Royal Bank of Canada (RY) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the RBC 2010 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. Josie Merenda, VP and Head of Investor Relations. Please go ahead, Ms. Merenda.

Thank you. Good morning and thank you for joining us. Presenting to you this morning are Gord Nixon, our CEO; Morten Friis, our Chief Risk Officer; Janice Fukakusa, our Chief Administrative Officer and CFO. Following their comments we will open the call for questions from analysts. The call will be one hour long and end promptly at 9 a.m. To give everybody a chance to participate, please keep it to one question and then re-queue. We will be posting 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; Barb Stymiest, Head of Strategy, Treasury and Corporate Services; Jim Westlake, Head of International Banking and Insurance; and Zabeen Hirji, Chief Human Resources Officer.

As noted on slide 2, 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 very much, Josie, and good morning, everyone. Before I begin, you'll recall this summer we announced that Zabeen Hirji was appointed to our executive committee and this is Zabeen's first meeting, so I'd like to welcome her to our conference calls and she, of course, is available as well for questions.

Turning to slide 4 -- in the midst of continued significant changes in the financial services sector, RBC executed on our long-term strategy; we grew our franchise both in Canada and internationally. Our progress this year illustrates once again the power of our diversified business mix and our commitment to putting our customers first.

We delivered strong earnings of more than CAD5.2 billion which was up 35% from a year ago. Of course excluding the loss on the sale of Liberty Life and, more importantly, the goodwill charge of 2009, earnings were CAD5.3 billion, up 10% from the prior year.

With the exception of our US Bank I am very pleased with the strong results in each of our business divisions and our earnings of CAD5.3 billion were pretty much in line with our expectations at the beginning of this year. Canadian banking had record earnings for the year and we had solid business growth in our wealth management and insurance segments. Trading results remain strong considering the unfavorable market conditions particularly in the latter half of the year, although they were of course down from the strong performance of a year ago.

In our investment banking business we had strong revenue growth and increased deal activity. This year we took significant steps to advance our leadership in Canada, to expand globally and strengthen our competitive positions, and invest in future sources of growth all while maintaining reasonable [disk] management policies.

As shown on slide 5, we delivered top quartile shareholder returns for three- and five-year time periods compared to our global peer group, reflecting our strong and consistent financial performance and strong capital base. With respect to our dividend, we're maintaining our dividend at CAD0.50 in the first quarter of 2011. We ended the year with solid capital ratios; our Tier 1 capital ratio was 13% and our Tier 1 common ratio was 9.8%.

We, like everyone else, are awaiting further clarifications from regulators with respect to the Basel III capital regulations. Having said that, given our strong capital base, we're well-positioned and quite confident that we will be in excess of the new capital requirements by 2013 as they are currently specified. The expected growth in risk weighted assets and related capital requirements from Basel III rules, as well as IFRS transitional adjustments, we will be well supported by our current surplus capital as well as our retained earnings growth.

Our focus remains on investing capital into product and business lines that deliver the highest levels of risk adjusted returns. As an example, this quarter we announced the sale of Liberty Life in our insurance segment as it lacked the scale needed to build significant presence in the US and produced inferior returns in relation to our other business activities.

Over the past two years we have also focused on selling legacy trading and credit positions on our balance sheet to reduce risk as well as free up capital. As an example, this quarter we disposed of all of the remainder of our correlation trading book in capital markets.

There has been a lot of talk about systematically important financial institutions and a lot of speculation as to whether -- our organization in this context. We have received assurances from our banking regulator that all Canadian banks will be treated equally and, while the interpretation of systemically important banks is highly definitional, none of the Canadian banks, at least in my view, should be designated.

At the recent G20 meetings regulators announced the formation of a working group mandated to assess the implications of systemically important institutions and develop qualifying criteria. I'm pleased that regulators are undertaking a full examination as a great deal of ground work is required before definitive lines can be drawn around different types of institutions.

Now turning to slide 6, let me take you through the specific performances and achievements of our businesses over this past year. Maintaining leadership position across all of our businesses and domestic markets is critical to our strategy. Virtually all of our Canadian lines of businesses have advanced their position in each market and product category. By leveraging our leading Canadian-based franchise we have been able to build strong competitive positions in our capital markets and Wealth Management businesses outside of Canada, both which are significant in scale and expanding their global reach.

Canadian banking of course underpins our results with record performance this year, earning over CAD3 billion. We had strong revenue growth in all businesses driven by strong home-equity and personal deposit volume growth, increased credit card transaction volumes and improved mutual fund distribution fees. Accompanying the revenue growth we made significant strides to manage our costs and reinvest those savings to drive growth in market share and to better serve our customer needs.

We made investments in our distribution network to deliver high quality advice faster, cheaper and more effectively. We were with first Canadian issuer of both Visa and MasterCard and we launched our new retail store concept which transforms the branch experience into an interactive learning and shopping opportunity for both existing as well as prospective customers. We will continue to leverage our size and scale to drive revenues and further efficiencies which we believe will feel superior earnings growth as the Canadian economy continues to recover.

In Wealth Management we had strong earnings growth of 15% from the prior year driven by higher average fee-based client assets and higher transaction volumes as market conditions improved and investor confidence returned. During the year we announced a number of transformational changes to better align our operating structure with our goals and to accelerate our gross strategy.

We are extending our leadership position in Canada, leveraging our position in the US as the sixth largest full service wealth manager and expanding our presence in targeted international markets to solidify our position as a global leader in wealth and asset management. We announced our intention to acquire UK-based BlueBay Asset Management which will expand our global asset management business and aligns with our global expansion objectives.

We also acquired the Wealth Management business of Fortis Wealth Management Hong Kong Limited, reaffirming our intent to significantly expand our operations throughout Asia. Our focus of advancing our global leadership in Wealth Management will be a key driver of RBC's long-term growth as favorable demographics have the potential to generate attractive returns in this business.

Our insurance business continued to make solid contributions to our diversified earnings stream. It complements our retail product offering by providing a full suite of products to better serve our Canadian banking and Wealth Management customers. As I mentioned earlier, we did announce the sale of Liberty Life in the fourth quarter and this of course reduced our earnings. Throughout the year we improved profitability, however, by streamlining our processes and deepening our client relationships and we continue to refine and improve efficiencies.

We also expanded our retail insurance network to 52 branches providing customers with more access to our insurance services. Looking forward we plan to increase client attraction and loyalty as well as efficiency and employee engagement through more cross-platform collaboration.

International Banking -- overall we are certainly disappointed with the results of our International Banking segment which comprises the US, the Caribbean retail bank as well as RBC Dexia services. Our US retail bank drove the losses in this segment over the year and, as you know, it has been severely impacted by the weak US economic and credit conditions. Asset quality in the US is stabilizing and we are encouraged by this positive sign.

We certainly feel that the worst of the credit cycle is behind us and credit quality should continue to improve. We continue to be proactive in the management of our loan portfolio and we are focusing our efforts to restructure our operations and improve our operational efficiency. We believe we are taking the necessary steps to restore profitability to this segment in the coming year.

Our Caribbean bank and RBC Dexia made positive contributions despite the challenging operating environment. In the Caribbean we made solid progress in implementing new technology and leveraging the capabilities of the broader RBC network to enhance the client's experience. In RBC Dexia Investor Services, our global custody investor services joint venture, remains a top 10 global custodian and was awarded top rated status across three major categories in the 2010 agents' bank according to Global Custodian magazine.

Moving to capital markets, we had solid results in 2010 with earnings over CAD1.6 billion, down 7% from 2009 as trading revenues were impacted in the latter half of the year by lower client volumes and tighter credit spreads. Although trading results were down from strong levels in the prior year, our investment banking business delivered strong results across all products and geographies reflecting a significant pickup in this business in deal activity.

The run rate of both our trading and investment banking businesses continue to improve. However, given the ongoing issues in Europe, our European debt trading business is operating in a difficult environment. However, we are taking the necessary steps to minimize adverse financial impacts by actively managing our inventories within proper levels and therefore minimizing our direct exposure to certain European sovereign credits and banks that have come under financial pressure over the past several weeks. As a result, trading profits improved this quarter and we have very little direct exposure to countries the likes of Ireland, Portugal, Spain, and Greece.

Looking at our global business over the course of the year, we have advanced our position in each of our respective markets we operate in. In Canada we continue to be the leader and have distinguished ourselves as Canada's only truly global investment bank which is a distinct competitive advantage for us. By leveraging our strong Canadian franchise we continue to build our global capital markets platform in all geographies.

We significantly deepened our US franchise and increased market share by winning key mandates for both mid and large cap companies and we expanded our trading floors. In Europe we grew our investment banking, equity and research business and now have primary dealer status in France and Germany in addition to the US, Canada, the UK and Australia. In the UK we expanded our capabilities in fixed-income and currencies and are a top five Gilt-Edge Market Maker.

Our credit trading business in Europe received top rankings from institutional investors in several categories including best bank for fixed-income eTrading in non-core currency bonds by Credit magazine. We continue to make strategic hires and just last month we opened our new trading floor in Hong Kong, a key focus of our global expansion.

Capital markets is growing its business in this region by partnering with our wealth management division and we intend to dramatically expand our distribution capability of products across this region. We look forward and we believe that our capital markets will come from maintaining our leadership position in Canada, but also growing client relationships in the US and Europe through enhanced product suite, investment banking coverage and the prudent use of our balance sheet.

As I had said previously, we continue to manage our retail banking to retain our leading market positions and deliver top market share performance. Looking ahead the recovery of economies will take time and the global banking industry will undergo significant changes in response to both economic client and changing regulations.

An extended period of slower economic growth and a low interest rate environment will make revenue growth more challenging and equally important are the global shocks that can potentially result from situations like the ones we are currently experiencing in Europe. Given the global span of our business across several markets, client segments and products we feel we are well-positioned for the ongoing turbulence in these various markets.

While we certainly hope for effective resolution of these issues, we are managing our businesses prudently and have the ability to evoke plans to mitigate any potential impact. Increased regulation of financial institutions, capital and liquidity requirements will add more complexity and raise operating costs making business mix and capital deployment an increasingly important driver of future success.

In my view many financial institutions around the world will be forced to change their strategic and business priorities while well-capitalized and stable institutions like RBC will be positioned to take advantage of emerging opportunities and differentiate ourselves in the marketplace.

In the face of increasingly scarce capital long-term business building, our commitment to disciplined capital deployment and generating efficiencies will be essential. Despite our track record of success we certainly are not complacent; we will continue to help our clients reach their goals by staying committed to finding new ways to innovate and by being proactive in adapting to clients' changing needs with service at the highest levels of operational excellence.

Our strength and stature provides us with a wide range of strategic opportunities in the coming year. As a result of changes in the financial services industry over the past few years they present both Canada and globally, we have refined our strategic goals. Our aspiration is to be a top-performing diversified financial institution that delivers sustainable profitable growth and top quartile returns for our shareholders.

Turning to slide 7, our new strategic goals are, firstly, in Canada to be the undisputed leader in financial services. Globally to be a leading provider of capital markets and wealth management solutions. And in targeted segments to be a leading provider of select financial services that are complementary to our core strengths.

In closing, RBC is well-positioned to drive long-term growth and success. There's no doubt that the environment we operate in will continue to be challenging; however, guided by a clear long-term strategy, the strength of our franchise and our strong financial position, I believe it puts us in a better position to weather these economic challenges and navigate the changing industry as we continue to strategically invest and grow our businesses throughout these times. With that I'll turn it over to Morten.

Thank you, Gord. Overall credit quality improved significantly compared to last year and was stable compared to last quarter. Turning to slides 10 to 12, specific provision for credit losses was relatively flat from last quarter and we incurred a very small general provision related to our US banking business this quarter.

Looking at credit performance in our business segments -- in Canadian banking specific provisions were essentially flat to last quarter. Provisions in our personal portfolios were up marginally, but this was partially offset by improved performance in our commercial and card portfolios. Credit card specific provisions as a percentage of average loans improved to [364] basis points from 407 basis points last quarter driven by portfolio growth and improved asset quality.

In capital markets we had a recovery of CAD22 million comprised of recoveries on a few large accounts that more than offset new provisions for credit losses in the quarter. This compared to a recovery of credit losses of CAD9 million in the prior quarter. Specific PCL in international banking was flat due to lower provisions primarily in our US residential builder finance and commercial portfolios offset by higher provisions in the Caribbean commercial portfolio. We see signs of asset quality stabilization in the US resulting in improved PCL this quarter.

The economy remains under pressure and ongoing declines in the real estate market have contributed to continuing losses on foreclosed assets in commercial banking. Continued weak conditions in the Caribbean economies have resulted in reduced banking volumes and contributed to higher PCL this quarter. We expect the economic conditions in our Caribbean business to remain challenging until we see some improvement in the economic environment. While the asset quality metrics reflect the challenging conditions, there are signs of stabilization in the overall Caribbean portfolio.

Now turning to market risk, this quarter improvements in global capital markets led to lower volatility in equity and fixed income markets and, as a result, we had six days with net trading losses compared to 20 days last quarter. We had one trading day in the quarter with a net loss that exceeded value at risk reflecting the loss related to the fair value adjustment on RBC debt due to tightening in RBC's credit default swap spreads.

We're coming off a year in which overall provisions for credit losses declined significantly reflecting the high levels they were at one year ago on the general improvement in the global economic environment. Looking to 2011, improvements in credit quality will continue to be driven by the economic conditions of the regions in which we operate, including any future gains in employment levels.

In Canada we expect slower growth reflecting moderate consumer and business spending. While labor markets are expected to strengthen the improvement will be gradual which may limit the pace of additional improvements in credit quality.

In the US moderate consumer and business spending, additional fiscal stimulus and low interest rates are expected to provide support for the economy and we expect to see improving trends in PCL in US banking through 2011, although the level of impaired loans will likely remain high.

Further detail on our economic and market outlook can be found in our 2010 annual report. With that I'll turn the presentation over to Janice.

Thanks, Morten. Moving to slide 14, we reported net income for the fourth quarter of CAD1.1 billion, down 9% from last year and down 12% from the prior quarter. Excluding the CAD116 million loss on Liberty Life, earnings were flat compared to the prior year and down 3% from the prior quarter. Year over year our earnings reflect solid volume growth in Canadian banking, favorable actuarial adjustments in insurance and higher fee-based client assets and wealth management.

This quarter we saw improvement in our sales and trading revenue compared to last quarter, although they were lower compared to a strong period last year. And as Morten mentioned, credit quality improvements resulted in lower PCL compared to last year, in line with levels we had last quarter.

Non-interest expense increased on a year-over-year basis primarily in our Canadian banking business. Compared to last quarter non-interest expense increased CAD440 million. About half of the increase relates to variable compensation in our capital markets and wealth management businesses related to stronger business performance. Of the remainder one-third relates to certain one-time year-end adjustments and the balance relates to investments we are making in efficiency and effectiveness.

Our ongoing focus on cost management has generated significant cost savings which are being reinvested into new initiatives and infrastructure to support business expansion and drive further efficiency. While we may see expense levels fluctuating quarter to quarter as these reinvestments are made, we are committed to making the optimal decisions necessary to support our objectives.

With regard to the impact of IFRS adoption, we've identified areas that we think will have the most significant impact in our MD&A beginning on page 60. For these areas our preliminary estimate is the reduction of our Tier 1 capital of the something less than 1%. And since we are still in the process of quantifying this, this impact could change.

The decrease will mainly arise from the treatment of employee benefits as unrecognized benefit costs are deducted from retained earnings; other key areas of impact relate to securitization and special purpose entities. Securitization income previously recognized will be deducted from retained earnings with earnings being recognized in the future on an accrual basis.

With respect to special-purpose entities, certain entities will be consolidated on our balance sheet with the full impact dependent on the entity's level of assets and liabilities.

Now let's move to slides 15 and 16. Starting with Canadian banking, net income was CAD765 million, up 7% from last year driven by revenue growth across all businesses and lower PCL, partly offset by higher costs in support of business growth. We had solid growth in personal deposits, home equity products, higher credit card transaction volumes and mutual fund balances.

Moving to slide 17, net interest margin increased 5 basis points from the prior quarter reflecting higher short-term rates on core deposits and Prime/BA expansion. NIE was up 8% from last year and 6% from the prior quarter driven by higher initiative spend, higher marketing and staff costs, as well as the full impact of the harmonized sales tax.

In the quarter we had higher operating costs as we extended hours of business and increased spend on special marketing campaigns which combined drove an increase to sales results and higher performance-related compensation. There were also a number of nondiscretionary costs this quarter related to increased pension costs due to the lower discount rate on our actuarial valuations as well as the sales tax impact mentioned earlier.

To counteract this rise in ongoing nondiscretionary expenses we will continue to drive efficiencies and reduce costs. We remain focused on lowering our efficiency ratio into the low 40s and reinvesting savings back into the business to drive further growth by improving and adding new products, services and channels of distribution.

Moving on to Wealth Management, net income of CAD175 million increased 9% over last year reflecting higher average fee-based client assets partially offset by the impact of a stronger Canadian dollar. This quarter was impacted by higher money market fee waivers largely in our US wealth business and we foresee continued fee waivers in 2011 as the low interest rate environment continues.

Net income was down 5% compared to the prior quarter as last quarter benefited from an accounting impact and income tax adjustments. We had higher transaction volumes and average fee-based client assets this quarter reflecting improved market conditions and investor confidence.

Turning to insurance, net income was CAD27 million, down CAD77 million from last year. Excluding the loss on Liberty Life net income was CAD143 million, up 38% from last year reflecting favorable actuarial adjustments. We also experienced volume growth across all businesses and higher investment gains.

International banking's net loss of CAD157 million compares to a net loss of CAD125 million last year and a net loss of CAD76 million last quarter. As Gord mentioned, our US retail bank continues to be challenged by the weak economic and credit conditions. Although credit quality and PCL have stabilized, both revenue and earnings were impacted by higher losses in foreclosed assets in commercial real estate.

We also had higher cost in compensation and increased infrastructure investments in the Caribbean as we continue to build out and integrate our platform. Improving the operating performance of this business segment remains a key focus for us. Capital markets net income was CAD373 million, down CAD188 million from last year's strong results. This was primarily due to lower trading results partially offset by lower provisions for credit losses and growth in our investment banking businesses. The strengthening Canadian dollar also contributed to the decrease. Compared to last quarter earnings were up CAD172 million.

Looking at slide 18, sales and trading revenue was CAD889 million reflecting higher fixed income in US-based equity trading results. We also had gains related to MBIA and BOLI this quarter. As mentioned last quarter, the valuations of these portfolios can fluctuate from a quarter-to-quarter basis; however, if you look at the full-year impact it's quite minimal. Further details on these and other market and credit related items, along with historical comparatives, can be found in our financial supplementary on page 8.

In corporate and investment banking we had another strong quarter with revenues of CAD604 million reflecting growth in most of our businesses, particularly in debt origination and M&A activity. During the quarter we also had recoveries of credit losses reflecting improved credit quality. Expenses were up CAD107 million from last year and CAD259 million from the prior quarter.

Over the year we had increased costs in support of business growth and new regulatory requirements. There was also a year-end adjustment last year which lowered the prior year's variable compensation expense. Over the sequential quarter we had higher variable cost reflecting stronger results and higher costs supporting business growth as we expand our platform in all major geographies and continue to make strategic hires.

At this point I'll turn the call over to the operator to begin the Q&A session. Please limit yourself to one question then re-queue so that everyone has the opportunity to participate. Thank you.

(Operator Instructions). Robert Sedran, CIBC.

Hi there, good morning. Janice, you talked a fair bit about expenses in your commentary. But if I leave aside the increase in variable comp, I still have expenses up quarter on quarter about CAD230 million. And I couldn't tell how much of that was special Q4 kind of stuff and how much stuff of that we should assume in a new run rate. Can you give a little bit more color just in terms of what you might expect going forward, please?

Sure. I think that what we have there is some special year-end adjustments and one-time costs, so about one-third of what's there would not be considered run rate. I think that we do have a run rate increase in expenses related to a number of the initiatives that we've talked about over the past year and our cost takeout to fund those initiatives.

And Rob, perhaps to give you more color on our expenses, because it's so important for Canadian banking, I'm going to let Dave speak specifically about Canadian thinking because it is the bulk of a lot of the run rate increase. Dave?

Sure, thanks, Janice. Hi, Robert. As far as our growth in expenses -- year over year it was 8%, and one-third of that would have been nonrecurring. So nonrecurring being heavy up in our marketing and advertising spend in Q4 and some true-ups from our operational partners.

So going forward I would say that we're going to face headwinds in the form of pension and HST costs which is a common theme I think you're hearing across a number of areas. But roughly one-third of that year-over-year growth will be nonrecurring, so say two-thirds would be potentially our run rate going forward. Does that help?

It does help, thank you.

John Reucassel, BMO Capital Market.

Thank you. A question for Gord. Gord, just -- you mentioned that you refined your strategic goals and, just looking at your refinement in the presentation here and what you said in the annual report in 2009, I just went to make sure the message is clear. What I'm hearing is less emphasis on US and banking and more emphasis on Wealth Management capital markets globally, is that a fair summary of what your future plans are?

Yes. I would say, John, it's more of a tweak of our goals to be consistent with what we've been building over the last period of time. And I think if you look at our global businesses, our truly global businesses are Wealth Management and capital markets. They are our two businesses where we operate in every region of the country and we think that both those businesses are businesses that we will continue to build global platforms.

We have an initiative in Asia which is very much a joint initiative between Wealth Management and capital markets in terms of building both our manufacturing but also distribution network across that region the way we've done it in the United States and the way we've done it in Europe. So we wanted to reflect our global goal as being very consistent with the businesses that we are growing globally.

The third objective really reflects the fact that we do have our specific businesses like our US banking business and our US -- sorry, our Caribbean banking business and Dexia fits into that category as well, which tend to be businesses that are -- they're important to the organization, they're very complementary to the businesses that we're in and it's not to suggest that we're not going to continue to invest in those specific businesses, in fact we are.

But it does reflect the fact that our aspiration is not to build a global retail banking operation. So, if you look at what we're going to do in China and India and South America and Europe, it's going to be geared towards Wealth Management and capital markets. If you look at our specific niche businesses like banking, we are going to focus on -- we're truly committed to the Caribbean which we think is a great region and will be very strong for us, we're going to continue to invest in.

And as you've heard me say with respect to the US, our priority is to get that bank performing at a much, much higher level. And then we'll make a decision in terms of how much more we want to invest in the US banking sector generally. So, it's not a major shift as much as it is a requirement to really reflect the way we are currently growing our businesses.

Okay, and just to follow on that, Gord, about a year ago you said on the expansion of the capital markets business that you thought pricing should get better because of less competition and higher capital requirements. Is that what you're seeing today or is price competition back and is that going to change as the new capital rules come out? Or what is the effect of all that?

I'm going to turn it over to Doug and Mark to respond specifically. I would say that we continue to be in an environment where we're able to achieve things in the marketplace because of the strength of our relative franchise compared to some of our competitors.

But like every other market we operate in, it continues to be very aggressive and I think that's particularly reflected on things like credit spreads where you've seen corporate lending spreads come down from very lofty attractive return levels now to levels that are much, much more competitive and with less margin.

But we're certainly making gains, and I think you see that reflected in things like investment banking market share and investment banking revenues, which has grown very significantly notwithstanding the fact that trading revenues have come down. I'll let Doug comment.

So, I would just -- I'll comment on credit and some of the things we were doing in the investment bank and then Mark Standish can talk about the trading spreads. I would just say, following on Gord's comments, that while credit lending spreads have come in over the past six to 12 months, certainly over the past six months, depending on where you are, Europe or the US or Canada, the primary places we lend, I would still say that when you compare the spreads that we're lending at now to what we were putting on in 2006 and 2007, they are reasonably attractive.

In fact, the overall spread of our loan book as we roll to different spreads has improved year over year. And so lending money is still attractive. Now that's the good news. It's finding clients with credit you like that want to borrow is a bit more of a challenge. But frankly we're fortunate because we have a footprint in the US now with a large corporate banking group and a large investment banking group.

So the loan book is growing there and it's really helping our investment banking revenues which have grown very significantly over the past year. So on the credit side I'd say PCL is good, spreads are in good shape, we are growing our loan book to support our origination business in the US and the UK in particular and so far so good.

Yes, I'd just add, Robert, that if you turn the clock back a year and predict what the trading environment would look like, I think people would have been surprised that the new capital rules would be phased in over such a long period. So I think that some firms are able to compete more aggressively than we would have anticipated.

And then secondly, we're still seeing very fierce competition from essentially government-owned or partially owned foreign institutions which has also added to the competitive nature of the markets.

Just geographically I think the US is and remains a very attractive market with very attractive spreads for us. Obviously Europe is very difficult at this point and it's less in matter of spreads and more a matter of illiquidity and just keeping risk very tight.

Thank you.

Michael Goldberg, Desjardins Securities.

Thank you. Can you please give us some idea of how much your almost CAD25 billion of market risk weighted assets would increase under the new market risk regime that goes into effect in fiscal 2012? How much would it reduce your Tier 1 and common equity Tier 1 ratios and what actions do you expect to take to mitigate this impact and what impact could this have on the economics and revenue from your trading businesses? Thanks.

So, Michael, it's Morten; let me just start off and I'll see if some of my colleagues may want to help up on the details here. But in terms of the market risk amendments which take effect at the end of the current fiscal year, the impact on the capital supporting our capital markets business is about 20% or around a CAD2 billion increase.

As you look at the overall capital of the Bank, I mean we have sufficient surplus capital to accommodate that. So linking -- linking it specifically to the Tier 1 capital ratio is not, I don't think, directly meaningful at this stage.

And then in terms of mitigating actions, I think I'll let Mark Standish speak to the specifics. But I mean, clearly as we move into this environment there will be some aspects of the businesses that attract RAA and capital that we will look to be running on a more balance sheet efficient basis to mitigate somewhat the impact. So, Stan, I don't know whether you have --?

Yes, I think the biggest impact relates to our fixed income and currencies business, specifically derivatives. And I think -- what I think you're going to see in the marketplace is as this business attracts more RWA there will be more coordinated efforts between institutions to sort of mitigate risk and balance sheet usage down.

Right now these are sort of very balanced and numbers -- okay numbers the market can absorb. And obviously as capital goes up there will be a much more focused effort by the industry, both participant and issuing clients, to reduce the effect of this. And that will help us manage it going forward.

But just to repeat, Michael, to make sure you got the answer you want -- with respect to the platform, capital in the platform, it's going to go up by approximately 20% at year end.

So I just find it interesting that yesterday on another conference call, [TD], the comment was made that the impact of this adjustment would be to increase that risk weighted asset component by a factor of about three to four fold.

We read that -- Michael, we read that and I think we talked about that, we don't understand it, so we can't really comment. I think you're going to have to ask that -- the other institution because we couldn't make sense out of it. Now they might have been referring to a different --

Michael, this is Morten again. Just to provide a little bit more color on the detail, because I mean part of this is driven by the fact that from an RBC standpoint we have a higher proportion of our book on the standardized approach for regulatory capital. So a significant amount of our market risk capital in effect is unaffected by this change. There may be some of those factors that make it look like there's quite a bit of difference from one institution to the next.

Thank you.

Gabriel Dechaine, Credit Suisse.

Hi. Just on the comments that, Gord, you made on the current trading environment in Europe. Just want to get a better sense of what you mean by managing the exposures. What are you doing differently now that you weren't doing in Q3, I guess, which was a similar environment? And then just a clarification on the risk weighted assets -- what about the trading -- the counterparty credit risk weighted assets? Any impact there from Basel III?

Okay, I'll take a first shot and then I'll let Mark Standish talk a little bit about the euro trading, and then Morten can come back on the capital side. I think when we talked about our results in the third quarter, I think we were pretty candid about the fact that the sovereign crisis in Europe was a challenge for us given the size of our trading operations in Europe. And partly because I think we were probably not as well-positioned as we could have been and I think partly, as we talked about at the time, a desire to, if you will, stand in in the marketplace to support our customers in a marketplace that essentially lost its liquidity.

I would say we also made the comment at the time that we are going to significantly look at our trading positions and ensure that we were prepared given the turmoil in Europe. And I think that's exactly what has happened.

So if you look at the euro fixed-income market it continues to be very tough, but if you look at our inventory levels and positions and how we're managing it, we're managing it to a standard which has resulted in obviously much better performance. And if you look at the overall business, including the other products, business continues to be pretty good. But that euro bond market per se is tough. But Mark, who has -- I would say spent a lot of time on that business post the third quarter, might like to comment specifically.

Yes, I would only just add to Gord's comments, that obviously during the quarter we became a primary dealer in both Germany and in France. It fits very nicely into our global primary dealer network, part of our sovereign supranational and agency business which is a very global business. Away from Europe that business performed extremely well, but Europe is an important part of that.

So we took a slightly different approach to market. While we've been standing up and doing a lot of business with clients we've been really very, very tightly controlling our inventory positions. And we've sort of lowered our expectations for that region just simply to build what we see is a really good long-term franchise. So in short we've just been managing our risk very aggressively.

So -- it's Morten. In terms of counterparty risk management and Basel III, I'm not quite sure if I understand your question precisely. I mean we are obviously continuing to manage, particularly in areas like the euro zone, our overall counterparty risk exposure quite carefully to ensure that we have positions that are at the low-end of what we need for normal business purposes. But I'm not quite sure what your question referred to.

I'm referring to -- similar to market risk weighted asset inflation you've got a similar for counterparty credit risk, especially in the derivatives book?

I don't have specific numbers for how those will change as we move through the various regulatory regimes, but obviously we will continue to manage and the profitability associated with that activity will be affected by the level of capital that's attached to it and will be managed accordingly.

Okay, thanks.

[Fred Smith], Stonecap Securities.

Thanks very much. I had a couple of questions on the domestic bank. I wonder if I could just get some comments from you in terms of your outlook for consumer and commercial loan growth. And there was a comment, I think, earlier about cost being escalated relating to some extended hours. I was wondering if you might elaborate on that strategy.

And then, finally, I note that the residential mortgage portfolio looks like it was -- suffered some deterioration in the quarter with gross impaireds rising about 8.5%, sequentially. I was wondering if you could speak to that issue. Thank you.

Yes, Fred; it's Dave McKay. So, as far as the outlook for consumer loan growth, it really hasn't changed from our investor day a month ago where we talked about mid single-digit growth across most consumer lending products, consumer deposit products maybe a little bit higher than that. Commercial lending probably in the upper mid single-digit range.

So really that is the forecast that we gave a month ago and we still believe that will hold for the coming year. So mid single-digit growth.

As far as our cost management program and reinvesting savings in our business going forward, I feel that the cost control and the run rate of the business has been very good. And as I said, a big part of our cost escalation going forward are in the pension and HST range, which will account for a big part of our cost growth going forward.

We are reinvesting the savings that we have obtained from the automation programs that we have implemented and technology that we've implemented. We are reinvesting them in hours of business in hundreds of branches across the country, opening on Saturdays, opening at nights during the week; the customers want to shop then. We see that as a very productive use of our savings and we expect to get incremental sales from that.

We are also reinvesting those savings in opening 15 to 25 branches over the next year and again in the following year into high-growth areas in Canada. So, no, we sit down before we invest that and we look at do we take the savings in the income or do we reinvest it in capacity that will generate revenue and NIAT growth. Our first objective is always to take it into growing our business prudently. So, if that growth doesn't materialize the way we expect then we will be able to remove some of that cost at a later date.

But that is our operating strategy, [Fred], around how we look at the savings and how we deploy them. So I would say we are extremely happy with our ability to grow our network and manage our cost base going forward.

As far as the mortgage book, I will let Morten answer the GIL growth, but as you realize that a big part of our book is insurers and, while gross impaired loans do or could grow, they rarely materialize into significant PCL because of the insurance. So, Morten.

So let's see if this answers your question. But in terms of the overall level of impairment in the residential mortgage book in Canada, in basis point terms it's basically stable quarter over quarter for the total real estate -- the residential property-related piece at around 32 basis points which is consistent with what we have seen for the last several quarters.

PCL in this portfolio continues to show in at a basis point or less on the overall. So I mean we've had over the last year a few regions where we've had some small spike up in delinquencies and impaireds in that portfolio, but at levels that get absorbed quite easily and, as I said, it has had no impact on provisions. And actually the current environment on the straight residential mortgage piece is actually looking like it's trending down somewhat.

Okay I'm sorry, just to be clear, I was just talking about the CAD544 million of gross compared loans you show at the end of the year, which was up about CAD41 million or 8%.

Right. So, I mean maybe -- the better place to look perhaps in terms of -- I think this is more of a quarter-over-quarter sequential look -- if you look in the supplementals on pages 30 and 31 you see -- you start to see somewhat of a story around the overall level of new impairments and at the bottom of the page you get the breakdown by geography and portfolio on a net impairment basis. And so we are looking at slightly -- basically around the CAD600 million mark for overall Canadian retail and it's relatively stable through the year at those kinds of levels.

Okay, thank you.

Cheryl Pate, Morgan Stanley.

Hi, a question for Dave McKay on the Canadian banking net interest margin. I saw some good expansion in the quarter and obviously Prime/BA spread was up. I just wondered if you could give some color on whether the increase was more driven by improvement in the deposit margin versus how the lending margin looks this quarter and if you can give some color around the competitive environment on the lending side?

Sure, Cheryl, it's Dave. The 5 basis point NIM increase, as you referred to, was driven primarily by BA rate increases year-over-year and over the quarter. A little bit by expansion of Prime/BA spread, we had a small Prime/BA spread expansion, but the majority of that would have been a positive impact on our deposit book. So that really is the explanatory side of our NIM expansion.

As far as competition and spreads going forward, a common theme you're hearing in the market is increased competition, particularly in the mortgage markets and in the commercial lending markets. I think they will serve to hold margins in check when what expansion we do see could get pulled back by competition. So, my view is that margins should be largely flat over the coming year.

Great, thank you.

Brian Klock, KBW.

Good morning, just one quick follow-up, Morten, for you. On the US gross impaired loan -- I mean from the severity perspective it looks like the net right off and the provision for credit losses related to wholesale have started to decline. It looks like the new impaired formation is still increasing and maybe just the pace of resolutions are slowing.

It's still kind of remaining stubbornly high at the level of GILs in the states. Is there anything you see in the pipeline or maybe the fourth quarter -- obviously it's seasonally slower -- but is there anything you would expect to see in the first quarter that may improve some of the resolutions and help to kind of bring that net balance down more?

What's driving that dynamic is really the external environment. I mean, coming into this year we'd hoped to see a bit more of an improvement in the second half of the year, that has been delayed somewhat. I would say when we look at some of the -- the migration that we look at, both in terms of our criticized and our non-accrual loans, we do see a trendline across most of the portfolios for the level of criticized assets to start reducing.

We've had a period of a few months of that occurring at this stage. And as you can see, overall PCL did come down this quarter and if the economic conditions continue and if all we have is a delay of a couple of quarters of the patterns that we'd hoped for coming into this year, you should see both level of overall non-accruals and provisions start to come down through 2011.

And as I said in my comments, we're seeing signs of stabilization, it's highly dependent on particularly the real estate market in the US and more general the level of economic activity. But if things evolve according to the common economist view, we should see fairly clear improvements in PCL.

I would say on non-accruals I would expect the progress to be somewhat more slow. And I mean, unfortunately the reality is in this market I think the improvement in credit quality metrics in the US is going to be slow, but if the economic outlook is what is confirmed we should over 2011 see improvements in all the key metrics that you're looking at.

All right, great, thanks for the color.

Mario Mendonca, Canaccord Genuity.

Good morning. I don't want to put words in your mouth -- and I'm not sure if it was Janice or Gord -- but there seemed to be suggestion that you felt it was possible for the US international retail banking business to be profitable in 2011, is that fair?

Yes, Mario, it's Jim Westlake. I think that certainly our expectation is that we will start having quarterly profit in the segment as a whole by -- during fiscal 2011.

And is that mostly PCL-related or is there anything else you would point us to?

No, I think that we've got a combination of things. In our custody business things are coming back in that and we're seeing regular growth again. Certainly in the US it is primarily a PCL story as that continues to come down, but we're seeing some signs of renewed business growth in some positive items. In the Caribbean we also see partially a story of PCL, but also just our business efforts there are improving.

And these higher foreclosure costs on the commercial side this quarter, was there something -- a bit of a true-up this quarter where you sort of got around to actually foreclosing? Was there anything specific that pushed it into this quarter?

No, we think that was a little bit unusual. Of course, in the US that ends up flowing in through the expense line instead of as a provision. And so it just was -- the way it unfolded, we don't see that as a trend and would certainly expect it to be lower in Q1.

Okay, and then just one final thing. On the exit in the correlation trading book, I'm trying to get a sense for whether this was an important part of what drove the very high trading results, trading revenues in 2009, specifically those quarters when we saw CAD1.3 billion plus. Was correlation trading an important part of that? That's the first part of the question. The second part, in exiting the business do you get much capital relief? Does the RWA actually come down as a result?

It's Mark Standish. As we talked about I guess a year, year and a half ago when we sold the bulk of that book off, I think we mentioned at the time we were going to manage the residual down. We exited the residual positions essentially flat to reserve so there was no positive or negative P&L impact in the quarter. There is some small reduction in capital associated with that, but I think the key thing was just to mention that we had exited what was one of the focus legacy businesses.

The question was though in 2009 was it a big part of the profits.

No, it was not.

Thank you. That clarifies it, thanks.

Steve Theriault, Bank of America.

Thanks very much, just a couple of numbers questions. Gord, you said earlier that troubled euro debt exposure is manageable in your view, but can you give us some numbers on this front? How much sovereign, non-sovereign, derivative-related exposure do you have at your end to Greece, Ireland, Italy, Spain and Portugal? And secondly, just for Janice -- how much -- you mentioned the cumulative securitization gains that have to get backed out; can you give us a number on that please? Under IFRS? Thanks.

I'll let Morten -- do you have the list? I mean, the answer is very little exposure. I've got a sheet somewhere, it's almost negligible to those countries. But do you have the specifics, Morten?

Well, I do have some specific numbers; it's somewhat dangerous to get into too much detail here on the numbers. Basically to Greece, when you look at it we're rounded to the nearest number. We've got about CAD1 million worth of exposure, CAD10 million to Italy. We've got somewhere below -- around CAD80 million to Italy -- sorry CAD10 million to Portugal. Spain and Ireland is a bit more of a complex story.

If you look at between mark to market on derivatives, money market placements and lending, we've got around CAD500 million to both. But I would emphasize that in both cases you've got for Ireland about 58% of it being mark to market derivatives with a very, very small number of that being to actually Irish Bank or Irish sovereign entities. It more reflects the mix of financial institutions that have operations in Ireland and in Spain, the number is driven more by money market and inventory positions weighted more towards the sovereign.

I mean, I think the way I tend to look at it and the question I ask of Morten is if there was a problem in Europe what would the impact be? And I think the answer is de minimus.

Yes. The economic impact of restructuring in any of these countries from direct exposure would, by the time the restructuring happens, be very, very small. I mean clearly the second order impact is really what we're focused on in that context.

So Steve, with respect to the securitization business, our securitization activities are actually sized in note 5 to our consolidated financial statements. But just to give you an order of magnitude and it's one of the areas that we're still working on with respect to our transition adjustments.

Our securitization has come down significantly, so if you look at the IFRS potential impact on Tier 1 capital that I spoke about, the impact of backing out the securitization income and re-recognizing it over the course of the mortgages would be probably less than 10% of that Tier 1 is estimates. So that just gives you order of magnitude. And as we work through the details of what our transition adjustment will be, we'll expand our disclosure to encompass some of the items that we're still working on.

Is it fair to say that then most of that 100 basis points that you referenced on the call is employee benefits related?

A significant portion is employee benefits related, probably about half, and then we have all of our consolidation activity as well and some other adjustments that we're working on sizing at this point.

Like the [VIEs]?

VIEs, I'm talking about -- right, [STEs] and VIEs, and a lot of that depends on where we'll stand when they actually size them and put them on balance sheet. But we should have more clarity over the coming quarter or two.

Thanks very much. I appreciate the color on summer debt.

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

Okay, I would just like to thank everybody for participating and we look forward to the next conference call and we particularly look forward to moving on to 2011. So, thank you very much. Goodbye.

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