initiatives above and beyond the great work that's already underway. So there's a strong momentum that Peter has highlighted in his remarks outside of Canada already, and we'll look to accelerate that.

With respect to Canada, there is a very solid partnership between our Asset Management business, which is within Wealth Management and the branch distribution side of our investment business in Canadian banking. It's a very unique success story because if you look around the world, in fact, I think we're one of the leading manufacturers of investment products for a bank branch network. I know there's lots of good things under way with respect to the working relationship between Dain and Centura and I expect that to continue, particularly as both businesses focus on growing their business in the U.S.

Darko, I could only add, this is Peter Armenio. Especially in where our geographies overlap, when you think of the Southeast and a lot of the initiatives we've got on the go there, clearly, to sort of make this one plus one equal three from a competitive perspective, we've got to work together. So there's no issue around that. The teams are pretty engaged on both sides and George and I feel very much like partners on this exercise and we're going to make sure that it works.

One thing I would add too, Darko, is that if you look at our Wealth Management business in the United States or in Europe or outside of North America, there's no question that trust products and credit products are becoming increasingly important to those franchises.

As Peter mentioned in his remark, our premier line of credit we've got about $1 billion out through the Dain network. That is a GPB product. That is not a bank Centura product. It's basically linking credit and the same thing I would suggest on the trust side as well into the Wealth Management product offering. So I wouldn't just focus on synergies between Centura and Dain. I would focus on the whole evolution of credit, trust, investment, mutual fund, product and the convergence that's occurring. And one of the things we want to do is make sure that we're well positioned to take advantage of that convergence, regardless of where it comes from across the organization.

Okay, great. Thanks very much and if I just had one small request. I wonder if we can get data on this division prior to you actually reporting the quarter next -- in May.

Darko, we're working on that right now, so our plan is of course to report the second quarter under the new segments and we'll let you know what we of course have an objective to get there before we report our Q2 results but we're still in process.

Okay, great. Thanks very much and congratulations on a great quarter.

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

I was just going to make the exact same request as Darko. That is awfully important to us, particularly if next quarter is anything like this quarter.

I think Janice is giving the right answer, but we are certainly going to move heaven and earth to get there. It doesn't always just involve us wanting to do things. It involves external auditors and all sorts of things, but we certainly respect that and we'll do our absolute best.

Okay.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Nixon.

Okay, well, I would just conclude what I started which is to thank everyone for joining us for the call and we look forward to answering any further questions that you might have and we look forward to our call at the end of next quarter and I hope everyone has a good weekend. So thanks very much for joining us.

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