Royal Bank of Canada (RY) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the RBC 2012 fourth-quarter results conference call. I would 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, President and CEO; Morten Friis, Chief Risk Officer; and Janice Fukakusa, 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 9 AM. To give everyone 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 today are George Lewis, Group Head Wealth Management and Insurance; Doug McGregor, Chairman and Co-CEO Capital Markets and Co-Head of Investor & Treasury services; Dave McKay, Group Head, Personal and Commercial Banking; and Mark Standish, President and Co-CEO of Capital Markets and Co-Head of Investor & Treasury Services.

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, Amy, and good morning, everyone. 2012 was a record year for RBC, with net income of over CAD7.5 billion, which was up 17% from a year ago. On a continuing basis, our net income of CAD7.6 billion was up 9% over last year, with record earnings in three of our businesses -- Canadian Banking, Capital Markets and insurance. We delivered a strong return on equity of 19.5%, even with higher capital, as we transitioned to Basel III which becomes effective for the Canadian banks in the first quarter of 2013. Looking at our fourth quarter, earnings were over CAD1.9 billion, up 19% over last year on a continuing operations basis, with Canadian Banking earning over CAD1 billion for the second consecutive quarter.

It was a clean quarter with earnings per share of CAD1.25 or CAD1.27 when you add back amortization of intangibles, also up 19% from last year. Our fourth-quarter results also reflect strong fixed income trading, driven by improved conditions compared to last year, strong corporate and investment banking results, and solid performance from Wealth Management and Insurance. Overall, our fourth-quarter and full-year results clearly demonstrate the earnings power of RBC and our ability to successfully execute our long-term strategy.

By focusing on this strategy and maintaining strict risk and cost discipline, we delivered strong earnings through a period of ongoing headwinds. And we extended our leadership position in Canada, while building on our momentum outside of our domestic market. As shown on slide 4, our capital ratios remain strong and well above both internal and regulatory targets. At year end, our tier 1 capital ratio was just over 13%. And our estimated Basel III pro forma common equity tier 1 ratio was 8.4%.

Turning to slide 5, our objective over the medium term is to achieve top quartile shareholder returns, as we believe this reflects a longer-term view of strong and consistent financial performance. We used key financial performance objectives to measure against this medium-term goal. As you can see, based on our performance in 2012, we achieved all of our financial objectives. We raised our quarterly dividend twice, for a total increase of 11%, and ended the year at the midpoint of our dividend payout ratio.

Looking ahead to 2013, we're maintaining the same mid-term objectives of diluted earnings per share growth of over 7%, plus return on equity of 18%-plus and strong capital ratios as measured under the new Basel III standards, as well as a payout ratio of between 40% and 50%.

Before I review the performance of our businesses, I would note that our fourth-quarter and full-year results reflect the strategic realignment of certain segments that we announced back in September. You also would have seen that in mid-November we released our historical financials under this new structure to provide the investment community with information in advance of reporting today. To recap, we created a personal and commercial banking segment under Dave McKay's leadership to leverage our domestic banking expertise across our international operations. We also created an Investor & Treasury Services segment under Doug McGregor and Mark Standish to better serve and grow our institutional client base. And with the retirement of Jim Westlake after 17 years of service, George Lewis will assume responsibility for our Insurance segment, in addition to his ongoing leadership of our Wealth Management segment.

I will now provide an overview of our annual performance in each of these segments. And following, Morten and Janice will comment on our fourth-quarter results. Starting with personal and commercial banking, this segment now includes Canadian Banking as well as our Caribbean and US banking business. Our Canadian Banking business delivered record earnings of CAD4 billion, representing over half of our total earnings. These results reflect our ability to leverage our size and scale to take a disproportionate share of industry growth and profitably gain market share. I would note that in the fourth quarter we gained market share in all of our businesses. This year we had strong volume growth of 8.5%, well ahead of the peer average, with notable strength in our commercial business. And we maintained consistent margins throughout the year.

While we anticipate that the strong growth in consumer lending that we experienced this year will moderate, we continue to have good momentum in the higher-margin commercial business. Overall, we believe that we can continue to achieve volume growth at a 25% premium to the market. And we have a number of initiatives under way to achieve this objective. For example, we're continuing to expand our client reach and invest in innovative solutions to broaden our distribution network and improve our customer experience. This year we announced a banking partnership with Shoppers Drug Mart which includes in-store ATMs and a number of co-branded products. We're excited about this initiative as Shoppers Optimum is the number one loyalty program in the country, and currently only 15% of Optimum holders are RBC clients.

On the commercial side, we expanded our sales force and continued to strengthen our product and service offering, including enhancing our mobile banking capabilities for business. Overall, corporate balance sheets remain strong. And as more companies invest we believe we're well-positioned to gain share with our focused industry expertise and broad coverage across the country. Additionally, we see opportunities to leverage Ally Financial's Canadian auto finance business, which will make us a market leader in auto finance in Canada. Going forward, in Canadian Banking, we continue to focus on managing expenses relative to revenue growth, and we believe our performance this year clearly demonstrates our commitment to controlling costs while we invest in future growth.

Moving to the Caribbean, as we have discussed throughout the year, our results reflect the prolonged weak economic conditions, including reduced demand for loans. We continue to believe that this remains an attractive region for RBC. As we mentioned last quarter, we're aggressively managing this business and we believe our performance will continue to improve in 2013. In US Banking we're successfully transitioning our clients to new cross-border banking platforms during the year. Going forward, we're focused on growing this high-value cross-border business, as well as servicing the banking needs of our US Wealth Management clients.

Turning to Wealth Management, while our ambitious growth objectives for this segment is behind schedule, given the uncertain markets and low interest rate environment, we are seeing strong momentum in our largest business by earnings, Global Asset Management and Canadian Wealth Management. Outside of our domestic market we are confident that we are investing in a foundation that will provide future growth, particularly as markets stabilize, client activity increases, and interest rates normalize. Even with market headwinds this year, we achieved strong growth in client assets, which were up 10% from last year.

Let me provide some highlights of our performance, starting in Canada where we continue to extend our lead. Our Canadian Wealth Management business grew its share of the high net worth market to 18%, an increase of over 100 basis points last year. And in our global asset management business we captured over 23% of long-term fund sales, and remain the industry leader. Given global asset management is our most profitable business, with the highest pretax margins in the industry, and contributing over 50% of our Wealth Management earnings, we are exploring potential acquisitions to further enhance our asset management capability.

In US Wealth Management, we're improving our operating efficiencies and driving productivity. While this market remains challenging, we had high growth. We had growth in fee-based client assets, reflecting our strategy to shift our business to a greater proportion of fee-based revenue. Internationally, we're leveraging the strong foundation of our global trust business to build our on-shore presence in the UK where we now have over 60 advisors. And we are also laying the groundwork to build in emerging markets.

Insurance had record earnings of over CAD700 million, driven by strong volume growth across all of our insurance businesses and lower claims costs in the year. We're continuing to drive efficiency by increasing sales through our low-cost proprietary channels, while at the same time achieving strong customer satisfaction rankings. Our new segment, Investor & Treasury Services, brings together RBC Investor Services, our global custody and asset management servicing business, with two businesses previously in Capital Markets, Global Financial Institutions and Treasury Services. Global Financial Institutions provides transaction banking services such as cash management to a global client base, many of whom are also clients of RBC Investor Services.

Treasury Services provides short-term liquidity and funding for RBC through its management of a high-quality conservative investment portfolio, primarily comprised of US and Canadian sovereign debt. We believe the combination of these three businesses provides opportunities to increase efficiencies and deliver a more integrated suite of products and services to this client base. In the near term we're focused on integrating Investor Services, having just assumed 100% ownership at the end of the third quarter. As a reminder, our full-year results for this segment were impacted by the accounting treatment related to this transaction.

We are also taking steps to strengthen the business model in order to adapt to ongoing industry headwinds, including uncertain markets and prolonged low interest rates which are impacting us as well as our clients. And this includes reviewing our pricing strategy as well as our expense profile. As part of the integration, you will have seen on closing that we repositioned and derisked the balance sheet, much like the activities we undertook in Capital Markets in recent years. Looking forward, we believe the long-term fundamentals of the global custody business remain attractive and that Investor & Treasury Services segment will create great opportunities to increase cross-sell and deepen client relationships.

Turning to Capital Markets, we had a record year with earnings of CAD1.6 billion. Our performance highlights the successful execution of our strategy, including the shift to more traditional corporate and investment banking activities and the repositioning of our trading business to focus on origination which has driven greater stability. Our results also reflect the success of our growth and diversification strategy in the United States, as this market accounted for over 50% of Capital Market's revenues this year. Our North American strength is evidenced in the league tables as we ranked tenth largest global Investment Bank by fee revenue for the first nine months of 2012 according to Dealogic, driven by a significant increase in our Americas market share.

In the UK, our involvement in a number of notable deals this year is a testament to the successful build-out of our investment banking business, even in the face of challenging markets. As an example, we were a book runner for the Spanish bank Santander's CAD3.6 billion initial public offering of its Mexican subsidiary, the largest equity offering in Latin America so far in 2012, and one of the largest in the world. Looking ahead for Capital Markets, we see opportunities to extend our leadership position in Canada and build on our momentum outside of our domestic market. While continuing to optimize capital and manage headwinds related to the regulatory and market environment.

In closing, 2012 was a record year for RBC. We continued to extend our leadership position in Canadian Banking and we ranked number one in cross-sell, ahead of our peers by a significant margin. We also received Retail Banker International's award for the best retail bank in North America. In Wealth Management we received a number of recognitions, including best overall fund group by Lipper and were again recognized by Scorpio as the sixth largest global wealth manager by assets.

Insurance had record earnings and achieved the highest ever scores for likely to recommend and ease of doing business, two key indicators in customer satisfaction, very important to this business. And in Capital Markets, in addition to a record year of earnings, we had the largest increase in market share among the top 25 global banks, while maintaining our number one position domestically. From a capital perspective, we exited a number of low-return, low-growth businesses and assets, which included our US branch network. We consolidated our ownership of RBC Dexia and continued to reduce level three assets to an insignificant amount. We also created the Investor & Treasury services segments and again consolidated our banking businesses under Dave McKay. Overall, we're certainly proud of our accomplishments.

Looking ahead to 2013, there's no question that financial services companies will continue to face headwinds. In addition to regulatory changes, I believe the economic headwinds will continue until there is a more improvement in the global economy. And we see resolutions to both the European sovereign debt issues, as well as the US issues, particularly the imminent fiscal cliff situation.

But notwithstanding these challenges, we're very confident about our financial and competitive position and our ability to deliver against our objectives and grow our business in 2013. We have balance sheet capacity. We have capital flexibility. And we have good momentum in all of our businesses. We believe our strategy is the right one, value and people to succeed. And key strengths that drove our performance in 2012, including our leading market positions, diversified business mix and prudent focus on managing risk and costs, will continue to be key advantages as we move forward.

With that I'll turn it over to Morten.

Thank you, Gord. Starting with credit on slide 9. While we saw a modest uptick in provisions this quarter, overall credit quality remains sound. Provisions for credit losses on impaired loans of CAD362 million increased 3 basis points to CAD37 million from the prior quarter to 37 basis points. This increase was driven by provisions related to a single account within Capital Markets. as well as increased provisions within Canadian Banking. Partially offset by lower provisions in the Caribbean.

With respect to Capital Markets, the higher provisions relates to the Canadian account of the technology and media sector, which was originated five years ago right before the 2007 market turbulence. This was a syndicated transaction where we did not reach the target hold level because of market volatility at the time. As a result, our exposure is larger than normal for a name of this quality. As we discussed in our Capital Markets Investor Day in June, our priority for this segment is to develop client relationships using the loan book and loan loss provisions at moderate levels to our expected outcome of that business activity. Specific provisions for our Capital Markets business of 49 basis points this quarter is within the range of what we regard as normal provisioning levels. I would add that we continue to adhere to strict credit underwriting standards. Approximately 70% of the authorized portfolio is investment grade. And our inventory of watch list and workout accounts remain at low levels.

Turning to the personal and commercial banking segments. In the Caribbean, provisions on impaired loans were CAD28 million. While credit quality has shown some signs of stabilization, challenges are likely to persist in the near term in this region until we see sustained improvements in the economic environment. In our Canadian Banking portfolio, provisions were CAD269 million, up CAD35 million over the last quarter or 4 basis points to 34 basis points, primarily reflecting higher provisions in our personal and business lending portfolios due to a higher level of impaired loans.

Turning to our Canadian retail portfolio on slide 10, provision on residential mortgages remained low at 2 basis points, consistent with our historic performance. As you know, there continues to be considerable media attention directed toward the Canadian housing market and consumer leverage.

Let me briefly provide our perspective. Overall Canada's economy continues to fare reasonably well. And we expect financial conditions to continue to support stable credit trends. While we see some weakening in the housing market, we do not foresee the recent cooling as a sign of a US dial downturn. [The only] significant structural differences between these two mortgage markets that mitigate risk. Housing affordability remains reasonable in most regions. And we are carefully monitoring certain areas where the price appreciation has been above the long-term average.

We actively stress-test our portfolio for changes in key parameters, including interest rate increases, housing price decreases, and unemployment levels. And our analysis shows that our portfolios can absorb large movements in these variables without significant impact on loss rates. Also, we are seeing a shift in behavior as more clients opt for fixed instead of variable rate mortgages, which is good both from a business and risk perspective. With respect to gross impaired loans, new formations has increased somewhat over the last quarter but remain well within our historical range.

Turning to slide 11, compared to last quarter our net exposure to Europe is flat at CAD43 billion. We remain comfortable with our exposures and continue to transact in a prudent manner with well-rated counterparties, predominantly in core European countries.

Moving on to market risk, we recently expanded the set of positions included in our value at risk, or VAR, measure in order to provide a more comprehensive view of the market risk of our portfolios on a basis consistent with how we manage risk internally. The new VAR disclosure now includes certain positions that are not part of our trading book but have mark-to-market risk characteristics, the larger of these being credit valuation adjustments. We have provided disclosure in our annual report on this new market risk VAR for 2012, alongside our previous measure. On average for 2012, under the expanded set of positions, our market risk VAR was CAD52 million, CAD15 million higher than it would have been under the previous VAR measure. Stressed VAR was CAD17 million higher. Credit valuations was the most significant contributor to the increase, with debt valuation adjustments and the credit default swaps used to hedge our banking book, accounting for the balance of the increase.

Despite the reported increase, there's been no change to our overall risk profile. Using consistent measures, market risk has actually decreased during 2012 compared to the prior year. During the fourth quarter we had four days with net trading losses, but no losses exceeding value at risk.

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

Thanks, Morten, and good morning. Turning to slide 13, as Gord mentioned, we had a strong fourth quarter with earnings of over CAD1.9 billion, up 22% over last year, or 19% on a continuing operations basis. Compared to last quarter, and excluding the items of note we highlighted in Q3, net income was down slightly. We had solid results this quarter across most business segments. And overall it was a clean quarter with no items of note. I would highlight that last quarter included other favorable tax adjustments and corporate support, consistent with the prior year's third quarter.

Turning to the performance of our business segments on slide 14. Personal & Commercial Banking earned over CAD1 billion, an increase of CAD87 million or 9% from last year, driven by solid volume growth in Canadian Banking, as well as a lower effective tax rate in Canada. Compared to last quarter, earnings were down CAD68 million or 6%. Excluding the mortgage prepayment interest adjustment in Q3, earnings were up CAD24 million or 2%.

In our Canadian Banking business, excluding the prepayment adjustment, earnings were relatively flat over last quarter as seasonally higher expenses and increased provisions partly offset continued volume growth. Notwithstanding higher expenses, Canadian Banking delivered operating leverage of 1.8%, based on strong revenue growth and a strict focus on cost. Our efficiency ratio this quarter was 44.9%, an improvement of 80 basis points over last year. Margins were stable in Canadian Banking over last quarter, reflecting our strict pricing discipline, as well as our ability to grow volumes at a premium to the market and profitably gain market share. Looking ahead, we expect ongoing margin pressure as interest rates remain at historic lows and competitive pressures continue.

Turning to Wealth Management on slide 15, we earned CAD207 million this quarter, an increase of CAD28 million or 16% over last year and up CAD51 million or 33% from the prior quarter. As noted on this slide, our results last year and last quarter were impacted by certain items of note. Our fourth-quarter results were driven mainly by higher average fee-based client assets reflecting capital appreciation and net sales, higher transaction volumes reflecting improved market conditions, and the increase in fair value of our US share-based compensation plan.

Moving to insurance on slide 16, net income of CAD194 million was down CAD6 million or 3% compared to last year. This quarter we had lower claims costs in both Canadian insurance and reinsurance products and volume growth across most businesses. The prior year benefited from a new UK annuity treaty, as well as higher net investment gains. Compared to the prior quarter, earnings were up CAD15 million or 8%, driven by lower claims costs in reinsurance and Canadian insurance products. As noted last quarter, Q3 was favorably impacted by the reduction of policy acquisition cost-related liabilities.

Turning to slide 17, Investor & Treasury Services had earnings of CAD72 million, up CAD32 million from last year, and up CAD21 million from last quarter, largely due to higher funding and liquidity trading results. Our results in Investor Services were impacted by spread compression from the continued low interest rate environment and lower custodial fees from reduced transaction volume due to ongoing market uncertainty. Also, the prior quarter had strong securities lending fees, reflecting the European dividend season. This was the first full quarter of 100% ownership of Investor Services. Given the industry headwinds, we believe the fourth-quarter run rate is reflective of what we would expect to earn in the near term. And, as Gord discussed, we have a number of initiatives underway to address the current challenges and position the business for long-term growth.

Turning to Capital Markets on slide 18, we had earnings of CAD410 million this quarter, up CAD285 million from last year, primarily reflecting strong fixed income trading. Corporate and Investment Banking was also up, with growth in origination, lending and loan syndication activities. These results were partly offset by higher provisions in one account, as Morten discussed. Compared to last quarter, net income was down CAD19 million or 4%, reflecting lower trading, particularly at the end of the quarter, due to uncertainty around the US election, as well as two fewer trading days in the US as a result of Hurricane Sandy. Our results also reflect lower loan syndication and advisory fees compared to a strong third quarter, and higher PCL.

To wrap up, we are very pleased with our strong performance this quarter. As Gord said, notwithstanding the headwinds in 2013, we believe we are well-positioned to deliver against our objectives. At this point I'll turn the call over to the operator to begin your questions and answers. Please limit yourself to one question, then re-queue so that everyone has the opportunity to participate. Operator?

(Operator Instructions)

Steve Theriault from Bank of America Merrill Lynch.

For Gord and/or Mark and Doug. It's been suggested in recent days that foreign banks and brokers operating in the United States could be forced to set up bank holding companies that would be required to fully comply with capital leverage and liquidity standards. Can you tell us a bit about your current legal structure in the United States? And are we looking at a situation where there's a possibility you might have to scale back to some extent? And/or have increased capital backing some of those businesses. What I want to understand is how big a deal this could potentially be.

Thanks, Steve, for the question. It's Janice speaking. Yes, we did hear about the new bank holding company regulations. And in fact, about a year ago, when we still had the US bank, we were actually scoping out how we would comply and set up a bank holding company. And, yes, there are additional capital requirements. But in the US we're very well capitalized. Our business base is pretty solid. And so we believe under any outcome with respect to this talked about new legislation, we're very well positioned to continue to operate.

Steve, I would just add to that, because we did talk about it at our corporate governance meeting yesterday, is that if it's something that we have to manage around, the impact will be more just in terms of how we're structured. And it may impact things like compliance and so forth. In terms of businesses, it will have no impact whatsoever.

Okay. That's helpful. I'll be a good citizen and keep it to one question.

Rob Sedran from CIBC.

Just a question on expenses, if I may. Janice, if I exclude the variable comp, fixed expenses were up 5% quarter on quarter. I know you mentioned a couple of different places about seasonally-elevated expenses. But of that quarter-over-quarter increase, how much of that would you expect to settle back down as we look into next year? And then, second, in terms of the pension expense, I'm wondering, under IFRS, if there's any impact as we look into '13 from what was in all likelihood a bad year on the pension side, considering how low rates are, is there potentially a higher pension expense that might eat into operating leverage as we look into next year, as well?

Those are two good questions, Rob. I'll start with the first one. When you look at our longer-term commitment to expense containment, we're focused on positive operating leverage. And in our retail platforms Dave has scoped out that that means between 2.5% and 3%. And so, when you look at the change quarter-over-quarter, there's some seasonality in the expenses. And remember, this is the fourth quarter, so we have a lot more variability in the expense base as people true up things like comp accruals or like advertising and promotion, and those discretionary expenses. So we expect our expenses to actually be at more of an average quarterly run rate.

When you look at what the trajectory is, I think you have seen that our depreciation expense is inching up because of all of the large investments we've put in, in supporting all of the great revenue growth, especially in the Canadian Banking platform. So, when we're looking at that trajectory, we are specifically targeting discretionary expenses, like consultancy marketing, to actually reduce the impact of that depreciation build so that we can still drive positive operating leverage. If you look at FTE and exclude the impact of RBC Dexia, we've basically been flat on a trailing quarter basis. And if you look at how we're managing that, we're managing our FTE through attrition. And at the margin putting in more front office staff and reducing some of the back and middle office as we benefit from a lot of the cost management initiatives in terms of efficiencies.

For pension expense, definitely because of where interest rates are, our pension disclosure and valuation reflects an October 31 valuation, in accordance with IFRS. We definitely see that there's going to be an increase in our pension expense going forward into 2013, based on that valuation and where interest rates are. From our perspective, it's a manageable increase. I think that the range is possibly maybe 20% to 30% over the pension expense. And it's taken into consideration in all of our cost management initiatives.

Does that come immediately into 2013, Janice, on the pension side? The full impact gets felt immediately under IFRS?

The pension expense from an expense perspective, aside from a different sort of valuation, aside from a funding valuation. So you may see some impact towards the end of the first quarter, of that rise. So we know potentially what that increase is. So you will see some impact in Q1.

Okay. Thank you.

John Aiken from Barclays.

Gord, in your prepared commentary you talked about potential acquisitions in Global Asset Management. I was wondering if you could run down what your regions are in terms of order of preference. And secondarily, how do you view what the excess capital levels are within Royal?

I'll answer the second part of the question and then I think I'll turn it over to George to answer the first part, John. The second part of the question is that -- and I'll lump it in with acquisitions, because while we do highlight that the Wealth Management area is the one area where, if we did find the right strategic opportunity, we'd certainly be prepared and we would like to find that right strategic opportunity. But I would also emphasize that that's extremely challenging to do in today's environment. And part of it is because of the capital issue. You've had very little in the way of M&A activity, generally, in the financial services industry over the last number of years. And my personal view is that's going to continue going forward because if you actually look at the capital rules, we live in an environment -- I refer to it as the hotel California elevator. You're allowed to go up but you're not allowed to come down in terms of capital.

So when you look at potential M&A activity, it has to be financed with a lot of core equity to ensure that we continue to comply with the capital requirements going forward. And, frankly, we live in an environment today where, when you look, in my judgment at least, at our share price, our return on equity and our dividend, you measure those opportunities against things like buying back your own stock. I would say that M&A activity becomes even more challenging. So you've got a less friendly regulatory environment from an M&A perspective. You've got a much less friendly equity issuance environment and dilution issue from an M&A perspective. And you've got a fairly attractive alternative in terms of capital repatriation.

So in the face of that environment, as I say, we're continuing to be, I would say, very disciplined around the deployment of capital from an M&A perspective. Having said that, when you look at our asset management business, there are some holes that we've talked about in the past that we would like to fill in. We've got a very strong global business. And we've got close to 50% pretax margins in that business which are extremely attractive. And even when you look at something like a BlueBay acquisition, which again was expensive when you compare it to today's pricing levels, again, we've continued to see very good momentum built on that. And if you actually look at fund sales and asset growth within that investment, it's continued to be extremely strong. And so if we found the right opportunities that fit that strategic level, that was not overly dilutive relative to other capital alternatives, it is the one sector where I think it would be more likely that we would do something. But I would emphasize that we're going to continue to be very disciplined. In terms of the geographical priorities, I'm going to turn it over to George.

Sure. Thanks very much, Gord. Thanks for the question. Just to build on Gord's comments about asset management being our highest margin business within the Wealth segment, it's also our most leverageable. So we have specific goals about increasing the penetration of our asset management solutions throughout our Wealth Management business, not only in Canada but also around the world. And we feel encouraged by the success of our Phillips, Hager & North acquisition in 2008. And to Gord's comments, BlueBay has had a stellar last six months in terms of asset growth, has hit a new high watermark. If you look at our overall asset management business, we would have a large exposure to a global fixed income franchise. And so, rather than answering your question from a geographic perspective, I would say that we're more focused through both team hires and potential acquisition opportunities on building our exposure in the equity area.

Great. Thanks, George and Gord. I really appreciated the reference to the Eagles.

Peter Routledge from National Bank Financial.

Gord, coming back to page 6, and just following on from the last question, it sounds like a big transformational acquisition is probably less likely, just given the environment. And I look at page 6 and I see a revenue mix that's two-thirds weighted towards Canada. And the question I ask myself is can RBC, which is a premium-priced, or the premium-priced Canadian bank today, can you stay a premium-priced bank with that revenue mix, where you're weighted rather in a pronounced way towards Canada? It seems like solving that mix problem with acquisitions probably isn't something that can be expected. So, do investors risk a relative decline in RBC's valuation over the next five years? What's your response to that?

Firstly, I would say from an objective perspective, when you look at where we're growing globally, and where we're investing globally, the way I look at the business is that we would like to essentially have a mix which would be about 50% banking, 50% non-banking. And move towards roughly 50% Canada, 50% non-Canada in terms of our growth. Now, it may take us time to get there, but I think that would be a reasonable objective. And we're currently getting very strong growth in our international markets, in businesses like Capital Markets, Wealth Management is continuing -- has got very significant growth outlook for outside of Canada. And when you look at our new division of Treasury & Investor Services, again, a very good growth profile outside of the domestic marketplace.

Firstly, I would say that from a going-forward perspective, I think you'll continue to see that percentage come down, although also acknowledging the fact that our returns in Canada continue to be very strong. Our growth in Canada continues to be very strong. And it continues to be a very favorable market environment. So, to answer your question, absolutely, I think we can maintain that. Although I would also suggest that if you actually look at where we are today, we've lost -- we don't really trade at a significant premium multiple at least compared to the other Canadian banking institutions. So I think you will see that trend down.

In terms of the wild card, I would say that -- and I said this in the past -- the one thing away from Wealth Management that we continue to look at from a macro perspective is, given the fact that on the consumer and retail businesses in the United States, we have a relatively clean sheet of paper. We do think there is an opportunity to look at the US market from a different perspective. And certainly Dave has been spending a lot of time looking at the US system, the US payment systems. Has met with number of people in different areas of the payment system, not just the obvious financial services candidates. And so I wouldn't suggest that we don't think there is an opportunity for us to find interesting avenues of growth with respect to the US consumer and retail side, as well. Including leveraging our Internet bank as it exists today. We do have a fairly significant customer base and deposit base in the United States, although we don't have the branch network.

So there are still some pretty attractive opportunities, at least in our view, for us to conservatively continue to take advantage of our strength as a global FI to grow our international businesses. And as I say, when you look outside of our banking business, all of our businesses have pretty strong aspirational growth plans in terms of the non-domestic marketplace. And was said in a business like Capital Markets, we're bigger today in the United States than we are in Canada and that margin is growing. And we continue to see good opportunities going forward.

Is 50/50 viable over a five-year period?

I don't like to put -- then people zero in on where you are. I think that we would like to trend towards that level. And I think you'll get there, and from a timing perspective, depending very much on opportunity. And you don't want to be pressured into doing something to hit some sort of artificial target. But I think you'll see that trend move in that direction and that's probably a reasonable time frame.

Thank you.

Cheryl Pate from Morgan Stanley.

Appreciate the color that you gave on expenses already. But just wondering if we could drill down a little bit more specifically into Canadian Banking. And any color you can give in terms of specific initiatives to help manage down that efficiency ratio from around 45% this year, down to that low 40% target.

Sure. Thanks, Cheryl. It's Dave here. As Janice mentioned, there was some seasonality in our Q4 expense growth of 4%. As we look forward over the next year, we are certainly managing in an environment where we expect mid single-digit revenue growth. Therefore, we are very much targeting a 2.5% to 3% expense growth to drive positive operating leverage. As we look at the initiatives that we have to continue to manage, as Janice referenced, we've invested a significant amount of technology in our back office. You've heard of our retail credit transformation program. That will be coming online mid next year. That will allow us to automate an end-to-end back office capability, that will allow us to create a more efficient processing of our mortgage and consumer credit business as we roll out a number of products onto that platform over the coming years. So that has been one of our big investments that we're yet to realize the full benefit.

Having said that, on the journey we realized already some good savings from process change, pre-technology implementation. I think that's some of the benefits of pursuing these larger technology programs. We've done exceptional job of managing the efficiency of our sales network over the last three years. We've generated record growth, market-leading growth across our businesses, upwards of you've seen a 50% premium to our top competitors. And we continue to do that with largely the same employee base as we've had for the last year to two years. So we've moved people to higher efficiency areas of the country within markets, within branches as we drill down, trying to maximize the efficiency of our network. And then with the addition of Shoppers Drug Mart, ability to meet clients and non-clients in a third-party site in a very efficient way is exciting for us. And we're in the infancy of a long-term relationship with Shoppers and we're seeing some very good results. As we pointed out in Gord's comments, 85% of the Canadians that walk into a Shoppers Drug Mart outlet -- and they have, I think, almost 1,200 of them -- are not Royal Bank clients. And it's our brand and our employees that are in there greeting and meeting Canadians. So being able to extend your distribution power, Canada's number one distribution network, with a partnership like Shoppers in a very cost-effective way gives us confidence in being able to manage our efficiency going forward. So a combination of back office, front office is how we see reducing that efficiency ratio.

And just a quick follow-on, if I may. How do you think about investment spend in 2013 relative to 2012?

Certainly to manage that 2.5% to 3% NIE growth target we are looking at our investment profile very carefully. As Janice mentioned, our amortization of previous investments is creeping up. So we're looking at our discretionary spend and our long-term spend at the same time, and trying to manage both horizons. You can't invest only in the short term. You have to invest in the long term and you need a balanced approach to short and long investments. And we're looking at both. We're looking at long-term investments that create future drag, as well as Janice mentioned short-term investments in marketing and sales growth. And just trying to balance towards that positive operating leverage. And we constantly rebalance and it's a dynamic process within our divisions.

Sumit Malhotra from Macquarie.

First question is probably for some combination of Mark, Doug and Morten. When I think about the stability in Capital Markets revenue this year relative to the last two, it certainly seems like, at least in my mind, a good part of the global Capital Markets roll-out version 2.0, if I can call it that, is being led by the corporate loan book. And that's having a positive impact on investment banking, loan syndication, net interest income, things like that. Wonder if you can give us an idea -- and we can probably break some of this apart through your disclosure. But your corporate loan growth, how much of that is coming from outside of Canada? And do you think this introduces additional credit risk in the interim?

Okay. So why don't we start with the loan book. So in the supp, I think we started the year off with about CAD38 billion of drawn loans in the business and we ended the year at about CAD50 billion. Almost all of that loan book is in the US. So the number of names that we're lending to and the amount of lending we're doing in Canada has been fairly stable. There's been churn in that book but most of the growth is in the US. And I think the names, it's about 160 names, we've been putting on about 40 new names a quarter. And I think, as Morten said in his remarks, it's about 70% investment grade, 30% non-investment grade. So the loan book overall, and I think Gord's made reference to this a couple times over the last couple quarters, is a bit smaller than it was in the late 1990s. So we had a small loan book going into the 2007, 2008 period. And we certainly decided in 2008, if we were going to build out this investment bank, it was a good time to put credit on because spreads were good and the competitive environment was quite favorable.

The run rate from the loan book is now running CAD1 billion plus. So year-over-year, it's up. The run rate is up about CAD200 million. So that's adding a certain amount of stability. But, of course, the business that we're doing with those clients away from the lending is really getting some traction. If you look at the year-over-year revenue increase in Capital Markets, we've almost doubled our revenues from a year prior. Now, a year prior was a weak quarter. But there's no question, most of our revenue growth year-over-year has come in the US. And that's to the earlier question about what's the opportunity. A lot of these names that we put on we're now starting to get traction with because the bankers have been on the platform for three to five years. The name's been in the book for a few years. Now we're starting to see results. So we're pretty optimistic about where that's going to take us.

Sumit, I would also add to that. When you look purely at the trading numbers, within that we've had quite a significant shift of emphasis. Not just the reduction in market risk that you've seen over the last 12 to 18 months, but also in the type of business. As we've talked about on a number of occasions, we've moved to a much greater focus on origination. But it's origination, supporting sales and trading and supporting financing that's the complete package now for our clients. So we've had a significant focus on a business called Central Funding which in the more traditional sense is repos, stock loan, prime services. But that business really supports the origination and sales and trading business. And we've seen quite significant growth in that business, probably a 50% growth in Q4, this current quarter, versus a year ago. So it's really been a matter of putting stability into the business through changing its mix and focus and really supporting the clients more fully than just in a pure sales and trading sense.

Do you feel the ability to deploy corporate credit or offer corporate credit is a differentiator for this bank right now compared to some of the other global broker dealers? And that is the biggest factor behind the increased stability in Capital Markets revenue this year?

Sumit, it's Gord. The answer is absolutely. I would say that in this industry you don't get credit very often for what you didn't do. But between 2000 and 2007, we took our loan book in the US down dramatically because we weren't getting paid for it. The lending terms were loose and the ability to leverage it was low. And as a result, we find ourselves in a position with significant balance sheet capacity. And if you look at the actual size of our book, even relative to our Canadian competitors, it continues to remain quite small. If you look at individual statistics, one that I like is if you look at something like commercial real estate as a percentage of total assets, we're less than half the level of some of our even domestic, let alone international, competitors. So, to some degree, I think we've got balance sheet capacity because we're at such a reduced level.

But I would also emphasize that the discipline that I think we showed during that period clearly remains today. We're being very disciplined, because you can be. But we're being very disciplined to ensure that we are getting paid to lend money, that we're lending to customers that we're very comfortable with, both from a credit perspective but also from a relationship and from a leverage perspective going forward. And we're ensuring that we've got very significant broad diversification across our book and our industry sectors. So if you look at it from a timing perspective of where we were and where we are today, it clearly is -- it gives us an opportunity to leverage.

Just to add to Gord's comments. I think the other big shift is that we've doubled the number of bankers we have on the ground in the US. So that when it comes to -- and to Stan's comments -- we've got the capability now in debt capital markets, equity capital markets, loan syndications, to compete with anybody in that market. And the customers are responding. The origination -- the lending is in large part due to the fact that we've got a lot of good bankers on the ground.

Okay, Gord, just since you jumped in, I'll wrap it up here. When I think about your 18%-plus target for ROE, you've achieved that the last couple years even with the volatility that's being going on. I know you're not in the business of forecasting the future. But it certainly seems like we're in a very accommodating credit quality environment with your loan loss ratio around 35 basis points. Correct me if I'm wrong here. But unless you're forecasting a significant increase in loan losses, it's hard to see why your ROE would be less than 18% as we think about 2013, 2014. Am I incorrect in stating that? Or is there another lever that I might be missing?

As you say, we're not in the business of forecasting. But we do provide a mid-term objective and our mid-term objective is 18%-plus, in terms of ROE. So our mid-term objectives are based on our plans and our internal processes. I would just say your assumptions are certainly consistent with what our objectives are, which are built from the ground up.

Thanks for your time.

Michael Goldberg from Desjardins Securities.

I'm looking at slide 20 in the presentation in the appendix. If you left out the GICs from deposits, what would your market share be? And what's been the trend in this market share over, say, the past couple of years?

Yes, Mike. You're referring specifically to the personal core deposits in GIC line?

That's right. Leaving out GICs.

Actually our market share gain in the personal core deposit side has been much stronger than the market share gains in the GIC side. Our GIC book has been growing modestly after shrinking in the previous few years. The majority of our market share gains have come in personal core deposits and our personal savings accounts and not on the GIC line. That's driven by our very successful core deposit campaigns that we run year-round that you've seen in the marketplace. We call it Got It. Has been extremely successful. We opened a record number of new accounts again this year as Canadians continue to switch to our more convenient network. We've also been very successful on our high interest savings strategies, both in the branch channel and in the broker channel. Those are the key drivers of market share gain, not GIC.

Thank you.

Mario Mendonca from Canaccord Genuity.

I just want to revisit something in the annual report. There was a reference to the Volcker Rule and how, depending on how it's implemented, it could impact certain products. It's not so much that I thought the Volcker Rule was behind Royal. But I was a little surprised to see that there's still a reference to the Volcker Rule having an adverse effect and perhaps peeling away certain products. Could you address that?

Sure, Mario. It's still somewhat of a fluid situation. I think it's fair to say with everything that we're hearing that there will not be a reproposal of this regulation for additional public comment. All the comment that's been provided is what the regulators are now working on. We're expecting an issue of the final regulation sometime during the first quarter of 2013. And from what we're hearing, the Fed and the other banking agencies will ensure that the final regulation takes a more prudential approach than the proposed regulation that was issued back in October 2011.

Some of the things that a number of institutions have addressed we believe will be addressed. And particularly the issue around sovereign debt and the market making and trading of sovereign debt being treated in the same way that US debt is treated. From a purely proprietary perspective, that's really the remaining issue that we'll be working around. The proprietary trading business has been a very successful business for many years here. In terms of percentage of results it's been shrinking consistently. And you can see the shrinkage through market risk indicators such as VAR, et cetera. But when the final rule is out, we will be looking at it to determine how certain strategies that we're involved in, market making in both equity and fixed income, will be impacted. And there is the potential for some modest impact. But until the rule is out, it's very difficult to really comment on it. But we don't think in the long run it will be significant to the operation.

The other thing I would add is if there are areas where we pare back from, the issue is at what return do we redeploy that capital. And we're pretty comfortable that we can redeploy that capital at returns that are similar. So, as Mark said, it may have some impact, depending on how the rules are written. But we've got plan A, B and C to restructure around it. And I don't think it will be overly significant. But it may impact how we're structured in some of our businesses.

Just to be clear on this, then, I think what you're saying is if you exclude the sovereign debt, if you set that aside and we assume that that's addressed in the Bank's favor, then all the other things that could be coming down the pipeline, that's what you would call modest -- having a modest effect going forward? Is that a fair way to paraphrase what you said?

That's correct. And, as Gord said, we have spent a lot of time looking at different alternatives. We feel pretty comfortable that these alternatives will be attractive in the medium and long term. There may be some short-term transitional impacts. But we feel reasonably comfortable about what we're hearing at this point.

Thank you.

Mr. Reucassel.

For Dave McKay. Could you talk about the trend in new mortgage originations through the quarter and as you got towards the end of the quarter and where we're heading? And then maybe put that in a context of overall loan growth and the top line that you're thinking with narrower spreads. Maybe just give us an update on that.

I thought I was going to make it through without a mortgage question. I'm surprised it came at the end. Mortgage growth, as you saw in Q4, was strong. Home equity growth, just over 6%. We certainly are seeing the effect of the B20 rules come into effect. They vary across the country, obviously, with different sentiments towards buying a home, particularly first-time home buyers. I think obviously you'll see a slowing. I think the industry will still be positive. And you should expect, I think, roughly 3%, 4% growth the in the industry going forward. It's hard to predict that exactly. I think the range is widening.

We're not sure of the impact particularly on first-time home buyers, as you read in the paper, whether it's the broker industry talking about their slowing trends. We expect to outperform the marketplace, as we always have, and going forward at a 25% premium. So I think the market -- there's still demand out there. There's still people that need to buy homes. There's new immigrants coming into the marketplace. So there always is a base of new demand that comes in every year. You've seen housing starts slow by 10%. I think that's a pretty good approximation of a 10% to 15% to 20% slowing in the marketplace. But still positive. Still really good customers out there buying homes. And we expect growth going forward.

And on the spreads, Dave, what do you think? Is 2.74 a good number to think about or is there still pressure out there?

We have opposing forces in our business. We still are -- obviously the continued low rate environment as mortgages that were put on the book in 2008 and 2009 and 2010 come off, they're coming off at higher spreads and being reinvested at lower spreads. All banks have that reinvestment issue, that they're suppressing margins. On the other side, we've been very disciplined in our pricing strategies. I think our value propositions are strong. We're creating enormous value for Canadians through our convenience and through advice message. And we're able to command a stronger price in the marketplace. So that strategy, that consistent strategy, has played well for us. And, as we mentioned in our opening comments, we've had very strong growth in our commercial lending business and in our credit card business. Now, we're leading the market in growth in credit cards. And those are high-margin businesses that are helping offset some of the pressure on the mortgage side. When you put it all together, you're going to see, I think overall, again some modest compression in margins, continuing on what we've seen over the past year. But nothing significant.

Okay. Thanks, Dave. And thanks for squeezing me in, Gord.

No problem. Thank you very much for your question, John. And thank you, everybody, for joining on this call. Nice to have a day where we're the only bank presenting, which has been a problem the last couple of quarters. But we look forward to talking with everybody next quarter at our annual general meeting. So thank you very much.

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