Royal Bank of Canada - Earnings Call 2014-12-03 FS000000002184405463

Company Name: Royal Bank of Canada Market Cap: 117,670.
85 Bloomberg Estimates - EPS

Company Ticker: RY CN Current PX: 81.59 Current Quarter: 1.611
Date: 2014-12-03 YTD Change($): +10.18 Current Year: 6.545
Event Description: Q4 2014 Earnings Call YTD Change(%): +14.256 Bloomberg Estimates - Sales
Current Quarter: 8874.333
Current Year: 35088.857
Q4 2014 Earnings Call

Company Participants
• David I. McKay
• Janice R. Fukakusa
• Mark Hughes
• A. Douglas McGregor
• Jennifer Tory
• George Lewis
Other Participants
• John C. Aiken
• Gabriel Dechaine
• Brian Klock
• Doug Young
• Mario C. Mendonca
• Meny Grauman
• Peter Routledge
• Sohrab Movahedi
• Steve Theriault
• Sumit Malhotra
MANAGEMENT DISCUSSION SECTION

David I. McKay
Business Highlights
Performance
• It was a record year for RBC with record results in all of our business segments reflecting the strength of our
client-focused strategy
• We met or exceeded all of our financial performance objectives
• We earned CAD9B, up 8% from last year
• We delivered a return on equity of 19% while holding higher capital
• And we increased our dividend 12%, all of which helped drive strong total shareholder returns
Canadian Banking
Earnings, Volume and Revenue

• Let me start by sharing my perspective on the year
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Company Name: Royal Bank of Canada Market Cap: 117,670.85 Bloomberg Estimates - EPS
• Beginning with Canadian Banking, we had record earnings, up 7% from last year, reflecting solid volume
growth, strong fee-based revenue and market share gains across nearly all of our businesses
• Overall, I believe these results demonstrate the ability of our franchise to adapt to the forces of change in our
business like the shift from consumer borrowings to savings and investments and changing client preferences
driven by technology
Consumer Lending
• As expected, we saw consumer lending moderate following many years of strong credit growth
• But we’ve been planning for this shift for some time
• In fact, we spent the last decade enhancing our suite of savings and investment solutions and increasing the
number of investment professionals
• We believe our approach is working
• Over the last year, we achieved double-digit growth in mutual fund revenue and 6% growth in deposits,
including 12% growth in core checking balances
Business Clients
Small Business Segment

• Turning to our business clients, this year, we saw an increase in activity, in particular, in the small business
segment, where RBC is a leader with over 30% market share
• This is an important segment for us as we not only serve the needs of the business, we also provide advice and
services to the business owner
• Additionally, small business clients are a source of deposits and often grow into commercial accounts over
time
• This is a competitive market
• To differentiate our offering, we are leveraging our scale to create specialized industry verticals, which enable
our account managers to provide targeted solutions
• We’re also differentiating from a technology perspective
New Products and Services

• We’re designing new products and services specifically for mobile channels including our app for business
owners, which has seen 20% growth in subscribers each month since it launched, additionally, we have a
number of exciting product launches planned for 2015
• This is not new to us
• We’ve been investing heavily in technology for the past five or six years
New Mortgage System

• We’ve recently put in a new mortgage system, a new data center and we’ve invested in our commercial
lending systems
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• These costs are already built into our run rate

• We’ve remained vigilant about managing expenses to deliver positive operating leverage
• And we continue to drive our efficiency ratio even lower, and I believe we can do more to further improve our
productivity
• Overall, I feel good about the business
• We’ve delivered strong results and our customer satisfaction ratings continue to climb to new highs
Caribbean
• Moving to the Caribbean, we’ve made significant progress repositioning our operations, including selling RBC
Jamaica, a country where we did not have the scale to compete effectively or meet our hurdles
• We are starting to see an improvement in core earnings and in our operating efficiency as we have a more
targeted focus on core markets and clients
• We believe that the business will return to profitability next year
• Although, ongoing economic headwinds require us to continue to look for ways to strengthen our business for
the long term
Insurance
• Turning to Insurance, we had record earnings in 2014 even with pressure from persistently low interest rates and
changes in the regulatory environment
• I believe our results highlight the strength of our business model, including pricing and product enhancements
we’ve made in recent years as well as our strong focus on deepening client relationships and driving efficiencies
Wealth Management Segment
Global Asset Management

• Our Wealth Management segment had record earnings which surpassed CAD1B for the first time and were up
22% from last year
• Growth was underpinned by our Global Asset Management and Canadian Wealth Management businesses
• Starting with Global Asset Management, our results reflected continued leadership in Canada, where we have
over 30% market share of long-term funds amongst the Canadian banks
• They also reflected our success beyond the Canadian retail market
• In fact, today, more than half our assets under management are now from institutional clients
• Further, roughly 30% of our institutional assets are from outside of Canada
• This is largely due to the BlueBay’s growth since acquisition, our expanded institutional sales teams in the
U.S. and international markets as well as team hires to enhance our investment capabilities including global
equities
Wealth Businesses
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Canada and U.S

• Turning to our Wealth businesses, in Canada, our franchise is exceptionally strong with the Dominion
Securities remaining the number one bank-owned brokerage firm
• We have continued to grow our share over the high net-worth market and we consistently deliver
industry-leading profits and margins
• In U.S. Wealth, we’ve improved profitability by increasing fee-based revenue and we’ve continued to develop
tools to improve advisor productivity
International
• In International Wealth, we recently decided to realign and restructure the business with the goal of serving
high and ultra-high net worth clients from centers where we have scale
• I would point out that none of these changes impact our Canadian and U.S. Domestic Wealth businesses or
our Global Asset Management business
• While these changes impact a small component of our overall Wealth segment representing less than 5% of
revenue and a much lower percentage of earnings, I want to take a moment to explain the key changes
• We are exiting all of our international private banking businesses in the U.S. and Canada except for our
Vancouver office, which we continue to serve – where we’ll continue to serve our Asian client base
• We are also exiting our wealth operations in the Caribbean except for investment advisory business
• This is separate from our banking business, which as explained earlier, we are working harder to strengthen
Restructuring Costs
• There were restructuring costs associated with these changes this quarter but they were not material for the
segment
• While our restructuring efforts will take some time
• Over the long term, it will allow us to provide more value to our clients by serving them from key markets
where we can better leverage the capabilities and infrastructure of other RBC businesses
Investor & Treasury Services
Earnings Growth and Deposits

• Moving to Investor & Treasury Services, our results this year demonstrates strong earnings growth and
progress from efficiency management program
• After two years of extensive restructuring, we’re moving to a more client and market-focused strategy
centered on continuing to lead in Canada and maintaining our momentum in Luxembourg and Ireland where
we have a strong presence
• We’ve successfully grown deposits by over 20% since 2012, which help support RBC’s overall balance sheet
Capital Markets
• Turning to capital markets
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• We had a record year with earnings exceeding CAD2B and our results are a testament to the strong client
franchise we built
Canada
• We have maintained our lead in Canada and we solidified our franchise in the U.S. by continuing to build on
our investment banking capabilities, developing new lending relationships and doing more business with our
existing clients
• We are optimistic about the prospects for investment banking and a strong economic environment
UK and Europe
• In the UK and Europe, notwithstanding a more challenging business environment, we continue to grow our
corporate investment banking businesses by developing strong client relationships and by selectively adding
talent to expand our capabilities
• For example, we recently recruited three new industry heads for industrials, consumer and healthcare
sectors
• Europe continues to be a challenging market and we are being cautious with our build-out, but I am
encouraged by the teams we’ve added and some of the mandates that we’ve won
Q4 Results
• Turning to our fourth quarter, we ended the year on a strong note with earnings of CAD2.3B, up 11% from last
year reflecting record earnings in Canadian Banking and insurance and strong growth in investor and treasury
services and wealth management
• Capital market results were impacted by a few items, which Janice will expand upon as well as market volatility
in September and October
• However, I do want to highlight the businesses' results for the year with earnings up over 20% and continued
growth and improvement in the U.S. and Europe
• Overall, I am pleased with the quarter which caps off a record year and reflects our ongoing focus on developing
and deepening client relationships
Janice R. Fukakusa
Financial Highlights
Earnings and Revenue Growth

• Turning to slide 9, in our fourth quarter, we earned over CAD2.3B, up CAD232mm or 11% from last year
• Earnings were down CAD45mm or 2% from last quarter as solid revenue growth in our retail businesses was
more than offset by lower results in Capital Markets, which I will expand on in a moment
Capital
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• Starting with capital, our common equity Tier 1 ratio increased 40BPS from last quarter to 9.9%
• The increase reflects strong internal capital generation and lower risk-weighted assets related to our exit of
certain proprietary trading strategies, which reduced RWA by CAD6B, partially offset by business growth in
Capital Markets in Canadian Banking
• Overall, we’re comfortable with our capital position which remains very strong
Business Segments
Personal & Commercial Banking

• Now, let me review the performance of our business segments
• Personal & Commercial Banking earned over CAD1.1B, up CAD81mm or 8% from last year and up
CAD13mm or 1% from last quarter
• Canadian Banking reported record earnings of over CAD1.2B, up CAD123mm or 11% from last year
• This reflects strong growth in fee-based revenue of 14%, mainly from higher mutual fund distribution and
credit card fees, as well as solid volume growth of 5%
• Sequentially, Canadian Banking earnings were up CAD25mm or 2%
Cumulative Accounting Adjustment

• This quarter, our earnings were favorably impacted by net cumulative accounting adjustment of CAD55mm or
CAD40mm after-tax largely reflecting a change in how we account for certain loan fees in our business
portfolio
• This quarter, our net interest margin was 2.66% down 7BPS sequentially
• We had a 3 basis point decline from accounting adjustments which are not expected to recur
• Another 3BPS of the decline was from the change in how we account for certain business loan fees
• These fees were previously deferred and amortized over the term of the loans in net interest income
• Effective this quarter, they are being recognized as received in other income
• This not only impacted our margins this quarter but will continue to have an impact going forward
• As an aside, as you have seen on slide 32, the increase in other income is higher this quarter as it includes this
catch-up
Expenses
• Turning to expenses, costs in Canadian Banking were elevated this quarter, largely due to higher marketing spend
as well as higher infrastructure cost in support of business growth
• But we delivered positive operating leverage
• We continue to target operating leverage in the 1% to 2% range, and drive our efficiency ratio to below 40
Caribbean and U.S. Banking
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• Turning to Caribbean and U.S. banking, our results this quarter reflect higher PCL in the Caribbean which Mark
will discuss in more detail, as well as the restructuring charge to reposition our operation
Wealth Management
Earnings, Revenue and Net Income

• Turning to slide 12, Wealth Management had earnings of CAD285mm, up CAD83mm or 41% from last year
• This reflects higher revenue from growth in average fee-based client assets in our Global Asset Management
group and Canadian Wealth Management businesses, reflecting capital appreciation as well as strong net sales
• Also, we had PCL on a few accounts last year, but none this quarter
• Sequentially, our net income was flat
Restructuring Cost and Pre-Tax Margins

• Our results this quarter also reflect restructuring cost of CAD18mm after-tax related to the repositioning of our
U.S. and international wealth businesses, which Dave discussed
• Overall, Wealth Management businesses remained strong
• Assets under management and assets under administration were up 17% and 12% respectively over last year
• Our pre-tax margins continue to improve, and this is our third consecutive quarter with positive operating
leverage
Insurance
Net Income
• Moving to Insurance on slide 13, net income of CAD256mm was up CAD149mm from last year
• Excluding the prior year charge of CAD118mm after-tax related to the new tax legislation in Canada, net
income was up CAD31mm or 14%
• Sequentially, net income increased CAD42mm or 20%
• This quarter, we benefited from lower net claims costs including a favorable cumulative adjustment related to
outstanding claims in our life retrocession business, as well as earnings from a new UK annuity contract
Investor & Treasury Services

• Investor & Treasury Services had strong results with earnings of CAD113mm, up CAD22mm or 24% from last
year
• These results largely reflect higher net interest income on our growth in client deposits, continuing benefits
from our efficiency management activities and higher foreign exchange revenue
• Sequentially, net income was relatively flat
Capital Markets
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• Turning to capital markets, this quarter, net income was CAD402mm, down CAD67mm or 14% from last year
and down CAD239mm or 37% from last quarter
• I would remind you that last quarter was exceptionally strong and included about CAD100mm of revenue from a
couple of outsized client transactions
Spending Valuation Adjustments

• Our results reflect the challenging market conditions that Dave highlighted, as well as two specific items
• First, we had a CAD105mm pre-tax or CAD51mm after-tax charge related to spending valuation adjustments or
SVA on uncollateralized, over-the-counter derivatives
• I would point out that as part of an industry migration to incorporating funding cost into security valuations, we
have been recording SVA reserves and all significant trades since the beginning of 2013 and on all new trades
since the beginning of this year
• The charge we took this quarter represents the impact of FVA on our entire portfolio over and above the reserves
we have already taken
• It’s a one-time catch up that reflects trades done prior to 2014
CAD75mm
• The second item I’d like to highlight is that we had CAD75mm or CAD46mm after-tax of lower revenue and
costs associated with our exit of certain proprietary trading strategies, which occurred in particularly volatile
market conditions
• We’re well advanced in restructuring our proprietary trading activities in the U.S. to comply with the Volcker
Rule
• We’ve exited about half the trading strategies, we’ve transitioned market-making strategies into our agency
trading businesses, and we are restructuring our remaining strategies to comply
• We are actively redeploying capital from the strategies we exited in two other businesses
• We estimate that the impact of these changes won’t be material to our earnings going forward
• Factoring these items into our results, we believe Capital Markets had a solid quarter and while corporate
investment banking was down from a strong quarter and prior year, it continued to perform well
Mark Hughes
Highlights
Favorable Credit Trends

• If I could turn you to slide 17, we continue to see favorable credit trends that remain near historic lows reflecting
our strong risk culture as well as the supportive economic backdrop
• The Canadian and U.S. economies continue to improve in Q4 underpinned by strength in the labor market with
unemployment rates declining to pre-crisis levels
• Globally, monetary policies remained favorable
Page 8 of 19
• Provisions for credit losses on impaired loans this quarter were CAD345mm or 31BPS
• That’s up CAD62mm or 5BPS from last quarter, mainly reflecting increased provisions in Caribbean banking
and capital markets
Caribbean Banking
• In Caribbean banking, provisions were CAD77mm, of which, CAD50mm was related to our impaired residential
mortgage portfolio
• This additional provision reflects our experience with the ongoing challenging economic environment in the
region
• This was partly offset by provisions in our commercial and retail portfolios
Capital Markets
• With respect to capital markets, this quarter, we had provisions of CAD32mm related to a single account, which
was newly impaired this quarter, but not reflective of any overall credit deterioration
• The capital markets loan book continues to perform well and we ended the year with a provision for credit loss
ratio of 7BPS, the lowest level since 2011
• Provisions in Canadian Banking were CAD236mm or 27BPS and remained near historic lows
• They were up slightly by CAD6mm or 1 basis point from last quarter driven by higher provisions in
residential mortgages and business mostly offset by lower credit card write-offs and lower provisions in our
personal lending portfolio
Canadian Banking Retail Portfolio

• Turning to slide 18, which focuses on our Canadian Banking retail portfolio, our credit card provisions remains
near historic lows at 231BPS, down 15BPS sequentially, largely driven by seasonal factors in line with last year
• The portfolio continued to perform well with low write-offs and strong recoveries
• Our credit card delinquency rates remained low during the quarter, and we regularly monitor these rates as part of
our early warning signals
Small Business and Residential Mortgage Portfolio

• Our small business portfolio increased to 92BPS, up 16BPS from last quarter, although last quarter marked a
seven-year low for provisions
• The increase this quarter was largely due to higher net write-offs
• Our residential mortgage portfolio, which is well-diversified across Canada, as highlighted on slide 19, makes
up 64% of our retail portfolio
• It continues to perform well with provisions this quarter of 2BPS, consistent with our historical
performance
Canadian Housing Market
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• Looking forward, our view remains that the Canadian housing market is moving towards a better balance of
supply and demand
• Generally speaking, we are seeing Canadians display greater fiscal conservatism by increasing their down
payments and accelerating their mortgage repayments
• Additionally, clients are opting for fixed rate mortgages, which now make up 75% of our book, up from 73%
at the end of 2013 and the average amortization at origination has declined
• Across our entire portfolio, we continue to actively monitor our portfolio for early warning signs of credit
deterioration and perform ongoing stress testing for numerous scenarios, including increases in unemployment
and interest rates, a downturn in the real estate market, and given current market conditions, the price of oil
• At this time, we are comfortable with our stress test results
• We do not see signs of deterioration
• And the overall credit quality of our retail portfolios remain strong
Gross Impaired Loans

• On slide 20, gross impaired loans amounted to about CAD2B this quarter and were relatively flat from Q3
• New impaired formations were relatively stable for the quarter amounting to CAD326mm and included one
newly impaired loan in capital markets for CAD33mm, which was fully provisioned for in the quarter and written
off
Average Market Risk VaR

• Turning to slide 21, in Q4, average market risk VaR, value at risk, was CAD26mm, unchanged from the previous
quarter
• Our fourth quarter average market risk stress VaR was CAD78mm, down CAD9mm or 10% from last quarter,
reflecting the exit of certain proprietary trading strategies in Q4 referenced earlier
• We did have 10 days of net trading losses totaling CAD46mm, which was highly unusual and largely reflects the
fact that we exited certain proprietary strategies during a period of increased market volatility in October
• Market volatility also negatively impacted our fixed income trading businesses
• We have returned to more normal results in November
• We monitor the market risk positions we undertake on a daily basis and are comfortable with our market risk
controls
David I. McKay
Outlook
Before I open it up to Q&A, let me comment briefly on our outlook and why I'm confident RBC is well positioned to
serve our clients going forward
In Canada, we expect the economy to grow modestly next year, driven largely by a pickup in business investment,
continued export growth and steady consumer spending
• We also expect the market to remain competitive and low interest rates to continue to be a headwind
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Investment and Savings Products

• Within this context, let me highlight a couple of areas where we see opportunities for growth
• First, investment and savings products are forecast to grow three times faster than credit over the next decade
• With the most extensive financial planning platform, including the largest mutual fund provider and the largest
full service Wealth Management business, we are well-positioned to capture a disproportionate share of market
growth
Ownership Change
• Second, over 45% of businesses are expected to change ownership in the next five to 10 years
• And with our market-leading capabilities, we are well-positioned to help business owners plan their succession
by finding a buyer for their business, financing the transaction and helping them manage their new wealth
Domestic Businesses
• Third, we believe we can continue to extend our lead across all our domestic businesses by deepening client
relationships through our proven ability to cross sell more effectively than our peers
U.S
• Turning to the U.S., we expect the economy to outperform next year, which would benefit our businesses as RBC
currently generates approximately 20% of revenue serving two very attractive client segments, institutional and
affluent high net worth
• Within Capital Markets, the U.S. business now accounts for more than 50% of the segment’s revenue or
approximately CAD4.1B
• Over the past five years, this business has made considerable investments in people and infrastructure and
expanded its corporate client relationships substantially by providing credit
• Following a number of years of investment, we are now focused on strengthening returns by doing more business
with clients, winning new mandates and driving greater efficiencies
• U.S. Wealth will continue to drive productivity and will look to enhance its capabilities to provide additional
credit and deposit solutions to its clients
UK and Europe
• Turning to the UK and Europe, although we expect conditions to improve as stimulus measures take hold, we
believe economic growth will continue to be relatively slow
• Within this context, we will selectively expand our investment banking sector and geographic coverage and we’ll
continue to prudently extend our loan book where it makes sense to help drive new originations
Global Asset Management

• In Global Asset Management, we will focus on growing select international investment strategies, including
global equity and alternative assets and extending our reach to more institutional investors in the U.S. and select
Page 11 of 19
global markets
• Across all of our businesses, we will continue to strengthen customer relationships, manage costs and leverage
investments in technology to drive efficiencies and enhance the client experience
Conclusion
To conclude, I believe that RBC is well positioned to manage through industry headwinds and capitalize on the
opportunities created by the changing environment
I’m confident that we’ll continue to deliver long-term value to shareholders, given the strength of our diversified
business model, our strong capital base, and importantly, our clear strategy for building long-term, sustainable, client
franchises
QUESTION AND ANSWER SECTION

<Q - John C. Aiken>: I was hoping that we could revisit the charges taken on the [ph] prop test (00:27:14) to –
because of the Volcker Rule. The CAD75mm, can you let us know how much of that actually related to charges for
exiting the position and if any of that amount actually related to run rate earnings that were previously embedded.
<A - Janice R. Fukakusa>: I think that we haven’t bifurcated the amount that we would have taken in terms of the
timing of the positions going down. But if you look at the net result of the charges that we sized to CAD75mm, that
would be mostly one-time costs and some losses on trading position. So, on a go-forward basis, we still have effective
strategies and we said that we don’t think it will impact us materially going forward.
Doug, would you like to say something?
<A - A. Douglas McGregor>: In particular, we were exiting – what we determined was we’re going to exit about half
the strategies we’ve been running for more than a decade. And in particular, we have credit opportunities or credit
strategy which really revolves around corporate credit. And what we found was, we determined – well, we wanted to
exit by year-end.
And I think as you know, credit backed up and rates were pretty volatile as well through the month of October. So, the
bulk of the loss was in selling credit books, which we have sold. So, we have – of the strategies we exited, we have sold
about 99% of the assets. There’s one or two remaining.
<Q - John C. Aiken>: Thanks, Doug. And when we talk about half of the positions presumably than the other half are
the ones that are being transitioned into other areas or being made Volcker compliant?
<A - A. Douglas McGregor>: Yes. So, we transferred some of the businesses, meet the market making exemption.
And so we have transferred those businesses into our cash equities and our securities funding business. And we’re just
repositioning the remainder.
<Q - Gabriel Dechaine>: Just a follow-up on that topic. So, you mentioned that half of the strategies you have exited,
I’m trying to tie that into some of the historical guidance that you’ve given that the prop trading, overall, was about 2%
to 3% of total bank revenue. So, should we assume that half of that amount is gone and that over time, you’re going to
replace it? And what’s going to happen with the other half?
<A - A. Douglas McGregor>: Well, as I just said, the remaining strategies will be Volcker compliant or...
<Q - Gabriel Dechaine>: Okay.
<A - A. Douglas McGregor>: ... or we wouldn’t have kept them. And I would say that between redeploying the capital
that we’ve just recovered from exiting certain strategies and what we have left on, I think Janice said in her remarks
that there wouldn’t be a material change in our run rate, which is what we believe.
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<Q - Gabriel Dechaine>: Okay. So, there should be no like – the way I kind of understood it was that over – you
would take a short-term reduction in your revenues, but that as you redeploy the capital, that you would replace it. But
that takes a little bit of time or have you already effectively deployed that capital?
<A - A. Douglas McGregor>: Yeah. I mean I suppose it’s possible during the quarter that, that might occur. I would
say so far, the returns on what we’ve retained have been certainly satisfactory, and we have put out a reasonable
amount of the capital we recovered. So, could it be a bit softer by the end of the quarter, I guess that’s possible. But so
far, so good.
<Q - Gabriel Dechaine>: Okay. And my next question is for either Dave or Jennifer, on the Canadian P&C business.
Good quarter there, good loan growth. Just wondering about the outlook for your operating leverage in 2015. And then
some of the comments you’ve made recently kind of backing off a bit about industry growth plus 25%.
What does that say about your expense management strategy next year? I know in previous periods, 2008-2009 for
example, when the going got tough, you did really pull back on expenses. Should we expect that next year? Because
this year, for Royal and other banks, there’s been quite a bit of an expense inflation.
<A - Jennifer Tory>: Thanks very much, Gabriel. I’ll first start by saying we’re pleased with our record quarter. and
going forward, as we invest and continue to invest in the business, we’re still targeting operating leverage of 1% to 2%
and continuing to drive our efficiency ratio to the low 40s. As far as overall expense management, it continues to be a
focus for all of the Canadian banks because we want to continue to invest in our business.
And as far as our premium, we have come off somewhat as the overall industry volumes have declined. But we’re
continuing to see market share gains across all of our businesses, as Dave said, and we’re also maintaining, as Mark
said, our strong credit performance, a very good margin and industry-leading efficiency ratio.
So, going forward, we remain committed to growing at a premium, and we’re seeing good momentum in a few areas.
For example, as Dave highlighted, we’re very well positioned to capture a disproportionate share of the deposit
investment growth. And, in fact, our market share has grown over 80BPS over the past two years.
And in mutual fund business, we have in excess of 30% share of all mutual funds sold. So, we think that, that part of
our business is going to continue to have great momentum. And in addition, we’re pleased with the improved
momentum in our lending business this quarter.
<Q - Brian Klock>: I guess thinking about the weakness in oil pricing. Can you comment on what you think about the
contribution that sector has done for capital markets revenues for this year? And is there any expectation of some
weakness going forward in volumes related to the weakness in oil?
<A - A. Douglas McGregor>: Yeah. From the slides in the deck, you can see that energy is about 15% of our loans.
So, there’s some revenues associated with that. In terms of the overall capital markets revenues, I mean, it varies, but
it's between 5% and 10%. Energy is an important business for us both in Houston and Calgary. The run rate from the
business has been pretty good recently, frankly. And whether lower energy prices will slow that or not, we’ll just have
to wait and see.
<Q - Brian Klock>: Yeah. So, let me just clarify it. So, when you said 15% of loans, 15% of your capital market loans,
the 100...
<A - A. Douglas McGregor>: That’s correct.
<Q - Brian Klock>: ...or the 68, 69...
<A - A. Douglas McGregor>: I think that the slide shows, I think, there are loans above CAD61B and I think it shows
us that – what percent?
<A - Mark Hughes>: 12% to 13%.
<A - A. Douglas McGregor>: About 12% to 13%.
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<A - Mark Hughes>: And for oil and gas, and energy, in total, including mining would be 15%.
<A - A. Douglas McGregor>: Right. And the energy business includes the pipelines as well as the exploration
companies. And the pipelines – so the CapEx would be have been spending and they’ve been a big contributor to our
revenues. I don’t see that slowing in the near term.
<Q - Brian Klock>: Okay. So, and I guess, maybe as a follow up, and maybe this is related to Mark. The Capital
Markets, the GIL formation this quarter, there was one company – can you comment whether or not that was in the
energy or mining and metals sector?
<A - Mark Hughes>: As it turns out, it was actually in the energy sector. But I would say that it was completely
unrelated to the oil price or the energy prices moving up and down. It was actually a fire at the facility itself. So, totally,
unrelated to where the commodity prices are.
<Q - Brian Klock>: Okay.
<A - Mark Hughes>: And just to add a bit more on the percentages, it’s – for oil and gas, it’s around 12% to 13% of
the corporate banking Capital Markets books. In terms of the overall bank credit book, it’s around 2% to 3%. So,
obviously, it’s how you look at the numbers.
<Q - Brian Klock>: Okay. And then maybe just while you’re on it, and then I’ll get back in the queue. If you can just
comment, how much of that energy portfolio is E&P reserve-based vs. the suppliers, which is a little bit more risky?
Thank you.
<A - Mark Hughes>: We have about half or just over half of the numbers that I’ve been quoting and it is in E&P. And
about 13% of it would be in the drilling and services business, which in my mind is where the risk will start to take in
effect first, as and when the E&P firms start to cut back or if they do cut back on CapEx.
<Q - Doug Young>: Just – the first question is on the Caribbean and, David, you made a comment in your prepared
remarks that you’re comfortable that it’s going to return to profitability next year. I’m just trying to get some detail
around where that comfort comes from. And within the Caribbean, obviously, you have RBTT, just wondering how
comfortable you are with the carrying value of that investment.
And then I wanted – a third part of this, I just wanted to clarify. There was a CAD17mm restructuring charge in the
Caribbean. Janice, I think, is that independent of the CAD18mm that was related to the Wealth? Thank you.
<A - David I. McKay>: Yes. So, I’ll make – I’ll cover that first part of that question, Doug, and then Janice will talk to
the carrying value of the Caribbean Bank. We’ve done a lot of work in the Caribbean and restructuring operations,
focusing on core markets and core clients. You saw us this year exit RBC Jamaica, which was a significant decision for
us along that line.
So, as we look at our core operating earnings in the business, they’ve been improving quarter by quarter by quarter to a
point where we did take some one-time credit charges this quarter, particularly in our mortgage book as Mark
referenced.
But as we look forward, we expect that core operating strength to emerge next year, and we’re confident – albeit the
economy is tough, but we look at our revenue run rates, we look at our expense control and the repositioning of our
cost base in the Caribbean, and we’re confident we’ll return to profitability next year.
<A - Janice R. Fukakusa>: Great. And Doug, it’s Janice. I’ll answer the question on the carrying value of the
investment. We constantly review the Caribbean for any indications of impairment, and we didn’t see any. In addition,
with respect to this quarter, we performed our annual goodwill testing and so, a lot of the details of the assumptions we
made are actually in our disclosure in the consolidated statements which describe how we’ve done, looked at the cash
flows and how the discount rates that we’ve used. And so we continue to be comfortable with the carrying value of the
investment and that’s why you see that we did not consider any impairment at all.
Page 14 of 19
The CAD17mm charge that’s in the Caribbean is totally independent of the international wealth management charge
and it relates to our continuing restructuring of the domestic banking businesses down there in an effort to improve
efficiencies.
<Q - Doug Young>: And then if I can just sneak just a clarification. On the insurance side, I guess for George maybe,
was there any benefits that came through from actuarial assumption changes, methodology changes? I know there’s
some big changes coming through the Lifeco industry and just wondering if there was any, in the ways of the insurance
results that boosted earnings this quarter?
<A - George Lewis>: Sure, Doug. I’ll take that. Q4 does tend to be a seasonally strong quarter for us in RBC Insurance
because we do conduct our annual review of actuarial assumptions. And also, it’s typically a lower claims cost quarter
as well.
But within the annual review of actuarial assumptions, there was no significant impact from the URR change either
positive or negative. So to a large extent, several years ago, we had instituted a program to more closely match our
assets and liabilities in insurance and so working with finance and risk management in that respect before interest rates
declined. So we did not benefit from the URR formula change to the same extent as some other players.
<Q - Mario C. Mendonca>: First, Janice, or whomever. The bank is sticking with the 7% EPS growth target for 2015
and looking forward. First, what base would you say the bank is using, base in terms of EPS for 2014, from which to
drive the 7% growth?
<A - Janice R. Fukakusa>: I think – Mario, I think that by base you mean what is that growth rate teed off
[indiscernible] (41:44) we’re using our actual results and saying that we believe in our medium term objectives we can
achieve 7% growth in the future going forward from 2014.
<Q - Mario C. Mendonca>: Using...
<A - Janice R. Fukakusa>: Reported.
<Q - Mario C. Mendonca>: …the reported number.
<A - Janice R. Fukakusa>: Right.
<Q - Mario C. Mendonca>: Now, I know they’re medium-term objectives but in each Q4, you do assess the results of
that year against those objectives. So – they tend to have, it tends to feel like an annual target as well because of the
way you assess those results in Q4. Is that 7% something you would point us to for 2015 as well?
<A - Janice R. Fukakusa>: Well, I think it is the medium-term objective and we’ve managed to over the past few
years, meet most, and this year, all of our medium-term objectives. So I think that our – encompassing medium-term
objective is to achieve top-performing total shareholder returns. And then we encompass the financial metrics in that
and we measure on an annual basis. So, I would say that if you look at it, we are not putting out annual guidance, just
medium-term objectives but we have been very successful in meeting them over the past few years.
<Q - Mario C. Mendonca>: Does 2015 seem a little more challenging, though, than in prior years, in getting to that
7%?
<A - David I. McKay>: I think – this is Dave. Based on my comments I made earlier, we see a good Canadian
economy with growth across the consumer, commercial and corporate sectors, we see a very strong U.S. economy that
will help drive Canada through exports. We’re well positioned in the U.S. in our Capital Markets business and in our
Wealth business to capitalize on that growth.
So, we have a number of ways to grow the organization. In addition to the secular trend of seeing a shift towards
deposits and investments, we see significant opportunity in our franchise to capture the core areas of growth in Canada,
the U.S. and emerging Europe.
Page 15 of 19
So, I think if you look at our franchise and the diversification that we have across our businesses, we will stand by our
medium-term objectives.
<Q - Mario C. Mendonca>: Okay. And then just one final point on energy. So, if it’s 12% to 13% of the corporate
book, it sounds like oil and gas would be something like CAD7B to CAD7.5B. Would be helpful to know is if you
could break that down between the reserve-based lending and the covenant for the cash flow lending. Does anyone
have it handy?
<A - Mark Hughes>: I don’t actually have that handy. I would say that a large proportion of our loan book is to
investment grade large corporates. But we do have a sizable amount as well to borrowing bases and we would have to
get you back the exact split on how that works.
<Q - Meny Grauman>: My question is also dealing with the impact of lower oil prices. But I was wondering about –
as you think through the implications for the Canadian P&C business, in particular. I’m wondering – maybe it's a
leading question, but wondering sort of what are the – are there positive implications from that for Canadian P&C
business specifically? And where do you see those impacts hitting?
<A - David I. McKay>: When you respect positive drivers being lower, gas prices driving consumer spending, which
is some of the commentary you’ve seen in the United States. I think it’ll be modest at the end of the day. Job creation is
one of the critical drivers in the economy. Business spending and exports, I think, will be the predominant drivers.
We’re seeing very strong export growth in the country. We’re still waiting to see more private sector investment in the
economy. Those will be the primary drivers, I think, rather than lower gas prices at the pump stimulating consumer
spending. It’ll be marginal I would say.
<Q - Meny Grauman>: Thanks a lot. And just a follow-up on that. At what point or at what price or what duration do
you have to start to reappraise your outlook for 2015 when it comes to oil prices? I’m wondering if you could add a
little bit of insight into that.
<A - David I. McKay>: On the credit book are you asking, specifically?
<Q - Meny Grauman>: On the credit books, specifically.
<A - Mark Hughes>: Yeah. I mean at the moment, we’re doing constantly lower oil price sensitivities. We have
actually gone in an overall stress test portfolio significantly below the current market prices. We’re also doing
individual name-by-name stresses against where the prices are currently and a little bit below where they are currently.
And based on what I am seeing so far, given the expectation for what we have with either hedging in the E&P
producers or the amount of credit availability that they still have for liquidity or the ability that they have to cut CapEx.
At this point in time, we’re not seeing future deterioration with oil price, of course, it’s always about how long it goes
on for. And at the moment, we are stressing out one year or two years. And we still, at this point, remain – seeing
things within our overall risk appetite.
<Q - Peter Routledge>: I’ll pick up from that last question. On page 19, you gave us the geographic diversification of
your mortgage book. It looks like 34% of your mortgages are in BC and Alberta. Is your – do you have the same basic
geographic mix for your unsecured household lending?
<A - David I. McKay>: I don’t know if we have that rate at hand here. We can get back to you.
<Q - Peter Routledge>: Yeah.
<A - David I. McKay>: But I – our credit strategies wouldn’t change secured or unsecured against that region. We
have a client strategy at the end of the day in the credit side, so I would expect to see an equal distribution and that our
strategies don’t change in secured and unsecured would be my answer. Mark, do you have anything to add to that?
<A - Mark Hughes>: I think that would be exactly how I would answer it. I don’t have the specific number to hand,
which we can get you. But certainly, my understanding of our strategies and how we’re managing is consistent across
Page 16 of 19
the country, not geographic. I would also add as – on this oil price point, I mean, we’ve talked a lot more about on the
corporate type and commercial type of exposures.
We are looking also on the retail side. We are able to monitor at even a community-type basis where our exposures are.
So far, we have not seen outstandings or delinquencies increase in, say, the Alberta region. But that is part of our early
warning signal approach.
So, we are monitoring that as well. I think what I would say, from a risk perspective, is until you really see
unemployment hit caused by some form of lower CapEx or lower spending by the corporate side or the E&P side, you
will not see that dramatic impact or negative impact on the retail books. I think, you’ll see, initially, a positive impact.
They’ll have more cash flow, better gas prices and all of that. And the negative impact would be if people start to be
unemployed as the industry cuts back, which at this point, we have not seen happen.
<Q - Peter Routledge>: And do you have any sense of how your PCLs might look a year from today if oil is still at
CAD65 or in and around that range? PCLs from Canada, I mean, specifically.
<A - Mark Hughes>: Yeah. At this point, they would still be within the range of our normal expectations.
<Q - Peter Routledge>: All right. So, this is a slow issue.
<A - Mark Hughes>: Yeah.
<Q - Peter Routledge>: Dave, just a question for you on capital, I see your CET1 is about 9.9%. So, it feels like the
industry is trending towards 10%. In your view, what’s the likelihood it goes above that or are we finally going to stop
at 10%? And then – well, I’ll leave that question. I have a follow-up.
<A - David I. McKay>: I think as you’ve heard us comment on quarter-to-quarter, we’re targeting 9.5% plus the
buffer, so you’ve seen us trend to that range right now at 9.9%, a little bit higher than our buffer. I think, we see good
opportunity to deploy capital into organic growth next year and we see growth in our lending book in Canada and the
U.S. So, I think that is obviously a factor. And we have overall capital deployment opportunities. We’ve renewed our
share buyback of 12mm shares and we have all the tools available that you expect to manage our capital base, including
organic opportunity to deploy capital and to grow.
<Q - Peter Routledge>: So, if you’re at comfortable level, will you start – restart, I should say, your NCIB this quarter
or next quarter?
<A - Janice R. Fukakusa>: Peter, it’s Jen. So, we’re always looking at the levels and opportunities to do that, and we
did renew the NCIB because it’s our intention to use it as an active capital management tool.
<Q - Sohrab Movahedi>: Just maybe a bit of a difficult question to answer, but if you think about the overall tax
spend budget looking into 2015, how much higher do you think it’s going to have to be vs. 2014?
<A - Janice R. Fukakusa>: Because of the way that we do technology projects and that we have multi-year projects
and we’re always reinvesting, I would say that our tax spend budget will be very consistent next year to what we have
just gone through this year. Because of the nature of our programs and our commitments to invest to new technology in
terms of simplifying our processes for our clients innovation, all of that, we don’t see any major shift in that.
We started the programs a lot of them two or three years ago. Some of them are midstream, and we continue to invest
because we’re investing in, basically, on a medium term to ensure that we are always at the front end of anything
happening. I don’t see any shifts.
<Q - Sohrab Movahedi>: And do you see any shift in the mix of that spend between the business segments?
<A - Janice R. Fukakusa>: No. I don’t see any shift at all in the mix.
<Q - Steve Theriault>: First, for Doug McGregor, the decline in fixed income trading – I apologize if this is a repeat
question, by the way. But the decline of fixed income trading looks to be more than slower client activity to me at any
rate. So, I guess what I’m wondering is, were there material mark-to-market losses in the fixed income books through
Page 17 of 19
that mid-quarter or that mid-October period of high volatility with spreads widening or would you really insist that it
was more client activity levels?
<A - A. Douglas McGregor>: Well, if you look at the fixed numbers, the headline items, first of all, is the FDA.
Second that I described earlier is that we had a credit opportunity strategy in our proprietary business that we
determined to take off. And I think it was a result of – it just marks as a result of illiquidity in early and mid-October.
I would say, overall, the rest of the weakness was rates, was gapping up and down for the better part of 30 days. And
we have, I think if you look in the disclosure, 10 or 11 days of trading losses. And they would have been $5 to $10, but
that was a mix of GAT in Europe – or sorry, in FIC in Europe and the U.S.
And I would say, our credit books in the U.S. also were just – we were just marking inventory and trying to provide
liquidity to our clients and our customers and it got expensive. So, I think as the numbers come out, you will see a trend
that it was a difficult trading environment in fixed income.
<Q - Steve Theriault>: Okay. That credit opportunity strategy took off. Is that Volcker related or that was – that’s
taken off for some other reason?
<A - A. Douglas McGregor>: Yes. Yes.
<Q - Steve Theriault>: Got you.
<A - A. Douglas McGregor>: It was part of the proprietary business that we said we’ve had for a long time, and we
didn’t see that any way that was going to comply with Volcker longer term, so the strategy is that we determine would
not comply. We have wound down, and the people have left.
<Q - Steve Theriault>: Okay. That’s helpful. And thanks, Doug. And Janice, just a point of clarification, earlier on the
call, did you talk about the efficiency ratio in Canadian Banking being below 40%? I thought I caught that relative to
the – what I thought the low 40% target rate.
<A - Janice R. Fukakusa>: No, Steve. It was low 40%, consistent with what we’ve been targeting.
<Q - Sumit Malhotra>: Question in relation to the Wealth Management segment and the restructuring as well as the
outlook going forward. So if I got your comments correct at the beginning, Dave, I think you said the businesses that
you’re disposing of are about 5% of revenue, but it sounds like not a very big contribution to earnings. Is that correct?
<A - David I. McKay>: I’ll let George maybe comment on that, but, yeah, that’s correct. It’s not immaterial.
<Q - Sumit Malhotra>: Well – and before George jumps in, I’ll just ask, as you think about the Wealth segment going
forward, are there other areas of the business particularly outside of Canada that are under review in terms of the
potential restructuring or potential attempts of restructuring those as well going forward?
<A - George Lewis>: So, Sumit, I’ll take that. As Dave commented in his remarks, the restructuring activities in our
international wealth business, it does represent a very small component of our wealth segment and this will not impact
our Global Asset Management business which, to your point, has a very large footprint outside of Canada. It’s growing
well, positive flows and it won’t affect our Canadian and U.S. wealth domestic businesses either.
So, stepping back, for context, these international businesses, at one point in time, in 2008, 2009 represented about 20%
of our segment earnings. They’re now close to breakeven as we’ve invested in strengthening the infrastructure front
and middle office, during a period of – extended period of low interest rates.
So, what we’ve done is take a look at this which has negatively impacted our trust and deposit revenues and decided to
narrow our country and client focus and concentrate on serving those international cross-border clients from our key
international center in our British Isles, where we do have scale.
So, that will take some time to implement. We’re looking at all strategic options for the various components of the
International Wealth business, including identifying interested parties to purchase portions of those operations. But this
will not impact our large high-performing businesses in Global Asset Management or Canadian Wealth or U.S. wealth,
Page 18 of 19
which really drove an excellent year for us this year in terms of earnings, up 22%.
<Q - Sumit Malhotra>: So, George, to wrap it up, I know we’ve had this discussion a few times over the years, but
when you think about the pre-tax margin in the segment this year, just under 24%, and specifically give some of the
targets that you had provided in the past that you wanted the segment to get to. In taking this first step to reposition the
business, where do you think margins of this business improve, so I can probably do some of the math myself, but
wanted to get your outlook on what’s a more reasonable goal now that you’ve taken the step on the wealth side.
<A - George Lewis>: Yeah. Sure. So I think we anticipate continuing to make progress in improving our pre-tax
margin. Our Global Asset Management business, which represents about 60% of our earnings, is a very high-margin
business, 50% pre-tax margins is why we intent on continuing to grow it. Obviously, as we exit lower-margin
businesses in International Wealth, that’s going to naturally improve our pre-tax margin, which remains our principal
goal.
I’d also say that looking forward to next year, we were conscious that we’ve benefited from robust markets in both
2013 and 2014. Our earnings were up to 18% last year, 22% this year. And our plan is based on normal markets and we
intend to – aim to deliver positive operating leverage in a lower revenue growth environment in 2015, if that comes to
pass.
<A - David I. McKay>: Sumit, the only comment I would add is you see a theme across our Wealth and Caribbean
businesses and even I see us going to focus on core markets, core clients. We understand where the growth is going to
come from. And I think it’s good discipline for the business to really focus on where that growth’s going to come from.
So, these are important rules for us to manage areas that don’t have scale and we don’t believe have long-term potential
for us
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Company Name: Royal Bank of Canada Market Cap: 117,670.

85 Bloomberg Estimates - EPS

Q4 2014 Earnings Call

MANAGEMENT DISCUSSION SECTION

Earnings, Volume and Revenue

Small Business Segment

New Products and Services

New Mortgage System

• These costs are already built into our run rate

Wealth Management Segment

Global Asset Management

Canada and U.S

Investor & Treasury Services

Earnings Growth and Deposits

Earnings and Revenue Growth

Personal & Commercial Banking

Cumulative Accounting Adjustment

Caribbean and U.S. Banking

Earnings, Revenue and Net Income

Restructuring Cost and Pre-Tax Margins

Investor & Treasury Services

Spending Valuation Adjustments

Favorable Credit Trends

Canadian Banking Retail Portfolio

Small Business and Residential Mortgage Portfolio

Canadian Housing Market

Gross Impaired Loans

Average Market Risk VaR

Investment and Savings Products

Global Asset Management

QUESTION AND ANSWER SECTION

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