Royal Bank of Canada (RY) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the RBC 2013 fourth-quarter results conference call.

I would now like to turn the meeting over to Ms. Karen McCarthy, Director of Investor Relations. Please go ahead, Ms. McCarthy.

Good morning. Thank you for joining us. Presenting to you this morning are: Gord Nixon, President and CEO; Dave McKay, Group Head, Personal and Commercial Banking; Morten Friis, Chief Risk Officer; and Janice Fukakusa, CAO and CFO.

Following their comments, we will open the call for questions from analysts. The call will be approximately one hour long, and will end just before 9:30. To give everyone a chance to participate, please keep it to one question and then requeue. We'll be posting management's remarks on our website shortly after the call.

Joining us on the call: George Lewis, Wealth Management and Insurance; Doug McGregor, Capital Markets and Investor and Treasury Services; Mark Standish, Capital Markets, and Investor and Treasury Services; Zabeen Hirji, Chief Human Resource Officer; and Mark Hughes, Deputy Chief Risk Officer.

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

I will now turn the call over to Gord Nixon.

Thank you, Karen, and good morning, everyone. As you've seen in the press release issued early this morning, we announced that I will be retiring on August 1, 2014, after 13 years as CEO. You will also have read that Dave McKay will take on the role of President at our annual meeting on February 26, and will assume the role of President and CEO on August 1, 2014. I can't tell you how delighted I am by this announcement.

Many of you on the call know Dave well. In my opinion, he is one of the best retail bankers in the world, and has been recognized as such. He's universally supported and respected across our Organization. In addition, his risk management and international corporate banking experience round him out nicely. Dave is a strong leader, an innovator, he is client focused and collaborative, and like me, believes our employees are the core of this great Organization.

So let me turn to the obvious question: Why now? I think the time is right for a transition. When I retire, I will have been CEO for over 13 years. I'm very proud of what we have accomplished, but feel it is a great time to look to the future and build for the longer term.

When we presented our five-year strategy to the Board this Summer, it was clear to me that someone else should take the lead, as they would ultimately have the accountability for its performance. Dave just turned 50. He's at the right age, and stage of his career, to hopefully have a good 10-year run at leading this incredible Organization. Dave has earned the opportunity, and he has the full support of our management team, which is fully committed, and has never been stronger.

I'd just like to remind people that Bruce Ross will be joining our management team. He is one of the most highly seasoned, global technology executives in the world. He'll be joining in a few weeks as Group Head of Technology and Operations. We're excited to have him on board.

Over the past decade, our earnings and market shares have grown, both in Canada and internationally. We have a diversified business mix that continues to deliver sustained shareholder value, as was evidenced this quarter. We have a strong brand and culture. Our culture of inclusion makes this a great place to work, where all employees have the opportunity to succeed. I am very proud of our employees, who put their clients first, and work together to bring out the best of RBC.

There's no question that, as an organization, we are poised for success and continued strong performance. All of our businesses ended this year in good shape, with strong momentum and solid growth plans. So while I'm excited about continuing to lead the Organization into 2014, I do believe that succession is one of my primary responsibilities, and I feel it is the right time to pass the baton to the next leader to take this great Organization to the next level.

Before I conclude, I'd also like to thank Mark Standish for his contributions over the last 18 years. Mark has made a significant contribution in building the Business globally, particularly in the US, through some of the most challenging market conditions in recent memory. Mark provided strong leadership in growing the RBC brand in New York, which has helped attract and retain new talent and clients. Part of that successful brand building was a result of Mark's personal commitment to make a difference in the community through his volunteer board memberships and other activities. So on behalf of the Board and my colleagues, we look forward to working with Mark over the next several months as he works with some of our trading businesses to facilitate transition under the changing regulatory regime in the US.

I'd also like to congratulate Doug McGregor, who's assuming the role as Chair and Chief Executive Officer of RBC Capital Markets, and Group Head of both Capital Markets, and Investor and Treasury Services. Doug has helped capital markets, and investor and treasury services, grow in the face of economic and market uncertainties, an evolving regulatory environment. I know that he will continue to be a positive force for change. Doug has led the expansion and rebalancing of capital markets, where a greater portion of our earnings are now derived from corporate and investment banking, origination fees, and client-based activities in our trading businesses, and this was evidenced again this quarter.

His strong leadership, deep knowledge of the Business, and client focus will continue to serve RBC exceptionally well into the future. I'm looking forward to continuing to lead group executive over the next eight months. I will be working closely with Dave to ensure a smooth transition.

So before I turn to our record results that we delivered, I'd like to ask Dave to say a few words. I'm happy to come back to these issues during the Q&A. Dave?

Thank you for your kind words, Gord. Let me start by saying how honored I am by the confidence the Board has placed in me to take over the stewardship of this incredible Organization. It is an exciting time to be asked to take on the role of President, and then CEO. As Gord said, we have tremendous momentum. Momentum that I think is created not only by the success of our diversified business mix, but also by our 79,000 employees who are focused on our clients, and deliver on our brand and our values each and every day.

I'd like to take a minute to thank Gord for his ongoing support and guidance throughout my career. He's played a very important role in providing me with development opportunities. He has set a high standard for me and all the senior executives to follow.

Let me close by saying that I'm excited not only about this new challenge, but also by the fact that I will continue to work with an excellent senior leadership team. I believe that, together, we can continue to build on our great success to date. Thanks.

Thank you, Dave. Now, to the more important matter of the morning, which is our record results for 2013. As you've seen, we reported net income of CAD8.4 billion, which was up 12% from last year. We delivered return on equity of over 19%, and our all-in common equity tier 1 ratio remains strong at 9.6%. We achieved all of our financial performance objectives for the year.

Our results were underpinned by the strength and diversity of our businesses, led by record performances in personal and commercial banking, wealth management and capital markets. During the year, we launched new products and partnerships, won new clients and gained market share in our key Canadian and global businesses, all while increasing efficiencies.

Looking at the fourth quarter, we delivered earnings of CAD2.1 billion, up 11% from last year. Our fourth-quarter results were driven by strong growth in our corporate and investment banking businesses, solid volume growth in Canadian banking, higher average fee-based client assets in wealth management, and improved business performance in investor and treasury services. We did have a charge, as was reported a couple of weeks ago, in our insurance segment, which had an impact, but we also had a favorable tax adjustment this quarter related to prior periods, both of which Janice will discuss in her remarks.

Turning to our business segments, I will provide an overview of our annual segment performance, and following, Morten and Janice will comment more fully on our fourth-quarter results. Starting with personal and commercial banking, our Canadian banking business delivered record earnings of over CAD4.4 billion, up 9% from last year, reflecting solid volume growth across all businesses, improved credit quality, and our ongoing focus on efficiency and management activities. Our Canadian banking fourth-quarter earnings were CAD1.1 billion, up 7% from a year ago.

We closed our acquisition of Ally Canada back in February, and completed the integration of this business this quarter. Overall, we are very pleased with Ally's performance, which has exceeded our objectives. The timing of this acquisition could not have been better. It not only gave us the leading market position in auto financing, but enabled us to take advantage of growing market trends.

Across all other key product categories, we continue to be a market leader, with either number-one or -two market share. Our results clearly reflect our ability to leverage our size and scale to take a disproportionate share of industry growth at least a 25% premium to the market over the last few years, which, as you know, is our objective.

In personal financial services, we saw solid volume growth, reflecting the unparalleled size and scale of our multi-channel distribution network, which allows us to reach more clients when and how they want. The breadth and quality of our product offering allowed us to grow faster than our peers, and we are also delivering innovative and differentiated products and services to capture a greater share of key high-growth client segments such as retirees, business owners and newcomers to Canada, a key priority for us.

In addition, RBC has a proven ability to cross-sell more effectively. We led the industry with close to 22% of our clients having at least three products or services with us -- checking, investments and lending -- compared to a peer average of 14%. This year, we were recognized, for the 2nd consecutive year, as the Best Retail Bank in North America by Retail Banker International.

As well, our business financial services business was recently recognized as the Best Commercial Bank by World Finance. We have the leading commercial franchise with unparalleled industry specialization, and the largest sales force in the industry. We continue to expand our sales force, and strengthen our product and service offering, including enhancing our mobile capabilities for business.

In cards and payment solutions, we have an extensive cards portfolio, and grew both transaction volumes and loan balances this year. We pride ourselves on our long-standing relationships with our clients. They appreciate that we are constantly innovating, enhancing our cards portfolio, including entering into key partnerships this year with Target and WestJet. We are also at the forefront of emerging payments and mobile technologies, and in the last few months we announced a number of innovations in this space, including the first cloud-based secure mobile payment solution in Canada.

While growing volumes in Canadian banking is a priority, we are also committed to improving efficiency and productivity, particularly as we face a slower growth environment. For example, in early 2014 we will be launching a new mortgage origination system that automates and simplifies the end-to-end mortgage process to improve client response time. As you're aware, we've been working on this for quite some time. Our efficiency ratio of 44.5% leads the industry, and we expect to continue to drive this ratio to the low-40%s over the medium term.

In the Caribbean, as we have discussed throughout the year, we continue to believe that the Caribbean remains an attractive region for RBC, and we are aggressively managing this business to indrive improved performance, while in US banking we are focused on growing our cross-border business and serving the banking needs of our US wealth management clients.

Turning to wealth management, we had record earnings of almost CAD900 million, up 18% last year, largely reflecting higher average fee-based clients and transaction volumes. We also generated strong earnings of CAD205 million in this quarter. While flat year over year, our underlying performance was very strong, but we were impacted by an unusual credit charge that Morten will discuss later on. Our client assets grew by 12% this year to reach over CAD1 trillion for the quarter.

While the low-rate environment persisted, our Business capitalized on a moderate improvement in global and economic market conditions. Starting with global asset management, we are now a top-50 global asset manager, and the second-fastest growing asset manager in the world, having more than doubled our assets under management from 2007 to 2012, according to a global ranking published by Pension and Investments, and Towers Watson. In Canada, we continue to lead in the mutual fund market share, and captured the largest share of long-term fund sales in the industry.

In addition, our institutional asset management business experienced positive flows from both our North American and BlueBay teams, and consistently ranked number one for fund assets quarter over quarter. Our global asset management business is highly profitable, and a significant contributor to RBC wealth management's earnings. This Business continues to be the focus of our acquisition efforts, and we look for complementary international acquisitions to add to global equity capabilities, particularly given our success with BlueBay.

Turning to the Canadian, and US and international wealth management businesses, RBC is the largest, most comprehensive wealth manager in Canada. We were recognized this year as the Best Private Bank in the country for the 2nd consecutive year, by Professional Wealth Management and the Bankers Magazine. Overall, RBC has a strong and industry-leading high net-worth market share of 19%, and we continue to extend this lead by offering superior advice, best-in-class solutions, and broad experience.

We continue to shift towards a more fee-based model. In the US, our average fee-based clients' assets are up 9% from last year, contributing to an increase in earnings for the region. Beyond North America, we continue to invest in establishing scalable foundations in key financial centers.

In insurance, although the results were negatively impacted by the fourth-quarter charge related to the proposed legislation in Canada affecting certain individual life insurance policies, this Business contributed almost CAD600 million of earnings this year. Factoring out the charge, our fourth-quarter earnings were very strong compared to the prior year. We are transforming the way we sell insurance, as we are going directly to consumers more than ever before, given our comprehensive product offering. We are selling more insurance through our lower-cost channels such as our retail insurance stores, proprietary sales force, contact centers and online presence.

In investor and treasury services, our business performance continued to improve as we delivered higher revenue, and benefited from our ongoing focus on efficiency management activities, generating annual earnings of over CAD340 million. Our fourth-quarter earnings of CAD92 million were up 28% from the prior year. We are creating a specialist custody bank that provides excellence and asset servicing, with an integrated funding and liquidity business for financial and other institutional investors worldwide. We're the leading Canadian custodian, with more than 40% market share of assets under administration. Our Business is completed by offshore expertise, primarily based in Luxembourg, where we have the largest third-party asset service provider.

We are building revenue opportunities by leveraging RBC's strong reputation, brand, financial strength and cross-sell capabilities, opportunities we didn't have under our joint venture. I'm extremely excited about this Business going forward. For the 3rd consecutive year in a row, we were voted the number one overall custodian in the R & M GlobalCustodian.net survey.

Turning to capital markets, we had a record year with earnings of CAD1.7 billion. We finished the year with fourth-quarter earnings of over CAD470 million. These results highlight the successful execution of our strategy to rebalance this Business towards an originate-and-distribute model.

We continue to shift to more traditional corporate and investment banking activities, and are repositioning our trading businesses to focus on origination to achieve greater earnings flexibility. We had strong growth in our corporate and investment banking business, particularly in lending and loan syndication activities, primarily in the United States, as we remain focused on extending our loan book to establish new client relationships and deepening existing ones by offering a fuller suite of products.

This year, our global markets businesses were impacted by a changing market environment, particularly due to the uncertainty pertaining to the direction of the US fiscal and monetary policies in latter half of the year. We lowered our compensation-to-revenue ratio to 37.8%, which is down 200 basis points from 2012, driven by our focus on improving productivity relative to compensation. Geographically, we produced solid results in Canada, where we are a clear market leader. We remain focused on execution and building long-term relationships, increasing market share with small- and medium-sized companies, and leveraging our global capabilities.

We continue to win significant mandates. We're advising Shoppers Drug Mart on their CAD13.8-billion sale to Loblaw's, and Hudson's Bay Company on their CAD2.9-billion purchase of Saks, ranking us number two globally in retail M&A as at October 31, according to Dealogic.

In the US, we are now generating over half of our capital markets revenue globally, providing us both diversification and attractive growth opportunity, particularly as the US economy improves. Recently, we have been involved in a number of high-profile US deals, including the $49-billion offering of senior unsecured notes by Verizon, the financing of the $25-billion privatization of Dell, and the $6-billion acquisition financing for Neiman Marcus. All three of these deals closed this quarter.

In the UK and Europe, we are selectively building our investment bank, and continuously evaluating the performance of our Business. We're also shifting from trading to more lending and origination, consistent with our North American strategy. While global capital markets continues to face regulatory reform, we believe we can continue to successfully adapt our Business to the changing landscape.

As I mentioned earlier, we met all of our financial performance objectives for the year. Our strong capital position continues to provide us with the flexibility to find the optimal balance between investing in our Business for long-term growth and returning capital to our shareholders. During the year, we raised our dividend twice for a combined increase of 12%, and we also repurchased 6.8 million of our common shares. We ended the year at the midpoint of our dividend payout range.

We are maintaining the same financial performance objectives for next year: Dilutive earnings per share growth of 7%-plus; return on equity of 18%-plus; strong capital ratios; and a dividend payout ratio in the range of 40% to 50%. These key financial performance objectives help us measure our progress against medium-term objectives of maximizing total shareholder return by achieving top-quartile performance. We generated strong total shareholder returns of 13% for both the three- and five-year periods. I would also highlight that, in 2013, we generated total shareholder return of 28%.

Our record results and accomplishments this year are in large part reflective of our strategic goals, as outlined on page 6, which we have remained focused, consistent and build on our strength. These strategic goals drive our high-quality and sustainable earnings growth. While regulatory changes, prolonged low interest rates, market volatility, and increased competition certainly have posed, and will pose, challenges, we also see great opportunities that are aligned with our view of global trends, and build on our strengths. We're committed to delivering the right strategy, business mix, culture and people to drive continued growth, and take advantage of these opportunities. And our financial strength, diversified businesses and leading market share remain clear competitive advantages in today's environment.

In closing, I am certainly pleased with our accomplishments this past year. We ended a record year, building on the strong momentum we had throughout 2013, and we believe this positions us very well going forward.

Before I turn the call over to Morten, as you would note, we announced back at the end of August that Morten will be retiring early next year after more than 30 years of service with RBC. Given this will be his last quarterly call, I wanted to take this opportunity to thank him for his exceptional contribution during his distinguished career at the Bank. His strategic thought leadership, breadth of experience, and deep understanding of the ever-evolving risk management landscape has made him an outstanding Chief Risk Officer. We are all extremely grateful. Thank you for that, Morten.

With that, I turn it over to you.

Thank you, Gord. That's very kind, especially as people are focused on other retirements than mine.

Turning to credit on slide 8, we saw an uptick in provisions this quarter, but overall credit quality remained sound. Provisions for credit losses on impaired loans of CAD335 million, or 32 basis points, increased CAD68 million or 6 basis points from the prior quarter. With respect to gross impaired loans, while impairment formations have increased this quarter, gross impaired loans are down CAD50 million over the year, and our impairment level is lower than our Canadian peers.

Looking at credit performance in more detail, turning to slide 9, provisions in Canadian banking were CAD250 million, up CAD37 million over last quarter, or 4 basis points. At 29 basis points, this remains at the low end of our historical range. The increase in provisions primarily reflected higher impairment in our personal lending portfolio, and higher impairments in our business portfolio, as we grew volumes in both businesses. Provisions in our credit card portfolio decreased quarter over quarter, reflecting fewer bankruptcies. Provisions on residential mortgages remained low at 3 basis points, consistent with our historic performance. Gross impaired loans increased slightly over last quarter, but remained within our historical range.

Turning to the Caribbean, provisions on impaired loans were CAD26 million, up CAD13 million from the previous quarter, largely related to a couple of accounts. While credit quality in our Caribbean portfolio has been stabilizing, challenges are likely to persist in the near term until we see sustained improvements in the regional economic environment.

We incurred provisions of CAD42 million in wealth management this quarter, related to a few accounts. As I mentioned last quarter, growing the credit book forms part of this segment's long-term growth strategy, and provisions at moderate levels are an expected outcome of that business activity. We expect loan loss provisions within wealth management to show some degree of variability from quarter to quarter, but this quarter's provisions fall outside of our expected range. We remain comfortable with the segment's overall credit quality, given our strict credit adjudication standards and the strong credit worthiness of the client base. With respect to capital markets, provisions were CAD11 million, or 8 basis points, down CAD17 million, or 12 basis points, compared to last quarter.

Turning to market risk, in 2013, average value at risk was CAD44 million, and average stressed VaR was CAD95 million, up CAD17 million compared to last year. The increase in stressed VaR largely reflects the fact that our trading portfolio is more heavily weighted towards mortgage-backed securities and high-grade credit-sensitive fixed income debt whose price behavior was particularly volatile during the financial crisis of 2008/2009, which is the historical period used for stressed VaR calculations.

During the fourth quarter, we had no days with net trading losses. In 2013, we had 7 days with net trading losses, down from 20 days in 2012. The annual number of days with net trading losses is down for a 2nd consecutive year.

Before I conclude my remarks, I want to take this moment to thank you all for your questions over the years, and to officially welcome my successor, Mark Hughes, and wish him luck. Mark has been with RBC since 1981, and has both a broad and deep experience with our Organization, which will make him an excellent Chief Risk Officer.

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

Thanks, Morten, and good morning. Turning to slide 11, we had a solid fourth quarter, with earnings of CAD2.1 billion, up CAD208 million or 11% over last year. Continuing our momentum, performance this quarter was underpinned by strong fundamentals.

I would note that while we had a relatively clean quarter, we had two items that largely offset each other. The first item is a CAD118-million after-tax charge in our insurance segment discussed earlier. The second item is a favorable income tax adjustment of CAD124 million related to prior years. While this tax adjustment reduced our effective tax rate this quarter from 23% to 18%, we continue to expect our effective tax rate to be in the low-20%s range going forward. Compared to the prior quarter, earnings were down CAD185 million or 8%.

Moving on to capital, we completed our first year under Basel III with our capital ratios remaining strong and in excess of regulatory requirements. For 2013, our common equity tier 1 ratio was 9.6%, largely driven by strong internal capital generation.

This quarter, we also built our capital levels in anticipation of several notable regulatory and accounting changes scheduled to come into effect in the first quarter of 2014. As I mentioned on our last call, the first phase of the Credit Valuation Adjustment, or CVA, is expected to negatively impact our common equity tier 1 ratio by approximately 30 basis points. Effective November 1, we adopted a new accounting standard related to pensions and other post-employment benefits, which is expected to negatively impact our ratio by approximately 10 basis points.

As we transition to the new standard, we will be restating our financials next quarter, including an increase in pension expense of CAD70 million for 2012, and CAD125 million for 2013. Going forward, we anticipate a modest increase in pension expense. We will continue to prudently manage our capital levels going forward, given the evolving regulatory environment.

Let me now turn to the quarterly performance of our business segments on slide 12. Personal and commercial banking generated strong earnings of over CAD1 billion in the quarter, representing an increase of CAD47 million, or 5% from last year, largely due to earnings growth of 7% in Canadian banking, reflecting solid volume growth of 7%, which includes the contribution of our Ally Canada acquisition.

Sequentially, earnings decreased CAD99 million, or 8%. Higher volume growth across all our Canadian banking businesses was more than offset by higher PCL, a provision related to post-employment benefits and restructuring charges in the Caribbean, and moderate spread compression.

Margins in Canadian banking were down 7 basis points from last quarter, as the prior quarter was favorably impacted by fair value purchase accounting adjustments related to our acquisition of Ally Canada, and the reversal of accounting volatility from the second quarter. Factoring out these impacts, margins were down 2 basis points, in line with our expectation of 1 to 2 basis points of sequential compression. Looking ahead, we expect margins to remain under pressure, given the continued low interest-rate environment, slowing growth in consumer lending, and competitive pricing pressures.

Our reported operating leverage and efficiency ratio this quarter were 0.2% and 44.8%, respectively, with growth in non-interest expense remaining well contained. I would remind you that expenses in the fourth quarter are often subject to a degree of seasonal elevation, due to true up of marketing and other discretionary spend. Going forward, we continue to manage the trajectory of expense growth against revenue growth, and are adjusting the pace of our investments in response to a slower growth environment.

We remain committed to driving our efficiency ratio down to the low-40%s over the medium term, and are seeing good progress from a number of initiatives under way in Canadian banking, including the launch of our new mortgage-origination system early in 2014, as Gord mentioned. Also, with the acquisition of Ally Canada now fully integrated, we believe we are on track to generate meaningful synergies, further contributing to steady improvements in our efficiency ratio, as well as generating positive operating leverage.

Turning to wealth management on slide 13, we earned CAD205 million this quarter, relatively flat compared to last year, as higher average fee-based client assets resulting from net sales and capital appreciation were offset by higher PCL of CAD42 million on a few accounts, as discussed by Morten, and lower transaction volumes as we continue to shift our Business towards more recurring fee-based revenue. Non-interest expense also increased this quarter compared to last year, reflecting higher variable compensation, driven by higher commissionable revenue, as well as increased staff levels and infrastructure investments as we support the growth of our wealth and asset management businesses. Compared to the prior quarter, earnings were down CAD31 million, or 13%, driven by higher PCL.

Moving to insurance on slide 14, net income of CAD107 million was down CAD87 million, or 45% compared to last year, and down CAD53 million compared to last quarter, primarily due to the previously disclosed charge of CAD118 million after tax discussed previously. Let me take a few moments to explain the charge more fully.

Under Canadian IFRS, the present value of the expected profit for a life policy is recognized at the time the policy is sold. Subsequent to initial recognition, changes in assumptions as a result of updated experience or new regulations impacting these life insurance policies are recognized in net income when the changes are made. While the legislation remains proposed, from an accounting perspective we considered the measures to be substantively enacted. Therefore, as a result of the legislative changes, the current expected profit on these policies is lower than what we initially expected.

The charge is based on our assumption that we expect a significant portion of affected clients to select one of the revised offerings we are offering, and we will update the charge, if necessary, to reflect any changes in policyholder experience or regulation. Excluding this charge, net income increased CAD31 million, or 16% compared to last year, and CAD65 million, or 41% compared to last quarter, reflecting favorable actuarial adjustments and a gain on the sale of our Canadian travel agency insurance business.

Turning to slide 15, investor and treasury services earned CAD92 million, up CAD20 million, or 28% from last year, reflecting improved business performance in investor services and continued benefits from our ongoing efficiency management activities. Compared to the prior quarter, earnings were down CAD12 million, or 12%, as the prior quarter has seasonally higher securities lending fees.

Turning to capital markets on slide 16, we had strong earnings of CAD472 million, up CAD62 million, or 15% from last year. This reflects strong growth in our corporate and investment banking businesses, primarily loan syndication and lending activities in the US, and the favorable impact of a stronger US dollar. We also had lower PCL due largely to a provision taken in the prior year on a single account, which also contributed to the increase. This impact was offset in part by higher litigation provisions and related legal costs. Compared to last quarter, net income was up CAD84 million, or 22%, largely driven by strong growth in loan syndication activities across all geographies, and higher debt origination, mainly in the US.

Our results this quarter highlight our strong momentum in corporate and investment banking, and our performance was positively impacted by a number of large notable transactions that Gord highlighted, which closed at the end of the quarter. Looking ahead, we have a strong deal pipeline, which continues to grow, both in Canada and the US.

To wrap up, we are very pleased with our solid performance this quarter. We have a diverse and strong portfolio of businesses. As Gord noted, we believe we remain well positioned to continue delivering sustainable earnings growth.

At this point, I'll turn the call over to the operator to begin the Q&A. Operator?

Thank you. We'll now take questions from the telephone lines.

(Operator Instructions)

Robert Sedran, CIBC.

Not sure if the question is for Morten or for George, but I wanted to come back to the issue of the Wealth Management loan losses. I know, George, you've talked in the past about wanting to grow the loan book and I guess with -- there's no such thing as a riskless loan, as we found out this quarter. Can you maybe give us a little more color in terms of what the security is behind these kind of loans? What kind of lending this is, and whether we should expect these kind of provisions to now bounce in and out of the segment as the odd one goes impaired?

It's Morten, Robert. I'll start and George may want to fill in a few business details. If you look at the supplementals, you'll see on the Wealth Management breakdown that we've got about CAD13 billion in loans for this segment. There's another CAD3 billion or so in letters of credit that represent the total amount of credit risk we have in that business. More than half of those loans are in North America, the majority of them are traditional margin loans that you find in a broker dealer private banking operation. The vast majority of the loans are secured by liquid collateral. There is a small portion of less than 10% that is secured by commercial or residential real estate and a tiny fraction of 1% or so that is unsecured.

So the nature of this portfolio is one where you should not expect ongoing significant provisions. I would say if you look at the charge that we're having this quarter, it reflects a small number of loans with a large concentration and a small number of securities where there was a significant fall in value. That's what drove the significant provision. So, as I was saying in my comments, this is very much outside of the range of losses that we expect to see in the portfolio and does not affect our view of the credit quality of the portfolio as such. I would say that our historical experience is way more indicative of what you should expect than what you've seen in the last quarter or two. But, when have you a CAD16 billion portfolio, you have growth objectives, obviously you will have losses here and there, but at more modest levels than we've seen this quarter, would be my expectation.

Marten, when you talk about having the traditional margin secured by highly liquid securities, I'm assuming then that you're able to run numbers in terms of how much concentration you might have in a specific asset class or a specific security in terms of what's backing these loans? Is it just that this was an abnormal quarter, that it just happened to be in a pocket of the book, or is it that maybe we're still developing the infrastructure to support some of this business?

So this business is a business we've been in for a long time. As a daily mark-to-market process, there's securities listed on public exchanges with daily margin calls and so on. What was unusual this time was we had a small number of loans with similar securities backing them up and large concentrations in specific securities, where those securities saw a large drop in value.

Okay. Thank you. Janice, just a very quick numbers question. The Q4 insurance segment, as you mentioned actuarial adjustments plus a gain, is that pretty much responsible for all of the year-on-year increase or is there actually something else in there?

That's what it is. You'll recall that once a year we formally revise all of our actuarial adjustments so you get a bit of volatility in the fourth quarter related to that, and of course the gain on the sale of our travel business this quarter.

Thank you.

Gabriel Dechaine, Credit Suisse

Just a clarification for Janice. First of all, you said the pension expense would have a modest impact, so after tax it works out to about CAD0.07 in 2014. I'm just wondering if you're thinking of offsetting that item somehow with savings in other areas? Then second one, first of all, Dave, congrats on the promotion. Just want to talk about your pattern every 3 years, and this is across the Bank, but it impacts Canadian Banking, of undergoing big initiative spending to generate better efficiency down the road. Is 2014 going to be one of those years? Should we expect some softer operating leverage as a result in the near term until you yield those savings?

Gabriel, it's Janice. I'll start first with the pension explanation. What I said is that it would be relatively flat in 2014. You should recall that we are restating 2012 and 2013 because the pension accounting, it's a retroactive accounting. That's why there's an immediate hit to the Common Equity Tier 1 ratio. The ramp up in expense that you see, what we're saying is it will be relatively flat year over year. Of course, on a cash basis, we are generating a higher expense rate. We look at all the expenses when we look at our efficiency programs and our investment programs. Dave, you can comment on some of the investment and efficiency programs.

Actually, that CAD125 million, is it pre tax or post tax?

It's pre tax. It's an actual expense number.

Thank you.

Gabe, it's Dave. We're still targeting an operating leverage of 1% to 2%, as this large program comes to a successful conclusion and we deploy it across our network over the coming quarter. We continue to invest in our technology. We will do so going forward, focusing on our commercial systems, particularly our commercial deposit systems, but not to the level that you've seen historically with the retail credit transformation. So, it will be a smaller project, but it's something we continuously invest in our back office capabilities, our front office technology capabilities. We're watching our costs and our revenues very closely and driving positive operating leverage.

So, there is a program taking place in Q1 but it's going to be smaller than prior years?

It's in a normal course of business for us.

Okay. Thank you, Dave and Janice.

Peter Routledge, National Bank Financial.

Thanks, couple questions for Dave. First of all, Dave, I noticed just in loan growth generally and Canadian Banking, but retail loan growth in particular, Royal's a little bit slower than peers, which over the last couple quarters. I wonder if you have any thoughts over why that might be?

Certainly if you look at where the source of growth is in the marketplace, we do not book any mortgage whole loans from third parties, nor brokers, but particularly if you were to extract whole loan mortgage purchases from the growth of our peers, you would see a dramatically different number, I would believe. Our growth is core, proprietary channel growth. If you look in the appendices of the slides, I think the first appendix, we're gaining market share in all our core segments with the exception of commercial deposits. But, when you look at commercial and consumer lending growth, market shares are up. Our core channels are continuing to perform, we believe, at a premium to the market.

The uptick in third-party and broker-channel originations, your view, is that classic end-of-cycle adverse selection? I mean, are folks just gathering up weak credits at the end of a long credit cycle?

I'll answer that one. It's Gord. Because I don't think we should comment on what other financial institutions do, but what I would say is, as Dave reiterated, John, I mean, as you know, we've been a long-time believer in core originations and not buying third-party mortgages. We think through you the cycle that's going to be positively reflected in terms of both margin and performance. So I don't think we should say it's end-of-cycle behavior on behalf of competitors, but it's something that we just don't -- have never subscribed to.

Thanks. Dave, on the mobile payments strategy, can you talk about how that aligns with your Avion strategy? How do the economics compare?

They're a somewhat distinct strategies. Avion is a credit card product. The mobile payment strategy encompasses all payment products, including debit, in particular debit. We were the first bank to launch a mobile debit payment with McDonald's this year, which we're extremely proud of. I wouldn't link, necessarily, Avion specifically to a mobile payments, because it's a multi-card, multi-product umbrella strategy. We're very proud of our mobile strategy, particularly the innovation around our secured cloud, which we announced this year, which we feel is the strongest customer offer in the markets place, particularly around security and ease of use. We'll be deploying that over the next 30 to 60 days in the marketplace. So we are extremely happy where we are in mobile payments, but I wouldn't necessarily link our Avion strategy, which is very much about building on, we believe, Canada's number one premium credit card, taking advantage of the mild disruption that's in the marketplace and acquiring more customers.

I guess where I was going with that is a certain part of the Avion clientele uses the card for just transactional basis.

Right.

Does the mobile payment strategy risk cannibalizing that revenue stream?

In the fact that a customer might choose debit over credit, I would say no. I think the number one driver of a consumer, particularly in Canada, in choosing which payment vehicle to use is loyalty. Canadians are very attached to the loyalty programs on their credit cards, particularly the Avion loyalty program. And that is the number one driver of which payment card, debit or credit, you choose to use. So whether that sits in a digital wallet or it sits in your physical wallet, that same driver will cause you to pull it out and use it either through your phone or direct at the terminal.

Okay. Thanks for that. Appreciate it.

Michael Goldberg, Desjardins Securities.

First of all, congratulations to all of the people on the changes in your careers. My first question is for Morten. As Royal grows its lending in the US and Europe, are you comfortable that the credit discipline among banks there has become comparable to Canada and that discipline will continue in the future?

A couple of comments. First of all, I guess we're driven by our discipline more than the market discipline. Where we have been able to grow the business on the lending side is where there's enough of an overlap between how we are prepared to do business and what allows us to win business in the market. I would certainly say that it's been fairly good expansion in those areas from an overall market standpoint. If you look at the leverage lending business in particular, we've had great success there and worked very hard to do that within our credit standards. I would say the regulatory wins would suggest that some of the aggressive practices in that business are likely to diminish somewhat over the next year or two. As for Europe, I think the question from my standpoint is a question of whether you have a decent risk return relationship. For the kind of credit transactions we're looking at, we have not been going after business that's been outside of what we can do within our risk appetite and our standards. Just as a footnote, so Mark is coming out of having managed a lot of that business. That means you've got a guy in the chief risk officer chair who is extremely well equipped to deal with those credit issues going forward.

Okay. The next question I have is, this is about the insurance and the charge that you took. Is there any reason that we should think that there's anything different about your 10-8 product and the policyholder behavior that you expect that that should be different from anything else in the industry in terms of resulting policyholder behavior?

Thanks, Michael, it's George Lewis here. I think given our focus on high net-worth clients and business owners, we are a significant player in the 10-8 market. Because of that, these policies were sold as part of financial plans and we expect a high degree of conversion to our replacement product because of that.

That being said, among other sellers of the 10-8 product to affluent customers, was there anything different about your product that would result in different policyholder behavior in response to the changes that are taking place?

Micheal, not that we're aware of, no.

Okay. I also have a couple of people questions. First, could you give us some background on Bruce Ross? Why is he being brought in and what are his objectives?

Sure, I'd be happy to. It's Gord, Michael. To be honest with you, when you look at our industry going forward, technology is going to be an equally important part of strategy of just about any other part of the industry. I would describe Bruce as one of the top technology people, particularly as it relates to financial services in the industry globally. As you know, he ran not only with CEO of IBM Canada a ways back, but most recently ran their business in North America and prior to that, Europe. He has great experience in the financial services sector, and has a tremendous understanding of not only technology from an engineering perspective, but technology from a strategic perspective. We have been, for a while, looking for the right individual to take on responsibility for technology and ops. As I say, extremely important part of the backbone of banking, but also an extremely important part of strategy for banking going forward. In Bruce, we think we have an absolutely -- not only a world leader, but a remarkable GE partner who is going to be instrumental in terms of leading this section of the Bank for us going forward. Remember, tech and ops has -- Janice, how many people in our technology and operations?

8,000 people.

8,000 people, and it's a big part of banking going forward. So we're very excited to have Bruce on board as an addition to GE.

Lastly, for Dave McKay, again, congratulations. What would you like to do or how would you like to further increase RBC's business diversity? Aside from that, how should we expect that RBC's strategies may evolve, given your different background from Gord's? Please don't say, no change, because invariably there's always differences.

Thanks, Michael, for your comments. The first thing I'll say is, our success has been driven by our diversified business model, and that will continue to be a tenant of our success going forward. If you look at each and every one of our existing businesses, they're undergoing enormous change as it is. The Canadian Banking business model is evolving through technology. The Capital Markets' model is evolving, and the Wealth Management's model is evolving. So when you say no change, we're already going through an enormous amount of change as each individual leader looks to the future and builds a competitive model. So the world changes and our models will change going forward. But the tenant of our success is diversification across those core businesses, including Insurance.

Okay. Thank you.

John Reucassel, BMO Capital Markets.

Just a clarification for George or Morten on this Wealth Management loss. Was this in Canada or the US, or was it internationally? Was it through the broker dealers, or was it through the private banking? Could you just qualify that a bit more for us?

It's Morten. It was through a private banking unit internationally. In terms from an operational standpoint, whether in the broker dealer or the private banking unit, the operational infrastructure is pretty much identical and the processes are the same.

Okay. So, it was outside of North America?

That's correct.

Okay. Thank you. For Gord and Dave, since we're running out of time here, just could you talk about your medium-term EPS guidance of 7%? Are you going to stick with that? And in the transition period here, would you say that the balance between acquisitions or buyback is likely to sit with buybacks in the transition period?

I wouldn't say that, John. I would say that during the transition period for the Bank, generally speaking, it's business as usual. As I said in my comments, I think we exit this year with all five businesses performing well. They've all got strong growth objectives and plans going forward. And as I'd say, they're all in pretty good shape. There's not a lot of issues with respect to them.

In terms of our strategic agenda going forward, there is nothing major on the front burner, but I would say it's business as usual. We continue, and will continue, to look at opportunities to deploy capital between repatriation to shareholders, investing in the Business, which as you know is my favorite way to invest capital. I'd love to give the businesses even more, but they can only take so much, and investments through acquisitions. Our program around that front is not going to be any different over the next 8 months than it would otherwise have been, other than obviously we're not going to do anything that Dave doesn't 150% subscribe to, because ultimately he's going to be accountable for the execution and performance of that. But, as I say, I think it's business as usual. One thing that I'm certainly very pleased and happy about is our whole succession process. We've got, as I say, businesses firing well, but in place. The GE is very strong, very established. The transition process will go very smoothly, and, as I say, pretty much it's going to be business as usual.

I guess I would disagree a little bit with Michael Goldberg's last comment that don't say it's business as usual. I think one of the things we're trying to make sure that it is, is that it's business as usual. I think you can expect more of the same going forward, at least during the transition period, than we've had in the past.

And the 7% still stands, Gord?

Yes, absolutely. Our mid-term objectives are mid-term objectives and it's what we use to measure our benchmark. They are minimum objectives, as you know, and we have tended to exceed them and I hope that will continue to be the case. But they are, as described, they are mid-term objectives. They're not an 8-month or a 1-year forecast.

Thank you.

Okay. That brings this call to a conclusion, and we appreciate everybody's participation. And we look forward not only to the next quarterly call, but hopefully everybody's participation at our annual meeting, which is where it will take place from. So, thanks very much, and we'll see everybody soon. Thank you.

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