Earnings Call: Q1 2018

Feb 23, 2018

Good morning, ladies and gentlemen. Welcome to the RBC 2018 first quarter results conference call. I would now like to turn the meeting over to Mr. Dave Munn, Senior Vice President and Head of Investor Relations. Please go ahead, Mr. Munn. Thanks, operator, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Mark Hughes, Chief Risk Officer. We will open the call for questions following their comments. In previous calls, we have run out of time for everyone's questions, so to give everyone a chance to ask a question, we really ask that you keep it to one question and then re-queue. Joining us in the room today are our business heads, 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. Graeme Hepworth, our Deputy Chief Risk Officer, is also with us today. As noted on slide 2, our comments may contain forward-looking statements which involve applying assumptions and have inherent risks and uncertainties. Actual results could differ materially. With that, I will turn it over to Dave. Thanks, Dave, and good morning, everyone. I do not think we have ever had to compete with a Team Canada Olympics hockey game before. So thanks, everyone, for joining us this morning. We got both angles covered, though, as we have got lots of ads on the Olympics if you are watching that coverage at the same time. I am not sure how Team Canada started, but RBC had a strong start to the year with robust client activity across our businesses. We saw strong volume growth and investment appetite in our retail businesses and good origination and lending activity in capital markets. Supported by rising interest rates and equity markets, we generated strong revenue growth. This led to CAD 3 billion of net income in the first quarter while we absorbed a write-down related to the U.S. tax reform. Excluding this write-down, we generated CAD 3.2 billion. Overall, we believe the US tax reform will be positive for the broader U.S. economy and our businesses. Our strategy for sustainable growth is built on prudently managing risks and effectively deploying capital to deliver premium returns through the cycle. We did so this quarter with an ROE of 17.4%. We invested in organic growth in each business while buying back 9 million shares and maintaining a strong CET1 ratio of 11%. In addition, I am pleased to announce a CAD 0.03 increase to our dividend this morning, bringing our quarterly dividend to CAD 0.94 per share. Our strong performance gives us the flexibility to invest more in technology and position RBC for the future. We are using our resources to help advance Canada's competitive position. This includes researching new banking models and developing data and machine learning capabilities at our Borealis AI research facilities. We are also opening a cybersecurity lab at the University of Waterloo as part of our commitment to develop talented researchers in Canada. Our commitment to innovation is one example of how we are living our purpose: to help clients thrive and communities prosper. That is why we introduced RBC Future Launch last year, a CAD 500 million commitment over 10 years to prepare young Canadians for the future of work by providing them with access to skills development and networking opportunities. We are also living our purpose through our commitment to the environment and to diversity and inclusion. This quarter, we were one of two Canadian financial institutions that committed to a global United Nations project to identify climate-related risks and opportunities. RBC was named to the 2018 Bloomberg Gender Equality Index, and our U.S. business was recognized by the Human Rights Campaign as the best place to work for LGBT equality. We believe that having a purpose and doing the right things for our communities and employees will help us outperform over the long term. Now turning to our segment performance. Our Canadian banking business generated record revenues this quarter. We saw strong client activity that drove volumes higher across our products, with results also benefiting from a rising interest rate environment. The recent normalization of house prices in certain areas like Toronto is healthy for the market. While it is too early to measure any long-term impact of the B-20 rules, we continue to believe in the fundamental strength of the Canadian economy because of our low unemployment rates, solid GDP growth, and healthy immigration levels. We will continue to help Canadian homeowners while supporting balanced growth in the market. As always, we monitor risk profiles to manage through a cycle, and we place emphasis on the quality of the borrower. We will not compromise in our risk profile just to add mortgage volume. In cards, we recorded 11% growth in purchase volumes, driven by a number of factors, including the strength and breadth of our market-leading value proposition, including RBC Rewards, coupled with strong partnerships and, more recently, new retail offers. Our Petro-Canada linked loyalty offering has shown early signs of success with over 340,000 linked loyalty accounts and 10,000 new card sales through the promotional website alone. Additionally, industry data shows our cards business is growing at a significant premium to the market on purchase volume and balances. We are achieving this growth even while staying focused on prime and super prime borrowers. Turning to our business customers, we have added more commercial bankers to help our clients grow. This helped us achieve 12% growth in business loans as clients and the markets appear to look past NAFTA concerns. Our commitment to helping customers grow across borders helped us win Best Trade Finance Provider in Canada by Global Finance Magazine. In wealth management, we achieved a record quarter for both revenue and earnings. Our Canadian wealth management advisors were recognized by Euromoney as the best private banking services in Canada. Global Asset Management continues to outgrow the market. We generated strong retail net sales and added some large institutional mandates. We also benefited from strong global equity markets and good fund performance, with 83% of our funds outperforming their benchmark on a three-year basis. This business grew assets under management by more than CAD 40 billion over the last 24 months. In our U.S. wealth management business, our strong growth momentum continued. We added more client-facing colleagues as we expand commercial banking coverage, including in the food and beverage industry, and added private bankers throughout California. This has led to double-digit growth in new clients at City National. Investor and Treasury Services posted record results this quarter, driven by an increase in deposits and favorable markets. Our continued investment in sophisticated end-to-end technology drove new relationships, including that of HarbourVest, a large global private equity investment manager. We also made strategic hires in our asset services business to bolster our competitive position in key global markets. Our Capital Markets clients were active this quarter, which led to record results. Origination activity was up, and our fixed income team continued to outperform with strong origination and credit trading. Our U.S. and European investment banking results were also strong, with several large M&A mandates completed. For example, RBC Capital Markets provided a comprehensive financing solution for Sempra Energy's acquisition of Texas-based Energy Future Holdings, the largest utility acquisition financing in recent history. We will continue to look for ways to deepen and develop new long-term relationships with quality clients. Overall, I'm very pleased with our first quarter results. We are mindful of the recent market volatility, and this is where we can provide valuable advice to clients to ensure they are on track to achieve their goals. I believe we are well-positioned to meet our financial objectives through the coming year. I'll now pass it over to Rod. Thanks, Dave, and good morning, everyone. Starting on slide six, our first quarter earnings of CAD 3 billion were relatively flat year-over-year, and EPS was up 2%, reflecting the benefit of share buybacks. This quarter, we absorbed a write-down of CAD 178 million related to the U.S. tax reform. Excluding this write-down and last year's Moneris gain, earnings of CAD 3.2 billion would be up 13% and EPS up 16%. In addition, we had a couple of favorable items which added, in aggregate, CAD 50 million after tax to earnings. Our revenue growth was driven by solid volume growth and client activity across most businesses, partly due to favorable macro tailwinds. Our cost discipline across the organization allowed us to improve efficiency while investing more in innovation and talent to grow our business. We also continued to absorb higher regulatory and cybersecurity spend. On taxes, we expect to earn back the tax write-down in the first year through the lower tax rate on U.S. earnings. I should note that we are required to use the same blended federal tax rate in the U.S. throughout the whole year, including the current quarter. This blended rate includes the previous U.S. federal tax rate of 35% and the new tax rate of 21%, so our blended U.S. federal rate of about 23% will be used in each quarter of 2018. We're projecting an annual benefit to earnings of about CAD 250 million, and our effective tax rate guidance for the bank would move to the lower end of our 22%-24% range going forward. I'd like to spend a moment on the change in the accounting standard for PCL. Effective November 1st, 2017, we adopted IFRS 9, which introduced an expected loss accounting model for credit losses that differs from the incurred loss model under the previous IAS 39 accounting standard and results in earlier recognition of credit losses. Under IFRS 9, credit loss allowances are applied to nearly all financial assets, and PCL is recorded in three stages. Both stage 1 and stage 2 allowances are held against performing loans but tend to the old general allowance. Stage 1 and 2 are both contingent on the magnitude of credit risk, with the key difference being the time horizon for expected losses, and we expect migration between these two stages depending on significant changes to credit risk. Allowances in each stage are impacted by a large number of variables, including, but not limited to, macroeconomic projections. These include the credit quality of the borrower and volume growth net of maturities. As always, the remeasurement of expected losses considers not only forecasts of economic conditions, but also past events and current conditions. Stage 3 PCL is held against impaired loans and effectively replaces specific PCL under the previous accounting standard. As Mark noted last quarter, through the cycle, we expect the level of provisions under IFRS 9 to be relatively similar to provisions under the previous accounting standard. Mark will comment further on our credit performance shortly. Slide seven provides the IFRS 9 transition impacts on our capital and equity positions. On transition, our shortfall of accounting allowances to Basel expected losses was CAD 1.2 billion. The impact of the impairment requirements of IFRS 9 reduced the shortfall but did not eliminate it, so the impact on CET1 was negligible. Going forward, this remaining shortfall from CET1 of CAD 549 million at the end of Q1 provides an additional capital buffer against future PCL increases in an economic downturn. Turning to slide eight, our common equity Tier 1 ratio was strong at 11%, up 10 basis points from last quarter. This was largely driven by internal capital generation and a reduction in the Basel I floor adjustment, which, as you may recall, we triggered last quarter. These factors were partly offset by higher RWA in the quarter due to business growth and the previously mentioned repurchase of shares, completing our 30 million buyback program announced in March 2017. This morning, we announced a new repurchase program for 30 million shares. Share buybacks continue to be a useful tool to deploy excess capital after fully investing in our businesses. In January, OSFI proposed a new regulatory capital floor based on Basel II standardized RWA, which will take effect in the second quarter of 2018. The Basel II floor is more risk-sensitive than the current Basel I floor. As a result, it is more aligned with how we manage our business, and therefore, we do not expect the Basel II floor to impact us in Q2 or throughout 2018. I will turn to the performance of our business segments. Starting on slide 9, Personal and Commercial Banking reported earnings of CAD 1.5 billion. Canadian banking net income of nearly CAD 1.5 billion was down 4% from a year ago due to the prior year's CAD 212 million gain on the sale of Moneris. Adjusting for that gain, net income was up 11%. We also had a gain of CAD 27 million related to the reorganization of Interac this quarter. Revenue increased 3% from a year ago or 8% adjusting for the gains I just noted. Underlying revenue was driven by solid volume growth, higher spreads, and higher mutual fund distribution fees. There was also higher-than-normal client activity in our direct investing online brokerage business. Reported operating leverage in Canadian banking was -1.7%. However, underlying operating leverage was 3.5% after adjusting for both the Interac gain and last year's Moneris gain. Mortgages were up over 6% year-over-year, with a small portion of the growth due to increased demand ahead of the implementation of the B-20 guidelines. We continue to expect mortgage growth to moderate to the mid-single digits. NIM increased seven basis points year-over-year and three basis points quarter-over-quarter, largely benefiting from higher interest rates. Given the current interest rate environment, we expect NIM to grow an additional three to five basis points for the remainder of the year, with some quarterly variability depending on further rate increases as well as competitive pricing pressure. Turning to slide 10, Wealth Management reported earnings of CAD 597 million, up 39% from last year. In both Canadian Wealth Management and Global Asset Management, revenue increased largely due to higher fee-based assets under management due to strong market performance and solid net sales. In U.S. Wealth Management, including City National, revenue was up 17% due to higher fee-based assets, as well as 14% strong loan growth at City National, and the benefit from recent Fed rate hikes. This quarter's earnings also included a CAD 23 million favorable accounting adjustment related to City National and the lower effective tax rate benefits from U.S. tax reform. All three of these wealth businesses, Canadian and U.S. and Global, all three of these businesses achieved record results. Moving on to Insurance on slide 11, net income was down 5% from a year ago, largely due to favorable updates in the prior year related to premium and mortality experience in International Insurance, as well as higher claims volumes related largely to life retrocession this quarter. First quarter earnings were low when compared to the fourth quarter due to the favorable impact of the annual update of actuarial assumptions completed in Q4 2017. Higher seasonal claims costs in disability, life, and travel also contributed to the decrease. Moving on to slide 12, Investor & Treasury Services had strong earnings of CAD 219 million, up 2% from last year. Growth in earnings was driven by an increase in client deposits, increased revenue from our asset services business, and higher funding and liquidity earnings. We continue to invest in technology and automation as we streamline processes and enhance the client experience. Moving on to slide 13, Capital Markets had record earnings of CAD 748 million, up 13% year-over-year, with our businesses performing well across all geographies. Part of the increase was due to the lower effective tax rate from U.S. tax reforms. However, we also did well in corporate investment banking, including higher lending revenue, as well as increased debt origination across all regions and equity origination activity, mainly in the U.S. Global Markets improved year-over-year, with fixed income trading performing well in the face of difficult market conditions. Results benefited from higher equity trading and increased origination activity. Looking forward, our pipeline of deals remains solid across all regions. However, as a reminder, both our Capital Markets and I&TS businesses do tend to have stronger first quarters. Also, as a reminder, Canadian banking gets impacted by fewer days in Q2. All that said, we expect to continue benefiting from our scale, performance, and innovation across our businesses. Overall, we expect the recent strong operating environment to drive continued revenue and earnings growth. With that, I'll turn it over to Mark to discuss credit. Thank you, Rod, and good morning. As Rod mentioned, this marks our first quarter under IFRS 9. Total PCL of CAD 334 million was up CAD 100 million from last quarter. This includes PCL on impaired loans of CAD 325 million, up CAD 91 million from last quarter, and PCL on performing loans of CAD 9 million this quarter. Our total PCL ratio was 24 basis points. The PCL ratio on impaired loans was 23 basis points, up six basis points quarter-over-quarter, largely due to a few outside recoveries last quarter. Overall, our credit quality remains strong, supported by positive macroeconomic conditions. Let's now turn to slide 16, where we discuss the segment PCL on impaired loans, otherwise known as Stage 3 PCL under IFRS 9, as it is more indicative of the current credit performance of our portfolio. In Canadian banking, PCL on impaired loans of CAD 268 million increased CAD 17 million quarter-over-quarter, reflecting marginally higher PCL, but up from low levels in our personal lending portfolio. Canadian banking PCL of 26 basis points, up one basis point this quarter, continues to be at the lower end of the range experienced over recent quarters. Caribbean and U.S. banking PCL on impaired loans were down CAD 11 million from last quarter, reflecting lower provisions in our Caribbean lending portfolios. We do not yet have an updated assessment of the hurricane damages in the Caribbean, where our exposure to the islands impacted is approximately CAD 300 million but expect greater clarity in the coming quarters. Capital Markets PCL on impaired loans of CAD 45 million increased CAD 83 million from last quarter, largely due to higher recoveries in the oil and gas and real estate sectors last quarter. This quarter included new provisions on a few accounts, including one in the consumer goods sector. Turning to slide 17, gross impaired loans of CAD 2.5 billion were down CAD 49 million or 2% from last quarter. Our gross impaired loan ratio of 45 basis points was down one basis point from last quarter. Canadian banking gross impaired loans increased CAD 224 million from last quarter, reflecting a CAD 134 million increase due to a change in the definition of impairment for certain products as a result of our adoption of IFRS 9. In regards to this IFRS 9-driven increase, we now include mortgages and personal loans that are greater than 90 days past due in our gross impaired loans measure. Under IAS 39, the thresholds for mortgages were 180 days past due if privately insured or 365 days past due if government insured. The threshold for personal loans was mainly 90 days past due, but a small proportion of this portfolio had a threshold of 365 days past due under the prior accounting standard. Unrelated to IFRS 9 adoption, we also saw higher impaired loans in our business banking portfolio, but no specific trends were identified. Wealth Management gross impaired loans decreased CAD 276 million, mainly reflecting lower impaired loans in City National due to the exclusion of CAD 229 million in acquired credit-impaired loans that have returned to performing status since the acquisition, and a CAD 58 million decrease due to a change in our definition of impairment for certain products to better align to RBC's definition. Let's now turn to our Canadian retail exposure on slide 18. Overall delinquencies for most portfolios stayed relatively stable at low levels, with cards higher quarter-over-quarter, largely due to seasonality. As you can see, our PCL remains largely stable across all Canadian retail products. Slide 19 shows that the credit quality of our Canadian mortgage portfolio continues to be strong, with provisions remaining at two basis points. We remain comfortable in our clients' ability to service their mortgage in this rising rate environment, given our strong underwriting and credit monitoring practices. As you know, we already stress most of our new mortgages at a rate above the contract rate. Overall, our lending portfolios continue to perform within expectations, and for the remainder of 2018, we continue to expect our PCL ratio to trend in the 25-30 basis point range, subject of course to quarterly volatility. Assuming a stable macroeconomic environment, growth in non-impaired PCLs should be mainly related to portfolio growth. Turning to market risk on slide 27, average market risk VaR increased CAD 7 million quarter-over-quarter, largely driven by the adoption of IFRS 9, which caused certain assets to be redesignated from AFS to trading. In addition, equity exposures were higher on average during the quarter due to increased client-driven activity in volatile equity derivative markets. We did have no days of net trading losses in the quarter. As this will be my last earnings call, I would like to thank the analyst community for your interesting and challenging questions during my time as CRO. I have enjoyed dealing with you, and I'm sure you will find RBC's risk management to be in very safe hands as Graham takes over. With that, we'll hand the lines over for Q&A. 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 *1 on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press *1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead. Good morning. My question was on City National and U.S. Wealth. When looking at slide 23, when we look at year-over-year deposits, they have been relatively flat. You mentioned 3% on the slide. Loan growth has been very strong. I guess if you could just talk about in terms of your outlook on, one, loan growth driven by a bunch of hiring that you are doing, investments you are making, and on the other side, do you expect deposits to pick up pace or do you expect that loan to deposit ratio to move closer to 100% over the next year or two? Thanks everyone for your question. This is Dave here, and I will start and maybe hand it over to Rod after if he wants to fill in any comments. First, I think the most important part is to focus on the loan growth at City National at 14%. Given that we have long deposits in that business, generating revenue and growth through the lending side is the core focus of the business right now. Strong diversified loan growth across a number of sectors, our specialty banking, our entertainment business, our real estate business. We are competing very well. Part of it comes from growth, obviously, and expansion of our sales force, bringing in teams. We brought a food and beverage team in from the competition. They are doing very well within our specialty banking business. I would say that the loan growth side is strong. The business is obviously being helped by rate expansion and NIM expansion, partly from the rate environment, but also from putting more of our deposits to work in the lending business. I think I would characterize the balance as healthy. You saw 3% growth on the deposit side. Obviously, clients are quite active at the upper end of the market in the ultra-high net worth, high net worth space. We are seeing some clients put their money to work in different ways. It is very competitive on the deposit side. I would expect you will see loan growth outstrip deposit growth as far as percent growth as the economy remains strong and client demand strong. Betas are up a little bit in the marketplace as we compete for deposits. I do not think it is directly impacted by QE unwinding. But certainly, you are seeing competition and some price pressure in the deposit marketplace. You are seeing some volatility within some of our sub-sectors, like the technology sector as they invest. We are seeing cash flow volatility in some of those business a little higher than we experienced in the past. A lot of ratios going on there, but overall, very happy with the balance sheet, the growth in the balance sheet, the revenue growth, and the overall NIMs are up in the business. I would characterize the City National performance as exceptional. As you saw from the slides, pushing $180 million on a cash basis, albeit with the one-time benefit that Rod pointed to, very strong growth aided by all those factors. Sure. Thank you. Thank you. Our following question is from Manny Gomeu from Cormark Securities. Please go ahead. Hi, good morning. Hoping you can comment on what you are seeing in terms of residential mortgage originations in Canada, and if you can comment on the uninsured bucket in particular. Thank you. Thanks for the question. It's Neil. Yeah, I'd say with B-20, we're only a month into it. It hasn't really changed our outlook for the year from what we shared last quarter. We're maintaining a view of a mid-single digit growth for 2018. We mentioned last quarter we did start to see some pull forward of clients, I think, really trying to get ahead of the regulation. We saw that through the entire quarter, and that ended up with originations slightly above Q1 2017. We are expecting some slowing in the second quarter, but we're maintaining our outlook at mid-single digits. And essentially the mix of insured to non-insured is about exactly where it's been. You're just saying if you look on a year-over-year basis, you're seeing your residential mortgage originations up a little bit. Is that correct? That's right. Okay. Thank you. Thank you. Our following question is from Nick Stogdill from Credit Suisse. Please go ahead. Hi, good morning. Just on the business lending in Canada, maybe for Neil or Dave. We did see some acceleration. If you could give us your thoughts on where the incremental growth is coming from. Is it new customers or gaining share within your existing base? And Dave, I believe you mentioned that you think the clients and markets continue to look past NAFTA concerns. Why do you think that is? And what do you think it would take for them to be a little more cautious on that front? Yeah, I'll let Neil start, then I'll handle NAFTA second. Thanks for the question. So in terms of business lending, maybe I'll just start with the sectors. We've identified a number of sectors we think we were under-penetrated that we had attractive returns. So we've been increasingly focusing on those. Those would be within real estate, agriculture, retail, and wholesale. So we're starting to see more movement and more market share gains there. But as we look across every sort of loan segment size from zero to $5 million, $5 million to $25 million, and then $25 million and above, we're making market share gains across that spectrum. The underlying strategy has really been about taking time to understand the risk we're taking on. We've adjusted some policies that are essentially driving more competitiveness around credit terms, and then we've combined that with a larger sales force. We've commented in previous quarters, we've added more than 80 account managers to that business over the last year, and combined, that's really where the growth is coming from. Yeah, Nick, on the NAFTA side, I'd say there's kind of a couple of factors. One, markets are looking through it, equity markets are looking through it, and maybe bond markets are looking through it at the same time. But certainly some of our commercial customers remain concerned about it, and it's certainly impacting longer-term investment decisions that we see customers making. Now, having said that, I do believe that this is highly beneficial obviously for both countries on a relatively balanced trade of goods and services. We certainly hear a strong support for NAFTA among U.S. CEOs, among U.S. congressmen, Democrats and Republicans. Therefore, we all remain hopeful for a good outcome from this. There still is a reasonable probability that the 180-day clause gets invoked. At that point, I still think there's a good runway to negotiate this, and I still think the markets will largely anticipate a good outcome and look through that. But you'll see some volatility through this process as we're experiencing it through the communication and positioning of both sides. Net, hopeful for an outcome. Markets are looking through it. Customers who have to make long-term investments are obviously hedging and thinking twice about it, and we all hope this gets resolved in the near term. Thank you. Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Good morning. I have a question about slide 7 in the presentation. I appreciate this breakdown. It's pretty interesting. I'm just wondering, this ratio you show regulatory expected loss coverage of LTM net write-offs. You got 3.2 and 3.3. What are you communicating with that? Is that some sort of target you want to maintain? No. It's actually just some simple math just saying that if you look at our last 12 months write-off, our coverage under IAS 39 from a regulatory capital and a book allowance perspective, and we're adding in that shortfall, the Basel III shortfall. Yeah. Basically, we have over three years covered, and now under the new standard, we again have over three years, slightly higher of last 12 months, and it doesn't mean the last 12 months is indicative of the next 12 months, but it is a level of comfort that I think that should provide to investors and stakeholders. Is there some sort of forward-looking type of metric that you look at, or is there a level at which you would want to remain above? Maybe Mark or Rod? I think that would be cyclical. Yeah. If there was to be an economic downturn, you would expect the denominator to increase, and given the nature of IFRS 9 now, you would expect an acceleration of the losses in the P&L and in the book equity. But we also have that CAD 549 million of Basel losses, which is a different methodology. It is a one-year stressed view as opposed to the IFRS 9, which is a multi-year life of loan current view. So they are two different time durations and different economic situation. But you would expect those to ebb and flow, and even in a severe cycle, you would want to see that close to one or something like that. You would have to model that out if there was another great recession. All right. I will stick to that. Thank you. Thank you. Our following question is from Steve Thériault from Eight Capital. Please go ahead. Thanks very much. For Neil, I think personal lending still hovering around flat in terms of year-on-year growth. Some good momentum elsewhere, certainly. Last quarter, you suggested we could see some improving non-auto components. I think it's the non-auto components that are driving that. Improving those I think is a priority for this year. We're not seeing it in Q1, so can you talk a little bit about your outlook here, what initiatives you have going on? What kind of improvements should we expect to see through the course of 2018? Yeah. Auto, we're feeling quite better about. We're seeing the growth that we were hoping for. In terms of the non-auto portion, I guess a couple things. One is we're renewing some credit strategies to look at borrowers that we actually haven't gone out and made proactive offers to. Our branch channel is really something we're looking to educate our branch channel about looking for these opportunities and then providing the pre-approvals so that when they sit down with clients we're helping them with better CRM. That's really I'd say the primary driver. Then just being more proactive with our marketing. This isn't a product we've put a lot of CAD into marketing, and it's something we'll start to rebuild in the back half of 2018. Could you give us a split of the Q1 auto growth versus the rest? Yeah. Auto Because the rest is down slightly. Yeah. Auto's up about 4.5%, and our personal lending to the branches is down about 2%. I'll leave it there. Thanks. Thank you. Our following question is from Sumit Malhotra from Scotiabank Capital. Please go ahead. Thanks. Good morning. Just a couple of points of clarification from Rod, please. First off, Rod, on the 22%-24% tax rate range, lower end of that, is that non-TEB or TEB in that range that you provided? That would be non-TEB, so that would be our reported earnings. Reported. Okay. So non-TEB 22, so maybe closer to 24 TEB. On the Basel I floor, your CAD 12 billion plus RWA there went down significantly this quarter. I heard you loud and clear on the fact that the Basel II floor shouldn't be too much of an issue. Does that remainder RWA that you have allocated to the Basel I floor, does that go to zero or is there some remnants of that going forward? No, that will go to zero, and it would be replaced by the new Basel II floor, which we have a comfortable surplus on that given the nature of the calculation and the methodology. That should go to zero and remain at zero for the foreseeable future. Okay. So all else equal, another CAD 2 billion or so comes off your RWA next quarter. Absolutely. The last question for me, it has to do with, I don't know if this is wealth or it's in Investor and Treasury Services. One of your line items, I think it's the investment management and custodial fees. Certainly seemed to have a sizable increase in the quarter, about CAD 100 million or so sequentially. Some of that I'm sure is just based on the fact that your AUM or administration levels are higher. But is there anything special in that line that was impacted this quarter? Because it did seem like a sizable increase. Well, you did see increased growth in both of those businesses as we talked about, and certainly the AUM has been going up. Most of the growth is in wealth management. I'd say 85% of the growth is in wealth management, driven by the strong market appreciation as well as the strong net sales that we've been enjoying across all of our wealth management businesses, both in U.S. and Canada. I just remember in the past there was some performance fees, I think especially for the BlueBay business that got booked earlier in the year. It doesn't seem like it's related to that. Yeah. That was the case a few years ago. There was more volatility in the BlueBay performance fees, but the volatility on that front has come down a bit. Where you do see volatility though is the BlueBay net sales have been quite positive the last two quarters. In fact, 4 billion of net new sales in BlueBay. While it's not those direct performance fees that is helping that from a seasonality standpoint, it helps it a little bit quarter-over-quarter, but not much year-over-year. The benefit has been the AUM has gone up and therefore the income across that has improved. Thanks for your time. Thank you. The following question is from Robert Sedran from CIBC Capital Markets. Please go ahead. Hi. Good morning. Just a couple of revenue items that I wanted to ask about, some movement in some items, and I am wondering if they are related. I noticed the consolidated margin, depending on how you calculate it, there is a lot of different ways to do it I guess, but it looks like it is down. At the same time, I look at other income, and it looks like it is up meaningfully. I am wondering if there is some interplay between line items perhaps that you could illuminate, and if not, maybe explain why both those things happened. Rod, I will take that. Yeah. On the NIM, the net interest income at the consolidated level is a factor of the mix of the business first off. As we grew the reverse repo book this quarter, that does put some downward pressure on the consolidated NIM even though we saw the improvement in Canadian banking. We also had an accounting adjustment a year ago. That was in Q2 that we made that change. That was in Investor and Treasury Services where we moved from net interest income to that other line. That is a little over CAD 100 million. That should stop being a year-over-year comparator next quarter. But you would see that impacting both of those line items. So it benefited net interest income last year in Q1 and was not there in Q1 this year. That was a portion of the consolidated reduction. But on that other, since you asked about that, there was that year-over-year change I mentioned. There was a second element, which is the Interac gain and the City National accounting item. Both of those went through that line item, which was about CAD 50 million after tax. So the pre-tax was above that. Then the third element is really the adoption of IFRS 9, which moved certain securities from changes in AFS, the old AFS, available for sale, which changes went to OCI. And now the changes go through fair value and go through that line item. That added about CAD 50 million this quarter. So that will be a little choppy depending on the market activity on some of those securities. I would look more towards Q2 or Q3 last year as kind of the run rate for that line item, notwithstanding that better market performance will put upward pressure on that. And if there was a market correction, it would put downward pressure on that line item. Some of this IFRS volatility, we are all looking at the loan loss line, but you are saying some of this IFRS volatility we should also look to like another other as well. Well, that is just the accounting since it had us change the accounting for securities. The old AFS, which basically gains and losses went through other comprehensive income and sat outside the P&L. Now certain securities go back into the P&L, where previously they had been outside the P&L, and others actually, where they also used to be in AFS, others have moved, and the changes will go directly into retained earnings when we sell them. That is a small portion of our security balance. I would not worry too much about it. IFRS 9 has far more wide-reaching implications than just the loan loss line. Okay. I have got some more on this, but I think we will just take it offline. Thank you. Okay. Thank you. Our following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Thank you. Question on the Capital Markets front. When I look at your rolling four quarter net income in that business, for the better part of the last, I don't know, three or four years anyway, it's been in that, call it CAD 2.3 billion plus or minus. But the last couple of past five or so quarters and especially this quarter, you're up to, by my math anyway, north of CAD 2.6 billion now. Is this a new run rate for your business, do you think? Or are you going to kind of revert, if I can think of it like that, back to that CAD 2.3 billion-ish on an annualized basis? If it is the new run rate, will it require some additional balance sheet resources, maybe increase some lending activity or you can do it with the allocated resources as they are today? Yeah. First of all, I'm hoping that we're not reverting back to CAD 2.3 billion. The business is growing. I think when you look at the number this quarter, you should keep in mind that that tax rate change is quite significant for this business. So it adds this quarter between CAD 40 million and CAD 50 million after tax to the earnings, which is sustainable. So you're going to see a change in the run rate of the business by virtue of the fact that more than half of its earnings are in the U.S. and most of its growth has been in the U.S., and I expect, given market conditions and where we're putting human resources and efforts, we'll continue to grow significantly in the U.S. and in the U.K. and Europe as well. We'd like to grow in Canada. It's a little more difficult right now, but certainly there is significant opportunity in the U.S. So the run rate will change because of the tax rate as long as we remain profitable. In terms of the balance sheet, we did put out a fair amount of balance sheet in the repo business in the last quarter because there were some opportunities with some large asset managers to put on repo, and we did it. I think you'll see that subside over the course of the year. In terms of the use of RWA, we really haven't increased RWA significantly over the last couple of years. That is mostly or half of it's attributable to our loan book and the other half to our trading securities, and both have been reasonably flat. So we're just getting more productive in terms of origination against the balance sheet we have out. We will grow the balance sheet certainly more modestly than we did several years ago. Yeah, I think that as we had hoped and expected, the business continues to improve. Okay. Maybe just speaking of productivity, maybe I can sneak one in for Neil. Neil, is your 1%-2% operating leverage full year target embarrassingly low now? I don't think we're embarrassed about where we're headed at all. But definitely with the interest rate improvements and the NIM outlook that Rod gave, we do have a different outlook for the back half of the year. So we would say in the short term, in Q2, just based on some one-time items we had, favorable items last year, that we would be towards the top end of the previous 1%-2% range. But we would say for Q3 and Q4 that our outlook is higher. So likely towards the higher end of a 2%-3% range. Thank you. Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead. Good morning. I want to go back to several of the questions that have sort of come up as it relates to the balance sheet and the change in the complexion of the balance sheet. If you go to page 15 of your supplement, there is a bit of what does appear to be a fairly substantial change in the nature of the asset side. You can see average loan, or rather loans down, call it CAD 4 billion, and then all of the other items, the sort of lower margin liquidity business up substantially. What I'm getting at in asking the question is, to what extent is what we're seeing mostly currency when we look at loans? Why loans would have declined that much? To what extent was this just a very conscious decision to move from loans into these lower margin liquidities? Yeah, Mario, it's Rod. I'll take that. You mentioned the loan decreased quarter-over-quarter, and you're spot on with the FX impact. But then getting back to the complexity of IFRS 9, there was also a reclass from loans into securities of some of those products, and that's in one of our footnotes, 4 or 5 I think, that you can see that. If you strip those two items out, we actually had positive sequential growth in loans. Doug talked to the increase in the repo book quarter-over-quarter, and that growth might subside a bit. As you look forward, I would definitely consider the FX impact, consider the IFRS 9 impact, but then, we would expect to grow loans similar to recent growth, as Neil outlined with his guidance, and then in continued growth in City National as Dave mentioned, and then the guidance that Doug gave earlier in the call as well. You might not see as much growth on the security side as the repo book growth subsides a bit, as well as the fact that the IFRS 9 change was a one-time change. Okay. So it's probably fair to say that the sequential growth story hasn't been altered in any way. What's happened this quarter is just a lot of ins and outs that make it appear like you didn't grow. But would you say, Rod, that sequentially, ex-currency, ex the reclassification, that loan growth was in the sort of 1%-2% range? Yeah, I would say that. Yeah, it was in the high single-digit billions. I did the exact math a week ago, and it was in the high single digits. Okay. I will figure that out. A different type of question. If I could take you then to slide 12, when you talk about the improving of the record earnings in Investor and Treasury Services. That net income up 40% quarter-over-quarter, obviously that caught my attention. You refer to higher funding and liquidity earnings. Could you put a little bit more texture on that? Are you referring specifically to Royal's funding and liquidity earnings or business with clients? That is what it would be helpful to understand. Yeah. So that business raises funding, short-term funding for the bank, and we deploy a certain amount of it internally to fund businesses like Central Funding and other trading assets. We also invest in high-quality liquid assets where we need it to meet regulatory requirements around the world. So we are actually managing a pool of just under $100 billion of liquidity assets for the bank. So this is- The earnings really come from the spread we earn between our cost of funds and the investment in HQLA and the internal pricing we get when we fund other businesses in the bank. This would be, perhaps I characterize this correctly by saying some of this is actually transfer pricing that had sort of benefited this segment. Yeah. To the extent that we raise unsecured funding in that business and we fund assets, for instance, certain repo assets are funded this way, then there is some transfer pricing in the numbers. Some banks may report it in treasury and pass it on to the business through transfer pricing. We happen to deal with it in this business as a standalone unit. Net, it accrues to the shareholder wherever we book it. I understand. It is more geography what we are seeing here. Maybe then just finally, what would give rise to the benefits this quarter? What, from a macroeconomic perspective, led to this 40% increase? In the business, a lot of it was FX. It was FX at the year-end, and it is really executing trades for customers who are moving assets at year-end. There is typically a good bump in those earnings at year-end. There is some additional funding that occurs then. This business is onboarding some fairly significant customers as well. So the revenues around deposits, custody, asset servicing are all increasing. We expect that is going to continue. As Dave mentioned in his comments, we have made a significant investment in technology in this business. We are starting to see a payoff. As I mentioned, there is some seasonality to some of the points that Doug mentioned. Q1 is typically our highest quarter. It does not mean it always will be in this business, but to Q1, for the reasons Doug outlined, it is. But the tide is rising longer term in the core businesses, the custody business that Doug mentioned. We should move on to the next question. Thanks, Mario. Thank you. Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead. I just want a clarification, maybe Rod, on the CAD 50 million that you talked about, the AFS or the gains, fair value gains from other. Is there any offsetting items anywhere else, or is that what you are characterizing as you could see some volatility coming through on that line going forward? No, those are gains from securities that typically in the old day, pre IFRS 9, the increases, the fair value marks would have gone into other comprehensive income. Then we would have realized the gains through the P&L when we sold the asset. Now those marks will go through the P&L, and they relate to a series of securities that we have for client businesses that we typically hold longer term, and they are not necessarily trading assets. That is why they do not go through the trading income line. The CAD 50 million, we will have to see how that trends. That could be at the higher end based on the strong market that you saw in Q1, our fiscal Q1. But as markets rise, I would expect there to be positive numbers in there on a go-forward basis. Just on IFRS 9 How often for Stage 1 and Stage 2, you obviously have your models, there's many inputs that go into that. How often do you update those models? Is that done quarterly, like a full comprehensive review quarterly? Is this more going to be done on an annual basis? Maybe you can just flesh that out. Thank you. We actually are looking at it on a monthly basis. We look at the various inputs and whether it's the economic indicators or the credit quality trends and also the flows. As we grow our loan book to the earlier question, you will see an uptick in Stage 1, naturally, losses just based on what the standard requires. We're running that monthly, and we're assessing the sensitivities on some of those inputs monthly. Okay. Thank you. Thank you. Our following question is from Scott Chan from Canaccord Genuity. Please go ahead. Good morning. Just on the mutual fund side. It appears to me that our RSPC is a bit slower this year, yet RBC, I think, did a record CAD 1.8 billion in net inflows in January, a record for you guys. Maybe you can talk about the drivers of that and perhaps what you are seeing in February with the equity market volatility. Thanks. Sure. Yeah, the quarter has been a bit odd in terms of mutual fund. The whole industry saw a very slow December, and you could speculate whether that is a function of just the long run in markets or other. We watch carefully whether the bank in total is gathering assets at an acceptable level, whether those are going into deposits in Canadian banking or whether they are going into longer term investments, and we are quite happy with that pattern. As you identify, our share of industry sales has been really quite significant over the last three months, over the three months before that, over the last month, and I think it is just a combination of very strong performance in the mutual fund business. Dave mentioned 83% of Global Asset Management's funds are outperforming their benchmark on a 1-3-5 basis. That has been quite consistent. I think a lot of what is going on in the outside world accrues to our benefit in terms of the investments we are able to make in distribution. Some of those have not hit yet, but applying technology to the branch channel, applying technology to help our advisors. So, I feel like the winds at our back in a number of ways. Our share of industry revenues and Dominion Securities is very high and rising. We continue to add in advisors. We seem to be one of the only banks that are adding advisors in the brokerage channel. So I think it is everything. It is manufacturing and distribution, both in wealth and in Canadian banking. Are the ETFs included in that number? In the 1.8, I am not sure it is. I would have to check. Okay. Thank you. Thank you. Our last question is from Nigel D'Souza from Veritas Investment Research. Please go ahead. Thank you. Good morning. I had a quick question first just on your residential mortgage growth expectations for 2018. I just wanted to clarify that the mid-single-digit growth rate that you are expecting for FY 2018, is that relative to your average balances in FY 2017, or is that based off your spot balance at the end of 2017? That would be essentially our year-over-year. As we look at Q1 over Q1, we're at about 6%. Again, sort of in that mid-single digit range, and that's pretty much where we think we'll trend as we go through year-over-year comparables throughout 2018. A quick follow-up, if I may, just on your provisioning in the Canadian banking segment. You mentioned the uptick there from loan volumes, and I understand that's related to Stage 1 and Stage 2 provisioning. Can we essentially expect kind of the trend that we saw in Q1 to be indicative of the trend for Stage 1 and Stage 2 in that segment for the remainder of F 2018? Thank you. Mark will take that. It'll really depend on a number of things as to Stage 1 and Stage 2 is dependent on a number of variables. The first one, of course, will be driven by originations. How much volume growth will we have? The second one will be whether there's any changes in credit quality, as that would then create transfers from Stage 1 to Stage 2. The third one would be any changes in the economic variables that we would expect to be used in our forecasting of our models. All three of those could impact how the PCL in Stage 1 and Stage 2 could go forward. I think the biggest driver at the moment that you should look for is really originations and how the volume growth is doing, and view that as your starting point. Okay, thank you. Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. McKay. Thanks everyone for your time today. Before I end the call, as Mark mentioned, it is his last official quarterly call, and I just wanted to sincerely, on behalf of all our stakeholders, our investors, our employees, our clients, thank Mark for an outstanding 37 years. He has served our organization and our shareholders exceptionally well and done just a wonderful job. So congratulations on a great career. As we said, with Graham taking over, we know we are in great risk hands. I would also like to mention that we will hold a Canadian retail-focused investor day on June 13, where we will discuss some innovation initiatives that we have been talking about in the market, as well as our strategy to provide greater value to customers. We hope to see you there. In summary, I think you saw very strong performance, volume growth, margin increases, good cost control, relatively benign credit environment, strong ROEs. We are really happy with our Q1 performance and the momentum we have. Thanks everyone, and have a good day. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.