Royal Bank of Canada (RY) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the RBC 2007 third-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.

Thank you very much, operator. Good, afternoon, everyone and thanks for joining us. Presenting to you today are Gord Nixon, our CEO, Morten Friis, our Chief Risk Officer and Janice Fukakusa, our Chief Financial Officer. Following our formal comments we will open up the call for questions from, analysts. We ask that you please ask one or two questions and then requeue so that everyone has an opportunity to participate.

In addition I would like to thank our shareholders who e-mail questions to us. Our management team will be addressing your questions in their remarks. The call will be one hour long and we will be posting our formal comments on our website shortly after the call.

Joining us for your questions are Peter Armenio, head of our U.S. and International Banking segment; George Lewis, head of our Wealth Management segment; Marty Lippert, head of Global Technology and Operations; Barb Stymiest, our Chief Operating Officer; Jim Westlake, head of our Canadian Banking segment and Chuck Winograd, CEO of our Capital Markets segment.

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 will now turn the call over to Gord Nixon.

Thank you, Marcia, and good afternoon, everybody. Before I turn to RBC's performance I would like to make some opening comments on the Canadian economy and then address what is happening in the financial market.

As you know we have experienced strong economic growth in Canada in recent years as growth has been largely driven by an extended period of low and stable rates, strong consumer spending, low unemployment and a robust business environment. Today the fundamentals of our economy continue to remain solid as unemployment is at a historically low level and retail sales remain strong. Overall the Canadian economy is expected to grow at 2.6% in '07 and our outlook remains positive.

As we examine what is happening in today's financial markets I do believe it is important not to lose sight of those fundamentals. Global financial markets as you well know have been reacting to issues in the U.S. subprime market for some time now. Until recently they have been largely contained. However late in the third quarter these concerns escalated and spilled over into other markets, including high-quality debt markets that are not directly related to the U.S. subprime market. The result has been increased volatility, wider credit spreads and the lack of liquidity in certain assets. We have enjoyed robust capital market conditions for an extended period of time and now credit markets are experiencing a correction.

During the sustained period of low rate, access to capital has been relatively easy, which created a surplus of liquidity in the market. The excess liquidity led to some disconnect between debt prices and the associated risk.

Investors are now reevaluating their portfolios and as some reduce or eliminate certain positions it is causing general [flight] to quality. Those who hold higher risk, more complex investment products are having [difficult] finding buyers and these markets are going through this period of the liquidity.

It is important to recognize that for the vast majority of investment the underlying assets have not deteriorated in quality. I expect that it will take some time before we return to more balanced conditions.

Now the bad news is this recalibration process brings with it challenges, not just with respect to balance sheet management but it will also impact business activity in certain areas. The good news, though, is the volatility that we are experiencing will also create opportunities. Risk is now more appropriately priced, which we believe will have a positive long-term impact on our return on assets.

During periods of turmoil in the past the strength and breadth of RBC's capability have allowed us to grow our rate of client acquisitions and market share.

There are a few points I would like to emphasize. First, we have a solid capital position and our Tier 1 capital ratio is well above most global financial institutions. We have prudent risk management practices, designed to proactively manage exposures and control risk. Our current liquidity and funding position is sound and we have a comprehensive framework for managing liquidity in funding.

I'm very comfortable with the quality of the businesses that we are in. In fact, the diversity of our businesses across and within banking, insurance, Wealth Management and Capital Markets is a core strength and I believe a competitive advantage of RBC.

I will briefly comment on a few topical areas of recent concerns. The U.S. subprime market, leverage buyouts or LBOs, hedge funds and nonbank sponsored asset-backed commercial paper programs. Morten will elaborate and cover other issues of interest with respect to balance sheet and risk following my remarks.

First we do not originate U.S. subprime and our exposure to U.S. subprime residential mortgages' back securities and collateralized debt obligations is minimal. Our underwriting commitment to LBOs are also quite minimal as is our exposure to hedge funds. We are not anticipating any significant impact on our results from these areas.

Turning to asset-backed commercial paper the sector that has been [in] liquid in recent weeks is the Canadian nonbank-sponsored conduit, with general market disruption facility. Our exposure as an owner of this paper as a distributor of this paper or a liquidity provider is nominal. With respect to banks sponsored conduits, our Canadian based asset-backed commercial paper program is among the smallest of the Canadian bank. Over 70% of our conduits are U.S.-based and all of our programs have and always have what are referred to as global or U.S. style liquidity, meaning that they do not require market disruption to occur for back-up liquidity to be available. None of our conduits have required this back-up liquidity.

We apply the same prudent standards when it comes to our clients. All of the asset-backed commercial paper held by RBC Asset Management is sponsored by the major Canadian chartered banks with full liquidity committed and we do not hold any nonbank-sponsored conduit in RBC Asset Management or in any of our private client accounts.

Now turning to our business strategy we remain focused on our strategic goals, which are to be the undisputed leader and financial services in Canada, to build on a strength in banking, Wealth Management and Capital Markets in the United States; and to be a premier provider of selected global financial services. In our quarterly earnings release you will see just a few of the many achievements that demonstrate the progress we are making to extend our leadership in the domestic market and grow our business outside of Canada.

We grew earnings this quarter by 19% from a year ago as business in all areas remained strong. Revenue was up 5% this quarter but it was up 9% when you exclude the impact of the new financial instrument standard. I would like to make a few remarks about the performance of each of our core business segments and Janice will review our quarterly results in a little more detail after Morten.

Our Canadian Banking segment continues to underpin our franchise. We have been using our position of strength to significantly reinvest in our business; and it is paying off. This quarter Canadian Banking earnings were up 6%. Banking, pure banking-related revenue, was up 8% reflecting strong growth in loans and deposits, which were up 8%. We're continuing to gain market share. Net income in our banking-related, pure banking-related operations was down slightly as a result of the significant investments we have made in this business, as well as increased provision for credit losses which were particularly low last year and some margin pressure.

We have invested heavily in the last year in our client facing staff and infrastructure as of our plan and Janice will elaborate a little on that. These investments have strengthened our overall business and are enabling us to raise our service levels so that we can increase client loyalty and retention; and this is reflected in our market share growth. We believe our expense growth will moderate going forward while revenue from this investment should continue to grow, helping us drive operating leverage in the Banking segment.

In Wealth Management our businesses continue to deliver strong results with earnings up 30%. We have consistently grown net mutual fund sales in our fee-based asset book. In our U.S. and international Wealth Management business we have also continued to invest in infrastructure and people.

Overall our Canadian Banking and Canadian Wealth Management businesses together had a very strong earnings growth in the quarter. U.S. and International Banking net income increased 6%, reflecting revenue growth in RBC Dexia, at our expansion of banking in the U.S. (inaudible). We're very pleased with the success of RBC Dexia and its growing contribution.

We are also making good progress at RBC Centura when this quarter we started to realize the full impact of integrating Flag and the branches that we purchased from AmSouth.

Capital Markets had a good quarter with net income of 19% with robust performance across most businesses. We had higher M&A in origination activity. We also had solid trading results despite the difficult market during the month of July.

Over the last several years we have also made strategic investments to strengthen our Capital Markets capability in selected product areas and geographical markets. These investments have increased the overall diversity of this segment; and I believe this diversification will be a source of strength in these challenging times and market conditions.

Turning to slide 6 you will see that we are progressing well towards our 2007 objective. Diluted earnings per share have increased 20.5%. Return on equity of 25.1% is 180 basis points higher. Our nine-month operating leverage is slightly below our annual objective of greater than 3% which reflects the growth in our business and the significant investment in growth initiatives as well as acquisitions. As I mentioned before we have solid capital position with our Tier 1 capital ratio at 9.3%.

Slide 7 and 8 show our track record of consistently outperforming the market in delivering top quartile shareholder returns for investors. As you have already heard this morning we announced a C$0.04 increase in our dividend to C$0.50 per share. Over the last few years we have taken advantage of our excellent performance to reinvest significantly in our businesses, and our ability to serve the needs of our clients in every market is as strong as ever. I'm certainly confident that we are well positioned to make the most of the opportunities presented by the volatility and uncertainty in the current market.

With that I will turn it over to Morten.

Thanks, Gord. I will begin by reviewing U.S. subprime, leveraged buyouts, hedge funds and the asset-backed commercial paper market, all areas that Gord Nixon highlighted at the outset. I will then discuss U.S. RBC's trading performance and view our credit portfolio and overall credit quality.

Starting with slide 10, we don't originate subprime loans and have minimal exposure to U.S. subprime residential mortgage-backed securities and collateralized debt obligations. At July 31, 2007 our net exposure to these securities was C$1.1 billion, which represents less than .2% of our total assets. Less than 10% of this exposure relates to RBC Centura, and is associated with this investment portfolio.

All our investment-grade was 59% rated AAA. We don't hold any subprime residential mortgage-backed securities that have been downgraded or are on negative watch. Also our exposure to CDO Squared is nominal and most is hedged.

Looking at leveraged buyout underwriting commitments, it is important to differentiate between recent deals that are properly priced and structured for today's markets and precollection deals that were structured and priced before the credit environment changed. We (inaudible) spent C$2 billion in LBO underwriting commitments and of this approximately C$1.3 billion are pre-correction underwriting. This represents approximately .2% of our total assets.

No single commitment exceeds C$250 million and we have no covenant like deal. We have placed paper on all of these through the last three weeks, demonstrating continued market acceptance of all of these transactions. We are confident that in aggregate we will be able to place these at a profit.

With respect to hedge funds our exposure is modest, collateralized and not concentrated in specific funds or strategies. We conduct regular and extensive due diligence on our hedge fund counterparties and have prudent limits in our exposure to individual names and the sector as a whole.

Turning to commercial paper, at the end of Q3 we had approximately C$40 billion in backstop liquidity facilities for asset-backed commercial paper programs. This represents normal course commercial paper programs with little or no leverage. Of this 94% was committed liquidity for RBC-sponsored conduit.

Our RBC-sponsored conduits have five significant attributes. First none have drawn on their backstop liquidity facility. Second, all have fully committed liquidity facilities, meaning that they do not require a market disruption to occur for the back of liquidity to be available. Third, over 70% are U.S.-based conduits. Fourth, none issue extendable asset-backed commercial paper. And fifth, all benefits from the program-wide credit enhancement facilities provided exclusively by RBC.

The segment of the asset-backed commercial paper market that has received the most media attention recently is the Canadian and nonbank-sponsored conduit segment. These programs are experiencing significant liquidity issues. As Gord stated, RBC is not a significant participant in this market and our current commitments are minimal.

Looking at market risk on slide 11, we recorded six days of net trading losses this quarter, none of which exceeded the global value at risk for their respective day. As we all know, equity and credit markets experienced significant volatility in the latter half of July contributing to five out of the six net trading loss days. I believe we managed well through some challenging market's conditions. The breadth of our trading businesses diversifies our market risk for any particular strategy and helps reduce our overall volatility.

We have been managing well through the continued volatility in August. Results in individual books have been consistent with our risk measures and well within our bar and stress limit. Volatile market conditions can also create opportunities, and in fact with our broad range of trading businesses we have been able to make money.

Moving on to credit on slide 12, the overall quality of our loan portfolio remains steady. The trend in provisions has been stable this year but has been at a higher or more normalized level compared to a year ago. There's no clear indication of a major negative trend in any specific segment of our portfolio.

On slide 13, you will see that our gross impaired loans ratio remained stable at 0.39%. The uptake of two basis points in gross impaired loans this quarter was mainly due to a moderately higher level of impairment in two areas. Canadian and commercial small-business loans and U.S. builder financed. This group of loans represents a small component of our overall portfolio.

New impaired formations and the consumer portfolio remains stable and equal to the [nine] quarter average. New formations in the business portfolio are coming off historically low numbers and represent normalization in this area.

Turning to slide 13, our provision for credit losses and dollars were up from historical low levels in the prior year but as you can see were comparable to the second quarter of 2007. Quarter-over-quarter in our consumer portfolio we saw slightly lower provisions in our credit card and personal and residential mortgage portfolio. The growth of the credit card book is solid; and we are priced correctly for the risk we take on in this portfolio. We are very comfortable with our residential real estate book as virtually all of these exposures relate to Canadian residential real estate which consist of high-quality loans. Two-thirds have an average loan to value ratio below 70%. The remainder has an average loan to value of 90%.

As a reminder, Canadian residential mortgages with a loan to value higher than 80% are required to be covered by mortgage default insurance.

Turning to our business portfolio we saw slightly lower provisions in our small-business and commercial loan portfolios, quarter over quarter. We currently have no concerns regarding any specific sector exposures in our business loan portfolio. We've had sector and single lien limits consistent with our risk appetite and as a result are not overly concentrated in any particular sector.

Within the financial services sector, banks make up the largest part of our exposure. Our exposure to nonbank financial institutions is well diversified. The unsecured exposure is well-controlled and predominately to well rated counterparties. The exposure to a smaller or less strongly rated player in this sector is diversified, maintained at the modest level and well collateralized.

Commercial real estate represents our largest sector exposure. The portfolio is well diversified and we're not experiencing any difficulties in this sector.

To sum up our loan portfolio is in good shape and we do not currently see any significant negative trend. At this point I will turn the call over to Janice to discuss our overall third-quarter results as well as the results of individual business segments.

Thanks, Morten. As Gord said we had a good quarter with earnings up 19% from the same period last year as shown on slide 16. These results were largely driven by solid performance across our Capital Markets, Wealth Management and Canadian Banking segments, supported by generally favorable market conditions and a lower effective tax rate.

Revenue was 5% higher this quarter or 9% higher once you exclude the impact of the new financial instrument accounting standards. Turning to slide 16 net interest income increased in our Canadian and U.S. banking businesses, largely driven by higher volumes in loans and deposits.

Slide 17 shows that strong Wealth Management-related activities drove non-interest income higher. So this was partially offset by lower fixed-income trading revenues.

On slide 18 you will see that non-interest expense rose 11% from a year ago. This was primarily due to investments we made to support our increased business levels and growth initiatives, including our recent acquisitions.

Slides 19 and 20 clearly illustrate the strength of our balance sheet and our exceptional year-over-year growth in client assets under management and assets under administration.

Turning to slide 21 as Gord mentioned earlier our Tier 1 capital ratio of this quarter was 9.3% which is comfortably above our 8% objective and well above the 7% regulatory target. I would like to add that our access to liquidity has not been significantly impacted by the current market conditions and we continue to have access to both short- and long-term funding. While spreads have widened for all issuers increasing our cost of funding, this also allows us to earn higher spreads in other parts of our business. Our name continues to be well-received in the market and we remain among the lowest cost issuers.

I will now review the quarterly financial performance of each of our four business segments.

On slide 23 you will see earnings were up 6% for the Canadian Banking segment on a consolidated basis. This quarter we provided separate disclosure of our banking-related operations and our global insurance business to give our investors better transparency. So I will speak to these individually.

Strong growth in volumes including 14% in the residential real estate loans and 9% in personal deposits contributed to an 8% increase in revenue in banking-related operations. Net income decreased slightly from a year ago, primarily due to business reinvestment, increased provisions for credit losses and narrower interest margins.

First, we made significant investments in the past year in our client facing staff and branch network. We added 23 branches and almost 1500 people, representing a 6% increase in our sales and service personnel over the last year. Second, we were coming off cyclically low provisions for credit losses year-over-year. Third, we experienced some margin compression due mostly to a change in product mix. We had stronger volume growth in lower yield products such as home equity; higher margin products such as unsecured personal loans and cards also showed good growth at a slightly slower rate.

In addition loans grew faster than deposits with the difference in growth rate being greater than in the prior period. This had an impact because the spread we earn on deposits is less than the spread on the loans.

Our net interest margin decreased by 11 basis points compared to the prior year, largely due to the change in portfolio mix and the steepening of the yield curve. The loans and deposit product mix change I mentioned earlier is amplified in the standard net interest margin calculation since net interest margin takes the total spread divided by earning asset balances. Compared to Q2 of 2007, NIM decreased by 10 basis points. However as a reminder our Q2 NIM was positively impacted by funding investments made in the second quarter that related to the first quarter and the impact of applying the effective interest method under the new financial accounting standards.

Overall, we are pleased that we've continued to deliver stable net interest margins over an extended period. A key point to remember is that we grew our net interest income by 7%, year-over-year. The revenue growth of our three banking-related businesses is shown on slide 24.

Turning to our global insurance business on slide 25, earnings were higher compared to a year ago, up 59% or 72% adjusted for the impact of financial instrument's accounting standards primarily due to improved disability claims experience and solid growth in our European life reinsurance business. Our disability claims experience improved in Q3 and year-to-date is in line with our expectations.

If you turn to slide 26 you will see results from Wealth Management. This segment grew earnings 30% year-over-year. NIE increased 16% primarily due to increased variable compensation on higher commission-based revenue and higher cost supporting our business growth. As you can see on slide 27, revenue growth over the last year has exceeded 15% in each of the segments' (inaudible) business line.

Moving on to U.S. and International Banking, on slide 28, you can see year-over-year earnings were up 6% largely due to higher revenues in RBC Dexia OIS and the inclusion of our recent acquisitions of Flag and the AmSouth branches. We also had higher costs to support increased volumes at RBC Dexia and our expanded U.S. banking network, which is 26% larger than last year.

Slide 29 shows the revenue growth in this segment to business lines.

Turning to Capital Markets on slide 30, earnings growth 19% over last year, primarily due to robust mergers and acquisitions and equity origination activity, and higher foreign exchange and equity trading results. This was partially offset by lower fixed-income trading due to U.S. subprime market concerns and its effect on other financial markets.

Total revenue for the segment was up 13% from the prior year. Expenses increased 7% from a year ago mainly due to the inclusion of recent acquisitions and higher staffing levels, but were partially offset by lower variable compensation due to lower trading results.

Revenue growth in our Capital Markets businesses is shown on slide 31.

Slide 32 illustrates the components of RBC's total trading revenues. This quarter, fixed-income and equity trading revenue were down relative to last year, largely due to the challenging market conditions that I just spoke about. However on a taxable equivalent basis, equity trading was up.

I will conclude my comments by reiterating that Q3 has been a solid quarter overall and the bank is on a good forward trajectory. At this point I will turn the call over to the operator to begin the questions and answers.

(OPERATOR INSTRUCTIONS). Jim Bantis. Credit Suisse.

Just got a couple of questions. One, focused on the retail bank and I guess for Jim Westlake. Can you just kind of give us some color and guidance in terms of whether the interest margin compression in terms of the factors that were described in the pick up in operating expenses are a one time hiccup this quarter or a trend we should be considering for the next few quarters going forward?

Sure. Thanks, Jim. Maybe if I could just -- Janice went through some of the numbers. I think what I really like this quarter is what I'm going to call market momentum. We have been building that all year and that is what we have been investing in. A lot of the product mix changes reflects great volume growth in balances. Home equity was up over 14%. Our total deposits up over 5%. Our savings growth was over 9%. And we did that with very solid pricing. So I'm very pleased with that and the momentum that we have had all year going forward.

The NIM, really, is a reflection of the two factors. One, we had quite a product mix change based on all the different products we have been introducing to the market and the growth in the home equity side. And there was -- we did not mention it much -- but a pretty steep rise in the interest rate curve this quarter which had an impact as well in terms of the large mortgage business.

The NIE, I think that I would say that that is peaking out as we have been investing all year. And certainly my expectation would be that that will level off and then as you go into year-over-year measurements by quarter would be at a much lower level.

And then, finally, I think the other big factor that throws into our numbers is the PCL, and, frankly, we were lower than Q2. We were pretty pleased with the performance of our loan book and about on plan. And just when you compare it to that incredibly low quarter we had last year, that is a C$70 million swing in one quarter which is 10% of our earnings. So those are kind of the big factors that go in.

So a good market momentum is kind of the reflection of the investment and I feel good about the position.

Thank you, Jim. The next question is for Chuck, and Chuck, I know the team has been working hard in building a global wholesale bank and differentiating yourselves versus the peers here in Canada. Can you talk about the market conditions, let's say over the next quarter if they extend this way, what kind of impact or knock on effect it may have on your business development out of London as well as your Asian operations?

Well, I think that clearly there are mixed impact from the short-term. I mean market conditions are more difficult and while there are areas of the business that are actually quite good, overall it is not going to be the type of period that we have enjoyed over the last couple of years. But basically looking forward, there really is no change to any plans we have got. Based on the fact that we expect that after a period of stabilizing whenever we begin to stabilize -- I'm sort of hoping and knocking wood that that has happened -- basically we expect the business to continue to be a very strong business.

And there are particular areas where we see more opportunity, and I guess there are a couple that we see less opportunities. But, overall, we are still very optimistic about what we have got, and we expect to be able to turn it into something much better than it is.

Chuck, what are the couple of areas that you see that you have still got large opportunities on?

I think that the infrastructure business continues to be very strong. The fixed-income business is still a business that is very healthy and will have opportunities. We think that a lot of the trading businesses when you are a liquidity provider and there is no value to liquidity, are not as valuable. I think it is clear that there is higher value to liquidity than there has been.

And just from the standpoint of our proprietary businesses -- most of which are located outside of Toronto -- effectively the real problem in those businesses has been the oversupply of capital. You might have noticed in the last couple of weeks a lot of the capital disappearing. And that I think lays the groundwork for one of the most important things that is going on how in the world which is the repricing of risk. And the repricing in risk is just another phrase for higher spreads. And higher spreads gives us a lot of leverage, operating leverage and financial leverage in terms of the way we operate.

Chuck, just my last question, you have got the most grey hair in the group there and you remember '87 -- .

That is a compliment to me.

Figuratively speaking. (multiple speakers). When you look at what is going on in the markets right now, how much worse is this then 1998, and is that the potential to get to 1987-like conditions?

Well you know, actually I mean, and I'm not commenting on how we have done because we have actually done quite well through this piece. But basically it is, I think, more complex, deeper and broader than 1987 was. It is just that 1987 was really in one product which was equities, and equity is the [marquee] product.

This has been clearly much, much more difficult, complex and has already lasted longer in many respects than the 1998 loss. But it has been in much different product mixes. It has been been more in what I call subprime expanding into higher quality mortgages as it has gone on. It has been a credit issue as credit from the standpoint of the credit curve moving up and quite major increases as a result of the [fund] bridge loans. And so that would be the second aspect. And then the other aspect, which is very -- has been very substantial, has been what I would call the equity stock correlation or equity correlation which have matching either relationships between stocks or between indexes and their components, which has been a very substantial part and really has been a part of the delevering that has been going on.

Those three things have really occurred without much move in the either interest rate on an overall basis or market, equity market on an overall basis. So it is very different from anything I have seen before.

I might just add, Jim, that from a strategic perspective we have always been -- and you have heard me say this many times -- focused on a target of somewhere between 20 and 30% with sort of 25% being the target for our wholesale businesses. I think if you look at this quarter it comes in at about exactly 25%. I think as -- there's no question the world is deleveraging and it will be a different environment. I think that we remain very committed to continuing to maintain that. As I think Chuck alluded to, notwithstanding some short-term turmoil I think the loss of opportunities and probably more so for strong well-rated financial institutions and particularly those, i.e., banks versus investment banks, where credit pricing becomes a competitive advantage as opposed to just pure liquidity or other parts to it.

I would add there are a couple of businesses that clearly are smaller ones that are going to have to be [redone]. None that really are major or significant profit contributors. We sit here and we are obviously working hard like everybody else is to get through the period of time, but we sit here and say, "What are the prospects for a bank our size with commitments to do well in the marketplace and can we do relatively better than we could have before this happened?" And that answer is a clear yes.

Our prospects are better on a relative basis and we can clearly do better than we could have before this all started.

Andre Hardy. RBC Capital Markets.

Chuck, when we look at slide 11, which shows trading revenues and the VAR, obviously the second half of July was rough. It looks like credit spreads have widened further. Since then we have had more weakness in subprime indices. So is it a fair comment to say that so for this quarter looks worse than the second half of July? Or were there actions taken in your trading book or otherwise to mitigate the impact of what looks like has continued to be a worsening environment?

I just hesitate to make any comments that talk about how our earnings are going. That is the problem. But basically it's been a difficult time in the market and I think we have done quite well, considering it.

Maybe if Peter Armenio is there, I got a question on the U.S. International. We had a 21 increase in revenues with a 6% increase in income. So can you talk about what drove the cost increases to be larger than the revenue increases and whether some of that may fall off going forward?

Sure. Most of those cost increases came from our acquisitions and the banking side of things. The other part of it was also RBC Dexia which continues to grow its business and with that comes some of the costs to continue to make sure we do the right thing on the service side. The combination of Dexia's performance and the acquisitions we have been making at Centura have contributed to the higher cost overall.

The good news is that we have taken care of virtually everything that had to do with one-time items in this quarter. But this was probably the last quarter we had that. So what you should start to see hopefully it over time is both the acquisitions and the banking sector starting to contribute more positively.

So as you're saying Q3, there were integration expenses on the banking side?

That is right.

And within Dexia were these some investments that were made to take you to the next level scalewise or were those investments we should expect to continue as the revenue grows?

I'm not sure I get your question, but I think both of them but for Dexia for sure, it was all with regards to investment to grow the business, to continue to grow the business.

Sumit Mahotra. Merrill Lynch.

The first one for Janice or Jim Westlake. Just a comment on the sales and service growth, I think the 6% year-over-year you mentioned. It looks like in your Canada staffing numbers the bulk of that came this quarter. First off, is that correct? Secondly, do you think the bulk of the staffing for the growth initiatives is done? Thirdly, the growth rate we saw this quarter, the 8%, you talked about that starting to trend down. You have been somewhere around 3% to 4% over the last year or so.

Is that a level we can look for RBC Canadian Banking to return to in the near-term?

I will start and then Jim will chime in. The first question that you asked was about our staffing levels in Canada; and what I said was that we added about 1500 people to the frontline staff. If you look at our overall Canadian staffing levels, you're also looking at staffing levels in some of our service delivery units that also have gone up. We have increased staffing on the service side through our global technology and operations platforms to increase our client service and client satisfaction. With respect to the sales staff that Jim has added in this network it is about 1500 people which as Jim said is picking up this quarter.

If I can just -- I cannot give you terribly specific numbers -- but you know we have done all of the hiring as in a few more new branches that we are opening. So we have gone through the bulk of staffing up and building out some of the sales forces that we wanted to. So as that hits a peak, I think you would see it sort of step down over time as you start comparing the year-over-year quarters, as we won't be adding at the same level.

I might just said because I think maybe we're a little out of sync with some others in that we were very early on, if you go back to sort of client first '03, 04 to go through a very rigorous process of reduction. And as we said at the time we were going to reinvest a lot of those proceeds in the front end of our businesses.

If you look at what we have done over the last -- really over the last couple of years but it certainly shows up -- is we have continued to invest in spend at a time when I think others have been perhaps spending less if I can describe it that way. And I think that that is what Jim referred to as being reflected in, if you look at market share, gross market share performance. And I think a lot of that, that planned spend it sort of peaking at this point in time.

Okay, and thanks for that detail. One more from me is actually for Peter Armenio. We heard that there is no origination of subprime mortgages being done in the U.S.. We also heard that Centura securities portfolio may have some MBS that are subprime backed. The third thing I wanted to know about Centura is the actual loan composition, the portfolio composition right now of the loan book.

How much is -- what is the commercial/personal split these days? And how comfortable are you with the commercial real estate exposure, specifically for Centura given it looks like there was a noticeable uptick in gross impairments this quarter.

I'm going to let Morten Friis start with that and if there is anything I can add, I will.

We can follow up off-line if you like if you need further detail. But in general terms in terms of the general loan composition, I would emphasize on the consumer side it is a very small portion of unsecured. It is high-quality, either conventional first mortgages or secured consumer loans on the consumer side. The business and commercial loans are of high quality. The portfolio quality in that segment is holding up extremely well. The area where there was a reference to an increase in impaired loans was in our U.S. builder finance segment. And that -- the largest contributor to the growth of impaired in the U.S. and International Banking platform.

So we are seeing -- that is a national footprint. I would emphasize we have no charge-offs in the business this quarter. And we actually have a detailed fall review, don't see any near-term reasons for an increase in provisions and charge-offs of that portfolio. But clearly the runoff in impaired we're expecting the potential for some modest additional material ration there. But given the size of the portfolio it is not something that is going to have a large impact on U.S. [NOI] or RBC as a whole.

I would just add two more things to that on the builder finance. One is as you may know the portfolio is really focused on more midprice type of housing; so it avoids the risk of high-end housing or high-rise condos and those kinds of things. And the second point I would make is that most of the loans are short-term and the turnover -- every 18 months.

Mario Mendonca. Genuity Capital Markets.

A question for Chuck. I can appreciate that it is difficult to give us an indication of how things are shaping up in the fourth quarter on the Capital Markets site, specifically in the U.S. But perhaps you could help us by describing the nature of the structured finance business in the U.S., so fixed-income trading in the US. When I said describe the nature, is it facilitation, is it proprietary trading equipment? Is it CDO structuring? Is it a leverage business? Is it relative value business? That sort of thing. Is there anything you can offer us?

Yes, in terms of the U.S. fixed-income business, we have a number of aspects of U.S. fixed-income businesses. I guess the core business, the business that we have really adjusted from what was original model that Dain Rauscher had into more of a Capital Markets model, and that has been very much a work in process over the last two or three years and not I might say a particularly profitable part of our operation as we have been getting it going.

We have a municipal business in the U.S. that is fixed-income. And again these are primarily dealing with clients we do -- we do -- we have capital network but it's not a -- relative to what we do on the global basis. It is not a large part of our business. We have a securitization business in the U.S. that would be part of the fixed-income business. We have a very small high-yield business. It really is a diversified business that is not particularly large and not particularly capital-intensive. It has not been something that we have really focused that hard on in this last month.

The structured businesses we have are primarily run out of London, of which -- and we have structured equity that is actually run out of Toronto. We operate in either geography. But basically those businesses, structured credit has been where most of the impact has been. I would say that that has never -- that for us has been a business that we have labored building and has never really made us money. In fact, it just has not -- it never has and clearly that has been the area where most of the issues have come in the last month, for the market. And we have had some but basically nothing that is not very manageable.

And in fact, structured rates and equities and (inaudible) would have done very well through this (inaudible) and we have done very well with them.

Maybe, can I try this in a different way? In 2006, started around Q2, 2006, the Company's fixed-income trading and trading revenue generally hit -- just hit a new plateau and it stayed there for five quarters. What might be helpful then is to understand what was driving that particular new plateau and trading and fixed-income trading in particular?

You look across it and there are probably seven big components. The amazing thing about it is that if you look at it and you say different quarters, different parts of the equation have really driven -- I mean if you call it a plateau. I would call it a plateau. But basically there is no one influence you could look at and say, "This has been a particular problem."

I would say that over that period of time probably structured credit, per se, has been one of the areas that has held us back from reaching higher plateaus.

I would -- because it is an important question -- in that if you look at our fixed income business most of our fixed-income business is pretty straightforward, nonstructured fixed-income business. That period was a very strong period for the fixed-income markets generally. I mean I think if you look at -- perhaps it changed in the last little while with interest rates coming down, but it was just a very strong period for traditional cash fixed-income products. So it is not -- it does not have a lot to do with structured credit or [complexed] fixed-income, because as Chuck said, that has never been an area where we've really made money. It was really more just with respect to our straightforward fixed-income trading activities of which we've got a very wide and broad business.

And that is the business that has slowed a little bit in the last second half of July?

Yes, that has certainly been a business that has been an issue.

Okay, and my second question -- sort for fodder my first one. My second question really relates to the asset-backed commercial paper market. I can appreciate that Canada has been hanging in, or the bank sponsor has been hanging in a lot better. But is there anything you can do to help us understand even if it is bank-sponsored, what sorts of assets are we talking about backing that commercial paper?

In the bank business?

The bank-sponsored. Because I appreciate that Royal has very little I think the word's nominal and nonbank.

Maybe I could start just and talk in terms of talking about the RBC-sponsored conduits themselves. (multiple speakers) The predominant asset mix there is for the most part very plain vanilla, you should understand traditional asset classes. You know, credit card receivables, auto receivables, trade receivables with a very modest amount of more structured products and one of the conduits. But it is when you look by dollar amount these are easy to understand assets, traditional long history, well overcollateralized, extremely safe assets that from a CPU market standpoint are the easiest to understand.

Got it. And then I think, Gord, you said that 70% of the liquidity facilities are in the U.S., relate to the US. I think you wanted to really emphasize that because the Canadian has been where the issues have been. But does that give you a lot of comfort that the liquidity backstops really 70% relates to the U.S. where this all kind of got started in the first place?

Well no, I think I mean 70% -- I was just trying to give the breakdown between Canada and the U.S. Because we have ended Canadian market where the issues have been on a relative basis we would have a fairly small program. Having said that there has been no liquidity draw downs in the bank liquidity in Canada, either. I think the U.S. market is a much bigger, deeper market. I think the size of the U.S. securitization market -- Morten, correct me if I'm wrong -- but I think is about C$1.8 trillion? Is that -- I mean it is trillion.

And as Morten said most of our conduits in the U.S. are very straightforward asset classes that have global style, liquidity lines and are financing. So a lot has to happen before that market has -- again, touch wood -- has those kind of issues.

But the other point I would make is from a liquidity management provision, we are quite comfortable with our liquidity plan and contingency regardless of what would happen with respect to asset-backed securities. And just using Canada as an example, if there were liquidity issues in Canada it is a very manageable number in terms of financing. There continue to be very good return, high-quality assets.

And it is a blip on the Tier 1, it taken in any way I guess is the idea?

Yes.

Darko Mihelic. CIBC World Markets.

My first question is for Morten.

Could you speak up please?

Sorry, can you hear me now?

Yes.

I apologize for that. My first question is for Morten Friis, with respect to the commentary you give us on U.S. subprime mortgages, you mentioned hedging. Am I to understand that the C$1.1 billion in the unhedged portion or is that a total sort of exposure that would include hedged positions? Can you help me out with that? And what kind of hedging for that matter? Is it insurance or is it an indexed hedge?

The reference in my comments, the hedging, was related to the very nominal amount of CDO squared exposure that we had and that that is hedged, and it hedged through the synthetic market.

So am I to believe that there could be other positions that are insured that are not included in the C$1.1 billion? Would that be a correct statement or an incorrect statement?

I'm not sure I understand your comment. I would say incorrect.

I think that there are times when we would use macro hedges of various types. And even, specifically, hedges to offset some of the positions we have. But that would not be a position we would have in place all of the time.

I would emphasize that in any event the CDO squared exposure is nominal.

Very small, yes.

I think I understand what you're getting at. The only reason why I asked this question is we've got different disclosure from one of your peers, which suggested that there was an unhedged portion of their book? And that is what they focused on and then an unhedged portion which presumably would have been remnants from underwriting that they had insured -- that they have insurance on.

And with respect to the -- to your position, if that's in the trading book I'm to understand that same mark-to-market every -- ?

It is in the trading book.

Mark to model, okay. And I guess my last question just refers back to the question with respect to asset-backed commercial paper. In -- the 70% that is in the U.S. I was not quite sure I understood. The assets backing those programs is just as solid as they are here in Canada? Is that correct?

The description of the asset classes in the U.S. and Canadian conduits at a general level is identical. It is the same types of assets, same plain vanilla, easy to understand, easy to finance asset.

Okay, great. That is very helpful. And maybe just one last question for Chuck. I guess I can appreciate the comments that widening of credit spreads would present opportunities. But I guess my question is, is that really what is happening right now in your business? Are you really running around looking for new business and generating new business and seeing opportunities? Or are you really busy sort of trying to contain risk and making sure there are not any problems in the business?

Yes, I mean, be clear. We are right now playing defense unless there are extraordinary situations trying to make sure that we get ourselves through this situation and the (inaudible) we expect to. I was referring to the long-term -- longer-term, by not the long-term being -- long-term [would all be dead] -- but basically looking out when we get this thing under more stabilized position. And I think the most important point, and I would just emphasize it is, the spreads have come in primarily because there's been an oversupply of capital. And capital is disappearing, and that is where I see the opportunity for people with a lot of capital.

But there is new business that is going on all the time, and the spreads on that new business is much better. I mean if you look at the corporate lending market, the deals that are being done are being done at very healthy spreads relative to where they were three or four weeks ago.

Michael Goldberg. Desjardins Securities.

Looking at the table on -- the tax table on page 10 of the shareholder's report, your tax-free was down 4% from the third quarter last year, with the biggest factor identified being the high-level of dividends. But if I put the number on a tax equivalent basis the tax rate is still down 2.8%. That is, I guess, then attributable to the other two items. Income from low tax jurisdictions and favorable tax settlement.

So my question is, how much was the tax settlement? And was there any tax [arb] this quarter and if so, how much?

Michael, you are quite right that the balance and when you did your rate reconciliation, the balance of the difference is related to tax settlements. Our tax settlements are fairly lumpy and from time to time we get them, depending on when the revenue authorities in the various jurisdictions complete their work. I think that from our perspective we're looking at our tax rate in the low to mid 20s and that is where we're looking at it over the course of the year. So there is some lumpiness in the expense from quarter to quarter.

So how much was the tax settlement actually?

We are not disclosing the actual settlement. But what I said is your reconciliation is in line with what has happened to our provisions for Q3.

Okay and was there any tax arb?

I don't understand what you mean by tax arb.

Okay, we can speak about it afterwards. I have another question. First let me say thank you for the improved insurance disclosure. Where I see the insurance is up at C$103 million net income this quarter from C$52 million less quarter. And last quarter you attributed unfavorable disability experience to the results. And now in this quarter disability experience was favorable.

What were the experience amounts in the two quarters and what is the swing from quarter to quarter?

I don't know if I can give you the exact swing quarter to quarter on disability results. Certainly the results this quarter had a lot of other factors other than just the disability results. I guess if you look at the nine months year-to-date, the results in this quarter almost represent a third, so maybe just all the volatility is evening out.

Is -- does the swing though in invisibility experience account for a lot of the swing in earnings from insurance this quarter?

Well, when you compare it, certainly, to Q2. So quarter-over-quarter and also interestingly year-over-year, last year our worst quarter for disability experience was Q3. This year it was Q2. So using those two comparisons, it would be rather large.

And while disability business is more volatile, I would expect that swings C$10 million, C$15 million, either way would represent kind of the brackets if you said what would the normal volatility range be.

Right. So were these normal swings this recently?

I would say that this quarter was a very solid quarter. And if you recall, yes, we typically [taught] disability incidents. And last year, last quarter in Q2 the reason for the big difference was on recoveries which was a little more unusual that we -- it was almost a little more operational. So if you are talking normal incidents and the reserves that you put up and take down with the incidents rate, that C$10 million or C$15 million would look on the size of book we have like normal volatility.

Okay, and I have one more question. Why is the minority interest adjusted for VIEs up so much this quarter at C$37 million versus C$16 million last quarter and C$12 million last year?

Michael, why don't we take the answer to that later because -- I will call you after, and Marcia will call you because it has to do with the way we're consolidating them and some of the volatility in some of the VIE. And it is as you know it is in and out and it has no impact on our net earnings. So we will give you a call after this.

Okay. One final question for Chuck. You mentioned that a structured credit has never really made any money for the bank. And a couple of years ago, TD made the decision strategically to exit a lot of structured product. Is that something that Royal is considering also?

No, I think one of the issues with respect to a structured platform is that you need a multiproduct structured platform in our view to make it work. Credit is going to be an important part of the platform going forward in terms of certainly not -- certainly going forward it is going to be very important. There is no question though with what has happened in the market though that this structuring is going to be used by clients in a different fashion then it has been used before. And we're going to be looking at some rethink of the structured credit business.

Thank you very much.

Hopefully with outside upside from a very low-level.

That goes without saying.

Operator, we are now going to take our last question. And apologies to people still in the queue. Please feel free to follow up with me after the call.

(inaudible)

I just wanted to get some further clarification on systems on this multi seller conduit issue to go specifically related to the 70% roughly C$30 billion US business. Because I've heard some comments on the call that are saying the assets in these U.S. conduits are very plain vanilla, car loans, etc. I'm looking at the note disclosure in note 11, page 45 of today's shareholder report. Specifically, the sentence "certain of the multiseller conduits also finance assets in the form of either securities or instruments that closely resemble securities such as credit-linked notes."

The disclosure goes on to say, "in these situations the multiseller conduit is often one of many ventures in the securities or security-like instruments."

So that does not sound to me like car loans. Could you just comment on that? That sounds a lot more like the credit arbitrage structures that some of the Canadian nonbank conduits were employing?

It is Morten Friis. Let me respond to that. So what I said in response to the earlier question I think it is predominantly those asset classes. One of our conduits has the ability to take on a wider range of assets which, from an ability standpoint, includes the kind of description in our note disclosure. We have a very small amount in total of anything other than the plain vanilla in this one conduit. So in total my comments are entirely accurate.

The note disclosure refers to the ability and the fact that we do have some small positions in one conduit that are slightly more structured assets.

Okay and is that in terms of the structured financial assets that are in that conduit? Is it -- is there exposure to U.S. subprime? Because this would be off your balance sheet and would not be included in the other disclosure that you provided today.

We will follow up. I'm relatively confident that there's no subprime in that conduit. In any event, the structured asset is a very small number for the conduit. And for the overall. But we will follow up to get clarification on the precise point.

Sure. Just in terms of small, because the U.S. conduits is about C$30 billion. Is that small as in a couple of hundred million or a couple of billion?

Small as in -- small in the context of one conduit. Which means that -- I mean I find it hard to be clearer than nominal small. Think tiny.

Thank you. This concludes to question and answer session. I would now like to turn the meeting back over to Mr. Nixon.

Okay, and I would just like to thank everyone for their participation. As Marcia has said, if there are any questions they will be lots of people around to deal with them. If there is any feedback with respect -- from the analysts in particular with respect to the form of a conference call that we tried to be responsive in terms of clarification on issues and speakers, etc., so we would be certainly interested in that. And we appreciate everybody's participation and we will talk again in the next quarter. Thank you very much.

Thank you. This concludes today's conference call. Please disconnect your lines and thank you for your participation.