Royal Bank of Canada (RY) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the RBC 2017 Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dave Mun, SVP and Head of Investor Relations. Please go ahead, Mr. Mun.

Thanks, operator. And good morning. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Mark Hughes, Chief Risk Officer. We'll open the call for questions following their comments. (Operator Instructions)

Joining us in the room are business heads: Neil McLaughlin, Group Head of Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; and Doug McGregor, Group Head, Capital Markets and Investor & Treasury Services.

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

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

Thanks, Dave. And good morning, everyone, and thanks for joining us. This morning, we reported quarterly earnings of $2.8 billion, capping off a successful year in which we met all of our medium-term financial objectives.

We delivered record revenue of over $40 billion in 2017 and earnings of $11.5 billion, up 10% year-over-year. We generated a strong ROE of 17% for the year while maintaining a CET1 capital ratio of 10.9%.

Demonstrating our commitment to drive long-term shareholder value, we delivered on our growth strategies and returned a record $8 billion of capital this year through dividends and buybacks.

Our results not only reflect our diverse client franchises but also our commitment to invest for the future. As we reimagine the role we play in our customers' lives, we have been accelerating our investments and finding new ways beyond traditional banking to add value to our clients and communities.

Each of our business segments delivered strong underlying earnings growth in 2017, while making significant investments. During the year, we spent $3 billion in technology, including digital initiatives and cybersecurity. We even expanded our capabilities in artificial intelligence. We will open a new AI lab in Montreal, building on our existing Borealis AI, locations in Toronto and Edmonton, allowing us to provide better insights for our clients.

We also invested in our people to drive sustainable growth. I continue to be impressed by our employees who are innovating to generate new solutions for our 16 million customers. I'm excited about the momentum we built as we enter 2018 in an environment of strong employment levels, rising interest rates and solid GDP growth.

Before I share my view on our business outlook, I would like to mention that our thoughts remain with our Caribbean employees impacted by the hurricanes, and we will continue to support communities in the region as they rebuild.

In Canadian Banking, we generated record revenues in each of our businesses in 2017, resulting in net income of over $5.5 billion. As the Canadian housing industry digests the changing regulatory landscape, we expect our mortgage growth to slightly moderate to the mid-single digits. Household demand, however, should still be supported by changing demographics, including the large influx of immigrants expected in Canada over the next 3 years.

Increasingly, we are developing innovative tools, such as the RBC True House Affordability tool and Neighborhood Explorer to help more of our clients find their perfect home.

In 2017, we captured 23% market share of Canada's credit card purchase volume and grew at a premium to the market.

Our RBC WestJet co-brand credit card has shown strong growth with new cardholders up 32% year-over-year. I'm proud of our linked loyalty card with Petro-Canada, which was built through an innovative relationship to drive new accounts to RBC and deliver material fuel savings to millions of personal and business customers. In fact, our RBC Rewards program, Canada's largest and most flexible bank-owned proprietary loyalty program, recently received 3 awards at the Loyalty360 Customer Awards for demonstrating our commitment to client experience, advocacy and innovation.

We also implemented new technologies to simplify customer experience as we've seen a shift in the way retail clients are interacting with us. For example, self-serve transactions represent 84% of our total activity, and we've seen a growing shift towards mobile usage.

Our mobile community grew 19% over the year to 3.2 million active users, and growth in mobile sessions was up 30%.

Since the recent launch of NOMI, our mobile customers have benefited from actively reading more than 15 million financial insights, using its predictive analytics to help manage their day-to-day finances.

We are also creating an ecosystem for small business clients to help grow their businesses. For example, we are collaborating with an award-winning software firm called Wave to provide business owners access to an integrated financial management and accounting platform. We partnered with a digital health benefits provider called League to help manage small business employees' health care expenses. And last week, we introduced MyBusiness Dashboard, a tool that brings together complete picture of these and other online financial metrics into a single view on any device for better decision making.

Together with our commercial banking business, where we increased our sales force by 10%, we are investing in capabilities to help clients grow their businesses that support our economy. We have strong momentum with business clients and intend to grow our 26% share of business loans in Canada.

Our Canadian Banking and Wealth Management teams are also working together to offer a full spectrum of investment solutions ranging from self-serve to full-service advice models.

For example, we will soon launch InvestEase, our new digital investing offering to help clients manage their investments at a lower cost. This follows the success of MyAdvisor, where mutual fund clients set up 4,000 appointments with digital financial specialists in the first 4 months of its launch.

In 2017, our Wealth Management businesses has generated revenue of over $10 billion and earnings of over $1.8 billion.

In Canadian Wealth Management, the strong expertise and productivity of our 1,700 advisors were drivers behind RBC being awarded the Best Private Bank in Canada by The Banker.

In Global Asset Management, our strong fund performance and enhanced product suite were drivers that allowed us to capture 23% of industry net sales in 2017, adding to our industry-leading 15% market share of Canadian Retail Assets Under Management.

RBC Global Asset Management won 10 Lipper Canada Fund awards and was recognized as the Best Bond Fund ETF group.

In U.S. Wealth Management, including City National, our growth was driven by client acquisition through our growing sales force and expanding footprint. We welcomed the new teams in Washington, D.C., Minneapolis and New York City to drive an accelerated growth strategy. This is supporting our above-average loan growth, and we continue to benefit from rising interest rates.

And all of our teams in the U.S. including Capital Markets have collaborated very well and generated over $1 billion of referrals in the U.S..

Our Insurance segment generated strong net income of $726 million in the year. Our partnership with Aviva Canada has allowed us to deepen client relationships through a more comprehensive suite of insurance products while new mobile apps, such as MyBenefits and PATH, enhance the customer experience.

As part of our collaboration efforts, Investor & Treasury Services was recently appointed custodian for Aviva Canada, adding to our successful home and auto Insurance relationship.

Investor & Treasury Services posted very strong results for the year with assets under custody reaching a record $4.3 trillion and earnings of over $740 million. We continue to make significant multiyear investments in data and analytics within our Advanced Client Experience program to provide better customer-driven solutions. This has driven notable client wins and renewals in Canada, Australia and Ireland. We're also investing heavily in robotic process automation tools to make ourselves more efficient and improve the client experience.

Capital Markets also had another strong year, with net income of $2.5 billion driven by record revenue and disciplined risk management in a year characterized by market uncertainty and lower volatility. We remain the leader in Canada and are working together across borders to provide financing for deals, such as the acquisition of DigitalGlobe by Maxar Technologies for over $4.5 billion. We are deepening client relationships within Corporate and Investment Banking in the U.S., and will add managing directors and specialist teams in our U.S. and European locations to develop new relationships, adding to a solid pipeline.

Our fixed income and equities businesses performed well despite market headwinds. And as a testament to the strength of our global equity research team, we received a top 10 ranking overall by Institutional Investor. This positions us well for any changes driven by MiFID II.

I'm proud of the progress we made across our businesses in 2017 and how we are driving strategies forward for our customers.

In conclusion, I remain confident in our growth outlook and ability to meet our medium-term financial objectives. We are adding client-facing employees to serve more customers and capture market share in what we see as a solid economy and stable credit environment. At the same time, we are investing in new technologies for clients and to be more efficient across our businesses. Our industry-leading employee engagement and the trust that clients have given us, position us well for the future.

And with that, I'll turn the call over to Rod.

Thanks, and good morning, everyone. I'll talk about our business performance in the quarter and will add to Dave's outlook comments.

Starting on Slide 6, we reported strong earnings growth of 12% in fourth quarter. Our EPS growth rate of 14% benefited from 36 million of share repurchases, reducing shares outstanding by 2% from a year ago. We have now repurchased almost all of the shares we issued for the City National acquisition 2 years ago. Good revenue growth and lower PCL drove our earnings this quarter, as we supported clients across our businesses and benefited from favorable macroeconomic conditions. Most segments reported strong double-digit earnings growth. And while strong results drove higher variable compensation, we generated positive all-bank operating leverage of 1.5% net of the insurance fair value change. As Dave mentioned, we invested heavily in talent and new capabilities to help us deliver great customer experiences, reduce inefficiencies and strengthen our risk infrastructure, including cybersecurity and compliance with regulatory requirements, such as CCAR.

Our results this quarter included pretax severance costs of $66 million, which brings our full year severance to about $240 million pretax.

Finally, the lower tax rate this quarter was due to changes in earnings mix in Capital Markets, including higher revenue in U.S. Municipal Banking.

Turning to Slide 7. Our CET1 ratio remained strong at 10.9%, which is in line with our target range of 10.5% to 11%. We generated strong internal capital, repurchased a further $0.5 billion of shares and saw good organic RWA growth in our retail businesses balanced with an improved credit quality and RWA optimization in certain portfolios. However, a big driver of our capital ratio this quarter was the triggering of the Basel I regulatory floor, which was largely driven by growth in our wholesale and retail businesses as well as FX rate impacts. We understand that OSFI is currently reviewing its Basel I floor guidance for Canadian banks in response to a request from the industry to look into revisions to the current floor.

As you know, we are adopting IFRS 9 in the first quarter of 2018. Based on current estimates, the transition to the new accounting standard is not expected to have a significant impact on our capital ratios since we already have a sizable $1.2 billion capital deduction for our shortfall of allowance to expected loss. This shortfall is expected to absorb our estimated $600 million reduction in retained earnings for IFRS 9 transition. We would still have room under the shortfall to absorb future PCL impacts from a capital perspective.

Furthermore, the Financial Stability Board recently designated us a G-SIB, reflecting the scale of our global operations. Given our status as a D-SIB in Canada, we are already carrying 100 basis point capital surcharge, which meets our G-SIB requirements. We remain very comfortable with our CET1 ratio and do not expect the G-SIB designation, IFRS 9 or Basel I floors to impact our business growth, capital management or deployment strategy.

Given our competitive position and desire to invest and manage capital carefully for our clients and shareholders, we expect to target the higher end of our 10.5% to 11% range in 2018.

Let me turn to the performance of our business segments. Starting on Slide 8, Personal & Commercial Banking earned $1.4 billion. Canadian Banking net income of $1.36 billion was up a strong 9% from a year ago. Revenue growth of 5% was driven by solid volume growth, higher spreads and higher mutual fund distribution fees. This was partially offset by nonrecurring items in Cards revenue.

Mortgages were up over 6% as we won new customers and increasingly retained existing ones. Business loan growth was up a strong 11%. We adapted to changing client preferences in a rising rate environment by growing combined personal deposit and investment product balances 9% over the year.

NIM increased 2 basis points year-over-year and 4 basis points quarter-over-quarter, benefiting from Bank of Canada rate hikes in July and September. And given gradual outlook for rising rates, we expect NIM to increase 4 to 6 basis points in 2018 with some variability quarter-to-quarter.

Operating leverage in Canadian Banking was 1.5% in Q4. For the full year, adjusted operating leverage was 0.9% including the elevated severance costs or 1.3% excluding severance. We continue to target operating leverage of 1% to 2% as we expect solid revenue growth to be partially offset by increased investments in technology, including digital initiatives.

Turning to Slide 9. Wealth Management reported record earnings of $491 million, up 24%. In Canadian Wealth Management, our focus on customer relationships drove higher fee-based revenue year-over-year.

In Global Asset Management, our strong fund performance, broad distribution network and low fee structure helped us win even more new business.

Our U.S. Wealth Management revenue growth was up a strong 14% year-over-year as we continue to benefit from recent Fed rate hikes and strong loan growth, which we expect to continue at a double-digit rate.

Our Wealth Management segment had record earnings in the quarter. And in fact, each of our 3 key businesses had record quarters, notwithstanding mixed market performance, with North American equities performing favorably but the opposite in fixed income markets. While we invest for future growth, we expect to maintain our good efficiency trends in each of our wealth businesses.

Moving to Slide 10. Our insurance business ended the year with strong Q4 earnings of $265 million, reflecting actuarial adjustment updates. The timing of the recognition experience is based on accounting and actuarial standards. We generally see about $50 million of assumption in experience benefits in the fourth quarter, and this year, we saw around $100 million, which is really indicative of good experience. In many businesses, this would flow through evenly over each quarter, but with the current insurance accounting, it tends to be lumpy. This was partially offset by our earnings from U.K. annuity contracts, which were lower this year by approximately $33 million, given the general slowdown in the U.K. longevity transactions market. We believe a rebound is expected in 2018, though the timing of such contracts will continue to be variable quarter-over-quarter.

We discuss Investor & Treasury Services results on Slide 11. Earnings of $156 million were down 10% year-over-year as we continued to invest heavily in technology, which is an important factor in recent client wins and renewals. Recall last year's funding and liquidity earnings benefited from tightening credit spreads and FX volatility. Client deposits were up 11% and assets under administration were up 9% as we benefited from the strength of our credit ratings, reputation and product offering.

On Slide 12. Capital Markets net income of $584 million was up 21% year-over-year, reflecting lower PCL and higher Corporate Investment Banking activity. We generated more lending revenue in Canada and saw higher Municipal Banking revenue in the U.S. Our Global Markets business continued to deliver solid results in what has been a tougher quarter for the industry driven by low volatility, which particularly impacted corporate investment grade and rates products within fixed income trading.

Capital Markets achieved strong returns and record revenue of $8.2 billion in 2017, while reducing our risk-weighted assets in the business by 6% over the last 2 years. Similarly, both Market Risk RWA and the average group VaR is down over 30% since 2015.

We're pleased with our fourth quarter and our record full year results in 2017. All of our businesses delivered strong earnings growth. We met all our medium-term financial performance objectives, both in 2017 and over the last 3 years on average. We remain committed to these objectives and believe our business model with scale franchises will continue to drive long-term value to our shareholders while supporting our clients and communities.

As we look ahead to the first quarter, our year-over-year comparables for our wholesale businesses are expected to be more difficult given the strong first quarter we had earlier this year. However, all of our businesses are collaborating and innovating to support our clients and win new business. And we are starting to see the benefits from interest rate hikes, which will grow over time. We expect to see over $180 million benefit from the July and September rate hikes. Another 25 basis point hike in Canada would lift net interest income by approximately $90 million in the first year, and a similar hike in the U.S. would increase revenue by $50 million in the first year. And we expect to improve underlying efficiency ratio across all of our businesses.

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

Thank you Rod, and good morning. I'm very pleased with our credit performance this year with annual provisions for credit losses of 21 basis points, similar to the lows that we last experienced in 2005. This is reflective of our strong underwriting practices, low unemployment levels and an improving macroeconomic backdrop, particularly in the oil and gas sector.

Turning to Slide 16. In the fourth quarter, total provisions for credit losses of $234 million were down $86 million or 27% from last quarter with provisions down across all business segments.

The PCL ratio of 17 basis points was down 6 basis point quarter-over-quarter. As I have mentioned in the past, both provisions and recoveries within our Wholesale book could show some degree of variability from quarter-to-quarter. Excluding a few outsized recoveries in Capital Markets, our total PCL ratio would have been 20 basis points this quarter.

In our Canadian Banking business, provisions of $251 million decreased $8 million quarter-over-quarter, reflecting lower PCL in our Commercial lending portfolio.

Caribbean and U.S. Banking provisions were up $5 million from last quarter, reflecting higher provisions in our Caribbean lending portfolios. Wealth Management had no provisions this quarter.

Capital Markets had a net recovery of $38 million this quarter, largely due to recoveries on a few accounts in the oil and gas and real estate and related sectors.

Turning to Slide 17. Gross impaired loans of $2.6 billion were down $320 million or 11% from last quarter, largely driven by repayments and accounts returning to performing status in our Capital Markets and Wealth Management portfolios. Our gross impaired loan ratio of 46 basis points was down 7 basis points from last quarter. Our gross impaired loans do not yet reflect the impact from the recent hurricanes in the Caribbean, where our exposure of approximately $300 million is limited to Saint Martin and Dominica. We've had limited access to our clients in these regions and continue to assess the full extent of damages as we regain access to these hardest hit regions. Positive trends in internal and economic indicators for certain wholesale and retail portfolios allowed us to absorb an increase in the collective allowance for Caribbean Banking related to the hurricane.

Let's now turn to the Canadian retail exposure on Slide 18. Delinquency rates and PCL ratios trended lower year-over-year for most retail products, supported by low unemployment levels in key provinces along with steady wage growth.

Slide 19 shows that the credit quality of our Canadian mortgage portfolio continued to be strong, with average provisions of just 1 basis point for fiscal 2017. In this rising rate environment, we remain comfortable with our clients' ability to repay given over 90% of our mortgages have already been stressed at a rate above the contract rate.

At origination, we have not seen any material changes in average FICO scores, LTV or amortization periods over the last 12 months. And more recently, we have seen an increasing number of fixed-rate mortgage originations, signaling increased conservatism by our clients in a rising rate environment.

Our variable rate HELOC portfolio continues to perform well with delinquency ratios similar to that of our insured mortgage portfolio. Furthermore, HELOC utilization rates have remained relatively stable over the past year with over 90% of our total Homeline clients paying down their principal.

Looking ahead, we remain conservative in our credit adjudication strategies and we continue to leverage digital capabilities to support credit decisions and predict early warning signs in order to mitigate risks.

For 2018, we are still thinking our PCL ratio could be in the 25 to 30 basis point range. Given the current macro environment and the quality of our portfolio, we would expect PCL ratio to be in the low end of the range or possibly lower for at least the start of 2018.

Having said this, as we implement IFRS 9, growth and variability from stage 1 and stage 2, market and economic factors as well as forward-looking considerations could add some quarterly volatility towards the higher end of the range as we move through the year.

Through a full economic cycle, the level of provisions under IFRS 9 should be relatively similar to provisions under the previous accounting standards.

Turning to market risk. Market risk VaR of $18 million in Q4 was the lowest level observed this year. In addition, the average VaR for the year was $11 million lower year-over-year. During the quarter, we had no days of net trading losses. We incurred only 1 day of net trading losses during 2017 compared to 7 days in 2016.

With that, I'll turn it back to Dave.

Thanks. Before we take Q&A, I believe Dave wanted to say a few words.

Oh sorry. We'll take -- operator, we'll take questions now.

(Operator Instructions) Our first question is from Robert Sedran with CIBC Capital Markets.

I just wanted to come back to the IFRS 9, I guess, outlook on loan losses. And Rod, I'm paraphrasing, but you said something along the lines of the buffer leaves you room to absorb from a capital perspective, an increase in loan losses. Does that suggest that as the IFRS 9 losses may roll through the income statement, you're going to have a benefit to CET1 as that buffer gets reduced further?

No, I wouldn't say there is a benefit to CET1, Robert. I'd say that the old Basel short deduction was about $1.24 billion in Q4. The $600 million I mentioned would largely go and reduce that. It won't always work out dollar-for-dollar because the mechanics of the Basel deduction, it's a different expected loss methodology than what is going to be the expected loss methodology under IFRS 9. So there could be some puts and takes. But largely, think about the first $1.2 billion of increases under IFRS 9 should be no to negligible impact on CET1. There could be some puts and takes there depending on the nuances of calculation, of course.

And so understanding it's not dollar-for-dollar, but the $600 million comes out of that $1.2 billion?

Yes.

A $600 million impact on retained earnings as the opening adjustment from IFRS 9?

Largely. Now within that $600 million, there is a small amount of classification and measurement, and that's where the old AFS accounting is going away. And so there was some volatility that went through OCI there. So there is a portion of that, it's only $50 million. So the $600 million isn't a dollar-for-dollar there, but it's within $50 million.

Okay. And Mark, understanding that the IFRS 9 is not going away, but were it not for IFRS 9, would you still be suggesting 25 to 30 basis points for next year?

I would certainly be saying at the low end of that range, as I said in my comments, possibly lower, at least at the start of the year.

Our next question is from Meny Grauman with Cormark Securities.

Just a question on Slide 22, a little bit of extra disclosure in terms of self-serve transactions and climbing steadily. I just wanted to ask in terms of that self-serve transaction -- as a percentage of self-serve transactions going through the branch networks, I just want to clarify that. And then just ask where do you think that can go over a reasonable time frame? And how does that compare to your peers? Is everyone basically looking the same or is there something different in what you're doing that is making that number higher for you?

Thanks for the question, it's Neil. So in terms of the self-serve transaction, this will be inclusive of our ATMs, our online banking capability and mobile, and we're comparing that to the total transactions. So the trend has really been driven by a chart up above as we look at mobile. And so we would look back and say that 2017 is the year that mobile has really taken off. Mobile became more active. Our customers are more active in our mobile application now than they are in our online banking application, so that's really the driver. In terms of where do we benchmark ourselves versus peers, we do have an award-winning mobile app, and we are seeing growth that we're quite proud of, up 19% for the year.

And where do you think that number can get to? Is it realistic to get to the high-90s? Mid-90s? I don't know. What's your view on that?

Well, I guess, when we look at sort of what the ceiling would be, we have to benchmark against the Scandinavian banks. It's a very different model that they've employed. They've gone very hard at mobile. And they would be in the kind of that mid-90 range. I think, right now, our focus is really about sustaining growth in activity in the mobile app and continuing to drive functionality.

Our next question is from Sumit Malhotra with Scotia Capital.

First off, either for Dave or Rod, just thinking about the share repurchase activity this year and into next year. I think, Dave, in your comments you talked about the $8 billion return on capital and $3 billion of that was share repurchases. I've never really thought of Royal as a -- I don't think you've been in the past a very large buyback bank. And this level of activity this year, would you say that it was very much related to some of those third-party share specific or third-party specific transactions you were able to enter into? Or is this in your view just a better reflection of how you want to deploy capital in the near-term?

Thanks for your question, I'll say a few comments and hand it to Rod. As we look at the year in the past versus projecting forward, certainly we had an opportunity to repurchase shares over the year. We had strong capital ratios. At the same time, we were able to grow our balance sheet. So we did take the opportunity to buy back shares throughout the year as you saw and returned almost $3 billion of capital to shareholders via that mechanism. As we look forward and you heard my comments around organic growth opportunities across the business, we expect our corporate lending portfolio to start growing again. As you noted, it has been relatively flat as we repurposed and recycled capital of our own client franchises there for a number of years very effectively. We still see strong growth in the Canadian marketplace, albeit maybe slowing in the consumer side, but certainly business financial services are growing well. We have a unique opportunity to grow in the United States and putting our balance sheet to work, across all those corporate institutional, commercial and high net worth customer franchises. So first and foremost, we see a very strong opportunity to deploy capital organically into all 3 of our core customer franchises going forward. We exited the year with a strong 10.9% CET1 ratio, obviously impacted by, as we noted, the Basel I floor. So again, we still see the flexibility to grow our business but also return capital to shareholders via share buybacks going forward. And potentially, inorganically, if the opportunity were to present itself, having said that, we remain primarily focused on growing our business organically. Rod, did you want to make any comments about share buybacks?

Yes. And I think, Sumit, your comment on the historical view is spot on, and that's largely as a result of us growing our capital base over the last 5, 6, 7 years from the 8%, 9% level up to the 10.9% that we're currently at. We also had the City National acquisition, which created goodwill that we needed to basically accrete capital back into the business. So as Dave outlined, our first preference is to grow client organic business. Obviously, dividends, we continue to maintain the same medium-term objective. And we will buy back shares if it makes sense. It's not our first objective, but we also treat capital very seriously and would not want to absorb unnecessary capital into our capital ratio.

Rod, those specific share repurchase programs that you participated in this year, is there more of that to do? Or has that particular type of transaction largely run its course?

I would not -- yes, I don't want to comment because those are our single counterparty transactions, so I would not want to comment on those. If there are opportunities in the future, we would love to do them. Couldn't say they're absolutely done.

Rod, there is room within the current perspective to buy back shares right about 10 million in current filing?

Yes, yes, we are about 2/3 of the way through. We're 20.5 out of 30 million from the current NCIB program.

I think the...

And lastly Rod, just to clarify. I think you said on the Canadian Banking NIM in your prepared remarks, you expect 4 to 6 basis points of margin expansion through the year. First off, am I correct on that? And secondly, is that a pro forma i.e., not baking in any further action by the Bank of Canada?

Yes. I'd say that's based on the 2 that have taken place, and it's based on the yield curve kind of behaving where we think it's going to behave. But obviously, if the longer rent contracts or the yield curve inverts or anything like that, which I don't anticipate happening, those numbers would change. But based on the current outlook for the economy, I'd say that's a safe assumption.

Our next question is from Gabriel Dechaine with National Bank Financial.

I want to ask you about mortgages and B20, which is just being implemented in the next few weeks. And got a bit -- frequent questions on if demand is being pulled forward ahead of that. Are you seeing that in your business today?

Yes, thanks for the question. It's Neil. We have seen a little bit of pull forward this fall as we talked to customers, some of them are surprisingly aware of exactly what the stress test is about and have decided to move more quickly. As Dave mentioned, we've taken a look at the portfolio and we still look at the overall impact of the business to be fairly modest, and we've included B20 in our outlook of having our home equity portfolio grow in the mid-single digits.

So how much -- just for some perspective, can you -- I know you made some comments at a conference recently, but to get some actual numbers, like, how much do you originate in mortgage volumes in a given year or this year, for example? And how much would that number decline due to B20? We've got one number from a competitor yesterday. And I guess from a credit risk standpoint, if we start thinking, well maybe if it's worse than 10% compression it starts trickling into economic activity, what sort of decline would be, I guess, worrisome from a credit standpoint if we start seeing that in terms of going back on housing start jobs? It's about 20% of the economy after all.

Yes. So we -- again, we've taken a look at our originations. We don't see a material reduction in what we expect to originate from this. The number put out yesterday by one of our competitors, we'd see a similar number as we look at the stress test and the capacity of the borrowers and who do we think wouldn't be applicable to really originate. Right now, and Mark had mentioned, over 90% of our mortgages are already underwritten at these higher rates. So the vast majority of the portfolio and our originations are not really going to be impacted. In terms of our expectations of the impact, we did a number of things really impacting the mortgage market, interest rates being one, regulation being second. I think the overall consensus is that it will take a couple of months really into 2017 as these things get implemented in January to really understand the impact. One thing we've also wanted to emphasize is that with the regulations, that does not apply to existing customers, so as we look at the size of our franchise, we do see this as a positive and we do expect some lift in our retention rates.

Okay. And on the credit, maybe, Mark, I don't know if you had input there? And also the origination volume numbers, is that a number you can share or like -- we can't see that anywhere, actually.

On the credit side -- it's Mark here. I mean, I -- at the moment, we are not really seeing expectation for a decline of a nature that would worry me from a credit perspective of our portfolios.

Our next question is from Ebrahim Poonawala with Bank of America Merrill Lynch.

I just wanted to follow up something that, Dave, you mentioned in your opening remarks around an outlook for a strong economy and consumer and job market next year. I think as we sort of get into 2018, can you talk about sort of, do you see more, like this year we were surprised to the upside in terms of how strong GDP growth was. As you look into 2018, do you see more downside risks to economic growth in Canada? And can you talk about in terms of the risks to the consumer from the BOC rate hikes, I think, we are on track for maybe 2 or 3 hikes next year, would love to get your sort of thoughts on those.

Yes, absolutely. As we look at the Canadian economy going forward, we do expect growth to moderate from the higher 2017 levels into the 2% to 2.5% range, which is still in the new economy relatively strong growth. So we see that growth balanced. You're seeing stronger exports of the Canadian economy. And with improved global conditions, you would -- if you look at of the Bank of Canada forecast, you're seeing good export growth, you're seeing good investment by businesses that we didn't see in 2015 and early '16. We're still seeing the government stimulus and infrastructure having an effect. So you've got balanced growth in other parts of the economy that are taking some of the pressure off the consumer and consumption side that has been driving our economy for the past decade almost. So we're seeing balanced growth across sectors. And that's why you're seeing our business financial services, deposits and lending growth so strong. You're still seeing consumption very strong on credit card side and that we project that to continue going forward. So I see a bit of a moderation but a better balance in the economy as to where is the growth occurring. And a better balance geographically. You've seen in the West -- strong B.C., strong Ontario. But you're seeing a bit of a rebound now in Saskatchewan again and in Alberta. So you're seeing balance. You're seeing strong Qu�bec. So good geographic balance, good sectoral balance across the country and that's reflected, I think, it's in our numbers as we exit the year and where we're seeing growth. We're also seeing that in the United States, very strong economy. Haven't forecasted the corporate rate impact on growth yet or any infrastructure spend or any loosening of standards for the banking industry that could accelerate growth. So we're seeing growth balanced across the City National franchise and our Wealth franchise and our Capital Markets franchise. We're seeing good pipelines as we exit the year. So we're seeing very much balanced conditions out there that give us confidence in the year to come.

That's helpful. And just as a follow-up to that, just listening to your remarks on PCLs for next year. It sounds like if anything there's probably -- it could be better than sort of the guided range as we think about '18. Like should we be worried about sort of the consumer leverage levels? And what higher rates might do next year? Or you're not too concerned about that?

We've always said that as we stress our portfolio, the number, the primary driver of credit stress in the consumer book is unemployment. Second is the VaRs. So when you look at the impact of rates, as Mark said, we've already stressed 90% of our mortgage portfolio to 200 basis point higher rate. It's unlikely that we're going to see rates at the longer end of the curve go up that much. What you're seeing are short-term rates go up, a flattening of the yield curve, but you're not seeing longer-term rates go up to the same extent. So as we look at where the stress is going to manifest itself, and we project strong employment growth, strong economic conditions, the primary driver of credit stress doesn't seem to be on the horizon. Therefore, we are forecasting in the lower range that Mark nominated, including the impacts from IFRS 9, which obviously in stage 3 -- sorry, stage 1, growth in your portfolio, does impact your overall number. And that's something we're all going to adjust to over the coming year.

Our next question is from Doug Young with Desjardins Capital Market.

Rod, just on the CET1, it sounds like OSFI could relax for Basel I risk-weighted assets as far as we've heard that from yourself, we heard it from one of your competitors. Obviously that would be a positive. However, it sounds like Basel 4.0 or whatever you want to call it could be agreed to next week and in some way shape or form that could include obviously some floors. I'm just trying to get a sense of how we should think about this. Are we going to simply replace the old Basel I floors with something new that is coming in? Just wanted to get your thoughts on that.

Yes. The -- obviously, I would -- you could assume that OSFI would replace Basel I floor with another floor. And then Basel IV, as you referred to and others referring to as Basel 3.5 would be a different floor regime that would have a phase-in period. So it would probably take a couple of years before it would kick in. And then what they -- what we've heard from people is that it would be a several-year phase-in. And OSFI may choose to accelerate that. Based on what we're hearing and what we've read in the press and what folks in Switzerland and in Europe have told us, if it falls into the 72.5% floor range for the Basel IV, it's not going to be a significant impact to our RWA. In fact, it would be smaller than what you saw this quarter for the Basel I floor. But again, that would not come into play for us for several years.

So the way to think of it is you would get a benefit potentially for a few years until the phase-in started to happen in 2020 and thereafter. Is that a fair way to think of it?

Yes. Or even later. The report that came out a few months ago was that it's going to be phased in through 2027 or something, and it would start at a very low floor rate. And I'm not going to guess what those rates might be, but if you believe what you read in the press, it would not impact us for many years.

Okay. Fair enough. And then just a few clarifications. The insurance impact from the actuarial items you said from $50 million to $100 million that was after tax, I assume?

Yes. And again that is experience driven. And so we have to go through the different models that we go through on the actuarial side, and that's how that works out. And so I think what you can infer from that is that we continue to have strong experience in our insurance book, and this year was better than in recent years. There is conservatism built into the actuarial models and into the accounting. And so that's how that plays out.

Yes. And then just one last clarification, Mark. I think you talked about your exposure to the Caribbean, I'm sorry I didn't jot the number down. Can you just repeat that?

Yes, for Saint Martin and Dominica, it's $300 million.

Our next question is from Sohrab Movahedi with BMO Capital Markets.

Dave, just maybe some color. You noted in your outlook specific to expenses, you're talking about $3 billion in tax spend as you make investments in the digital initiatives. How does that $3 billion compare to where you're at right now and relative to your revenues? And is that a number that you think about, I guess, in dollar terms? Or do you think about it relative to opportunity to spend if you had more revenues?

I think if you look at where it -- currently the relationship to revenue, I think we benchmark well against our peer group of JPMorgan and Bank of America and others who are spending 8%, 9% of revenue on technology. And I think ours is in that similar range and maybe elevated above where some of our Canadian peers might spend. But we do think about it more in the terms of an absolute spend and the things that we need to achieve, where the opportunity lies. And I would say that spend is elevated right now. I've made that comment pretty consistently over the last 6 quarters, as we have an opportunity to transform our business from the digital perspective and create new channels. You've seen the customer movement into the mobile channels. We've had a number of -- if you've heard my comments this morning, there are 6 or 7 examples of functionality and very exciting capabilities that are coming onstream that we've invested heavily in over the past, and you're starting to see that benefit and that customer switch coming to us. We're very excited. So we don't see a need to keep that pace as a percent of revenue going forward, and it's an absolute spend. And I think it's at an elevated level, so you will not see the same type of growth in that as our revenues grow when we (inaudible) revenues.

Our next question is from Mario Mendonca with TD Securities.

These are more just quick clarifications. Rod, when you referred to 4 to 6 basis points of NIM improvement in domestic retail, were you referring to off of the Q4 level or for the full year average?

Yes, the Q4 level.

Okay. And then on the margin generally, it was great across the board, Capital Markets, domestic retail, City National and frankly, it was better than what you'd offered us in prior quarters. It seems like things just improved. Would I be right in saying that it was deposit? Betas came in a little lower than you expected, is that what the message is? Or is there something else going on?

It's a combination of factors. One, I think the -- generally, if the market is anticipating a rate hike, it kind of flows into our funding costs ahead of the rate hike, so we get some compression in that quarter. This quarter, I think the market was a little surprised. And so we did not see that normal compression, which benefited us. So that benefits us on the lending and the deposit side. And so our ability to price into the loans versus what we passed on the deposits, as you mentioned, the beta, was favorable. We also had about a basis point of benefit from ALM activities.

So going forward, Rod, you wouldn't -- do you think this level of margin in Capital Markets, domestic retail, City National is sustainable, especially in domestic where you're actually calling for it to improve? You wouldn't expect any kind of check back on an all-bank level next quarter then?

No. We do not.

And then on the severance costs, the $240 million pretax for the year, it seemed a little elevated. I think that's the way you described it as well. Is that the number you'd expect to see drop materially next year?

Yes, we would expect that to be much lower. If you recall in '16, it was around $130 million. In '14 and '15, it was around $90 million. We would expect it to be back to those levels.

The '15 and '14 levels.

If not below, it's hard to say what the future will bring, but I would expect it to be below or at those previous year numbers.

Our next question is from Steve Theriault with Eight Capital.

Couple of things for me. First, Rod, did I see that NIM benefited at City National, I think, 4 basis points from acquired credit-impaired loans so I guess, IFRS related. Does that go away under IFRS some of these tailwinds, whether it's from the acquired credit-impaired book or from the performing book in terms of accretable yield? Maybe you can give us a little sense on that.

Yes. So if you look at Slide 23, you'll notice that the delta which was between those 2 spreads was quite significant, certainly through 2016. That has basically narrowed and it was down to 8 basis points. And as part of the IFRS 9 transition, the -- as you would recall and correctly point out, we did wipe out their loan loss reserve at acquisition in purchase accounting. Now under IFRS 9, kind of reestablished it, so that's a meaningful portion, not all, but a meaningful portion of the transition adjustment. So we would expect the PCL there and the spreads there to be more normalized. But I wouldn't expect a material difference coming out of IFRS 9 on the NIM side for CMB. I think if you look quarter-over-quarter, we were up 2 basis points on the NIM, excluding the acquired loans. And absent further fed rate hikes, those would be the levels I would look at. But if we're given future fed rate hikes, you would expect that NIM to continue to expand.

Okay, that's helpful. And then for Neil. Neil, Personal was flagged as an area where you'd like to see some improvement. We're not seeing it this quarter. So maybe you can talk about the drivers there, your outlook for next year. And also if you can fold in, in terms of cards, I know it's early days, can you talk a bit about how adoption and utilization is going with the new Petro-Canada relationship?

Sure. Thanks for the question. In terms of Personal franchise, I guess, maybe two comments. One, we are looking at the personal lending portfolio. We are seeing some good momentum in our auto business. In terms of branch-based personal loans, unsecured credit lines and installment loans, it's been fairly stagnant, and this is something we'd look at in terms of needing to focus on both value proposition and distribution to start to move that along in 2018. In terms of deposit side of the Personal business, it is about the Personal deposit accounts and we do believe that's an opportunity to drive some innovation, starting in the back portion of 2018 to really have client acquisition as a driver in the personal franchise. In terms of credit cards, we're feeling really, really good about the credit card franchise continuing to really outperform in terms of purchase volume. Trending about 10% year-over-year in terms of purchase volume growth as a key driver of other income, both from the Avion product, and Dave mentioned our WestJet product is something that's continually gaining steam and we have a great relationship with WestJet that we are quite proud of. In terms of Petro-Canada, it's early days, but we've been very pleased with the response from clients. Part of this is due to just the sheer value of that Petro-Canada and ourselves have put out to consumers. And the second portion would be just the ease of the experience. So once those clients simply go online and link their cards, the entire value is automated. And so Petro-Canada is obviously benefiting as more of our customers move to their locations to take advantage of the value.

And the Ally runoff, has that run its course or are we still feeling some of that?

Essentially, yes. It has essentially run its course, and that's one of the drivers of why we were mentioning that there is renewed momentum in the auto business.

Our next question is from Nick Stogdill with Cr�dit Suisse.

Just sticking with the card service revenue line. Rod, you called out the nonrecurring item in that line this quarter. Does that have anything to do with the recent partnership you've signed? And absent that item, would growth have been similar to what we've seen in the past few quarters, high single digits year-over-year? And tied to that, was that most of the slower growth in Canadian Banking fee line this quarter?

It's Neil, I'll take that question. I had mentioned our card purchase volume continues at 10%. So the drop in other income is predominantly due to cards. There's really 2 drivers. The first being, we've had 2 fewer processing days in the quarter, and so that's just what day those transactions were actually recorded, completely unrelated to the year-over-year growth in purchase volume. The second is a onetime cost that we needed to incur as we transition to high net worth card portfolio through new value propositions. And combined, it was about a $20 million in quarter impact.

Okay. So we should see sort of growth resume next quarter absent that item?

Yes.

Okay, great. My second question is on IFRS 9. Could you give us a sense on how much of the $600 million allowance true-up is being driven by retail versus commercial? And is it fair to assume most of that increase relates to Canadian Banking? Or is it -- are you seeing a lot go through other segments as well?

Yes. I mentioned the impact to City National, which certainly does have a portion of that, but there is also largely in Canadian retail is where you're seeing the rest of it. We also saw some increase in Caribbean as well. But the wholesale side, we saw a slight decrease.

So more on the retail side. Okay, great. And then one last one, on the Investor & Treasury Services. You called out the higher tech spend this quarter. Should we expect a similar level of spending to continue through 2018 in that business line?

There was an unusual item in the last quarter that was a little lumpy related to RPA, I think Dave mentioned that in his comments. But the spend will be pretty consistent, frankly, if you look at spend through the whole year. And you'll see that go through the numbers for the next couple of years.

Our next question is from Scott Chan with Canaccord Genuity.

On the Canadian side, you talked about the mortgage growth expectation. I was just wondering on the commercial business side, very strong in the quarter. Is it reasonable to assume that you guys expect double-digit loan growth on that side of the business in 2018?

It's Neil. Thanks for the question. Yes, we're feeling quite good about the commercial and business loan segments growing. A lot of it and really on 2 fronts, first being we took our time to really make sure we understood the risks that we were taking on. Having that work completed, we adjusted some policies and at the same time, grown our sales force. So Dave mentioned, we have about 10% increase in our commercial account managers covering its clients, and between those 2 levers, we'll expect that growth to continue into '18.

Okay, great. And maybe just one on Wealth. Just with the consolidation happening in Canada, does RBC see any opportunities in certain pockets of distribution, whether it'd be a positive on the manufacturing side in Canada?

It's Doug Guzman, thanks for the question. The -- yes, I think we see opportunity. I think a lot of what's going on in the outside world accrues to those who have size and have a range of options. And we have a distinguished number of channels and are able to access clients digitally and with human advice. So I think there's -- there'd be a general trend to it, we're certainly an attractive destination for investment advisers as they consider whether they are in homes that are able to invest at the rate they'd like to serve their clients. I don't know that we see a lot of inorganic consolidation in Canada, but we do see it being tougher and tougher for those who have less to work with to be both an attractive place for the investment advisers but also for their customers.

Thanks, operator. We're going to have to end the questions there.

I would now like to turn the meeting back over to you, Mr. McKay.

Thank you. Just before we finish, I'd like to comment on this morning's announcement that Mark Hughes has decided to retire in April after 37 years at RBC. And there will be many opportunities to recognize him over the coming months, but I'd like to take this moment to thank him for his significant contributions to the bank, to our clients and our shareholders. On a personal note, I want to thank Mark for his incomparable counsel and partnership over the years. I'm pleased that Graeme Hepworth, currently Executive Vice President of Retail and Commercial Risk, will take on the role of Deputy Chief Risk Officer in February and then assume the role of Chief Risk Officer in April 2018 when Mark retires. Graeme has been with RBC for 20 years and held progressively senior roles in our risk management group. He brings a deep expertise in risk as well as experience working across multiple businesses and regions, so he's well positioned for his new role.

So I want to thank everyone for attending our call today. I wish you a happy and healthy holiday season, and we'll see you in Q1 in February 2018. Thanks very much, everyone.

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.