Royal Bank of Canada (RY) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the RBC 2014 third-quarter results webcast call. I would now like to turn the meeting over to Amy Cairncross. Please go ahead.

Good morning and thank you for joining us. Presenting to you this morning are Dave McKay, President and Chief Executive Officer; Mark Hughes, 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 will be approximately one hour long and will end at 9 AM.

To give everyone a chance to participate, please keep it to one question and then requeue. We will be posting management's remarks on our website shortly after the call.

Joining us on the call our George Lewis, Group Head, Wealth Management and Insurance; Doug McGregor, Group Head, Capital Markets and Investor and Treasury Services; Jennifer Tory, Group Head, Personal and Commercial Banking; Zabeen Hirji, Chief Human Resources Officer; and Bruce Ross, Group Head, Technology and Operations.

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 Dave McKay.

Thanks, Amy, and good morning, everyone. RBC had a record third quarter with earnings of over CAD2.3 billion, which after you exclude the loss related to the closing of RBC Jamaica this quarter and a tax item in the prior year, were up 10% from last year and 10% from last quarter.

We reported record earnings in Canadian banking, capital markets, wealth management and insurance and had solid quarter in investment and treasury services. Our results reflect strong revenue growth, solid credit quality and positive operating leverage across most businesses.

We maintained our strong capital position with a common equity Tier 1 ratio of 9.5% and I'm pleased to report that this morning we announced a CAD0.04 or 6% increase to our dividend bringing our quarterly dividend to CAD0.75 a share. On a year-to-date basis RBC has generated over CAD6.6 billion with a return on equity above 19% and we remain on track to meet or exceed our performance objectives.

These results truly demonstrate the strength and agility of RBC's market-leading franchise as our diversified business model can capture growth by adapting to the changing needs of our clients and also adapt to different market conditions. Our results also reflect our focus on clients and our proven ability to manage costs and capital effectively.

As another testament to the strength of our businesses, RBC was recently awarded Global Retail Bank of the year by Retail Banker International and I am very proud of this tremendous achievement.

Let me now make a few comments on our businesses. Our Canadian banking business had a record quarter reflecting solid volume growth of 4% over last year, a relatively stable credit environment and strong growth in fee-based revenue. In fact it was our eighth consecutive period of double-digit growth in mutual funds revenue. A key driver of our success in fund sales is the strength of our multichannel distribution network which includes our in-branch financial planners and our mobile investment retirement planners.

It also includes direct investing, our online investment channel where we had double-digit growth in new accounts this quarter due in part to our new campaign which is targeted to the next generation. In recent years we have been strengthening our capabilities including investing in our channel strategy to position RBC for changes in technology as well as shifts in client needs. For example from borrowings to savings and investments, our performance this quarter reinforces the strength of our approach.

I am also pleased with the continued momentum we have in our deposit businesses where we had 10% growth in core checking balances over last year. Our clients often begin their relationship with RBC by opening a checking account and over time we aim to deepen and extend that relationship by offering our full suite of products. Additionally these deposits help support our margins and increase our leverage to a higher grade environment.

On the business side, the rate of loan growth improved over last quarter. We are gaining market share and are encouraged by some early signs of increased activity across our range of industries. While competition for new business remains tough and we are being selective in the deals we pursue, we continue to differentiate and strengthen our offering. For example, we were the first financial institution in Canada to offer a mobile app for business owners on all major platforms.

Our July launch was successful with over 1000 subscribers in the first 30 days as clients take advantage of having digital access to real-time information and being able to conduct business quickly and conveniently. This new app is a great example of how we are investing for the future in areas like technology and product innovation. At the same time we remain focused on managing investment spend in order to continue delivering positive operating leverage.

Turning to the Caribbean, we closed the sale of our Jamaican banking operations in June. We remain committed to our core markets and continue to make progress in our restructuring efforts notwithstanding a very challenging credit environment.

Turning to wealth management, we had record earnings up over 20% from last year reflecting higher average fee-based client assets across all businesses. These results are largely a testament to the continued momentum in several businesses including global apps and management. This quarter we continue to lead competitors in retail asset growth driven in part by the strength of our Canadian banking network referenced earlier as well as by RBC wealth management and external channels allowing us to capture 16% of the market's fund sales.

On the institutional side, we continued to have positive funds close in both the North American and European markets with strong growth in our BlueBay business. RBC global asset management is among the fastest-growing asset managers in the world and we are continuing to invest in the business to drive long-term growth.

Turning to our Canadian wealth management business, we continue to expand our number one position in the high net worth market by collaborating across RBC to deepen client relationships. For example, we are leveraging RBC's strong commercial banking franchise and our market leading private bank to deliver tailored products and services including providing advice on business succession planning and generational wealth transfers.

In our US and international wealth management businesses, we continue to focus on building deep client relationships driving advisor productivity and strengthening our overall competitive position for the long term.

Moving to insurance, we had a record quarter reflecting favorable actuarial reserve adjustments and improved claims experience. Insurance is a good business for us which complements RBC's overall product offering and through increased collaboration across our businesses we have been able to achieve growth in creditor insurance that exceeds underlying lending volumes.

Turning to investor and treasury services, we had a solid quarter. We remain diligent in identifying opportunities to optimize efficiencies across the business and driving topline growth by focusing on new mandates and deepening existing client relationships. For example this quarter, we renewed a multiyear contract with a long-standing global financial institution client to manage their shareholder services in Luxembourg.

Capital markets had an exceptional quarter with record earnings of approximately CAD640 million which greatly exceeded our expectations. These results reflect the success of our strategy to focus on traditional client driven corporate and investment banking and origination activities. It also reflects our ability to strengthen client relationships by providing ancillary products and services.

As a testament to the progress we have made in extending our global capabilities and the success we have had achieving building a client focused franchise, capital markets was recently named The Most Trusted Investment Bank in the World by the Economist and was ranked second globally in terms of expertise and skills.

Overall we saw very strong results this quarter across almost all our businesses and we benefited from robust equity and debt markets as well as favorable credit trends. Our trading businesses performed exceptionally well reflecting our focus on origination activities which have nearly doubled over the past two years driving a significant lift in secondary trading.

We also had a couple of outsized trades this quarter which contributed to the results. It is worth highlighting that our strong trading results also reflect our business mix. We are more heavily weighted towards fixed income credit, equity and municipal businesses all of which benefited from improved market conditions.

We also have relatively less exposure to the interest-rate and foreign currency trading businesses which have been most affected by macroeconomic conditions as we have seen in the reporting of some of our US peers.

Overall it was an outstanding quarter for capital markets. Clearly the segment benefited from a number of factors which are unlikely to be repeated to the same degree but their success of the repositioning of the business in recent years is undeniable and I remain confident in their long-term strategy.

To conclude, I am very pleased with the quarter. Our record results reflect the strength of our diversified business model and our leading market position. Our ability to drive efficiencies and manage capital effectively positions us well to execute our client focused strategy and to continue to invest in our business to deliver long-term sustainable growth.

With that I will turn it over to Mark Hughes.

Thanks, Dave. Good morning, everyone. Turning to slide 7, our overall credit quality remained strong this quarter. Our credit trends are near historic lows reflecting a supportive economic backdrop in Canada and our strong risk management practices.

The North American economic environment continues to rebound from a weather-related slowdown in the first quarter and while there is still some economic challenges in Europe, conditions have improved somewhat compared to last year. Provisions for credit losses on impaired loans this quarter were CAD283 million or 26 basis points, up CAD39 million or 3 basis points from last quarter. The increase was mainly driven by higher provisions in the Caribbean and Canadian banking partially offset by lower provisions from capital markets.

Let's look at our credit performance in a little bit more detail. Provisions in Canadian banking were CAD230 million or 26 basis points, up CAD26 million or 1 basis point from last quarter driven by higher provisions in the commercial loan book and our personal loans portfolio.

Within our commercial portfolio, we had a few small provisions that were uncorrelated and while we would expect to see some variability from quarter to quarter, we remain comfortable with the portfolio's overall credit quality.

In Caribbean banking, provisions on impaired loans were CAD54 million, up CAD27 million from the previous quarter largely related to higher provisions in our commercial and retail portfolios reflecting the ongoing challenging economic environment in the region.

With respect to capital markets, this quarter we had provisions of CAD1 million compared to CAD13 million in the prior quarter and the loan book continues to perform well.

Turning to slide 8 which focuses specifically on our Canadian banking retail portfolio, our credit card provisions remained near historical lows at 246 basis points down 23 basis points sequentially largely due to seasonal trends that impacted the second quarter.

Our Canadian residential mortgage portfolio which makes up 64% of our retail portfolio, continues to perform well with provisions this quarter or 1 basis point. This continues to be consistent with our historical performance.

As you can see on slide 9, our mortgage portfolio is well diversified across Canada. We continue to actively monitor our loan portfolio for early warning signs of credit deterioration and perform ongoing stress testing for numerous scenarios including increases in unemployment and interest rates and a downturn in the real estate markets. At this time we are very comfortable with our stress test results. We do not see signs of deterioration and the overall credit quality of our retail portfolios remains strong.

Turning to market risk, in the third quarter average market risk VAR, value at risk, was CAD26 million, down CAD10 million or 28% compared to last quarter as the data used to calculate our value at risk has been rolled forward and the related market volatility of spring 2012 that resulted from European sovereign debt concerns are no longer included in the dataset.

The decrease in value at risk was also driven by lower equity risk and the adoption of IFRS-9 last quarter whereby changes in our fair value on our liabilities are now recognized in other comprehensive income instead of through the income statement.

Our third-quarter average market risk stress VAR was CAD87 million, down CAD16 million or 16% from last quarter. There was one day of net trading losses this quarter and we had one day of sizable net gains primarily related to the sale of a legacy asset.

With that I will turn the presentation over to Janice.

Thanks, Mark, and good morning. As Dave mentioned, we had record results this quarter with earnings of over CAD2.3 billion, up CAD93 million or 4% from the prior year and up CAD177 million or 8% from the prior quarter. Overall we had a clean quarter with only one item of note which was the previously announced loss of CAD40 million related to the sale of RBC Jamaica which closed in June. Excluding that item and the CAD90 million favorable tax adjustment we reported last year, net income was over CAD2.4 billion, up 10% from last year and 10% from last quarter.

Our results were driven by record earnings across a number of our businesses.

Turning to capital on slide 12, our common equity Tier 1 ratio was 9.5%, down 20 basis points from last quarter as higher risk-weighted assets more than offset strong internal capital generation. The increase in risk-weighted assets was driven primarily by an update to the risk parameters in our corporate and business lending portfolios resulting from the model review that I noted last quarter. The increase also reflects business growth.

The perimeter updates this quarter were largely reflected in revised loss given default rates and they were predominantly in the commercial portfolio in Canadian banking and to a lesser extent in the loan book and capital markets. Excluding these updates, the segment mix of our risk-weighted assets is largely unchanged from the last quarter.

Let me now turn to the quarterly performance of our business segment starting on slide 13. Our personal and commercial banking segment earned over CAD1.1 billion, down CAD29 million or 2% from last year on a reported basis. Canadian banking reported record earnings of over CAD1.1 billion, up CAD34 million or 3% from last year reflecting volume growth of 4% and strong growth in fee-based revenue largely driven by higher mutual fund fees. This growth was partially offset by higher provisions for credit losses which Mark noted.

Sequentially Canadian banking earnings were up CAD75 million or 7% primary due to additional days in the current quarter, volume growth across most businesses and higher mutual fund fees. Our net interest margin in Canadian banking was relatively stable at 2.73%, down 4 basis points over last year or up 1 basis point on an adjusted basis and down 1 basis point sequentially. Our overall favorable funding mix continues to be offset by competitive pressures in the low interest rate environment.

We delivered positive operating leverage in Canadian banking of 2%. I would point out that our results last year were impacted by a few items related to the acquisition of Allied Canada which impacted both the revenue and the expense line. Factoring in those items, our operating leverage was just over 1% which is well within the target range for this business.

Canadian banking continues to progress towards the target of driving an efficiency ratio in the low 40s reporting 43.7% for the quarter, a 90 basis point improvement over last year.

Turning to the Caribbean, we are making progress in our restructuring efforts. We have reduced costs and we have seen improvements in topline growth from our repricing initiatives. However, the operating environment remains challenging.

Looking at wealth management on slide 14, we had record earnings of CAD285 million, up CAD52 million or 22% from last year reflecting higher average fee-based client assets across all businesses and capital appreciation and net sales. We also continue to generate positive operating leverage.

Sequentially net income was up CAD7 million or 3% mainly due to higher average fee-based client assets. Growth in assets under management and assets under administration were up 18% and 14% respectively over last year. Pretax margins were just under 25%, an improvement of more than 200 basis points from last year.

Moving to insurance on slide 15, record net income of CAD214 million was up CAD54 million or 34% from last year and up CAD60 million or 39% from last quarter. This increase was mainly due to favorable actuarial adjustments reflecting management actions related to our efficiency management program and assumption changes. In addition, we benefited from lower net claims cost.

Investor and treasury services earned CAD110 million, up CAD6 million or 6% from last year reflecting higher funding and liquidity revenue and increased net interest income on growth in client deposits. Sequentially net income was relatively flat.

Turning to capital markets on slide 17, we had a very strong quarter with record earnings of CAD641 million, up CAD225 million or 66% over last year. Sequentially net income was up CAD134 million or 26%.

Trading and origination activity improved compared to both prior periods driven by strong equity in debt markets and increased activities from our client focused strategies. We also saw higher loan syndication activity and growth in our loan book relative to last year and last quarter. If you recall, our results in the third quarter of last year were negatively impacted by challenging market conditions and this quarter our trading business benefited from a couple of outsized trades which added approximately CAD100 million to revenue.

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

At this point I will turn the call over to the operator to begin the Q&A portion of the call. Please limit yourself to one question and then requeue so that everyone has an opportunity to participate. Operator?

(Operator Instructions). Steve Theriault.

Bank of America Merrill Lynch. Just a quick follow-up, I had a question for Dave on the buyback but you mentioned tax. You didn't get the positive impact from your usual tax review this Q3. Just wondering if that is timing or something else?

What the tax impact relates to is that every year we are audited by CRA and in the last two years actually those audits were completed in Q3. CRA has extended an audit period and so we don't have the benefit of having a (inaudible) year and that is why we didn't make the adjustment so it is a bit of timing but we can't really predict when they will be done.

Can you predict the direction? Do you expect it to be another positive number?

I can't really predict the direction because it's generally just the volume of audit work and a lot of the work the CRA is doing.

Okay, thanks. So, Dave, it has been a few consecutive quarters where you have been quiet on the buyback versus expectations and I think at the outset of the program, it would be somewhat active. So I guess the question is would you link it back to the risk perimeter review? Is it a changing in your or the regulatory's thinking on capital return? Do you need to be at closer to a 10% core Tier 1? Just interested on your thoughts going forward on buybacks.

Thanks for the question, Steve. I think maybe I will answer the question broadly. When we look at our ability to deploy marginal capital, our first priority is to deploy that organically and we still see good opportunity to deploy capital organically.

Our second strategy as you know is to return capital to shareholders and as you have seen this quarter we have increased our dividend by CAD0.04 and we are very happy with that so that certainly fits within our overall strategy of returning capital to shareholders.

Share buybacks obviously remain an important part of returning capital to shareholders and we will obviously consider that going forward. But those are certainly the top two strategies and the third one is to selectively make acquisitions that enhance our existing customer franchises.

So when we look at all three of those, I think we have demonstrated strongly certainly with the first two that we are acting on that particularly with the dividend increase you saw today.

Do need to get capital higher in order to activate the buyback or not necessarily?

It is hard to comment. We are managing our capital very closely as you see. We got our regulatory requirements and if you look at organic growth and capital return to shareholders, we take all that into consideration. So I think it is something that obviously management looks at very closely.

Okay. Thanks very much.

John Aiken.

Good morning. I am with Barclays. I guess the reward for such an exceptionally strong capital market this is going to be questions around the sustainability of this going forward. But in conjunction with that, Dave, I was hoping that you might be able to provide some insight as to the discussions that the Board is having around the contribution of capital markets to the overall bank particularly in light of the article that came out yesterday from The Wall Street Journal.

Right. I'm not surprised at that question. First, let me say how exceptional the results are and how happy we are with the capital markets franchise and the core business growth. And while there were some one-time trading items and some very, very strong markets for us, our overall franchise and our client centric franchise has grown nicely and the business is doing very well.

As we think about our strategic guidelines as I like to think of it of 25% that we really believe fits into an overall diversified business model, we do look at the strength of our other businesses and wealth management. You saw a record result, you saw record results in Canadian banking. We look at our opportunities to grow in all of our businesses and we remain confident that we can continue to grow capital markets and still remain within our longer-term strategic guidelines.

So I think while we went slightly over this quarter with an exceptional quarter, we are just slightly over our long-term strategic guideline, I think all things being considered as we look forward and remain confident of being able to balance our diversified model.

Dave, if I can paraphrase, so the 25% is not really a hard line and this isn't going to cause any drastic changes in strategy in the near term just because you have crossed that line?

We crossed the 25% periodically over the past year so it is something that we have done before but over the long term we look forward and we say can we keep this in balance and we feel we can. So I think it is not a cap. I think some people refer to it as a cap. Cap to me connotates drastic action as you said. I think the business ebbs and flows, has a seasonality to it, has strong quarters, has sometimes challenges in front of it. So I think as we look at the ebbs and flows of the business we feel confident we can maintain the balance of our business model.

Great. Thanks for the color.

Sumit Malhotra.

Thank you. Good morning. First point is just a clarification with Janice. So you had as far as the RWA is concerned, you had the retail portfolio review during Q2 and then let's call it the business lending review during Q3. I know these things can be ongoing over time but just wanted to get an update on where you think the RWA methodology for Royal is and whether there is any other reviews that you are contemplating at this time?

Good questions, Sumit, and I think we did have -- we just finished off two fairly intensive reviews where we looked at all of our assumptions. We review all of our assumptions so on an ongoing basis and at least annually so it is part of ordinary course. Some of the adjustments you have seen over the past two quarters are ordinary course adjustments, some of them reflected more detailed assumptions reviews.

Going forward we recognize that we constantly review the metrics. We are fairly comfortable with where we are with respect to RWA but as you know as we continue to grow our balance sheet we will continue to grow our RWA.

That I fully acknowledge. Just when I think about the CET1 right now being below the year end 2013 level three quarters of the way into what has been a very strong year from your seat right now, is there anything what I would call more than normal course in the business that you would contemplate on the RWA line? Or are we now to the point where the refinements are not likely to be the driver in the interim?

From our perspective we think that as far as this fiscal year goes, the refinements that we have made are basically the major ones that we were working towards doing. With respect to our capital accumulation and deployment, we should be back to more business as usual in terms of our earnings growth, funding our dividends and also getting some capital accretion. And so that is why Dave talked about our strategy around deployment being funding organic growth and then looking at rewarding the shareholders and looking at longer term growth in earnings as the three prongs of our strategy.

All right. My actual question was for George Lewis in wealth and looking at a couple of things on revenue, it looked like transaction revenue was down in the quarter and the international and US segment was down as well. Just wanted to ask you, when you think about operating leverage in this business outside of aggregate market conditions, is there anything that the bank is thinking through on the expense side that could lead us to better operating leverage without necessarily having yet another uptick on the revenue side or the market side?

Thanks for the question. I think overall we were very pleased with the quarter record earnings. It was a clean quarter. We had double-digit growth in AUM and AUA. I guess the flipside of your question on transaction revenue in the US which I will come to in a moment is the growth of our fee-based revenue which for the first time reached over [$]1 billion this quarter. So that now represents two-thirds of our segment revenue, up from around 50% in 2007. So both the quantity and the quality recurring nature of our earnings continues to improve.

With respect to the transaction activity, there is definite seasonality in the business in terms of the summer quarter being a slower one particularly in our US business. That I think accounts for the quarter-over-quarter change in terms of transactional revenue.

In terms of expenses, we do have a strong focus on NIE at the same time we are investing for growth particularly in our global asset management business which is our highest margin business. And we are making investments particularly in our international wealth business to strengthen our control environment.

So I think we are pleased with our progression in both revenue and expense and generating positive operating leverage of I think 2.3% this quarter and we expect that to continue.

Doug Young, Desjardins Capital Markets.

First question just on the capital market side, I guess really a two-pronged. You had exceptional loan growth, wondering if you can give a little bit more detail where that loan growth is coming from segment or whatnot?

Then can you give -- I know you said CAD100 million of outsized trading gains, is that something that falls to the bottom line? And how should we think about that in terms of the earnings impact in the quarter?

Starting with the loan growth, the loan growth was stronger than actually we anticipated it would be at the start of the year. If you look at the slides, a lot of the loan growth has been coming from our real estate business. We identified an opportunity a couple of years ago with some major clients to finance some activity in Europe and we have been doing that and the results have been very good from that. But I would say overall away from those activities, the loan growth is really focused in the US and the opportunity to lend to corporations in the US is still quite good. The margins are certainly acceptable and the business that comes with the loan growth has been very good. So most of the loan growth has been the US; the European loan growth more focused on the area I described.

I would say going forward, we are seeing some slowing and that is fine. We are certainly not going to push it but we are certainly happy with what we have done so far this year.

In terms of the trades, one was the legacy asset in fixed that we had on our books for several years. We had written it down substantially. It was secured on an asset that actually was performing quite well. We restructured it and sold it so there was a pretax gain there. The other was a client trade here in Canada that affected the securities finance and equity side of the business. And in Janice's remarks, she mentioned it was about CAD100 million pretax and we identified those because we look at them and say it is reasonable to say it is nonrecurring.

And then just I'm not sure if you can give any color or whatnot on the insurance side, you talk a bit about the actuarial, the positive impact from actuarial adjustments and I'm going to assume that is on your life insurance book of business. Just wondering if you can give any color as to what drove that, were there assumption changes that were pushed through and what that was? And can you give any quantification of what the impact was from that?

It is George Lewis. Thanks very much for the question. I think in terms of the actuarial adjustment this quarter, as Janice mentioned in her remarks, it related to our ongoing efficiency management program. So it didn't relate to an annual process that we do typically in the fourth quarter which will recur this quarter where we do a complete scrub of our actuarial assumptions, morbidity, mortality, claims, [lap], etc. So that is yet to come.

It was a very strong quarter for RBC insurance. I think I mentioned last quarter that our earnings in Q2 was at the lower end of a typical range for the business. This quarter was certainly from the underlying business itself driven by improving claims experience particularly on the disability side, we also had better claims experience in home and auto. Strong creditor premium growth to Dave McKay's comments, drove us to the upper end of that range of a typical quarter and then the actuarial adjustment took us above that.

And you haven't given any quantification what that adjustment was?

No.

Thank you.

Gabrielle Dechaine, Canaccord Genuity.

Good morning. Just a quick one. I apologize if I missed this one. But do you have a target capital ratio, is it 9.5%, 10% for the quarter one ratio? Then I've got a follow-up on the cards business.

I think if you look at where we are maintaining our ratios we think that we are maintaining a pretty strong capital ratio if we are in the mid 9s. So we ended up at 9.5% and we are pretty comfortable with being in that vicinity.

Okay, thanks. And then on the credit cards, I noticed you had pretty good average balance growth 4% quarter-over-quarter. That is encouraging and in this environment. Just wondering if you believe to maintain that level of growth or maintain your market position or grow it preferably. Do you need to do any tweaks to the Avion portfolio whether it is more accelerators or enhanced benefits, something of that nature?

And then also on the interchange regulation, where do we stand with that and are we going to hear anything soon on potential regulation?

It is Jennifer and I will take the first part of that question. We continue to benefit from all the recent activity in the credit card space and our new account flows continue to be significant, up (inaudible) [19%] year-over-year and we are also seeing great utilization of our cards. We are very happy with our Avion card and the position that it has. Clients love it and continue to give it very high ratings for customer satisfaction because the points are easy to redeem and they don't expire. So we are very well positioned in the credit card space. Interchange space, want to take that?

Thanks, Gabriel, it is Dave here. It was also noted in the federal budget that the government would be moving forward so we do expect to see some changes as far as interchange in Canada. It would be premature I think to try to speculate or comment on what those are going to be. I would say that there is a significant amount of dialogue among all industry participants through the government of Canada. I think the goal is really to promote a long-term ecosystem that supports the Canadian economy but at the same time really fosters leading-edge payment capabilities and service to Canadians. So there is a lot of stakeholders to balance, there's a lot of issues to balance, there is dialogue and we will see what comes out of the Minister of Finance and the federal government.

Have you ever quantified the contribution of interchange to your revenue and earning?

It is certainly a large component of being in the large purchase business. But as interchange changes, there's many variables that an issuer can use to manage any type of reduction if there was a reduction in interchange. You can reduce your cost base, you can look at your credit profile and you can look at the value of your points program. All of those ultimately affect customers in one shape or form or another. But the issuers have a lot of tools and their ability to manage any type of change to the system.

Thank you.

(inaudible)

Good morning. Just a broader question about domestic loan growth, mortgage growth of 4% year-over-year pretty much in line with the previous quarter. And I am wondering what the outlook is for mortgage growth in particular but domestic loan growth in general, has there been any change in your view on that? And do you think the current pace, more importantly, do you think the current pace is sustainable or could we see another slowdown coming?

Thanks for the question. We feel good about our mortgage business. Our volumes were up just over 4% from a strong Q3 last year and in fact I think everyone knows that we got off to a slower start in the spring housing window because of the weather but we saw strong June and July and actually our pipelines for the fourth quarter also look strong.

As far as consumer loan growth, obviously you can see from our results notwithstanding the good growth that consumer loan growth has slowed and our expectations are for consumer lending to moderate to mid single-digit 3% to 4% growth rate. And it is why in Dave's comments he commented on us really looking position to meet our customers' needs including shifting a lot of our capability as well to making sure that we capture the significant investment and project opportunities.

Great, thank you.

Derek De Vries.

Great, thanks a lot. It is Derek De Vries from UBS. My question is in regard -- there has been a lot of regulatory change and consultations going on at the moment. And I guess in that context, I wanted to ask you a little bit about your CoCo issuance.

So I'm curious why you went for this type of instrument, and was that in response to an expectation for change in the regulatory environment? I would also be curious on the breakdown of the buyers between retail and institutional and domestic and international, if you have got that.

It's Janice. By CoCo issuance, do you mean our nonviable contingent capital, I am assuming?

Correct, yes.

So on the prefs, we did two preferred share issues and they basically were requirements in order for us to issue preferred shares that we put in the nonviable contingent capital trigger. Those two instruments by the way are recovery tools so at the option of our regulator if they believe that any sort of a bank instability can be solved by financing to capital, they can trigger.

With respect to the distribution because there were pretty healthy yields on that pref, I think that is where we ended up was about 70% to 75% retail and the balance institutional and that is a little bit unusual based on what the splits we have had on our preferred share issuance.

For sub debt, same thing nonviable contingent capital with a trigger and that was a requirement in order to have that qualify as sub debt in terms of the capital treatment. So that too is a recovery instrument.

When you look at the overall context of the white paper that has come out on the [bail-in] regime, the difference between those instruments and bail-in are of course bail-in is a resolution instrument. So with respect to the sub debt of course it is a little bit of a more complex instrument and it was all institutional.

Right. So if I'm understanding what you are saying correctly, this is going to be the norm going forward for the Canadian banks. Is that right?

Yes, that is right.

Understood. That is what I was getting at. Thank you very much.

Mario Mendonca, TD Securities.

Good morning. If we could go back in exchange for a moment, when [Nemea] reported their Q2 2014 results last week, the CEO specifically referred to changes and said that industry participants could voluntarily implement reductions and/or cap interchange rates. What I'm getting at here is how does that square with you? Is that a plausible outcome that we could rather than seeing a hard and fast regulatory change instead see the banks voluntarily reduce their cap interchange fees?

I think the answer to your question, Mario, is banks don't control the spending of interchange. That is controlled by the network exclusively, Visa and MasterCard. So banks are recipients of the revenue stream from that interchange but we have absolutely no control whatsoever of the setting of those rates. So I don't see how we would be able to do that. That is purely in Visa and MasterCard's control.

So anything negotiated between say Visa and MasterCard and the federal government would apply to us and we don't have control over it.

Okay. And do you contemplate any -- is it conceivable that you could see changes in on or all cards or is that something also you don't think is not part of your control?

That is again a network regulation. It has been a critically important part of building and overall effective and efficient payment system over the last 50 years. A customer has to have the confidence that when they go to a point of sale online or physically that their card will be accepted so it has been the foundation to building a global payments network.

There has been discussion between all parties whether that rule should exist going forward. The issuers and the networks would say it is a very important part of our franchise. But I think all the rules are under negotiation at the same time. So I would hope to see that a core part for our customers sake. I think confidence in using your payment vehicle is a foundational element and we would encourage that to stay in place.

But you are saying that is on the table as well then?

It has been discussed but I think I would expect all participants to understand the need for consumer confidence when presenting a payment card that is accepted. So I think we are playing with the foundational elements and that has received a lot of discussion. There are many different ways we can go but I wouldn't rule it out but I would be very disappointed if we did go down that (inaudible).

Okay. The growth in the wholesale loan book, clearly we see it in real estate as you highlighted. Can you talk about financial sponsors and whether they've played a role in growing that loan book as well?

We disclose separately the leverage loan segment of the loan book and it is about 8% of the loan book. So the sponsored business is all about half of that book. So while significant, not a large component of the loan book and that is because in the sponsor business basically we are typically underwriting to distribute term loans and high-yield bridges we take out in the capital markets.

The sponsor business has been pretty vigorous over the last several months. We are participating and we are participating at roughly our market share in other businesses so we would be ninth or tenth in private equity financing which is where we are in most of our other businesses.

Okay, thank you.

(inaudible)

It is actually BMO Capital Markets. I hope that wasn't a Freudian slip.

Just to follow-up on Mario's point a little bit. Outside of the exceptional trading revenue in capital markets, you had obviously very good results in your NII and fee income type stream as well. What is the outlook on that, Doug? Is that sustainable?

Yes, a lot of that fee revenue is from the US and the US is roughly half of our overall revenues now and it has almost doubled our revenues from Canada so you can see where we have had nice year-over-year and quarter-over-quarter growth in Canada and we certainly want to continue that track, a lot of the growth is in the US and it is right across the board.

It is equity new issue. We have really been emphasizing that we want to lead equity deals in the US and we are making a lot of headway there. We are about fifth or sixth in the convertible new issue lead tables. We are outperforming there, high-yield same thing, loan syndication. It is really spread right across the products and it is really about raising capital for customers.

So as long as you have good credit markets, the markets we have been in, you can distribute loans and you can distribute high yield quite easily frankly. And so as long as credit markets are good and there is an opportunity there, so we are trying to grow those businesses. If you get into less receptive markets then it will be more difficult.

It looks like this quarter the spread was richer than the prior quarters. Was there something unique this quarter?

Spread in the wholesale loan book?

Yes.

No, I don't think so. I pointed to some growth in the real estate segment. There is an opportunity there that we have been taking with some strong clients. And so we have been earning some good spread in that business but I think it has been fairly consistent.

If I can have just one additional one maybe for Dave. Dave, these are obviously very good results and the hurdle has been set. The question really is though in Canadian banking 3% to 4% loan growth is what you are gearing up for and you are really relying on organic growth to a large extent to accommodate the growth let's say for the capital markets business, where is that organic growth going to come from?

I think you have seen while the mortgage business has slowed as expected given the regulatory and consumer change in preferences, I would highlight the agility of our business model as growth in consumer demographics shifts to deposits and investments, we have top franchises in those areas, number one or number two franchises and we are able to capture that growth irrespective of where it occurs in the Canadian economy. So I remain very confident about the agility of our business model and its ability to capture a disproportionate share of growth irrespective of where it occurs in the customer segment or in a business.

But I think that is a really important part and you have seen that with our investment growth numbers, you have seen that with our core deposit growth numbers and we remain very confident in those franchises.

I think as you look at the Canadian economy and expected improvement whether it is a Bank of Canada forecast or own internal economic forecast, we are expecting a modest improvement in economic growth next year and that will hopefully drive some more organic growth and deployment of marginal capital.

So I think we are confident of capturing growth and expect to see a little bit better environment going forward.

Thank you very much.

Peter Routledge, National Bank Financial.

Thanks. Just like to come back to the mix question. If I look at Canadian banking which is 50% of the earnings, pre-provision income grew about 3.8%, that is before the interchange headwinds that are probably going to hit over the next little while. And I look at capital markets, you had a 15-year track record of growing earnings at a pretty repeatable level and avoiding the asymmetric losses that have hurt so many of your peers. So you have clear risk return superiority relative to peers in that business and that business has a great growth outlook. So how can you not allocate more capital and be more aggressive in growing capital markets given those dynamics?

I think as we look back, the balance that we have achieved in our diversified business model has suited us very well and all of those strengths in capital markets we fully acknowledge and we are very proud of the consistent growth, the very well-managed business and a business that has attractive opportunities. But as we balance all our stakeholder needs, sticking to that diversified business model is important. It has been a core to our success in the past and our strategic guidelines remain a guideline over the medium to longer term.

So I think we have opportunities in all our businesses. We saw a record results at the same time in our wealth management business and we have got definitive demographic shift in our economy in North America and in Europe and in a number of markets. So all of our businesses have attractive growth opportunities and that we feel will allow all businesses to grow and keep the existing ratio of our diversified model roughly the same.

Just on the Canadian banking, and there's exogenous factors, you are performing well in the segment I'm not critiquing the performance. It is more their exogenous factors that are going to slow earnings growth there and a risk to me for Royal seems to be 50% of your earnings are coming from a business that faces some pretty material headwinds. Do you think I am alarmist in that concern or not?

On the retail side you are saying?

Yes, Canadian banking.

Well, I think you are being an alarmist. One, as I responded to I think Mario's question, the previous question, we have -- on interchange specifically, we have a number of levers if interchange is reduced by legislative action or regulation. We have a number of levers through cost, through credit profile, through managing our reward programs to deal with that. It will impact consumers in Canada across the board but we have the option to manage that.

You look at the types of tailwinds we would have in our retail and in our wealth management business particularly from a higher rate environment as you have seen disclosed in the industry in North America are quite material. So combine that with the outlook for better core economic growth and I would say you are being quite alarmist. But there certainly are some very positive opportunities and potential tailwinds.

So I think they certainly offset any type of headwinds that we might receive from a deteriorating credit environment, risk cycle or any type of regulatory change.

Okay. Thanks for the frank answer.

Robert Sedran, CIBC.

Good morning, Doug. I'm not if sure your comments about some of the unusual items during the quarter covers my question but I note a pretty significant uptake in European revenue as well and against the backdrop of some mix let's call it between the UK and the continent in terms of the economic backdrop. Can you comment a bit on the European outlook and whether that unusual item affected Europe this quarter?

One of them did. One of them was on our books in our European sub so slightly less than half of the 100 occurred in the UK. I would say away from that, one of the things that we have been focused on is improving the European business so that we have done more hiring in Europe than any other geography over the last year. And our operating committee came to the conclusion this is an opportune time to improve our platform in Europe and many of our businesses especially in the creating side are under new leadership in Europe and we are actually very pleased with the results that we are getting under that new leadership. We are hiring and upgrading people. And yes, we are going to improve that business. You are starting to see some results of the efforts in the investment we are making.

Have you grown more comfortable putting capital into Europe then?

Well, we've got a small loan book in Europe. We would have about 160 borrowing customers. It is actually in Europe, the corporate business is really focused in the UK, Germany and France and it is mostly -- it is largely investment grade which really supports FIC origination, new issue origination in the FIC business. We are going to continue to lend but we are going to really focus on those economies and so we have some loans elsewhere but I would say it is really focused in those three places.

Thank you.

We have no further questions at this time. I would like to return the meeting back to Mr. Dave McKay.

Thank you, operator, and thank you everyone for joining us this morning. This was a great quarter for RBC, a testament to the strength of our diversified business model and our strong capital position. We look forward to presenting to you again next quarter. Thank you everyone and have a good weekend.

Thank you. The conference call has now ended. Please disconnect your lines at this time and we thank all who participated.