Earnings Call: Q4 2018

Nov 28, 2018

Good morning, ladies and gentlemen, and welcome to RBC's conference call for the fourth quarter 2018 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Dave Mun, Head of Investor Relations. Please go ahead, Mr. Mun. Thanks, and good morning. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer. Then we'll open the call for questions. To give everyone a chance to ask a question, we ask that you please limit your questions and then re-queue. We also have with us in the room, Neil McLaughlin, Group Head of Personal and Commercial Banking, Doug Guzman, Group Head, Wealth Management and Insurance, and Doug McGregor, Group Head, Capital Markets and Investor and Treasury Services. As noted on slide 2, our comments may contain forward-looking statements, which involve 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 thank you for joining us on the call. This morning, we reported earnings of over $3.2 billion, wrapping up a successful year where we met or exceeded all of our medium-term financial objectives. In 2018, we delivered record revenue of $43 billion and earned over $12 billion for the first time in our history. We generated a premium return on equity of 17.6% while maintaining strong capital ratios and one of the highest debt ratings for banks globally. We deployed capital across all of our key priorities to support our clients, and we repurchased $1.5 billion of shares and increased our dividend by 8%. We ended the year with a CET1 ratio of 11.5%, or 11.3% on a pro forma basis after adjusting for expected regulatory changes in Q1. We are well-positioned to continue funding growth opportunities and to return capital to our shareholders, and Rod will touch on this shortly. With respect to credit, our performance was strong, and we maintain a consistent approach to lending through the cycle, which Graeme will expand on. While increased protectionism and geopolitical risk created market uncertainty throughout the year, our results did benefit from rising interest rates, GDP growth, a benign credit environment, and US tax reform. We took advantage of the strong macroeconomic environment to add over 1,000 frontline staff in Canada and the U.S., and to invest in technology to strengthen our leading position. As you've heard me say before, this is a period of secular change for the industry, and we believe our investments are building capabilities that will significantly differentiate us and enable us to deliver even more value for our clients. For example, our Borealis AI team has grown to over 60 PhD-level researchers across five Canadian research centers. They're enhancing our business with new ideas. Excuse me. I'm just gonna take some water here. Earlier this year, we introduced RBC Ventures to move beyond banking with creative solutions for Canadians. Through Ventures, we're solving common problems, including creating a personal home ecosystem with GetDigs and MoveSnap. in 2018, we acquired 300,000 new Canadian banking clients on top of 350,000 registered RBC Venture users. With the momentum we've built, I'm confident that we'll achieve our client growth target of adding 2.5 million customers in 2023. More broadly, we remain focused on evolving mobile banking as our clients' digital engagement continues to hit record highs. Today, we have over 6.5 million digital users in Canadian banking alone, and our mobile banking user base is up 17% year over year. We also launched a redesign of our mobile app with a significant uplift in capability to align with our clients' increased usage. When combined, the scale of our data, technology, leadership, and our talent will continue to differentiate us with our clients. Turning to our business performance, Canadian banking had a record year. We earned over $5 billion in 2018. We did this by expanding market share in areas such as personal core deposits, credit cards, and business lending, and also by improving our efficiency ratio. Our nine million personal banking clients or accounts generate over 2.5 billion transactions per year, which drives $350 billion in total purchase volumes, and we expect this to grow. As one of the lowest cost providers in the country, we can leverage our cost and investment scale to create client-leading solutions. For example, in the coming months, you'll hear more about RBC InvestEase, our new robo-advisor platform. In credit cards, our partnerships and engaged membership base drove an 11% increase in purchase volumes this year. Our RBC WestJet co-brand credit card showed strong year-over-year growth with purchase volumes up 38% and cardholders up 26%. Along with the success of our Avion card, our momentum positions us well to become the largest card issuer by balances and reward points in Canada in 2019. This year, we added 150 commercial account managers to expand our expertise while leveraging our data advantage to provide more insights for business clients. Our commercial lending portfolio was up 13%, with broad-based growth in our client base across sectors, including technology, real estate, agriculture, and manufacturing. With business investments lagging GDP growth and interest rates remaining low, we expect commercial growth to remain robust. Turning to wealth management, we generated revenue of $11 billion this year, and for the first time delivered earnings of over $2 billion. Wealth Management Canada had a record year in terms of assets under care, revenue, and earnings, widening our market share lead in each of these categories, as well as widening our leading share of industry investment advisors. We are the destination of choice for the industry's best IAs, and we are taking advantage of that by consistently hiring top contributors from outside RBC. In Global Asset Management, we captured over 40% of total Canadian retail net sales this year in an environment of industry-wide net redemptions. Our market-leading performance also sets us apart with close to 80% of AUM outperforming the benchmark on a three-year basis. We believe the diversity of our portfolio and the quality of our advice across wealth management are strengths in these volatile markets. These strengths will help us grow market share in 2019. Our U.S. wealth management business has also been growing. This year, its contribution to consolidated pre-tax cash earnings surpassed $1 billion. In Canadian dollars, our after-tax cash earnings was over $1 billion. We expanded our footprint in the U.S., adding new offices in Boston, Washington, and New York, while adding teams in our home markets in California and Minnesota. We also added over 130 experienced financial advisors and 440 new colleagues at City National this year. With our expanded jumbo mortgage platform and our new U.S. credit card suite, we expect our momentum in the U.S. will continue. As you know, Russell Goldsmith will transition from his current responsibilities as CEO of City National to become its Chairman. The business has performed exceptionally well under Russell's leadership, and with the addition of Kelly Coffey as CEO, will add to our success at City National. Her experience in leading the U.S. private banking unit at one of the largest banks in the world will be a great asset as we focus on growth in our second home market. For all of our colleagues in California, our thoughts are with those affected by the terrible wildfires. We are helping our communities by donating to support local relief efforts and will continue to monitor the situation. Turning to insurance, earnings were up 7% this year at $775 million, and notwithstanding higher than normal investment-related gains, we are expecting to grow this business in 2019. We continue to develop innovative solutions to serve our 4 million insurance clients, including new partnerships to provide personalized services in our group benefits business. I am proud to say RBC Insurance was ranked highest in client satisfaction in 2018 by the J.D. Power Home Study. Investor and Treasury Services reported earnings of $741 million and ended the year with assets under administration reaching $4.3 trillion. We continued to invest heavily in client-focused technology through advanced client experience initiative. As a result, we experienced growth in client accounts and a record sales year in our asset services business. We retain key clients and have a strong client pipeline, which bodes well for 2019. Capital Markets had a record year with net income of $2.8 billion, driven by revenue of over $8 billion, despite market uncertainty. In corporate investment banking, we continued to build on our momentum with clients, adding about 20 senior managing directors to our M&A and ECM coverage teams outside of Canada. Given our rank among the largest global investment banks by fees, we are well-positioned to continue winning new mandates with large investment-grade companies such as T-Mobile and Walt Disney. In global markets, our fixed income business produced strong results despite broad underperformance across the industry. In equities trading, we delivered our second-best year with strong performance from our equity derivatives business, which recently executed one of its largest transactions to date. Overall, I am proud of what we accomplished in 2018, and I am very excited about our momentum into 2019. As we head into our 150th year as a chartered bank, our commitment to build long-term relationships is as strong as ever. While there are always questions as to where we are in the cycle, we believe our focused growth strategy will be well-supported by a solid economic backdrop. Economic prospects in North America remain solid with strong employment, steady interest rate increases, and GDP growth expectations hovering around 2% in the medium term. Recent trade agreements, such as the USMCA and the Trans-Pacific Partnership, will provide more avenues for Canadian businesses to drive future growth. We still expect to benefit from healthy consumer spending in 2019, albeit at a more moderate pace. Together, our scale, innovation, and talent are our competitive advantage. We are creating differentiated value to help more clients succeed. This positions us to outperform the industry with consistent growth and premium returns for our shareholders. I want to take this opportunity to thank all 84,000 colleagues across the bank for their continued dedication to our clients. We are proud to have been named to both the Bloomberg Gender Equality Index and the Thomson Reuters Top 100 Diversity and Inclusion Index in 2018. We strongly believe in our responsibility to advocate for diversity and inclusion in business and in society as a whole. This is one of the reasons why 95% of our employees told us that they are proud to be part of RBC this year. With our leadership, I remain confident in our ability to meet our medium-term financial objectives as well as the targets set out in our last two investor days. With that, I will turn the call over to Rod. Thanks, Dave, and good morning. I will focus my comments on the fourth quarter and trends that we are seeing leading into 2019. Starting on slide seven, we ended the year with record quarterly earnings of CAD 3.25 billion, up 15% from last year. Diluted EPS of CAD 2.20 was up 17%, and earnings grew by double digits in four of our five segments. Revenue growth benefited from client volume growth and higher interest rates from last year. Expenses were up 5% year over year due to higher variable compensation due to strong performance, as well as continued investments in technology and talent to grow our business and create value for our clients. Our PCL ratio this quarter was 23 basis points, including three basis points for PCL on performing loans, known as Stage 1 or Stage 2. Overall for 2018, although there have been some ins and outs, since adoption of IFRS 9, our allowances have grown in line with portfolio growth. Our effective tax rate was 17.5%, down from 19.9% a year ago, benefiting from the impact of US tax reform and some tax benefits. Given our anticipated earnings mix, we expect our effective tax rate to be in the 20%-22% range in 2019. Turning to slide eight, our CET1 ratio was 11.5%, up 40 basis points from last quarter. The increase reflected strong capital generation as well as some model parameter changes, even as we continue to invest and grow RWA in each of our businesses. We allowed our CET1 ratio to drift up to absorb upcoming regulatory changes in Q1, which we expect will reduce our CET1 ratio in the 10-15 basis point range. Going forward, we expect that our CET1 ratio will remain slightly above our typical 10.5%-11% target range to provide us more flexibility in 2019 to leverage opportunities for growth across our businesses. Moving to our business segments on Slide 9, Personal and Commercial Banking reported earnings of CAD 1.5 billion. Our Canadian banking net income was up 8% year over year. Our Canadian banking pre-tax, pre-provision earnings were up 12% year over year as we continued to build Stage 1 and Stage 2 PCL in this business. Our strong revenue growth of 10% in Canadian banking was driven by improved spreads reflecting rate hikes as well as solid volume growth, particularly in business lending and cards as we gain market share in both businesses without increasing our risk appetite. We also saw higher average mutual fund AUA balances. While housing prices remain stretched in key markets, price appreciation stabilized nationally with very modest price increases in Toronto and Vancouver. As such, residential mortgage growth was 5% year over year. Looking forward, we expect mortgage growth to be in the range of 3%-5% for 2019. Net interest margin of 2.77% increased 12 basis points year over year and three basis points quarter over quarter, driven by higher deposit spreads. In 2019, we expect our NIM to improve by approximately one to two basis points per quarter based on the current rate environment and competitive pricing pressures, with some volatility between quarters. As Dave mentioned, we continue to invest in frontline staff and client solutions amid favorable macroeconomic conditions. This led to expense growth of 7% year over year. For the full year, our reported operating leverage for Canadian banking was 1.5%. However, excluding last year's gain on sale of Moneris, operating leverage was strong at 3.1%. Looking forward to 2019, we expect full year operating leverage to be in the 2%-3% range, subject to some movement between quarters. Turning to Slide 10, Wealth Management earnings of $553 million were up 13%, driven by strong earnings in all of our businesses. Global Asset Management revenues were up 1% as higher AUM from net sales was mostly offset by lower seed capital fair value marks, largely reflecting soft market performance of emerging market securities. Excluding these seed capital marks, GAM revenues were up 7%. Canadian wealth management revenue was up 11% from last year, driven by growth in fee-based assets due to net sales and continued momentum from strategic hiring of investment advisors. For the full year, we had strong operating leverage of 2.2% in our non-U.S. wealth business. This led to a 140 basis point improvement in our non-U.S. wealth efficiency ratio. We have strong momentum into 2019 and current macroeconomic indicators remain positive. However, we expect the recent market volatility to provide some downward pressure on assets in the first quarter, and we will focus on cost management levers to adjust to the market environment. In U.S. wealth management, including City National, revenue was up 4% year over year in US dollars. Loan growth at City National continues to be strong at 13% year over year and significantly above U.S. industry growth. Loan growth was driven by expansion in new and existing markets and the addition of 125 more client-facing colleagues compared to last year. In addition, referrals from RBC's U.S. businesses, both capital markets and U.S. wealth management, as well as cross-border from Canada, have accelerated, with close to CAD 1 billion in loans books this past year and exceeding CAD 2 billion since the acquisition closed three years ago. For the full year 2019, we expect good growth in core earnings in U.S. wealth management, including City National, continue, driven by double-digit loan growth. Q1, however, may be a difficult comparable given last year's record results, including a favorable accounting adjustment. However, we do expect deposit growth may remain slow, in line with the industry, due to rising commercial deposit betas. Moving to insurance on Slide 11, net income of CAD 318 million was up 20% from last year, reflecting the positive impact of contract renegotiations in our life retrocession business and higher favorable investment-related experience. This was partially offset by lower favorable annual actuarial assumption updates. Our outlook for earnings growth remains positive, albeit at a lower rate than past years, given a higher than normal level of investment-related gains in 2018. On Slide 12, Investor and Treasury Services earnings were unchanged from a year ago. We saw improved deposit margins and increased revenue from asset service business. However, this was offset by lower funding and liquidity revenue, and our technology spend remained high. Looking forward, we expect to add new clients from our strong pipeline and deepen existing relationships. We will also continue to execute on our strategic technology initiatives to enhance the client experience as we scale our business to support our growth ambitions. Slide 13, earnings in capital markets of CAD 666 million were up 14% year-over-year, our highest ever fourth quarter. In global markets, we benefited from strong equity trading in North America and equity origination in the U.S. In corporate investment banking, we saw higher advisory fees in Canada and Europe, as well as increased lending revenue in Europe and the U.S. Looking forward to 2019, our investment banking pipeline remains strong. We expect moderate upward pressure on RWA as we phase in regulatory changes, and we expect loan growth to moderate from double-digit loan growth that we saw in 2018. In conclusion, we are pleased with our performance against our financial objectives this year, as shown on Slide 14. Looking forward to Q1 2019, we expect to see some weakness year-over-year in our wealth and wholesale businesses, given the recent market volatility as well as strong first quarters that we had earlier this year. However, our above-average net sales and strong investment banking pipeline will position us well for growth throughout the year. We need to be vigilant in driving operational costs down as we want to be the lowest cost provider of banking services in order to support our clients and grow in any environment. We fully expect to meet our medium-term objectives again in 2019, given our momentum and investments in sales staff and technologies for future growth. We expect to drive positive operating leverage across our businesses and will continue benefiting from interest rate hikes through the year. In addition to those objectives, we guided to several profitability and growth targets in past Investor Day, as seen in this slide. Dave mentioned some of our progress earlier. We also improved efficiency ratios in our Canadian banking and non-U.S. wealth management businesses, and we look forward to providing you these updates on an annual basis as well. With that, I'll turn the call over to Graeme. Thank you, Rod, and good morning. I'll start with some general comments before getting into our Q4 PCL performance. As Dave mentioned, the macroeconomic environment on both sides of the border remains favorable. We continue to see unemployment rates near multi-decade lows, steady inflation, and solid GDP growth in Canada and the United States. As well, the conclusion of the NAFTA negotiations in Q4 has helped remove a significant point of economic uncertainty across North America. Despite the positive baseline outlook, we do see elevated external risks. Most notably, global trade tensions, rising interest rates, and weakening oil prices present potential downside risks to our current macroeconomic outlook. As always, we are maintaining a prudent risk management approach and closely monitoring these developments. Overall, our PCL ratio continues to reflect the high credit quality of our portfolio, as seen on Slides 16 and 17. Total PCL for the year increased, mainly due to the adoption of IFRS 9 on November 1, 2017, as well as higher provisions in Personal and Commercial Banking. This quarter, lower PCL in our loan portfolios was more than offset by higher PCL on securities. The increase in PCL on securities this quarter relates to write-downs following the restructuring of the Barbados government debt. In Personal and Commercial Banking, PCL and impaired loans was nearly flat to last quarter as lower PCL in our Caribbean banking lending portfolios was largely offset by higher PCL in our Canadian commercial lending, residential mortgage, and personal lending portfolios. In Wealth Management, PCL and impaired loans increased to $7 million, mainly due to a greater amount of loans returning to performing status last quarter. In Capital Markets, PCL and impaired loans increased to $15 million as we took provisions across several accounts this quarter compared to a higher level of recoveries last quarter. For the year, credit conditions have been stable, with overall allowances on performing loans increasing in line with portfolio growth as expected. In Q4, we increased allowances for our performing loans to not only reflect portfolio growth in our Canadian banking and Capital Markets portfolio, but also the heightened macroeconomic risks I referenced earlier. This was offset to some degree by a reduction in allowances in our Caribbean banking portfolio due to model and parameter updates, as well as better-than-expected performance in regions impacted by last year's hurricanes. Turning to slide 18, gross impaired loans reached a low of CAD 2.2 billion this quarter, driven by loans returning to performing status, sale of loans, repayments, and lower new formations, mainly in our wholesale loan portfolio. Our gross impaired loan ratio of 37 basis points was down 3 basis points from last quarter. Let me now comment on key trends impacting certain of our portfolios. For our Canadian consumer portfolios, we continue to be mindful of the increasing risks associated with the rising rate environment, given the relatively high levels of consumer debt in Canada. Regulatory changes, including OSFI's B20, have both served to bring better balance to the housing market, as well as ensuring consumers are more resilient to future interest rate increases. Overall, we continue to deploy strong and consistent underwriting standards that give us confidence that our portfolio will be resilient throughout a credit cycle. Lastly, on energy, I just wanted to provide a few comments on our oil and gas exposure in light of the recent decline in market prices. Credit trends in our oil and gas portfolio remain stable, with our exposure to the sector being low at 1% of our total loans outstanding. Our exposure to Canadian heavy oil companies, those most impacted by the crude price differential, represent 0.2% of total loans outstanding. The majority of those companies are investment grade with a breadth and sophistication of operations that helps mitigate the effect of this price differential. Overall, we are pleased with the credit performance of our portfolios for fiscal 2018. Looking forward to 2019, we expect PCL impaired loans to be in the range of 20 to 25 basis points, consistent with the strong macroeconomic fundamentals we are currently experiencing. We expect PCL and performing loans to grow in line with our portfolio growth, or approximately 3 basis points, assuming a stable macroeconomic environment. With the recent declines in both oil prices and equity markets, we would expect provisions on performing loans to exceed the run rate associated with portfolio growth in Q1 as it currently stands. However, as we have guided over the past year, Stage 1 and 2 will add more volatility, with the potential for higher PCL in any given quarter. Over time, we would expect our total PCL ratio to move up as the economic cycle progresses and interest rates rise to more normal levels. With that, operator, let's open the lines for question and answer. Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your telephone keypad, and any time you wish, you can cancel your question by pressing the pound sign. So please press star 1 at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. The first question is from Ebrahim Poonawala from BofA Merrill Lynch, Bank of America. Please go ahead. Your line is open. Hello? If you are on mute, please unmute your line. Yeah. Hi. I had a question on City National in the U.S., Rod. I appreciate your comments around deposit betas rising and pricing competition in the U.S. getting harder on deposits. Having said that, I would think that given the overlay of RBC to the City National franchise and your national expansion in the U.S., you would have seen better deposit growth as you add new client relationships, enter new markets. If you could help us understand in terms of why we are not seeing that and what that means as you think about the loan-to-deposit ratio at City National and the margin outlook. Sure. Thanks, Ebrahim. This is Dave. I will start, and then I will ask Rod to jump in with additional color. There is a number of dimensions. I think first and foremost, at the industry level, you are seeing, particularly in the affluent and high net worth markets, a shift from bank deposits into other investments to seek yield, and that is to be expected. If you look at the results across the industry, you are seeing very similar trends of slower growth and asset shifts. I think that is obviously one factor. The second factor is the business has not been as focused on deposits as it has been on the lending side. The balance sheet has been long deposits for quite some time, and we have been leveraging those long deposits to grow our asset base. You have seen us emphasize maybe margin at the expense of growth for some time, and I think we will rebalance that a little bit going forward. I think you can expect us to see a little bit more emphasis on deposits and growing deposits. That is enhanced by the acquisition of capabilities like Exactuals, which is a payments capability in the entertainment industry that allows us to be a deposit taker as we feed those funds out to the various constituents through the payment system. I think a number of initiatives going forward may be a little bit of a lack of focus given our long deposit strategy and an overall industry trend, as I said, of a shift in deposits, particularly on high net worth customers. We feel good about the franchise going forward with a renewed focus and the expansion of our business into new markets such as Washington and New York, we think are also deposit-taking capabilities. That's helpful, and just tied to that, any updated thoughts on additional U.S. M&A, particularly on the bank side, or is that still unlikely? No, certainly as we look at tuck-in geographic expansion of our existing model, we certainly are watching and looking at various enterprises that we think would be a cultural and business fit that would create shareholder value. As I said before, we are looking at playbooks, but there's nothing imminent. We have so much organic growth opportunity in front of us with the expansions of the markets. I mentioned Boston, Washington, New York, Minneapolis. In footprint in California, we're still a small market share player. We've got a lot of opportunity to grow organically. So if it fits and it's the right price and we can drive a shareholder return, we'll consider it. But right now, we're focused on organic growth in the marketplace, and assets are still pretty expensive. Right. Thank you very much. Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Hi, good morning. First question is just following up somewhat on the M&A question. I think, Rod, you talked about keeping capital levels elevated to take advantage of growth opportunities. I am wondering if you can just expand on that. Is that primarily organic growth opportunities, or were you referring to M&A? It was primarily organic growth opportunities and to keep our optionality if the economy does take a downturn, which we don't expect, which we expect to continue to grow. But it's basically giving us discretion at this point. If there was an M&A that met the criteria that Dave outlined, then we'd also be well-positioned for that, but that's not the primary driver. Okay. Dave, I'll jump in. We continue to target 10.5% as our target ratio. We view anything above that as a discretionary capital. I think we've proven that we're disciplined allocators of capital, and we will make the right choices with that. That capital ratio at 11.5% this quarter gives us flexibility to do different things, grow organically, ahead if there's any cycle coming, we have that flexibility, and return capital to shareholders, we've talked about before. It's nice to have that flexibility, but our capital targets and strategy hasn't changed. Okay. Just in terms of understanding the current oil price environment and how that is likely to impact the PCL ratio going forward, I think it'd be helpful just to understand how formulaic this all is. Prices have dropped quite dramatically. Next quarter, is it just simply updating those prices and just by definition, you're going to have to add provisions because of that? Or how much discretion do you have in all of this? Yeah. This is Graeme. I'll take that. As you saw in our disclosure there now, we run a number of scenarios, and our pessimistic scenarios already do account, to some degree, a decline in oil and gas prices. Our current ECL and the current provisions we have against our performing loan portfolio would already to some degree account for the oil and gas type of concerns. As that moves into more of a base case or parts of those downside scenarios move more into our base case, we would expect that to add some incremental losses, as I alluded to in my speech. But we think that would be marginal, and that would show up more in Q1. I mean, a lot of this has happened over the last few weeks, so it wasn't fully reflected in the Q4 numbers. But certainly because of the way we approach it with the multiple scenarios, it is already at this point partially baked in. Thank you. Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. State business specifically. There's been fairly meaningful growth there in Canada. 7 billion- Mario, can you restart? We didn't catch the first part of your sentence. Sure. I was referring to commercial real estate growth or commercial real estate generally. There's something like CAD 51.6 billion in commercial real estate and construction lending. CAD 36 billion of that is in Canada, and the growth there has been fairly meaningful. I'm going at it from this perspective simply because in historical cycles, commercial real estate almost always accounts for the lion's share of the increase in non-performing loans when things do soften. Maybe this is for Graeme. Is there some reason why it might be different this time? Because you seem to have a lot of confidence in this sector given the kind of growth that you're layering on. Hi, Mario. It's Neil. I'll start. In terms of development loans, it's actually a fairly small chunk of our overall commercial book. We actually see a lot more growth in our commercial mortgage book in terms of real estate. We've mentioned before, it's an asset class that's performed very well for us and we like the risk. In terms of development loans, it actually hasn't grown even on average. The average rate our commercial book has grown. We're starting to see projects get out of the ground, and our strategy has been to grow that with our best clients, and it's predominantly in the Toronto market, in the Vancouver market. It's in around a CAD 3 billion portfolio for us. We haven't really taken on new clients over the last year and a half. Just to be clear, of the CAD 36 billion or so in Canada, you'd say only 10% of that or so is construction, the rest would be commercial real estate, or mortgages rather? In the retail portfolio, yes. Right. I would just comment overall, I would say commercial real estate, I would say your comment about the riskiness of it. I mean, our commercial real estate is a much more globally diversified portfolio than it has ever been. Certainly the addition of City National adds more diversification there. Capital Markets activity in that space is much more international in nature. As Neil said, I think in all of that, the construction financing piece, which I would say has historically been the riskier piece, has not been the biggest source of growth. It has been much more of a shift into commercial mortgages. That is true of CNB as well. I think that is what gives us more comfort from a risk perspective as to why that growth has been very reasonable and has not really shifted our risk profile materially. Certainly, commercial real estate is a key concentration, and so we constantly are stress testing that and making sure that works inside of our risk appetite. I think today we continue to be supportive of that growth. Okay, just tying that in then from a credit perspective, you are guiding to where you offered 20-25 basis points and we will add 3 basis points of that for the performing. So you are talking about a very good credit environment outlook for 2019. Where I am going with Sorry, just to be clear, the 3 basis points is additive to the 20-25. Yeah, that's what I was. Sorry, I understood it to be additive. Yeah. Okay. What I want to ask is when you look at your commercial and wholesale, so everything non-consumer, there were losses there of about CAD 147 million in the year PCLs on a balance of approaching CAD 200 billion. So we're looking at something like 7-8 basis points of credit loss in your commercial and wholesale. In offering that outlook for 2019, are you essentially saying then that losses in commercial could very well remain in the sort of 8-10 basis points in 2019? Yeah, I think, again, we're differentiating. Certainly in the near term, we expect a relatively benign credit environment. Wholesale certainly always provides the most significant point of uncertainty in any given quarter. A handful of loans can change that. But I think overall in the near term, we continue to expect a fairly consistent trend on the commercial side. I think as I said in my comments, the further we look out there, I think we do expect that to increase gradually over time and certainly the uncertainty gets larger the further you look out. But in the near term, the fundamentals continue to be strong and fairly supportive there. I wouldn't be overstating it to say your guidance is consistent with, call it, 10 basis points of credit loss in commercial and wholesale. I wouldn't be overstating matters in saying that. Again, I'm focused on the overall there, but- We'll circle back. I'll have to circle back to you on that one. Specific for you. All right. Why don't we just move on to the next question, then requeue Mario, if you like. I'm done. Thanks. Thank you. The next question is from John Aiken from Barclays. Please go ahead. Good morning. Certainly not complaining about the operating leverage that was generated within the Canadian P&C, but it does look like the efficiency ratio has inflated as we progress through the year. When I look back, the similar situation happened in 2017 as well. Is this something where basically you take a more conservative stance at the beginning of the year, and then as revenues unfold, you actually then are a little more active on your project spend? Am I misreading exactly what's happening here, and this is just an ongoing evolution that will occur? Thanks, John. It's Neil. No, in terms of our efficiency ratio, there is some seasonality to the expense line. This is kind of a trend we see each year, and we do have more expenses coming to Q4. I think in terms of the appetite, in terms of spending, obviously we're looking at what's our revenue growth, and we take that into consideration as we really manage our costs. But we haven't shifted at all from our goals around a sub 40% efficiency ratio, and would really chalk it up to seasonality. Okay, I guess, Neil, to paraphrase, given the fact that the fourth quarter and the third quarter efficiency ratios were above the annual, and yet you're trending down towards the sub 40%, can we assume then that we might see another step function in Q1 on some moderation through the latter part of the year, even if it's just the fourth quarter? Yeah, I think that's fair. Great. Thank you very much. I'll requeue. Thank you. Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead. Thanks. A couple for me. I just want to go back to the U.S. margin for a second. Dave, you talked about having gotten margin maybe to some extent at the expense of growth and maybe flipping that script somewhat. Rod, last quarter you talked pretty constructively about the U.S. NIM, and we got a rate hike towards the end of September, I think it was. The margin didn't move this quarter. To me, that's a bit surprising despite what U.S. comps did. Maybe you could give us a sense, an idea of what we should expect in terms of NIM upside in the event of future rate hikes and how that balances with deposit growth. Sure, I can take that. Just be careful on a quarter-over-quarter basis. You even saw it in Canadian banking. We were flat last quarter, up 3 basis points this quarter, but up 12 basis points year-over-year. I think City National, you'll see continued upward trends. Overall, we were up 40 something basis points year-over-year in Q4. With a couple of Fed increases being priced in by the market, 2 to 3 of them, you should expect 5 to 10 basis points of improvement per quarter next year, I would think. There might be some volatility to that. One quarter might be below that, one quarter might be above that. Certainly the deposit betas that we talked about earlier will factor into that and may slow that growth rate down a bit, which you'd expect. As NIM gets higher, competition increases, and that's natural and consistent with past cycles. Okay. That's helpful. If I could, likely for Neil, last quarter you mentioned an increase in mortgage renewal rates as a positive driver. Are you seeing that hold consistently? Are you seeing more upside from renewal rates? Are they still, I think you said, around the 92% range? Could that increment higher if rates continue to tick higher and renewals get a little trickier for customers? Yeah. The renewal rates are still in that zone. They've come off a little bit, but we're still in the 90% range. In terms of the outlook, it's a real focus for us, obviously retaining those mortgages after we spend the cost to acquire them. I think we've probably seen most of the uplift in terms of, we've talked in the past about the B20 impact. I think that's probably mostly baked in. We still feel very good about what our renewal rates compared to our competition. So if it's still in the low 90s, what would the renewal rate run rate have been like a year ago, two years ago, before B20 was implemented? We'd be in the 88, 87 range. Okay. Thanks for that. Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Hey, merci. My first question is for Doug, actually, on the Capital Markets outlook. Just high level here, total trading revenues for the year were up a bit, but we are definitely seeing some weakness in FICC. Advisory revenues were down a little bit versus 2017, kind of a wash with the trading. The loan growth, if I understand correctly, the loan growth that you got in this business is going to moderate a bit in the year ahead. You are not going to have the same tax uplift this year from the U.S. and PCLs, well, they will probably stay flatter. Just wondering, where do you expect the momentum next year, and how do you expect the business to grow relative to the bank's overall target? Why do not I start with the tax? I mean, the tax uplift, I do not see any reason why that is going to change going forward. Most of our revenues are in the U.S., and we have a lower tax rate there, and we have various investment structures in our portfolios that I think will persist. I think that the tax improvement is not going to go away anytime soon. In terms of the business in the investment bank, I would say that Canada has been difficult. To the extent that we see any improvement in that going forward, that will be quite helpful. There just has been very muted capital raising and M&A activity this year. The situation in the oil patch has made financing more difficult. We are hopeful of some improvement going forward. But really our focus is in Canada and Europe, where we are seeing significant gains. Dave mentioned in his conversation that we have hired I think a dozen senior investment bankers in the U.S. over the last six months that are just coming onto the platform. We expect productivity improvements with them. Our brand is getting better there. In terms of the loan book, we expect that we are going to see some leverage in terms of fee revenue from some of the loans we have put out this year. Dave mentioned a couple of large investment-grade underwritings that we have on our books right now that will generate significant fees. I mean, we have got good momentum. We will carry on. Okay. The trading? Did I miss that? Yeah, the trading, I think we're just getting better and better on the equity side, frankly. Okay. You're seeing a little bit of an uptick in VaR, but that's in our listed and over-the-counter options business and in our structured equity solutions business. They're performing very nicely. Fixed income, I think rates globally has been a little difficult. We're really quite focused on credit. We've had a bit of a softer credit market in the last quarter, but I think we're confident that we'll grow that revenue as well. Okay. Thanks for that overview. My next question's for Graeme. Okay, let me ask you to re-queue. Sure. We don't. Yeah, thanks. Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead. Thanks. Good morning. I'm going to start with Graeme, please, and just to get a little bit more color on energy. First off, on your slide in the presentation, slide 21, you gave us a breakdown of how much of the Canadian heavy oil portfolio is investment grade versus non-investment grade. Do you have that number on a total E&P basis? Because I wanted to compare it to where you were a couple of years ago when we were talking about this issue. I don't know if I have that number right at me. Sumit, I'll have to come back to you on that number. Let me just. Has it changed materially in your view from where we were in 2015, 2016? Or we can come back to it if you want. Yeah, let me come back to you on that, Sumit. I just want to make sure I have the right numbers for you. Okay. The way I'd guess the next part of this and thinking about how provisioning changes under IFRS 9. When we look back at Royal's credit performance for the energy book in that period of time, the producer portfolio specifically, you ended up taking in 2015 and 2016 something like CAD 350 million in provisions, 5% cumulative. Under IFRS 9, do we see that very quickly and upfront as you adjust expectations for what happens in Stage 1 and Stage 2, or has there been enough strengthening of balance sheets in the oil patch that you don't think the level of provisioning required is going to be nearly to that level? Yeah. Let's go through the different parts there. Just to tie into my remarks earlier. As we showed in our disclosure here, the direct exposure to the kind of acute levels we're seeing in the Western Canadian Select prices is a pretty small, pretty manageable exposure, largely investment grade. We do not see that as a real acute concern at this point. We are seeing overall price levels down, oil and gas. Although I would say that is not anywhere near as acute as we saw in 2016. Additionally, our book is a little bit smaller than it was in 2016, and I would say it is arguably a better quality. When I say better quality, we have seen our clients de-risking significantly. Borrowing bases that I think were very effective through the last downturn, I think have even become more robust. I think we head into this in a much better manner. That does lead into the IFRS 9 part of it. As you said, I think historically we would not have seen the losses accrue until we saw the impairments. Now those do get pulled forward in the IFRS 9 world. The mix of our book, the quality that is reflected in our ratings does translate through into our IFRS 9 models. As I said earlier, we have already provided for that in part, because we do look at multiple scenarios there. We do weight those different scenarios, and a couple of those scenarios do consider decreases in oil and gas prices. As that shifts to our, or at least the commodity pricing shifts into our baseline, we would see some incremental. That does pick up also the indirect side, like our consumer exposure and our commercial exposure we would see in Alberta. That is why I said earlier, yes, it will come in through Stage 1 and 2 initially, and then translate over to Stage 3 through time. That is very helpful. Thanks for that color. Thank you. The next question is from Robert Sedran from CIBC Capital Markets. Please go ahead. Hi, good morning. Wanted to ask about the insurance business. I guess first, Rod, the positive impact of life retrocession contract renegotiations. That sounds like a non-recurring kind of benefit. Is that the largest mover this quarter, and am I correct? It's Doug Guzman. I'll take that. As you know, there's a number of moving pieces in the business. There's this quarter, the life retro. There's every Q4, the actuarial adjustments. There's the investment-related gains, which featured this year, as well as longevity reinsurance or the annuities. The life retro, this is obviously where we take risk of mortality off of primary insurers. That's been uneconomic for the industry for a period. This year, we and many others, we have the ability to reprice that. That creates a release of reserves this quarter or this year, but what it does is restores a run rate profitability to the business for next year. I wouldn't anticipate that to fall off materially year-to-year. More importantly, what I'd encourage you to do is focus on the whole segment, because with those big pieces that move around from quarter to quarter and year to year, I think both Dave and Rod said we'd anticipate to grow the business from here. The investments were a positive this year, and life retro was a positive this year, which might be lower next year. But our annuities offer opportunity we believe. We believe our investment book, which is extremely conservatively set up with kind of 2%-3% non-fixed income compared to much higher for others, offers continuing opportunity to release reserves. The core business and claims was a little weaker than we'd expect this year. I think as you wrap the whole thing up, we expect to grow from here. But of the two that are cited in the public disclosure, the life retro piece was a smaller positive than was the investment activity. Thanks, Doug. That's actually kind of where I wanted to go because the slide every quarter seems to reference the volatile items that sort of explain the most volatile business that you guys seem to have. And you talk about full year growth, and there's less on the slide, there's often less in the disclosure about where that growth is going to come from. Is this just about making the operation better and tighter, or is it actually about top-line growth and new business being added to the mix? It's both, right? First of all, the investment side of the portfolio is part of the business. But we've talked about in home and auto, an ability to serve more clients with a broader product range. We believe that's an opportunity over time. Disability claims throughout the year for many have been a little weaker than we thought. That should regress to the mean. We're taking action to get people back to work. So that's a core operational business, if you will. Creditor is slow growth. That's a client-facing business, obviously. Slow growth isn't helped by digital distribution, but we expect that to show growth over year. And then if you start with a conservative posture on your investment portfolio, and each fourth quarter, we have tended to show you releases on the actuarial assumptions, which would suggest that the reserving is not aggressive to begin with. You should expect to see improvements with the passage of time on both those investments and actuarial adjustments line items in addition to the core business growth. Okay. Thank you. I guess just one other thought. The release of reserves for actuarial adjustments, in essence, is the release of profitability of business that has been written in the past. Right? Because you are adjusting your assumptions for experience. And so view it not as anomalous or separated from the business, but view it as the delivery of product that is previously been written. Yeah, we will move to the next question. We do have an ability to go a little bit beyond 9: Yeah depending on the queue, so. And Graeme, Yeah, maybe I'll just jump in. I just wanted to follow up on Sumit's question there. I was looking up some of the details there on the investment grade, non-investment grade mix. Again, caveated with we just don't think that in aggregate we're nearly the same severity as we were in 2016. The investment grade, non-investment grade mix for our energy book is about the same as it was three years ago. It is a smaller book though at the same time. Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Thanks. Graeme, just to confirm, I think a couple of years ago, you were about 80% to 85% non-investment grade. Is that the ratio you're talking about? Non-investment grade? Yes. No. Can you tell us what the mix is then? Well, for our overall energy book, it's about 50/50, investment grade, non-investment grade. Thank you. Yeah, as I said earlier, the investment grade side tends to be your larger, more diversified, integrated operators. The non-investment grade side tends to be well-secured and borrowing-based structures as we referred to earlier. Okay. Sorry, I must have written it down wrong because it felt like it was a larger proportion non-investment grade a couple of years ago. I just wanted to get from Neil. Neil, I think, or Rod for that matter, you were talking about 1-2 basis points, let's say, or 4-8 basis points, I guess, over the full year, 1-2 basis points per quarter NIM expansion in Canada. I wonder if you could just talk us through where you see that expansion coming from. What would be the drivers of that? Well, it's Rod. I'll start, and Neil can jump in. Most of it is structurally inherent in our book right now because from the past Bank of Canada increases that have happened because we've gotten the deposit beta is kind of baked into the book, and now our mortgage book is repricing. So it's not as dependent on future rate increases as you might otherwise expect. We've talked in the past, and we showed at Investor Day that we get a nice even flow over 5 years from interest rate increases, and that's what most of that would flow from. So if you look at it from an FTP standpoint, it's higher deposit spreads. If you look at it from an economic standpoint, it is higher mortgage rates accompanied by a deposit beta. That's perfect. Thank you. Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead. All right. Good morning. Doug, just going back to the insurance side, you talked about the growth in the investment portfolio, and majority being fixed income. What's the other 2%-3% makeup of that portfolio right now? Yeah. So it's not necessarily the growth of the portfolio, as the positioning of the portfolio. The rest would be fixed income, which is obviously a natural match to the long duration liabilities on the insurance side. Okay. The other 2%-3% is just, I guess, a whole gamut of stuff? It's not- Yeah. Equities, there's a little bit of real estate, there's U.S. equities, which offer some diversification. But the point really is that that proportion is very small relative to others in the industry. Agreed. Maybe just turning over to the Canadian side, appreciate the guidance on the resi growth. But if you look at the other categories like HELOCs and other personal, which I think is mostly investment loans, it was kind of flat throughout 2018. What do you see within those buckets heading into 2019 in the face of deleveraging and potentially higher rates? Thanks for the question. It's Neil. Yeah, we've actually had our HELOC product shrinking as we see some flow of clients at renewal looking to lock that in a residential mortgage. That's starting to slow. The outlook in there, we've been sort of negative 2%. Probably start to see that come back to flat and then some slow growth over time. In terms of personal lending, there's really two segments there. It's our auto book and then it's our direct consumer loans that we originate through our branches. Our auto book is up about 6%, competitive, but we've been doing a lot of work there to really provide growth, and that's something we feel is sustainable. In terms of the consumer lending, we've commented in the past we have, by far the largest market share. I think really making sure we're balancing opportunity to lend more with making sure we feel good about the risk and we're not over-leveraging our customers. We've started to move back to starting to see growth again in terms of month-over-month in that book. Right now we're about flat, and we'll start to see low single-digit growth as an outlook for 2019. Great. Thank you very much. We'll take another call. I know we're a bit over, but there's a few people in the queue that haven't had a chance. Perfect. Thank you. Next question from Doug Young from Desjardins. Please go ahead. Good morning. I'll try to keep this quick. Just back to City National. You covered off the NIMs nicely and the deposits and the loans, but when I look at the quarter sequentially, it looked like there was a bit of a, or quite a decent pullback in earnings sequentially. I know year-over-year it looks quite good still. I think there were some tax benefits in the quarter, and I know you've hired some additional frontline staff. Is there anything else that's dragging down the profitability in the expense side that could continue into next year? How should we think of, because the tax benefits are in there, but the year-over-year comparison goes away next year. Is there anything else that could drag the evolution of earnings at City National as we think out over the next year? No, I think as you look at this business, the theme in the comments I made and Rod made are certainly around investing for medium and longer term growth. We're opening new centers, we're hiring private bankers, we're hiring commercial bankers, we're ramping up our back office capability on the jumbo mortgage side, which is a big part of our acquisition strategy. Every business goes through step-ups in investment to create future growth. I think we're able, for the first couple of years, to run off the existing platform. Now there's been a bit of a step-up, as I've talked about over the last year, to create the capacity for another growth spurt and acquisition spurt. You're seeing a little bit of that kind of roll into Q4 as we've hired, as you heard, hundreds of frontline staff to create opportunities in New York and Boston and Washington and in markets. There's a bit of a step-up there that it takes a private banker a good year, commercial banker a good year to two years to get going. We're into our third year now of doing this, so we're going to start to see that traction. I think it's a little bit of that for sure. There's a bit of the business trying to adjust to higher regulatory expectations with CCAR in the U.S. versus what they've had before, as we've absorbed that cost increase. We call it a dis-synergy in the acquisition. I think what you're looking at predominantly now is the posturing for growth. We're very excited about the run rate going forward. As Rod referenced, it'll be supported by some margin increase from, we expect, anywhere from two to four rate increases coming at us in the United States, and the business is well-positioned to do that. We sense a very strong market with tailwinds going forward to invest in, and I think that's what you're reflecting in Q4. It doesn't feel like you expect there to be a lag in earnings growth next year and then it to pick up again in 2020 as some of these individuals and regions get up to speed. It sounds like you think you're set up well to continue the momentum. Is that a fair characterization? Yeah, I don't expect us to do 47%. As you normalize for the tax increases, Yeah we're back to the original discussion we had when we acquired City National, double-digit growth. It could be lumpy quarter to quarter as we talk about, but we look at a year, we have 15% loan growth, and we're going to try to do better on the deposit side. We got margin increases. We've invested already in stepping up our cost base. Hopefully that can hold, and we'll create solid earnings growth as we talked about. Appreciate the answer. Thanks. I think we have time for maybe one more, and that will be it. Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. My questions are asked and answered. Thank you. Okay. One more. We'll take one more then. There's one more in the queue, I think. Thank you. The next question, Nigel D'Souza from Veritas Investment. Please go ahead. Thank you. Good morning. I wanted to circle back on your residential mortgage growth outlook for F 2019, that 3%-5% range that you mentioned. At the high end of the range, that's just a marginal step down from F 2018. So where do you expect to be in that range, at the low end or the high end? What are the underlying assumptions for real estate? Are you expecting both prices and volumes to move higher in 2019? Thanks. Thanks for the question. It's Neil. I think the range we've given just gives a sense. There is some uncertainty in the market, obviously. The assumptions in there is that we see about a 3% increase in home sales and a very moderate increase in home prices of 1%. That said, if we look at 2018 as a comparator and just the uncertainty there, we had a pull-forward effect, pulled a bunch of volume forward, and then from kind of May on, we've been slowing. So we're trying to provide this outlook coming through a fairly choppy year. In terms of where do we see it, Ontario, particularly GTA, is stronger. We're really stronger to the east, and we're seeing weakening volumes kind of Manitoba west, if that gives you a sense of the mix. Okay, sure. For now, I think we'll just take the midpoint of that range. Appreciate the call. Why don't I wrap up? Thanks, everyone, for joining the call today. I think from the themes from all the questions and the responses you heard from the business leaders, we've got a lot of momentum, and we've invested in growth. You've seen that in our revenue line. We feel we're operating in good economic conditions. We still feel there's tailwinds on margin from rates in both our Canadian and U.S. businesses. We feel we're in a strong credit environment. Going into 2019, having invested in growth and technology and frontline people, as you've heard, we're feeling good about the outlook for the economy and for the bank. I think that's kind of the themes that we wanted to communicate and came out, I hope, with your questions. Thank you, and we'll see you again in Q1. Thank you. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.