Earnings Call: Q4 2016

Nov 30, 2016

Good morning, ladies and gentlemen. Welcome to the RBC 2016 fourth quarter results conference call. I would now like to turn the meeting over to Mr. Dave Mun, Senior Vice President and Head of Investor Relations. Please go ahead, Mr. Mun. Thanks very much, and good morning, and thank you for joining us. Presenting to you this morning are Dave McKay, President and Chief Executive Officer, Janice Fukakusa, Chief Administrative Officer and Chief Financial Officer, and Mark Hughes, Chief Risk Officer. Following their comments, we will open the call for questions. The call is one hour long and will end at 9:00 A.M. To give everyone a chance to participate, please keep it to one or two questions and re-queue. We will post management's remarks on our website shortly after the call. Joining us for your questions in the room are our business heads, Jennifer Tory, Group Head, Personal and Commercial Banking, Doug Guzman, Group Head, Wealth Management and Insurance, and Doug McGregor, Group Head, Capital Markets and Investor and Treasury Services. Also, Rod Bolger, CFO effective tomorrow, is also with us. 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 from these statements. I'll now turn the call over to Dave. Good morning, everyone, and thank you for joining us this morning. This morning, we reported fourth quarter earnings of over $2.5 billion. This capped off a record year with earnings of $10.5 billion, up 4% from last year. I'm pleased with these results, particularly given challenges in the operating environment, including sustained low interest rates and energy prices, as well as the subdued macroeconomic backdrop across our key markets. We continued to focus on prudently managing our costs. Expenses were up 8%, or down 1%, excluding the impact of City National. We achieved this while incurring about $130 million of severance charges in 2016, higher than our typical run rate of about $90 million to $100 million, and this additional charge was taken in the fourth quarter. Our results illustrate the strength of our diversified business model, driving sustainable growth, a disciplined approach to cost management, and our commitment to maintaining a strong financial profile. Turning to slide 4, we use key financial performance objectives to measure progress against our medium-term goals, which we define as over three to five years. This year, we did not meet our EPS growth and ROE targets. Both of these measures were impacted by the issuance of common shares related to the acquisition of City National. On our capital objective, we exited 2016 with a strong CET1 ratio of 10.8%, four quarters after having closed the largest acquisition in our history. Our strong capital position continues to provide us with the flexibility to invest in our businesses for long-term growth, while also returning capital to our shareholders. During the year, we repurchased 4.6 million of our common shares and increased our quarterly dividend twice, for a total dividend increase of 5%. We ended the year at the high end of our dividend payout ratio of 40%-50%. Going forward, we've decided to revise our medium-term objective for ROE to 16% plus, recognizing the pressure on returns in the market, including persistently low interest rates and uncertainty on regulatory capital requirements. This new level continues to give us flexibility to grow our business, including abroad. In 2016, we achieved an ROE of 16.3%, which is in the top decile of global banks. In spite of the downward impact from the acquisition of City National, our revised 16% plus objective reflects a premium ROE that we continue to expect over the medium term. In all other aspects, including EPS growth, our financial objectives remain unchanged, and I am confident we will achieve all of these over the medium term. Let me share my perspective on the full-year performance of our business segments. Canadian banking had a record year, with earnings of over $5 billion, despite a challenging operating environment. Clients continued to take advantage of historically low interest rates as we saw solid growth in residential mortgages, with average balances up 7% from last year. Our mortgage volumes continued to grow at a premium to the market, driven by expanded mortgage sales force, focus on key client segments such as newcomers, as well as the return of our successful employee pricing campaigns. We also had excellent performance in our cards business this year, with strong growth in purchase volumes and balances up 6%. We continued to build our mobile capabilities, including the release of the RBC Rewards mobile app this October, and Apple Pay in May. The RBC Rewards app gives our clients the functionality of the online rewards platform while they're on the go, including instant access to merchandise through partnerships with Best Buy and Saks, for example. As well, our clients can use points to pay down their mortgage and credit card balances. RBC Rewards is the largest and most flexible loyalty rewards program in Canada, reflecting our commitment to innovation and best-in-class mobile solutions. It's the core to our differentiated long-term strategy, which also provides us with unique customer insights and data. For 2016, we delivered an all-time low efficiency ratio of 43.4% in Canadian banking, reflecting our focus on cost discipline while continuing to invest in technologies for our clients and infrastructure. As we said before, we manage our business for long-term sustainability. Our cost program to drive efficiencies is designed to do what is best for our clients and our employees. Earnings were up 41% as we continued to realize the benefits from our cost management initiatives and lower provisions for credit losses in the Caribbean. Moving to insurance, our net income of CAD 900 million for 2016 reflects the CAD 235 million gain from the sale of our home and auto insurance manufacturing business to Aviva Canada. The transaction not only broadened our ability to serve our clients, but also provided RBC with additional capital that we can deploy to advance other growth initiatives. In wealth management, we had strong results with earnings of CAD 1.5 billion, up 41%. City National performed very well, and despite the challenging markets in 2016, wealth management earnings, excluding City National, were up 14%. In 2016, we saw solid net sales, particularly in the second half, benefiting from our cost management initiatives as well as lower restructuring charges. While global capital markets were turbulent in the first half of the year, markets improved in the latter half, and we were able to help our clients take advantage. In fact, RBC Global Asset Management captured one-third of industry sales in the fourth quarter, and we expect our strong momentum to continue. In Canadian wealth management, we achieved solid net sales of almost CAD 20 billion, or half of the growth in client assets, driven by strong advisor productivity. In U.S. wealth, our results were driven by the stronger-than-expected contribution from City National. City National delivered Canadian dollar earnings of CAD 290 million, or CAD 465 million, excluding the amortization of intangibles and integration costs of CAD 175 million. Our results also reflect the benefits of referrals and collaboration across our businesses. In 2016, our head count at City National increased by 10%, which we expect will continue driving double-digit growth in loans and deposits. We have also invested in infrastructure and technology to support revenue growth going forward. I am very pleased with City National's performance in the first year as we continue to execute on our strategy to be the preferred partner in the U.S. corporate, institutional, and high-net-worth clients and their businesses. Moving to Investor & Treasury Services, we had a record year driven by favorable credit markets and interest rate movements. We achieved these results while making significant investment in the technology of our custodial business to enhance the client experience. In capital markets, we had solid underlying results in light of difficult markets. Net income was down only 2% from a year ago, despite higher provisions in our energy lending portfolio and lower client activity. The resilience of our performance was helped by our ongoing discipline on efficient capital deployment to focus on traditional corporate and investment banking activities. On that, corporate investment banking had a solid year with revenue in 2016 relatively in line with last year's record levels. Even as global deal volumes fell 22% during the first nine months of 2016, we had our best year ever in M&A, participating in significant mandates, including Dell's $67 billion acquisition of EMC. Looking ahead to 2017, our pipeline is strong, and so far in Q1, we have seen continued momentum in our U.S. investment banking business and good M&A activity. To wrap up, I am pleased with our record results this year, which reflect significant investment across all of our businesses, notwithstanding the more challenging operating environment. We have grown our core client businesses successfully, integrating City National, and continued to enhance our digital capabilities for our clients. Looking ahead to 2017, we expect an operating environment characterized by moderate GDP growth in North America in the 1.5%-2% range, low interest rates, an evolving regulatory landscape, and changing client preferences and demographics. We believe we are well-positioned to capitalize on opportunities created by the changing environment, given our strong capital position and risk management and ongoing investments in our business and technology. We will also leverage our top employee engagement and customer satisfaction scores across our businesses. We also welcome recent actions by our regulators and the Department of Finance that promote a healthy Canadian housing market aimed at ensuring consumer debt remains at sustainable levels. While the changes may weigh on mortgage growth for certain client segments, we see opportunities in others. We also believe these changes could ultimately help curb the tail risk associated with long-term slowdown of economic growth. Finally, we have spoken before on how shifting demographics and growing digital expectations are changing the landscape of banking. We continue to transform how we serve clients by delivering a compelling digital experience and leveraging the scale of our data advantage to provide timely and personalized advice. We believe we are uniquely positioned to achieve even greater client relevance in the digital world of the future. In 2017, our focus is on driving run rate cost reductions to support these investments in technology, as well as deploying capital for earnings growth, all with a focus on maintaining a premium ROE. I am confident that we will continue to deliver long-term shareholder value, given the strengths of our sustainable client franchises, leading culture of innovation, and disciplined approach to risk and cost management. Before I end my remarks, I would like to take a moment to recognize Janice. As most of you know, she is retiring on January 31st after a distinguished 31-year career with RBC. I would like to thank Janice for her partnership and for her leadership and dedication to our bank, our clients, and the community throughout her career. Rod Bolger will take on the role of Chief Financial Officer beginning tomorrow. Rod brings deep financial services experience, and I have no doubt that his business knowledge and leadership position him well for success. With that, I will now turn over the call to Janice to discuss our fourth quarter results. Thank you, Dave, and good morning, everyone. Starting on Slide 7, our fourth quarter earnings of over CAD 2.5 billion reflect solid underlying results across our businesses. Earnings were down CAD 50 million, or 2%, mainly due to the lower effective tax rate last year of 7.6%, which was driven by favorable income tax adjustments. At the enterprise level, our effective tax rate for the fiscal year was 21.4%. Based on our forecasted earnings mix, we expect our 2017 tax rate to remain within the 22%-24% range. Compared to last quarter, earnings were down 12%, or 4% excluding the gain of CAD 235 million after tax from the sale of our home and auto insurance business. Our growth in adjusted earnings from the prior quarter reflects higher results in insurance, Investor & Treasury Services, and wealth management. These factors were more than offset by lower earnings in capital markets and personal and commercial banking, which were largely impacted by seasonality. Turning to Slide 8, our Common Equity Tier 1 ratio was strong at 10.8%, up 30 basis points from last quarter, driven by internal capital generation. in November, the sale of Moneris USA to Vantiv was announced and is expected to close in the first quarter of 2017. We estimate the transaction will result in an after-tax gain of approximately CAD 200 million, with an expected impact to our CET1 ratio of about 8 basis points. Our strong capital ratios and focus on balance sheet optimization provide us flexibility to fund all growth in all of our businesses and manage pending regulatory capital changes. As Dave mentioned, we will balance our capital deployment with returning capital to the shareholders through dividends and share buybacks. Please turn to Slide 9 for the performance of our business segments. Personal and commercial banking reported earnings of almost CAD 1.3 billion, which was relatively flat compared to last year. Canadian banking had earnings of over CAD 1.2 billion, up CAD 19 million, or 2% from last year. Results were driven by solid volume growth of 6% across most of our businesses, partially offset by lower spreads as well as higher fee-based revenue. This includes strong deposit growth of 8%, which was driven by momentum in both business and personal deposits. Loans increased by 4%, reflecting solid growth in commercial lending and higher volumes in both residential mortgages and credit cards, partly offset by lower balances in auto lending. These results were largely offset by higher PCL, primarily in oil-exposed regions, higher technology spend, and higher costs in support of business growth. The fourth quarter was also impacted by seasonally elevated levels of expenses due to the timing of certain marketing activities. For example, we ran a successful national deposits campaign with iPad incentives, and this quarter also included costs associated with our 2016 Summer Olympics campaign. For 2016, operating leverage was 1.4%, which is within our annual target of 1%-2%. Compared to the prior quarter, Canadian banking earnings were down 3%, largely driven by higher initiatives and technology spend and higher marketing costs, partially offset by volume and fee-based revenue growth. Caribbean and U.S. banking had earnings of CAD 29 million, down CAD 14 million from a year ago, mainly reflecting higher costs to support business growth. Sequentially, earnings were down CAD 9 million. Turning to Slide 9, wealth management had earnings of CAD 396 million, up CAD 141 million from last year. Results continued to benefit from the contribution of City National earnings of $89 million, or $127 million excluding the amortization of intangibles and integration costs of $38 million. Excluding City National, wealth management earnings were up 20% from last year, reflecting higher results in Canadian wealth management and asset management, as well as lower international restructuring charges. In fact, Canadian Wealth achieved record revenue this quarter, driven by growth in average fee-based client assets and higher transaction volumes on improved markets. Compared to last quarter, wealth management results increased by 2% or $8 million. Moving to insurance on slide 11, net income of $228 million was relatively flat from a year ago. Higher results from new U.K. annuity contracts were offset by the reduction in earnings as a result of the sale of our home and auto insurance business last quarter. The reduction to earnings this quarter from the sale was in line with the $10 million-$15 million range that we provided previously. Compared to last quarter, earnings were down $136 million. Excluding the gain on sale, net income was up $99 million, mainly due to favorable actuarial adjustments resulting from our annual review and higher earnings from two new U.K. annuity contracts. Turning to slide 12, Investor and Treasury Services had record earnings of $174 million, up $86 million or 98% from last year. Compared to the prior quarter, net income increased $17 million or 11%. Results were mainly driven by higher funding and liquidity earnings. As you may recall, credit spreads widened significantly in the fourth quarter of last year, causing our funding and liquidity portfolio to realize mark-to-market losses. Throughout the current year, results have benefited from the subsequent tightening of credit spreads, which drove funding and liquidity earnings up. Turning to capital markets on slide 13, net income of $482 million was down $73 million or 13% compared to a year ago as the prior year benefited from favorable tax adjustments, contributing to an effective tax rate of 12% last year. This quarter, our results included unfavorable tax adjustments that contributed to a tax rate of 30%, which was higher than the full-year tax rate of 28%. Looking ahead to 2017, we expect our tax rate in capital markets to be in the 27%-29% range. Pre-tax earnings were up 10% in the current quarter and results were solid, reflecting higher revenue in both our corporate and investment banking and global markets businesses. In corporate and investment banking, we experienced strong debt and equity origination revenue driven by increased client activity and increased loan syndication, particularly in the U.S., in advance of the potential U.S. rate hike in December. In global markets, fixed income trading revenue strengthened across all regions, and we had higher equity trading revenue in Europe. This was partially offset by lower equity trading in Canada. Sequentially, earnings were down $153 million or 24%. Fixed income and equity trading results were lower compared to robust levels last quarter. These factors were partially offset by higher loan syndication revenue, largely in the U.S. In 2016, our compensation ratio for capital markets was 34.9%, down from 37.2% last year. A primary driver of this variance was related to a change in the bonus deferral policy that aligns us with industry practices. As a result of this change, the compensation ratio will continue to be impacted in 2017 and 2018, but to a lesser extent than in the current year. Before I turn the call over to Mark, it has been a privilege to work with such a talented team here at RBC, and I truly value the connections I've made with our investors and analysts over the year. With that, I'll turn it over to Mark. Thank you, Janice, and good morning. Turning to slide 15, total provisions for credit losses of CAD 358 million were up CAD 40 million or 13% from last quarter, and our PCL ratio of 27 basis points increased three basis points quarter-over-quarter. We believe these results reflect the strength of our diversified portfolio and benefited from low interest rates, stable employment trends, an improved backdrop for the oil and gas sector, and prudent risk management. Let me discuss the performance of each segment on slide 16. In personal and commercial banking, provisions of CAD 288 million increased by CAD 17 million from last quarter. Canadian banking provisions of CAD 276 million increased by CAD 11 million from last quarter, largely in our retail portfolios. Caribbean and U.S. banking provisions were up CAD 6 million from last quarter due to the impact of Hurricane Matthew. Wealth management provisions of CAD 22 million increased by CAD 8 million from last quarter, mainly reflecting higher provisions at City National due to normal loan growth and a single account in international wealth. Capital markets provisions of CAD 51 million increased by CAD 18 million from last quarter, largely reflecting higher provisions in the oil and gas sector. Turning to slide 17, gross impaired loans of CAD 3.9 billion were up CAD 187 million or 5% from last quarter. Our gross impaired loan ratio of 73 basis points was up three basis points from the prior quarter. In Canadian banking, the reduction in formations was due to a number of commercial accounts returning to performing status. This was offset by higher formations in Caribbean banking due to Hurricane Matthew. In wealth management, we had an increase in formations in City National's technology portfolio, largely offset by a reduction in credit-impaired loans acquired by City National after the financial crisis. In capital markets, we had higher impairments, largely related to a few U.K. and U.S. oil and gas accounts and one consumer goods account. Let me elaborate on our oil and gas portfolio on slide 18. Our drawn exposure to the oil and gas sector of CAD 6.3 billion, or 1.2% of RBC's drawn loan book, decreased by 11% from last quarter, driven by higher repayments from exploration and production companies as they benefited from improved performances, improved balance sheets, and increased M&A activity driven by higher oil prices. We are approximately 40% through our fall redetermination, and so far we are seeing that borrowing bases in both Canada and the United States are largely flat from their spring levels. At current oil prices, our portfolio has performed as we expected. While the increase in oil prices has provided some relief to certain of our clients, the price remains well below 2014 levels, which continues to challenge the profitability of the sector and its ability to reinvest for future growth. We are monitoring this portfolio closely. Outside of our direct oil and gas portfolio exposure, our commercial portfolio in Alberta continues to demonstrate resiliency. Let's now turn to our Canadian retail exposure on slide 19. We had an increase in provisions in a few of our retail portfolios this quarter, which was partially offset by lower write-offs in our cards portfolio. The higher PCL is due to an increase in the allowance in our residential mortgage and personal lending portfolios following our review of loss rate assumptions applied to collectively assessed impaired loans, which we conduct annually. Normally, we make these changes in Q1, but since our retail review was completed, we elected to apply them this quarter. Next quarter, we will be reviewing our wholesale parameters. This year's change for our residential mortgage portfolio primarily reflects the termination of valuation allowance provided by a third party. It is a one-time change and does not reflect any change in the underlying credit risk of our portfolio. Nationally, our mortgage delinquencies are flat quarter-over-quarter, but we did note a modest deterioration in our personal lending and residential mortgage portfolios in oil and gas-exposed regions. Delinquencies for our cards and auto portfolios declined even in oil-exposed regions as they benefited from stable unemployment rates both nationally and in Alberta and a strong employment rate in Ontario. Turning to slide 20. Overall, we remain comfortable with the risk profile of our residential mortgage portfolio. Our clients' credit profiles remain strong, with low LTVs and high FICO scores. Many clients are also committed to increased down payments, fixed mortgage rates, and accelerated repayment plans, reinforcing our confidence in our clients' ability to repay. Our impaired rates remain low, especially in Greater Toronto and Vancouver. However, given the elevated house prices in both Greater Toronto and Vancouver areas, as well as the recent announcements by the Department of Finance, we continue to actively monitor this portfolio. Overall, I'm pleased with our credit performance this year, with total annual PCL of 29 basis points, which is slightly below our historical range of 30 to 35 basis points. Looking ahead, the outlook for PCL relative to our historical range remains contingent on both the duration and level of macroeconomic drivers such as interest rates, unemployment, and commodity prices. Also, as I've mentioned in the past, both loan loss provisions and recoveries within our wholesale book could show some degree of variability, which in turn may drive our total PCL to fall outside of our historical range from quarter to quarter. Turning to market risk on slide 21, average VaR of $25 million decreased by $10 million from last quarter due to inventory reductions in fixed income and securitized product portfolios. We had one day of trading loss this quarter, largely driven by market conditions that negatively impacted trading activity across major business lines. With that, we will open the lines for Q&A. Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press 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 a brief pause while participants register for questions. We thank you for your patience. Our first question is from Robert Sedran from CIBC. Please go ahead. Hi. Good morning. When I look at the full-year adjusted operating leverage at the all-bank level in the sub-packets, it has been negative for each of the last three years. Does that reflect a bank that is at, I guess, peak efficiency, considering all the different areas in which you need to invest? Or should we expect to see that flip into positive operating leverage in the next couple of years? Hi, Robert. Janice speaking. I would say that one of the functions of mix weighs heavily on the operating leverage. I would say that if you look at our all-bank operating leverage and look at, for example, NIE, there are things like restructuring charges that are embedded in that NIE run rate. Also the revenue variability, depending on where we are earning revenue, if it is capital market sensitive, of course, those particular revenues have a higher cost in terms of compensation or commissions associated with them, so they impact our run rate. I would say at the all-bank level, we are striving for 1%-2% operating leverage, but it depends on mix. What is more relevant for us from an operating leverage perspective is to look at our banking platforms and efficiency ratios as well as operating leverage at that level. I think if you want to do a comparison year-over-year, you should look at our annual run rate of expenses because I think it demonstrates how we are managing our expenses and spend vis-à-vis the large investment we are making in technology. You would have seen that if you look at the run rate on NIE excluding City National's impact, we are down year-over-year. I think that year-over-year is a good metric because it eliminates some of the seasonality that happens. I would start with that. Okay. When you think about the banking outlook then, Janice, and maybe I am asking you to put your successor on the spot, but when you think about the coming years, even there, the efficiency ratio is at the low end of the group, is there room to still take the banking efficiency ratio lower? Yeah. I think Jennifer will answer that, Rob. Hi, Rob. I will take that. We continue to target a low 40s efficiency ratio, and as Dave mentioned, this year we are at a historic low. We continue to reduce expenses across the board, both with changes we are making in our infrastructure in terms of technology spend on the back office. In fact, we have reduced our FTE base by 1,100 in 2016, mostly through attrition. We continue to have opportunity in that area, as well as continuing to look at our branch network and gain efficiencies on the service side as we spend on digital technology to enhance the client experience. But we are investing through all that in our sales capacity, as well as increasing our spend on technology. I think our guidance on operating leverage for 2017 continues to be in the 1%-2% range, and in fact, I would say at the higher end of that range, just as we finished up this year as well. Okay. Thank you. And Janice, thanks for the help and candor over the years, and good luck. Thanks, Rob. Thank you. Our following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead. Hi. Good morning, and also Janice, my congratulations on your change and good luck in the future. My first question's on the mortgage business, and you said, Mark, that you're reviewing that portfolio for obvious reasons. We've seen some of the numbers coming out of B.C., volumes down, prices down, and then we see the trend in your mortgage book in Alberta. We're nearing no growth, might hit negative growth at some point. At what point do we start to wonder about the indirect impact of the mortgage business, similar to what we were doing with oil earlier in the year where you got the job losses tied to the construction sector instead of the oil and gas business? The quality question? Yeah. I'm sorry, I'm not- Gabriel, it's Dave. Are you talking about the GDP impact from slower housing? Pretty much, yeah. On the quality? Well, if you look at it, I think housing starts are off just a bit, but housing starts are, I think, annualized in the what, 170,000 to 180,000 range. So you're seeing purchase activity down in Vancouver. You're not seeing a lot of purchase activity change in GTA, that's for sure. So there's definitely policy impacts that you're seeing in Vancouver from the taxes and from the Department of Finance changes. They'll have to work their way through the system. So I would separate, the markets are different. There are certainly demand formation that's continuing in core markets in Canada, whether it's household formation or immigration into the city continue to have demand formation. There continues to be supply constraints in a number of key markets, particularly the GTA, which is giving price support and price inflation, which you're not seeing as demand starts to fall off in Vancouver. Some of that is actually shifting into the GTA. So you're seeing healthy demand creation. You're still seeing relatively healthy housing starts. You're seeing good capacity uptake. So there will be a moderation, I think, in supply, and therefore there will be somewhat of a moderation on the impact in GDP going forward. I think you should expect that, but I think it's going to be gradual and won't be a shock to the system. Just wondering, when Mark was talking about the review of that book, what areas of concern you're looking at in particular? No, it wasn't a concern that we do the review. Okay. We do this particular review of loss rates annually for both the retail and the wholesale books. We normally do them in Q1. That sort of then allows us to take the prior year's performance into account to add it to our historical performance. With the retail book, we actually had the results finished in this quarter, and so we brought them forward and took them in Q4. The primary change, as I mentioned in my remarks, is a one-time change that is related to a valuation allowance program we had with a third party, which has been terminated. We do not expect that change to go forward, and we expect to revert back to the PCL performance for the residential mortgage book that we would've had in prior quarters. Okay. Thanks. My next question's for Doug. In the trading performance discussion, looks like 3 out of the 4 main regions indicated that equities trading was down, and I see it in the numbers as well. Equities trading was pretty weak. Can you give me a sense of what was going on there? Is it my kind of business or some of the more esoteric stuff, and if any of that's reversed in Q1 or if there's any other tailwinds that have emerged in Q1 in the wake of the U.S. election? Yeah. The cash equities business in particular is quite influenced by new issue activity, and new issue activity has been pretty slow really throughout the year. There was actually a month last quarter where we did not book run a deal in Canada, which has not happened, I think, for many years. So we saw a significant slowdown on new issue activity, and the clients just prior to the election, I think, were stopped repositioning, if you will. So those businesses were weak quarter-over-quarter and year-over-year. We have seen a significant impact on new issue activity and trading as people are now repositioning after the election. Yeah, it is better now, and hopefully that will sustain itself. You mean quite a bit better, or do you feel maybe it is shaping up to be a good quarter for trading? Yeah. Look, I would say there is a number of things going on in terms of the business, and one of them is that we have gone through a period of significant weakness in energy. We went through a period of not terrific credit markets, and so it was hard to issue leverage finance and high yield. These are all big businesses for us. So now, through November, we have been doing a lot more business in the loan syndication business, especially in the U.S. You have seen some large energy infrastructure deals clear Canada over the course of this week and earlier in the month. So yeah, activity is up, and those are really very big businesses for us that have seen much better markets. Okay. Thank you. Thank you. Our following question is from John Aiken from Barclays. Please go ahead. Good morning. I am trying to square some of the commentary about City National versus the disclosure that you had in terms of USD revenues and AUA in the wealth management segment. If the contribution from City National was up strongly sequentially on a sequential quarter basis, yet we actually had a decline in AUA and essentially flat revenues. Does this mean that we are getting incremental efficiency out of City National, or was the U.S. business and wealth management outside of City National facing some headwinds in the quarter? I can start with that. When we look back, one of our businesses, Convergent, we sold. You would have seen, I think, a decline in AUA from that largely, but all other kind of core volume drivers in the business are very strong with loans up in double digits, with deposits up double digits. AUM is strong, but the AUA would have been our ultra-high net worth family office that we sold over the quarter. Great. Very small operation, but it neutralized any type of growth. No, thank you very much. Then carrying on with wealth management, the rising PCLs that we are seeing coming through this, is this a seasoning of the portfolio, and should we expect this to carry on for a little while? I mean, essentially, what are the expectations that we are going to see for provisions going forward? You are relating to City National, is that your question, John? Yes. Yep. Yeah. Basically, as you know, when we acquired City National, we used the purchase price accounting. As we now are growing the business, we are essentially rebuilding the reserves that we have, and as loan growth grows we take incremental reserves on PCL. So it is not really a credit quality aspect. It is a growth aspect. Typical of every U.S. bank. Typical of every U.S. bank operation. Great. Right. You can see that, John, through the purchase accounting adjustments. You will see that. They are all related to City National loans. Great. Thank you very much. Thank you. Our following question is from Steve Theriault from Dundee Capital Markets. Please go ahead. Thanks very much. A couple questions, one on rates, but starting with Capital Markets. It has been highlighted in some past quarters the strength and positive trajectory in Europe, but with a sequential decline after a very strong Q3 on the back of Brexit tailwinds. Can you talk a bit about your outlook for the European component of Capital Markets now that Brexit tailwinds have passed? Do you still view this as an area of potential strength looking out over the next year or 2, or has Brexit or European turbulence generally amended your expectations at all? Yeah. I was over there week before last, and spent several days with all the people that run the businesses over there. I would say the big improvement has really been in our fixed income business in Europe, and just new leadership, and it is just better people doing the right things. They are doing reasonably well as we start the quarter. I expect that they will continue to improve that business, and they certainly have plans to. In the equity or in the investment banking business, the numbers have been improving year-over-year. They are starting off with reasonably decent backlog of business. I expect that will be okay. I would say that Europe is more difficult than, say, the U.S. in terms of margins and growth rates of the European economies. I think we have more leverage, certainly, in the U.S. right now. It is a much bigger business, the U.S. versus Europe. Overall, I would say that we are just better in Europe than we were, and we expect we will continue to get better. Do you think if you think of your plan over the next couple of years, I think Europe's been running about maybe 15%, 14%, 15% of revenue. Would you expect that to change? No. I think really what we're focused on is sustaining our leadership in Canada, doing all the business we can do in Canada. But we do expect the growth opportunity and the margin opportunity is to continue to grow our business in the U.S. Okay. That'll be the focus. So it would be difficult for Europe to take a significantly bigger share of our business over the coming couple of years, especially given what's going on in the U.S. right now. Okay, that's helpful. My second question, probably for Janice. Janice, I think it was last quarter you talked about de-risking and shortening duration in your funding and liquidity portfolio. So I'm wondering how you were positioned rates-wise into the U.S. election. Should we expect to see a noticeable lift in Treasury revenue or margin in Q1 if the curve steepening holds? No, I would say, Steve, that we were positioned the same way for the election that we had positioned for Brexit. We took maturities longer, and we always plan for the worst but hope for the best. The actual last quarter, part of the de-risking and part of the reduction in our LCR had to do with the fact that we had a buffer that we thought was too large vis-a-vis what we needed. That was more of a one-time step down, and you'll see us running buffers around where we are today, where we reported. So maturities being longer, does that help you with a steepening curve? Will we see that at all through the revenue line next quarter? No, I think that what you'll see is more of a neutral position because the longer maturities were in response to the two significant events, and we would've gone on to a normal run rate at this point. Although you can't tell what's happening with credit spreads and market volatility. I would say that's the caveat. Okay. Thank you. Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead. Mr. Young, your line is open. You may proceed with your question. Thank you. Sorry. Just on the ROE target, medium-term target reduction to 16% from 18% plus. I believe, Dave, maybe you said, and correct me if I'm wrong, that part of that reduction is a result of potentially more cumbersome regulatory capital rules. If that's the case, you can elaborate a little bit about that. If you can give any further updates, maybe on the changes that potentially could come from Basel. Thank you. I think what drove this is as we, a year into our acquisition with City National, we had significant rate uncertainty leading up to the close and in the past year or so. Our expectation on rates and rate outcomes have the largest impact on our ROEs as far as tailwinds go and earnings lift. That continued uncertainty of that trajectory in the U.S. and in Canada, I think, weighs heaviest on our decision to move it down, in addition to the expected mix. I think tertiary to that is as we await the decision, I think they're meeting this week, the FSB and the regulators to go through trading book final treatment any capital floors that may come out. We have enormous flexibility with a 10.8% CET1 ratio. We're running at the high end of where we thought we'd be. We've got flexibility there. I don't think there's anything specific, honestly, Doug, that I can articulate right now. It's just we have enormous-- We're carrying a little bit more capital for the uncertainty of all of those aspects, and we're reducing our expectations of ROE given that uncertainty going forward. But our goal, our strong goal is to continue to drive a premium top decile ROE growth. We expect to grow back to that 18% plus, but it's going to take a little bit longer to do that with the capital and interest rate environment. What was the big change last quarter to this quarter that made you move? Because rates, I guess, have moved up a little bit, obviously, and the outlook looks a little bit more optimistic. The delta last quarter to this quarter, is it just it's not moving up as much as you anticipated? Just wondering if there's something else I'm missing. No, it's an annual process we go through to reaffirm our medium-term objectives. We wouldn't have made the change in Q2, Q3, or Q1 even. As we go through that with our board and we sit down and talk about our expectations going forward, we do that each year. So we would not have made that change anywhere else than at Q4 heading into a new fiscal year-end expectation. Okay. Then just secondly, in Capital Markets, it just looked like net interest income was down and was off relative to what we were looking for. I'm just wondering, on the corporate banking side, because I didn't see a significant change in loan balances that would account for that. Is there a reduction in fees, or just wanted to see if there's additional color you could provide? Yeah. Throughout the year, there was. At the start of the year, in particular, there was an increase in funding costs of that book that obviously gets netted off and some decrease in margins. We've seen some relief in terms of the funding cost issue in the latter part of the year, and the balances in that business were pretty stable during the course of the year. We expect, and given the business activity that we're seeing right now, we expect to grow the balances of that book this year, but it'll be in the sort of low to mid-single digits. Would you expect further margin pressure? Has that been the biggest impact? I see margin stabilizing over the course of the last several months. A lot of the growth in that book, or most of the growth in that book is in the U.S., and we have seen some stabilization there, so I'm hopeful that will continue. Okay. Thank you. Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead. Good morning. A couple of my questions are related to questions that have already been asked. Dave, the extent to which a close call on being labeled a G-SIFI, did that inform your decision to reduce the ROE guidance at all? No, because I think as we've talked about before, as a D-SIFI within Canada and where we look at where level 1 G-SIFIs are, we've always kind of maintained in our commentary that we do not expect it's a major capital issue for us. There are obviously costs of compliance, and there's resolution planning requirements that would change. But we never felt that in our dialogue with our regulator, that where we're capitalized and where level 1 G-SIFIs are capitalized, that was going to be a capital issue. No, that didn't factor into our expectation going forward. We- Again, it's a medium-term objective, and we revise that every year. But we're really trying to look forward and anticipate the rate environment and where growth's going to occur and where the returns are for that growth for all industry players. Our view is that over the next three-plus years, it's going to take us a little longer to get back to where we thought we'd be when we entered into the year about 18 months ago. Okay. When you refer to regulatory uncertainty, you're not suggesting uncertainty associated with being labeled a G-SIFI or not then. You're referring to all the other factors that could play out in 2017. Exactly. Correct. Okay. A slightly different question related to Royal's mortgage mix. Can you speak to any observed changes in fixed rate mortgage margins? If you could discuss that in the context of the recent move in the five-year, the government of Canada five-year bond yield. Yes, certainly, I think I'm going to hand it to Jennifer. We're seeing margin compression in our rollover of our fixed rate mortgages as we're seeing lower spreads in the environment that we're competing in. But Jennifer, do you want to comment on your margins and the decision to change your fixed rate pricing? We've seen continuing pressure on our margins. As you saw on November 16, we revised our variable and fixed rate mortgage pricing. We consider a number of factors when we're making changes to mortgage rates, including funding costs and market conditions. I think that we're comfortable for the moment that we review on a daily basis our rates to make sure we continue to grow our business and meet client expectations. The prices changes are only on newly originated loans. I think as opposed to the much larger existing portfolio or on renewals, we don't anticipate an uplift in NIM in the near term. But we did want to address some of the pressure that was in the rate environment. Despite the changes in mortgage rates you've seen, Jennifer, you would not guide us to any improvement in NIM in the near term then? Not in the near term, no. Okay. Any update on wholesale funding costs? This is just more generally for the bank. Are you seeing anything there? Sorry in the context of higher rates. In our wholesale funding of our- Yes. Wholesale funding costs, just generally for the bank. On a five-year spreads or? I'll answer that, Mario. We haven't seen any significant movement, and you know that when we do our funding, we try to fund in advance in all durations and periods. We try to fund tightly. We try to minimize any of those types of spread impacts. But we haven't seen anything significant. I would say, Janice, one of the other things we've done this year, we did earlier in the year and throughout the year is extended term when we saw quite a flat yield curve in that wholesale book. I think that will benefit us going forward in terms of the certainty and the cost of funding. Okay. Thank you. And Janice, congratulations on having a great career. Thanks, Mario. Thank you. Our following question is from Peter Routledge from National Bank Financial. Please go ahead. Hi, Dave. I guess a question for you just on the ROE target change. Certainly, City National probably put a little bit of downward pressure on the bank's ROE. So in your opening comments, you seem to identify other future acquisitions is something you might look at. So, to what extent will you limit the bank's acquisitions to only those that are ROE-accretive or not materially dilutive? I don't think our strategy's changed in how we're going to deploy our capital. We've got enormous flexibility with a 10.8% CET1 ratio. We see significant organic growth potential. Our capital, first and foremost, is going to be deployed organically across all our businesses. And one of the themes that really we want to make sure comes out is that we feel we're exiting the year with enormous kind of organic momentum across all our businesses. Doug referenced the momentum that we've got in our Capital Markets business after a bit of a slow, choppy Q4. We've exited the year across our investment banking business, our lending businesses, and our trading business in better shape. Doug Guzman referenced the significant momentum we have on the flow side in our Asset Management business and in our wealth franchise. If you look at Jennifer's numbers as we exit Q4 with strong momentum now across almost all our product categories, from mortgages to business deposits to better business loan performance. You've got I&TS and insurance. So we've got significant momentum across all those businesses that we feel really good about, and continuing that momentum will consume some of that organic capital going forward. So I think we feel good about that. We continue to look for opportunities to return capital to shareholders as a core tool we'll have. And then, my view on inorganic growth remains the same. We will look for selective small tuck-in opportunities to grow City National in the U.S. If it makes sense, we're looking for a wider range of synergies that's more accretive to the shareholder and will not be as dilutive as the City National move. Now, valuations in the U.S. are quite unattractive right now with a run-up in banks. That will obviously play to our mind despite our own strong currency. The answer to your question is yes, we are being very prudent, and we will look to drive strong shareholder returns. With the strong organic momentum we have and organic growth opportunities, that's our priority. All right. You answered my question. No follow-up. Janice, thanks for everything. Great working with you. Great. Thanks, Peter. Operator, we'll take one more question before handing it back to Dave for final remarks. Thank you. Our last question is from Meny Grauman from Cormark Securities. Please go ahead. Hi, good morning. Dave, in your opening remarks, you talked about some of the impacts of mortgage rule changes, and you mentioned that you see opportunity in some segments of the mortgage market. I was wondering if you could just elaborate on that comment specifically. Yes. In the absence of any monetary tightening in Canada, we welcome the rule changes. We want a sustainable long-term mortgage market in Canada. It matches with our sustainable long-term growth strategy within the organization. In the absence of any monetary tightening, we need the policy changes that we're seeing to slow down some very hot markets out there. We continue to grow our sales force to continue to target premium clients. We've had enormous success with newcomers and first-time homebuyers. We continue to rely on a proprietary channel so we can control the credit risk of those incoming into the bank. I think we feel good about our business model. We feel good about our scale and the growth and our investment in that business. We feel good about the credit. We've taken on a little bit more insurance. I think as you look at how we've invested prudently in that business, where we're positioned for growth geographically, we feel good about the business going forward. We had very strong results in 2016 with 7%+ growth. We had market share gain, the quality of our book is strong. Mark articulated in the one-time change that we went through in Q4 due to valuation allowance changes, but we continue to expect that portfolio to perform strongly. We got 47% insurance on the portfolio now. We feel good about how we've grown and our ability to continue to grow it. Just as a follow-up on that, would you say that the rule changes benefit you, maybe at the expense of some of the smaller players? Would you say that there is an element of that going on, or what's your view on that? It's hard to say. Certainly, there are smaller players in the market whose funding model will be impacted, and you should expect to see some channel shifts. We would hope to be the beneficiary of that with our expanded sales force. How that plays out, it's hard to predict, but certainly there are more challenges to some of the smaller players in the market who've relied on traditional funding models. Thanks for that, and best wishes, Janice. Thank you. I would now like to turn the meeting back over to Mr. Mun. Maybe I'll take it. Thanks everyone for your questions this morning and your participation. We look forward to seeing you again in another three months. Thank you. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.