Royal Bank of Canada (RY) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the RBC 2007 fourth-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. I would just like to caution you that this call may contain some forward-looking statements. I'll introduce the speakers of the call and the other participants in the room here today. We have Gord Nixon, President and CEO; Barb Stymiest; Janice Fukakusa; Morten Friis; Chuck Winograd; Jim Westlake; George Lewis; Peter Armenio; and Marty Lippert in the room today.

Our call will end at 2:45 PM this afternoon. And I'd like to just ask all of the analysts to limit themselves, please, to two questions each so that we can make sure that everybody gets a chance to have their questions answered.

Thank you very much. And I'll now turn the call over to Gord Nixon.

Good afternoon, everybody. I'm pleased to report that RBC had record financial results this year in 2007 with earnings of CAD5.5 billion, which is 16% up from a very good year in 2006. This performance reflects our leadership in our core Canadian businesses and growth in our nondomestic operations.

In a year that was marked by some challenges in the financial markets, all of our businesses continue to perform extremely well. Canadian Banking and Wealth Management continue to underpin our franchise, delivering record earnings for the year. We are on a strong path to the future. We have invested heavily in our Canadian Banking platform and should begin reaping the benefits of our investments as we move into the upcoming year. We expect to see Canadian Banking's revenue growth accelerate and expense growth slow.

Wealth Management delivered outstanding earnings growth of 26%, driven by our leadership in Canada. We are also seeing results from our target investments outside of Canada.

Our US and international banking businesses continue to evolve and grow. RBC Dexia delivered record revenues this year. This segment had great results if you isolate the effects of the US housing environment on our US residential builders finance business, which we will talk about in a moment.

We also had good results in Capital Markets with broad-based revenue generation across most businesses. Capital Markets' earnings were at record levels if you exclude the CAD160 million after-tax write-down that was announced earlier in the quarter.

Our solid performance reflects the diversity of our businesses across geographies and products and our strong risk management practices. I'm certainly pleased with how we manage the business in 2007. We succeeded in delivering solid returns to our shareholders while continuing to significantly invest for future growth in all of our business segments.

I would like to briefly comment on our US subprime exposures in a few topical areas. We do not originate US subprime, and our net exposure to it is minimal. We have CAD216 million of net exposure to US subprime CDOs of ABSs. We also have CAD388 million of exposure to US subprime or MBSs, which is classified as available for sale and which we intend to hold to maturity. Combined, these amounts represent less than 0.1% of our assets.

In addition, we have de minimis dealings with structured investment vehicles, or SIVs as they are referred to, and Canadian nonbank sponsored ACB with general market disruptions. We are not and have never been a significant distributor or liquidity provider for these products.

Our exposure to hedge funds is modest, and our underwriting commitments to pre-correction LBOs are also minimal. In aggregate, these amounts are very manageable, and we have provided further details in our various disclosure documents. And Morten is going to elaborate on these following my remarks.

Turning to our 2007 performance, the table on slide five shows our 2007 performance compared to our financial objectives. Our diluted earnings per share growth of 17%, ROE of 24.6% and dividend payout ratio of 43% compare favorably to our stated annual objectives and were due primarily to strong performances across our Canadian Banking Global Wealth Management businesses.

We returned capital to our shareholders through dividends, which we increased twice this year, for a total increase of 26%. And we repurchased 11.8 million shares.

Our capital position remains strong with our Tier 1 capital ratio of 9.4%, which is comfortably above our target. Our defined operating leverage was below our annual objective, reflecting higher costs supporting our growing businesses and investments in future growth initiatives including acquisitions.

Slide 6, you'll see that our total shareholder return was 16% for the year ended October 31. Our three-year returns were 25%, five year 19% and 10 years 15%. Relative to our peer group, we delivered top-quartile returns over the past three and 10 years and second over the five-year period.

Our results were made possible by a clear focus on three strategic goals. They are to be the undisputed leader in financial services in Canada; to build on our strengths in banking, Wealth Management and Capital Markets in the United States' and to be the premier provider of selected global financial services. We think we made great strides in 2007 towards achieving these long-term goals, and I would like to highlight some of those areas.

In Canada, our retail businesses demonstrated leadership throughout the year, setting an excellent foundation for future growth. This past year, we generated profitable revenue growth and positive operating leverage in our Canadian Banking-related operations while investing in client-facing staff and branches. We also introduced a new suite of personal deposit products. We grew Canadian Banking-related lending volumes by 11% and deposit balances by 6% over 2006, and we were recognized by Synovate as the best among our large Canadian competitors for service and value we provide to our customers in our branches.

In Canadian Wealth Management, we increased assets under administration by 9% over 2006. In global asset management, we grew assets under management by 13% over the year and maintained our lead in net sales of long-term funds in Canada for 16 consecutive quarters. Our broad-based Capital Markets businesses led in most elements of the Canadian market, and we continue to differentiate ourselves from our Canadian peers by leveraging our global capabilities.

Turning to our second goal, our progress in the US does continue. In 2007, we made significant steps towards our goal of becoming a preeminent bank for businesses, business owners and professionals within our footprint. We grew loans and deposits in our US banking operation in 2007, and I'm encouraged by the work we have done to build a foundation for future growth, especially in the face of today's demanding market conditions. We grew our branch network by 24% over the last year through acquisitions and de novo branches and invested in our technology platform to support our expanding network.

While our US banking business is managing through the effects of the recent downturn in the US real estate market, particularly our builders' business, we're confident in it. Morten will elaborate a little on that, and we certainly remain committed to our long-term strategy of building a strong retail banking operation in the US Southeast.

Our pending acquisition of Alabama National is evidence of this commitment and will extend our branch network by one-third in key states. Alabama National fits extremely well within our existing footprint. We will have over 450 branches following the acquisition, providing us with a solid platform in our priority regions.

In US Wealth Management, we continue to build scale by attracting new financial consultants and increasing their productivity. We also acquired JB Hanauer, which expanded our Wealth Management presence in high-growth markets in New Jersey, Florida and Pennsylvania. In our US Capital Markets business, we continue to leverage our bulge bracket position in Canada to provide expertise and product breadth to companies in the United States mid market. In 2007, three acquisitions helped us expand our client base and enhanced our capabilities in cash equities, municipal finance and US mergers and acquisitions.

Turning to our third goal, most notable development, was the announcement of our intention to acquire RBTT Financial Group. This is a perfect complement to our current footprint in the Caribbean and will create one of the most extensive banking networks in this very good region. Also, our core strength in international trust services in Wealth Management is helping us drive success as a top 20 global private bank, and we continue to expand our presence by opening offices in different international cities.

Finally, we continue to build on our global Capital Markets strength by focusing on select areas where we have competitive strengths, including fixed income, infrastructure, mining and energy. Overall, we're certainly pleased with our achievements in 2007 and we're looking forward to 2008 from a position of strength.

Looking ahead, slide 8 outlines our annual performance objectives for 2008. These are based on our three strategic goals and our economic outlook for next year, and we are defined by measures that we believe will generate strong returns for our shareholders. Our economic outlook is detailed in our Annual Report. Generally speaking, we anticipate a slower economic environment next year and expect the financial market volatility will persist into early 2008 as lenders and investors remain cautious, given the US slowdown -- sorry, the slowdown in the US housing market.

Our 2008 objectives for ROE, defined operating leverage, Tier 1 capital and dividend payout ratios are unchanged, reflecting our continued commitment to strong revenue growth and cost containment as well as sound and effective management of capital resources. In addition, our objective is to grow diluted earnings per share by 7% to 10%. Our objectives factor in the effect of our pending acquisitions of Alabama National and RBTT. We intend to fund these partly through common shares and expect to incur related upfront costs. We expect Alabama National will close in early 2008 and RBTT to close in the middle of the year.

We expect our provision for credit loss ratios to trend upwards towards historical averages, which is in line with our view of the overall credit environment and part of our planning process. While we look ahead with some caution, given the economic environment and understanding the current market volatility uncertainly, we nevertheless have confidence in the capabilities of the organization, our management team and our people to deliver on our 2008 objectives and our commit to generate top-quartile total shareholder returns over the medium term.

With that, I will turn it over to Morten.

Thanks, Gord. I will start with a review of key areas of investor focus, and then we will provide an update on our credit portfolio. In October, the credit markets deteriorated dramatically after rating agents downgraded a broad group of US-based subprime residential mortgage-backed securities and collateralized debt obligations of asset-backed securities.

Following these events, we recognized losses in our Capital Markets segment of CAD357 million pretax or CAD160 million after tax in compensation adjustments. This charge consisted of two components -- one, write-downs of the fair value of direct holdings in the US subprime RMBS and CDOs of ABS; and two, write-downs on the fair value of related credit default swaps.

Our Capital Markets' holdings of RMBS and CDOs of ABS arose primarily in relation to our role in structuring CDOs of ABS and are classified as held for trading with unrealized changes in fair value reflected in non-interest income. Our other holdings of RMBS -- our other holdings are RMBS and are classified as available for sale. And unrealized changes in fair value are generally reflected in other comprehensive income and are reflected in non-interest income only if management determines that it is appropriate that the value be written down.

Slide 10 outlines US subprime exposures in other areas of recent investor focus. As of October 31, 2007, Capital Markets had CAD216 million of net exposure to US subprime CDOs of ABS after taking into consideration protection provided by credit default swaps. We have credit default swaps with counterparties rated less than AAA by S&P and Moody's, providing protection of CAD240 million, recorded at their fair market value of CAD104 million. Other credit default swaps provide an additional CAD1 billion of protection against our gross exposure and are either collateralized or with counterparties rated AAA by S&P and Moody's.

Capital Markets had no net exposure to US subprime RMBS after taking into account credit default swaps that provide CAD1.1 billion of protection and are either collateralized or with counterparties rated AAA by S&P and Moody's.

Finally, we had CAD388 million of exposure to US subprime RMBS recorded as available for sale, which we intend to hold until maturity. Looking at Canadian non-bank-sponsored asset-backed commercial paper, where liquidity is contingent on a general market disruption, our participation in this market is nominal. As of the end of October, we had CAD4 million of direct holdings. We are not a significant distributor or liquidity provider in this market, and we do not have any Canadian non-asset-backed commercial paper in our money market funds.

With respect to structured investment vehicles, or SIVs, we do not manage any. At the end of October, we had CAD1 million of direct holdings, CAD140 million of committed liquidity facilities and CAD88 million of normal course interest rate derivatives. Our liquidity facilities remain undrawn as of October 31st, and we do not consider any of our positions to be impaired.

Turning to leveraged buyout loan underwriting commitments, at the end of Q4, we had CAD1 billion in pre-correction underwritings, meaning they were structured and priced before the credit environments changed in the summer. No single commitment is over CAD250 million. We continue to sell these down and overall are optimistic in our ability to place our outstanding commitments at appropriate prices.

Our exposure to hedge funds is minimal, predominantly collateralized and not concentrated in specific funds or strategies. We conduct regular extensive due diligence on our hedge fund counterparties and have prudent limits on our exposure to individual names and the sector as a whole. In order to alleviate any concern investors have about Alt-A exposure in RBC Centura, we have only CAD100 million that could be classified as Alt-A in our residential first and home equity portfolios of CAD4.2 billion.

Looking at slide 11, trading losses at the end of October reflect the write-downs in Capital Markets that I described earlier, resulting in one day of net trading loss that exceeded the daily global VAR. The volatility in daily trading revenue in Q4 reflect the difficult market conditions in both interest rate and credit-related products. Overall, we remained well within our VAR and stress limits. The outcomes from a risk and P&L perspective during the quarter were consistent with our risk measures.

The volatility also created opportunities, and we experienced several days of significant trading gains across different businesses. Our trading businesses are well diversified across asset classes and geography, which is helpful in managing through demanding markets.

Moving on to credit on slide 12, the overall quality of our loan portfolio remains steady for most of 2007. We remain well within acceptable range for loss rates. Although, we did see credit quality weaken in certain areas.

In our US and international banking wholesale portfolio, the US residential builder-financed business was impacted by the housing environment. Higher impaired loans, particularly in California and Georgia, largely contributed to the increase in PCLs in this segment. The increase in PCL is reflective of us taking steps early on to address the credit environment. We believe we are well equipped to manage through this environment. Our builder finance clients are reputable, well-established, and duration of the portfolio is relatively short.

Over the last 12 to 18 months, we have actively reduced our business production in some of the less favorable markets across the US. Also, to give some perspective, this portfolio is small in the context of RBC, representing approximately 1% of our total loan portfolio.

Please stand by. We are experiencing technical difficulties. Bancorporation. We performed stringent due diligence on ANB's loan portfolio and continue to monitor it actively. We cannot publicly disclose the size of ANB's residential builder finance portfolio, since this information was provided to us confidentially as part of our due diligence process.

However, ANB has publicly disclosed that they have CAD2 billion in construction, land development and other land loans. And the residential builder finance loans are part of this portfolio. The remaining 60% of their loan portfolio consists primarily of mortgages, home equity lines, commercial real estate and commercial and industrial loans.

ANB has a very strong credit culture with excellent risk management and loan underwriting practices. They do virtually no unsecured lending, and their historical charge-offs are well below their peers. We are comfortable with the quality of their portfolio.

In the Canadian wholesale portfolio, we have no major sector-specific concerns. There are no negative trends, as credit quality remains well within acceptable levels. Overall, the credit quality of RBC's retail portfolio remains in acceptable range and relatively stable.

On slide 13, you will see total provision for credit losses increased compared to the prior year and over Q3. In retail loans, the increase in specific provision for credit losses compared to prior year was primarily attributable to higher credit card provisions, which are tracking to levels we expected. Volume growth also contributed to the increase in specific provisions for retail loans. The corporate loan portfolio continues to perform well with no significant negative trends and continue to have net recoveries.

In summary, our loan portfolio is stresses confined to specific areas. Going forward into 2008, we expect overall loan portfolio loss rate to trend higher towards historical averages, largely because of increases in the areas referenced today.

At this point, I'll turn the call over to Janice Fukakusa.

Slide 15 provides an overview of our quarterly performance. Net income was up 5% from last year, largely driven by strong performance in Canadian Banking and global Wealth Management. Our results were affected by three items that we announced in mid-November. Morten addressed the write-downs, and I will explain the other two items when I review the Canadian Banking segment.

Appreciation of the Canadian dollar against the US dollar reduced our earnings in the quarter by 4% over last year and 2% over last quarter. Noninterest expense rose 5% from a year ago because of higher costs supporting business initiatives. We grew our client-facing staff, made acquisitions and added branches. Expenses were down slightly from Q3, reflecting lower variable compensation in Capital Markets and the moderating pace of investments in our businesses.

Turning to slide 16, our Tier 1 capital ratio this quarter was 9.4%, which is comfortably above our objectives. I would like to add that our access to liquidity has not been impacted by the market conditions this quarter. We are a regular issuer in a variety of markets globally. And this quarter, we continue to have access to both short and long-term fundings.

I will now review the quarterly performance of our core business segments. Starting with Canadian Banking on slide 18, this quarter, we recorded a gain of CAD326 million pretax, CAD269 million after-tax from the exchange of our membership interest in Visa Canada Association for shares of Visa, Inc.

We also recorded a charge against revenue of CAD121 million pretax, CAD79 million after-tax, for an increase in our credit card customer loyalty rewards program liability. The adjustment to our loyalty reward liability reflects higher redemption rate assumptions consistent with our strategy of encouraging clients to more fully use the RBC reward points that they accumulate by providing them with a broader range of redemption options. We expect no significant change in our run rate costs.

Canadian Banking-related net income was up 40% over last year and 34% over the third quarter. Excluding the Visa gain and adjustment to our loyalty reward liability, net income grew 7% and 2% from last year and last quarter, respectively. We had strong volume growth, particularly in residential mortgages and personal deposits. Offsets included a higher provision for credit losses, which Morten discussed.

Compared to last year, expenses were higher, reflecting the significant reinvestments we have made over the year. Our pace of investment has moderated from the third quarter, and resulted in our NIE being flat from Q3.

On slide 19, you'll see that we experienced some margin compression compared to the previous year and previous quarter. This reflected two factors -- one, ongoing changes in product mix as we continue to have higher growth in lower yielding products such as home equity lending; and two, narrower spreads on prime-based lending products in the quarter, resulting from dislocation in the credit markets. It's worth noting that with our significant volume growth, we grew our net interest income by 7% over last year.

Turning to global insurance on slide 21, we had solid results this quarter. Business growth was offset by claims experience, which was less favorable than a year ago. Our insurance net income was consistent with the third quarter.

Slide 22 shows Wealth Management, which grew earnings 10% from a year ago and 2% from last quarter. Appreciation of the Canadian dollar against the US dollar reduced earnings by 4% compared to last year and 2% compared to last quarter. Strong performance across all our business lines contributed to the increasing revenue over last year, reflecting growth in fee-based client assets, the inclusion of JB Hanauer and loan and deposit growth in our international Wealth Management business.

Our earnings are up 26% over last year. And since 2006, we have increased the proportion of fee-based revenues to total revenues from 50% to 53%.

Noninterest expense grew from last year on higher variable compensation, commensurate with higher commission-based revenue, costs related to JB Hanauer and investments for future growth. These include adding investment advisers and other client-facing professionals and opening international offices.

Moving on to US and international banking on slide 24, earnings decreased over last year and last quarter, primarily reflecting the deterioration in the US housing market, which accelerated in the fourth quarter. Revenue in our banking businesses increased for the year on loans and deposit growth from both acquisitions and organic growth. Revenue decreased over the third quarter as growth was offset by the reversal of accrued interest on impaired loans, early redemption of trust preferred debt and the strengthening of the Canadian dollar against the US dollar.

You'll see that US&I's net interest margin decreased by 15 basis points from the third quarter. This is because of the two items I just mentioned. Early redemption of trust preferred debt reduced NIM by 9 basis points and the reversal of accrued interest related to loans that were classified reduced NIM by a further 6 basis points, the impact of early redemptions and shorter terms. And we will get the benefit going forward.

RBC Dexia's revenue was up 20% from last year due to a growing client base and higher transactional business. Revenues declined over last quarter because of seasonally higher results in the third quarter. Noninterest expense was up over the prior year, reflecting investments in US banking, including adding 56 branches through acquisitions and opening 10 de novo branches.

Business growth in both banking and RBC Dexia also contributed to higher expenses. Compared to last quarter, non-interest expense was down due to the favorable impact of the stronger Canadian dollar on US dollar-denominated expenses and lower expenses in RBC Dexia, reflecting seasonally lower business activity.

Turning to Capital Markets on slide 26, as Morten explained, we recorded a charge of CAD160 million after-tax, which reduced our net income. Also, appreciation of the Canadian dollar against the US dollar and British pound reduced earnings by CAD28 million from last year and CAD19 million from the third quarter. As a result of these two factors, revenue and net income were down over last year and last quarter. The strength of our diversified portfolio helped mitigate the impact of these factors. Many businesses performed well in the quarter, including equity derivatives and foreign exchange trading, M&A and our daily cash equities business. Noninterest expense decreased over last year in the third quarter, largely due to lower variable compensation.

On slide 28, you'll see a breakdown of RBC's total trading revenue. Compared to last year and last quarter, interest rate and credit revenues were down due to the valuation charge. Equity derivatives, foreign exchange and commodity trading results were up over last year and last quarter on the expansion of certain equity trading strategies that benefited from the higher market volatility.

At this point, I will turn the call over to the operator to begin questions and answers. Operator?

(OPERATOR INSTRUCTIONS). Jim Bantis, Credit Suisse.

A question for Jim Westlake regarding the Canadian Banking operations. Jim, the operating leverage was about 100 basis points when you isolate out the insurance operations. Gord had already said in his commentary that the revenues were going up and expenses were going to moderate, so I guess we're going to see some improvement in the operating leverage. But if you could just isolate where you're seeing the expenses dropping off, what particular buckets of expenses? And when you think of your three product areas -- personal, businesses and cards -- where do you see the revenue pickup coming from?

I think I should go year over year. For three consecutive years, we've had 4% operating leverage across those three core banking businesses. That was included for this year. I wish we were good enough to time everything perfect every quarter, but we didn't. We kind of peaked out on expenses last quarter in our investments and mainly involved with opening new branches, adding new client-facing people.

We think we will see a very balanced revenue growth over those three business areas. We feel very good about the market momentum and the volumes that we are doing across all of them. Particularly, I would say, if I had to highlight, our cards have been very consistent, the home equity financing and the personal financial and the commercial segment of our business financial services.

As we peaked on our expenses, we expect the revenue growth to continue. Just on a quarter-over-quarter basis, we expect a continual decline as we go through next year. And we're holding ourselves to that same standard in terms of a strong operating leverage going forward.

Jim, could you give us an update with respect to the personal deposits market share or the strategies you put in place reaping some rewards?

We feel very good. The last number I saw at the end of October is about CAD4.6 billion in terms of the [hiss] account and still roughly 50% coming from net new money. So that certainly is not having any kind of a negative impact on spreads, but it's having a very positive impact on deposit market share. We are also seeing a reasonable pickup in terms of our new product lineup, where we're seeing core deposits through checking accounts coming up as well.

So it's just specifically -- is the personal core deposits market share -- the gap between you and number one, do you actually see it closing? You haven't disclosed that this quarter.

Well, it's hard for us to necessarily know by individual product. It's more of an aggregate number for us. We can give you our own individual numbers. But certainly if we look at the trajectory over the last quarter, our numbers grew consistent with the leading companies in the market. I think we may have had the highest rate of growth. Although, I can't confirm that entirely.

Rob Sedran, National Bank Financial.

Just a couple of questions. First on, if I'm looking at credit quality in the US, is it fair to say it was a number of credits that would have deteriorated during the period, or was it one or two specific names that were a problem?

Second, are you able to tell us in terms of the increase in provisions what percentage or what number may have come from the old Centura kind of network versus some of the more recent acquisitions?

To answer that first, in terms of numbers of credit, it was, as we said, entirely almost restricted to the builder finance portfolio. But within the builder finance portfolio, there were a number of names, double-digit names, moving into nonaccrual [at cost fees] of provision to go up.

In terms of the distribution of problem accounts, as we said in the comments, they are predominantly in the more difficult markets and for us, this showing up in Georgia and California. In the Georgia numbers, there is a reasonable representation of assets that came with the recent Flag acquisition.

Just turning quickly to the added disclosure you've given on the hedged portion of the subprime RMBS and CDO exposure, one of your competitors provided a little more detail in terms of exposure to some that they are a little bit more concerned about versus others that they are not concerned about. Can you break down the exposure in terms of number of counterparties and whether there's any that you may be particularly concerned about?

We can't comment on individual names. I think, beyond the numbers that I went over in my comments, where I highlighted the fact that we have credit default swaps of CAD240 million recorded at fair market value of CAD104 million with counterparties rated less than AAA, I can't provide any detail beyond that.

In terms of the AAA, I guess you are not interested in going any further in terms of the number of counterparties?

No.

Brad Smith, Blackmont Capital.

Just a couple of quick questions on credit derivatives as well. I just noted in your trading data that after adjusting for the write-downs, the interest and credit trading profits look like they came in around CAD170 million in the quarter, which I gauge to be about CAD100 million below the run rate. I was just wondering, were there particular losses incurred in that book of business, and could you quantify them for us?

Well, again, looking back to August, you recall that in a lot of fixed income businesses they were basically repricing some spreads that resulted in losses, and that was spread over a number of portfolios.

And is the aggregate about the CAD100 million shortfall from run rate?

It's probably -- if you added up all the business, it might be a bit more but because basically we also had business going on during the quarter in a run rate sense. But it was the August effect, primarily.

Then last question. Just in reviewing your disclosures in your recently-published Annual Report, credit derivatives really took off, it looks like, in terms of notionals, in terms of credit equivalent amounts and risk-weighted asset allocations. I was just wondering, because we only see that really on an annual basis, can you give me some sort of timeframe? Was that a steady build through the year, or would that have been isolated in the back half of the year? Can you give me some sense for that?

I'm not quite sure exactly what disclosure you are referring to. If you're talking about increases in credit protection bought and sold, there has been some increases associated with some specific capacity-related hedges. But I'm not sure exactly (technical difficulties) --

I'm referring to the notional amount of credit derivatives, which increased from about CAD220 billion to CAD399 billion at the end of the year, reflecting a fairly substantial increase in activity level. I'm just wondering if that activity was building throughout the year or if it was concentrated in the back half for the last quarter of the year.

Again, to the extent we're talking about the disclosure around credit derivatives positions on our lending portfolios, there were a couple of transactions towards the end of the year, transaction specific, capacity-related hedges. But there was no particular timing pattern to that activity. We may have to get back to you on further details. Because I'm not sure I'm connecting with the question you are answering.

Yes, the question is related to your trading of credit derivatives as disclosed in Note 7 in your Annual Report. Thank you.

Andre Hardy, RBC Capital Markets.

Two questions. Back to you Morten please on the credit. You isolated Georgia and California. You didn't mention Nevada, Florida, Michigan and Arizona, which are all areas that have had issues. Is that because you're a smaller player there, or it's just a matter of timing?

Secondly, probably for Chuck, with a lot of questions about bond insurers, the muni market would seem at risk from an underwriting standpoint and perhaps write-downs on inventories. I suspect I am not the only one who sees that coming. So can you maybe talk about how big a business it is for the Royal Bank and what the bank may have done to hedge itself or not against a deteriorating environment in the muni market?

In terms of the -- it's Morten again -- on the credits, in terms of the geographic spread in the US, I guess I'd say two things. Number one, we have, as we know, to taking some action over the last 12 to 18 months to scale back our origination in the markets that look troublesome. And several of the ones that you mentioned are ones where we have scaled back our production significantly.

With respect to the muni market, I'm just sizing it. It's a very attractive business for us when we expect to have an excellent future. Just sizing it, it's over 5% of our overall business and one of the bigger fixed-income businesses we have.

With respect to the bond insurers, there have been a number of things happening in the muni market in the trading side over the last year. We have reduced our portfolios dramatically between spring and fall. And, while again, as part of what I was describing earlier, there were some hits in the third quarter, we would not have had a substantial -- it wouldn't have been a substantial part of the fourth quarter. Basically, we don't expect any impact, really, whatsoever from the mono-line impact in the muni business.

A lot of it has already been [arb'ed] out of the marketplace from the standpoint of prices are there. As I say, we have very small portfolios, and we don't expect it to change the issuing pattern. The issuing part of that business is the bigger part of the business for us. We have very little inventory.

Back to you Morten, are you willing to give us a geographic mix to so-called trouble states?

We are, broadly speaking, not in the more troubled markets. In terms of providing a geographic portfolio breakdown, we're not prepared to go there. But I can let you know that from a current portfolio standpoint, our participation in the more difficult markets is relatively modest, aside from the two that I've mentioned.

Mario Mendonca, Genuity Capital.

A question about the AAA-rated matures covering the subprime exposure. Could you let us know if any of those happen to be AAA-rated mono lines?

In terms of the credit derivative and protection, it is predominantly from mono-line insurers rated AAA by S&P and Moody's.

You talked a little bit about the issues in the US, the builder finance. What would be helpful is to understand whether this quarter or that -- the move to CAD72 million from CAD17 million just last quarter -- was there any sort of catch-up there that would cause it to look so large in one quarter, and we sort of migrate back down to something more, something we are used to? Or is CAD72 million really the new way to look at this?

First of all, we don't provide forward-looking statements on provisions, so it's a little bit hard to answer you too explicitly. The way the market has evolved, there was clearly a significant movement during the fourth quarter of builders that ended up recognizing that they could no longer service their debt or are close to that point. So there was a fairly rapid movement towards the latter end of the quarter.

We continue to see some movement of builders, but whether or not -- I would say that from RBC's portfolio standpoint as a whole, and the statements that we have made around expecting to trend towards more historical levels continue to be accurate. And the builder finance issues will be part of that. And I would anticipate to it normalize over the near to medium-term. But I can't provide comments beyond that.

Michael Goldberg, Desjardins Securities.

I also have a question about credit quality. Your gross formations were up quite dramatically this quarter. Would you characterize that as a bulge, where you would expect to default back to a lower level, or should we look at the full-year gross formations of CAD1.6 billion last year as really likely to be well exceeded this year, given that you have almost CAD600 million in the fourth quarter?

In terms of the formations, it might be, as I assume you probably have looked at it -- but if you look at the pattern displayed in supplementals in terms of where the increase in formations largely have come from, you can see that a large chunk of it is out of the builder finance portfolio. The overall view for the year, as I said, is that our run rate of 40 basis points in PCL is a level that we're likely to see coming out of the formations that we have coming over the next little while.

One other question, you note that you are a nominal participant as distributor in Canadian asset-backed commercial paper. But can you actually quantify how much of this paper that you sold is still in the hands of clients, just so that we can gauge litigation risk for you and for other banks?

It's difficult to call it much beyond what was in our comments. It's a de minimis amount, predominantly to large, sophisticated institutional investors. And we frankly have no concern about our litigation risk.

It's a very, very small amount. We don't disclose the specifics, but we were just not a large distributor of that. I think it's isolated to one name, and it's not a large number, nor a difficult structure, I gather.

If I could, one more. Actually, this is just a number question. Page 5 of the sub pack, and I've asked Amy this -- if you take the 326 Visa gain out from the other noninterest revenue, you're left with CAD226 million in that number. It's an amount that's quite a bit higher than prior periods. I am wondering what else is in that number to have caused it to increase?

In that number, we have our mark-to-market gains and losses on our credit default swaps and also our structural rate derivative hedging is -- the gains and losses are marked through here and of course our regular other other income like ongoing sundry income of the various business platforms.

So was it the mark-to-market on the CDS that really boosted that number? I think it was up by about CAD75 million from prior periods.

From last year or last quarter?

Last quarter.

Last quarter, it would be some derivative mark to markets. Last quarter, we also had positive mark to market on our credit default swaps. So, while there would be an increase, it would create or cause some of the positive variance. If you are looking at a trailing rate quarter, some of that has to do with, also, our structural book swap marks.

Is it possible to actually quantify these amounts just so it makes it easier to follow the numbers?

We don't normally quantify them. Because, on a quarter-to-quarter basis, there's a bit of volatility. But they are fairly consistent.

Shannon Cowherd, Citigroup.

The notes detail the various types of VIEs -- I think it's like Note 6. For the CAD40 billion in multi-seller conduits, what percent are Canadian assets versus non Canadian?

This is the Canadian asset-backed commercial paper program.

It's all Canadian? Because it doesn't explicitly say.

No, sorry the --

CAD13 million.

Yes, it's about one-third. Two-thirds is US, and so one-third would be Canadian.

Ian de Verteuil, BMO Capital Markets.

Could you imagine what the questions would be like if you didn't earn 23% and 23% ROE in the quarter?

Thank you, Ian.

We all are being very cynical here, so I'm going to join in the bandwagon. Your disclosure is very good and very detailed on subprime CDOs and various structures like that. I'm sort of struck -- others have disclosed all their CDOs, whether it be subprime, near prime, Alt-A or even prime. Can you provide any light on that? Are those even meaningful numbers beyond the subprime?

We talked about that earlier because of the question. And I think there was a specific question with respect to Centura that came up this morning, I think, from you. Morten referred to that in his comments, where I think it's a de minimis or a very, very small number.

I'll be honest; it's not an issue that -- it's not a large number that we're worried about. There's nothing that's nonperforming. And we are hesitant to give any number out, whether it be small or otherwise, because there's a lot of different businesses around the organization. But it's not something that is an issue to us at this point. And it's not a large number. You're talking about Alt-A --

I'm just talking about because your terminology is subprime, and others have used CDOs. So I'm just wondering if there's a difference between the two. I presume there is.

Well, it's not -- Alt-A is -- we consider Alt-A between subprime and agency.

But our CDOs or our CDOs exposure, they are all our CDO exposures. We don't have any other CDO exposures which are just Alt-A.

We have no CDOs of Alt-A.

So the CDO number is your total exposure to CDO; there's nothing else?

That is correct.

The second question is related to taxes. It looked as if the taxes this quarter came down a bit. I apologize for the minutia of the question here. If we removed all the unusuals, because it's tough to get at the tax implications of all the unusuals, what would the tax rate have been? Was there anything unusual this quarter?

Basically, the rate came down because of mix. So for the one-time items, first of all, the Visa gain is capital gains as opposed to income. And then, the Visa points accrual would be --

So far remove that, what is the tax rate? The tax is still down?

If you removed that, I think that strips out about 2% from the rate, 2% to 3%. So the balance would be the business mix. We had some of our dividend trading activity that has higher volumes this year than it has in previous years, and it was ramping up that sort of thing.

So I think that when we look at our tax rate, we're always looking at it on an ongoing basis. We look at it on an annual basis of somewhere in the low 20s in terms of ongoing -- stripping out all the unusuals. But we have had our share of the unusual items.

Sumit Malhotra, Merrill Lynch.

Jim, reading the economic outlook, it sounds like the bank is expecting the Canadian economy to slow a little bit. Rather than slowing, though, your residential mortgage growth seems to be accelerating as we head into 2008. Can you give us a little bit of an idea how you think housing market in Canada is trending, specifically what it means for your business going forward?

And on that same point, how is your book right now in terms of mix, fixed, floating? How does that position you from a margin perspective?

Our volumes have been very good. Notwithstanding all the noise around residential mortgages, it continues till this point. We are very fortunate that we're well distributed across Canada, and particularly, notwithstanding any of the economics we're talking about in Central Canada and Western Canada, in particular, continues to be very robust.

For our economic forecast, while we have moderated slightly, that has all been the manufacturing sector in Central Canada. So we think that's well contained in all of our forecasts.

We're also seeing a lot of debt consolidation within our Homeline product. And so that is having a good growth effect on our overall home equity financing. So we're certainly concerned that it will be slower going into the year, but we think that we're very well-positioned in terms of the distribution we have against the marketplace and where we are deployed geographically in order to take advantage of that. We might be a little less convinced of that if we were more completely focused in Central Canada.

In terms of your other part of your question on the fixed and the floating, can you just repeat -- I didn't quite get what that was you're looking for.

This one, it might be more for Janice. Just in terms of the mix of the book right now in terms of how much is fixed rate, how much is floating rate, what that could mean if we start to get some movement in rates going forward from a margin perspective.

I think our typical mix up to this time was about two-thirds fixed and one-third floating with a duration of about 2 to 3 years. So, if interest rates start to climb up, there may be more of a propensity towards the new product to fixed. But it takes several months of origination to really shift the duration. But that's what we've been seeing.

I might just add, just because this call is often well listened to, is that our official forecast for 2008, while for a slowdown, is still fairly reasonable in Canada. I think our official forecast is somewhere around 2% GDP growth. And level of unemployment continued to be low, which is a key driver of real estate, which hasn't been overinflated in Canada.

So as we look at 2008 and the domestic retail business, I wouldn't overemphasize the word slowdown. I think it is still going to continue to be a reasonably good market. There hasn't been the real estate inflation. Unemployment rates are low. And while there parts of particularly Ontario that I think are a little tougher, I think rate across the country, it's not a bad outlook.

Lastly for me, in the capital market segment, if I look at loan growth there -- and it's slowing down the last couple of quarters. It seemed to accelerate again in Q4. Is this M&A related, or are you starting to see more corporate loan activity in place of debt issuances? Along with that, still in another year of net recoveries here -- I know you don't offer guidance; you said that before -- but just maybe an update on some of the healthy of your corporate borrowers and where that trend is going, along with the robust loan growth you have had over the last couple years on the corporate side?

I'll start, and Chuck may have a couple of comments to fill in. There have been a few larger investment-grade M&A-related transactions that [we've been convinced] contributed to some of the growth. Overall, if you look at the health of the corporate borrowing base, ratings actually remain quite stable. We've been quite careful in selecting our clients over the last cycle. And so for the large part of the corporate portfolio, ratings migration is relatively minimal. As we noted, we still continue to see recoveries in the portfolio overall.

So the current environment obviously drives us to look more closely at the portfolio. But I would emphasize that when we look at our borrowers and the health of our portfolio, actually, it remains remarkably strong and stable in that segment.

I would just say that, if you look at the fourth quarter -- I don't think, aside from what Morten mentioned, there was very much. There were a couple of deal-related loans. But if you look over the longer period of time, the growth has occurred, really, in two places. In the US and in the UK, where we have essentially reallocated loans from seven or eight years ago, which used to be made on what I would call a [pure stuffy] basis to loans where we have strategic intention and we're doing a lot of other business with those clients.

Darko Mihelic, CIBC World Markets.

My first question is for Chuck. Chuck, I realize this isn't going to be an easy one to answer, and I'm just hoping that you don't give me the usual answer.

Remind me what the usual answer is.

Well, my question is -- we've gone through a pretty rough period, and you can see it in the trading results. I just wanted -- maybe you can give us an update where you think you sit now with the pipeline, deal flow. Do you see trading back to "normal" parameters? Can you give us any sense of how you feel so far into the first quarter and maybe give us a general outlook for your part of the business?

I can't say how we're doing thus far in the quarter. But I think it's going to be a matter of a trade-off between -- depending on what happens and how temporary the year-end phenomenon is in the brokers and in the banks in the US or in global banks, I think you've got a combination of continuing repricing of risks, which at times can reprice portfolio, with what I consider are better spreads out there to grab from the standpoint of ongoing trading activity. That will be the rates in the first quarter.

Secondly, in terms of the deal size, clearly it's not as visible as it was particularly from an M&A side at this time last year. But at the same time, there seems to be deals that are getting done every day, and we still have a very busy M&A platform. So, while I wouldn't hesitate to characterize this period as normal because there's not that much normal about Capital Markets these days, there's opportunity here, and that's what we're working on.

I appreciate it. I know these questions are always tough to answer, but just trying to get a feel for your part of the business and what your outlook is for 2008.

My next question is more of a broader question, I think, for Gord. I'm looking at page 10 of the supplemental, and the second line, the annual columns, which is second line from the bottom, sorry, which is economic profit. I look at that for the last four years; you have basically, according to this, you have destroyed shareholder value in the US and you are about to acquire more in Alabama.

Sorry; we haven't destroyed shareholder value in the US. I think you're talking about Centura.

Well, I'm looking at the overall division. In the US and international banking, the overall economic profit for the last four years nets out to a negative 84. So I would presume that includes everything in that division. If you're saying that it's all coming from Centura, I guess that's exactly where my question is going.

Sorry, just for clarification, again is that we have businesses in the US Capital Markets, and Dain Rauscher Wealth Management business that have all generated positive economic capital. So if you look at the US in general, the number is not negative. It's not divided that way. But you're looking at the US&I platform.

Exactly, and my question relates to that platform. Specifically, the question is, what is your outlook for that, given that you are going to be acquiring Alabama, ALib I guess, very shortly? What are you shooting for? Do you even care about that measure? Or how should we look at your plans for investing more capital in this business?

No, it's a great question. Yes, absolutely, we care about that measure. I will tell you that there's no foreign bank in the world that has acquired banks in the -- well, sorry; I shouldn't say no. There may be some -- that very few that would show positive economic capital, given the way that economic capital is attributed.

I would view it as being a strategic growth opportunity for us that we've got to ensure that as we move forward, we focus on hitting our ongoing operational metrics. I think, unfortunately, with RBC Centura, as a result of the builders' write-down in the fourth quarter, a lot of the very positive things that have been going on over the last year or so get pushed by the wayside.

We have done a lot of restructuring in that business over the last year, which has brought with it some restructuring charges, portfolio restructurings, et cetera. We have invested a lot, both in -- not just in terms of -- we have not only made some acquisitions, but we have invested in de novo branch expansions. And we think we're building a platform that, when we are able to move away from some of those heavy expenses, will allow us to reap the benefits, if you will, of that investment. It does take time. And the more one invests, the more economic capital is impaired, if you will, in the short-term, but hopefully is building for positive economic growth in the long-term.

We're very positive on the Alabama National acquisition. We this is an organization that's very complementary to Centura. It gives us a good footprint in the region that we're focused on and I think, a reasonably strong platform. As Morten said, they have got a very disciplined and strong risk culture that we're quite complementary of. I should say that even RBC Centura, if you look at their builders' business within footprint, their performance has been very, very strong if you look at the legacy Centura business. That is clearly strategically the direction that we're moving.

So if you look at our plans for that business over the next year or so, it's to do a good job in terms of integrating Alabama National to ensure that we manage the real estate issues the best that we're able to. We think we will come out of that with a good platform and a good asset base. If we can get up to reasonably good industry metrics in terms of return on assets, we'll add a lot of value to our shareholders.

Are we disappointed that we are not further ahead because of the fourth quarter? The answer is yes, but we remain very committed to that. We think ultimately the numbers will come onside. But it is very -- economic capital is a great discipline. We do pay a lot of attention to it, but it's very difficult to compare making acquisitions to 139-year-old business, where your cost base is well paid for.

So you are comparing a little bit of apples and oranges, but we clearly have to get those numbers more positive. I would say the same thing with respect to RBTT. We feel that that is an acquisition that, with the economics, will be very attractive longer-term from our perspective. And it's a very good natural fit in terms of building up our overall platform.

So I think you will see those numbers get better. But as I say, it's very difficult to compare some embedded historical businesses with some new businesses where you got goodwill that are being driven by acquisitions.

Maybe if I could paraphrase, then, could I think of it in the following terms, which is you are not alone. TD has got -- actually, TD has got [that isn't] much bigger decline in economic profit and a bigger loss, I should say. But their response was invest a very large sum and build scale. It doesn't sound like that's your response. Can I paraphrase you that way?

No. I think you can paraphrase me the way -- what I've said for quite some time, which is we don't believe that we have to invest significant amounts of dollars for the sake of scale and growth. We think the platform, the size, 450 branches, is an opportunity to generate good value for our shareholders.

I think acquisitions with respect to scale should be driven by value and strategy as opposed to just a desire for scale. There is clearly an inverse correlation in the world between scale and performance. You know that better than I do. Just look at the big banks around the world and look at the big banks in the United States, those that have been serial acquirers, there's an inverse correlation between performance and scale.

So I will not be convinced that scale is a necessity. Having said that, I think that scale does provide an advantage if there are attractive strategic acquisitions that allow you to not only get economic efficiencies but, frankly, give you revenue efficiencies because you've got a stronger brand and a stronger distribution platform and more products, et cetera.

So I think, from our perspective, we will be very cautious unless we feel that opportunities meet those various criteria. But as I say, with -- I think, in the five states that we're represented with any significance in the platform that we have, particularly close to the Alabama National transaction, if we can get our operating performance up to good industry levels, we'll add a lot of value to our shareholders.

Mario Mendonca, Genuity Capital.

A question about the US. You've given us some color on the builder finance. Do you see any other areas? I read virtually every day about this contagion and how it could be spilling into commercial real estate generally in the US. What's your perspective on that? Is there any indication to that effect, any indication of weakness in the rest of Centura's portfolio?

Actually, when you look at the rest of Centura's portfolio, it is performing remarkably well. There is minimal ratings migration. We have very modest write-offs and impaired loans in the other portfolios. So, while, like you, we all read the press about the worries about the contagion into other areas, it has yet to show up in any of those portfolios.

I would also add that when it comes to the consumer portfolios, they are all high-quality, well-secured. The business and commercial portfolios are with relationship clients and also well structured and well secured. So current performance is strong, and we don't anticipate the spread into these portfolios anytime soon. Obviously, if there's a broader market deterioration, it will have some impact.

Why is it that you don't really anticipate it spreading into the other portfolios? The reason I'm asking is several large US banks are pointing in that direction already.

I think it probably speaks to the size and quality of the portfolios that we have. The portfolios are not that large, but they are with relationship clients, high underwriting standards, well structured and well secured. So, absent broad deterioration in terms of employment levels, consumer confidence and so on, we do not see -- we do not, for instance, in terms of credit card exposure and the areas that you see being hit first, we have little to no exposures. I think, to the extent you have contagion, it will take a little bit longer before it reaches portfolios of the type and quality that we've got in Centura.

I'm just going to step in there. We're just about to wrap up, but we are going to clarify two of the questions that came up on the call. The first one is the question that was asked by Brad Smith regarding Note 7 of the financial statements. We're also going to just provide a bit more color on the question that Shannon Cowherd asked about asset-backed commercial paper.

So what I'll do is I will first turn it over to Morten to respond to Brad's question. Then, he will pass the baton on to Janice.

In terms of Note 7 and the credit default swap growth, that is consistent with how we're trading liquid vanilla credit default swaps, similarly to how we're trading bonds. With capital relief on that, volumes have increased, and it's a notional number, I should emphasize, that reflects buys and sales and does not reflect treading or netting.

Now, with respect to the multi-seller conduits, the question was with respect to the composition. I wanted to emphasize that all of the liquidity facilities are global style, meaning that liquidity is not not contingent on a general market disruption. They are pretty vanilla. The asset quality in all of the conduits is very strong. 96% of those conduits are sponsored by us, RBC, and as I said before, one-third of them are Canadian, and two-thirds are US.

And all financings without any problem.

Yes, and they are all financing and rolling their paper without any problem.

Thank you very much. Gord, would you like to make any final comments?

No. I would just like to, once again, thank everybody for participating in the call. Clearly, it was a noisy quarter, given some of the events out there. I would just emphasize that, while the last quarter has had a lot of issues with respect to the financial services globally, generally, I think we feel pretty confident about the way we have been able to manage through it, given both our domestic and our international operations. As I said in my remarks, we certainly look forward as we move into 2008.

We try to provide a tremendous amount of disclosure at year-end. I think we have. I hope the analysts feel that we have. We certainly -- if there are any further questions, we're certainly prepared to take them. But we certainly have attempted to provide as much color with respect to the different businesses that are under the spotlight in both the domestic but, more importantly, the international markets.

With that, I hope everyone has a relaxing and enjoyable weekend.

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