Royal Bank of Canada (RY) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the RBC 2015 second-quarter results conference call. I would now like to turn the meeting over to Ms. Amy Cairncross, VP and Head of Investor Relations. Please go ahead.

Good morning and thank you for joining us. Presenting to you this morning are Dave McKay, President and Chief Executive Officer; Janice Fukakusa, Chief Administrative Officer and CFO; and Mark Hughes, Chief Risk Officer. Following their comments we will open the call for questions from analysts.

The call is one hour long and will end at 8:30. To give everyone a chance to participate, please keep it to one question and then requeue. We will be posting management's remarks on our website shortly after the call. Joining us for your questions are George Lewis, Group Head of Wealth Management & Insurance; Doug McGregor, Group Head of Capital Markets and Investor & Treasury Services; Jennifer Tory, Group Head of Personal & Commercial Banking; Zabeen Hirji, Chief Human Resources Officer; and Bruce Ross, Group Head of 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.

Good morning, everybody, and thank you for joining us today. This morning we reported record earnings of over CAD2.5 billion, up 14% from last year. Excluding a foreign exchange gain that Janice will explain, earnings were up 9%. We had solid results across our businesses, credit trends remain strong, our common equity tier 1 ratio increased by 10%.

Overall, we had a great quarter and a record first half with a year-to-date earnings of over CAD4.8 billion on an adjusted basis, up 11% from last year, and ROE of nearly 19%. These results again underscore the strength of our diversified business model and our client-focused strategy, which has enabled RBC to deliver quality earnings and consistent growth in a range of economic backdrops.

As another testament to the strength of our business, RBC was recently named Global Retail Bank of the Year for the second year in a row by Retail Banker International. This marks the first time in the history of the award that a bank has received this distinction for two consecutive years. I am very proud of this achievement.

Let me now provide my perspective on the performance of our business segments. Canadian Banking had another strong quarter with earnings up 7% from last year. Our results reflect our continued execution on key extra strategic priorities which we believe will drive growth and extend our lead in Canada. Let my highlight three of our priorities.

First, we've been adopting to the consumer shift from borrowing to saving and investment as baby boomers retire, as young people become increasingly responsible for their own retirement. With the largest financial planning workforce, an industry-leading mutual fund business, and proven ability to cross-sell at a higher rate than peers, we're well positioned to capture growth from these demographic trends.

Second, as the market leader in business financial services in Canada, RBC underwrites more than a quarter of all business loans under CAD25 million and we're seeing very good momentum, with business loans up 8% from last year and business deposits up 10%. Third, we're focused on becoming a more agile bank and our investments in technology are paying off and helping to further improve our efficiency ratio, which continues to be an industry best in Canadian Banking.

For example, as part of our overall digitization program, last year we introduced e-signatures which we estimate resulted in savings of up to 24,000 hours per week in administration time, allowing employees to spend more time providing advice to clients. Overall, I'm very pleased with the strong quarter in Canadian Banking.

Moving to the Caribbean, our banking business was profitable again this quarter even with the impairment loss related to the announced sale of RBC Suriname. And we continue to see improvement in our core operating performance.

Turning to wealth management, we saw continued strength in our two largest businesses. Global asset management had a strong quarter, driven in part by a record winter investment season in Canada.

Our results also reflect the strength of BlueBay, which now is approximately CAD75 billion in assets under management, nearly double the size since the acquisition in late 2010. Together with our organically developed US- and UK-based businesses, clients from outside of Canada now represent one-third of RBC GAM's total CAD370 billion of assets under management. Canadian wealth management also had a strong quarter and continues to focus on extending its number one position in the high net worth segment by deepening existing client relationships and continuing to track new clients and experienced investment advisors.

In the US, we're a top 10 full-service wealth manager and are seeing the benefits of shifting to a more fee-based model. We are poised to deepen our client relationships even further through the announced acquisition of City National. Last night, in fact, we met an important milestone on the pending combination of our two banks as City National shareholders voted in favor of our merger agreement. So far our integration plans are going well and we're on track to close in the fourth quarter of this year, subject to regulatory and other customary approvals.

Looking at insurance, even with the industry headwinds and higher claims this quarter, the business delivered solid results on a year-to-date basis. And we do expect the second half of the year to be seasonally stronger.

Moving to investor and treasury services, the segment delivered another record quarter reflecting favorable market conditions in our foreign exchange businesses and high levels of client activity including from a growing client base in Europe where we are a leader in the key offshore markets of Luxembourg and Ireland.

Turning to capital markets, we had a very strong quarter, demonstrating once again the success of our strategy to focus on traditional client-driven corporate investment banking and origination activities. As well, the value of our diversification across products, industry sectors, and geographies.

In Canada, we're committed to maintaining our leading market share and this quarter we continued to be on top of the league tables, involved in many high-profile deals. We're also proud of our involvement in the launch of the Aequitas NEO Exchange this quarter, a significant landmark for clients in the Canadian equities marketplace.

In the US, we had a record revenue this quarter, reflecting broad-based strength across most of our businesses. We're continuing to see solid growth in new clients and we're doing more business with existing ones.

Our European capital markets business also had a solid growth quarter with revenue up almost 30% from last year. We are seeing the benefits from repositioning our fixed income business and expanding our investment banking presence in key markets like France and Germany. Despite the challenging economic climate in Europe, I'm encouraged by our progress.

Looking ahead, it feels like the macro landscape is less volatile than it was a few months ago. However, as the outlook for the global economy remains uncertain, we are continuing to actively monitor industry headwinds.

While the price of oil has increased over 25% since the end of January, it remains at levels that challenge the profitability of the sector. Mark will provide more detail but to date we have not seen significant deterioration in our wholesale and retail loan portfolios from the sustained low oil prices. While we are monitoring conditions carefully, we're cautiously optimistic that in the second half of the year we should see the economic benefit of low oil prices and a weaker Canadian dollar in manufacturing and export in heavy provinces such as Ontario, BC and Quebec.

Turning to housing, notwithstanding the heightened media focus, we believe that the Canadian housing market generally continues to be supported by strong trends in employment, household income and population growth. We also closely watch supply and demand factors and are seeing that buyers and sellers are generally aligned in most markets, and that new construction has been broadly absorbed.

Price increases in a few markets fueled by low rates and limited supply definitely bear close monitoring, but overall the credit profile of our clients is strong, has remained relatively stable over the past year. The debt service ratio was at a record low, reinforcing our confidence in our clients' ability to repay. And we're comfortable with the results of our stress testing under a higher rate environment.

Lastly, the regulatory landscape for financial services continues to evolve but as we've demonstrated in the past our scale and financial strength gives us the flexibility to manage change while continuing to invest in our businesses to drive long-term growth.

To wrap up, I'm very pleased with our performance this quarter which demonstrates our continued leadership position in Canada, the strength of our client franchises in the US, and also in Europe. We feel good about our businesses heading into the second half of the year. While we continue to face some industry headwinds, I'm confident that RBC's diversified model positions us well to continue to capitalize on opportunities created by the changing market environment to grow our businesses and to continue delivering value to our shareholders.

I will now turn it over to Janice to provide more details on our second-quarter results.

Thanks, Dave, and good morning, everyone. As Dave said, we reported a record second quarter with earnings of over CAD2.5 billion, up CAD301 million or 14% from last year.

We had one item of note this quarter in corporate support. As a result of our exit of certain proprietary trading activities in Q4 to comply with the Volcker Rule, this quarter we dissolved a US-based funding subsidiary and realized a foreign currency gain of CAD108 million before and after tax. As this amount was previously booked as an unrealized foreign currency translation gain in other components of equity, there was no impact on capital. Excluding this gain, earnings were up CAD193 million or 9% from last year, driven by solid earnings growth in Canadian Banking, strong growth in capital markets, record earnings in investor and treasury services, and underlying business strength in wealth management.

Turning to capital on slide 7, our common equity tier 1 ratio of 10% increased 40 basis points from last quarter, primarily reflecting internal capital generation and the impact of a higher discount rate which decreased our pension obligation. The growth in risk-weighted assets this quarters was more than offset by the impact of FX translation due to the strengthening of the Canadian dollar.

With a CET1 Ratio of 10%, we are well positioned to maintain our ongoing capital management program of funding organic growth and returning capital to shareholders as we work towards closing the announced acquisition of City National, which is targeted for the fourth calendar quarter of 2015. On closing, we estimate that the acquisition will impact our CET1 ratio by approximately 70 basis points, as goodwill and additional risk-weighted assets will be partially offset by equity issued at the close of the transaction.

Before I turn to our business segments, I would like to point out that this quarter we began disclosing our liquidity coverage ratio which was 111%, well above our minimum of 100%. Overall, we're comfortable with the mix of our balance sheet.

Now moving to our segment results, starting on slide 8. Personal and commercial banking reported earnings of CAD1.2 billion, which was up CAD85 million or 8% from last year and down CAD55 million or 4% from last quarter.

Canadian banking reported earnings of over CAD1.1 billion, up CAD81 million or 7% from last year. Our performance reflects strong growth in fee-based revenue of 16%, as higher client balances drove card services revenue and mutual fund distribution fees. Solid volume growth of 5% also contributed to the increase and includes deposit growth of 6%, reflecting our focus on growing core checking accounts and loan growth of 4%.

Sequentially, Canadian Banking earnings were down CAD29 million or 2%, largely because there were three fewer days this quarter. This was partially offset by lower PCL.

This quarter our net interest margin was 2.64%, down 4 basis points from last quarter. Excluding cumulative accounting adjustment, our net interest margin was 2.66%, down 2 basis points from last quarter, reflecting spread compression and lower amortization of the fair value of our Allied Canada legacy loan portfolio. Looking ahead, we continue to expect margin pressure from the low interest rate environment and competitive pressures and will remain disciplined about managing our margins.

Turning to expenses, our results this quarter demonstrated our continued focus on cost management, as we continue to invest in our businesses. Our efficiency ratio improved 100 basis points over last year to 44%, and we generated very strong operating leverage of 2.4%. We continue to target operating leverage in the 1% to 2% range. This quarter we came in at the higher end of our range, in part due to elevated marketing costs last year related to our Olympic sponsorship.

Caribbean and US banking results reflect the previously announced impairment loss of CAD23 million related to the sale of RBC Suriname. Notwithstanding this loss, we're pleased that Caribbean banking's underlying earnings have improved, demonstrating the progress we have made in restructuring our operations.

Turning to slide 9, wealth management had earnings of CAD271 million, down CAD7 million or 3% from last year. This quarter we had after tax restructuring costs of CAD22 million related to the repositioning of our US and international wealth management businesses. We've incurred almost two-thirds of the estimated costs related to this repositioning and believe that the majority of restructuring will be completed by our fiscal year end.

Our results were also impacted by PCL of CAD32 million primarily related to one account in our US and international wealth management businesses. These factors aside, we had a strong growth in our two largest businesses, global asset management and Canadian wealth management, driven by higher average fee-based client assets.

Assets under management and assets under administration were up 13% and 8%, respectively, over last year, due to solid capital appreciation and net sales. Sequentially, net income was up CAD41 million or 18%, largely driven by growth in average fee-based client assets, partially offset by higher PCL.

Moving to insurance on slide 10, net income of CAD123 million was down CAD31 million or 20% from last year, largely reflecting the negative impact of the change in Canadian tax legislation which I discussed last quarter. Sequentially, net income was down CAD62 million or 34% from a very strong first quarter, as we had lower earnings from a UK annuity contract compared to two contracts last quarter, and had higher claims costs in our life retrocession business. On a year-to-date basis, earnings are relatively flat to 2014 despite the change in tax legislation.

Investor and treasury services had a record quarter with earnings of CAD159 million, up CAD47 million or 42% from last year and up CAD17 million or 12% sequentially. For the second consecutive quarter, we benefited from higher foreign exchange transaction volume and high levels of client activity in foreign exchange forwards markets, as some of the volatility we saw in Q1 continued in Q2. We're pleased with the results. However, these favorable market conditions may not continue to the same degree going forward. I&TS also benefited from higher funding and liquidity results, driven by interest rate volatility and growth in client deposits, which are up more than 15% from last year.

Capital markets had a very strong quarter. Net income of CAD625 million was up CAD118 million or 23% over last year, reflecting balanced growth across our investment banking, lending and trading businesses. We also benefited from foreign exchange translation which increased earnings by CAD34 million.

Compared to last quarter, net income was up CAD31 million or 5%, driven by a significant rebound in US and Canadian underwriting revenues, which in turn drove strong secondary fixed income trading. Equity trading revenue was also strong, although down 2% from record levels last quarter.

Before I turn it over to Mark, I'd like to address the proposed change in the recent federal budget and the potential impact on RBC. Since this is a consultation process, we are currently assessing the proposal but at this point we believe the impact may be 1% to 2% of total RBC earnings.

With that, I'll turn the call over to Mark.

Thank you, Janice, and good morning. Turning to slide 14, our credit quality remains strong this quarter as credit trends stayed near historic lows. This reflects our strong risk management practices and a supportive economic backdrop, which includes low interest rates as well as stable unemployment.

Provisions for credit losses on impaired loans this quarter were CAD282 million, or 25 basis points, up CAD12 million or 1 basis point from last quarter. This slight increase mainly reflects higher provisions in wealth management and capital markets, partially offset by lower provisions in Canadian banking.

Wealth management PCL was CAD32 million, up CAD19 million from last quarter, related mainly to provision on a single account in our international wealth management business. As we've mentioned in the past, growing the loan book forms part of this segment's long-term growth strategy. While some provisions are an expected outcome of that business activity, this quarter's provisions are higher than we would normally expect. Overall, we remain comfortable with this segment's credit quality, given our strict credit adjudication standards and the strong creditworthiness of our client base.

Capital markets had PCL of CAD15 million this quarter related to a drilling and services account and a technology and media account.

Moving to Caribbean banking provisions were up CAD4 million. While credit trends were relatively stable this quarter, reflecting the work we've done to strengthen and reposition our operations, we are mindful of the economic environment and the region remains challenging.

Turning to Canadian banking, we had PCL of CAD212 million, or 25 basis points, down CAD22 million or 1 basis point from last quarter. Looking at our retail portfolios, highlighted on slide 15, our credit card provisions remained low at 262 basis points, up 7 basis points sequentially, primarily due to seasonality. In our personal portfolio, provisions increased 3 basis points from last quarter due to lower outstanding loan balances in our auto portfolio and seasonality within our lines of credit.

Looking at slide 16, our residential mortgage portfolio makes up 66% of our retail portfolio and is well diversified across Canada. It continues to perform well with provisions of 1 basis point this quarter, consistent with historical performance.

Turning to slide 18, gross impaired loans and new impaired formations increased this quarter, largely due to a few accounts in capital markets, one of which was related to a drilling and services account which we provisioned this quarter. Sequentially, our gross impaired loan ratio remained flat.

Let me spend a moment on our oil and gas exposure. As Dave noted, we are not seeing any significant credit deterioration in our wholesale portfolio or in our retail loan book in oil-exposed provinces and are encouraged by the increase we saw in oil prices this quarter.

Looking at slide 19, our drawn exposure to the oil and gas sector continues to represent only 1.5% of RBC's total loan book. Over 63% of our oil and gas loan book is to exploration and production companies, while around 20% is to drilling and service companies. The remaining balance is to integrated companies, refiners and distributors. While we've seen some clients draw on their lines, on a net basis it's relatively stable compared to last quarter.

The spring review of our borrowing base clients is nearly complete. As a result of lower oil prices, we have seen some of our clients' limits reduced but this has not resulted in additional provisions. And while we've added a couple of new names to our watch list we have been proactively monitoring the portfolios, the movement was not significant.

Turning to slide 20, in Q2 average market risk -- value at risk of CAD34 million and our average stress value at risk of CAD105 million remained largely unchanged compared to the prior quarter. We had no days of trading losses in the quarter.

To conclude, while we are actively monitoring the macroeconomic headwinds impacting our operating environment, I am comfortable with how we are managing our businesses and overall am pleased with our credit performance. Operator, could you now open the lines for Q&A.

(Operator Instructions)

Our first question is from Robert Sedran from CIBC. Please go ahead.

Hi. Good morning. I wanted to talk about the wealth management segment and the restructuring for a moment. And actually I'm wondering more if the loan loss that was recorded this quarter has anything to do with the restructuring. Is the loan loss in the part of the business that's a going concern or part of the business that's being restructured?

Thanks, Rob, it's George Lewis. We are, as Janice mentioned, about two-thirds of the way through our wealth management restructuring program on the international side. And we do expect that to be completed by the end of the year. As Mark mentioned, the PCL this quarter did relate to a single client account in our international business.

You will see at the end of that restructuring program a narrower footprint in that business. And while we expect PCL from time to time in wealth, this is clearly outside of our risk appetite for this segment, one of the reasons we're doing the restructuring.

And I would expect if you go back to 2014, we had three straight quarters of zero PCL. And I would expect by the time we get through the restructuring program and looking forward, I would expect that would be more the norm rather than the exception going forward.

But does this loan fall into that thinner footprint that you're expecting or does it fall outside that thinner footprint?

It falls within that footprint.

Okay. And the last time we had one of these rather sizable loan losses in this segment, it actually persisted for more than one quarter. Does it feel like this is an item that's going to happen this quarter and move out of the P&L or should we expect something there perhaps next quarter, as well?

Hi. It's Mark here. Obviously it's difficult to talk about an individual client's circumstance. It is one that we are working our way through. I think that's really all I can say at this point.

Okay. Thank you.

Thank you. The following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Good morning. Firstly on the trading, another great quarter. I'm just wondering if you can give me a sense of how it progressed through the quarter, month by month, and so far how trading is going in May.

I have to think about that in terms of month by month.

You mentioned on the last call that February was good.

Yes. Credit has been strong through the quarter and so credit trading in FIC was quite good. The equities business continues to be good. It was flat quarter over quarter, but it continues to be good.

I think really what's driving a lot of this improvement is we have constructive markets but we're originating a lot more active book running positions in the fixed income business and the equities business, which is just helping us with client flows. You saw in the results, I think, for some of the global investment banks it was a good trading quarter overall. I would say that the environment remains quite constructive.

Okay. Thank you. And then just a question for Dave and Janice on the capital, a couple things that are tied to this issue. One is you talk about the target you want to get to by the end of the City National closing and how you want to balance your capital deployment to shareholders against that. Does that mean that we have to wait until after the close until Royal resumes share buybacks or could it occur during that time?

And then also, just as we look towards the closing of that deal and Royal becoming noticeably larger and already the biggest bank in Canada, and large globally, what are your thoughts on Royal possibly being named a G-SIFI at some point? And how do you manage to avoid that, if you can?

Thanks, Gabriel. I'll take part of that question. With respect to capital deployment for the balance of this year, as I said, we are building towards having a 70 basis point additional capital to how we're building on an ongoing basis with our ratios and buffer so that we can fund the other half of the acquisition price that's internally funded with the capital, the acquisitions. So, on that basis, given where are today, we will probably not be in a position to do any buybacks until after we close that transaction and fully fund it.

With respect to your question related to G-SIB, we of course are looking at our balance sheets and where we sit with respect to that. Our regulator has not been definitive with respect to whether or not there is a G-SIB but what to do if there is a G-SIB in terms of capital buffers. As you know, we already have a 1% D-SIB buffer in addition to a Prudential buffer, so we're running our capital quite a bit higher than the 7% minimum. And we are discussing with the regulator from time to time what any G-SIB buffer would mean to our capital position.

But on a net basis, we think we're building into pretty strong capital positions. We're at 10% now, as we said after the last call in the past quarter. We're continuing to build our capital to both fund City National and fund solid growth going forward.

The only thing I would add, Gabriel, is the calculation for G-SIB status is based on the end of 2014 numbers. So City National won't impact that. Having said that, City National is a relatively small balance sheet compared to our CAD1 trillion balance sheet. It won't have a material difference in our overall score.

Related to that, Dave, since you've taken over we've seen a lot of announcements -- down-sizing of certain wealth activities, exiting Suriname, Jamaica. Are those moves prompted primarily to make Royal easier to manage or is there any thought on the capital deployment in those regions?

It's the latter, obviously. We go through a very rigorous process of looking at how our businesses are generating shareholder value and shareholder return. We look at our competitive market position and the long-term growth opportunity and the risk-return nature.

We go through every one of our businesses and we've been very disciplined about exiting businesses we don't think can achieve all those objectives. And that's what you're seeing is the outcome of exiting businesses that don't meet those criteria.

Okay. Thanks.

Thank you. The following question is from Meny Grauman from Cormark Securities. Please go ahead.

Hi, good morning. Just wanted to ask a question on the comment, Janice, you made on the 1% to 2% impact from synthetic equity arrangements. I'm wondering if that includes any mitigation efforts on your behalf.

That estimate, Meny, is a growth estimate, so it would be looking at what the impact is without mitigation or without capital deployment, redeployment.

Would you be able to comment on any mitigation tools that you have in terms of the magnitude of those, in your view?

I think it's too early to comment, really. We're looking at our options and there are options to mitigate some of the impact on the synthetic rules. We're going to make some submissions later in the summer. But we won't have the final rules until late August, I think, early September. So it's a little early to tell what the ultimate impact is going to be, but we're working away.

Okay. And then just a quick question just on the Volcker Rule. Is there any more, I don't know if you call it noise, or is there still more to come in terms of adjustments that you're making to Volcker? Or is it largely behind us?

It's largely behind us. We took about CAD5 billion of risk-weighted assets off the balance sheet when we closed down roughly half the strategies at the end of last fiscal year. We have repositioned some of the trading businesses where they are Volcker compliant in terms of facing clients. And we've also repositioned a few of the other strategies outside of the US. So, most of the noise, I would say, is behind us.

And then just a quick follow-up on that. There's been talk from the finance minister about Volcker and whether it goes against NAFTA. Is that something you have any view on? Does it make a difference to you one way or the other?

No, I think that's really rates or Canadian government securities is that dialogue is focused on, and that's not a security that we actively trade in that business.

Thank you.

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

Hi, there. A question for Mark. I wanted to maybe get a little bit more color. There was a rise in gross formations, bad loan formations in Canadian retail. I accept that it's off a very low base, but is there anything there you're seeing that we should worry about?

Hi. Thanks for the question. The GIL increase, as you would have seen, is really in capital markets. In Canadian retail bank it's really flat. We've had marginal increases in one place and then marginal decreases in others, and then a decrease in the Caribbean partially offsetting the capital markets increase.

So, you're not seeing anything problematic related to what's going on in Alberta or anything like that?

We are not still seeing anything like that.

And, Dave, I appreciate your comments on housing. You mentioned debt service ratios are at an all-time low. But house price to income is also at an all-time high. The question I'd ask you is how would your view on housing change if mortgage rates went up 100 basis points?

Certainly we do expect rates to go up at some point given this ultra-low environment for quite some time. That's going to slow demand, without a doubt. And what we've seen, market react very well. As demand changes, projects start much more slowly. We still require presales before putting new multi-family inventory into the marketplace.

We've seen supply and demand balance each other quite well so far in a disciplined fashion and we watch that equation very carefully. So you'll see obviously impact demand factors, and we'll watch how supply and we'll watch sales soliciting ratios in the resale marketplace very carefully around how that impacts house prices. Obviously that is the primary impact.

We stress our portfolio against higher rates to ensure serviceability. As you know, when we adjudicate, even in this environment, an existing mortgage, we adjudicate at the five-year mortgage rate, irrespective of which term the client ultimately chooses. So, we've already built in roughly a 200 basis point-plus buffer into all adjudications on a client. We manage this very prudently. But you have to expect demand will come off when rates start to go up.

When you stress the portfolio for higher rates, what's the stress level you use, like increase in rates by X, what's X?

I hand that to Mark.

We obviously use multiple different stresses, but I would say the one that we focus on the most would be a 400 basis points. And I think to also add to Dave's answer to your first question, I think it really would be the pace of that increase as to you how fast the government would really bring that on. And then I would also offer that 73%, 75% of our residential mortgage portfolio is fixed rate. Again, it would really relate to the pace and how fast that would you affect the portfolio over time.

But it's a 400 basis point stress and that's absorbable for Royal?

It's certainly within our risk appetite, yes.

Okay. And just one more question on the wealth management PCL. And I don't need detail on the individual PCL but the question would be, what are the lessons learned around risk in that business -- whether it's for George or Mark? It just seemed to me like these events over the last year and a half occurred during pretty accommodative markets and if markets weren't as accommodative the losses could have been larger. So, what are the lessons learned on risk?

Hi, it's Mark here again. I think I would say both for the situation we had at the end of last year and this particular one, they're not either really related to market circumstances. They're really related to client circumstances, the value of the underlying collateral and how that is measured against our loans. So, I would not really tie to market at this point.

I guess, though, how do you prevent these sorts of circumstances from arising? What are the lessons learned on risk?

It's a great question, Peter. I think what's really underlying -- coming back to Dave's comment about risk-reward as we look at the performance of our businesses, the scale in which we operate -- these occurred in smaller centers and ones that are part of our re-examination of our strategy. So, I think the lesson learned from a business perspective is to align your risk and reward, stick to your risk appetite, and focus on your larger and high-performing businesses, which is what we're doing.

Okay. Thanks very much.

Thank you. The following question is from Stefan Nedialkov from Citigroup. Please go ahead.

Hi, guys. Good morning. It's Stefan from Citi in London. I had a question on the net interest margin, actually, in Canada. We've seen a bit of divergence between you and your other peers that have reported quarter to date. More specifically, most of your peers showed good quarter-on-quarter increases while you're showing a bit of a decline. Obviously there's a bit of the Ally impact.

But I was wondering, is there anything more than that in terms of lending spreads, funding costs? Are you seeing more pressure on spreads in certain loan categories, for example, or just anything else that we're not really thinking about right now? And the second question is do you have an update on the impact from the City National acquisition? Thank you.

Okay, Stefan, it's Janice. I'll answer the first question on NIM. When you look at the 4 basis point movement down on NIM, 2 of that related to the correction of an accounting error, and the Ally fair value adjustment shifts around a bit because of the way the portfolio is amortizing.

We had always said that, for the 1 basis point, given where rates are and given that short-term rates had reduced, because of the way that we track through our deposits you will see the impact of some of that compression coming through on a quarterly basis. We had always said that it's 1 to 2 basis points of compression. So, it has to do more with the rates coming down again last quarter and our tractors moving through the portfolio. We tractor deposits over a three-year period, so you see the impact of any rate movement happening on the future funding costs. So that's what it's all about.

As far as our NIMs overall in the portfolio, they're all holding. So it is about the funding side of the equation there. And Dave, City National?

The only other thing I would add on NIMs is, as we benchmark we have a greater exposure to fixed rate mortgages, as Mark referenced, over 75% of our portfolio. And you've seen some margin expansion in variable rate mortgages which could drive positive NIMs that our competitors are less exposed to, or less ratio of fixed to variable on their balance sheets.

As far as City National, obviously we're going through the regulatory approval process. As I mentioned in my remarks up front, we had a very positive shareholder vote at City National last night with overwhelming support in favor, I believe. Of those who voted, over 99% voted in favor of the transaction.

Going through, we remain in the planning phase, obviously, looking at our synergies and planning with management. And we're very excited about this opportunity. We see all the synergies we thought up front around cross-sell to our existing high net worth client base in the US, allowing to accelerate the growth of City National franchise and cross-selling and partnering with our capital markets operation in the US.

All those synergies that we articulated in January, we are putting detailed plans around and planning the integration to execute those with City National. And I have to say I'm very happy with the way things are going.

Okay. Great. And do you guys have an update on the capital impact or are you sticking with your guidance from City National?

70 basis points of capital from our current ratio.

Thank you.

Thank you. The following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Hi, good morning. I think mine will be fairly quick. Janice, just wanted to go through -- I just want to make sure I understand all the one-time items. I know you had the wealth management be PCL which is going to fluctuate. You have the wealth management restructuring charge. You have the loss on the sale of Suriname. Those aren't backed out of cash. Is there anything else that I'm missing? Were they any gains on the insurance side related to mark-to-mark interest rates or any other noise on the insurance side that I should note here?

Doug, it's Janice. You picked them all up. There's nothing unusual about the insurance activity. You saw some volatility on the revenue side because of valuation. And the major drivers were the claims experience, which we said had deteriorated this quarter, and basically the fact that we didn't have a UK reinsurance contract renew this quarter. Everything else is as stated.

Of course, you didn't mention the foreign currency translation gain which we did adjust for. So that would be the one that you didn't mention.

Okay. But you adjusted for that.

Yes.

And then just going onto -- I struggle with the treasury area because it's been so volatile. You've gone through what the impacts have been on that business. And I'm just trying to gauge when I think about what the earnings power of this kind of business should be. Can you talk about maybe what some of the normal items are in the quarter or have been recently? But what's the true -- what should we be thinking about in terms of what that business can earn?

I'll give you some help in terms of why it had such a good quarter. It was really around FX, foreign exchange. Executing foreign exchange transactions and FX forwards for clients was quite robust this quarter. It was a CAD30 million to CAD40 million increase in revenue for the business from that activity. And if you have volatile foreign exchange markets, then you're going to continue to see good numbers.

The other thing that's happened in that business is that the revenues have gone up 11%. The non-interest expenses are down 4%. And so we have really improved the efficiency ratio of that business, so it's going to help the earnings going forward. But I would say that that was an unusually good quarter and it was because the foreign exchange business was quite strong.

Okay. Great. Thank you.

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Thank you. Janice, just a quick question on capital. You had previously noted that a 9.5% CET1 plus or minus, call it a 20 to 30 basis point buffer, is probably the range that you think you'd have to operate within on a steady state basis. Are you still comfortable with that post City National acquisition or do you think that range will have to move higher?

I think that we are still comfortable with that range and that's what we're forecasting and building towards as we move through Q1 of next year.

Okay. Thank you very much.

(Operator Instructions)

There are no further questions registered at this time. I would like to return the meeting to Mr. Dave McKay.

I'd like to thank everybody for getting up early this morning and attending our call. I know it's a very busy day. Thank you very much. Have a great summer and we'll see you at the end of August.

Thank you. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.