Royal Bank of Canada (RY) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the RBC 2013 second-quarter results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Karen McCarthy, Director of Investor Relations. Please go ahead, Ms. McCarthy.

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 9.30 AM. To give everyone a chance to participate, please keep it to one question and then re-queue. We'll be posting management's remarks on our website shortly after the call. Joining us for your questions are George Lewis, Group Head - Wealth Management & Insurance; Doug McGregor, Chairman and Co-CEO Capital Markets and Co-Head of Investor and Treasury Services; Dave McKay, Group Head - Personal & Commercial Banking; Mark Standish, President and Co-CEO Capital Markets and Co-Head of Investor and Treasury Services; and Zabeen Hirji, Chief Human Resources Officer.

As noted on slide 2, our comments may contain forward-looking statements, which will involve applying assumptions, and have inherent risks and uncertainties. Actual results could differ materially from these statements.

I'll now turn the call over to Gord Nixon.

Thank you, Karen, and good morning everyone. I'm pleased to announce that RBC earned CAD1.9 billion in the second quarter, up 26% from last year. Excluding certain items pertaining to our acquisition and the integration of RBC Investor Services, which Janice will expand on in her remarks, our earnings were approximately CAD2 billion, up 13% from last year. And excluding amortization of intangibles, earnings per share were CAD1.31. We had solid earnings growth compared to last year across all of our business segments, with Canadian Banking and our corporate and investor banking and asset management businesses being particularly strong. But I would emphasize that all of our businesses were up.

Year-to-date, RBC has earned just over CAD4 billion, delivering return on equity of 19.1%. Our all-in common tier 1 equity remains strong at 9.1%. And that's notwithstanding the 45 basis point reduction as a result of Ally. That strong ratio gives us flexibility in deploying our capital, as we strive for the optimal balance between investing in our businesses for longer-term growth, and returning capital to our shareholders through dividends and share buybacks, which we started this past quarter. And as well as pursuing acquisitions like Ally.

The strength and complementary nature of our diversified business continues to contribute to our earning power. Even as the Canadian banking industry is facing slower growth, we remain confident in our ability to successfully execute on our strategy, extend our leadership position and invest for long-term growth. In fact, during the quarter we were recognized by Bloomberg in their annual list of the world's strongest banks. RBC was ranked the fourth strongest bank in the world, up two spots from last year.

Let me now turn to our business segments. Personal & Commercial Banking had a strong quarter, with earnings of CAD1.1 billion. Our momentum in Canadian Banking continues. Each of our businesses had solid volume growth compared to last year, as we continue to leverage our size and scale to take a disproportionate share of industry growth, while profitably gaining market share. And our integration of Ally is well underway. We are seeing good progress as we have retained over 95% of commercial clients since closing this deal. And our pipeline remains strong. These results reflect our ability to meet our customer needs with superior advice, convenience, service and value for money, even as market dynamics shift.

As we bring our advice and solutions to our clients precisely when and where they need them most, we remain focused on innovation through new partnerships, online features and mobile applications. As an example, we recently partnered with Bell to provide secure integrated mobile payment solutions for both debit and credit transactions. And with McDonald's, Moneris and BlackBerry to deliver the first Canadian mobile debit transaction using mobile Interac Flash. We expect both of these applications to be rolled out more broadly by the end of the year.

I'm also pleased to note that our innovative approach to meeting our clients' needs was recognized recently by Retail Banker International as we took the top spot for the first time in the highly competitive innovation and customer service category. And for the second consecutive year were awarded best retail bank in North America in recognition of the strength of our Canadian Banking operations, including the size, scale of our distribution network and breadth and quality of our product offerings.

In Caribbean Banking, while our performance improved this quarter, reflecting some signs of stabilization and credit quality, results do continue to reflect prolonged weak economic conditions in the region.

Turning to Wealth Management, we continue to see good momentum in both our Global Asset Management and Wealth Management businesses across most of our regions. And we delivered another solid quarter of earnings. In Global Asset Management, we remain the leader in mutual fund sales in Canada, capturing 23% of the market. And net flows strengthened in Canada, the US and BlueBay which benefited our institutional Asset Management business. RBC Wealth Management continued to gain market share. And as the largest full-service wealth manager, asset manager and mutual fund provider in Canada, remain the clear leader. We ranked first among bank-owned brokerage firms in Canada in Investment Executives Brokerage Report Card. And were recognized in Canada for best private banking services overall by Euromoney.

In the US, we continue to make good progress on increasing advisor productivity and efficiency to capitalize on improving market conditions. We were ranked the highest in investor satisfaction among all full-service brokerage firms according to JD Power & Associates. Internationally, we continue to expand our high and ultra-high net worth market share, and leverage our capabilities to win more business.

Moving to Insurance, we had another solid quarter of earnings. And this business continues to make consistent contribution to our diversified earnings stream.

In Investor & Treasury Services, we continue to make solid progress towards integrating RBC Investor Services, and strengthening the business model to adapt to the changing operating environment. While we continue to improve our efficiency and streamline our operations, we are also leveraging our reputation, brand and financial strength to win new clients and business. Our commitment to delivering superior service to our clients was once again recognized by the R&M Global Custody net survey where we recently won best overall custodian for the third year in a row. We also retained our title as Fund Administrator of the Year in Canada as part of the 2013 Custody Risk Americas Award.

Moving to Capital Markets, we continue to see strength in our Corporate & Investment Banking business as we remain focused on origination-led and client-based lending and fee-based activities in our target sector and geographies. Our diversification is key strength, and reflects what we believe is the right balance of business and geographies to derive growth while managing risk. Our US business now generates significantly more revenue than our Canadian business. And we continue to focus on building client relationships and increasing our market share. Our solid results in that market are helping offset the impact of the prolonged recession affecting many European countries, as well as some softness in commodity markets in Canada.

As an example of our strong momentum in the US, RBC acted as lead financial and technical advisor to SandRidge Energy, a US based oil and gas E&P company on the sale of its assets in the Permian Basin to US-based Sheridan Production Partners for $2.6 billion. This transaction represented the largest single on-shore conventional oil divestiture in the past 10 years. As part of this transaction, we also acted as lead arranger and joint book runner on the $1.7 billion five-year senior secured revolving credit facilities used to fund Sheridan's acquisition of SandRidge.

Turning to Global Markets, while we have shifted the balance from trading to more lending and traditional investment banking, and continue to realign our fixed income and global equities business to a more originated-led model, results can be impacted by changing markets, new regulations and slowing economies. While our second-quarter results are typically lower than the seasonally adjusted strong first quarter results, trading was particularly soft in the latter part of the quarter due to persistent weakness, particularly in Europe, and a reduction in market volatility, and some emerging regulatory reforms. But we have started to see trading volumes tick back up in May. And we seem to be off to a good start.

We remain focused on our originate-and-to-distribute model, and increasing our relevance to both issuing and investing clients to produce sustainable, fee-driven income streams. We're happy with our progress thus far. We've increased our global fee market share for our debt capital markets business by 38% from last year, according to Dealogic. And we have increased the number of book run deals in North America by 23% in the last six months.

To conclude, our results this quarter demonstrate our ability to extend our leadership position by successfully executing our strategic initiatives, and making focused investments that deliver long-term shareholder value. Looking ahead at the remainder of 2013, the industry will continue to face some economic and regulatory headwinds. However, we do remain confident in our ability to deliver solid results. And we are on track to meet our financial objectives.

With that, I'll turn it over to Morten.

Thank you, Gord. Starting with credit on slide 7, overall credit quality improved compared to the prior year and prior quarter. Provisions for credit losses on impaired loans were CAD288 million this quarter, down CAD61 million over the last quarter, or 6 basis points to 29 basis points. The main driver of this decrease was lower provisions in Capital Markets where provisions were CAD40 million, or 31 basis points, down CAD69 million compared to the prior quarter. Provisions this quarter related to a couple of accounts in the technology and media sector. Loan loss provisions within our wholesale portfolio should be expected to show some degree of variability from period to period. With this quarter's provisions falling at the better end of the range. Overall we remain comfortable with the quality of the wholesale loan book.

With respect to Canadian Banking, provisions were CAD234 million, up CAD21 million over last quarter, or 3 basis points to 29 basis points. We continue to see stable performance in our retail portfolios, with provisions on residential mortgages of 2 basis points and 279 basis points for cards. Provisions in our commercial portfolio were up slightly this quarter at 33 basis points. Overall, provisions of 29 basis points in our Canadian Banking portfolio remain near historic lows, reflecting very strong credit performance across all products.

In the Caribbean, provisions on impaired loans were CAD19 million, down from the prior quarter, which we believe represents a sustainable level of loan losses for this portfolio. Conditions in the Caribbean remain challenging. And achieving ongoing stability and asset quality will depend on improving economic conditions in the region. With respect to gross impaired loans, new formations increased slightly over last quarter, but remain within our historical range.

Turning to market risk, value at risk was CAD42 million, and average stressed VAR was CAD84 million, both at similar levels to last quarter. During the period, we had three days with net trading losses totaling CAD5 million, none of which exceeded market VAR, with the largest loss of CAD2 million driven by RBC's credit spread tightening.

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

Thanks, and good morning. Turning to slide 10, we had a strong second quarter, with earnings of approximately CAD1.9 billion. Excluding the restructuring charge in the current period related to the integration of Investor Services, and a loss in the prior year related to the acquisition of the remaining 50% interest in that business, earnings were close to CAD2 billion, up 13% over last year. Overall, it was a clean quarter. And as Gord mentioned, we had solid earnings growth in each of our business segments, with particular strength in Canadian Banking, as well as our Corporate & Investment Banking and Asset Management businesses.

Turning to capital, our capital discussion on slide 11, as you know, RBC along with five other big Canadian banks, was designated a domestic systemically important bank by OSFI. As a result, we're required to maintain 100 basis point capital buffer on top of the Basel III minimum common equity tier 1 ratio of 7% by 2016. At 9.1%, our common equity tier 1 ratio remains comfortably above the 8% combined requirement. Our Ally acquisition, which closed February 1, negatively impacted our ratio by 45 basis points. As well, we began repurchasing shares this quarter under our normal course issuer bid.

Turning to the performance of our business segments, starting on slide 12, Personal & Commercial Banking earned over CAD1 billion for the fourth consecutive quarter, up CAD117 million or 12% from last year. Reflecting 9% volume growth in Canadian Banking, with growth across all of our businesses, and particular strength in personal lending. Net income decreased CAD63 million or 6% sequentially, largely due to the negative impact of seasonal factors, including fewer days in the quarter.

Turning to our Canadian business, margins in Canadian Banking were down 5 basis points from last quarter, due to lower spreads, reflecting the continued low interest rate environment and competitive pressures, particularly in business lending. The Ally Canada acquisition negatively impacted our margins by approximately 1 basis point, primarily due to costs associated with the unwind of the deposits. We also experienced some accounting volatility this quarter, which negatively impacted our margins by approximately 2 basis points. Of the 5 basis point decline, about 50% is not recurring. As I mentioned on our last quarterly call, we expect margins to remain under pressure for the remainder of 2013, given the interest rate environment, slowing consumer lending and competitive pressures.

Let me briefly comment on Ally Canada. Ally contributed earnings of CAD12 million this quarter, or CAD24 million when you exclude the CAD12 million of integration costs and amortization of intangibles. Integration of the business is proceeding well. And we continue to expect that it will generate earnings of around CAD120 million on a standalone basis, excluding integration activities, within the first 12 months after closing. Our reported operating leverage and efficiency ratio were 0.7% and 45%, respectively. Excluding the impact of the Ally Canada acquisition, our operating leverage was 1.8%, driven by solid revenue growth and continued benefits from our cost initiatives. On the same basis, our efficiency ratio was 44.6%, down 70 basis points from last year. And we remain committed to driving the ratio down to the low 40%s in the medium term.

Turning to Wealth Management on slide 13. Net income was CAD225 million, up CAD13 million or 6% from last year, due to higher average fee-based client assets, resulting from net sales and capital appreciation and improved transaction volume. Sequentially, net income was down CAD8 million or 3%, as higher average fee-based client assets this quarter were more than offset by the seasonality of performance fees earned in the first quarter. As a reminder, we typically recognize performance fees in the first and third quarter.

Moving to Insurance on slide 14. Net income of CAD166 million was up CAD15 million or 10% over last year, driven primarily by a favorable change in actuarial adjustments, investment gains and favorable life experience. Compared to the prior quarter, results were relatively flat.

Turning to Investor & Treasury Services on slide 15, earnings were CAD67 million this quarter compared to a net loss of CAD121 million a year ago. Excluding the restructuring charge in the current quarter related to the integration of Investor Services, primarily in Europe, and the related acquisition loss in the prior year as noted on slide 15, earnings were CAD98 million, an increase of 21% over last year. And were up 23% over last quarter. Earnings grew over both periods, reflecting improved results in Investor Services, as we benefited from ongoing cost management activities, higher foreign exchange revenue and higher fee-based client assets. Our results were partially offset by lower funding and liquidity revenue. As Gord mentioned, our Investor Services integration efforts are well underway. And as the majority of our integration costs occurred this quarter, we anticipate these costs to decline for the remainder of 2013.

Turning to Capital Markets on slide 16, earnings of CAD386 million were up CAD15 million or 4% from last year, driven by strong growth in our Corporate & Investment Banking businesses, particularly in loan syndication and lending in the US. This strong performance was largely offset by lower fixed income trading in Europe, particularly in the latter part of the quarter, driven by challenging market conditions. Compared to last quarter, net income was down CAD78 million or 17%, mainly due to lower fixed income trading results, driven by challenging market conditions and a seasonally strong first quarter. While our Corporate & Investment Banking results were solid, they were not as strong as the robust levels we saw last quarter, when we closed a number of large M&A and loan syndication deals.

To wrap up, we're very pleased with our performance this quarter. Every business segment grew earnings compared to last year, demonstrating the continued strength of our diversified business model. At this point, I'll turn the call over to the operator to begin Q&A. Please limit yourself to one question and then re-queue so that everyone has an opportunity to participate. Operator?

(Operator Instructions)

John Aiken of Barclays.

Good morning. Janice, a couple quick questions on the Personal & Commercial margins. Can you give us a little more context about the accounting volatility that you mentioned? And in the Caribbean, can you give us some flavor as to what's going on with the margin compression there? It looks to be fairly significant this quarter. And should we look at that in context with the improving provision for credit losses coming out of the region?

Thanks for the question, John. I'll first address the margins in Canadian Banking. The accounting volatility that we're talking about is on cash flow hedging. And it's basically with respect to our mortgage book. It is basis risk that we were exposed to. And going forward we don't see that happening. So it was a one-time adjustment that we have. When you look at the issue with respect to Ally, it is about the deposits, and some of the high cost deposits and the wind-down of that business. So when you look at what we're looking at in terms of margin compression, we've always signaled that there would be around a 2 basis point compression as we went through the year, because of what was happening with interest rates. So I think that we are on where we thought we would be with respect to the margins.

John, it's Dave On the Caribbean, you're seeing a similar core impact on a lower rate environment in the Caribbean, with the struggling economies and the interest rate environments, and the rollover of our loans into lower yields in general. So, a very similar type of impact in the Caribbean right now.

Dave, in the Caribbean, though, when you're rolling over those loans, as we're seeing the provisions decline, are you moving back on the risk? Or is this purely just the environment in terms of low-risk environment and what you actually can charge in the region?

That's a great question. I would say, yes, we are moving back on the risk as we've cleaned up our book and taken charges over the last four to six quarters, as you've seen. Certainly our risk appetite is one of caution on the commercial side, given the challenges in the economies right now.

Great. Thank you very much.

Robert Sedran of CIBC.

It's a question for Morten. We've seen credit card loss rates at some of your competitors this quarter actually come down, albeit from higher levels. And I'm wondering if the increase in your credit card loss rate this quarter is just related to seasonality. And perhaps what your thoughts are about the direction of these loss rates overall. Are we basically at trough levels and are just going to bounce around a little bit? Or is there some kind of trend still taking place?

I'll start and Dave may want to fill in. Certainly there is a seasonal feature to this. But from a risk management perspective, I would say that having the cards portfolio perform at loss rates below 300 basis points is a good place to be in this part of the cycle. And I would say, seeing the levels, that 279 basis points, while it's up a bit from last quarter, it still reflects very strong performance. And I would see it bouncing around at those levels if the economic conditions remain where they are.

All I would add is that we have very strong origination growth. So, normally cards exhibit a little bit higher rate the first year they're on the books, that first year of vintage. So a little bit of the strong acquisition trend we're on. But as Morten said, the absolute rates of the card portfolio, given that yields are in the 11%, 12%, is a very profitable place to be. So no concerns there whatsoever.

Thank you.

Peter Routledge of National Bank Financial.

Quick question for starters on page 22. You give the average LTV of 47%. I'll make an assumption that that is an average LTV weighted by property value. One of your peers disclosed the LTV if it was weighted by mortgage balance. It's quite a bit higher when you weight it by mortgage balance, at least for one of your peers. Would it be 5 to 10 percentage points higher if you weighted by mortgage balance?

Peter, it's Janice speaking. We'll have to go back and confirm that particular metric. We'll try to get some information during the call, so why don't we get back to you on that.

No problem. And just on mortgages, there's been a lot of rhetoric about putback risk in some corners. And the risk being, there would be systemic putbacks by CMHC to the banks, and therefore you'd have higher mortgage losses than historic norms. And the trigger often cited is just faulty appraisals. Is there any reason to think that there is a systemic issue with appraisals that might redound on the banks in the form of the CMHC refusing claims? How likely an outcome is that?

One, most of the banks, including ourselves, use the [AMLI] appraisal service which is CMHC's own appraisal, as they would do their own due diligence with AMLI. So, I don't think it would be the nature of the appraisal service. I think where operational risk evolves is the representation of the facts. If they were to go back to the loan application and find that the facts on income or on rental versus costs, other costs are different than what was presented during the adjudication process, then I think you have technically an opportunity to negate the claim. But I don't think it's just on how you use the appraisal. It's really the adjudication process that would create most of the operating risk. Which is why our bank, including, I'm assuming, most others, are very careful about our facts that are being submitted and how we put those applications together.

I would just reiterate, I think that in summary the likelihood of that is almost non-existent.

Thanks. And just to clarify, the AMLI system, that's a technology service that CMHC generates revenue from, right?

Right. Which I would assume they use for their own appraisals. They make their own adjudication decisions themselves.

Thanks for that. I appreciate it.

Peter, it's Morten. Just in terms of the use of AMLI, it is one of several tools that we use. Depending on the property we have, full appraisal or -- AMLI is a supplemental tool that we use in the appraisal process. To reiterate Dave's point, the risk around refusal on the insurance all relates to the accuracy of the documentation that we provide. We have ongoing audits and reviews with CMHC, and our track record with them is extremely strong. So the point on the risk of putback here, first of all, would be completely inconsistent with our historical experience with them. And as Gord is saying, I think it's an extreme tail risk where they obviously as an insurer have some ability to dispute claims. But I think our track record on accurate documentation is pretty strong.

Thank you very much.

John Reucassel of BMO Capital Markets.

Thank you. A question for Mark, just on trading. Gord mentioned that trading has picked up since quarter end. Could you just give some flavor on, is that because volatility has picked up? Were you missing something on client flow? Or is client flow picking up? And then just on the regulatory issues in Europe, do you expect Europe to respond to how the US has imposed stricter rules on foreign subs? If so, is it prudent to expect that? If not, why not and how does that impact Royal's European business there?

Thanks, John. I'll handle the market question first. I'd refer you to page 33 of the report to shareholders where you can see the revenue and VAR chart. And you can see there that the second half of the quarter was very quiet, indeed. As we mentioned, Europe was extremely quiet. We basically didn't make any money there. But also the rates business in the US was also quite quiet. One of the reasons for that is we had the US 10 year down at 1.63%. And when down there, there was very little secondary activity. On the positive side, however, we did see very good debt capital markets, DCM activity. Corporate bond issuance in the US now accounts for about 45% of our global DCM revenue. Two years ago it would have been 25%.

Now, what's different with that than usual is, at such low rates, we were advising clients to issue fixed debt and not to swap back to floating. So we didn't get that additional secondary, a lot of that additional secondary flow activity that we would normally see. Now, coming into May, as Gord mentioned, we've had a pickup in volatility and rates. We've had a 60 basis point increase in 10-year US governments. We've had a lot of volatility in other markets, Japan in particular. So now we've seen certainly a pickup in secondary flow. Other products performed quite well through the quarter. Foreign exchange, credit and municipal products performed quite well. And I think, as Gord said, May is off to a fairly strong start. In terms of the --?

In terms of the European question.

Yes. It's hard to know which is the chicken and which is the egg. The UK was the first to introduce Vickers, which was their form of ring fencing. And obviously now with the potential legislation with respect to FBO in the United States, you're seeing some of that, obviously, in the US. I think from our perspective, we would be more focused on how the US is going to unfold rather than UK. I don't think it will have much of an impact or much change with respect to the UK. And certainly the nature of our operations in the UK because it's primarily capital markets and wealth management. So, to answer your question specifically, with respect to the UK we don't think it will have much of an impact but we're obviously watching the US very closely in terms of how the rules may unfold with respect to subsidiary regulation in the United States. And we're quite comfortable in terms of our ability to manage that, as we've said in past quarters, but it will obviously have an impact on structure.

But, John, it is definitely weighing on activity levels in Europe, all of this regulatory uncertainty. And now you can add to that, given the results in the UK and the strength of UKEP with respect to exiting Europe for the UK, that added uncertainty in there that the market has to deal with. And it's probably not going to improve much in the short term either.

Okay. Thank you.

Michael Goldberg of Desjardins Securities.

Thank you. I want to follow up on a question I had last quarter, and that relates to Ally. At the end of January, the personal demand and notice deposits in res-mor were just under CAD1.6 billion. And the latest number is about CAD630 million. So you've lost about 60% of those deposits. My question is, why didn't you just sell the deposit business? I know this isn't a significant -- these numbers aren't significant -- but it would seem to me that getting something would have been better than getting nothing.

Yes, it's Dave here. The piece that you're not seeing is that we've been able to retain a significant number, amount of those deposits in our traditional business. So, while those high-interest savings accounts migrated from 180 basis points to 120, we were able to migrate many of those balances over to our own high interest savings account. On the GIC side, we've been in the market with offers to our Ally clients, very attractive offers, and we retained a significant margin of those clients. So, we felt it was much more economical to retain that business in RBC product than to try to go through an extraction and sale of res-mor which would have been extremely costly. And our retention numbers bear that out.

How much of that CAD900 million in the first two months would have moved over to RBC?

We've retained, I would say, between 70% and 75% of total HISA and GIC balances. So as you look at those decline in balances, take 75% of the delta and they would have moved over to RBC. The additional benefit of this is we've had really broad conversations with those deposit customers. And we've been extremely successful in broadening our relationship on the investment side at the same time as we put our best investment retirement planners in front of that client base. And we've seen significant investment cross-sell in addition to retaining over 70% of the GIC and HISA balances. So, overall I think the strategy to retain that business through organic channels has been very good for us.

Okay. I'll re-queue for another one.

Stefan Nedialkov of Citigroup.

Hi. Good morning, it's Stefan Nedialkov from Citi. I had a question on the insurance business. It's quite a volatile P&L this quarter. It looks like investment income was quite strong. But, of course, the disability benefits were much higher, as well. Some of your peers are also taking charges for low interest rates. Could you just give us a sense of how the P&L is likely to evolve over the rest of the year? Should we be expecting high investment income being offset by -- being matched by higher benefits? Or is this really just a one-off type of performance?

Sure. Thanks, Stefan. Do you want to take that?

Stefan, why don't I, first of all, take you through some of the accounting where, for some of the life policies that we have, of course we increased the revenue. And then the policyholder claim is the contra or offset. So those two lines, we actually look at them together and look at the net number. And George will take you through some of the business color, but there is that nuance on the insurance business. And that's why, when you look at our metrics, we're always saying what a metric is without that in terms of revenue growth. And the policyholder benefits, claims and acquisition, some of that reflects the policies that are owned by our policyholders, where we pick up the volatilities or the mark in the revenue and the claims line. So I think that, if you look at the net income overall, that's the best way to look at the business going forward. So George, would you like to talk about that?

Yes, just to build on that, I think what you're seeing is actually, from an earnings point of view and a net revenue point of view, really a lack of volatility that Janice just outlined. And I think overall for the quarter it was a fairly solid quarter. And one that I think reflects the run rate from the business. The only thing I would point out from here going forward through the balance of the year is that we did not benefit in the first half in insurance from any new UK annuity contracts. And that's the business where we take on longevity risk as pension plans are immunized. And that is a source of upside, I would say, for the second half, beyond what you're seeing in the quarterly run rate in Q2.

And the one thing I would also add is, with respect to interest rates, we spent a lot of time neutralizing the business over the past seven or eight years for the volatility of interest rates. So, of course, lower interest rates will have an impact on the valuation of the liability. But we have put a lot of rigor around asset liability management in insurance. So you would have seen over the past few quarters where comparable insurance companies have had way more volatility than we have, because of the rigor we put around managing our assets and liabilities. And we started that about seven or eight years ago.

Okay. Great. Very clear. Thank you very much.

Mario Mendonca of Canaccord Genuity.

One quick question on the domestic. I want to make sure I understand what you mean by 50% of the deterioration in NIM being non-recurring. Does that mean that you get, all things held constant, you'd get a 2, call it 2.5 basis point lift in the NIM next quarter? Or are you just saying that that just won't re-occur?

We're saying -- Mario, it's Janice -- we're saying that that won't re-occur. So, when you're measuring NIM, it depends on where you are quarter over quarter or year over year. But we are seeing that our expectation, given the low interest rate environment, is about a 1 to 2 basis point decline per quarter as we move to the end of the year, just because of our asset portfolios, of course, running off, and the repricing that's occurred in the market. And it has to do with actual runoff in duration. So we've always signaled that that would happen over the course of the year.

And just real quickly, on the reference that you were making to the regulatory issues impacting your trading revenue, what message are you trying to send us? That if everything were precisely the same next year as it is this year -- and I know that's not really possible -- but if everything were the same except for the changes in regulatory, how much of your business would be impacted by the change in the regulatory changes?

I think you've got to look at that, Mario, by geography. In terms of Canada, which performed quite well in the quarter, it's steady as she goes. In terms of the US, while there is a lot of uncertainty, the only thing that really is looming for us is the Volcker rule, and we don't have the final rule to look at yet. So it is still tough to comment on that. So the question, I think, really comes back down to Europe, which is where we've struggled for some time now, given the uncertainty from a credit perspective around sovereigns and not just corporates. I certainly think in the short term we'll see some sort of improvement there. We've seen that as we come into May as volumes have picked up. But from a headline number perspective, I think what we've talked about in the past is still good. I think you'll just see more of it come from the US and more of it's going to be linked to activity in debt capital markets and less of it coming to Europe. But the jury's still out in terms of what we've got to do going forward there.

Thank you.

Gabriel Dechaine of Credit Suisse.

I also have a follow-up from last quarter. Mortgage risk weights in Canada -- you're the only bank that actually focuses on the mortgages. You don't lump in HELOCs in the exposure. I estimate for Canada -- so I have to strip out the Caribbean mortgages -- there's about a 6% risk weighting on the Canadian uninsured mortgages. It's at odds with what Julie Dickson was saying about Canadian mortgage risk weights -- uninsured mortgage risk weights in the mid teens. I'm wondering if you can shed some light on the discrepancies between what I'm seeing and what she's seeing, perhaps. Then, also, in your commercial loan book in Canada, you've got CAD16.8 billion of real estate-related loans. The growth there has been pretty substantial, like other banks. I'm just wondering if you can break down what components are in that CAD16.8 billion -- REITs, commercial mortgages, development, apartment buildings, whatever. Thanks.

Doug, you go first.

Okay. In terms of the mortgage activity, what we have been doing is we've been making some larger-drawn loans against commercial real estate. And they're to primarily REIT customers where we're very active. We're the market leader there. And it's all against large office buildings and shopping centers for public REITs and some of the pension funds. For instance, OMERS. It's a concerted effort, really, to take reasonable loan to values, certainly under 70%, against high quality properties at spreads that we find attractive.

Most of that growth has been coming from REITs. I've seen your --.

Most of it.

In terms of -- that's the Canadian book. In the US, we lend to about 50 REITs. We have a fairly significant real estate practice which is ramping up quite nicely. We've got a full research capability. And so we have been lending again to the REITs and some of the private equity funds. Two that come to mind are Lone Star and Blackstone which we think are probably the market leaders. And we've done significant business with both in the US and Europe over the last 18 months.

What's the CAD16.8 billion, REITs versus other stuff? You can maybe get back to me on that?

It's Gabriel, Dave. [sic - It's Dave, Gabriel.] In Canada, our commercial real estate book on the P&CB side is around CAD13 billion. And that is largely developer risk -- high-rise condo, mid-rise condo, some single family home. We've been doing that for decades, as you know. The growth in that portfolio is not disproportionate to the growth in the overall commercial portfolio of 9%. Some of the characteristics that we're seeing in the commercial real estate development side are longer time to get to pre-sales. As you know, 80% pre-sale. Some projects are slowing down. So, a general slowing but still relatively good demand on the developer side. But not disproportionate growth to the overall commercial portfolio.

Thank you very much. And on the mortgage risk weights?

On the mortgage risk weights, we probably will need to get back to you on the detail. The average is 5%. Which is heavily weighted by the fact that the predominant part of our book is in Canada. I can't comment on Julie Dickson's comments. But if you look at the loss rates in our supplementals, you'll see that the loss rates suggest a risk weighting of lower than what we have on the book. But on the details, we'll have to get back to you.

It's a bit unfair to single you out because your peers actually lump in HELOCs which make the risk weights look higher and it's not a fair comparison. But anyway, if you could get back to me, that would be great. Thanks.

(Operator Instructions)

Sumit Malhotra of Macquarie Capital Markets.

Let's start in Canadian Banking for Dave McKay. Your credit cards' growth has been amongst the best in the industry over the last year. You've been one of the only banks that's actually been growing it. And this quarter we saw a decent sized pullback of CAD400 million. Anything you can point to on that side, whether that was driven by customers or whether that was an initiative that the Bank is looking at, given consumer debt levels in Canada?

Hi, it's Dave. No, we're very happy with the growth in our portfolio. It's a combination of the acquisition of the Shoppers Drug Mart portfolio from MBNA and good growth in that portfolio. Very strong growth in our core platforms such as Avion, good acquisition growth overall which I referenced in earlier comments. So the growth is strong. The pullback is more seasonal than anything. You always see very strong growth in Q1 because purchase spend is high, and then revolve rates go a little bit higher in Q1. So you see a bit of a seasonal pullback. But there is no change in risk strategy, appetite or outlook. We are bullish on credit cards and spend. We're leading the market in spend. We have new products. The Target co-brand coming to market -- is in market now, and we have high hopes for that. So we're looking to this sector and this product to continue to drive our business. And it's the leading growth business that we have right now at 20% year over year. So we're very happy with our credit card business.

Dave, you're right. As I go a little bit further back in the file here, it seems to always dip from Q1 to Q2. So thanks for that. And if I just stay with you on the same product, we were on another call an hour ago and there was a lot of talk about the future of the travel credit card market in Canada. At least from my seat it seems like you're pretty well positioned if a particular product would change hands. Can you talk a little bit about your competitive positioning and perhaps your competitive response as potentially one of the bigger competitors may be changing hands?

We do believe in the Avion product. We have the best product in the market. That's what customers are telling us. It is a very large portfolio. And with the WestJet co-brand product right beside it, we do believe that if there's any disruption in the marketplace it will create customers to re-evaluate their credit card and their value proposition. And that point of re-evaluation is a point of significant opportunity for us to present our solutions to a large number of Canadians who might not consider them otherwise. So, from that perspective, with Avion, WestJet and our co-brand portfolio, disruption is good for RBC.

And one point of clarification and I'll leave it there. On your share repurchase program, you're approved for 30 million shares. This quarter you repurchased 2.1 million. Is the level this quarter, the amount you're comfortable in using as a run rate or is this something we should expect the Bank to step up given where your capital position is?

Hi, Sumit, it's Janice. We started the program later on in the quarter because we felt that we were at optimal capital levels. So we will continue to execute on the programs. So it's a matter of timing last quarter because we didn't start it until the third month of the quarter.

We felt it was important to absorb the Ally capital.

Absolutely.

And we've earned the bulk of that back now.

I don't know where we are in the queue here, Janice. Do I have time for one more or should I jump back in?

I don't think there is a queue so you better go.

Okay. So, very quickly -- it's for George Lewis and wealth management. Surprised to see wealth revenue flat quarter over quarter on what looked like a month or a quarter of very good sales in Canada, and obviously a very strong market in the US. Particularly with your US wealth management operations, I've always thought of those as being more transaction oriented. So can you help us understand why revenue was basically unchanged sequentially despite what looked like some pretty good operating trends or operating backdrop?

Sure. Thanks, Sumit. I think it's a couple things to highlight. One would be, it is a quarter with fewer days And so our fee-based assets are done on that basis. So Q2 over Q1, much like Canadian Banking, is always a little bit down in terms of revenue. The second thing would be, we did have performance revenue that's Janice highlighted in the first quarter. And that's through our BlueBay business. And that was a significant revenue item in the first quarter that didn't recur in the second quarter. So the underlying volume trends, to your point, are very encouraging. Year over year, our assets, AUM is up 15%, our AUA is up 8%. Apart from those two factors influencing the quarter over quarter, I was very pleased with our revenue growth. And we're setting up, I think, for much better year-over-year comparisons for the second half given the trends that we're seeing in the business.

So those performance fees for BlueBay, I think it's mentioned in the literature that they get booked in Q1 and Q3. Are you in a position to tell us how much that added last quarter? So how much the sequential increase would have been ex of that?

What I can say is that they're recorded in the first and third quarters. The bulk of them are recorded in the first quarter. So Q3 is not as large an impact in terms of as they were in Q1. But it was a significant impact for our asset management business in the first quarter. Having said that, the second quarter revenue continued to increase in that business, as well.

Thanks for your time.

Thank you. There are no further questions at this time. I'd like to turn the meeting back to Mr. Nixon.

Thank you very much, operator. I'd like to thank everyone for joining us again on this call. And we look forward to presenting to you again next quarter. Have a good day.

Thank you. The conference is now ended. Please disconnect your lines at this time. And we thank you for your participation.