Royal Bank of Canada (RY) 2010 Q1 法說會逐字稿

Good morning, Ladies and Gentlemen. Welcome to the RBC 2010 First Quarter results Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Ms. Josie Merenda, Head of Investor Relations. Please go ahead, Ms. Merenda.

Good morning and thank you for joining us. 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 George Lewis, Head of Wealth Management, Doug McGregor, Chairman and Co-CEO of Capital Markets, Dave McKay, Head of Canadian Banking, Mark Standish, President and Co-CEO of Capital Markets, Barbara Stymiest, Head of Strategy, Treasury and Corporate Services, and Jim Westlake, Head of International Banking and Insurance.

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, Josie and good morning, everyone. Following this call, of course, we have our Annual Meeting and I hope that you will join us for that event as well.

As you can see from our results this morning, RBC is showing great momentum and is off to a solid start in 2010. We earned CAD$1.5 billion this quarter, up 35% from last year, and 21% from last quarter, our second best quarter of earnings. This quarter, we had earnings growth in all of our businesses. Canadian Banking earnings increased 12% from last year and Capital Markets continued its strong performance. We had growth in Wealth Management, Insurance, and made solid progress in our international banking business. We are seeing signs of improvement in market and economic conditions and we are taking advantage of opportunities. Our capital ratios remain among the strongest globally. We ended the quarter with a Tier 1 ratio of 12.7% and a tangible common equity ratio of 9.1%. At this time, we are maintaining our quarterly dividend at CAD$0.50 per common share. We feel very good about where we sit from a capital perspective. We believe even factoring in changes to capital rules we are extremely well capitalized. Our Tier 1 levels and our tangible equity levels are both high and our leverage ratios are low by global standards.

I will go into more detail on the proposed Basel regulations during my AGM presentation but I would like to comment briefly on the recently announced mortgage regulations. I do believe the proposed changes could head off a potential speculative activity in the housing market but from RBC's perspective we already have a very conservative underwriting standards and we don't anticipate any significant changes in how we underwrite our loans or how we operate our business. Before we look at our businesses, I want to point out that there were very few -- there were a few insignificant items impacting segmented results this quarter that offset one another and have no material impact on overall earnings. As an example I would highlight this quarter we recognized CAD$80 million on the sale of securities in our available for sale portfolio but these gains were mostly offset by the cost of unwinding the related funding of these securities that was reported in net interest income. We've actively repositioned our AFS portfolio over the last year by selectively selling lower quality positions and purchasing higher quality assets. We have also seen price improvements across a broad range in a number of securities. As a result we have a high quality portfolio compared to a year ago and currently have net end realized gains of CAD$39 million.

Canadian Banking performed extremely well and continued to underpin our earnings. We had strong volume growth and market share gains across most products reflecting our leadership position in Canada. The tremendous strength of this business has been supported by our ability to drive cost savings and build efficiency. We are continuing to make improvements in sales productivity and simplifying processes. For example, we are reducing costs by moving transactions to lower cost channels and delivering more client statements electronically. You can see from our results that we have made significant strides on the cost side. At the same time, we are continuing to invest in our business for the long term. For example, I'm sure some of you saw our new marketing campaign rolled out during the Olympics. Close to 90% of Canadians were watching during peak programming hours. Our sponsorship was a great opportunity to promote and enhance our brand strength and profile, RBC, on the Canadian stage and globally.

Our initiatives are gaining traction. Solid revenue growth coupled with our ongoing focus on cost management drove an efficiency ratio of 45.7% this quarter. That's 140 basis point improvement from last quarter and we believe we can continue to drive this ratio to the low 40s over the medium term. While we continue to experience elevated PCLs reflecting the current economic conditions, we still expect credit quality in Canada to improve in the latter half of 2010.

In Wealth Management, improved market conditions and investor confidence drove higher fee based assets and higher transaction volumes over last year continuing the significant earnings recovery in this business from the period of market lows. We are continuing to leverage our global capabilities to differentiate our product and service offerings, to both individual and institutional clients and we are being recognized for our achievements. Phillips, Hager & North was recently awarded best overall fund group and best bond fund family in Canada by Lipper. We also received recognition in Euromoney Private Banking Awards winning Best Private Banking Services Overall in three separate regions of the world -- Canada, the Caribbean and Jersey. Insurance exhibited strong growth across most products leveraging our distribution and brand strength and continues to compliment our retail product offering. We have taken a number of steps to enhance and streamline business processes to insure that clients find it easy to do business with us while keeping our expenses down.

In international banking, the net loss was lower than last year and last quarter. We continue to see signs of improvement in the US banking loan portfolio. We're working hard and making progress and restructuring this business to enhance our competitive position, improve client service, and achieve greater operating efficiency. Once again, in Capital Markets we benefited from the strength and diversity of this business. We had improvement in our Investment Banking results and while we did see some moderation in trading levels this quarter reflecting reduced market volatility, tightening spreads and increased competition, we continue to generate solid results. Our relentless focus on maintaining our leadership position in Canada has lead to a number of notable awards this quarter. We were once again named Canada's Dealmaker of the Year, a leadership position we have maintained for the past seven consecutive years. We were also named Best Investment Bank in Canada, winning all three categories -- debt, equity and M&A. Outside of Canada we continue to extend our lead in select markets and have momentum in a number of businesses. In 2009 we ranked in the top 20 for M&A both in the United States and globally.

All of our businesses had strong results this quarter. Earning CAD$1.5 billion this quarter and an ROE of 17.5% speaks to the earning power of the organization, the strength of our businesses and our ability to manage costs and capital effectively. Our longstanding strategy and diversified business model continues to serve us well as we extend our leadership position in Canada and build our global platform. I would like to recognize our employees around the world for their committment and dedication to the organization. They were key to our success this quarter and last year and will be drivers of the next phase of our growth.

And with that, I'll turn it over to Morten Friis.

Thank you, Gord. Turning to credit on slides 13 to 15, overall provision for credit losses decreased CAD$390 million over last quarter. Specific provision for credit losses declined primarily in our US corporate lending and US residential builder finance portfolios. We do not have a general provision this quarter which compares to a provision of CAD$156 million last quarter. Credit quality is generally improved from the last quarter reflecting stabilizing asset quality driven by the improvement in the economic environment. During the quarter key indicators such as the rate of bankruptcies improved and the unemployment rate steadied.

In our Canadian Banking segment, provisions were flat from the last quarter as higher provisions in our business lending portfolio were offset by lower provisions in credit cards and unsecured personal lending as a result of fewer personal bankruptcy filings. Credit cards specific provisions as a percentage of average loans improved to 439 basis points from 467 basis points last quarter. Our residential mortgage portfolio continues to perform well with specific provisions as a percentage of average loans of one basis point which is consistent with our historical performance. Specific provisions for credit losses in international banking decreased CAD$54 million mainly reflecting lower provisions in US banking, primarily in our residential builder finance portfolio resulting from stabilizing asset quality. This quarter we had no provision on available for sale securities reclassified to loans and this also contributed to the decrease in provisions.

These factors were partially offset by higher provisions related to US commercial loans. Provisions in the Caribbean were flat as asset quality remained stable in spite of the impact of slowing tourism and elevated unemployment. Capital Markets specific provisions of CAD$30 million decreased CAD$190 million from the prior quarter. Overall, our credit performance compared to last quarter was good. The sustainability of the current levels of PCL will be dependent on the further entrenchment of the economic recovery and improvement in unemployment levels. The absolute level of provisions still remains historically high and credit quality will continue to impact our consolidated results throughout 2010 as credit losses have historically come off the peak one year after the trough of the economic cycle. Although the unemployment rate in Canada is expected to remain at an elevated level throughout 2010, the expectation remains that credit quality will improve modestly in the second half of the year.

Credit quality is expected to continue to be weak in the US. However it should generally improve when compared to 2009 as we are coming off very high levels of credit losses last year. Turning to market risk, we had three days of small net trading losses all well within VaR. From a risk perspective, Capital Markets continued to generally improve and volatility has diminished from the prior year and quarter. Effective this quarter any gains or losses on securities which we previously referred to as market environment related will be treated as normal course and not be separately disclosed. This quarter we did have fluctuations in certain securities and the impacts are minimal.

With that I'll turn the presentation over to Janice Fukakusa.

Thank you, as Gord mentioned, RBC is off to a solid start in 2010. Our First Quarter net income of CAD$1.5 billion was up 35% over last year and 21% from last quarter. This quarter, we had strong results across most of our businesses and lower provision for credit losses and we continued to make progress on our cost initiatives. Earnings increased from the prior year reflecting the general improvement in market and economic conditions. As Gord mentioned, our capital position remained very strong with a Tier 1 capital ratio of 12.7%. Our ratio was down 30 basis points from last quarter largely due to higher risk adjusted assets from increased credit risk, partially offset by earnings.

To give you some background, under Basel II requirements we annually review and recalibrate key parameters to calculate risk adjusted assets based on our actual credit experience with respect to default, loss, and usage over the last 10 years. As a result, our risk adjusted assets increased this quarter primarily due to increased risk parameters reflecting higher realized defaults and losses in our retail portfolio as well as higher realized defaults for financial institutions in the wholesale portfolio and some credit deterioration. Before moving on to the segments I'd like to point out that our effective tax rate was 27.1% this quarter, up 3.5% from last quarter. This increase was mainly due to higher income from jurisdictions with higher income tax rates. We did have tax adjustments in some of our business segments this quarter but they were largely offsetting and had minimal impact at the consolidated level.

Let's move on to slides 17 and 18 for a closer look at the performance of our five business segments. Starting with Canadian Banking, net income of CAD$777 million was up 12% from last year mainly driven by volume growth across most businesses and our ongoing focus on cost management that Gord highlighted partially offset by higher PCL. Last year's earnings included a favorable adjustment to our credit card rewards program liability of CAD$32 million after-tax. Net income was up 8% from last quarter reflecting volume growth across most businesses and our cost containment initiatives. And last quarters earnings were positively impacted by a CAD$12 million after-tax gain on the sale of a portion of our remaining Visa shares. Looking at slide 19, you can see we experienced margin expansion from last quarter reflecting higher spreads from repricing activities and lower funding costs. When the absolute level of rates increases, we should benefit from further margin expansion.

Moving on to Wealth Management, net income was CAD$219 million, up CAD$91 million over last year due to higher average fee based client assets and transaction volumes. Cumulative accounting adjustments of CAD$34 million after-tax, and a favorable income tax adjustment of CAD$30 million. These factors were partially offset by spread compressions. Compared to last quarter, earnings were up CAD$58 million primarily due to the two adjustments I just mentioned, partially offset by lower transaction volumes. Insurance net income was CAD$118 million, up CAD$6 million over last year reflecting solid business growth largely in our European life business, investment losses in the prior year, and the favorable impact of a new UK annuity reinsurance arrangement. Our continued focus on cost management reflecting productivity initiatives also contributed to the increase. These factors were partially offset by unfavorable actuarial adjustments and higher disability claims cost. Net income increased CAD$14 million from last quarter mainly due to a lower level of unfavorable actuarial adjustments and investment losses in the prior quarter.

International banking net loss of CAD$57 million improved from a net loss of CAD$100 million last year primarily due to lower provision for credit losses which Morten explained and our continued focus on cost management. The net loss this quarter improved from a net loss of CAD$125 million last quarter due to the provision last quarter related to certain Caribbean banking Mutual Funds which was partially reversed this quarter. Our results also reflect lower provision for credit losses and our ongoing focus on cost management.

Net income for Capital Markets was CAD$571 million up CAD$346 million from the year ago as our prior year net income included significant market environment related losses. This was partially offset by lower trading revenue in certain businesses. We also had lower provision for credit losses and improved results across most of our Investment Banking businesses. Compared to last quarter, revenue and earnings were relatively flat. The increase in net income of CAD$10 million largely reflects lower provision for credit losses and the release of the remaining Enron related litigation provision of CAD$29 million after-tax. This was partially offset by higher variable comp as last quarter included an annual adjustment which lowered the Fourth Quarter expense.

Slide 20 illustrates RBC's total trading revenue. This quarter, we continue to benefit from the strength and diversity of our trading platform. Compared to last quarter, we had lower trading revenue in our money-market, foreign exchange, and fixed income businesses, partially offset by higher trading revenue in equity. Certain of our trading businesses performed at a more moderate level this quarter reflecting reduced market volatility, tightening of spreads and increased competition.

At this point, I'll turn the call over to the Operator to begin questions and answers. Please limit yourself to one question and then requeue so that everyone has an opportunity to participate. Operator?

Thank you. (Operator Instructions) The first question is from Steve Theriault, BMO Capital Markets. Please go ahead.

Thanks very much. A question for Dave McKay, maybe a two parter. One, how much price -- repricing effect -- is still in the pipeline that may come through the net interest margin in the next couple of quarters? And secondly, perhaps you could provide us with a bit of an outlook for your 2010 loan growth -- and I'd be interested also longer term, how concerned are you, Dave, that the increase in household leverage in Canada will make for less robust loan growth over the coming years? Thank you.

Thanks, Steve, it's Dave here. When it comes to the repricing activity, the repricing that we did in our unsecured business took effect on January 4th so we only saw one month in the quarter -- First Quarter of repricing -- so you'll start to see that flow through over the next couple of quarters. So that's really the extent of the repricing. Now, all of the repricing that we did in the commercial and small business book occurred well into 2009 is already in our run rate, so when it comes to repricing that's the remaining impact to be seen. We only saw one month of that in January as part of the Q1 numbers.

When you talk about the mortgage business and leverage, I would say that with the potential rising rate environment we do expect to see some slowing of demand for loans and you traditionally see that in a rising rate environment. But we don't expect -- as Gord mentioned -- the mortgage rules to really fundamentally change demand for loans so it would be prominently a rising rate environment. And we've enjoyed over the last three or four years double digit mortgage growth and consumer lending growth and I would expect that to moderate to the mid to high single digit range over the next year to two years as it will come off slightly.

So I think that's generally the consensus from what I see in the marketplace. Does that answer your question?

Yes, that's great. Thanks very much.

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

Good morning. My first question is for Janice. Just looking at core net interest income on an all bank level -- we just talked about Dave's segment, that's the biggest one -- but on an all bank basis still looks to me like your core net interest income was down about CAD$100 million quarter-over-quarter. The way you report NIM, we've seen a decline for the first time in more than a year. And I would have thought with funding costs continuing to improve with some of the repricing you've mentioned in the loan book, we would still have some further room for the core NIM and more importantly the net interest income to go further.

I'll stop here but just looks like most of it is coming from the corporate segment so if there's anything from a funding or hedging perspective you could tell me about that would be great.

It's Janice and I think you are right that over the longer term, we should see some expansion there. In the particular quarter, we had the unwind funding costs related to some available for sale securities portfolios that we rebalanced. So while we had the gains in AFS, the funding cost as Gord referred to this in his remarks -- went through net interest margin, so that had an impact in reducing our margins. And then we also had some accounting adjustments related to securitization accounting so it was an unusual quarter for some adjustments that impacted our NIM but aren't considered to be longer term what should be there. So we should see some widening as we move ahead.

So unwind of funding costs and-- .

Right, in our US operations and then also we had some securitization cumulative accounting adjustments related to some securitization accounting which are in corporate support which also affected the NIM because they were booked in net interest margins.

Did the AFS unwind go through corporate as well -- or it looks like international banking's NIM fell about -- it was a big number 30-40 basis points quarter-over-quarter.

The unwind of the NIM went through international banking as did the rebalancing of available for sale securities portfolios in international banking. So all of it went into international banking. So on a net-net basis for our available for sale portfolios across-the-board, we had a net gain position which was nominal, offset by this funding costs. But certain of the gains and losses went through international banking, so that's what you see in the disclosure, a bit of pressure on some of the numbers like spread because of rebalancing our US investment portfolio. And also looking at our Caribbean portfolio.

Do you have a ballpark on how much this removed from NII in the quarter?

It's about the total -- I think that our NIM was down about eight basis points and the bulk of that is due to those two adjustments.

Do you see these as very much a one-time Q1 issue?

Yes, hopefully I do because they were based on specific actions that we had to take on specific situations.

Okay, one more for George Lewis and that's it for me. The Wealth Management segment, you certainly bounced back pretty strongly on the top line in Wealth from the bottom in Q2 a year ago. Pretty surprised given the very conducive -- well for the most part -- conducive market conditions and strong fund flows you've enjoyed on the long term side -- that wealth revenue was down sequentially. Anything you can point me to here especially looking at the fee income side of the business. I understand what's happening with net interest income.

Sure, thanks very much, Sumit. I think the two factors I'd point out because we do have a global business, the one thing to keep in mind is the strength of the Canadian Dollar -- year-over-year -- would have had an impact on our revenue growth. Just to give you a sense of our balances because we have enjoyed very strong organic growth in our US and international businesses, our AUA there was up 22% year-over-year in constant dollars and US dollars if you will.

Sorry, George I was looking more quarter-over-quarter and the dollar was that much -- only about 1% move sequentially.

Sorry, sequentially quarter-over-quarter a minor impact but our transaction revenues as Janice highlighted were off somewhat quarter-over-quarter. Part of that is seasonality with the December month being in the quarter that I would point to. But in terms of our growth in fee based assets and our momentum, it's still very strong.

All right, thanks for your time.

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

Hi, good morning, I've got two quick questions. First one I think of -- some of the comments with respect to potential for rising interest rates and we see the Canadian dollar back at $0.97 and looking to go to parity with the US if not higher. I'm wondering what's the sensitivity on your business banking credit quality domestically with the rise in the Canadian dollar again and the potential for a little bit higher interest rates. Can you talk a little bit about potential deterioration on business banking, commercial banking?

It's more, I'll take that. We've actually had a history of a number of years looking at the Canadian small business and commercial segment and their ability to withstand a series of shocks whether it's FX or commodity price increases from a consumption standpoint. And we've seen our credit quality remain very strong there. So I would say that clearly, a prolonged strengthening of the Canadian dollar is a negative for the overall Canadian business community. But from our loan portfolio, the history of the last five years plus -- is that it actually has had very modest impact on our asset quality and Canadian business lending.

Got it. Thanks very much. It sounds like the worst is over in that context unless there's something more drastic from an economic perspective.

Janice, I've just got a quick question on market risk. We seen a CAD$3 billion increase to CAD$26 billion and that trend has -- really didn't have anything to do with some of the comments you provided earlier with respect to the adjustments on credit risk. Can you talk about the increase in market risk relative to the changes required for capital and the multiplier effect required on certain trading portfolios?

It's Morten again. So if you're looking at the reported value at risk numbers, I would say it's a reflection in part of the volumes and -- particularly some of the interest rate sensitive business -- and the consumption of VAR and those that have pushed the numbers up somewhat quarter-over-quarter. I'd also point out that those are businesses that have performed very well from a return and risk standpoint.

So just to follow-up quickly, is there a notion that perhaps despite the changes on capital, rules were assigned to market risk on risk weighted assets but the bank feels a little bit more comfortable assigning capital to this business in terms of the wholesale -- given the market conditions remain conducive for the franchise?

Well the capital allocation to the trading businesses are affected as we make adjustment to some of the detailed capital allocation methodologies and that is responsible for a small part of the increase in the economic capital associated with the trading businesses. From a risk and return standpoint, the continued strong performance of those businesses have contributed to both returns and risk metrics remaining slightly higher than you would have seen in previous quarters. A big element of that when it comes to the VAR metric in particular, is the pro-cyclicality of that measure. We're using a two year data stream for calculation of VAR which means that we now have in our methodology the full period of the financial crisis, including the Lehman bankruptcy period, affecting the measurement of risk for our trading businesses.

Thanks very much. I'll requeue.

Thank you. The next question is from John Reucassel from BMO Markets. Please go ahead.

Thank you. Just one question, two parts. The PCLs of 493 down from an aggregate of about 700 on the specifics in 2009. Morten, is this what we should think of as the new run rate for Royal Bank or is Q1 a bit of an anomaly here? It's a little stronger than you expected or could you talk a little bit about that?

Sure. Well, and I think I commented on this in my comments earlier. If you look at it from a segment by segment basis, there clearly is risk in the economic environment and you have to make your own call on where you see economic growth and unemployment in particular going over the balance of 2010. If the stabilizing to slightly improving trend holds, you will see that Canadian Banking has continued to perform very well, given where we are in the economic cycle, from a credit quality standpoint. And a stable economic environment should result in that continuing but clearly there's a risk in the environment. The international banking segment is effected primarily by the asset quality performance in the US, the RBC Bank USA portfolios. And given where our performance was in 2009 for that, we should expect to see some continued improvement over 2010. But again with the risk in that portfolio relating to where we see the overall economic environment in the US going.

The Capital Markets performance where the provision is down to CAD$30 million this quarter is for where we are in the cycle very strong performance. I would say that our current asset quality -- we do not see that moving up sharply. But it clearly -- that is a portfolio where there is greater risk of individual accounts affecting the quarterly provision significantly as I think there's greater uncertainty in the Capital Markets portfolio whether the performance can be sustained. But given the current shape of the portfolio we have to feel very positive about that business as well.

Okay, and then last question just for Janice, on the tax rate. Is this -- the earning more money in a higher tax jurisdiction -- should Royal Bank shareholders get used to a slightly higher effective tax rate for the foreseeable future or could you talk to us a little bit about where you see your tax rates going, or is Q1 an anomaly?

I think to some degree Q1 is a bit of an anomaly in terms of our overall tax rate. We're focused on a tax rate that would be in the mid 20s. We have had a lot of very good earnings growth in areas like the US that has definitely a higher corporate tax rate since then Canada and some of the other jurisdictions we operate in. So from our perspective, we also had some tax adjustments related to certain of our tax positions that flowed through the corporate support segment. So I think on an ongoing basis while our rate is at 27% we are targeting to get into the mid 20s over the next few quarters and to finish up the year. But there will be some volatility in the tax rate as we earn our income in different higher tax jurisdictions, particularly in the Capital Markets segment.

Thank you.

Thank you. The next question is from Cheryl Pate from Morgan Stanley. Please go ahead.

Hi, this question is probably for Morten. Just looking at the impaired loan formations and repayments, is there anything one-time in the wholesale repayment. And can you give some color on how that splits out geographically and repayments versus returning to performance status?

Well, I assume you're looking on the supplemental package on the formation. You'll see that our new impaired formation is the lowest since the third quarter of 2008 and actually net impairments have grown, we haven't seen numbers at this level since 2007. It's a combination geographically. It is in the sub pack done on the net impairment by region. You can see that Canada is generally somewhat stable reflecting the large impact of the Canadian Banking portfolios and the fact that they -- I think that they have stable asset quality but we don't see a falloff there as yet and I would expect we will probably have another quarter or two of impairment formation at current levels.

The US, given where that portfolio has come from, is improving and should continue to improve. And in terms of -- there have been no specifically large notable accounts that have caused the numbers to move in a fashion that it has a terribly one-off look to it, so I don't know if that helps answer the question?

Yes, and then just on the repayment side, is there anything one-time related there?

No. Whether write-offs or impairments, we are -- the largest driver of that frankly has continued to be our US portfolios where we do continue to both sell off assets and we have seen some recoveries on previously impaired loans but there are no large individual items that drive the numbers.

Okay, thank you.

Thank you. The next question is from John Aiken from Barclays Capital. Please go ahead.

Good morning. Jim, just wanted to look at your area for a moment. We've seen the best result in international banking that we've had in over a year but we're getting a lot of moving parts in terms of provisions were down but so were revenues but you continue to be good on the expense side. What do we need to see the international banking hit breakeven? Is this continued improvement on credit or are we going to be able to see operating leverage come through even stronger?

Thanks for that. I think you're going to see a combination of both. Some of the revenue is down as we have worked our way out of some non-core businesses that frankly had some revenue but a lot of cost attached to it and weren't very profitable for us. So things like -- we got out of the prepaid card business, the capital advisory business, payroll solutions business. So those things are all in the numbers. If you take a look at core banking, we would be running in the US around flat on revenue right now with slightly lower loan demand. And then of course a big focus on reducing cost. So we think we can continue with the good expenses and then we will see the revenue flatten and start to go up again as the economy improves.

Great. Thanks for the color.

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

Thank you. There are a couple of areas where you've talked qualitatively about the impact of some anomalies in your results but you haven't actually provided the numbers. So just at the outset I want to say it's frustrating to me and I think other people on the line -- that you don't actually provide these numbers for the anomalies. The two items I'm thinking of in particular right now is how much did the recall it operation of your credit actually add to your credit risk weighted assets during the quarter.

And secondly, Janice, you talked about your net interest revenue being impacted by accounting adjustments related to securitization accounting. How much did that actually impact your net interest revenue and was it offset anywhere or was this just a full impact on your earnings also? Thank you.

Thank you, Michael, and I hear your comments about some of the items in sizing and we've tried to do what we could on the sizing. And a lot of why things aren't sized this quarter is because there are direct offsets and the offset is de minimis. So I'll speak to the net interest margin comment first. As I discussed previously of the eight basis points of increase, the large portion of that related to those two items that I talked about -- the funding breakage cost and also the impact of the accounting adjustments related to securitization accounting -- and it was about equally weighted. So I think that that gives you an order of magnitude of what happened with respect to these adjustments and how it impacts our spread income.

With respect to the recalibration operation of credit, Morten?

We'll have to get back to you. I don't have the numbers at my fingertips here.

So we'll get back to you on that recalibration.

Thank you.

Okay, thanks.

Thank you. (Operator Instructions) The next question is from Mario Mendonca from Genuity Capital Markets. Please go ahead.

Good morning, Gord, I suspect you'll be talking about this at the Annual Meeting -- but have you learned anything from the capital, what was proposed by BIS that affects your outlook on dividend increases. Or is there any commentary you can offer us in that respect?

Well, I would open by saying that I think there's still a tremendous amount of uncertainty with respect to the Basel proposals and what will ultimately be implemented and what the impact will be. From a macro perspective we feel quite comfortable that our capital levels are sufficiently strong -- that whatever the new rules and regulations are, we should be in very good shape which shouldn't affect our ability to repatriate capital whether it's share buybacks or dividend increases as we move forward as long as we're in the range from an earnings perspective to insure those increases. So as I said at the last quarterly Conference Call, given the regulatory uncertainty there's certainly pressure out there to proceed cautiously with respect to repatriating capital. But I think as clarity comes around the rules in the latter half of this year, it should be a different environment and I think we'll be in a much better position to review share buybacks and dividend increases at that point in time.

Would you say it's more likely a 2011 phenomenon -- with the banks raising dividends -- your bank specifically -- or could it be late in 2010?

I wouldn't say because I shouldn't say and I can't say at this point in time and it will be dependent on a bunch of issues including strength of earnings as well as the regulatory rules. I think it's a better question not just for the banks but for regulators generally. I think as I said right now, there's no question there is pressure -- or guidance -- that banks should be very cautious about repatriating capital until there's greater clarity. I do think we'll have greater clarity around these rules in the latter half of this year and I think that is the time when it will become easier to reflect on those decisions.

And then a quick question on the Capital Market side. Last quarter you talked about -- I think the Treasury volumes were up something like 71% -- or the inventory of Treasuries -- this is -- I'm referring to UK and US government bonds. Your inventories were materially higher and that was reflective of the growth in your business. As interest rates move higher, government bond yields move higher, is there a risk we could see in any given quarter, Royal take mark-to-market losses as it tries to facilitate the trade in in Treasuries?

There's always a possibility that we could take losses in the sales and trading business, as Morten pointed out in the last quarter we only had three days of very modest losses. Unwinding of quantitative easing is something that everyone is anticipating and it shouldn't be a surprise for any participant, especially us. So we continue to manage the business to a very strict series of limits that aren't just VAR related. They relate to spreads, liquidity, funding, and stress. And I think we'll manage the business through the next cycle in the same way that we've managed it through the recent cycle.

The reason I bring it up though is you made specific reference to the inventory being materially higher, the inventory of those Treasuries being materially higher. That's ultimately why I brought it up. So you don't see that as a material risk to the bank simply because you can see it coming, so you can adjust for it?

No, I don't.

Thank you.

Before we move to that question, maybe I could just come back and answer Michael Goldberg's question on the RAA growth and the impact of the new parameters. It's about a CAD$14 billion growth in RAA quarter-over-quarter and a little less than half of that is associated with the parameter adjustments and the credit portfolio.

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

Thank you very much. I don't know whether it's a good thing or a bad thing but I think in 10 years this is the first time we've run out of questions with 15 minutes left to go. But there are no more questions in the queue. Hopefully that's because everybody is anticipating a sizzling Annual Meeting and will hopefully participate in that. We do thank you for your participation. We look forward to you joining us for the Annual Meeting and look forward to next quarter's Conference Call. So thanks very much to everyone for joining us.

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