Royal Bank of Canada (RY) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the RBC 2012 third-quarter results conference call. I would now like to turn the meeting over to Ms. Amy Cairncross, Head of Investor Relations. Please go ahead, Ms. Cairncross.

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 is one hour long, and will end at 8.30. To give everyone a chance to participate, please keep it to one question and then requeue. 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 - Capital Markets, Dave McKay, Head of Canadian Banking, Mark Standish, President and Co-CEO - 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 will now turn the call over to Gord Nixon.

Thank you very much, Amy, and good morning, everyone. I'm sure you're all very tired, given the active days of yesterday and today, but it's a pleasure to be here this morning. We reported our results, as you're aware, in the third quarter with earnings of over CAD2.2 billion, which is an increase of 73% compared to last year. Excluding certain favorable items this quarter, we had earnings of CAD2 billion, which again, very strong, driven by exceptional growth in our Canadian retail franchise, as well as strong Capital markets and Insurance results. We also had record results year-to-date with earnings of CAD5.7 billion, and based on our performance, we expect to meet our medium-term financial objectives in 2012. These results clearly demonstrate the earnings power of RBC and the strength of our diversified business model, with the right mix of retail and wholesale as we highlight on slide 6. I'm also very pleased to report that today we announced a CAD0.03 or 5% increase to our dividend, bringing the quarterly dividend to CAD0.60 a share, this is our third dividend increase in the past 15 months.

As shown on slide 7, our capital ratios remain strong. Our Tier 1 capital ratio stands at 13% reflecting solid retained earnings growth and risk-weighted asset management, offset somewhat by the impact of our acquisition of the 50% stake in RBC Dexia, which we're very excited about, and we closed at the end of the quarter. As we noted in Q2, based on our current interpretation of the rules, which have yet to be finalized, we already meet or exceed the BASEL III capital requirements that become effective in the first quarter of 2013. Currently our estimated BASEL III pro forma Tier 1 common equity ratio is 8.3%.

Turning to the performance of our business segments, overall we're extremely pleased with the strong momentum in Canadian Banking, and we're also proud these results were achieved while simultaneously reaching new heights in customer loyalty measures. Canadian Banking had a record quarter with earnings of over CAD1 billion, accounting for 50% of our total earnings. Even in a slowing environment, volume growth was strong at 8%, and we continue to leverage our size and scale to take disproportionate share of industry growth and profitability, and to gain market share. What's more, we achieved these results while demonstrating relative margin stability. As part of our enterprise-wide cost management program, Canadian Banking is focused on eliminating cost and reinvesting in the future. This quarter, Canadian Banking delivered strong operating leverage, ahead of schedule, and an efficiency ratio of under 45%.

Moving to Wealth Management, as you know, we have an ambitious growth objective for this segment, and while we are behind schedule as a result of the uncertain markets and low interest rates, we are well positioned and have good leverage to benefit from market stability. Notwithstanding the current environment, which I should say has improved over the last month or so, we continue to extend our number one position in Canada in both Wealth and Asset Management and are investing to strengthen our competitive position outside of our domestic market, during a period of challenging industry conditions. We are confident that we're investing in a foundation that will provide strong future growth, particularly as markets begin to stabilize and client activities increase.

Turning to Insurance, we had another strong quarter. This business continues to make a consistent contribution and complements our overall retail offering, providing innovative client-focused solutions through our multi-channel distribution network. We continue to strengthen our business for future growth by improving our products, mix, pricing, distribution, and claims management process. For example, this quarter, we made changes to our priority distribution channel, which we expect will drive greater efficiencies over the long term.

Moving to International Banking. While disappointed by the performance of our Caribbean banking, which continues to reflect the prolonged weak economic conditions in the region, we believe that this remains an attractive region for RBC, and the strategic investments we have made in recent years position us well for long term growth. Our market position is strong, our margins are strong, but we have been impacted by reduced demand for loans, and the credit cycle which Morten will cover off. In the near term, we are aggressively managing this business, and we believe our performance will improve significantly in 2013.

In RBC Investor Services, our performance this year has been relatively solid. However, our results have been impacted by the accounting treatment for the acquisition, as I believe you are all aware. You may recall that we were required from an accounting perspective to take a write-down on our current investment in RBC Dexia to reflect the purchase price, the majority of which we took last quarter, and the remainder recorded this quarter at the time of close. As a result, despite Investor Services being profitable, no earnings have been reported in the quarter. Looking ahead, we believe Investor Services is well positioned as a top 10 global custodian, in an industry with solid long-term fundamentals. And while this business is impacted by market and interest rate pressures similar to Wealth Management, it provides good leverage to market stability Furthermore, we believe we can leverage our reputation, brand and financial strength to win additional business, improve earnings trajectory, and drive long term growth.

In Capital Markets, we had another solid quarter of earnings, reflecting the successful repositioning of the business, which we have been discussing over the past few years. As we have highlighted, we have aggressively reduced risk and eliminated complex assets from our balance sheet. We've reduced trading inventories in response to global uncertainty, and we've narrowed our focus and breadth of training products. We've grown our lending to corporate clients significantly, especially in the United States, and that has supported substantial growth in our Investment Banking, as well as loan revenues. And we have continued to execute our focused strategy in our key geographic regions, without expanding our footprint.

Looking specifically at Q3, our corporate investment banking business had solid results, demonstrating our strength in Canada, and the success of our build-out in the United States and the United Kingdom. In Canada, we're acting as financial advisor to Nexen on the second largest Canadian energy M&A transaction in history and the largest foreign energy transaction in Canadian history. In the United States, we had a very active quarter, and we're involved in multiple capacities and a number of key mandates. As an example, we acted as lead advisor in Apollo's CAD7 billion acquisition of El Paso Exploration & Production Company as well as joint book runner on the financing. Another notable transaction was Penn Virginia Resource Partners' acquisition of Chief Gathering, where RBC was the M&A advisor, equity placement agent, and lead arranger of the credit facility. Our strength in the US was most evident in the latest Dealogic league tables. Measured by fee revenue, RBC ranked as the tenth largest global Investment Bank for the first half of 2012, and we've jumped seven spots to number 10 in US loan book runner ranking, increasing our market share to 2.4%, up from 1.1% in 2011. Within the Americas ranking overall, our market share has increased over the past two years to a record 3.9%, up from 2.4%, with more than 50% of this increase coming in the United States.

Moving to Europe, RBC acted as financial advisor to a consortium that acquired Open Grid Europe from a German listed utility for EUR3.2 billion. We were also lead arranger on this deal, providing the supported credit facilities. This transaction represents our largest UK cross-border M&A transaction involving a German target and is a testament to the successful build-out of our Investment Banking business in the UK, even in the face of these challenging markets. Although trading was down on a sequential basis, it was a solid quarter, reflecting the success we've had in repositioning our business, particularly in the fixed income area, and our focus on the customer. It is worth highlighting and emphasizing that we generated solid trading revenues from a base of securities which is approximately 25% lower than it was a year ago, and our VAR is down 50% or close to 50% from its peak, which was in Q3 2011.

Looking ahead, while market conditions remain uncertain, RBC has good momentum and a strong competitive position in our core markets, as well as a solid pipeline. To conclude, our results and dividend increase this quarter continues to demonstrate our earnings power. Our long-term diversified business model of retail, wholesale and other businesses, combined with our geographic presence, provides in our view, the right mix of earnings and risk diversifications, which will continue to translate into strong earnings. Going forward, we believe we're well-positioned to continue to extend our lead in Canada, and building on strong client relationships in select US and international markets, while delivering long-term growth to our shareholders. With that, I'll turn it over to Morten.

Thank you, Gord. Starting with credit on slide 10, overall credit quality improved compared to the prior quarter. Provision to credit losses of CAD325 million declined CAD23 million or 5 basis points from the prior quarter to 34 basis points. This decrease was driven by lower provisions, primarily in Canadian Banking, but also in Capital Markets, partially offset by higher provisions in the Caribbean due to the ongoing difficult economic conditions in that market. With respect to the Caribbean, we continue to face a challenging credit environment, given the region's dependence on tourism from both the US and Europe. These challenges are likely to persist in the near term until we see improvements in the economic environment in the region. With respect to gross impaired loans, new formations have improved significantly. At CAD261 million, this is the lowest level of impaired loans since the third quarter of 2006. Gross impaired loan balances were CAD242 million lower than the prior quarter, largely due to lower impaired loans in our residential mortgage portfolio, as well as in our business lending portfolios in Canadian Banking and Capital Markets.

Turning to our Canadian retail portfolio on slide 11, overall loss rates improved this quarter to 30 basis points of PCL, down from 34 basis points last quarter. Our mortgage portfolio continues to perform well, with provisions in residential mortgages remaining low at 2 basis points, consistent with our historic performance. We continue to actively monitor and stress this portfolio, and remain confident in its ability to withstand significant movements in the key underlying economic parameters. Turning to slide 12, on our European exposure, compared to last quarter, our net exposure was up approximately CAD4 billion at 10%, reflecting acquisition of the remaining 50% stake in RBC Dexia, which added approximately CAD6 billion, primarily lower-risk investment portfolio assets as the deployment of funds from client deposits. This increase was partially offset by our continued risk management and balance sheet optimization efforts, including further reduction of holdings of some European securities in the Investor Services business. We remain comfortable with our exposure and continue to transact in a prudent manner, with well-rated counterparties, predominantly in the larger European economies.

Turning to market risk, average management value at risk was CAD37 million, and average stress VAR was CAD60 million, with both remaining stable compared to last quarter. One element of our ongoing risk management activities is the active management and further reduction in trading inventory, primarily in fixed income. As shown on slide 13, inventories in the fixed income business have decreased by 25% over the past year, as we have narrowed our focus and breadth of training products, and shifted our focus to more traditional Investment Banking activities. We had a total of eight days with net trading losses during the quarter, with no losses exceeding the value at risk. With that, I'll turn the presentation over to Janice.

Thanks, Morten, and good morning. Turning to slide 15, as Gord mentioned, we had a record third quarter, with earnings of over CAD2.2 billion. Our results included three items of note outlined on slide 21, which had a favorable net impact of CAD262 million after tax. Excluding these items, net income was CAD2 billion, up CAD295 million, or 18% from last year, and 12% from last quarter. These results were driven primarily by record earnings in Canadian Banking and strong performances in Capital Markets and Insurance.

Turning to our business segments, starting on slide 16. Canadian Banking had record earnings of over CAD1.1 billion. Excluding the favorable mortgage pre-payment interest adjustment of CAD92 million after tax, earnings were still a record, at just over CAD1 billion, up CAD147 million or 17% over last year, primarily reflecting strong volume growth of 8%. On the same basis, net income was up CAD98 million or 10%, compared to the prior quarter, primarily due to the positive impact of seasonal factors, as well as solid volume growth across all businesses. As shown on slide 16, Canadian Banking delivered strong adjusted operating leverage of 3.5% this quarter. Looking ahead, while we expect to deliver positive operating leverage in the fourth quarter, it will be at a lower level than what we achieved this quarter, given the current low interest rate environment and the timing of initiative spend.

In keeping with our medium-term efficiency objectives, we continue to drive our efficiency ratio lower. This quarter, our adjusted efficiency ratio was 44.8%, an improvement of 150 basis points from last year, reflecting progress on a number of initiatives. For example, our staff levels remained flat over last year, despite adding 27 new branches and extending branch hours. In regards to margins, notwithstanding the low interest rate environment, we continue to achieve relative stability. On an adjusted basis, net interest margin was relatively flat from last year, and increased two basis points over last quarter. This sequential increase over last quarter reflected lower mortgage breakage costs, and a favorable change in our product mix. Our margin performance reflects our strict pricing discipline, as well as our ability to grow volumes at a premium to the markets, and profitably gain share. Going forward, we expect margins to reflect the competitive landscape, and prolonged low interest rate environment. I would note that the change in our estimation of mortgage prepayment interest is not expected to have a material impact on margins in future quarters.

Turning to Wealth management on slide 17, in Q3 we earned CAD156 million. Certain regulatory and legal matters unfavorably impacted our results this quarter by CAD21 million after-tax. Excluding these items, net income was down CAD15 million or 8% from last year, largely due to lower transaction volumes, reflecting continued investor uncertainty. On the same basis, earnings were down CAD35 million or 17% over last quarter, largely due to the decrease in the fair value of our US stock-based comp plans and lower transaction volumes. As Gord noted earlier, our Wealth Management results continue to reflect challenging market conditions and investments we're making for the long term.

Moving to Insurance on slide 18, net income of CAD179 million was up CAD38 million or 27% compared to last year, driven by lower claims costs in our Canadian Insurance products and a favorable adjustment of CAD24 million after-tax related to changes we made in the quarter to our proprietary distribution channel. Compared to last quarter, earnings were up CAD28 million or 19%, largely due to the favorable adjustment. International Banking results this quarter reflect the CAD11 million after tax loss related to the RBC Dexia acquisition. Compared to last year, this quarter also had higher PCL in the Caribbean banking, lower brokerage commissions in RBC Investor Services, resulting from weak market conditions in Europe, and higher staff costs. Compared to the second quarter which included the CAD202 million after tax loss related to the RBC Dexia acquisition, we also had higher PCL in Caribbean banking, which Morten discussed.

Turning to Capital Markets on slide 20, we had a strong quarter. Net income was CAD486 million, up CAD227 million over last year, due to higher fixed income trading results, reflecting improved market conditions and higher corporate and Investment Banking results driven by strong client growth in our lending and loan syndication businesses. Compared to last quarter, earnings were up CAD37 million or 8%, due to the strength in our corporate and Investment Banking businesses. This quarter, strong growth in our lending and loan syndication businesses, largely in the US, and higher M&A activity more than offset lower equity trading and equity origination. To wrap up, we are very pleased with our record performance this quarter, which demonstrates the strength of our diversified business model, and the earnings power of our organization.

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

(Operator Instructions)

The first question is from Robert Sedran of CIBC. Please go ahead.

Morten, but for the addition of Dexia, I guess the exposure to Europe would have declined. So is the plan to continue to whittle that down, or is it now in the range where it needs to support the ongoing business there?

So I'll start, and then I'll let my colleagues add in some business perspectives. But we are continuing to, as I said, actively look at the exposures that we have, and ensure that they're appropriate and relatively low risk. We continue to do business out of our UK operations that involve transacting with lower rated counterparties primarily in the better rated countries, and that will generate, depending on our success in the transactions, some variability in the exposure. And given the counterparties we're dealing with, I'm quite comfortable to see that number move around somewhat, because the mix of it is with better counterparties. I think what we're focusing on is making sure that the weaker end of the exposure scale, or the areas where there's not a strong strategic rationale for being there, that we take proactive action to dealing with that. So depending on our business success, you may see some ongoing slight reductions in the portfolio, but with any luck, we'll have offset with growth in the business activities with lower-rated counterparties that we're looking to do business with.

You don't see any need to high grade the portfolio at all? You're perfectly happy with the counterparties as they sit today?

On balance I'm quite satisfied with the exposure that we have. There's always opportunities to whittle out some of the weaker pieces, but I'd say we're close to the end of dealing with those issues.

Great, thank you.

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

Another one for Morten. The Caribbean PCLs are still elevated. Wondering when you expect that to tail off and then just on the trading, over the past two quarters, how much of the trading results been benefiting from the whittling down of your trading assets? Are there any substantial gains going in there, and just to confirm Janice, the operating leverage is 3.5% is not sustainable, in Canadian retail?

So I'll start with the Caribbean and Janice can handle the other parts of the question. So on the Caribbean, a couple of points there. The performance continues to be somewhat disappointing, but I want to emphasize a couple of points here. One of the things we did during the quarter was have a thorough look at our portfolios in terms of allowance coverage across the region, particularly for the retail portfolios. So a reasonable portion of the provisions you saw this quarter represents an effort, as a result of our review of those portfolios, insuring consistency and approach and appropriate level of coverage ratios for those portfolios to the CAD66 million worth of PCLs for the Caribbean. A good chunk of that is more in the nature of catch up and reflective of the view of the quarter.

I commented on impaired loans formations, and it remained relatively high in the Caribbean, but it was also worth noting that both impaired loans formations are down CAD20 million plus for the quarter, the overall level of impaired loans is also starting to come down, so while asset quality remains a problem in that business, we are generally seeing movement in the right direction, and so from an asset quality standpoint, I would expect to see slow but gradual improvements. I guess the balancing part to that, I would say the performance, from my perspective, in the Caribbean banking business is now more dependent on seeing revenue and net revenue improvements, and further improvements in asset quality. I think that will take a while, as I said in my comments with the economic environment, you can not expect to see a quick turnaround there but the trends are generally moving in the right direction, and if we have an economic improvement, the recovery piece on asset quality will speed up, but it will take some time to work through the problems.

Thanks for that response.

Gabriel, on the trading question, as we've talked about really for a couple of years now, we have been very focused on reducing our legacy exposures and reducing complexity in the business, so really what you're looking at is from a trading perspective, very clean numbers. I'd refer you to Morten's slide 13, where you can look at declining inventories from a year ago. You'll notice that really Q1, Q2, 2012 and Q3, that we've just reported really is not significant change. What really has happened as we've talked about is we've refocused the business around this very keen focus on clients and origination, and what you don't see in these numbers is around that a significant pick up in velocity. That is the amount of secondary flow that we're doing in the business to support client activity, so velocity has doubled from Q3 last year to Q3 today, and that's really what's driving the numbers, even though generally in the market, we're looking at a very difficult environment. Especially on the equity side, volumes are down significantly, but we've been able to gain market share and what's been driving that is the focus that we had a year ago on the clients, we talked about supporting our clients through very difficult markets and that's paying off, and then as Doug has talked about, our focus on origination and quarter on quarter, sorry year on year we've seen about a 24% increase for example, in DCM revenues, so the model has shifted and its proving to be in this environment certainly more resilient than a pure trading model.

It's Dave McKay here. I'll answer your operating leverage question. I think reflecting on Janice's comments, we are just forecasting slightly lower operating leverage, given the timing factor around expenses and the volatility there, but still forecasting positive operating leverage.

And is that a Q4 comment? Or what's the timing?

Absolutely.

Okay, good quarter, thanks.

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

Just a quick question on capital and what might be the governing concern. So it's clearly not BASEL III common equity given where you are in the ratio, but looking at the assets to capital, as the CMHC securitization funding rolls off, I imagine the assets to capital multiple will trend up, all else equal. If you can, give us a sense of how or what the order of magnitude of that might be, just on the securitization rolling off? And then how constraining do you think gross leverage ratios whether it's the OSFI version or the BASEL III version how much constraining will they be over the next couple years and will it change the way you're looking at the marginal profitability of your variety of activities?

It's Janice, Peter. Why don't I start with that and maybe my colleagues in Capital Markets can give some business color. When we look at capital in terms of constraining factors, we don't see leverage being a constraining factor, the roll off of the mortgages and securitization funding is not that significant because as you know we have the lowest insured ratio mortgages of all of the Canadian banks and when we manage our balance sheet we're really managing for risk returns, so as you saw us deleveraging our balance sheet it was all about ensuring that we were doing the right activity around balance sheet optimization. With respect to capital, we are maintaining very conservative buffers in anticipation of BASEL III, because we're waiting for additional guidance around areas like national SIFI. You've seen us on our segment reporting allocating a lot of capital down into the segments to ensure we get the right behavior around our balance sheet leverage and our use of the balance sheet in optimizing activities so why don't I turn it over to Doug, you and Stan to discuss how we're optimizing at the margin in Capital Markets?

Peter, I'll just comment on gross adjusted assets. As we've shrunk the trading inventory of business that we've grown, and has proven to be very successful is our secured financing business, and so that's picked up a lot of the balance sheet slack that has been reduced on the inventory side and I echo Janice's comments that we don't see leverage constraints as any issue to that business. It's right-sized for our size and the activity levels and the risk profile that we want to maintain there, so we're very comfortable and don't see it as a constraint.

The RWA pick up in the Investment Bank balance sheet is really around the loan growth, and so if you look at the stuff you'll see that we've had significant loan growth and it was in Janice's slides as well and most of that's in the US and it's about 75% investment grade, and that would be the largest use of balance sheet or the largest increase of balance sheet year over year.

But Dave McKay, do you have any concerns on how leverage ratios might impact your own capacity for growth?

Absolutely not, no. We are capable of growing whatever we can attract into our business.

Yes, as Janice said, just to emphasize we did have the lowest level of securitization of the banks. The other comment I'd make from a general perspective I think this applies to all of the Canadian banks but the bad news about the way we're operating today is we're operating with fully loaded capital and liquidity rules compared to a lot of other banks around the world. The good news of that is it puts us in a very strong position as the world unfolds going forward, and these rules are applied more strenuously to other institutions. And so when you look at how we're running the businesses today, it's with pretty much fully loaded capital and liquidity rules.

Thanks very much.

Thank you. The next question is from Darko Mihelic of Cormark Securities.

Just a point of clarification first of all. I think it was Janice in your remarks you're suggesting that the FTE count was flat year over year but when I look at the overall FTE count in Canada it looks like it's up quite a bit. I understand the others probably Dexia related, but were these people that brought in at the end of the quarter, and could you talk about the expense hit at the top of the house for Q4, and I'll sneak a real quick one in for George Lewis as well. George when I look at your results I tend to think of Royal as having the premier Wealth Management franchise but your results just don't look as good as your peers and it hasn't looked as good as your peers in the last few quarters. I'm wondering if you can talk about what it is you're finding challenging with your business and what you're going to do to fix it.

Darko, it's Janice. I'll start with the FTE question. So when I talk about FTEs at the end of the quarter I think in total we added about 6,000 FTEs related to our acquisition of the other 50% of Investor Services. Remember that we have a significant presence in Investor Services in Canada. We have the dominant market share. We have 2,400 FTEs in Canada, so almost 50% of the total of 6,000 in Investor Services that we added, so when you look at potential expense or revenue, you'll see what will be slowing in Q4 would be a fully-loaded 100% pick up of the Investor Services business both revenue and expenses. There are no other net adds anywhere else in Canada in any of the businesses.

Okay, thank you.

Darko, it's George. Thanks very much for the question and I guess I'd start by disaggregating the Wealth Management segment we have here at RBC, and making the point that our Canadian businesses on a peer-to-peer basis continue to perform extremely well both in Wealth Management and Asset Management so we continue to gain share in both of those businesses, and those are our highest-margin businesses. Where we are differentiated in our strategy is we have a large US Wealth Management business and a growing UK and emerging markets Wealth Management business as well, and overall when you look at our revenue sources, we are trying to drive a greater proportion across our segment in fee business, that's why we're growing Asset Management in particular and within our geographic businesses, emphasizing that, but fully one-third of our revenues remain transaction-based revenues and a large portion of that is reflected in our US Wealth Management business which I would say is making progress in improving revenue per advisor. But I'd say, the most differentiating factor you've seen in the last couple quarters of our results would be the investments we're making in building our UK and emerging market business. So for example, we attracted 40 advisors into those platforms in the third quarter alone and we're taking advantage of the strength and stability of RBC, our global focus on Wealth Management, but we're investing in a very challenging environment, as Gord mentioned. And while clients are coming over they are largely staying in cash balances at the moment as opposed to long term investments, so it's taking longer for that revenue and positive income impact to flow through on our results from that positive activity, so that would be the big differentiator because we have those global businesses which our Canadian peers would not.

Thank you.

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

Thank you. Just want to confirm a couple of numbers that I think were mentioned. You said with respect to the CAD51 billion of wholesale loans that you have, there's a percent in the US that I didn't catch, and 75% is investment grade, yet 40% year over year growth and 9% quarter over quarter, so how are you getting that strong growth in this lending, what kind of margin are you getting, and what kind of ancillary fee income do you build into your pricing expectations?

Okay so the total loan book is CAD51 billion and you're right on the growth numbers. I think year over year its gone from about CAD37 billion to CAD51 billion which is roughly 40%. Which is a significant increase, and most of that increase has occurred in the US. The exact amount I'd have to give you, but I'd say probably it's about 90% of the increased loan book is the US.

Is that this quarter?

Over the last year and over the last quarter. The Canadian loan book has been basically stable over the last year and the growth you're seeing in the loan book is largely in the US, and the margin, so you have to keep in mind that we have sort of 300 plus or minus 300 Investment Bankers in the US, 150 Corporate Bankers, 200 Municipal Bankers, we have a lot of people in front of clients, and a lot of opportunities to lend. And I think one of the best opportunities is that a number of our competitors, especially European competitors, have been backing off that market, and the number of the customers in the US would like to do business with the Canadian bank, so its been a reasonable opportunity at least.

I would say in terms of the margins, we're lending to the average customers BBB, BBB-minus public Company, and we would be lending between L plus 125 and L plus 150, with some fees up front. What we try to get to is the 2 to 1 ratio in terms of ancillary versus core lending revenue. Because we've been growing the loan book as quickly as we have, that will come. We've also as is noted earlier in the comment, we've been doing more leveraged finance and we've been able to distribute what we've underwritten and that's also been lucrative.

Michael, it's Gord. The other thing I would emphasize because I think it's extremely important is that if you remember back to what we were doing in the early part of the 2000s, we intentionally drove our loan book down in the United States and internationally quite dramatically, and it was on the basis that you weren't getting paid to extend credit. Covenants were light to say the least, and to some degree, we didn't have the ability to generate the same level of ancillary business so if you actually look at our loan book today in the United States, it's still lower than it was back in 1999, and I think that's correct isn't it? Yes it's lower than it was back in 1999 and it remains lower than any of our Canadian competitors even as we sit today, so we've had a lot of capacity to extend credit, because of the decisions that we have made over the last 10 years or so and the big difference is, not only do we get paid today to extend credit, the returns of the loans themselves are much more attractive. But the terms and conditions are also much more conservative and our ability to leverage those corporate and commercial relationships is much more significant today, so while the growth appears to be very high which we believe is a very good thing, it's off a very low base because of some of the decisions that we took over the past 10 years.

Thanks a lot.

(Operator Instructions)

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

Thank you. My question is for Dave. Dave could you talk a little bit, you said the operating leverage is going to be less in Q4. Could you talk about your plans for next year and then just give us an update on your outlook for NIMs and are you seeing more slowdown in mortgage originations as a result of the new rules that have gone into place?

Thanks, John. It's Dave. So, as we look at what we're trying to do, we're certainly -- our goal is to drive positive operating leverage, and we've always talked about that, so we'll continue to manage our expenses and our revenues carefully and we're in a bit of a volatile world, and there is pressure on deposit margins. We've been able to be very successful in offsetting that with good growth and higher margin commercial and credit card lending over the last quarter, so you've got a lot of offsetting courses going on, so it's tough to predict exactly where things are going, but overall, I think the comment was that it's going to get a little bit tougher to manage that, but our target is to drive our efficiency ratio down into low 40%s and we're, as you can see, we're continually quarter over quarter and year over year making very good progress towards that, and we'll continue to focus on that goal. And that's the important part of that driver is to make sure you manage your revenues and your expenses carefully. But we're heading into I think continuous as we've talked about over the last year, lower rate environment pressures are very large, deposit business, and that pressure won't alleviate.

As far as the mortgage business, you have to expect some slowdown. We've come through a very strong Spring mortgage season, we're extremely happy with our results, and the significant market share gains that we've seen. We'll continue to compete. There's not a lot of evidence of the slowdown right now but you have to expect with the B20 rules really kicking in and some of the price appreciation that won't be there in the marketplace around housing, those are some of the key drivers you see in mortgage growth, you'd have to expect some type of slowdown from the strong, strong rates that we're seeing today.

And just Dave, on the spreads, I think in the past you've said with the prospect of maybe Bank of Canada raising rates but now that prospect looks diminished. Are we just looking at a sustained period of a few basis points or 1 or 2 compression in margins over the next year, or is that a fair assumption to make?

We're not projecting anything drastic here, as we roll off higher-rate mortgages and put on lower rate mortgages and we don't have the ability to use our very strong checking account DDA deposit base to fund, it puts downward pressure on our overall margins without an increase in the rate environment, so we'll continue to operate in that challenging environment, and the key is to keep growing your credit card business, your commercial business to try to offset that. But you're right. I think you're on the right track to say there will be somewhat of a downward pressure there but we don't expect anything drastic.

Thank you.

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

Just a quick question for me. Just wondering probably for Janice or maybe Dave. Is there anything unusual in the credit fees this quarter, pretty significant increase both on a year over year and Q-over-Q basis.

Cheryl, it's Janice. We'll have to get back to you on that because there's nothing unusual that we've seen across-the-board and we'll look at the split so why don't we get back to you?

Okay.

Thank you. There are no further questions registered at this time. I would like to return the meeting over to Mr. Nixon.

Okay, well I would like to thank everybody. I don't think we've ever had a meeting end early, so that's either a very good sign or a sign that you're all very tired and have a busy day in front of you. I'm sure it's a combination of both, but I'd like to thank you for your participation. I would just close, as I said earlier, we're certainly pleased with what we think is an outstanding quarter, and we look forward to getting together in approximately three months. So with that, we'll end the meeting, thank you very much for your participation.

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