Earnings Call: Q3 2017

Aug 23, 2017

Good morning, ladies and gentlemen. Welcome to the RBC 2017 third quarter results conference call. I would now like to turn the meeting over to Mr. Dave Mun. Please go ahead, Mr. Munn. Thanks operator, and good morning. Speaking today will be Dave McKay, President and CEO, 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 participate, 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 the call over to Dave. Good morning, everyone, and thanks for joining us today. This morning, we reported solid earnings growth or solid earnings of $2.8 billion and grew our CET1 ratio to 10.9%. As part of our commitment to drive long-term shareholder value, we have returned approximately $7 billion to shareholders through buybacks and dividends this year. I am also pleased to announce a $0.04 increase to our dividends this morning, bringing our quarterly dividend to $0.91 per share. Before discussing our highlights this quarter, I would like to spend a few minutes on the macroeconomic backdrop. Canada is leading the G7 in economic growth, reflecting fiscal stimulus, increased business investment, and strength in consumer demand. This is partially reflected in the results this quarter with Canadian banking recording strong growth in business lending, mortgages, and cards. Labor markets are also strong with the unemployment rate down to 6.3%, the lowest level since 2008. Fairly benign credit conditions, which Mark will expand on, are supported by this healthy employment environment. The Bank of Canada affirmed its confidence in the economic outlook and raised interest rates in July for the first time since 2010. Our core deposit franchise is a key strength for us and is the foundation of our client relationships. This deposit base positions us to gradually benefit from a rising rate environment. On Canadian housing, we have seen a healthy moderation in housing activity in Toronto and Vancouver, supported by policy actions by provincial governments and our regulator to create a healthier and more balanced market. We continue to prudently grow our mortgage portfolio with strong FICO scores at origination and are seeing low delinquencies. Household demand should continue to be supported by economic and population growth, including immigration. We want Canadians to own homes they can afford, and we remain well-positioned to help newcomers and first-time homebuyers. Turning to our results, we had a solid quarter. All of our business segments performed well. Canadian banking reported solid volume growth driven by strength across our products, including cards, mortgages, business lending, and deposits. For the second year in a row, we ranked highest in customer satisfaction among the big five retail banks as part of the J.D. Power study, while also maintaining high Net Promoter Scores. We are launching new long-term relationships with flagship companies to drive sustainable growth. For example, we secured a new partnership with a major international auto manufacturer to provide subvented financing to its dealerships. Also clients who use their RBC credit card will instantly receive a discount for their Petro-Canada fuel purchases at the point of sale. You will hear more about how we are adding value to our clients in the weeks to come. This quarter, we also achieved a significant milestone. Our customers' mobile sessions surpassed that of online banking. We saw a 40% increase in mobile financial transactions over the past year. To support increasing mobile adoption rates, we released more than 20 new app capabilities to 3 million-plus mobile customers in the past year. RBC clients are now the first in Canada who can ask Siri to pay their bills. We also launched Interac e-Transfer payments within iMessage, giving our clients another innovative payment solution. In the coming weeks, you will also hear more about two new tools, NOMI Insights and NOMI Find & Save, which will use artificial intelligence to provide personalized advice, helping clients manage their day-to-day finances and make saving simpler. We are proud that our focus on innovation has awarded us the highest in customer satisfaction among Canadian mobile banking apps in the inaugural J.D. Power Canadian Bank Mobile App Study. Turning to wealth management, we had another strong quarter across the wealth franchise. Our diversified businesses are poised to benefit from rising interest rates, volume growth, and continued investments in people and technology. Last quarter, you heard me talk about MyAdvisor. Partnering with Canadian banking, we've launched our online wealth advice platform to select mutual fund investment clients across Canada with positive feedback. In U.S. wealth management, including City National, we are tracking well towards the 2020 targets that we highlighted in our 2016 Investor Day last summer. Capital Markets had another solid quarter demonstrating the quality of our client franchise. We remain committed to supporting our clients' financing needs with Canadian corporate and investment banking benefiting from increased syndicated finance deals this quarter. RBC advised on the CAD 4.8 billion sale of DH Corp to Vista Equity Partners, the largest acquisition of a Canadian company by a U.S. firm in the last couple of years. Our focus to deepen client relationships helped us drive market share upwards in the United States. Investor and Treasury Services posted strong results. Over the past two years, we've made meaningful investments in technology to enhance the client experience and position the business for success. We are seeing the benefits with new client relationships and record levels of assets under administration. Underscoring the impact of our efforts, we were recently recognized at the Global Investor Awards, including the number one global custodian and the number one global fund administrator of the year. Across the organization, we have a tremendous amount of work underway to be a digitally enabled relationship bank. This means speeding up how we do business and reducing complexity to deliver an exceptional client experience. This journey is not always easy. As part of this process, we made the difficult decision to reduce a higher than normal number of head office roles with the goal of reinvesting in areas like data analytics and artificial intelligence. We also created opportunities to move employees to different roles and bring in new talent. In my view, diversity and inclusion are core to an innovative environment. Of the promotions to executive roles, approximately half were women, and women now represent 40% of our executive positions. We remain committed to changing the way we work in a world where client needs and a competitive landscape are evolving. In short, we have a tremendous group of engaged employees, and we expect the investments in our people and digital capabilities will set our organization up for sustainable growth. Before I conclude, I'd like to mention the wildfires in British Columbia. It's a devastating situation. I know many Canadians have been affected. I'm proud of our teams for pulling together to provide much-needed support to our communities. We are committed to helping clients by providing financial assistance, including short-term payment deferrals, and will continue to provide support where needed. With that, I'll turn the call over to Rod. Thanks, and good morning, everyone. As Dave mentioned, we reported solid third-quarter earnings of CAD 2.8 billion, as shown on slide five. Earnings were down 3% due to last year's gain on sale of our home and auto manufacturing insurance business. Excluding the gain, net income was up 5% from a year ago, and EPS was up 8%, reflecting the benefits of our share buybacks in the first half of the year. We saw another strong quarter of underlying revenue growth, and net of the insurance fair value change, our adjusted operating leverage was positive 1.5%. Our expense growth included higher than normal severance costs, which were CAD 120 million pre-tax in the quarter or CAD 0.06 per share after tax. Of that amount, the majority was related to head office groups. More than half of the total severance, or CAD 70 million pre-tax, impacted the corporate support segment. As we allocate more resources into technologies for our clients and given increasing requirements for cybersecurity and regulations, we accelerated severance outside of our normal range this year. We don't expect to have as much severance next year. Turning to slide six, our Common Equity Tier 1 ratio increased 30 basis points from last quarter to 10.9%, driven by strong internal capital generation and benefits from a higher pension discount rate. In addition, we were able to reduce RWA in certain portfolios while supporting client-driven RWA growth. We manage our capital tightly and remain very comfortable with our CET1 ratio. Our strong earnings generation and capital ratio growth provides us flexibility to redeploy or return capital to shareholders. As Dave mentioned, we announced a CAD 0.04 dividend increase this morning. In the past, we received a number of questions around capital requirements if we were ever designated a G-SIB in the future. Earlier this week, OSFI released for public consultation its guidance if a Canadian bank was designated a G-SIB. Given this current guidance, we do not anticipate an additional CET1 ratio G-SIB buffer on top of the current 100 basis point D-SIB surcharge for large Canadian banks. Let me turn to our business segment performance. All businesses performed well in the quarter. Starting on slide seven, Personal & Commercial Banking earned CAD 1.4 billion. Canadian Banking net income of CAD 1.35 billion was up 5% from a year ago, reflecting solid client volume growth of 7% and fee-based revenue growth of 6%. Our business deposit growth was strong, up 14%, and business loans grew 11% as we added commercial bankers and continued to do more for clients. Mortgage growth remained solid at 6%. We expect our personal loan volumes to improve as the Ally portfolio runs off and as we gain momentum from the new auto partnership that Dave mentioned. We achieved these results despite NIM compression of 2 basis points year over year and 1 basis point from last quarter. We expect some NIM pressure to continue in Q4, but we do expect NIM to stabilize starting in the first quarter. Adjusted operating leverage in Canadian Banking was 0.7% year to date or 1.3% excluding severance, which was higher than normal this quarter. For the full year, we expect to be at the low end of our 1%-2% range for adjusted operating leverage, excluding severance, due to higher investments in digital and technology. Turning to Wealth Management on slide eight, earnings of CAD 486 million were up 25%, reflecting strong performance across all of our key businesses. In Canadian Wealth Management, we recruited experienced investment advisors over the past year and benefited from higher client activity and higher equity markets. In Global Asset Management, investors continued to trust our lineup of investment solutions, with over three-quarters of our funds outperforming the benchmark on a three-year basis. As the market leader in Canada, we continue to attract investments with a market share of over 30% amongst banks. Our U.S. Wealth Management business performed well, benefiting from the Fed rate hikes and strong loan and deposit growth, which drove revenue growth of 16%. This year, we also added over 450 colleagues at City National and expanded our footprint in Washington, D.C., Minneapolis, and New York to support our customers. Moving on to slide nine, Insurance earnings were CAD 161 million. Excluding last year's gain on sale, net income was up 25%, largely due to higher investment-related gains. As we strengthen our customer relationships, we are pleased that our Net Promoter Score in the insurance business remains among the best in class at over 53%. Investor and Treasury Services results are on slide 10. We delivered net income of CAD 178 million, up 13% from last year on higher foreign exchange market execution, driven by an increase in client activity, and higher funding and liquidity results. We're pleased with these strong results as we continue to invest heavily to deliver the right technology solutions for our asset services clients. On slide 11, Capital Markets again delivered solid results, generating over CAD 2 billion of revenue and CAD 600 million of net income for the third quarter in a row. While market volatility remained low, our client businesses performed well as we remain ninth in global fee pool rankings. Net income was down 4% as last year's third quarter benefited from Brexit. This quarter, lower fixed-income trading was offset by higher equity trading results and increased corporate investment banking activity, particularly in loan syndication and M&A. While we remain cautious in our outlook on the trading side, given low market volatility, we expect momentum to continue in our investment bank through the end of the year. To conclude, while our results were impacted by significant investments and severance costs this quarter, we are pleased with our performance. We believe we are well-positioned to continue our momentum in the fourth quarter. With that, I'll turn it over to Mark. Thank you, Rod, and good morning. Turning to slide 13, total provisions for credit losses of CAD 320 million were up CAD 18 million, or 6% from last quarter. The PCL ratio of 23 basis points was flat quarter-over-quarter. Overall, our credit quality has remained strong and stable year to date. Let me discuss the performance of each segment on slide 14. In personal and commercial banking, provisions of CAD 273 million increased by CAD 11 million from last quarter. Canadian banking provisions of CAD 259 million increased by CAD 3 million quarter-over-quarter, reflecting higher commercial lending provisions, largely related to one real estate account, partially offset by seasonally low credit card write-offs. Caribbean and U.S. banking provisions were up CAD 8 million from last quarter, reflecting fewer recoveries this quarter. Wealth management provisions of CAD 6 million decreased by CAD 9 million quarter-over-quarter, reflecting a recovery in one international wealth management account, offset by higher provisions in our City National portfolio. Capital markets provisions of CAD 44 million increased by CAD 20 million compared to last quarter, largely due to a couple of accounts in unrelated sectors. Turning to slide 15, gross impaired loans of CAD 2.9 billion were down CAD 353 million, or 11% from last quarter. Our gross impaired loan ratio of 53 basis points was down six basis points from the prior quarter. In capital markets, gross impaired loans decreased by CAD 200 million from last quarter, largely driven by foreign exchange translation, repayments, and accounts returning to performing status in the oil and gas sector. In wealth management, gross impaired loans decreased CAD 105 million, mainly due to repayments, a decline in acquired credit-impaired loans in City National, and the impact of foreign exchange translation. In personal and commercial banking, gross impaired loans decreased by CAD 32 million, reflecting the impact of foreign exchange translation and repayments in our Caribbean lending portfolio, partially offset by new impaired loans in our commercial lending portfolio. Let's now turn to our Canadian retail exposure on slide 16. We continue to see solid underlying credit quality with delinquency trends and provisions benefiting from an improving macroeconomic backdrop with solid GDP growth along with low unemployment rates, particularly in Ontario, B.C., and Quebec. On slide 17, we discuss the performance of our Canadian mortgage portfolio. As Dave mentioned in his opening remarks, recent policy actions have led to a cooling of the housing market in the GTA over the last few months. Overall, our portfolio remains healthy. Delinquency rates in the GTA remain below average at only six basis points. Year-to-date, the average LTV of new uninsured mortgage originations in the GTA was 65%, with a portfolio LTV of 43%. This provides a solid buffer should Toronto house prices continue to moderate. Given the recent interest rate hike, we continue to monitor the debt service ability of our clients. We remain comfortable with our portfolio, given a significant proportion of our mortgage originations have been underwritten at the Bank of Canada qualifying rate, which is approximately 200 basis points over the contract rate. Fixed rate mortgages represent approximately 75% of our mortgage portfolio. Lastly, our clients have a strong credit profile with the average FICO score of our uninsured mortgage portfolio remaining over 790. Overall, I am pleased with the performance of our lending portfolios this year as we continue to see PCL come in below historical levels. Turning to market risk on slide 18. Notwithstanding ongoing geopolitical risks, market volatility declined to historically low levels. Our average VaR remained relatively flat at $24 million, and we had zero days of trading losses this quarter. With that, operator, we will open the lines for Q&A. Thank you, Mr. Hughes. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 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. There will be brief pause while the participants register for questions. Thank you for your patience. Our first question is from Robert Sedran with CIBC. Please go ahead. Thanks, and good morning. Dave, it is a question on the dividend back-to-back, I guess, in terms of dividend increases of four cents. I am wondering when you think about your payout ratio and when you think about it in the context of IFRS 9, which I know we have not had a whole lot of disclosure on this yet, but our expectation is it is going to be some lumpier provisioning and perhaps higher provisioning at trough as well. When you think about that payout ratio, are you just going to run it basically on the old accounting methodology which is closer to economics, or are you taking IFRS 9 into account when you set the expectations there? Yeah, good question. Thanks, Robert. Certainly, as we look forward in our financial results and model IFRS 9 impact through cycles of stage 1, 2, and 3 provisions, your dividend policy has to take that into consideration. There'll be more volatility without a doubt, but we have very strong capital generation ability, as you saw again this quarter as we generated 30 basis points of CET1 ratio giving us flexibility to absorb the volatility going forward. Certainly, IFRS 9 will introduce some volatility through a cycle into earnings, and that will manifest itself in your outlook on dividends as you see that. We'll have to sit down with the board and talk about dividend policy in that context. But we're working through that now, and you'll hear more from us in the coming quarters, obviously, on the impact of IFRS 9. But for now, you're still comfortable at the higher end of that 40% to 50% range? Right. Okay. Absolutely. We wouldn't have recommended to the board to increase the dividend at that ratio if we weren't comfortable with our trajectory going forward. Okay. I think it shows a confidence in the underlying strength and diversification of our businesses. Very strong wealth results, strong Canadian banking, very good capital markets results, particularly in the context of the market environment, allows us to increase the dividend at the upper end of our range. Okay. Thank you. Just a quick clarification from Rod. Rod, I know the whole D-SIB, G-SIB thing, I guess it's finally been settled, but we've kind of become accustomed to you guys operating well above the regulatory minimums anyway. Are we basically saying we're comfortable that even from an operating level, nothing changes in a G-SIB world compared with the D-SIB world? Is that fair? Yeah, that's fair. Our reported minimum is 8% as a D-SIB, and based on the consultation that came out, should it become final it would also be 8%. We also have buffers on top of that, but the stated buffer that we have is 290 basis points, and the global G-SIB buffer is around 250 basis points. So we're comfortable with where we are. We don't think we need to go much higher. To your earlier question on IFRS 9, we'll also have to consider that into our stress testing and will we require a slightly higher buffer for that perhaps. But we think with the 290 we can largely encompass any changes that would come from IFRS 9 given the current environment. Thank you. Thank you. Our next question is from John Aiken with Barclays. Please go ahead. Good morning. Rod, in terms of the severance cost that came through this quarter, there was no discussion in the prepared remarks about what this means in terms of cost savings going forward. Can I assume that this is a one-off, but that as you talk about the investments that you're making into your platforms, that outside of this, we shouldn't really see any real change in the expense levels outside of this one-off severance cost this quarter? Yeah, I think it's pretty dynamic, right? Because we're going to have some savings from the severance costs from reduced run rate there, but we do have increased costs from digital investments, from AI as Dave mentioned, from cybersecurity, from regulation. So we kind of look at it all as a mix, and if we're not constantly vigilant about taking costs out, you're not going to see positive operating leverage. We have to take some costs out to be able to invest in what we need to invest in. So I wouldn't say that there's a parallel shift down in our cost base from this. I would say that it is necessary for us to maintain cost discipline and positive operating leverage going forward. Then in context, Rod, these ongoing investments that you're making, you also said that you didn't expect severance costs to be as high next year. What, in context, is this causing even greater pressure on operating leverage, or is this all part and parcel with your guidance and your expectations? Well, if we have lower severance costs next year, that will benefit our operating leverage. But putting severance aside, the regulatory pressures, the competitive pressures put downward pressure on an ability for any company to achieve positive operating leverage. We have to, like I said, drive costs out and deliver results from that investment to automate things, to make things easier for our clients and to increase our retention rates, which does help revenue. So we should continue to target positive operating leverage next year, even with these severance costs. Great. This is Dave. We have talked a lot about an ongoing program to manage costs and to reinvest and to create leverage, as Rod said. We have been really focused on our distribution networks over the last six, seven years. We found ourselves a need to accelerate our transformation in our head office functions and head office roles. We have really moved forward what would have been a two to three-year plan into the current first two quarters and largely took the severance this quarter in an accelerated way. You should expect next year will come down quite significantly as we moved kind of two years of work into two quarters. Therefore, it gives us flexibility to reinvest in the business. It might give us some short-term OpEx relief as we will take time to replace some of those roles and reinvest those roles differently and start different projects. As Rod said, it really gives us operating flexibility to make the investments we need to create long-term sustainable growth. You started to see the results of that this quarter, in the first six months, and in particular this quarter. 20 new app releases. The first real deployment of artificial intelligence into Canada, into the NOMI Find & Save examples. Starting to roll out some of the value propositions we have talked about with Petro-Canada. You are starting to see an increased cadence of rollout, which is a result of the investment we are making while we continue to drive very solid results as we reported today. Great. Thanks for the context. I will over to you. Thank you. Our next question is from Sumit Malhotra with Scotia Capital. Please go ahead. Thank you. Good morning. Just one point of clarification for Dave or Rod on the comments you made on the G-SIB versus the D-SIB. Have you gotten any indication from OSFI that while the official stated buffer, the G-SIB will replace the D-SIB, and if you're in the first bucket, then it won't have any kind of major change on the official stated buffer. Is there any indication from them that your inclusion on this list would result, or they would want you to manage capital at the high end of the Canadian group, or do they feel that status quo, wherever the bank is, as long as you fulfill the buffer requirement, is fine? Yeah. First off, we can't comment on conversations with OSFI, but when they treated us as a D-SIB, the intention is to treat us as if we were the lowest rung on the G-SIB level. I would not expect us to have any difference versus where we are now as a 100-basis-point G-SIB or 100-basis-point D-SIB. I don't think behind the scenes there we would have to manage our buffer any differently. Our communication to you in the market is consistent with our understanding of the situation around us. We would not communicate with you unless we had confidence in what our understanding of the situation is. We've been very consistent for two years now in articulating this, and now we've had more formal communication from the regulator on the D-SIB/G-SIB buffers. I think we continue to hear a consistent message. That's fair. Thanks for that. My actual question is for Doug Guzman and looking at the City National numbers. Just quickly here, want to go to the play between NIM and loan growth. We've heard from a lot of banks in the U.S., particularly post-election, that loan growth has stalled somewhat as there's clearly been some policy uncertainty. It doesn't look like that's been the case for City National, at least based on the numbers we're calculating here. More specifically for your business and not the industry, what are the key areas that you feel are driving your loan growth at such a strong pace, and do you think double-digit loan growth in this environment remains a reasonable expectation, especially since there's been an increase in loan yields that are now being derived? Maybe I'll ask Rod to take that question on the loan growth side, as you're a little bit closer to it, Rod, than I am. Maybe I'll make some color commentary afterwards. Sure. Thanks. Sure. We've seen the lower C&I loan growth in the U.S. in the last several quarters. Part of this is our investments in new markets. Part of it's growing in California, bringing in new bankers, and part of it is our specialty approach in the industries that we're in in California is still seeing some good growth. So we expect to outperform the C&I growth in the U.S. We've done that in City National since the acquisition, and City National was doing that well before the acquisition as well through their specialized approach. From a NIM perspective, we saw a lift this quarter that you would see on slide 22 of about nine basis points on the one metric or 11 basis points on the other. Really most of that was the Fed. We also had a little bit of runoff in the legacy acquired portfolio on the impaired side. We also saw an improved mix because we've been growing loans faster than deposits. We were able to take down some securities, invest in client lending, and increase our spreads that way as well. So we are seeing reasonably healthy margins and continued strong loan growth. The only additional color I would add is that we are seeing synergies with the Canadian businesses, with our Capital Markets businesses. I think we've booked upwards of CAD 1 billion of referred loans now. We're starting to increase the cadence there using a larger balance sheet to take and grow a relationship with clients where we would've had single name limits under a standalone City National. All the synergies that we saw, including lifting out teams from competitors, we're really starting to gain traction in some of those niche businesses that Rod referred to is leading to a significant outperforming of U.S. C&I growth. I think, operator, we have another question. Certainly. Our next question is from Meny Grauman with Cormark Securities. Please go ahead. Good morning. Dave, you talked about you're seeing moderation in Toronto and Vancouver housing. I wondered, in that context, the B20 revisions, that proposal, do you see that as being necessary, or is there a risk that another piece of regulation here could have too big of an impact on the downside? Curious of your thoughts. Then a related question, just the B20 proposal, how does it impact you specifically, and how do you think about it in the context of the market as a whole? I'll make some comments about the health of the housing market, and maybe I'll ask Neil to comment on adjudication of mortgages and how we look at things. Certainly, we've been calling for a coordinated effort to slow down the growth of house prices in the Canadian market. We really want to make sure that we have a sustainable Canadian housing market for our economy in particular, and therefore, we welcome the changes that have happened so far and the slowing in unit purchase volume slow, and also now you're starting to see certainly a slowing in small areas, a reduction in prices. Now we still are talking about a trifurcated market. You've got Canada, then you've got Vancouver, and you've got Toronto. So we continue to talk about kind of three different types of marketplaces and particularly the changes were needed in housing in Toronto and Vancouver. You're seeing a slowdown in prices in Toronto, a slight decrease in some areas if you start looking through the numbers. What we also saw in Vancouver is activity picked up about 6-9 months after the policies went in. We'll watch the Toronto housing market carefully. Therefore, additional measures may be needed to maintain a healthy balance out there, and we've encouraged by the existing measures and the effect they've had in creating a more sustainable marketplace. I think adjudicating at higher rates, which some of the B20 changes calls for, is prudent lending in the asset price growth that we've seen in those marketplaces. Some of the fine-tuning that is coming may be required given the bounce back we've seen in Vancouver and Toronto. We're seeing activity pick up in Montreal and increased activity as some of the investor money shifts there. Neil, do you want to comment on our business? Yeah. In terms of B20, I guess how we're looking at it is it's still relatively early. It's in draft. It's out for public consultation at this point. We do think there could be some very modest impact on the business. The main point that we think about is the requirement to have a stress test for uninsured mortgages of the 200 basis points over the contract that the client's paying. The reality is, and Mark had mentioned, the vast majority of our applications, upwards of 90%, are already adjudicated at the Bank of Canada posted rate, which is about 200 basis points higher than the client's contract rate. We think that'll be quite a modest impact if that's where we end up. If it gets implemented, it could influence some preferences around term or AM, but that's all yet to be determined. Thank you. Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead. Good morning. I have a couple of questions, so I'll be fairly quick. The strength in equity trading this quarter, would it be safe to say that was essentially Canada, or would some of that have been in the U.S. as well? Yeah. The equity trading numbers in Canada were pretty good. The cash equities business in particular held up. We had a number of large new issues associated with M&A transactions that helped. In the U.S., the cash equities business was a little bit slower. Where we're struggling a bit is in the equity derivatives business, in the options business, where the volatility's down. But the trading results, both in FICC and equities, have actually held up during the last quarter pretty nicely. If I could just, on CNB, this 455, an increase of personnel of 455 caught me off guard a little bit. I don't know how big that is in relation to the total amount, but that's a fairly big number. Where would you expect that to be in the next, say, 12 months? Like on a similar increase, or? It's a good question. Part of that increase is obviously front office employees, and part of it we plan to handle regulatory change and CCAR and growing our back office to prepare for an expanded growth trajectory organically. As we've talked about new markets, we've talked about new products, we've been building up the back office. I think roughly it's two-third back office, one-third front office to date. You'll see more front office growth going forward as we continue to see growth in existing footprints. New York, Washington, and in California, we see significant opportunity to grow. And you've seen the success of our franchise model growing at multiples of what the industry is doing encourages us, particularly as we see the early success in Washington, the success we're having in New York. New York's a huge market, and we're just getting a small toehold in there. You will see us continue to hire private bankers. You'll see us continue to hire commercial bankers. We'll continue to lift out teams because the model's really working. I think it's an organic growth trajectory that we've talked about extensively. We're a little bit ahead of our forecast that we gave you last year, and we've got significant momentum. You'll see us continue to hire frontline people. We shouldn't be overly surprised if we see that kind of growth in personnel. You are seeing the returns from that growth already. Okay. You are seeing strong revenue growth. You are seeing strong income growth. You are seeing the volume performance. You are seeing good NIM. Yes, absolutely. It drives great shareholder value and returns and the highest ROE you can find in the market as far as organic. I think absolutely we are going to continue to expand our model. That was the whole strategy in acquiring City National was to grow organically. Finally, you expressed a lot of optimism on Canada early on in your opening comments. Is that what is playing out in the auto loan growth and in the card growth we saw this quarter? Just pushing more aggressively, did it result in some market share gains? I will let Neil McLaughlin answer that. Thanks for the question, Mario. In terms of auto, there are a couple of things going on in the book. One is pretty much getting to the end of the runoff of the Ally portfolio that was acquired a few years back. That had been something that we needed to move an awful lot of originations to supplement as those paydowns came off the portfolio. The underlying business, we have made some changes just to improve our used book. David mentioned a new manufacturer relationship, and we have recently launched a new OEM with Hyundai, and we are starting to see that come on the books, and that will provide some growth into 2018. Market share gain in cards, do you think you had some this quarter? We feel really strong about our cards portfolio. We are seeing part of it in terms of the reward marketplace. Our marquee Avion product continues to stand out. We had almost 10% lift year-over-year in purchase volume, which is really strong, and that is translating into other fee income. Credit cards, we would say absolutely one of the businesses we are feeling very good about. Okay. Thank you. Thank you. Our next question is from Gabriel Lynch, with National Bank Financial. Please go ahead. Morning. I have a few quick ones as well. First one for Doug. A lot of banks are quantifying costs of relocating out of London in response to Brexit. I'm wondering if you have outlined any plans and if there are any costs associated with that. Also the Ally runoff, could you just give a quantification of how much you've run off, how much that's weighed on your personal loan growth, I guess? Lastly, Rod, you mentioned the IFRS 9 impact on your capital management. You said you're thinking about a buffer that you might have to operate under. Is that something you're willing to discuss a bit more in detail? This is Doug. I'll start with the European footprint and Brexit. We have a fairly robust footprint in Europe, mainly through the investment bank and also through our Investor and Treasury Services business. Our main jurisdiction for both businesses, we have a dealer in London. The issue, of course, is can we passport to Europe from there, and we'll see how that evolves. But we have subs to that dealer and people on the ground in Paris and France, approximately 20 front office people in both locations. We opened those locations a couple of years ago, not for Brexit, but really just to provide better local coverage to customers in those countries. We have about 75 people in Dublin, and that's a branch of our Investor and Treasury Services bank out of Luxembourg. So we're well established in Dublin and in Luxembourg. We're the fourth largest bank in Lux. RBC Investor Services has about 1,500 people. The footprint's robust. We have options. We're exploring them. But I think given where we stand now, we're going to wait and see how this evolves. Just intuitively, because I have seen some pretty big numbers, but I would not think that they would be as big for Royal as they would be for HSBC or somebody like that. No, I really do not think that is going to be the case. I do not think we are going to be spending a lot of money there. Okay. In terms of the Ally runoff question, I guess one of them would be, there was a few dealerships that were originally acquired that contractually we had to get to a threshold, so a few dealerships were attrited. We still maintain all those relationships, and it was the legacy portfolio that had to be replaced. So we are trying to grow into a much larger portfolio. Just to give you a sense, quarter-over-quarter, the book is a little over CAD 15 billion. We are up about 1% quarter-over-quarter. A year ago, we would be running negative growth in the portfolio. So we would say really in the auto book, sort of hitting the bottom and then growing from this point on is where we are seeing it. You are not running off the floor plan, are you? No. Floor plan's actually been quite strong. We've actually been adding floor plan volume quite in our commercial book, auto's actually been quite a strength. We've been targeting the consolidators, the larger dealers who are picking up rooftops and adding manufacturers, a number of probably about a dozen or so large acquisitions. So we're feeling quite strong about the floor plan business. How big is that one? The floor plan business, I wouldn't have that number offhand. Okay. Then Rod, on the IFRS 9 on your capital management? Yeah, our target is 10.5 plus, and I wouldn't want you to print that our target is increasing as a result of IFRS 9. I still think we're comfortable with the 10.5 plus. I think as we model out IFRS 9 and adopt it will come into play in our stress testing. If you think about what we went through a few years ago with oil and gas. Instead of losses coming in over several quarters or several years, you'll see them accelerated under the new accounting, and then ease up in the later years. And potentially see reversals if the losses are not as bad as expected, which would have been the case in the recent downturn in oil and gas. But that will come into play in terms of our buffers and our stress testing and setting our capital threshold. Which is probably why you're seeing us at 10.9 now versus 10.5. So we probably have a little bit of extra buffer there, but our target is still at the 10.5 plus, and we would expect it to continue that way absent other changes. Thank you. Thank you. Our next question is from Steve Theriault with Eight Capital. Please go ahead. Thanks very much. A few smaller ones for me as well. Just to follow up for Rod, I think on IFRS 9. Rod, can you remind me, is there much in the way of accretable yield coming through City National? I know it would be small, but can you confirm that if there is some of that disappears completely under IFRS 9? I guess what I am really wondering is, will we notice anything in the revenue line for City National next year on the back of this? That is a good question. We are going to reset our allowance, which we had to set to zero in purchase accounting. The accretable yield was not that significant. You do see increase in PCL quarter-over-quarter as we grow the loan book. But we would expect to see that in IFRS 9 as well. So we do not think that will change because your stage 1, your new loans, you are going to have to put a one-year expected loss for any new loans. As we continue to grow that loan book, we will see PCL increase even if losses are not coming through. From an accretable yield standpoint, I do not believe it will have a significant impact. Yeah. If I look at this quarter, the revenue growth was 12%. There is not really any material accretable yield lift in that? No. Okay. No, most of the yield increase, like I mentioned, was the Fed increase, and also the shift in asset mix from out of securities a little bit into loans. Okay. Thanks for that. For Neil, HELOCs had been, I think, down year-over-year in some recent quarters. I noticed through the footnotes, a bit of a turn there, right? So some quarter-over-quarter, some year-over-year HELOC growth. There's been talk about preferences and shifting away into fixed and longer term, but maybe a bit of color as to what's going on there in terms of preference-wise, or maybe it's pricing. Yeah. Thanks for the question. I wouldn't say it's dramatic. We are seeing a slight preference out of borrowing via mortgage. Our Homeline Plan product is still our most popular home equity product. But it's something that customers are starting to shift their preference. But I think we're just starting to see the trend. Okay. Lastly for me, going to treasury services. We focus a lot on the capital markets, trading revenues, and rightly so. But I did note that the trading revenue allocated to treasury services has been down each of the last three quarters. It's less than half of what it was a year ago. It's not a big number, but I don't think we hear about that too much. So maybe a little detail on what's driving that and anything you can give us on outlook. The treasury services trading results are most affected by credit spreads. I think this time last year you had a pretty good gapping in of credit spreads, or you're at the back end of that. Last quarter we had similar strong credit spread performance. That portfolio is high quality liquid assets, mostly sovereigns and covered bonds. So that's where the outperformance will come from. In this quarter, credit continued to be tight, but you didn't get the same amount of tightening. We're just going to continue to see that bounce around somewhat between, I guess, 50 and 100 is where it's been the last year or two. Yeah. If credit goes the other way, then depending on how well we trade, you could see somewhat reduced results. Okay. Thanks for that. Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead. Thank you. Dave, last year this time you would have had some amount of outlook for the business and the business lines that you operate. Year to date, you are up around double digits anyway, as far as your EPS. You have deployed capital with buybacks and what have you. Which one of the businesses in the diversified mix that you have are you most excited about over the next year from an earnings and growth perspective, and have you softened on any one of the other ones versus last year? That is a bit of a leading question. I think right off the top, I have continued to talk about the diversification of our client franchises. Diversification by type of client, corporate, institutional, commercial, consumer, but diversification geographically, Canada, U.S. and Europe, and really the strength of our franchise. You saw that yet again this quarter with all three client franchises performing strongly across a number of different geographies. I think that is the strength and thesis of our franchise, and we continue to demonstrate that with the growth you have seen and the strong internal capital generation to allow us to grow our balance sheet and to grow our client relationships organically, which is driving a premium ROE in the marketplace. That is the combination of capabilities that makes us strong. You saw significant momentum in the wealth management franchise with record results both in the United States, we had our best ever quarter, and outside the United States, we had a record quarter. You are seeing very strong flows into our Canadian asset management business. You are seeing exceptional performance out of City National and the entire U.S. wealth franchise. Seeing that great organic client franchise growth, and I think that marks the RBC franchise. Organic client franchise growth in wealth management and capital markets. You are seeing the benefit of that as we are continuing to build those relationships. We put our balance sheet out there. We are providing more advisory and underwriting services and fee-based services to those clients that we have nurtured over the last decade. You are seeing really balanced performance out of the retail platform. With a backdrop of our franchise operating in markets with strong, stable economic growth, Canada, the U.S., U.K., and Europe predominantly. You look at the markets we operate in, the strength and breadth of the client franchise causes me to feel really good about where we are and the momentum we have. It is not just one business, but it is the multitude of what we are able to bring to bear. You are generally feeling better today than you would have about a year ago, it sounds like. Yeah. I am very excited about the cultural transformation. I am really excited about the cadence you are seeing of technology deployment. We have talked a long time about the R&D we are doing, the patents we are filing. Now you are starting to see a cadence of client value propositions and client technology come to the market that is really exciting. The Petro-Canada deal that you might have caught is not insignificant, and the value we are creating for customers every day. You are starting to see the AI research, the blockchain research, the value proposition with rewards. You are seeing the investment in City National come to play. We have done a lot of heavy lifting over the last two years. We have spent money. We are delivering now momentum on that investment across a number of fronts. You are seeing an incredibly well-run and resilient capital markets operation with strength in the United States that goes from strength to strength and great balance out of Canada. As a CEO, when you have that type of diversification to drive your franchise, it gives you a lot of optionality, along with a very strong balance sheet and capital generation, and ability to return capital to shareholders at the same time. As I said right off the top, I think in my second comment, we have returned over CAD 7 billion to shareholders and continue to drive that EPS growth that you referenced. Our focus now is to keep building and keep going. We have got a great mix of franchises. Thank you. Thank you. Our next question is from Doug Young with Desjardins Capital Markets. Please go ahead. I think I'll be fairly quick here, but Rod, I guess, I think in the past what we've heard is CAD 90 million to CAD 100 million, I think it's pre-tax in terms of annual severance charges. Can you remind us where you stand in total severance charges year to date? Sure. Thanks, Doug. You may recall last year we were elevated up closer to CAD 130 million. The previous two years we were at that CAD 90 million level. So we increased it last year, and this year on a year to date basis, we had about CAD 55 million in the first half of the year, and then CAD 120 million, so we're about CAD 175 million on a year-to-date basis. And when you- We are elevated to the tune of about CAD 40 million to CAD 45 million versus the full year last year. When you think of next year, you are talking more about in the CAD 100 million range when you think of normalization then? No, I would expect us to get back on a normalized basis to the 90 to 100, but because of the acceleration that Dave mentioned, I would expect us to be well below that next year. Okay. These are pre-tax numbers, is that? Correct. Yeah. Okay. You talked about, I think CAD 70 million of this quarter going through corporate. The remainder, again, this would be pre-tax, remainder would've gone through Canada. Is that correct? Well, this was something, the cultural transformation that Dave mentioned was an enterprise-wide initiative. Portions in Canada, portions outside of Canada. All of the businesses would've seen elevated severance this quarter versus the prior year or the prior quarter. We did cite the with and without operating leverage in Canadian banking specifically, which it took us from about 0.7 year to date to 1.3 operating leverage if you adjust for it. On a quarter basis, we would've been negative, and we were flat if you adjust for severance just in Q3. Okay. So I can do the math to get the number there. The last one, just in insurance, I think it was mentioned investment gains were elevated. Was it a significant amount, and can you quantify? Well, we don't generally quantify too much of it, but it's nothing really out of the normal. It's Doug Guzman, by the way. We've got a very conservative investment side of our portfolio, and we just thought that we had a little room to lengthen duration. So you're seeing the accounting benefit of lengthening duration on a small slice of the asset mix. Okay. All right. Thank you very much. The other thing I'd add just to Neil's prior answer on the question on Canadian momentum is certainly on the investment side, we're seeing the same thing. Dave mentioned the numbers quickly at the start, but when we're doing 30% of the volume of mutual fund sales in the branch channel or the bank channel, that equates to something like 20-plus percent, low 20% overall. Our underlying share is 15%, so that forces that share up over time. And similarly in brokerage, we'd expect a tailwind in market share just given what's going on in the world in terms of technology and the need to have broader base planning and the benefits of having deep expertise across specific areas of interest to the clients, philanthropy, trust and estate, and those kinds of things. I think the sentiment that Dave expressed that Neil followed on, I'd share that in terms of our Canadian investments business as well. Thank you. Thank you. Our next question is from Nick Stogdill with Credit Suisse. Please go ahead. Hi, good morning. First a clarification. Rod, I believe you mentioned after Q4 you expect more stability in the Canadian NIM. Does that incorporate any future rate hikes? We do believe that we should see stabilization just based on the rate hike, but the market is pricing in a good likelihood of another rate hike before the end of the calendar year. That would also benefit the NIM for next year. But we have seen some volatility as the market anticipates a rate hike, you see some compression on our NIM, and we saw that a little bit in Q3 in early July. And we are seeing it right now as we're in the fourth quarter. As the rate hike takes effect, we expect to see benefits next year. I'll just add to that. It's Neil. A couple other things. We had fixed rate mortgages that we're booking into the last quarter on quite tight spreads. We increased rates a couple times, took back about 50 basis points of spread on the mortgage book. As those pull through and fund into Q4, that'll also give us some stability in NIMs. Also our deposit book, our Canadian consumer deposit book will start to see an end of quite a successful campaign. That'll provide some spread back into Q4 and Q1. Thanks. Just a second question maybe for Neil again. The branch count year-to-date down about 2%. Could you give us a little more color on where the closures are taking place, rural versus city centers? Are you offsetting that with the opening of smaller branches? Then should we expect net reductions to continue at a similar pace for the foreseeable future? Yeah. So, I mean, year over year, we're down about 25 branches. It's a combination. I guess the core focus right now is thinning out in sort of dense urban branch footprint where we're not really impacting the convenience for customers where you may go from a two-minute drive to your branch to a three-minute drive to your branch. And those have been, I think, quite benign in terms of reaction. There has been a small number of rural, but we're definitely not on a path to really look at that as the focus. In terms of your question about small footprint, absolutely. We have a very successful pilot we've launched in McMaster University just making sure we're where our customers are. And we are going to see the amount of real estate that a branch takes up continue to shrink. So trajectory down 25 year over year, we're down 10 quarter over quarter. And probably a similar trajectory moving forward. Are any of the severance costs this quarter coming from branch reductions? No, that's not really an impact at all. Okay. Thank you. Sorry, I think we're out for time operator, so we'll need to end the call there. Certainly. Thanks everyone for joining us for the Q3 call and for your questions today, and we look forward to seeing you at the end of Q4. Thank you very much. Enjoy the rest of your summer. Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.