Royal Bank of Canada (RY) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the RBC 2011 first-quarter results conference call. Please be advised that this call is being recorded.

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

Good morning and thank you for joining us. Presenting to you this morning 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 the call for questions from analysts. The call will be one hour long and will end promptly at 8.30 as this call is followed by our Annual General meeting. To give everyone a chance to participate please keep it to one question and then requeue. We will be posting Managements 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 an co-CEO of Capital Markets, 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 it over to Gord Nixon.

Thank you, Josie, and good morning, everyone. Following this call, we have our Annual Meeting and we're hopeful that you'll all join us for that event. As you can see from our results, RBC is off to a great start in 2011. We generated record earnings of CAD1.84 billion. These results were driven by record performances in Canadian Banking, in Capital Markets and in Wealth Management as well as very strong performance in Insurance and significant improvement in International banking which was slightly profitable in the quarter. Our results were impacted by a few one-time items amounting to just under CAD60 million. We grew earnings across all segments, demonstrating the strength and diversification of our businesses and the earnings power of this organization.

We believe that our diversified business model differentiates us today and will set us apart from competitors over the long term. Having the right business mix diversifies our earnings and drives strong consistent results through the cycle as we saw this quarter. Much of this performance can be traced back to the ground work laid over the past few years in building our domestic and global businesses. We extended our leadership position in Canada and we use this strength to build our global platforms and we are investing resources to grow market share in each of the markets in which we operate. As the global economy gained ground this quarter, we were well positioned to capitalize on improved investor confidence, stabilizing asset quality and stronger Capital Markets activities.

Looking at current levels, the political unrest in the Middle East is having a macro economic impact. I'd like to make a quick comment, simply put, we have minimal exposure to the impacted countries and the situation has had a minimal impact on any of our businesses.

In addition to sustaining momentum and building earnings capacity across our business, our focus remains on strengthening our balance sheet, optimizing our capital position and prudently redeploying capital in each of our businesses. Our capital position at the end of the quarter was strong, with a Tier 1 capital ratio of 13.2% and a Tier 1 common ratio of 9.9%, and of course that was after factoring in the BlueBay acquisition which was a cash purchase of about CAD1.4 billion.

Over the past years, we have taken many steps to derisk, strengthen and improve the liquidity of our already strong balance sheet. As an example in Capital Markets we sold the remainder of our correlation book and we restructured our BOLI portfolio. This quarter we settled our claims with MBIA, thereby reducing accounting volatility. We continue to hold the underlying assets which we believe are appropriately provisioned, however, we are taking the necessary steps to sell down these assets when opportunities arise with favorable outcomes. In International banking we derisked our AFS portfolio in both the United States and the Caribbean. In Insurance we have set the path to reduce our exposure to long term US annuities with the sale of Liberty Life which is scheduled to close in the second quarter. And we have significantly reduced our exposure to Level 3 assets which currently represent 2% of our total assets as of January 31, 2011, significantly down from the 5% peak at the end of 2008.

Optimizing our balance sheet has always been important and even more so now in the light of the changing capital regulations. Notwithstanding these new regulations, we believe that our strong liquid balance sheet underpins our financial strength and provides us with a high degree of flexibility and reduces risk. Our estimated pro forma Basel III common equity Tier 1 ratio already meets the 2019 minimum of 7% even without the benefit of the phase in of capital deductions outlined in the Basel guidelines. This pro forma assumes that certain internal counter party credit risk models will be approved the regulator.

In preparation for the new rules, every business has done a tremendous amount of work to optimize capital usage and focus their efforts on products and businesses that generate higher risk adjusted returns. As an example, we have been preparing for the changes arising from the new market risk framework and allocating additional capital against our trading book. We believe the expected growth in risk weighted assets associated with the new framework will have a relative basis, have less of an impact on RBC as compared to some of our peers as we have a significant portion of our book on the standardized approach for regulatory capital. Therefore a significant amount of our market risk capital is unaffected by these changes. I will address the new regulations and capital rules further during my AGM presentation. In short, my view is that strong banks like RBC will adjust to the new regulations and the changing economic landscape with minimal impact, and there will be an unprecedented range of opportunities for us to grow and invest in our businesses and continue to earn superior returns.

Before I turn to our business segments, I want to point out that we are maintaining our quarterly dividend at CAD0.50 per common share which puts us right at the low end of our payout ratio. We will monitor our earnings growth in the coming quarters and continue to review our dividend policy with our Board of Directors.

Turning to our businesses. Canadian Banking delivered record earnings with double-digit earnings growth. These results reflect our leadership and our proven ability to outperform in the marketplace. We managed to generate solid volume growth while expanding our net interest margin in a competitive environment resulting in strong revenue growth both on a year-over-year and quarter-over-quarter basis. Although consumer credit is expected to moderate, we are beginning to see a pick up in commercial loans as companies regain confidence and begin to invest and build their inventories. We are making the necessary investments and changing the way we deliver product and services to better serve our customers changing needs. We believe this in turn will differentiate us in the marketplace and grow our market share further.

For example, we have partnered with Microsoft to introduce their innovative service technology in our new branches allowing customers to improve their financial literacy by navigating through interactive advice-based applications. We also introduced the RBC mobile banking application for smartphones which has proven to be a market leader. Within the first 2 months of its release, 0.5 million clients downloaded the application and signed in over 3 million times, and 20% of those signed in, clients used the app to carry out their daily banking transactions.

Our unmatched size and scale gives us enormous potential to continue to drive efficiencies and selectively reinvest across our businesses to drive top line growth. We believe our leading market position, coupled with our unprecedented distribution capabilities will allow us to stay ahead of the competition and achieve our target of 25% volume growth premium to the market.

In Wealth Management we had great momentum across all of our businesses, which resulted in record earnings this quarter. We were able to capitalize on the improvement in the global market to grow fee-based client assets and generate strong transaction revenues. In our Global Asset Management business we lead the Canadian market in net sales of long-term funds and are in an excellent position to continue to drive further growth in assets under management. Our fund families continue to outperform and we have been recognized for this performance. PH&N won best bond fund family, best equity fund family and best overall fund group at the 2011 Lipper Awards. Our Asset Management business continued to expand its capabilities and distribution beyond North America, with the closing of the acquisition of BlueBay, providing us with increased product offering and greater reach in Europe and Asia.

For our geographic Wealth Management businesses, which serve affluent and high net worth clients, taking the success and strength we have built in Canada and the US and replicating that proven formula in other select markets is pivotal to our global growth strategy. Specifically in addition to our world class global trust capabilities, we're seeking to leverage the expanding investment solutions capability of our Asset Management business in the United Kingdom and emerging markets and those of RBC capital markets to broaden the reach of our Wealth Management Business to serve clients in these markets.

Our growing international presence is building momentum. Euro Money recently ranked RBC not only the number 1 for best private banking services in Canada, the Caribbean and Barbados, but also thirteenth for the best global private bank, globally, a significant improvement from the 24 spot in 2009. As a global leader in Wealth and Asset Management, we are well positioned to leverage our strong position and continue to grow this attractive business.

Insurance contributed another very strong quarter to our diversified earnings stream. We are growing market share by continually innovating and tailoring products to better suit our customer needs. In International banking, credit quality strengthened in the quarter reflecting stabilizing asset quality from the improving economic conditions. The largest factor of play in sustaining profitability in this segment is credit quality as the timing and levels of PCL are difficult to predict and highly dependent on the pace of the recovery in the United States and to a lesser extent the Caribbean economy. The results within this segment are encouraging and we're moving in the right direction. We are seeing some positive signs of underlying business growth in all 3 businesses and we remain hopeful that the performance of these businesses will continue to improve in tandem as the economies recover. Based on these current expectations, we feel this segment will likely sustain levels of profitability in the latter half of the year.

Capital Markets also delivered record earnings and generated a return on equity of over 25%. With a strong franchise in Canada, the United States and the UK, and select global markets, we are winning more mandates as deal flows pick up and origination levels improve. During the quarter, we extended our Canadian leadership and we were involved in a number of key US and international mandates. We acted as joint book runner on the combined $22 billion common and convertible offering for General Motors, the largest equity offering in US history. We were financial advisor to both Borealis and Ontario Teachers Plan on the joint contract to purchase the High Speed 1 from the UK government for GBP2.1 billion, joint book runner and lead manager of financing for general gross property $2 billion IPO, the largest REIT equity offering on record, and joint book runner on the syndication of the UK governments GBP3.25 billion index-linked inflation protected bond which is due in 2055.

Also, at the end of the quarter, a few large deals came through the pipeline. We were joint book runner on the world banks $5 billion and CAD5 billion global fixed rate note, the largest ever 5-year offering and the Province of Ontario successful CAD3.5 billion 3-year global fixed income note which had strong international interest. Our lead table standings continue to portray our clear leadership in Canada as we rank number 1 in debt equity and M&A in 2010. And in US and internationally we're seeing excellent market share gain and continue to move up the lead tables. In 2010, we ranked 12th in global M&A, up from 15th in 2009, 9th in US IPOs up from twelfth in 2009, and 20th in EMA equity and equity related up from 48 in 2009.

Along with our growth in our Investment Banking business our Trading businesses were up substantially from last quarter, although down slightly from the robust levels of the early part of last year. Our Trading business this quarter benefited from increased new issue mandates especially in Canada and the United States, and strong client volumes and spreads primarily in the US and European fixed income and equity businesses in the latter part of the quarter. You've heard me speak about our desire to increase our Investment Banking component of earnings this quarter and the results are a testament to the strides we have made. Over the cycle we target balance contributions from both our Trading and Investment Banking businesses and broad geographical coverage in order to produce strong consistent returns. As our Investment Banking and lending coverage grows it's increased client business benefits both our Trading and Investment Banking results.

In the appendix of this presentation, you'll find additional information comparing our wholesale businesses to our Canadian peers. No doubt when you look at RBC's Capital Markets business on an absolute basis we are the largest wholesale business. However, looking at our Capital Markets business in the context of the rest of RBC, the relative size of the business falls somewhere in the middle compared to the relative size of the wholesale businesses of our Canadian peers, and our trading revenues as a percentage of Investment Banking revenues are also close to the average. Our Capital Market strategy is premised on diversification and maintaining a highly liquid balance sheet both at the segment level and in each of our individual businesses which we believe is important and differentiates our performance. We focus on all key services, Trading, Investment Banking, and corporate lending, simply put, we are more diversified than our peers. As Canada's most diversified and only truly global Investment Bank we believe we have the right mix to deliver strong and consistent earnings.

In conclusion, the majority of our businesses had strong results this quarter demonstrating the earnings power and diversification of the organization. Our longstanding strategy and business model continues to serve us well as we extend our leadership position in Canada and invest and build our global platforms. With that, I'll turn it over to Morten.

Thank you, Gord. Turning to credit, on slide 7 to 9, overall provisions for credit losses decreased CAD98 million over last quarter as economic conditions improved and asset quality stabilized. Over the quarter the Canadian economy continued to show signs of strength as the unemployment picture improved. Additionally, while the unemployment rate in the US remained elevated, it reflected a slight improvement from the prior quarter. Specific provision for credit losses was down CAD86 million from last quarter reflecting lower provisions in our Caribbean, US and Canadian wholesale portfolios. During the quarter the general provision was a credit of CAD8 million compared to a provision of CAD4 million in the prior quarter.

Now let's look at credit performance in our business segments. In Canadian Banking, specific provisions were down CAD30 million from last quarter mainly due to lower provisions in our business lending portfolio. Credit card specific provisions as a percentage of average net loans and acceptances improved to 345 basis points from 364 basis points last quarter. Specific PCL and international banking decreased by CAD60 million over the quarter largely due to lower provisions in the Caribbean and US commercial portfolios. In Capital Markets we had a recovering PCL of CAD27 million comprised of recoveries in a few large accounts. This compared to recovery of CAD22 million in the prior quarter.

Turning to market risk. During the quarter we had a total of 3 days with net trading losses, 1 day of which exceeded VAR. This was largely due to the month end credit evaluation adjustment on the MBIA exposure. The largest gain this quarter was related to our legal settlement with MBIA. As Gord said, we've settled all claims against MBIA and eliminated our exposure. We continue to hold the underlying assets in our trading book and we're in the process of reducing our holdings and selling positions when favorable opportunities arrive. These assets had been previously written down and we feel they are appropriately provisioned to reflect the realization value.

Effective this quarter, in addition to VAR calculated using the internal model based approach, we have disclosed Management VAR which include additional products under the standardized approach. We have provided these additional details to better align external disclosure with internal Management measures. Average Management VAR decreased by CAD2 million quarter over quarter, largely driven by a decrease in interest rate risk, reflecting the continued run off of volatile 2008 scenarios from the VAR model. With that I will turn the presentation over to Janice.

Thanks, Morten, and good morning, everyone. Turning to slide 11, as Gord mentioned, we started the year with record first-quarter earnings of CAD1.84 billion reflecting strong performances across our segments and record results in our largest businesses, Capital-- Canadian Banking, Capital Markets and Wealth Management. Comparing these results with prior periods, earnings were 23% over last year and 64% over last quarter. It's quite clear that although we did benefit from the decline in PCL, as economic conditions improved this quarter, the majority of earnings growth was driven by solid top line growth across our businesses.

Slide 12 outlines in detail a number of small items that benefited earnings this quarter totaling approximately CAD60 million that Gord spoke about earlier. On a reported basis, revenues increased about 1% over last year and 3% over last quarter. However, if you factor out the impact of the fair value changes on investments backing our life and health policyholder liability, which is largely offset in PVCAE, revenue on an adjusted basis grew by 7% over last year and 13% over last quarter. Our businesses were well positioned and benefited from improving economic conditions and the rebound in global financial markets this quarter. We continued to have solid volume growth in Canadian Banking, higher fee-based revenue and transaction volumes in Wealth Management and strong origination activity in Capital Markets.

Turning to expenses, the year-over-year rise in non-interest expenses corresponds to the growth in revenue and the associated costs of ongoing business growth, expansion initiatives and the related staffing and compensation costs. Compared to last quarter, expenses were up 3% largely due to higher HR-related expenses primarily reflecting higher variable costs consistent with improved revenues and increased pension costs. Counteracting these increases, we had reductions across all other expense categories in the quarter. A number of projects are underway in each of our businesses to drive our cost base down and improve efficiencies. Realize savings from these projects will in turn be reinvested into new initiatives and infrastructure spend to support business growth along with initiatives aimed at achieving greater efficiency gains.

Before moving to our segments, I'll point out that this quarter, we realigned our Capital Markets disclosure to better reflect how we manage these businesses. As you can see on slide 23, we've created 2 main business lines, Global Markets and Corporate and Investment Banking. Our legacy businesses are contained in other. More details about these lines of business can be found on page 7 of our Q1 report to shareholders.

Now let's look at our segments starting with Canadian Banking. Canadian Banking had record net income of CAD882 million, up 14% from last year largely driven by solid volume growth across all businesses and lower PCL, partially offset by increased staff costs and higher pension expenses due to the impact of lower interest rates. Compared to last quarter, we also saw seasonally higher credit card transaction volumes, higher mutual fund trailer fees as equity markets improved and a pick up in business lending volume.

Looking at slide 15, net interest margin expanded over the last quarter reflecting improved deposit spreads. Expenses were up about 8% from last year with approximately half of this growth related to higher pension costs and the impact of harmonized sales tax. The other half relates to costs associated with business growth and includes higher staff and operating costs related to expanded branch hours and days of business. One of our key priorities remains the prudent management of costs and reinvesting cost savings into our businesses to drive further efficiencies and top line growth. Our efficiency ratio this quarter stood at 46.7%, one of the lowest levels over the last 2 years despite the headwind of increased pension and HST costs. Factoring out the increase in pension costs, our efficiency ratio dropped to-- dropped 130 basis points to 45.4%. We remain committed to driving this ratio down to the low 40%s over the medium term.

Turning to Wealth Management, net income was CAD221 million relatively flat over last year. Compared to last quarter, earnings were up CAD46 million, or 26%. The strong underlying year-over-year earnings growth in this segment is clouded by a number of one-time items in the current and periods-- in the current and past periods. For instance this quarter included a positive cumulative impact of CAD11 million after-tax related to our deferred comp liability whereas last year included a favorable accounting impact with a favorable income tax adjustment which together improved the prior years earnings by CAD64 million. Factoring out these items, earnings increased by 35% over last year which provides some clarity to the run rate of this business. As a result of stronger market activity, fee-based revenues were higher and transactional volumes increased.

Moving to Insurance, net income was CAD145 million, up CAD27 million over last year primarily reflecting lower claims costs. Net income increased CAD118 million from last quarter largely due to the loss on Liberty Life recorded in the prior quarter. International banking net income of CAD24 million compared to a net loss of CAD57 million in the prior year due to losses on available for sale securities in the prior year and lower PCL in the current quarter as credit quality improved. Both of our retail businesses within this segment experienced some underlying business growth this quarter and we had improved spreads and higher fee-based assets in RBC Dexia. As Gord indicated, generating profitable results in this segment hinges on a sustained improvement in credit quality and we believe the performances of these businesses will continue to improve as economic conditions improve.

In Capital Markets, net income was CAD613 million, up 7% from the prior year due to strong growth in our origination businesses, particularly debt origination driven by stronger new issue activity and higher loan syndication fees. Compared to last quarter, net income was up CAD240 million largely driven by substantially higher trading revenue and growth in our Investment Banking businesses, mainly in the US and Canada. Marginally lower trading revenue included a gain of CAD102 million related to MBIA which was partially offset by an impairment of CAD50 million on US student loan auction rate securities. We had a strong origination quarter, and as Gord outlined, we booked a number of large deals at the tail end of the quarter. Over the prior quarter, our Trading business significantly benefited from improved client volumes and spreads. In particular, we saw substantial improvement in our US-based Trading and Investment Banking revenue. Expenses were higher over last year and last quarter due to higher cost in support of business growth as well as higher variable comp reflecting higher earnings.

In conclusion, our businesses had strong performances this quarter as we saw solid business growth in Canadian Banking, Wealth Management and Capital Markets as economic conditions and global markets strengthened and confidence returned to the market. We also had strong performance in Insurance and an improvement in International Banking which returned to profitability this quarter. Continued success will come from growing our market share in Canada, the US and in select markets, and by expanding our strong client relationships and by prudently deploying our balance sheet. At this point, I'll turn the call over to the Operator to begin the Q&A session. Please limit yourselves to one question and then requeue so everyone has the opportunity to participate. Operator?

Thank you. (Operator Instructions)The first question is from Steve Terrio from Banc of America Merrill Lynch. Please go ahead.

Thanks very much. Just a couple of quick questions for Jim Westlake. Lowest credit loss number in International was even quite [low]. How comfortable do you feel that this is a sustainable drop off in PCLs or could that number still bump around a decent amount the rest of the year? And secondly, just quickly, any reserve releases in the Insurance division or is that CAD150 million-- earnings in the CAD150 million range relatively clean?

Yes, maybe I'll start with Insurance, Steve. For Insurance, I would say that that is a relatively run rate number. We had our normal modest changes both ways. We had a couple little ups and downs, but it would round out to about level. In the US, certainly we said the PCL is still the thing that is of most concern, and in the Caribbean as well, and we do think that there could still be some volatility. We are seeing underlying improvement both in our business, in our sales numbers and in the underlying economies, so while we can't make predictions about what could happen in the next couple of quarters, we generally feel that the business environment is getting better.

I'll leave it there, thanks.

Thank you. The next question is from Robert Sedran from CIBC. Please go ahead.

Good morning and I guess for Dave, just I'm looking at the current service revenue line and it seems to have jumped back to the old run rate before 2010 which was down meaningfully.

I can hear you.

Okay. I'm curious if we've moved back to that old run rate or if there was something unusual? I know some of the other banks have talked about the impact of regulations and all the rest perhaps being a bit of a head wind on that line and you seem to have a nice quarter-over-quarter move.

I would say, Bob, that there's two factors at play there. The headwinds would be predominantly on net interest income as a regulations impacted the calculation of your income, so I think there's two separate effects going on there. The fee impact that you're seeing is very strong purchase activity on our kind of market leading Avion product. So we're very happy with kind of the market share gains that we've seen on the purchase activity side, very, very strong card results, the business we've really focused on in the past year, and we've seen very good balance growth in addition to purchase volume. So I'd say those are kind of run rate activities that you're seeing on the balance side in particular. But purchase volumes always peaks in Q1 because you've got the Christmas season of November, December in there and then come off in January. So you won't see that level of purchase volume and fee repeat itself in Q2 but then we'll build again through the year so there is some seasonality in that number. Does that help?

Yes, thank you.

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

Thank you. Just a question for Gord or (inaudible).The trading business, you talked in the past that Royal has a bigger, better, counter-party can continue to gain market share and the pricing in this market should improve with less players in it. Has that transpired or does it remain quite a competitive market and could you give us some sense of the pricing in your trading businesses?

Well certainly on the competitive side, it's still very competitive. I mean, we do anticipate over time as the new rules come into effect as trading books need more capital to support them that we will start to see an advantage but for now, prior to those rules coming into effect, it's still very, very competitive. I think the dynamic that I talked about in the past is the requirement on the second [re-trading] side to support primary issue. For the quarter, that worked very well. I mean certainly, a big improvement from what we've seen in the last six months. Debt Capital Markets activity was extremely strong as was equity Capital Markets but on the debt side, we certainly had a much better experience in supporting our issuing clients and in terms of sort of general secondary flow, so I hope that answers your question.

And was there a better balance geographically?

There certainly was. The US and the Canadian businesses performed extremely well. We did have very good new issue in Europe and we saw a big improvement from the last six months in Europe, but we're still running below sort of our planned levels in Europe but we've modified our expectations just because the environment is tough. Asia had a soft quarter that, that was really from a very strong Q4. But no, it was all benefiting from the fact that we have a global business and we're seeing those benefits especially on the debt Capital Markets origination side.

The only thing I would add to that is that, and I'm going to be commenting on this during my AGM remarks, but we're in a little bit of a holding pattern here from a regulatory perspective. What we tried to indicate to you is that we positioned our bank to be at the leading edge of meeting any regulatory requirements. There's no question that there are many banks in the world who are in a very, very different position. And at some point, if there is consistency across the world, there is going to be a big impact on the business mix and the ability of some of the European banks in particular and some of the American banks in these marketplace. But we're sort of in this holding pattern where people have not yet had to necessarily comply with whatever the new rules are going to be.

And Gord, I just-- trying to make sure I understand because some European bankers talked about ROEs in this business going down. Do you believe that or do you think the pricing will eventually equal that out or could you comment on that?

That's a very complex answer because I think you really have to look at the mix of business across the various banks and as you know, some of the banks who have commented on that have very, very different balance sheet make-ups than we would have, and I think many cases very, very large asset levels on their balance sheet relative to their capital position. But I think that gets to this issue of people are going to have to make decisions around business mix. When we look across our mix, some of it I think will be reflected ultimately in pricing and we will continue to target at a very high minimum ROE requirements across our Capital Markets businesses because we feel that from a risk reward perspective, the ROEs have to be attractive in that business. So if you look at the environment we're in today and the returns continue to be quite solid and I think they'll continue to be that way going forward as long as people manage their balance sheet effectively and I think that's a key issue, because I think a lot of people have added assets without necessarily generating the same levels of returns. And that's where I think a lot of the restructuring will take place.

Thank you.

Thank you. The next question is from Darko Mihelic from Cormark Securities. Please go ahead.

Hi, thank you. One really quick question maybe for Janice. In Gordon's opening remarks he talked about some items that affected the quarter, could you maybe headline that for us? But my higher burning question is really for Jim Westlake. When I look at the US division, I see a bump up in the revenue run rate. I wonder if you could talk about, and there's a lot of things in your press release that talks about them, maybe if you could talk about the sustainability of your international revenue stream?

Darko, it's Janice, I'll answer first. There is a slide 12 that has the items impacting, so there-- and by segment, so there's an adjustment in Wealth for the deferred comp that I talked about in International banking litigation provision release in Caribbean banking, a tax adjustment in Caribbean banking. And then there-- then also on that slide you'll see the CVA adjustments in Capital Markets and then the-- for MDIA and the auction rate security impairment, so it's all there. It adds up to CAD60 million.

Great, thank you.

After-tax.

Darko, it's Jim Westlake. Certainly on the revenue line, I feel more confident at being positive there because it doesn't have the same volatility that the PCL could have. We are seeing more new businesses, particularly on the commercial side in the US, but retail is starting to pick up as well. The only caution I have on the revenue side is that there is still a lot of regulatory issues coming at us in the United States through Dodd-Frank and through Durbin, but we have tried to pick up most of the impact of that and it would be the only other area I would caution on the revenue side.

And what was the derivative impact there that I see in the Caribbean?

Not sure what you're referring to, Darko?

Well you mentioned in the-- the higher gain in certain derivatives in Caribbean banking during the current quarter, it's written in your page 10 of your report to shareholders.

Darko, I think we're going to have to get back to you on that one, because we need to--

Second paragraph on the right hand side.

I think actually, it's not the hedging positions, but I think as this comment relates to available [to debt] securities proposed, but we'll get back to you.

It's probably not material, but thank you.

Okay.

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

Thank you. I just want to make sure that I understand what you're saying on the Trading side. So on balance, would it be fair to characterize the strong Q1 Trading revenue as indicative of a run rate or above run rate at least in the near term?

I mean, when we look at 2010 and then sort of look forward to 2007 I mean it's clear that, sorry 2011, it's clear that 2011 will be better than 2010. I would look at the quarter as really defining the upper boundary of the range. I did mention that Europe was certainly soft from what we would hope it would be, but certainly we're very comfortable with what Europe is doing given the market. The thing I didn't talk about is the performance on the equity side. Our equity results were very strong, not just from the cash trading side but also from ECM. We did rollout a new electronic product into the marketplace floor which is getting tremendous market traction and you'll notice that our performance-- our revenues on the equity side have certainly picked up, but I would characterize it as the upper end of the range for the time being.

Thanks. And Jim, now that you're seeing underlying improvement in US commercial banking, do you have a clearer idea of your direction beyond fixing what you have in the United States?

Well, I'm still pretty focused on that. It's-- this is early signs of some better news, but I'm focused on growing our business and making things happening in what we have.

Yes, I mean, I-- that's-- I would add to that, Michael. The-- you've heard me say in the past, priority number one, two and three is to get the returns back in that business. If you look at the equity that we have allocated to that business to international banking generally which is essentially earning no return, if you can get the returns in that business back to a more normalized or even a reasonable level it generates a tremendous value of earnings growth and benefit to the shareholders and that's what we're focused on is insuring that we're getting a return on that capital. That's-- therein lies the challenge, but therein lies the opportunity as well. In terms of larger strategic alternatives and opportunities, we continue to monitor a lot of different things as we've said in the past but from a priority perspective, it is the focus is very much on getting returns back from that-- the equity we're deploying in those businesses.

So do you feel comfortable that the window for opportunity will remain open for a reasonable amount of time going forward, if-- the direction?

I think given the turmoil in the United States both currently and in the future is going to result in incredible opportunities for many years to come.

Thank you.

Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead.

Hi, thanks very much for the Capital Markets revenue breakup by geography on slide 22. Just a question on your US business, how has Q2 impacted your revenue coming from the US and Capital Markets? And then I'd be sort of, if you can, break it up into directly i.e. the-- your status as a primary dealer and perhaps sustain the open market operations and then indirectly via the liquidity injection that, that initiative by the Fed provides?Thanks.

Yes, I think if you look at QE2 relative to similar activities done a year, year and a half ago for example, in the UK, it's very different. If anything, its been very difficult to manage through that. If you look at the performance of US auctions they've actually been very volatile, so no, it's actually created on the primary dealership business a very different environment for us to--

So it's not a lift to your earnings?

No, it's not.

I would say the thing that's really driving the increase in the revenues in the US is that we're getting more origination activity. So that for instance yesterday, we booked around a CAD900 million high yield deal and I think you're seeing it reflected in the trading numbers and in the Investment Banking numbers is that we're just doing more client business.

And quickly for Dave, I noticed gross impaireds for consumers are up in Canada, any trends there that you're concerned about?

No, I think when you look at the gross impaired loans, the majority of that ,and Morten may want to comment, is in the mortgage home equity book and the insured portion. I think it reflects a bit of an elongated cycle to move some of the homes, so nothing of great concern there as far as our credit losses and that portfolio continue to average one basis point, so gross impaired loans are not translating into PCL.

Is it translating into slower number (inaudible) just pulling back?

That's a separate question on what loan growth is doing? Certainly, I think you're seeing declines from double-digit home equity growth down to the single digits as we talked about in our investor conference in the fall. We're still at the higher end of our forecast of kind of mid single-digit growth. I think we still maintain that forecast that we'll see solid kind of mid single-digit growth in the home equity side. We're waiting to see what the effect of the regulatory changes are particularly around amortization periods. Effect yet to be determined but certainly there is a noticeable slowing as you look at the quarter-over-quarter trends and the year-over-year trends in our consumer lending business, so it's low.

So Peter, it's Morten, just one additional comment on the impaired side. I mean I would say the quality in Canadian Banking remains quite stable. If you look at new impaired and net impaired information, they're actually coming down at a very encouraging pace. You'll see relative stability in the impaired levels in the retail books, improvements in the commercials, I think I mean it's consistent where we are in the economic cycle. And if the environment continues to be relatively positive, I think what one can expect further improvements but is obviously very dependent on where the economy goes.

Thank you. The next question is from Gabriel Dechaine from Credit Suisse. Please go ahead.

Hi, good morning. Quick question for Gord or Mark. The-- Gord, a quarter or so ago you suggested that prop trading was about 3% of your total revenues on average, how does that shape out this quarter? And then on the Basel III, did I hear you correctly saying that you're already at a 7% pro forma Tier 1 but you're also including some reduction to counter-party credit risk weighted asset insulation, can you provide a bit more disclosure there?

Yes, absolutely. With respect to the prop trading the answer is about the same. With respect to the second question, the answer is yes but I'm going to turn it over to Janice to provide a little more detail.

Sure, Gord. So for Gabriel, are you talking about any specific item in terms of RWA, because what our estimate reflects is both on the numerator, the deductions that go through the piece to 2019 and then on the denominator an increase in RWA for things like Basel 2.5 and items like an increase in CVA.

Okay, I got the Basel 2.5 would be less than peers and I get that. The other RWA component is counter-party credit with risk weighted assets. What is the expected inflation there and what are you kind of suggesting in terms of offsets via some of the new guidance that's been provided? And am I right, did I hear that you're at 7% now including a--?

We are at 7% now on a pro forma basis at January 31, if you include all of the deductions to capital through to 2019 and all of the increases in RWA through Basel 2.5 an Basel III. So our RWA growth is on a gross basis what it would be measuring it to date. So we would have in there the 2.5 adjustment plus increases in things like CVA, some of the counter-party exposures that on the trading side require more underpinning in terms of market risk so it's basically where we stand today with the metrics. What it includes at the margin on trading is the approval that [actually] will improve some of our modeling for some of the trading book which we don't think that will be an issue for us.

What it doesn't include is a lot of mitigation that Gord talked about in terms of the fact that we're constantly retooling our businesses to have the highest and best use of capital and because we have these new metrics coming on board including the growth up of RWA, we're actively looking at how to manage those businesses through to when we have to implement this from a regulatory perspective. So for us, it's a reasonable estimate based on other approvals from (inaudible) but also based on us not doing anything today but our intent is of course to manage our capital actively through the next couple of years.

Okay, thank you.

Okay.

Thank you. The next question is from Brian Klock from KBW. Please go ahead.

Good morning.

Good morning.

Just a quick question. In the US, like said it seems like the first quarter results were positive a little bit sooner than you were expecting. And just looking at the total loan growth from a wholesale perspective, first time we saw a pick up in wholesale ending balances, and maybe you guys can discuss what you're seeing as far as is this sort of a good carryover from the positive sentiment in the US in the fourth quarter, and what do you think is the pipeline and business demand in the US here in the first quarter and going forward?

The wholesale loan business is-- we're working pretty hard to acquire more corporate customers in the US, and so as we grow the Investment Bank and as we expand the various industries that we're covering, we're making more loans. I would say that our new names in the US run rate is sort of 30 or 40 a quarter and a lot of that is focused in energy. Some of it is real estate and some of it is industrial and communications companies, but I would say there's a good opportunity for us. There's-- in terms of our brand with the corporate customers and their willingness to see us and wanting us in their banking groups, its been very good. So we'll continue to do that as long as we feel good about the credit, as long as the spreads holdup.

And the sponsored business?

Well the sponsored business, I mean the leverage finance business has been as you know has picked up quite considerably. We have participated in a number of leverage finance deals. The bridges are clearing well. We're able to syndicate the loans well but the holds in the leverage finance business are quite modest.

Okay, and just one quick follow up, you talked about some good positive trends overall with the DIL formation down and the loans past due on impaired actually were somewhat stable, they picked up slightly overall from the fourth quarter. Anything to think about when you look at the retail one to 29 days met to the early stage and once those seeds are in that bucket were up, is that-- it's not only marginally, but is that anything in Canada or is that in the US driving that increase and is that, Morten, is that unsecured consumer in Canada or just (inaudible)?

So it's Morten. Just to make sure I get your question, so it's on the trends of impaireds in the retail book across the spectrum? Because I would say from a Canadian standpoint in dollar terms, there is-- because of the size of the mortgage book, a fair bit of the increase is in mortgage related. As you can see I mean that still translates into a PCL in the one basis point range, and I think we feel quite comfortable that, that relationship is quite stable. As David was indicating, it's-- you end up with slightly longer time periods to work through problem issues, so that's contributing somewhat to the level of impaireds. But the level of impaireds in the unsecured retail book is actually improving slightly in basis point terms.

And in the US, again we've got reducing levels of growth in impaireds but overall relatively stable to slightly higher levels. So when you look in dollar terms across-the-board, its actually contributed from a fair number of sources but it does not in my viewpoint to specific areas of concern in the Canadian book. And as I indicated in terms of the US retail book, it is really consistent with where we are in the cycle. It's-- if the environment continues we should see these numbers start to come off but I mean there is a certain amount of vulnerability, and as Jim was indicating, there is volatility in those numbers given the size of PCL relative to overall revenue streams, small movements have some impact on the bottom line there greater than you would see in the Canadian business for instance. I don't know if that answers what you were after.

No, that's great, that's great color. Thanks for taking my question.

Operator, it's Josie here, we've only got a couple more minutes so we-- one more question.

Thank you. The last question will be from Brad Smith from Stonecap Securities. Please go ahead.

I don't think your net interest margin actually basis points sequentially which is encouraging, I also know that you are adding your market share position in your core deposits and appear to be willing to see the little bit of share in your business loans. Could you talk a little bit about how you're seeing a competitive environment develop here in Canada and how that's influencing your willingness to actively pursue deposits and be more selective in your commercial lending?

That's a great question, there's a couple of answers there. One, that we constantly manage at the margin our tradeoff between margin and share. Our core banking offering that we launched our mobile apps this quarter as you heard has very strong momentum and strong growth, so we're taking share there and that's adding to some very strong revenue growth for us. We also talked about, we manage the GIC book very carefully and we've done a good job in increasing spreads in that business and managing pretty decent stabilized share, so I find the environment to be very competitive right now, probably as competitive as we've seen it in a number of years. Not only on the deposit side but I'd say more so on the mortgage and consumer lending side with some very difficult pricing environments as we head into the spring mortgage season. So we manage both sides of those equations very carefully. And I think as you see our NIMS have increased, we've done a good job in being able to grow profitable share which is always our core objective so we feel good about that.

And just a quick comment about the commercial lending area. It is a area of key focus this year for us as cards was last year and we are extremely happy with the turn out in our cards business last year and I think I would say we're not happy with that performance in Q1 in the commercial lending area, and we have a big focus on it and we're building the pipeline and we expect that to do better over the coming two and three quarters. So again, that's an area for us to improve an opportunity. Does that help?

Brad?

Oh, yes, I'm sorry. I said thank you.

You're welcome. Okay, I guess that's it. We apologize, we have to cut it off as we have our Annual Meeting which commences in just under half an hour, hopefully some of you will be able to either listen in or join us from that meeting. But we thank you again for joining this call and look forward to our presenting to you next quarter. Have a good day.

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