Royal Bank of Canada (RY) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the RBC 2009 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, operator. Good morning and thanks for joining us everyone. Presenting to you today are Gord Nixon, our CEO; Morten Friis, our Chief Risk Officer; and Janice Fukakusa, our Chief Administrative Officer and CFO. Following their comments, we will open up the call for questions from analysts. The call will be one hour long and we will post management's remarks on our website shortly after the call. Joining us for your questions are Barb Stymiest, Head of Strategy, Treasury and Corporate Services; Dave McKay, head of Canadian Banking; George Lewis, head of Wealth Management; Jim Westlake, Head of International Banking and Insurance; Doug McGregor, Chairman and co-CEO, RBC Capital Markets; and Mark Standish, President and co-CEO, Capital Markets.

As noted on slide two, our comments may contain forward-looking statements which involve applying assumptions and have inherent risks and uncertainties. Actual results could differ materially from these statements. I'll now turn the call over to Gord Nixon.

Thank you, Marcia, and good morning everyone. Before I start, I'd just highlight that we've moved this call, this quarterly call earlier, to give us the opportunity to discuss results with investors and analysts before the markets open and of course it is webcast so that people will have the opportunity to hear it later in the day. We think this is a good approach. We think it's best practices. But we would appreciate feedback, particularly from the analyst community, as to whether or not they feel it's the right direction to go. So I would just start out with that.

With respect to our earnings, I'm of course pleased to report that RBC has delivered record results this quarter. We earned CAD1.6 billion for our shareholders, with revenue of over CAD7.8 billion and a return of equity of 19.5% and earnings per share of CAD1.05.

Turning to slide five, you can see items that impacted our earnings. Namely, market related losses and a general provision. Together, these reduced our net income by CAD190 million and earnings per share by CAD0.13. As you can see, our market related losses continue to subside. Global capital markets continue to improve from last quarter and we have seen some signs of recovery in the general economy. Of course, higher unemployment levels have had an impact on loan portfolios and the low interest rate environment is keeping pressure on retail margins.

I believe that our diverse business mix is a key differentiator for our organization. We had strong results from capital markets and continue to see very solid performance from our Canadian banking, wealth management and insurance operations. We continue to take advantage of market opportunities to build on our competitive positions, and to drive efficiencies across our businesses.

Moving to slide six, our capital ratios are extremely strong, both in absolute terms and relative to our peers around the globe. Our Tier 1 ratio is 12.9%. This represents an excess of CAD10.7 billion over our medium term objective of 8.5% plus. Our tangible common equity is 9.1%. While these levels are high, I firmly believe we should only deploy capital on opportunities that meet our strategic and financial criteria. Over the next two to five years, I believe there will be plenty of restructuring in the financial services industry. With this restructuring comes significant opportunity.

Our strong financial position gives us the flexibility to invest in our businesses and to grow our asset base at a time when banks around the world will be shrinking theirs. With respect to acquisitions, as I have said in the past, we remain disciplined in our approach and are focused on exploring any options that complement our existing businesses and our existing growth strategies. Our priority with any acquisition is to enhance our platform in markets where we have an existing franchise and where we have the ability to generate a strong and reasonable return. We are maintaining our quarterly dividend at CAD0.50 per common share. Our dividend payout ratio in the quarter was 47%, well within our target -- the target range of our medium term objective. A stable and growing dividend, supported by long-term earnings power of our Company, is an important component and driver of both short-term and long-term shareholder returns.

Before I spend some time on each segment of our business, I would like to remind you that we require each of our reported segments to fully absorb the cost of running its business. I touched on this last quarter. We believe this provides a more accurate picture of each segment's performance and incents the appropriate business decisions to be made. Just three examples.

First, each of our reported segments fully absorbs the impact of interest rate environment on their respective businesses. In other words, our corporate support segment does not absorb margin compression. This quarter we began to see stability in interest rates and we would expect to see rates eventually rise. Mortgage securitization activity is a funding decision at the RBC consolidated level. Thus, any earnings impact in our -- remains in our corporate support segment and do not factor into individual sector performance. And third, we fully attribute specific provisions for credit losses to the relevant business segments. Banks treat these areas differently which results in significant variance in segment revenue, net interest margins and earnings across the banks. This variance has been amplified by the shifting interest rate and economic environment which has made it difficult for investors to properly compare performance of particularly Canadian retail operations of the various banks.

Turning now to our Canadian banking segment this segment again delivered extremely strong results. We continue to grow volumes and profitably gain market share across our business by leveraging our distribution, strength and scale. As you can see on slide seven and eight, we grew balances by 11% over last year, and have good market share momentum. What is equally impressive is that we have been able to support this double-digit growth operationally without increasing costs. Over the first three quarters of 2009, our Canadian banking segment has held noninterest expense flat from the prior year, reflecting our strong cost discipline. This platform delivered operating leverage of 3.1%, and an efficiency ratio of 48.1% year-to-date. Margins continue to be affected by the low interest rate environment, however, we are seeing stability and as I said, would expect that to eventually turn around.

In terms of credit performance our provisioning levels are within our expectations and consistent with the current economic environment. Our wealth management segment performed well. We started to see asset values recover and investor confidence return to the market. We had industry leading long-term fund sales in Canada and added over 100 experienced advisors across the platform. Our focus on containing costs is reflected in the decline in noninterest expense from last quarter. Our insurance segment made a solid contribution to our diversified earnings stream and complements our retail product offering. We continue to grow across all businesses, and expand our distribution network.

In international banking, our retail operations again had a loss in the quarter. However, the credit profile is showing signs of improvement as the rate of deterioration on our loan portfolios have slowed. We remain committed to refining our US banking operating model and to become more efficient and competitive. Our Caribbean banking business continued to perform well. Our capital markets segment again displayed the benefits of its robust and diverse platform. Our equity, fixed income, money market and foreign exchange businesses all performed extremely well. As Canada's only global investment bank, we are positioned to take advantage of market opportunities.

Looking at slide 10, we were voted best investment bank in Canada by Euro Money, winning all three categories, debt, equity and mergers and acquisitions. RBC Capital Markets continued to rank number one or two domestically in virtually all our key businesses. Outside of Canada, we have a tremendous opportunity to increase market share and build our client base across our businesses. We retain the number one global ranking for Canadian dollars in the 2009 euro money FX overall market share in FX moved two places in the global league tables to number 17.

As an example of our global fixed income strength, it was highlighted by Credit Magazine's 2009 European credit awards. Clients voted us top overall and top in a number of individual categories. We won the best overall credit house, ahead of JPMorgan. In terms of individual categories, we won the best bank for Sterling bonds, ahead of Barclays, best bank for noncore currency bonds, again ahead of JPMorgan and best bank for electronic trading, ahead of Deutsche Bank.

I point these out, I know there are many rankings out there, but I point these out to highlight the strength and diversity of our client based capital markets businesses which we have as you know been building over the last number of years. We continue to hire talent and extend our balance sheet in a disciplined manner and build our customer base. In conclusion, our results this quarter demonstrate the strength of our franchise, the value of our diversified business model and our commitment to serving clients. We remain focused on helping clients create confidence for their future by leveraging our expertise and global capabilities. This focus has resulted in greater sales volume and deeper client relationships. Our financial stability and our reputation for prudent management have helped us take advantage of opportunities in the marketplace to attract both new customers and new employees. In conclusion, RBC is well positioned for the future. I would like to recognize our employees around the world whose commitment to RBC and our goals continues to be very strong. Their success with our clients certainly gives me confidence that we'll continue our story of growth. With that I'll now turn it over to Mort.

Thank you, Gord. Turning to credit on slides 12 to 15, overall provision for credit losses declined CAD204 million over last quarter, with specific provision for credit losses decreasing by CAD42 million. This quarter we added CAD61 million to the general provision, relating to our US banking operations. This compares to CAD223 million last quarter, largely in US banking.

Let me make a couple of observations about where we are in the credit cycle. As I said last quarter, our home building business was among the first portfolios impacted when the housing market turned downward and economic conditions slowed. Residential builder finance portfolios in the US including ours were at the front end of the credit deterioration and were impacted earlier than other areas. This quarter, we had lower provisions in this portfolio as compared to the second quarter. Looking beyond residential builder finance, credit losses typically come off the peak one year after the trough of the economic cycle. This quarter, the pace of economic decline in the US slowed, reflecting some signs of stabilization. However, our US banking portfolios will continue to be under pressure until the economy shows sustained improvement. At this point in the credit cycle, I believe the areas that remain most vulnerable are US consumer credit and consumer banking including commercial real estate. We have relatively small exposure to both of these areas when viewed in the context of overall RBC loans. In Canada, the high level of unemployment will likely continue to impact credit card and retail unsecured lending portfolios, despite the fact that signs of economic recovery emerged during the quarter.

Turning to credit performance on a business segment basis, in international banking, provisions decreased by CAD59 million from last quarter, as a result of lower provisions in US banking, and the impact of the strengthening Canadian dollar. We had lower provisions in residential builder finance, as well as residential mortgages and lot loans. These factors were partially offset by higher provisions in our US commercial portfolio including commercial real estate loans. Our Caribbean portfolios have not been immune to the economic downturn, particularly in tourism dependent economies as seen by the increase impaired loans in our RBC wholesale portfolio. However overall provisions remain flat compared to last quarter. As a reminder, our Caribbean portfolio is small and is primarily retail and commercial.

In our Canadian banking segment, the decrease of CAD11 million in provisions from last quarter is mainly due to lower provisions in business loans, partially offset by higher loss rates in unsecured retail portfolios including credit cards. Credit card specific provisions as a percentage of average loans increased 30 basis points to 467 basis points. This is within what we believe is an acceptable range in light of the sustained recessionary conditions and increased personal bankruptcies. Our credit card business is highly profitable. The underwriting and pricing of the portfolio is designed to deliver an an appropriate balance of risk and reward through the entire cycle including downturns.

Canadian residential mortgage provisions remain stable, consistent with historical performance. Despite an increase in impaired loans we believe losses will remain loan. Capital market specific provisions increased CAD32 million, primarily related to single loan as well as fee other impaired loans mainly in our Canadian Perfect Lending portfolio.

Turning to market risk, we had three days of net trading losses, none of which exceeded par. We also had one day of large net trading gains which are primarily from credit valuation adjustments. Our daily trading revenue and VAR over the quarter is shown on pages 27 and 28 of our third quarter report to shareholders. With that I will turn the presentation over to Janice Fukakusa.

Before discussing our segment results I'll touch on three topics. Namely, capital ratios the market environment and securitization activity. As Gord mentioned, our Tier 1 capital ratio was 12.9%, up 150 basis points from last quarter. This was primarily due to lower risk adjusted assets and internal capital generation from earnings. Risk adjusted assets were down by CAD22.6 billion from last quarter, largely attributable to the stronger Canadian dollar and continued management of our balance sheet and a reduction in wholesale credit exposures. Our Tier 1 capital was up by CAD1.1 billion from last quarter, largely due to higher retained earnings, partially offset by a higher unrealized foreign currency translation loss relating to our equity investments in foreign subsidiaries. Note that we decided in recent quarters to hedge more of our investments in US subsidiaries, which mitigated the impact of the subsequent strengthening of the Canadian dollar on this component of our capital.

As you know, capital markets began to stabilize in our second quarter and this trend continued through the third quarter. As a result, market environment related losses continue to subside and net unrealized losses in our available for sale portfolios narrowed. Over the third quarter, credit spreads for us and many issuers have continued to tighten, reflecting both improved funding markets and increased investor confidence. As I've mentioned in the past, credit spread movements have both positive and negative impacts for us. We had negative adjustments on RBC debt designated as held for trading and on credit default swaps used to economically hedge our perfect loans. Positive credit valuation adjustments on derivative trading activities partially offset these amounts. Our credit spread is now close to precrisis levels.

Also our securitization activity this quarter was significantly lower than the first two quarters of the year. During the first half of the year, we securitized a large number of mortgages through the government of Canada's insured mortgage purchase program or IMPP. In addition to our regular participation in the traditional Canada mortgage bond program. This provided a cost effective alternative to unsecured debt and allowed us to further improve our liquidity position over that time frame. This quarter, the cost differential between securitization and unsecured debt narrowed considerably and access to funding markets also improved. This development, combined with our strong liquidity position, reduced our appetite for securitization, compared to the previous two quarters. The IMPP options are scheduled to end by September 30th, 2009.

Let me now move to slides 17 and 18 for a look at the performance of all five of our business segments. Net income for Canadian banking was down 6% from last year, related to higher provision for credit losses and spread compression. Compared to last quarter, earnings were up 15%, primarily reflecting seasonal factors, continued volume growth, and higher mutual fund distribution fees due to capital appreciation.

Looking at slide 19, you can see we experienced some margin compression from last quarter. The decline in interest rates was a key factor here. Recall that the Bank of Canada overnight rate was 25 basis points throughout the third quarter, as compared to an average of 64 basis points in the second quarter. This decline impacted spreads on demand deposits, which in turn put pressure on net interest margins. The prime BA spread was also lower on average by six basis points, causing spread compression on our prime base products. As Gord mentioned, we base transfer pricing on external market costs and each segment fully absorbs the cost of running their business.

Wealth management net income was down 10% over last year, mainly reflecting the impact of the market decline. As market conditions improved over the last quarter, net income this quarter rose 33% on higher transaction volumes and fee-based client assets. Insurance net income was 22% higher over last year, reflecting growth in all businesses and lower funding charges. Net income was up 48% from last quarter, due to favorable actuarial adjustments and claims experience, business growth and the impact of a new UK reinsurance annuity arrangement. International banking net loss of CAD95 million compares to a net loss of CAD16 million last year relating to higher PCL, largely in US banking and reduced revenue at RBC Dexia IS. The change from last quarter is largely attributable to a goodwill impairment charge of CAD1 billion taken in the second quarter.

Net income for capital markets was CAD562 million, up CAD293 million from a year ago, due to stronger trading revenue, particularly in most of our global fixed income and money market businesses and US-based equity businesses and lower market environment related losses. Compared to last quarter, net income was up CAD142 million on higher trading revenue in our US-based equity and fixed income businesses, and lower market environment related losses.

Slide 20 illustrates RBC's total trading revenue. We continue to have strong trading revenue in traditional, less structured, fixed income products such as bonds, money markets, and interest rate derivatives as well as equity products driven by favorable market conditions, increasing client activity and narrowing credit spreads. At this point I'll turn the call over to the operator to begin questions and answers. Please limit yourself to two questions and then requeue so that everyone has an opportunity to participate. Operator?

Thank you. (Operator Instructions) You may now proceed. Our first question is from Ian de Verteuil from BMO Capital Markets. Please go ahead.

Hi. I guess I'm the only one up this morning. Good morning, everyone.

We hope not.

Can you talk a little bit to the improvement in Tier 1? It looks to be largely driven by sort of the way BASL-II is dealing with risk weighting. It certainly looked at if the -- I mean, the corporate book -- by the way, I'm looking at page 21 of the sub pack. Obviously the reduction in the business loan book and the EUDs there are explaining the reduction and it arguably is associated with the business loans but the other asset segment is down quite a bit. I'm just sort of trying to grappling to understand how you're getting as much relief as you are as we move through a cycle where I thought credit migration would have worked against you.

Ian, it's Morten, on you your last point in terms of credit migration, I would say if you look at quarter-over-quarter, the degree of credit migration in the book and as it affects the capital allocation is actually quite low this quarter. We're just looking at those numbers yesterday. So while we continue to see some degree of migration, I think we've had on a total book level enough of it earlier that from a capital standpoint, the impact of credit migration is actually very small for this quarter.

So Ian, generally I think that if you look at the migration of the risk adjusted assets over the quarter, it is due to FX and also very active balance sheet metrics. In terms of the other asset metric, we're going to have to get back to you on a decomposition of what's in that other asset. So why don't we take that section of this offline.

I guess the second question follows on from that. I mean, Gord, are you sufficiently confident in the way BASL-II is working that you sit there at night, say I really do have a 12.9% Tier 1 or do you more think of it as, well, it's probably more like an 11 in the old days?

No, I think of it very much in the former, Ian, that it's -- it's at 12.9 and just, again, Janice will come back with those details but when I look at the increase, it's really a combination of pretty aggressive balance sheet management which as you know has been a trend over the last year, really since the credit crisis began or before. And again, you saw a reduction of risk adjusted assets in the quarter while at the same time very strong earnings and good capital generation. It is very real and we're very comfortable with that and so to answer your question specifically, we think very much of it as being in the range that it is presented. Very comfortable with BASL-II.

Thank you.

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

Hi. Good morning. I'm looking at page 11 of your supplemental, the insurance business. And I guess maybe just to make a long question short, trying to look at the earnings of 167 and trying to relate to it whether or not there were any reserve releases in the quarter in your insurance and if you could walk me through how it evolved to have the jump to $167 million of earnings. Thanks.

Yes, thanks, Darko, it's Jim Westlake here. There were some positive actuarial evaluations and the other one-time that was in that was a seating commission on a UK annuity book. But the vast majority of the earnings were just very solid business, very good creditor results, and that follows really the good loan and mortgage volumes that we've had, plus more of our customers are taking insurance with their loan and mortgage purchases. We had positive results from all businesses and really good control of expenses. Our NIE was down 8% from Q3 last year, despite the strong revenue growth.

Okay. So could you maybe quantify what the impact was of the UK annuity?

Well, I don't know the exact number, if we were to talk about one particular piece of business, but I would think that all of those adjustments would be less than $20 million on the actuarial side.

Less than $20 million on actuarial, that's helpful. Thank you. My only other question, Gord, is when you look at slide seven of your sub back -- not your sub pack, sorry, of your presentation, where is this recession in Canada? You've got tremendous loan growth happening here. Are you tracking statistics with your customers. Are you concerned that personal loans are up 22%? What is it that you're selling out there that's growing at 22%.

I'm going to actually turn it over to Dave McKay. I think your question is really related very much to our retail business. So Dave, do you want to -- I might add something afterwards.

Sure, Darko. We're gaining market share, particularly in the mortgage markets. When you look at our consumer loan growth, it is predominantly secured loan growth, rather than unsecured, so led by mortgages, also very strong auto indirect secured volume growth. From the mortgage side, we've expanded our mortgage sales force, our commission sales force that we talked about. We've got very strong distribution strength. We've expanded our branch network and the teamwork and the collaboration across our channels is really driving strong results.

On the indirect lending side, we're participating in channels that we didn't participate previously and we're driving high double-digit loan growth on a secured basis with very, very solid customer risk, great, great customer risk. So that's where our consumer loan growth is coming from, predominantly secured.

So how should we think about that as we come out of a recession into a recovery? Should we be looking for much -- I mean, very high double-digit growth rates in many of these product lines? What would your sense be in that in.

I think the Canadian economy's come through a, I would say almost surprisingly robust spring mortgage season across the country, driven by good value for consumers, lower rates and somewhat lower housing prices, but stable house prices so great value for first time home buyers drove a lot of demand across the country in all markets. So I think as long as unemployment trends stabilize, and Canadians get back to work, you should see relatively strong growth. You have to remember that Canadian consumer's not nearly as levered as the US consumer. They're in very strong financial shape on average across the country as you can see from Canadian loss rates compared to US loss rates. So Canadian consumer is in a good position to lead out of this.

And just highlighting Dave's comment, I think unemployment is clearly the statistic to watch very carefully in Canada.

Fair enough. I'm just -- it's a very good number. Thank you very much.

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

Good morning. Had a you few questions. First of all, could you give us some idea how much the steepness of yield curves in Canada and the US helped your net interest revenue, excluding trading related net interest revenue?

Michael, it's Janice. You're saying excluding the trading related revenue, so in our structural books, like in our banking books?

That's right.

We don't generally position. When we look at the structural books, we're actually hedging to not have that sort of an open exposure. So I would say to you that of course with all the hedging that's involved, it wouldn't be significant.

Well, in fact, you saw what happened to margins in the quarter. It's actually the other way.

Right. And as you said, you generally transfer price based on external market costs, presumably on a matched basis. So if there is any of the impact of gapping, I assume presume it would be taking place in Corporate Services. So it's there that I'm asking the question. And as I said, excluding the net interest revenue that's included in total trading revenue.

Michael, as I said, that we do run fairly matched books for our retail structural balance sheet and as Gord said and I said, we do put all of the impacts of our interest rate risk management back into the segment. So we do hedge the structure book. Now, that could be -- the interest rate position of course is a different story in capital markets but that's the nature of the business.

So it's not held in corporate Treasury, just to reiterate. It's passed on to the business units. So if you actually look at -- to sort of reverse your question, how much benefit have you derived, if you actually look at the margin in the businesses, you almost flip the question around. It's the opposite. It's because of the decline in interest rates, there's actually been compression because we do run a matched book.

Okay. It's just that I'm finding with the adjustments that I make to your net interest revenue that it's up very significantly on an adjusted basis, but, perhaps I can follow up offline. I did want to ask another question about the point that you made about transfer pricing, Janice. But it's based on external market cost and I'm wondering for RBC Capital Markets, does this mean that the overall market cost for RBC is used? Or is the cost used, what the cost of funding would be, for capital markets without the benefit of the parent bank covenant?

So just -- Dan's going to respond in the funding, in the detail, but for total bank of course for costs like liquidity, our term debt, those sorts of things, there's the benefit of the RBC covenant and we fully overlay those costs into all of the segment, because they're part of RBC, and Stan will talk about, though, the wholesale funding that is undertaken specifically in capital markets to fund their own activities. So Stan, why don't you talk about that?

Hi, Michael. Mark Standish. In terms of the capital markets business, we do fund that at the wholesale rate and obviously we take into account duration and liquidity around that. But the large bulk of our balance sheet is actually highly liquid securities that are funded on a secured basis, either via tri party arrangements or repo. But no it's not the blended rate, it is the wholesale rate.

Okay. And last question. You still have an undersized US banking franchise with a number of opportunities that you said may merge over time, so the question, that's lingered is whether Royal is going to go big or go home. Could you give us some color on your thoughts on this issue?

Yes, Michael, I mean, I don't think my response is any different than it has been over the last few quarters. The US banking market continues to be a market where I do believe there will be opportunities going forward, but it continues to be quite stressed and you've seen that reflected in a lot of the regional and loan loss numbers that have come out of banks across the US and so we're taking, as I say, a very measured approach. The top priority for Jim Westlake clearly is to get our RBC bank operating and performing at metrics which puts them in the top category in terms of relative performance and there's a tremendous amount of focus and energy going into that. There's been a major restructuring of our US bank which we talked about last quarter. There's been a significant cost initiative under way and you're going to continue to see that from an operational perspective.

In terms of acquisitions, we're going to continue to be very cautious because we want to make sure that if we deploy capital in that business, that we're earning returns that are as attractive as they are elsewhere, and just as an example of that, which I'll give, is if you look at some of the banks that have traded and there's actually been very few in our region, but when we look at them, one of the challenges that you continue to see in that US market is the tremendous amount of real estate exposure that is on the balance sheets of banks in the region.

We manage very aggressively to industry limits in a sector like that and we sit back and we look at our ability to allocate capital and deploy capital in a sector like real estate in businesses like Canadian banking and in our wholesale and capital markets businesses, and we measure those up against the return opportunities in an area like US retail banking. And it's a tough argument to make that you want to deploy capital at rates of return that are lower than are available elsewhere and so that's the approach we're taking. And as I've said in the past, we would rather continue to build a strong and stable and good small bank and be positioned to take advantage of a good opportunity if it arises, than to try to do something actively or aggressively, simply because we have excess capital. So we're going to continue to maintain that approach.

Thank you.

Thank you. The next question is from Summit Malhotra from Macquarie Capital. Please go ahead.

Good morning. Question on the trading side to start. Some of the commentary we received earlier in the year, not only from Royal but from investment banks globally on interest rate credit, fixed income trading, spoke to wider bid out spreads, less competition, less liquidity in the market. Almost somewhat perversely I've been thinking that as credit spreads begin to heal and the world feels a little bit better perhaps liquidity returns to the market, competition comes back, the ability to garner those wider spreads on plain vanilla business wouldn't be quite as robust as they were earlier in the year. Can you comment a little bit on your view on that statement and how it's affecting your trading business?

Yes. Hi, Summit, it's Mark Standish. We've enjoyed obviously very, very strong trading results globally and that's all products in not only Canada, but in the US, Europe and Asia. And what we've seen is tremendous client share gains. We've been attracting new clients globally. We're doing more business with existing clients. We've obviously been hiring extremely good people with very, very solid client relationships. So what we've seen I think is quite a significant improvement in market share, in all of our trading businesses. And if you look at the balance sheet numbers that we put out, obviously our balance sheet is continuing to be managed with a very disciplined eye, but within that we're seeing very, very high turnover of positions, very active trading with our clients and it -- it's not just limited to Canada.

The other thing we're seeing is because we have this global platform, we're able to service all of our clients much better in this market. So opposed to just servicing a client in a single market, having the ability to go beyond that market, to other geographies, is also something that we're seeing a lot of benefit from right now.

Certainly appreciate the fact there's been a structural build or advancement in your business, but maybe just a nonspecific to your revenue, in terms of a market commentary, as credit spreads have improved, as liquidity has returned, has that put somewhat of a dampening effect on the ability to garner wider spreads in the business or is it where it was earlier this year?

I think for us it's more a question of client activity and as I said, we're seeing tremendously strong client activity. If you look at our VAR, if you look at the, as I said parts of the balance sheet, we're not positioned -- we don't -- we haven't seen any shift, if you like, between how much of our money we make in proprietary trading versus client revenues. So for us it's just a very broad global strong improvement in general client flows and activity levels, irrespective of credit spreads coming in.

I think the one comment I would make generally, though, is that there's no question as you started to see more stability in the market, you're seeing some of -- you're seeing people come back into the marketplace. There's been some recent announcements in the US with some of the US banks that we're really withdrawing from the markets who are starting to deploy capital back into that sector because they were so aggressively withdrawing capital. So there will certainly be some stability I think in terms of the overall -- in terms of the overall competition in that sector. But I think the point that Mark is making is that it's not a question of huge bid/ask spreads. A lot of the markets, whether it's FX, or sterling or treasuries or Canada or whatever. There's been a lot of volatility. I don't think a tremendous amount of increased gains from wide bid ask spreads has changed very dramatically. We also have seen credit spreads actually widen out again over the last few weeks.

Thanks for that color. Last one for you, Gord. Just following up on the question on the US regional banking strategy. As you think through the different options for that business, how important is it for you to main control of the franchise? Is the possibility of joint ventures minority stakes something that the bank is open to in the right situation or is that something that just given the importance of asset quality and management decisions around lending, something that wouldn't work in your view?

No, I think that we're certainly not wedded to one way to continue to grow our franchise in the United States. I wouldn't suggest that what -- that a joint venture is necessarily a priority for the organization. I would certainly not want to lead you in that direction. Having said that, I've made it very clear that in terms of growing and expanding our franchise and our business in the United States, we are certainly very open to options and alternatives in the US banking side. And I would also -- I would be neglectful if I also didn't reiterate, we're continuing to look at ways to expand and grow all of our business in the United States, not just the US banking side, and so there's a lot of activity going on across all of our businesses, because our platform in the United States continues to be quite significant, quite broad, and generally highly profitable. Of course, the US bank is the one exception. But in terms of that particular franchise, as I say, priority number one is the -- is getting the performance strong in that business and that will have the most immediate impact in terms of turning around our international banking earnings and priority number two is of course how do we continue to build and grow a strong franchise. And I think all options are open with respect to that alternative.

Thanks for your time.

Thank you. The next question is from Jim Bantis from Credit Suisse. Please go ahead.

Hi. Good morning. Two questions. Just focusing a little bit back on the trading side, I think the old days which wasn't that long ago, Chuck Winnegrad would have been very pleased with $500 million in trading and clearly we're doing three times that amount and Stan, I know you talked about some of the structural changes in terms of the global platform that you have, but to what extent is the broad trading business contributing to this?

Hi, Jim. As I said earlier, it's in the same sort of range and ratio that we've seen in many prior quarters and many prior years. For us, this has been a very broad global improvement in sales and trading, not specific to any one area. Going back to Gord's comments, we've seen tremendous activity in the UK and if you go back to the credit awards, those were tremendous wins for us which were votes made by clients. Obviously, in our primary dealer designation from the New York Fed in the US is going to be very significant there. To sum it up, all of our businesses on the sales and trading side are performing well and proprietary trading is the same sort of proportion that it's been for quite a while.

Got it. Thank you. So when you think of the significant outperformance versus past levels, do you attribute most of it to the platform in Europe, in Asia? I'm just trying to get a sense of perhaps the contributions coming from a geographic perspective that's leading to this strength?

Yes. The geographic breakdown is approximately just slightly over 30% in Canada, it's around just over 40% in the US. Asia is I think 6%, with the balance being in Europe.

Got it. Okay. Thanks very much, Dan. My next question is with respect to Canadian retail banking. Dave, we've talked about the very strong asset growth and deposit growth, yet revenue is flat year-over-year. And I know NIM compression is a large part of that but is there anything else that's playing against you with respect to revenue momentum?

No, I think that's it, Jim. You've got it. I mean, the spreads that we're earning on the loan growth, whether it's the mortgage growth or the indirect lending growth, are very, very strong. So the new business coming on the books and the repricing activity continues to reflect the cost of credit are strong, so the NIM compression is due to that overall lower interest rate environment and a significant impact it has on our deposit business.

So when you're managing your business for the next year ahead and you think of this kind of deflationary environment, low interest rate environment, what type of management actions can you do or should we just in our own mind think of another kind of flat NIM year and just see how revenue grows from there?

I think, Jim, as we've talked about for the last year and I think what we've delivered is we're very focused on our operating leverage and managing our revenue stream and our cost base. So we've been able to grow our business significantly as Gord mentioned, by maintaining our zero percent NIE growth. We maintained or we're maintaining our commitment to really focusing on those two items. So we're going to watch our costs. We're going to watch our revenue growth. But at some point as we come through the year-over-year compression and things do stabilize, then what happens is your revenue growth starts to proxy your volume growth much more closely.

Got it. Thanks very much.

So right now our volume growth is being suppressed in revenue growth because of the compression in the overall interest rate environment but stability will allow revenue growth to transfer from the volume growth. So that is something that we're counting on going forward.

That coupled with cost control.

Right. Exactly.

Okay. My last question, a quick one for Gord. So we've seen a couple of quarters back to back with respect to trading revenue being north of 20% of the bank's aggregate revenue and some would say Royal Bank's become the Goldman Sachs of the north. But that leads to valuation issues and other concerns. What's a comfortable range, Gord, that you feel that the trading revenue will kind of gravitate towards in terms of aggregate revenue?

Well, I would firstly month out that we did make $1 billion excluding all of our wholesale lending and capital markets activities. So I wouldn't characterize it as the Goldman Sachs of the north. I think that the range that we have targeted in the past really hasn't changed and although you're correct in suggesting that if you look at the sort of 20 to 30% metric, we're certainly not only at the high end of the range, we're slightly through that.

I mean, if you look at earnings as an example, we're about a third in the wholesale lending and capital markets activities. We continue to maintain our range and the way I tend to look at it is if you normalize our international banking earnings today even, based on what we believe we can and should be doing, then we continue to be in that range. Clearly, at the high end of that 20 to 30% range, but we're not going to move off that.

As I said many times, we're going to continue to invest and to grow our capital markets business but it's going to be in conjunction with growth in businesses like wealth management, insurance and Canadian banking and international banking as well. And if we're able to manage the bank as we would like to manage it, and effectively grow all of those businesses, we think we'll be able to continue to have a very globally competitive significant major capital markets business.

But in the context of a bank where 70% of our capital, our earnings, our revenues, et cetera, comes from ancillary businesses because we think that business mix is the right one, given who we want -- how we want to position our organization, maintaining our credit rating, managing volatility, et cetera. So I don't think -- yes, there has been an increase and I would also highlight that we have always said that as we start to come out of this recessionary period and the financial crisis, that you are going to see the capital markets business experience the more positive turnaround first. I mean, if you look at previous cycles, you generally get a more dramatic improvement in the wholesale businesses, before you start to see that filter through into other businesses, whether it be wealth management or retail, et cetera. And that is the way this one is playing out and so our expectation is that you'll start to see down the road improvement in some of these other businesses. And as I say, particularly if you sort of take a more normalized approach to the international banking business which is obviously a big swing factor in those percentages that you mentioned.

Thanks very much. Appreciate that.

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

Good morning. I understand all the comments you made about segmented margins and why or even segmented results and why they're not comparable across banks and I certainly understand the concepts you've articulated about there are segments being transfer price, their actual cost having to sort of carry their own weight. What I really try to understand going forward, because these segments are not quite helpful anymore, at least in terms of comparison, is understanding that consolidated margin and what would be helpful for me would be to understand the increase in NII, again, excluding anything to do with trading NII, that's up about 12% year-over-year. If you look at things like average earning assets, they're down about 4%, loans are up only about 4% so clearly the balance sheet as a whole has benefited from something to cause these margins to improve. So it would be helpful for me to understand what is it that's causing the global margin, the consolidated margin to improve so much year-over-year and can this continue?

Mario, I'll give a stab at the answer to that question and you're right that you need to exclude all the trading positions because it really -- if you just look at the straight enterprise NII, it does move around just depending on where the positions are, if they're physical or derivative in capital markets.

I removed all of that stuff.

Pardon me?

You're absolutely right. I made all of those adjustments.

I think if you look at the composition of our spreads, while Canadian banking is the bulk of what's happening there, we also have very positive spreads in our international banking businesses. For example, in the Caribbean. And with the insertion too RBCT the spreads are quite a bit wider in those markets and we have seen some spread uptick in the US banking business to the extent there is revenue in business there. We have also some spread income in our wealth management businesses, which would sort of offset the -- would be sort of similar to the Canadian banking. So those are -- that's what's happening in the global spread.

What we will do is we'll look at all of our disclosures on an enterprise basis. We never look at NIM that way, of course, because we manage at the segment level and manage performance in that way. But we'll look at it that way and get back to you to see if there's a more helpful way.

I'll tell you the source of the confusion for me is because Canadian banking is such an enormous part of this overall bank and with margins down in Canadian banking, I think it's something like 24 basis points year-over-year. It's interesting that the overall margin, the overall margin is up so much and it appears that it's coming mostly from the corporate segment and from wholesale. So anything you can provide going forward about why it is that corporate and wholesale would benefit so significantly in terms of improving margins in this environment would be helpful.

Mario, it's Doug McGregor. One of the things that you have to take into consideration is that the spreads in the wholesale loan book are significantly wider than they would have been a year and-a-half ago. So that loan book has a duration of approximately two years, and so we have repriced a good portion of that book at significantly better spreads.

And as Dave McKay mentioned, new business on the retail business is being priced at much more attractive margins but you cannot reprice the retail business nearly as quickly as you would see on the wholesale side.

Is there any gapping on a global basis, like the entire balance sheet structurally?

No, not -- no, there isn't, not from that basis. So I think that the critical piece is it's more segmented information, Mario. So why don't we work on that.

Thanks.

Thank you. The next question is from Steve Theriault from Bank of America/Merrill Lynch. Please go ahead.

Thanks very much. Quick question likely for Janice. If we look at the corporate segment and adjust for the general provision in a portion of the market related charges this quarter, looks like one of the strongest contributions we've seen in quite an age are the corporate segment upwards of a couple hundred million. I would have thought that would be, with securitization down, I know securitization was mentioned in the report to shareholders, but it looked to me like the contribution from securitization was down sequentially. Could you expand a bit on what's going on in that line and could you quantify the tax and accounting related adjustments that are mentioned mentioned also in the report to shareholders.

In the corporate segment you've identified the material elements of what's in there and that's why we don't really do sequential analysis. So the securitization revenues, although down, are significant. The general reserve flows through there and then also the impacts of our Corporate Treasury available for sale portfolio and the market environment.

With respect to all of the other adjustments, they basically are there from a quarter-to-quarter basis. Sometimes they net. Other times they don't. And they're all well below our materiality threshold and that's why we don't disclose the items individually. They're also going through the corporate segment are things like our -- the impact of our mark-to-market on our funding derivatives that we use to hedge some of our funding programs. So that creates a lot of volatility. That's why you see volatility in the corporate segment and why we, rather than looking at trend analysis, identify the key components.

All right. Thank you.

Okay. Thanks, Steve.

Thank you. This ends today's question-and-answer session. I would now like to turn the meeting back over to Mr. Gord Nixon.

Okay. Well, I would just conclude by again thanking everyone for their participation and as I said at the beginning, if people have comments, particularly in the analyst community, on the timing of the call, we would appreciate it. We would appreciate your feedback. So thank you for joining us. We look forward to presenting to you again next quarter.

Thank you. The conference is now ended. Please disconnect your lines at this time. We thank you for your participation.