Earnings Call: Q4 2017

Nov 29, 2017

Good morning, ladies and gentlemen. Welcome to the RBC 2017 fourth quarter results conference call. I would now like to turn the meeting over to Mr. Dave Mun, SVP and Head of Investor Relations. Please go ahead, Mr. Mun. Thanks, operator, and good morning. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Mark Hughes, Chief Risk Officer. We will open the call for questions following their comments. To give everyone a chance to ask a question, we ask that you keep it to one question and then re-queue. Joining us in the room 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. 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, and thanks for joining us. This morning, we reported quarterly earnings of $2.8 billion, capping off a successful year in which we met all of our medium-term financial objectives. We delivered record revenue of over $40 billion in 2017 and earnings of $11.5 billion, up 10% year-over-year. We generated a strong ROE of 17% for the year while maintaining a CET1 capital ratio of 10.9%. Demonstrating our commitment to drive long-term shareholder value, we delivered on our growth strategies and returned a record $8 billion of capital this year through dividends and buybacks. Our results not only reflect our diverse client franchises but also our commitment to invest for the future. As we reimagine the role we play in our customers' lives, we have been accelerating our investments and finding new ways beyond traditional banking to add value to our clients. Each of our business segments delivered strong underlying earnings growth in 2017 while making significant investments. During the year, we spent $3 billion in technology, including digital initiatives and cybersecurity, and we have expanded our capabilities in artificial intelligence. We will open a new AI lab in Montreal, building on our existing Borealis AI, excuse me, locations in Toronto and Edmonton, allowing us to provide better insights for our clients. We also invested in our people to drive sustainable growth. I continue to be impressed by our employees who are innovating to generate new solutions for our 16 million customers. I am excited about the momentum we have built as we enter 2018 in an environment of strong employment levels, rising interest rates, and solid GDP growth. Before I share my view on our business outlook, I would like to mention that our thoughts remain with our Caribbean employees impacted by the hurricanes, and we will continue to support communities in the region as they rebuild. In Canadian banking, we generated record revenues in each of our businesses in 2017, resulting in net income of over CAD 5.5 billion. As the Canadian housing industry digests the changing regulatory landscape, we expect mortgage growth to slightly moderate to the mid-single digits. Household demand, however, should still be supported by changing demographics, including the large influx of immigrants expected in Canada over the next three years. Increasingly, we are developing innovative tools such as the RBC True House Affordability Tool and Neighborhood Explorer to help more of our clients find their perfect home. In 2017, we captured 23% market share of Canada's credit card purchase volume and grew at a premium to the market. Our RBC WestJet co-brand credit card has shown strong growth with new cardholders up 32% year-over-year. I am proud of our linked loyalty card with Petro-Canada, which was built through an innovative relationship to drive new accounts to RBC and deliver material fuel savings to millions of personal and business customers. In fact, our RBC Rewards program, Canada's largest and most flexible bank-owned proprietary loyalty program, recently received three awards at the Loyalty360 Customer Awards for demonstrating our commitment to client experience, advocacy, and innovation. We also implemented new technologies to simplify customer experience as we have seen a shift in the way retail clients are interacting with us. For example, self-serve transactions represent 84% of our total activity, and we have seen a growing shift towards mobile usage. Our mobile community grew 19% over the year to 3.2 million active users, and growth in mobile sessions was up 30%. Since the recent launch of NOMI, our mobile customers have benefited from actively reading more than 15 million financial insights using its predictive analytics to help manage their day-to-day finances. We are also creating an ecosystem for small business clients to help grow their businesses. For example, we are collaborating with an award-winning software firm called Wave to provide business owners access to an integrated financial management and accounting platform. We partnered with a digital health benefits provider called League to help manage small business employees' healthcare expenses. Last week, we introduced MyBusiness Dashboard, a tool that brings together a complete picture of these and other online financial metrics into a single view on any device for better decision-making. Together with our commercial banking business, where we are increasing our sales force by 10%, we are investing in capabilities that help clients grow their businesses that support our economy. We have strong momentum with business clients and intend to grow our 26% share of business loans in Canada. Our Canadian banking and wealth management teams are also working together to offer a full spectrum of investment solutions ranging from self-serve to full-service advice models. For example, we will soon launch InvestEase, our new digital investing offering to help clients manage their investments at a lower cost. This follows the success of MyAdvisor, where mutual fund clients set up 4,000 appointments with digital financial specialists in the first four months of its launch. In 2017, our wealth management businesses generated revenue of over CAD 10 billion and earnings of over CAD 1.8 billion. In Canadian wealth management, the strong expertise and productivity of our 1,700 advisors were drivers behind RBC being awarded the best private bank in Canada by The Banker. In global asset management, our strong fund performance and enhanced product suite were drivers that allowed us to capture 23% of industry net sales in 2017, adding to our industry-leading 15% market share of Canadian retail assets under management. RBC Global Asset Management won 10 Lipper Canada Fund Awards and was recognized as the Best Bond Fund ETF Group. In U.S. wealth management, including City National, our growth was driven by client acquisition through our growing sales force and expanding footprint. We welcome the new teams in Washington, D.C., Minneapolis, and New York City to drive an accelerated growth strategy. This is supporting our above-average loan growth, and we continue to benefit from rising interest rates. All of our teams in the U.S., including Capital Markets, have collaborated very well and generated over $1 billion of referrals in the U.S. marketplace. Our insurance segment generated strong net income of CAD 726 million in the year. Our partnership with Aviva Canada has allowed us to deepen client relationships through a more comprehensive suite of insurance products, while new mobile apps, such as MyBenefits and PATH, enhance the customer experience. As part of our collaboration efforts, Investor and Treasury Services was recently appointed custodian for Aviva Canada, adding to our successful home and auto insurance relationship. Investor and Treasury Services posted very strong results for the year, with assets under custody reaching a record CAD 4.3 trillion and earnings of over CAD 740 million. We continue to make significant multi-year investments in data and analytics within our advanced client experience program to provide better customer-driven solutions. This has driven notable client wins and renewals in Canada, Australia, and Ireland. We are also investing heavily in robotic process automation tools to make ourselves more efficient and improve the client experience. Capital Markets also had another strong year with net income of CAD 2.5 billion, driven by record revenue and disciplined risk management in a year characterized by market uncertainty and lower volatility. We remain the leader in Canada and are working together across borders to provide financing for deals such as the acquisition of DigitalGlobe by Maxar Technologies for over $4.5 billion. We are deepening client relationships within corporate and investment banking in the U.S., and will add managing directors and specialist teams in our U.S. and European locations to develop new relationships, adding to a solid pipeline. Our fixed income and equities businesses performed well despite market headwinds. As a testament to the strength of our global equity research team, we received a top 10 ranking overall by Institutional Investor. This positions us well for any changes driven by MiFID II. I am proud of the progress we made across our businesses in 2017 and how we are driving strategies forward for our customers. In conclusion, I remain confident in our growth outlook and ability to meet our medium-term financial objectives. We are adding client-facing employees to serve more customers and capture market share in what we see as a solid economy and stable credit environment. At the same time, we are investing in new technologies for clients to be more efficient across our businesses. Our industry-leading employee engagement and the trust that clients have in us position us very well for the future. With that, I will turn the call over to Rod. Thanks, and good morning, everyone. I will talk about our business performance in the quarter, and will add to Dave's outlook comments. Starting on slide 6, we reported strong earnings growth of 12% in the fourth quarter. Our EPS growth rate of 14% benefited from 36 million of share repurchases, reducing shares outstanding by 2% from a year ago. We have now repurchased almost all of the shares we issued for the City National acquisition two years ago. Good revenue growth and lower PCL drove our earnings this quarter as we supported clients across our businesses and benefited from favorable macroeconomic conditions. Most segments reported strong double-digit earnings growth, and while strong results drove higher variable compensation, we generated positive all-bank operating leverage of 1.5% net of the insurance fair value change. As Dave mentioned, we invested heavily in talent and new capabilities to help us deliver great customer experiences, reduce inefficiencies, and strengthen our risk infrastructure, including cybersecurity and compliance with regulatory requirements such as CCAR. Our results this quarter included pre-tax severance costs of CAD 66 million, which brings our full-year severance to approximately CAD 240 million pre-tax. Finally, the lower tax rate this quarter was due to changes in earnings mix and capital markets, including higher revenue in U.S. municipal banking. Turning to slide 7, our CET1 ratio remains strong at 10.9%, which is in line with our target range of 10.5%-11%. We generated strong internal capital, repurchased a further CAD 0.5 billion of shares, and saw good organic RWA growth in our retail businesses, balanced with improved credit quality and RWA optimization in certain portfolios. However, a big driver of our capital ratio this quarter was the triggering of the Basel I regulatory floor, which was largely driven by growth in our wholesale and retail businesses as well as FX rate impacts. We understand that OSFI is currently reviewing its Basel I floor guidance for Canadian banks in response to requests from the industry to look into revisions to the current floor. As you know, we are adopting IFRS 9 in the first quarter of 2018. Based on current estimates, the transition to the new accounting standard is not expected to have a significant impact on our capital ratios since we already have a sizable CAD 1.2 billion capital reduction for our shortfall of allowance to expected loss. This shortfall is expected to absorb our estimated CAD 600 million reduction in retained earnings for IFRS 9 transition. We would still have room under the shortfall to absorb future PCL impacts from a capital perspective. Furthermore, the Financial Stability Board recently designated us a GSIB, reflecting the scale of our global operations. Given our status as a DSIB in Canada, we are already carrying a 100 basis point capital surcharge, which meets our GSIB requirements. We remain very comfortable with our CET1 ratio and do not expect the GSIB designation, IFRS 9, or Basel I floors to impact our business growth, capital management, or deployment strategy. Given our competitive position and desire to invest and manage capital carefully for our clients and shareholders, we expect to target the higher end of our 10.5%-11% range in 2018. Let me turn to the performance of our business segments. Starting on slide 8, personal commercial banking earned CAD 1.4 billion. Canadian banking net income of CAD 1.36 billion was up a strong 9% from a year ago. Revenue growth of 5% was driven by solid volume growth, higher spreads, and higher mutual fund distribution fees. This was partially offset by non-recurring items in cards revenue. Mortgages were up over 6% as we won new customers and increasingly retained existing ones. Business loan growth was up a strong 11%. We adapted to changing clients' preferences in a rising rate environment by growing combined personal deposit and investment product balances 9% over the year. NIM increased two basis points year-over-year and four basis points quarter-over-quarter, benefiting from Bank of Canada rate hikes in July and September. Given a gradual outlook for rising rates, we expect NIM to increase four to six basis points in 2018 with some variability quarter to quarter. Operating leverage in Canadian banking was 1.5% in Q4. For the full year, adjusted operating leverage was 0.9%, including the elevated severance cost, or 1.3% if you exclude the severance. We continue to target operating leverage of 1%-2% as we expect solid revenue growth to be partially offset by increased investments in technology, including digital initiatives. Turning to slide 9, wealth management reported earnings of $491 million, up 24%. In Canadian wealth management, our focus on customer relationships drove higher fee-based revenue year-over-year. In global asset management, our strong fund performance, broad distribution network, and low fee structure helped us win even more new business. Our U.S. wealth management revenue was up a strong 14% year-over-year as we continued to benefit from recent Fed rate hikes and strong loan growth, which we expect to continue at a double-digit rate. Our wealth management segment had record earnings in the quarter. In fact, each of our three key businesses had record quarters. Notwithstanding mixed market performance with North American equities performing favorably, but the opposite in fixed income markets. While we invest for future growth, we expect to maintain our good efficiency trends in each of our wealth businesses. Moving to slide 10, our insurance business ended the year with strong Q4 earnings of $265 million, reflecting actuarial adjustment updates. The timing of the recognition of the experience is based on accounting and actuarial standards. We generally see about $50 million of assumption and experience benefits in the fourth quarter, and this year we saw around $100 million, which is really indicative of good experience. In many businesses, this would flow through evenly over each quarter, but with the current insurance accounting, it tends to be lumpy. This was partially offset by our earnings from new U.K. annuity contracts, which were lower this year by approximately CAD 33 million, given a general slowdown in the U.K. longevity transactions market. We believe a rebound is expected in 2018, though the timing of such contracts will continue to be variable quarter-over-quarter. We discuss Investor and Treasury Services results on slide 11. Earnings of CAD 156 million were down 10% year-over-year as we continue to invest heavily in technology, which is an important factor in recent client wins and renewals. Recall last year's funding and liquidity earnings benefited from tightening credit spreads and FX volatility. Client deposits were up 11% and assets under administration were up 9% as we benefited from the strength of our core ratings, reputation, and product offering. On slide 12, Capital Markets net income of CAD 584 million was up 21% year-over-year, reflecting lower PCL and higher corporate investment banking activity. We generated more lending revenue in Canada and saw higher municipal banking revenue in the U.S. Our global markets business continued to deliver solid results on what has been a tougher quarter for the industry, driven by low volatility, which particularly impacted corporate investment grade and rates products within fixed income trading. Capital Markets achieved strong returns and record revenue of CAD 8.2 billion in 2017, while reducing our risk-weighted assets in the business by 6% over the last two years. Similarly, both market risk RWA and the average group VaR is down over 30% since 2015. We're pleased with our fourth quarter and our record full-year results in 2017. All of our businesses delivered strong earnings growth. We met all of our medium-term financial performance objectives, both in 2017 and over the last three years on average. We remain committed to these objectives and believe our business model with scale franchises will continue to drive long-term value to our shareholders while supporting our clients and communities. As we look ahead to the first quarter, our year-over-year comparables for our wholesale businesses are expected to be more difficult given the strong first quarter we had earlier this year. However, all of our businesses are collaborating and innovating to support our clients and win new business. We are starting to see the benefits from interest rate hikes, which will grow over time. We expect to see over CAD 180 million benefit from the July and September rate hikes. Another 25-basis point hike in Canada would lift net interest income by approximately CAD 90 million in the first year. A similar hike in the U.S. would increase revenue by US $50 million in the first year. We expect to improve underlying efficiency ratio across all of our businesses. With that, I'll turn it over to Mark. Thank you, Rod, and good morning. I am very pleased with our credit performance this year, with annual provisions for credit losses of 21 basis points, similar to the lows that we last experienced in 2005. This is reflective of our strong underwriting practices, low unemployment levels, and an improving macroeconomic backdrop, particularly in the oil and gas sector. Turning to slide 16. In the fourth quarter, total provisions for credit losses of CAD 234 million were down CAD 86 million or 27% from last quarter, with provisions down across all business segments. The PCL ratio of 17 basis points was down six basis points quarter-over-quarter. As I have mentioned in the past, both provisions and recoveries within our wholesale book could show some degree of variability from quarter to quarter. Excluding a few outsized recoveries in Capital Markets, our total PCL ratio would have been 20 basis points this quarter. In our Canadian Banking business, provisions of CAD 251 million decreased CAD 8 million quarter-over-quarter, reflecting lower PCL in our commercial lending portfolio. Caribbean and U.S. Banking provisions were up CAD 5 million from last quarter, reflecting higher provisions in our Caribbean lending portfolios. Wealth Management had no provisions this quarter. Capital Markets had a net recovery of CAD 38 million this quarter, largely due to recoveries on a few accounts in the oil and gas and real estate and related sectors. Turning to slide 17. Gross impaired loans of CAD 2.6 billion were down CAD 320 million or 11% from last quarter, largely driven by repayments and accounts returning to performing status in our Capital Markets and Wealth Management portfolios. Our gross impaired loan ratio of 46 basis points was down seven basis points from last quarter. Our gross impaired loans do not yet reflect the impact from the recent hurricanes in the Caribbean, where our exposure of approximately CAD 300 million is limited to Saint Martin and Dominica. We have had limited access to our clients in these regions and continue to assess the full extent of damages as we regain access to these hardest-hit regions. Positive trends in internal and economic indicators for certain wholesale and retail portfolios allowed us to absorb an increase in the collective allowance for Caribbean Banking related to the hurricane. Let us now turn to the Canadian retail exposure on slide 18. Delinquency rates and PCL ratios trended lower year-over-year for most retail products, supported by low unemployment levels in key provinces along with steady wage growth. Slide 19 shows that the credit quality of our Canadian mortgage portfolio continued to be strong, with average provisions of just one basis point for fiscal 2017. In this rising rate environment, we remain comfortable with our clients' ability to repay, given over 90% of our mortgages have already been stressed at a rate above the contract rate. At origination, we have not seen any material changes in average FICO scores, LTV, or amortization periods over the last 12 months. More recently, we have seen an increasing number of fixed-rate mortgage originations, signaling increased conservatism by our clients in a raising rate environment. Our variable rate HELOC portfolio continues to perform well with delinquency ratios similar to that of our insured mortgage portfolio. Furthermore, HELOC utilization rates have remained relatively stable over the past year, with over 90% of our total home line clients paying down their principal. Looking ahead, we remain conservative in our credit adjudication strategies, and we continue to leverage digital capabilities to support credit decisions and predict early warning signs in order to mitigate risks. For 2018, we are still thinking our PCL ratio could be in the 25-30 basis point range. Given the current macroeconomic backdrop and the quality of our portfolio, we would expect the PCL ratio to be at the low end of that range, or possibly lower, for at least the start of 2018. Having said this, as we implement IFRS 9, growth and variability from stage 1 and stage 2, market and economic factors, as well as forward-looking considerations could add some quarterly volatility towards the higher end of the range as we move through the year. Through a full economic cycle, the level of provisions under IFRS 9 should be relatively similar to provisions under the previous accounting standards. Finally, turning to market risk. Market risk VaR of $18 million in Q4 was the lowest level observed this year. In addition, the average VaR for the year was $11 million lower year-over-year. During the quarter, we had no days of net trading losses. We incurred only one day of net trading losses during 2017, compared to seven days in 2016. With that, I'll turn it back to Dave. Thanks. Before we take Q&A, I believe Dave wanted to say a few words. Sorry. Operator, we'll take questions now. Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. You will hear a brief pause while the participants register for questions. Thank you for your patience. Our first question is from Robert Sedran with CIBC Capital Markets. Please go ahead. Hi. Good morning. I just wanted to come back to the IFRS 9 outlook on loan losses. Rod, I'm paraphrasing, but you said something along the lines of the buffer leaves you room to absorb, from a capital perspective, an increase in loan losses. Does that suggest that as the IFRS 9 losses may roll through the income statement, you're going to have a benefit to CET1 as that buffer gets reduced still further? No, I wouldn't say there's a benefit to CET1, Robert. I'd say that the old Basel shortfall deduction was about CAD 1.2 billion in Q4. The CAD 600 million I mentioned will largely go and reduce that. It won't always work out dollar for dollar because the mechanics of the Basel deduction, it's a different expected loss methodology than what is going to be the expected loss methodology under IFRS 9. So there could be some puts and takes, but largely, think about the first CAD 1.2 billion of increases under IFRS 9 should be no to negligible impact on CET1. There could be some puts and takes there, depending on the nuances of the calculation, of course. And so understanding it's not dollar for dollar, but the CAD 600 million comes out of that CAD 1.2 billion. Yes. Like the CAD 600 impact on retained earnings as the opening adjustment from IFRS 9. Largely. Now, within that 600, there's a small amount of classification and measurement, and that's where the old AFS accounting is going away, and so there was some volatility that went through OCI there. So there's a portion of that. It's only CAD 50 million, so the 600 isn't a dollar for dollar there, but it's within CAD 50 million. Okay. Mark, understanding that the IFRS 9 is not going away, but were it not for IFRS 9, would you still be suggesting 25-30 basis points for next year? I would certainly be saying at the low end of that range. As I said in my comments, possibly lower at least at the start of the year. Okay. Thank you. Thank you. Our next question is from Meny Grauman with Cormark Securities. Please go ahead. Hi, good morning. Just a question on slide 22. A little bit of extra disclosure in terms of self-serve transactions and climbing steadily. I just wanted to ask in terms of that chart, that self-serve transactions, the percentage of self-serve transactions going through the branch network? I just wanted to clarify that and then just ask, where do you think that can go over a reasonable time frame, and how does that compare to your peers? Is everyone basically looking the same, or is there something different in what you are doing that is making that number higher for you? Yeah. Thanks for the question. It is Neil. In terms of the self-serve transactions, this would be inclusive of our ATMs, our online banking capability, and mobile, and we are comparing that to total transactions. The trend has really been driven by a chart up above as we look at mobile. We would look back and say that 2017 is the year that mobile has really taken off. Mobile became more active. Our customers are more active in our mobile application now than they are in our online banking application. That is really the driver. In terms of where do we benchmark ourselves versus peers, we do have an award-winning mobile app, and we are seeing growth that we are quite proud of, up 19% for the year. Where do you think that number can get to? Is it realistic to get to the high 90s, mid-90s? I don't know. What's your view on that? Well, I guess when we look at what the ceiling would be, we'd have to benchmark against the Scandinavian banks. It's a very different model that they've employed. They've gone very hard at mobile, and they would be in that mid-90 range. I think right now our focus is really about sustaining growth and activity in the mobile app and continue to drive functionality. Thank you. Thank you. Our next question is from Sumit Malhotra with Scotia Capital. Please go ahead. Thank you. Good morning. First off, either for Dave or Rod, just thinking about the share repurchase activity this year and into next year. I think, Dave, in your comments, you talked about the CAD 8 billion return of capital, and 3 of that was share repurchases. I've never really thought of Royal as. I don't think you've been in the past, a very large buyback bank. This level of activity this year, would you say that it was very much related to some of those third-party share specific or third-party specific transactions you were able to enter into? Or is this, in your view, just a better reflection of how you want to deploy capital in the near term? Thanks for your question. I'll say a few comments and hand it to Rod. As we look at the year in the past versus projecting forward, certainly we had an opportunity to repurchase shares over the year. We had strong capital ratios. At the same time, we were able to grow our balance sheet. So we did take the opportunity to buy back shares throughout the year, as you saw, and returned almost CAD 3 billion of capital to shareholders via that mechanism. As we look forward, and you heard my comments around our organic growth opportunities across the business, we expect our corporate lending portfolio to start growing again. As you noted, it has been relatively flat as we repurposed and recycled capital among client franchises there for a number of years very effectively. We still see strong growth in the Canadian marketplace, albeit maybe slowing on the consumer side, but certainly business financial services are growing well. We have a unique opportunity to grow in the U.S. and putting our balance sheet to work across all those corporate, institutional, commercial, and high-net-worth customer franchises. So first and foremost, we see very strong opportunity to deploy capital organically into all three of our core customer franchises going forward. We exit the year with a strong 10.9% CET1 ratio, obviously impacted by, as we noted, the Basel I floor. So again, we still see the flexibility to grow our business but also return capital to shareholders via share buybacks going forward and potentially inorganically if the opportunity were to present itself. Having said that, we remain primarily focused on growing our business organically. Rod, did you want to make any comments about share buybacks? Yeah. And I think, Sumit, your comment on the historical view is spot on, and that's largely as a result of us growing our capital base over the last 5, 6, 7 years from the 8%, 9% level up to the 10.9% that we're currently at. We also had the City National acquisition, which created goodwill that we needed to basically accrete capital back into the business. As Dave outlined, our first preference is to grow client organic business. Obviously, dividends, we continue to maintain the same medium-term objective, and we will buy back shares if it makes sense. It's not our first objective, but we also treat capital very seriously and would not want to absorb unnecessary capital into our capital ratio. Rod, those specific share repurchase programs that you participated in this year, is there more of that to do, or has that particular type of transaction largely run its course? I do not want to comment because those are our single counterparty transactions, so I would not want to comment on those. If there are opportunities in the future, we would look to do them. I would not say they are absolutely done. Rod, there is room within the current prospectus to buy back shares, right? About 10 million in the current filing. Yeah. We are about two-thirds of the way through. We are CAD 20.5 million out of CAD 30 million from the current NCIB program. And the last thing, Rod, just to clarify. I think you said on the Canadian banking NIM in your prepared remarks you expect 4 to 6 basis points of margin expansion through the year. First off, am I correct on that? And secondly, is that a pro forma, i.e., not baking in any further action by the Bank of Canada? Yeah. I'd say that's based on the two that have taken place, and it's based on the yield curve kind of behaving where we think it's going to behave. But obviously, if the longer end contracts or the yield curve inverts or anything like that, which I don't anticipate happening, those numbers would change. But based on the current outlook for the economy, I'd say that's a safe assumption. That is very helpful. Thank you for your time, guys. Thank you. Our next question is from Junaid Hashmi with National Bank Financial. Please go ahead. Good morning. I want to ask you about mortgages and B20, which is just being implemented in the next few weeks. I get a big frequent questions on if demand's being pulled forward ahead of that. Are you seeing that in your business today? Yes. Thanks for the question. It's Neil. We have seen a little bit of pull forward this fall as we talk to customers. Some of them are surprisingly aware of exactly what the stress test is about and have decided to move more quickly. As Dave mentioned, we've taken a look at the portfolio, and we still look at the overall impact of the business to be fairly modest. We've included B20 in our outlook of having our home equity portfolio grow in the mid-single digits. How much, just for some perspective, I know you made some comments at a conference recently, but I'd like to get some actual numbers. How much do you originate in mortgage volumes in a given year or this year, for example, and how much would that number decline due to B20? We got one number from a competitor yesterday. I guess from a credit risk standpoint, if we start thinking, well, maybe if it's worse than 10% compression, it starts trickling into economic activity. What sort of decline would be, I guess, worrisome from a credit standpoint if we start seeing that in terms of no impact on housing start, jobs, it's 20% of the economy, after all? Yeah. Again, we've taken a look at our originations. We don't see a material reduction in what we expect to originate from this. The number put out yesterday by one of our competitors, we would see a similar number as we look at the stress test and the capacity of the borrowers and who do we think wouldn't be applicable to really originate. Right now, Mark had mentioned over 90% of our mortgages are already underwritten at these higher rates. So the vast majority of the portfolio and our originations are not really going to be impacted. In terms of our expectations of the impact, there's a number of things really impacting the mortgage market, interest rates being one, regulation being a second. I think the overall consensus is that it will take a couple of months, really into 2017 as these things get implemented in January, to really understand the impact. The one thing we also want to emphasize is that with the regulations, it does not apply to existing customers. As we look at the size of our franchise, we do see this as a positive, and we do expect some lift in our retention rates. Okay. On the credit, maybe Mark, I do not know if you had input there, and also the origination volume number. Is that a number you can share? We cannot see that anywhere, actually. On the credit side, it is Mark here. At the moment, we are not really seeing expectation for a decline of a nature that would worry me from a credit perspective of our portfolios. Okay. Next question, operator. Thank you. Our next question is from Ebrahim Poonawala with Bank of America, Merrill Lynch. Please go ahead. Good morning, guys. I just wanted to follow up on something that, Dave, you mentioned in your opening remarks around an outlook for a strong economy and consumer and job market next year. I think as we sort of get into 2018, can you talk about sort of, do you see more like this year, we were surprised to the upside in terms of how strong GDP growth was. As you look into 2018, do you see more downside risks to economic growth in Canada? Can you talk about, in terms of the risks to the consumer from the BOC rate hikes? I think we are on track for maybe two or three hikes next year. Would love to get your sort of thoughts on those. Yeah, absolutely. As we look at the Canadian economy going forward, we do expect growth to moderate from the higher 2017 levels into the 2%-2.5% range, which is still, in the new economy, a relatively strong growth. We see that growth balance. You're seeing stronger exports out of the Canadian economy. With improved global conditions, if you look at the Bank of Canada forecast, you're seeing good export growth. You're seeing good investment by businesses that we didn't see in 2015 and early 2016. You're still seeing the government stimulus and infrastructure having an effect. You've got balanced growth in other parts of the economy that are taking some of the pressure off the consumer and consumption side that has been driving our economy for the past decade, almost. We're seeing balanced growth across sectors, and that's why you're seeing our business financial services deposits and lending growth so strong. We are still seeing consumption very strong on credit card side, and we project that it continue going forward. I see a bit of a moderation, but a better balance in the economy as to where is the growth occurring and a better balance geographically. You've seen in the west, strong BC, strong Ontario, but you're seeing a bit of a rebound now in Saskatchewan again and in Alberta. But you're seeing balance. You're seeing strong Quebec. So good geographic balance, good sectoral balance across the country, and that's reflected, I think, in our numbers as we exit the year and where we're seeing growth. We're also seeing that in the United States, very strong economy. Haven't forecasted the corporate rate impact on growth yet or any infrastructure spend or any loosening of standards for the banking industry that could accelerate growth. We're seeing growth balanced across the City National franchise and our wealth franchise and our capital markets franchise. We're seeing good pipelines as we exit the year. We're seeing very much balanced conditions out there that give us confidence in the year to come. That's helpful. Just as a follow-up to that, just listening to your remarks around PCLs for next year, it sounds like, if anything, that probably it could be better than sort of the guided range as we think about 2018. Should we be worried about sort of the consumer leverage levels and what higher rates might do next year? Or you're not too concerned about that? We've always said that as we stress our portfolio, the primary driver of credit stress in the consumer book is unemployment. Second is divorce. When you look at the impact of rates, as Mark said, we've already stressed 90% of our mortgage portfolio to a 200-basis-point higher rate. It's unlikely that we're going to see rates at the longer end of the curve go up that much. What you're seeing are short-term rates go up and a flattening of the yield curve, but you're not seeing longer-term rates go up to the same extent. As we look at where the stress is going to manifest itself, and we project strong employment growth, strong economic conditions, the primary driver of credit stress doesn't seem to be on the horizon. Therefore, we are forecasting in the lower range that Mark nominated, including the impacts from IFRS 9, which obviously in stage 1, growth in your portfolio does impact your overall number, and that's something we're all going to adjust to over the coming year. That's helpful. Thank you. Thank you. Our next question is from Doug Young with Desjardins Capital Markets. Please go ahead. Good morning. Rod, just on the CET1, it sounds like OSFI could relax the Basel I risk-weighted asset floors. We heard that from yourself, we heard it from one of your competitors. Obviously, that would be a positive. However, it sounds like Basel 4.0, or whatever you want to call it, could be agreed to next week in some way, shape, or form. That could include, obviously, some floors. I'm just trying to get a sense of how we should think about this. Are we going to simply replace the old Basel I floors with something new that's coming in? Just wanted to get your thoughts on that. Yeah. Obviously, you could assume that OSFI would replace Basel I floor with another floor, and then Basel IV, as you refer to it, others are referring to it as Basel three and a half, would be a different floor regime that would have a phase-in period. So it would probably take a couple of years before it would kick in, and then what we've heard from people is that it would be a several-year phase in, and OSFI may choose to accelerate that. Based on what we're hearing and what we've read in the press and what folks in Switzerland and in Europe have told us, if it falls into the 72.5% floor range for the Basel IV, it's not going to be a significant impact to our RWA. In fact, it would be smaller than what you saw this quarter for the Basel I floor. But again, that would not come into play for us for several years. So the way to think of it is you would get a benefit potentially for a few years until the phase-in started to happen in 2020 and thereafter. Is that a fair way to think of it? Yeah, or even later. The report that came out a few months ago was that it was going to be phased in through 2027 or something, and it would start at a very low floor rate. I am not going to guess what those rates might be, but if you believe what you read in the press, it would not impact us for many years. Okay, fair enough. Then just a few clarifications. The insurance impact from the actuarial items, you said from CAD 50 million to CAD 100 million. That was after tax, I assume? Yes. Okay. Yeah. Again, that is experience driven. We have to go through the different models that we go through on the actuarial side, and that is how that works out. I think what you can infer from that is that we have continued to have strong experience in our insurance book, and this year was better than in recent years. There is conservatism built into the actuarial models and into the accounting. That is how that plays out. Yeah. Just one last clarification. Mark, I think you talked about your exposure to the Caribbean. I am sorry, I did not jot the number down. Could you just repeat that? Yes. For St. Martin and Dominica, it is CAD 300 million. Thank you very much. Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead. Thanks. Dave, just maybe some color. You noted in your outlook specific to expenses, you are talking about CAD 3 billion in tech spend as you make investments in the digital initiatives. How does that CAD 3 billion compare to where you are at right now and relative to your revenues? Is that a number that you think about, I guess, in dollar terms, or do you think about it relative to opportunity to spend if you had more revenues? I think if you look at where it currently is in relationship to revenue, I think we benchmark well against our peer group of JPMorgan and Bank of America and others are spending 8%-9% of revenue on technology, and I think ours is in that similar range and maybe elevated above where some of our Canadian peers might spend. We do think about it more in the terms of an absolute spend and the things that we need to achieve, where the opportunity lies. I would say that the spend is elevated right now. I have made that comment pretty consistently over the last six quarters as we have an opportunity to transform our business from a digital perspective and create new channels. You have seen the customer movement into the mobile channels. If you heard my comments this morning, there are six or seven examples of functionality and very exciting capabilities that are coming on stream that we have invested heavily in over the past. You are starting to see that benefit, that customer switch coming now. We are very excited. We do not see a need to keep that pace as a percent of revenue going forward, and it is an absolute spend, and I think it is at an elevated level. You will not see the same type of growth in that as our revenues grow. Okay. Thank you. The revenues. Okay, great. Thanks. Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead. Good morning. These are more just quick clarifications. Rod, when you referred to 4-6 basis points of NIM improvement in domestic retail, were you referring to off of the Q4 level or for the full-year average? Yeah, the Q4 level. Okay. On the margin, generally, it was great across the board, the capital markets, domestic retail, City National, and frankly, it was better than what you'd offered us in prior quarters. It seems like things just improved. Would I be right in saying that it was deposit betas came in a little lower than you expected? Is that what the message is, or is there something else going on? I think it's a combination of factors. One, I think, generally, if the market is anticipating a rate hike, it kind of flows into our funding cost ahead of the rate hike. So we get some compression in that quarter. This quarter, I think the market was a little surprised, and so we did not see that normal compression, which benefited us. So that benefits us on the lending and the deposit side. And so our ability to price into the loans versus what we passed on the deposits, as you mentioned, the beta was favorable. We also had about a basis point of benefit from ALM activities. Going forward, Rod, you think this level of margin in Capital Markets, domestic retail, City National is sustainable, especially in domestic, where you are actually calling for it to improve. You would not expect any kind of pullback on an all-bank level next quarter then? No, would not. Okay. On the severance cost, the CAD 240 million pre-tax for the year seemed a little elevated. I think that is the way you described it as well. Is that a number you would expect to see drop materially next year? Yes, we would expect that to be much lower. If you recall, in 2016, it was around CAD 130 million. In 2014 and 2015, it was around CAD 90 million. We would expect it to be back to those levels. the 2015 and 2014 levels. If not below. It's hard to say what the future will bring, but I would expect it to be below or at those previous year numbers. Thank you. Thank you. Our next question is from Steve Theriault with Eight Capital. Please go ahead. Thanks a lot. Couple things for me. First, Rod, did I see that NIM benefited at City National, I think 4 basis points from acquired credit-impaired loans. I guess IFRS related. Does that go away under IFRS, some of these tailwinds, whether it is from the acquired credit-impaired book or from the performing book in terms of accretable yield? Maybe you can give us a little sense on that. Yeah. So if you look at slide 23, you will notice that the delta, which was between those two spreads, was quite significant. Certainly through 2016, that has basically narrowed, and it was down to 8 basis points. As part of the IFRS 9 transition, as you would recall and correctly point out, we did wipe out their loan loss reserve at acquisition and purchase accounting. Now under IFRS 9, we kind of reestablish it so that is a meaningful portion, not all, but a meaningful portion of the transition adjustment. So we would expect the PCL there and the spreads there to be more normalized. But I would not expect a material difference coming out of IFRS 9 on the NIM side for CNB. I think if you looked quarter-over-quarter, we were up 2 basis points on the NIM excluding the acquired loans. Absent further Fed rate hikes, those would be the levels I would look at. But if we are given future Fed rate hikes, you would expect that NIM to continue to expand. Okay. That is helpful. Thank you. Then for Neil. Neil, personal was flagged as an area where you would like to see some improvement. We are not seeing it this quarter, so maybe you can talk about the drivers there, your outlook for next year. Also if you can fold in terms of cards, I know it is early days, can you talk a bit about how adoption and utilization is going with the new Petro-Canada relationship? Sure. Thanks for the question. In terms of personal franchise, I guess maybe two comments. One, we are looking at the personal lending portfolio where we are seeing some good momentum in our auto business. In terms of branch-based personal loans, unsecured credit lines, and installment loans. It has been fairly stagnant, and this is something we would look at in terms of needing to focus on both value proposition and distribution to start to move that along in 2018. In terms of the deposit side of the personal business, it is about the personal deposit accounts, and we do believe that is an opportunity to drive some innovation, starting in the back portion of 2018 to really have client acquisition as a driver in the personal franchise. In terms of credit cards, we are feeling really good about the credit card franchise continuing to really outperform in terms of purchase volume. Running about 10% year-over-year in terms of purchase volume growth as a key driver of other income, both from the Avion product, and Dave mentioned our WestJet product is something that is continually gaining steam, and we have a great relationship with WestJet that we are quite proud of. In terms of Petro-Canada, it is early days but we have been very pleased with the response from clients. Part of this is due to just the sheer value that Petro-Canada and ourselves have put out to consumers, and the second portion would be just the ease of the experience. So once those clients simply go online and link their cards, the entire value is automated. Petro-Canada is obviously benefiting as more of our customers move to their locations to take advantage of the value. Okay, thanks for that. The Ally runoff, has that run its course, or are we still feeling some of that? It essentially, yeah. It has essentially run its course, and that's one of the drivers of why we were mentioning that there's renewed momentum in the auto business. Okay, thanks for that. Thank you. Our next question is from Nick Stogdill with Credit Suisse. Please go ahead. Hi, good morning. Just sticking with the card service revenue line. Rod, you called out the non-recurring item in that line this quarter. Does that have anything to do with the recent partnership you've signed? And absent that item, would growth have been similar to what we've seen in the past few quarters, high single digits year-over-year? And tied to that, was that most of the slower growth in Canadian banking fee line this quarter? Hi, it's Neil. I will take that question. I have mentioned our card purchase volume continues at 10%, so the drop in other income is predominantly due to cards. There are really two drivers. The first being we have had two fewer processing days in the quarter. That is just what day those transactions were actually recorded. It is completely unrelated to the year-over-year growth in purchase volume. The second is a one-time cost that we needed to incur as we transition to high net worth card portfolio to a new value proposition. Combined, it was about a CAD 20 million in-quarter impact. Okay, thank you. We should see sort of growth resume next quarter absent that item? Yes. Okay, great. Thank you. My second question, just on IFRS 9, could you give us a sense on how much of the CAD 600 million allowance true-up is being driven by retail versus commercial? Is it fair to assume most of that increase relates to Canadian banking, or are you seeing a lot go through other segments as well? Yeah, I mentioned the impact to the City National, which certainly does have a portion of that, but there is also largely in Canadian retail is where you are seeing the rest of it. We also saw some increase in Caribbean as well. The wholesale side we saw a slight decrease. Okay, more on the retail side. Okay, great. One last one on the Investor and Treasury Services. You called out the higher tech spend this quarter. Should we expect a similar level of spending to continue through 2018 in that business line? There was an unusual item in the last quarter that was a little lumpy, related to RPA. Dave mentioned that in his comments. The spend will be pretty consistent, frankly, if you look at the spend through the whole year, and you will see that go through the numbers for the next couple of years. Okay, great. Thank you. Thank you. Our next question is from Scott Chan with Canaccord Genuity. Please go ahead. Oh, good morning. On the Canadian side, you talked about the mortgage growth expectations. I was just wondering on the commercial business side, very strong in the quarter. Is it reasonable to assume that you guys expect double-digit loan growth on that side of the business in 2018? It's Neil. Thanks for the question. Yeah, we're feeling quite good about how the commercial and the business loan segment's growing. A lot of it really on two fronts. First being, we took our time to really make sure we understood the risk that we were taking on. Having that work completed, we've adjusted some policies and at the same time grown our sales force. Dave mentioned we have about 10% increase in our commercial account managers covering these clients. Between those two levers we'll expect that growth to continue in 2018. Okay, great. Maybe just one on wealth. Just with the consolidation happening in Canada, does RBC see any opportunities in certain pockets of distribution whether it be passive or on the manufacturing side in Canada? It's Doug Guzman. Thanks for the question. The Yeah, I think we see opportunity. I think a lot of what's going on in the outside world accrues to those who have size and have a range of options. We have a distinguished number of channels and are able to access clients digitally and with human advice. I think there'd be a general trend to it. We're certainly an attractive destination for investment advisors as they consider whether they're in homes that are able to invest at the rate they'd like to serve their clients. I don't know that we see a lot of inorganic consolidation in Canada, but we do see it being tougher and tougher for those who have less to work with to be both an attractive place for their investment advisors, but also for their customers. Okay, great. Thank you. Thanks, operator. We're going to have to end the questions there. Thank you. I will now turn the meeting back over to you, Mr. McKay. Thank you. Just before we finish, I would like to comment on this morning's announcement that Mark Hughes has decided to retire in April after 37 years at RBC, and there will be many opportunities to recognize him over the coming months. But I would like to take this moment to thank him for his significant contributions to the bank, to our clients, and our shareholders. On a personal note, I want to thank Mark for his incomparable counsel and partnership over the years. I am pleased that Graeme Hepworth, currently Executive Vice President of Retail and Commercial Risk, will take on the role of Deputy Chief Risk Officer in February, and then assume the role of Chief Risk Officer in April 2018 when Mark retires. Graeme has been with RBC for 20 years and held progressively senior roles in our risk management group. He brings a deep expertise in risk as well as experience working across multiple businesses and regions, so he is well-positioned for his new role. I want to thank everyone for attending our call today. I wish you a happy and healthy holiday season, and we will see you in Q1 in February 2018. Thanks very much, everyone. Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.