Earnings Call: Q3 2014

Aug 22, 2014

Good morning, ladies and gentlemen. Welcome to the RBC 2014 third quarter results webcast call. I would now like to turn the meeting over to Amy Cairncross. Please go ahead. Good morning, and thank you for joining us. Presenting to you this morning are Dave McKay, President and Chief Executive Officer, Mark Hughes, Chief Risk Officer, and Janice Fukakusa, Chief Administrative Officer and CFO. Following their comments, we will open the call for questions from analysts. The call will be approximately one hour long and will end at 9:00 A.M. To give everyone a chance to participate, please keep it to one question and then re-queue. We will be posting management's remarks on our website shortly after the call. Joining us on the call are George Lewis, Group Head, Wealth Management and Insurance; Doug McGregor, Group Head, Capital Markets and Investor and Treasury Services; Jennifer Tory, Group Head, Personal and Commercial Banking; Zabeen Hirji, Chief Human Resources Officer; and Bruce Ross, Group Head, Technology and Operations. 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. We will now turn the call over to Dave McKay. Thanks, Amy, and good morning, everyone. RBC had a record third quarter with earnings of over $2.3 billion, which after you exclude the loss related to the closing of RBC Jamaica this quarter and a tax item in the prior year, were up 10% from last year and 10% from last quarter. We reported record earnings in Canadian banking, capital markets, wealth management and insurance, and had a solid quarter in investment and treasury services. Our results reflect strong revenue growth, solid credit quality, and positive operating leverage across most businesses. We maintained our strong capital position with a common equity Tier 1 ratio of 9.5%, and I am pleased to report that this morning we announced a four cent or 6% increase to our dividend, bringing our quarterly dividend to $0.75 a share. On a year-to-date basis, RBC has generated over CAD 6.6 billion with a return on equity above 19%, and we remain on track to meet or exceed our performance objectives. These results truly demonstrate the strength and agility of RBC's market-leading franchise as our diversified business model can capture growth by adapting to the changing needs of our clients and also adapt to different market conditions. Our results also reflect our focus on clients and our proven ability to manage costs and capital effectively. As another testament to the strength of our businesses, RBC was recently awarded Global Retail Bank of the Year by Retail Banker International, and I am very proud of this tremendous achievement. Let me now make a few comments on our businesses. Our Canadian banking business had a record quarter reflecting solid volume growth of 4% over last year, a relatively stable credit environment, and strong growth in fee-based revenue. In fact, it was our eighth consecutive period of double-digit growth in mutual fund revenue. A key driver of our success in fund sales is the strength of our multi-channel distribution network, which includes our in-branch financial planners and our mobile investment retirement planners. It also includes RBC Direct Investing, our online investment channel, where we had double-digit growth in new accounts this quarter, due in part to our new campaign, which is targeted to the next generation. In recent years, we've been strengthening our capabilities, including investing in our channel strategy to position RBC for changes in technology as well as shifts in client needs. For example, from borrowing to savings and investment. Our performance this quarter reinforces the strength of our approach. I'm also pleased with the continued momentum we have in our deposit businesses, where we had 10% growth in core checking balances over last year. Our clients often begin their relationship with RBC by opening a checking account, and over time, we aim to deepen and extend that relationship by offering our full suite of products. Additionally, these deposits help support our margins and increase our leverage to a higher rate environment. On the business side, the rate of loan growth improved over last quarter. We are gaining market share and are encouraged by some early signs of increased activity across a range of industries. While competition for new business remains tough and we're being selective in the deals we pursue, we continue to differentiate and strengthen our offerings. For example, we were the first financial institution in Canada to offer a mobile app for business owners on all major platforms. Our July launch was successful with over 1,000 subscribers in the first 30 days as clients take advantage of having digital access to real-time information and being able to conduct business quickly and conveniently. This new app is a great example of how we are investing for the future in areas like technology and product innovation. At the same time, we remain focused on managing investment spend in order to continue delivering positive operating leverage. Turning to the Caribbean, we closed the sale of our RBC Jamaica banking operations in June. We remain committed to our core markets and continue to make progress in our restructuring efforts, notwithstanding a very challenging credit environment. Turning to wealth management, we had record earnings up over 20% from last year, reflecting higher average fee-based client assets across all businesses. These results are largely a testament to the continued momentum in several businesses, including global asset management. This quarter, we continued to lead competitors in retail asset growth. Driven in part by the strength of our Canadian banking network referenced earlier, as well as by RBC Wealth Management and external channels, allowing us to capture 16% of the market's fund sales. On the institutional side, we continue to have positive fund flows in both the North American and European markets, with strong growth in our BlueBay business. RBC Global Asset Management is among the fastest-growing asset managers in the world, and we are continuing to invest in the business to drive long-term growth. Turning to our Canadian wealth management business, we continue to extend our number one position in the high net worth market by collaborating across RBC to deepen client relationships. For example, we are leveraging RBC's strong commercial banking franchise and our market-leading private bank to deliver tailored products and services, including providing advice on business succession planning and generational wealth transfers. In our U.S. and international wealth management businesses, we continue to focus on building deep client relationships, driving advisor productivity, and strengthening our overall competitive position for the long term. Moving to insurance, we had a record quarter, reflecting favorable actuarial reserve adjustments and improved claims experience. Insurance is a good business for us, which complements RBC's overall product offerings, and through increased collaboration across our businesses, we have been able to achieve growth in creditor insurance that exceeds underlying lending volumes. Turning to investor and treasury services, we had a solid quarter. We remain diligent in identifying opportunities to optimize efficiencies across the business and driving top-line growth by focusing on new mandates and deepening existing client relationships. For example, this quarter, we renewed a multi-year contract with a long-standing global financial institution client to manage their shareholder services in Luxembourg. Capital markets had an exceptional quarter, with record earnings of approximately CAD 640 million, which greatly exceeded our expectations. These results reflect the success of our strategy to focus on traditional client-driven corporate and investment banking and origination activities. It also reflects our ability to strengthen client relationships by providing ancillary products and services. As a testament to the progress we've made in extending our global capabilities and the success we've had achieving building a client-focused franchise, capital markets was recently named the most trusted investment bank in the world by The Economist and was ranked second globally in terms of expertise and skills. Overall, we saw very strong results this quarter across almost all our businesses, and we benefited from robust equity and debt markets, as well as favorable credit trends. Our trading businesses performed exceptionally well, reflecting our focus on origination activities, which have nearly doubled over the past two years, driving a significant lift in secondary trading. We also had a couple of outsized trades this quarter, which contributed to the results. It's worth highlighting that our strong trading results also reflect our business mix. We are more heavily weighted towards fixed-income credit, equity, and municipal businesses, all of which benefited from improved market conditions. We also have relatively less exposure to the interest rate in foreign currency trading businesses, which have been most affected by macroeconomic conditions, as we have seen in the reporting of some of our U.S. peers. Overall, it was an outstanding quarter for Capital Markets. Clearly, the segment benefited from a number of factors which are likely to be repeated to the same degree. But the success of the repositioning of the business in recent years is undeniable, and I remain confident in their long-term strategy. To conclude, I am very pleased with the quarter. Our record results reflect the strength of our diversified business model and our leading market position. Our ability to drive efficiencies and manage capital effectively positions us well to execute our client-focused strategy and to continue to invest in our business to deliver long-term sustainable growth. With that, I'll turn it over to Mark Hughes. Thanks, Dave. Good morning, everyone. Turning to slide seven, our overall credit quality remained strong this quarter. Our credit trends are near historic lows, reflecting a supportive economic backdrop in Canada and our strong risk management practices. The North American economic environment continues to rebound from a weather-related slowdown in the first quarter, and while there are still some economic challenges in Europe, conditions have improved somewhat compared to last year. Provisions for credit losses on impaired loans this quarter were CAD 283 million, or 26 basis points, up CAD 39 million or three basis points from last quarter. The increase was mainly driven by higher provisions in Caribbean and Canadian banking, partially offset by lower provisions in Capital Markets. Let's look at our credit performance in a little bit more detail. Provisions in Canadian banking were CAD 230 million, or 26 basis points, up CAD 26 million or one basis point from last quarter, driven by higher provisions in the commercial loan book and our personal loans portfolio. Within our commercial portfolio, we had a few small provisions that were uncorrelated, and while we would expect to see some variability from quarter to quarter, we remain comfortable with the portfolio's overall credit quality. In Caribbean banking, provisions on impaired loans were CAD 54 million, up CAD 27 million from the previous quarter. Largely related to higher provisions in our commercial and retail portfolios, reflecting the ongoing challenging economic environment in the region. With respect to Capital Markets, this quarter, we had provisions of CAD 1 million compared to CAD 13 million in the prior quarter, and the loan book continues to perform well. Turning to slide eight, which focuses specifically on our Canadian banking retail portfolio. Our credit card provisions remained near historical lows at 246 basis points, down 23 basis points sequentially, largely due to seasonal trends that impacted the second quarter. Our Canadian residential mortgage portfolio, which makes up 64% of our retail portfolio, continues to perform well with provisions this quarter of one basis point. This continues to be consistent with our historical performance. As you can see on slide 9, our mortgage portfolio is well diversified across Canada. We continue to actively monitor our loan portfolios for early warning signs of credit deterioration and perform ongoing stress testing for numerous scenarios, including increases in unemployment and interest rates, and a downturn in the real estate market. At this time, we are very comfortable with our stress test results. We do not see signs of deterioration, and the overall credit quality of our retail portfolios remains strong. Turning to market risk, in the third quarter, average market risk VaR, value at risk, was $26 million, down $10 million, or 28%, compared to last quarter, as the data used to calculate our value at risk has been rolled forward and the related market volatility of spring 2012 that resulted from European sovereign debt concerns are no longer included in the data set. The decrease in value at risk was also driven by lower equity risks and the adoption of IFRS 9 last quarter, whereby changes in our fair value on our liabilities are now recognized in other comprehensive income instead of through the income statement. Our third quarter average market risk stress VaR was $87 million, down $16 million, or 16%, from last quarter. There was one day of net trading losses this quarter, and we had one day of sizable net gains, primarily related to the sale of a legacy asset. With that, I will turn the presentation over to Janice. Thanks, Mark, and good morning. As Dave mentioned, we had record results this quarter with earnings of over $2.3 billion, up $93 million, or 4%, from the prior year, and up $177 million, or 8%, from the prior quarter. Overall, we had a clean quarter with only one item of note, which was the previously announced loss of $40 million related to the sale of RBC Jamaica, which closed in June. Excluding that item and the $90 million favorable tax adjustment we recorded last year, net income was over $2.4 billion, up 10% from last year and 10% from last quarter. Our results were driven by record earnings across a number of our businesses. Turning to capital on slide 12, our common equity Tier 1 ratio was 9.5%, down 20 basis points from last quarter, as higher risk-weighted assets more than offset strong internal capital generation. The increase in RWA was driven primarily by an update to the risk parameters in our corporate and business lending portfolios, resulting from the model review that I noted last quarter. The increase also reflects business growth. The parameter updates this quarter were largely reflected in revised loss-given default rates, and they were predominantly in the commercial portfolio in Canadian banking and, to a lesser extent, in the loan book and capital markets. Excluding these updates, the segment mix of our RWA is largely unchanged from the last quarter. Let me now turn to the quarterly performance of our business segments, starting on slide 13. Our personal and commercial banking segment earned over CAD 1.1 billion, down CAD 29 million or 2% from last year on a reported basis. Canadian banking reported record earnings of over CAD 1.1 billion, up CAD 34 million or 3% from last year, reflecting volume growth of 4% and strong growth in fee-based revenue, largely driven by higher mutual fund fees. This growth was partially offset by higher provision for credit losses, which Mark noted. Sequentially, Canadian banking earnings were up CAD 75 million or 7%, primarily due to additional days in the current quarter, volume growth across most businesses, and higher mutual fund fees. Our net interest margin in Canadian banking was relatively stable at 2.73%, down four basis points over last year, or up one basis point on an adjusted basis and down one basis point sequentially. Our overall favorable funding mix continues to be offset by competitive pressures and the low interest rate environment. We delivered positive operating leverage in Canadian banking of 2%. I would point out that our results last year were impacted by a few items related to the acquisition of Ally Canada, which impacted both the revenue and the expense line. Factoring in those items, our operating leverage is just over 1%, which is well within the target range for this business. Canadian banking continues to progress towards its target of driving an efficiency ratio in the low 40s, reporting 43.7% for the quarter, a 90 basis point improvement over last year. Turning to the Caribbean, we are making progress in our restructuring efforts. We have reduced costs, and we have seen improvements in top-line growth from our repricing initiatives. However, the operating environment remains challenging. Looking at wealth management on slide 14, we had record earnings of CAD 285 million, up CAD 52 million or 22% from last year. Reflecting higher average fee-based client assets across all businesses from capital appreciation and net sales. We also continued to generate positive operating leverage. Sequentially, net income was up CAD 7 million or 3%, mainly due to higher average fee-based client assets. Growth in AUM and AUA were up 18% and 14%, respectively, over last year. And pre-tax margins were just under 25%, an improvement of more than 200 basis points from last year. Moving to insurance on slide 15, record net income of CAD 214 million was up CAD 54 million or 34% from last year, and up CAD 60 million or 39% from last quarter. This increase was mainly due to favorable actuarial adjustments, reflecting management actions related to our efficiency management program and assumption changes. In addition, we benefited from lower net claims costs. Investor and treasury services earned CAD 110 million, up CAD 6 million or 6% from last year, reflecting higher funding and liquidity revenue and increased net interest income on growth in client deposits. Sequentially, net income was relatively flat. Turning to Capital Markets on slide 17. We had a very strong quarter with record earnings of CAD 641 million, up CAD 225 million or 66% over last year. Sequentially, net income was up CAD 134 million or 26%. Trading and origination activity improved compared to both prior periods, driven by strong equity and debt markets and increased activities from our client-focused strategies. We also saw higher loan syndication activity and growth in our loan book relative to last year and last quarter. If you recall, our results in the third quarter of last year were negatively impacted by challenging market conditions. This quarter, our trading business benefited from a couple of outsized trades, which added approximately CAD 100 million to revenue. To wrap up, we are very pleased with our performance this quarter. We have a diverse and strong portfolio of businesses, and we are confident that we remain well-positioned to continue delivering sustainable earnings growth. At this point, I will turn the call over to the operator to begin the Q&A portion of the call. Please limit yourself to one question and then queue so that everyone has an opportunity to participate. Operator? Thank you. Please press star one at this time for any questions. You can cancel your question at any time by pressing the pound sign. Our first question is from Steve Theriault. Mr. Theriault, your line is now open. Please state your company and proceed with your question. Thanks. Bank of America, Merrill Lynch. Jas, just a quick follow-up. I had a question for Dave on the buyback, but you mentioned tax. You did not get the positive impact from your usual tax review this Q3. Just wondering if that is timing or something else. What the tax relates to is that every year we are audited by CRA, and in the last two years, actually, those audits were completed in Q3. CRA has extended an audit period, and so we don't have the benefit of having a statute-barred year, and that's why we didn't make the adjustment. It is a bit of timing, but we can't really predict when they'll be done. Can you predict the direction? Do you expect it to be another positive number? Well, I can't really predict the direction because it's generally just the volume of audit work and a lot of the work CRA is doing. Okay, thanks. Dave, it's been a few consecutive quarters where you've been quiet on the buyback versus expectations, and I think at the outset of the program you'd be somewhat active. I guess the question is, would you link it back to the risk parameter review? Is it a changing in your or the regulators thinking on capital return? Do you need to be closer to a 10% quarter? I'm just interested on your thoughts going forward on buybacks. Thanks for the question, Steve. Maeve aligned the question broadly. When we look at our ability to deploy marginal capital, our first priority is to deploy that organically, and we still see good opportunity to deploy capital organically. Our second strategy, as you know, is to return capital to shareholders. As you've seen this quarter, we've increased our dividend by 4 cents, and we're very happy with that. That certainly fits within our overall strategy of returning capital to shareholders. Share buybacks obviously remain an important part of returning capital to shareholders, and we'll obviously consider that going forward. But those are certainly the top two strategies. The third one is to selectively make acquisitions that enhance our existing customer franchises. When we look at all three of those, I think we've demonstrated strongly first, and certainly the first two that we're acting on that, particularly with the dividend increase you saw today. Do you need to get capital higher in order to activate the buyback or not necessarily? It's hard to comment. We're managing our capital very closely, as you see, we've got our regulatory requirements, and as we look at organic growth and capital return to shareholders, we take all that into consideration. I think it's something that obviously management looks at very closely. Okay. Thanks very much. Thank you. Our next question is from John Aiken. Mr. Aiken, your line is now open. Please state your company and proceed with your question. Morning. I am with Barclays. I guess the reward for such an exceptionally strong capital markets quarter is going to be questions around the sustainability of this going forward. But in conjunction with that, Dave, I was hoping that you might be able to provide some insight as to the discussions that the board is having around the contribution of capital markets to the overall bank, particularly in light of the article that came out yesterday from The Wall Street Journal. Right. I am not surprised by that question. First let me say how exceptional the results are and how happy we are with the capital markets franchise and the core business growth. While there were some one-time trading items and some very strong markets for us, our overall franchise and our client-centric franchise has grown nicely, and the business is doing very well. As we think about our strategic guideline, as I like to think of it, of 25%, that we really believe fits into an overall diversified business model. We do look at the strength of our other businesses. In wealth management, you saw record results. You saw record results in Canadian banking. We look at our opportunities to grow in all our businesses, and we remain confident that we can continue to grow capital markets and still remain within our longer-term strategic guidelines. I think while we went slightly over this quarter with an exceptional quarter, we're just slightly over our long-term strategic guideline. I think all things being considered, we look forward and remain confident of being able to balance our diversified model. Dave, if I can paraphrase. The 25% is not really a hard line, and this isn't going to cause any drastic changes in strategy in the near term just because you've crossed that line. We've crossed the 25% periodically over the past year, so it's something that we've done before, but over the long term, we look forward, and we say, "Can we keep this in balance?" And we feel we can. I think it's not a cap. I think some people refer to it as a cap. A cap to me connotates drastic action, as you said. I think the business ebbs and flows, has seasonality to it, has strong quarters, has sometimes challenges in front of it. I think as we look at the ebbs and flows of the business, we feel confident we can maintain the balance of our business model. Great. Thanks for the color. Thank you. Our next question is from Sumit Malhotra. Mr. Malhotra, your line is now open. Please state your company firstly with your question. Thank you. Good morning. First point is just a clarification with Janice. So you had, as far as the RWA is concerned, you had the retail portfolio review during Q2 and then let's call it the business lending review during Q3. I know these things can be ongoing over time, but just wanted to get an update on where you think the RWA methodology for Royal is and whether there's any other reviews that you're contemplating at this time. Good question, Sumit, and I think we just finished off two fairly intensive reviews where we looked at all of our assumptions. We review all of our assumptions on an ongoing basis and at least annually. It's part of ordinary course. Some of the adjustments you've seen over the past two quarters are ordinary course adjustments. Some of them reflected more detailed assumptions reviews. Going forward, while we recognize that we constantly review the metrics, we're fairly comfortable with where we are with respect to RWA. But as you know, as we continue to grow our balance sheet, we'll continue to grow our RWA. That I fully acknowledge. Just when I think about the CET1 right now being below the year-end 2013 level, three quarters of the way into what's been a very strong year. From your seat right now, is there anything what I would call more than normal course in the business that you would contemplate on the RWA line, or are we now to the point where the refinements are not likely to be the driver in the interim? From our perspective, we think that as far as this fiscal year goes, the refinements that we have made are basically the major ones that we were working towards doing. With respect to our capital accumulation and deployment, we should be back to more business as usual in terms of our earnings growth, funding our dividends, and also getting some capital accretion. That is why Dave talked about our strategy around deployment being funding organic growth and then looking at rewarding the shareholder and then looking at longer-term growth in earnings as the three prongs of our strategy. All right. My actual question was for George Lewis in wealth. Looking at a couple of things on revenue, it looked like transaction revenue was down in the quarter, and the international and U.S. segment was down as well. I just wanted to ask you, when you think about operating leverage in this business, outside of aggregate market conditions, is there anything that the bank is thinking through on the expense side that could lead us to better operating leverage without necessarily having yet another uptick on the revenue side or the market side? Great. Thanks, Sumit, for the question. I think overall, we were very pleased with the quarter record earnings. It was a clean quarter. We had double-digit growth in AUM and AUA. I guess the flip side of your question on transaction revenue in the U.S., which I will come to in a moment, is the growth of our fee-based revenue, which for the first time reached over CAD 1 billion this quarter. So that now represents two-thirds of our segment revenue, up from around 50% in 2007. So both the quantity and the quality recurring nature of our earnings continues to improve. With respect to the transactional activity, there is definite seasonality in the business in terms of the summer quarter being a slower one. Particularly in our U.S. business. So that I think accounts for the quarter-over-quarter change in terms of transactional revenue. In terms of expenses, we do have a strong focus on NIE. At the same time, we are investing for growth, particularly in our global asset management business, which is our highest margin business. We are making investments particularly in our international wealth business to strengthen our control environment. So I think we are pleased with our progression in both revenue and expense and generating positive operating leverage of, I think, 2.3% this quarter, and we expect that to continue. Thank you. Our next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Hi, good morning. First question, just on the capital markets side, I guess really a two-pronged. You had exceptional loan growth. Wondering if you can give a little bit more detail where that loan growth is coming from segment or whatnot. Can you give, I know you said CAD 100 million of outsized trading gains. Is that something that falls to the bottom line? How should we think about that in terms of the earnings impact in the quarter? Okay, starting with the loan growth. The loan growth has been stronger than actually we anticipated it would be at the start of the year. If you look at the slides, a lot of the loan growth has been coming from our real estate business. We identified an opportunity a couple of years ago with some major clients to finance some activity in Europe. We've been doing that, and the results have been very good from that. I would say overall, away from those activities, the loan growth is really focused in the U.S., and the opportunity to lend to corporations in the U.S. is still quite good. The margins there are certainly acceptable, and the business that comes with the loan growth has been very good. Most of the loan growth is in the U.S. The European loan growth has been more focused on the area I described. I would say going forward, we're seeing some slowing, and that's fine. We're certainly not going to push it. We're certainly happy with what we've done so far this year. In terms of the trade, one was a legacy asset in FICC that we had on our books for several years. We'd written it down substantially. It was secured on an asset that actually was performing quite well. We restructured it and sold it. There was a pre-tax gain there. The other was a client trade here in Canada that affected the securities finance and equities side of the business. I think in Janice's remarks, she mentioned it was about CAD 100 million pre-tax. We identified those because we look at them and it's reasonable to say it's non-recurring. Great. Just, I'm not sure if you can give any color or whatnot on the insurance side. You talk a bit about the positive impact from actuarial adjustments. I'm going to assume that's on your life insurance book of business. Just wondering if you can give any color as to what drove that. Were there assumption changes that were pushed through and what that was? Can you give any quantification of what the impact was from that? Sure. George Lewis, thanks very much for the question. I think in terms of the actuarial adjustment this quarter, as Janice mentioned in her remarks, it related to our ongoing efficiency management program. It didn't relate to an annual process that we do typically in the fourth quarter, which will recur this quarter, where we do a complete scrub of our actuarial assumptions, morbidity, mortality, claims, lapse, et cetera. That is yet to come. It was a very strong quarter for RBC Insurance. I think I mentioned last quarter that our earnings in Q2 was at the lower end of a typical range for the business. This quarter was certainly from the underlying business itself, driven by improving claims experience, particularly on the disability side. We also had better claims experience in home and auto. Strong creditor premium growth, to Dave McKay's comments, drove us to the upper end of that range of a typical quarter. The actuarial adjustment took us above that. You haven't given any quantification what that adjustment was? No. No. Thank you. Thank you. Our next question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead. Hey, good morning. Just a quick one. I apologize if I missed this one. Do you have a target capital ratio? Is it 9.5%, 10% for the quarter one ratio? I got a follow-up on the cards business. Hi, Gabriel, it's Janice. I think that if you look at where we're maintaining our ratios, we think that we're maintaining a pretty strong capital ratio if we're in the mid nine. We ended up at 9.5%, and we're pretty comfortable with being in that vicinity. Okay. Thanks. On the credit cards, I noticed you have pretty good average balance growth, 4% quarter-over-quarter. That's encouraging in this environment. Just wondering if you believe to maintain that level of growth or maintain your market position or grow it preferably, you need to do any tweaks to the Avion portfolio, whether it's more accelerators or enhanced benefits, something of that nature. On the interchange regulation, where do we stand with that and are we going to hear anything soon on potential regulation? Thanks, Gabriel. It's Jennifer, and I'll take the first part of that question. We continue to benefit from all the recent activity in the credit card space, and our new account growth continues to be significant, up in fact 19% year-over-year. We're also seeing great utilization of our card. We are very happy with our Avion card and the position that it has. Clients love it and continue to give it very high ratings for customer satisfaction because the points are easy to redeem, and they don't expire. So we're very well-positioned in the credit card space. Interchange space, you want to take that? Thanks, Gabriel. It's Dave here. It was also noted in the federal budget that the government would be moving forward. So we do expect to see some changes as far as interchange in Canada. It would be premature, I think, to try to speculate or comment on what those are going to be. I would say that there is a significant amount of dialogue among all industry participants through the government of Canada. I think the goal is really to promote a long-term ecosystem that supports the Canadian economy, but at the same time, really fosters leading-edge payment capabilities and service to Canadians. So there's a lot of stakeholders to balance. There's a lot of issues to balance. There's dialogue, and we'll see what comes out of the Department of Finance and the federal government. Have you ever quantified the contribution of interchange to your revenue and earning? It's certainly a large component of being in the large purchase business. Yeah. But as interchange changes, there's many variables that an issuer can use to manage any type of reduction, if there was a reduction in interchange. You can reduce your cost base, you can look at your credit profile, and you can look at the value of your points program. All those ultimately affect customers in one shape or form or another. But the issuers have a lot of tools at their availability to manage any type of change to the system. Thank you. Thank you. Our next question is from Meny Grauman. Mr. Grauman, your line is now open. Please state your company, proceed with your question. Hi, good morning. Just a broader question about domestic loan growth. In mortgage growth of 4% year-over-year, pretty much in line with the previous quarter, I am wondering what the outlook is for mortgage growth in particular, but domestic loan growth in general. Has there been any change in your view on that? More importantly, do you think the current pace is sustainable, or could we see another slowdown coming? Thanks for the question. We feel good about our mortgage business. Our volumes were up just over 4% from a strong Q3 last year. In fact, I think everyone knows that we got off to a slower start in the spring housing window because of the weather, but we saw a strong June and July. Actually, our pipeline for the fourth quarter also looks strong. As far as consumer loan growth, obviously you can see from our results, notwithstanding the good growth, that consumer loan growth has slowed. Our expectations are for consumer lending to moderate to mid-single digits, 3%-4% growth rate. It is why in Dave's comments, he commented on us really looking to position to meet our customers' needs, including shifting a lot of our capability as well to making sure we capture the significant investment and deposit opportunity. Great. Thank you. Thank you. Our next question is from Derek de Vries. Mr. de Vries, your line is now open. Please state your company and proceed with your question. Great, thanks a lot. It's Derek de Vries from UBS. My question is in regard, there's been a lot of regulatory change and consultations going on at the moment. I guess in that context, I wanted to ask you a little bit about your CoCo issuance. I'm curious why you went for this type of instrument, and was that in response to an expectation for change in the regulatory environment? I'd also be curious on the breakdown of the buyers between retail and institutional and domestic and international, if you've got that. Hi, Derek, it's Janice. By CoCo issuance, you mean our non-viable contingent capital, I'm assuming? Correct, yes. We did two pref share issues, and they basically were requirements in order for us to issue preferred shares that we put in the non-viable contingent capital trigger. Those two instruments, by the way, are recovery tools. At the option of our regulator, if they believe that any sort of a bank instability can be solved by enhancing the capital, they can trigger. With respect to the distribution, because there were pretty healthy yields on that pref, I think that where we ended up was about 70%-75% retail and the balance institutional, and that's a little bit unusual based on what the splits we've had on our previous pref share issuance. For sub-debt, same thing, non-viable contingent capital with a trigger, and that was a requirement in order to have that qualify as sub-debt in terms of the capital treatment. So that too is a recovery instrument. When you look at the overall context of the white paper that has come out on the bail-in regime, the difference between those instruments and bail-in are, of course, bail-in is a resolution instrument. With respect to the sub-debt, of course, it is a little bit of a more complex instrument, and it was all institutional. Right. If I am understanding what you are saying correctly, this is going to be the norm going forward for the Canadian banks. Is that right? Yes, that is right. Understood. That is what I was getting at. Thank you very much. Thank you. Our next question is from Mario Mendonca from TD Securities. Please go ahead. Good morning. If we could go back to interchange for a moment. When NEMIA reported their Q2 2014 results last week, the CEO specifically referred to changes and said that industry participants could voluntarily implement reductions and/or cap interchange rates. What I'm getting at here is, how does that square with you? Is that a plausible outcome that we could, rather than seeing a hard and fast regulatory change, instead see the banks voluntarily reduce or cap interchange fees? I think the answer to your question, Mario, was banks don't control the setting of interchange. That's controlled by the network exclusively, Visa and Mastercard. So banks are recipients of the revenue stream from that interchange, but we have absolutely no control whatsoever of the setting of those rates. I don't see how we would be able to do that. That's purely in Visa and Mastercard's control. So anything negotiated between, say, Visa and Mastercard and the federal government would apply to us, and we don't have control over it. Okay. Do you contemplate any Is it conceivable that you could see changes in honor all cards, or is that something also you don't think is inside of, not part of your control? That is, again, a network regulation. It's been a critically important part of building an overall effective and efficient payment system over the last 50 years. A customer has to have the confidence that when they go to a point-of-sale online or physically, that their card will be accepted. So it's been the foundation to building a global payments network. There has been discussion between all parties whether that rule should exist going forward. The issuers and the networks would say it's a very important part of our franchise. I think all the rules are under negotiation at the same time. I would hope to see that a core part for our customers' sake and confidence in using your payment vehicle is a foundational element, and we would encourage that stay in place. Right, but you're saying that's on the table as well then? It's been discussed, but I think I would expect all participants understand the need for consumer confidence in presenting a payment card that's accepted. I think we're playing with the foundational elements, and that has received a lot of discussion. There are many different ways we can go, but I wouldn't rule it out. But I would be very disappointed if we did go down that direction. Okay. The growth in the wholesale loan book. Clearly we see it in real estate, as you highlighted. Can you talk about financial sponsors and whether they've played a role in growing that loan book as well? Yeah, sure. I think we disclosed separately the leverage loan segment of the loan book, and it is about 8% of the loan book. So the sponsor business is about half of that book. So while significant, not a large component of the loan book. And that is because in the sponsor business, basically, we are typically underwriting to distribute term loans and high yield bridges we take out in the capital markets. The sponsor business has been pretty vigorous over the last several months. We are participating, and we are participating at roughly our market share in other businesses. So we would be ninth or tenth in private equity financing, which is where we are in most of our other businesses. Yep. Thank you. Thank you. Our next question is from Sohrab Movahedi from RBC Capital Markets. Please go ahead. It is actually BMO Capital Markets. We were getting you mixed there. I hope that wasn't a Freudian slip. To follow up on Mario's point a little bit. Outside of the exceptional trading revenue in Capital Markets, you had obviously very good results in your NII and fee income type stream as well. What's the outlook on that, Doug? Is that sustainable? Yeah. A lot of that fee revenue is from the U.S. The U.S. is roughly half of our overall revenues now, and it's almost double our revenues from Canada. You can see where we have had nice year-over-year and quarter-over-quarter growth in Canada, and we certainly want to continue that track. I see a lot of the growth is in the U.S., and it is right across the board. It is equity new issue. We've really been emphasizing that we want to lead equity deals in the U.S. We're making a lot of headway there. We're about fifth or sixth in the convertible new issue league tables. We're outperforming there. High yield, same thing. Loan syndication. It's really spread right across the products, and it's really about raising capital for customers. As long as you have good credit markets, the markets we've been in, you can distribute loans and you can distribute high yields quite easily, frankly. As long as credit markets are good, then there's an opportunity there. We're trying to grow those businesses. If you get into less receptive markets, then it'll be more difficult. And it looked like this quarter the spread was richer than the prior quarters. Was there something unique this quarter? Spread in the wholesale loan book? Yeah. No, I don't think so. I pointed to some growth in the real estate segment. There's an opportunity there that we've been taking with some strong clients, so we've been earning some good spread in that business, but I think it's been fairly consistent. Okay. If I can just have one additional one, maybe for Dave. Dave, these are obviously very good results, and the hurdle has been set. The question really is, though, if in Canadian banking 3%-4% loan growth is what you're gearing up for, and you're really relying on organic growth to a large extent to accommodate the growth, let's say, for the capital markets business, where is that organic growth going to come from? Well, I think you've seen while the mortgage business has slowed, as expected, given the regulatory and consumer change in preferences, I would highlight the agility of our business model. As growth in consumer demographics shifts to deposits and investments, we have top franchises in those areas, number one or number two franchise, and we're able to capture that growth irrespective of where it occurs in the Canadian economy. I remain very confident about the agility of our business model and its ability to capture a disproportionate share of growth irrespective of where it occurs in the customer segment or in a business. But I think that is a really important part, and you've seen that with our investment growth numbers, you've seen that with our core deposit growth numbers, and we remain very confident in those franchises. I think as you look at the Canadian economy and expected improvement, whether it's Bank of Canada forecast or own internal economic forecast, we are expecting a modest improvement in economic growth next year, and that will hopefully drive some more organic growth and deployment of marginal capital. I think we are confident of capturing growth and expect to see a little bit better environment going forward. Okay. Thank you very much. Thank you. Our next question is from Peter Routledge from National Bank Financial. Please go ahead. Hi. Thanks. Just like to come back to the mix question. If I look at Canadian banking, which is 50% of the earnings, pre-provision income grew about 3.8%. That is before the interchange headwinds that are probably going to hit over the next little while. I look at capital markets, got a 15-year track record of growing earnings at a pretty repeatable level and avoiding the asymmetric losses that have hurt so many of your peers. You have clear risk-return superiority relative to peers in that business. That business has a great growth outlook. How can you not allocate more capital and be more aggressive in growing capital markets given those dynamics? I think as we look back, the balance that we have achieved in our diversified business model has suited us very well. In all those strengths in capital markets, we fully acknowledge and we are very proud of the consistent growth. It is a very well-managed business and a business that has attractive opportunities. But as we balance all our stakeholder needs, sticking to that diversified business model is important. It has been a quarter of success in the past, and our strategic guidelines remain a guideline over the medium to longer term. I think we have opportunities in all our businesses. We saw record results at the same time in our wealth management business, and we have got definitive demographic shifts in our economy in North America and in Europe and in a number of markets. All our businesses have attractive growth opportunities, and that we feel will allow all businesses to grow and keep the existing ratio of our diversified model roughly the same. Just on the Canadian banking. There are exogenous factors. You are performing well in the segment. I am not critiquing the performance. It is more there are exogenous factors that are going to slow earnings growth there. A risk to me for Royal seems to be 50% of your earnings are coming from a business that faces some pretty material headwinds. Do you think I am alarmist in that concern or not? On the retail side, you are saying, the headwinds? Yeah, Canadian banking. Well, I think you are being alarmist. One, as I responded to, I think, Mario's question, the previous question, on interchange specifically, we have a number of levers if interchange is reduced by legislative action or regulation. We have a number of levers through cost, through credit profile, through managing our reward programs to deal with that. It will impact consumers in Canada across the board. But we have the options to manage that. If you look at the types of tailwinds we would have in our retail and our wealth management business, particularly from a higher rate environment, as you have seen disclosed in the industry in North America, are quite material. You combine that with the outlook for better core economic growth, and I would say you are being quite alarmist that there certainly are some very positive opportunities and potential tailwinds. I think they certainly offset any type of headwinds that we might receive from a cheering credit environment at the growth cycle or any type of regulatory change. Okay. Hey, thanks for the frank answer. Thank you. Our next question is from Robert Sedran from CIBC. Go ahead. Hi. Good morning, Doug. I am not sure if your comments about some of the unusual items during the quarter covers my question, but I note a pretty significant uptick in European revenue as well, and against the backdrop of some mix, let's call it, between the U.K. and the continent in terms of the economic backdrop. Can you comment a bit on the European outlook and whether that unusual item affected Europe this quarter? One of them did. One of them was on our books in our European sub. Slightly less than a half of the 100 occurred in the U.K. I would say away from that, one of the things that we have been focused on is improving the European business, so that we have done more hiring in Europe than any other geography over the last year. Our operating committee came to the conclusion that this is an opportune time to improve our platform in Europe. Many of our businesses, especially in the trading side, are under new leadership in Europe. We are actually very pleased with the results that we are getting under that new leadership. We are hiring and upgrading people, and we are going to improve that business. You are starting to see some results of the efforts and the investment we are making. Have you grown more comfortable putting capital into Europe then? Well, we've got a small loan book in Europe. We would have about 160 borrowing customers. It's actually in Europe where the corporate business is really focused in the U.K., Germany, and France, and it's largely investment grade, which really supports FICC origination, new issue origination in the FICC business. We're going to continue to lend, but we're going to really focus on those economies. We have some loans elsewhere, but I would say it's really focused on those three places. Thank you. Thank you. We have no further questions at this time. I'd like to return the meeting back to Mr. Dave McKay. Thank you, operator, and thank you, everyone, for joining us this morning. This was a great quarter for RBC, a testament to the strength of our diversified business model and our strong capital position. We look forward to presenting to you again next quarter. Thank you, everyone, and have a good weekend. Thank you. The conference call has now ended. Please disconnect your lines at this time, and we thank all who participated. This conference is no longer being recorded. Please note that this conference call has ended. Please disconnect your line at this time. Thank you. Please note that this conference call has ended. Please disconnect your line at this time. Thank you. Please note that this conference call has ended. Please disconnect your line at this time. Thank you.