Earnings Call: Q4 2013

Dec 5, 2013

Good morning, ladies and gentlemen. Welcome to the RBC 2014 first quarter results conference call. Please be advised that this call is being recorded. I would like to turn the meeting over to Ms. Karen McCarthy, Director of Investor Relations. Please go ahead, Ms. McCarthy. Good morning, and thank you for joining us. Presenting to you this morning are Gord Nixon, 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 8:30 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 Dave McKay, President; George Lewis, Group Head, Wealth Management and Insurance; Doug McGregor, Group Head, Capital Markets and Investor and Treasury Services; 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. I will now turn the call over to Gord Nixon. Thank you, Karen, and good morning, everyone. We appreciate you joining us today on this call, and hopefully after it, you'll be able to join us for our annual shareholders meeting. As you can see from our results, we had a solid start to the year. Earnings were CAD 2.1 billion or CAD 2.2 billion, up 7% from last year when you exclude the loss on sale of our RBC Jamaica bank and the provisions occurred in our Caribbean operations. Our return on equity was just under 19% on the same basis. Revenue was up 8% from last year, and our results reflect continued strength in Canadian banking and higher earnings in capital markets, investor and treasury services, and wealth management. Our ability to continue to deliver solid results is a testament to the strength of our leadership position in Canada and our disciplined global growth strategy. As well, our ongoing focus on managing costs and risks and our commitment to maintaining a strong capital position remain clear competitive advantages in today's environment. Our all-in Common Equity Tier 1 ratio remains strong at 9.7%, up 10 basis points from last quarter, even with the new credit valuation charge and pension accounting adjustments. We continue to take a measured approach to capital deployment and strive for the optimal balance between investing in our businesses for long-term growth, returning capital to our shareholders through dividends and buybacks, and pursuing select acquisitions. This morning we announced a CAD 0.04 or 6% increase to our dividend, bringing the quarterly dividend to CAD 0.71 a share. Our dividend increase reflects the strength of our core earnings and the confidence we have in our ability to continue to generate solid earnings growth and successfully execute on our disciplined growth strategy. Before moving on to the performance of our segments, let me spend a few minutes on the Canadian economy and regulatory environment. The Canadian economy continues to fare relatively well against other global economies, with solid growth and relatively stable unemployment levels. However, we are seeing a slowing consumer lending environment, which frankly is a good thing. Notwithstanding the deleveraging of the consumer, which has reduced demands for mortgages and loans, we still continue to expect to see mid-single digit growth in consumer lending. We are seeing very strong core deposit growth and higher client investment balances. An improving U.S. economy will certainly benefit Canada and those businesses that provide products and services to our biggest trading partner. Our capital markets and wealth management business in the U.S. give a significant upside to the benefit from their growing economy. On the regulatory front, after constant regulatory change, we are finally seeing more clarity and certainty than we've had in the past few years. Although an evolving regulatory environment is part of being a financial institution, we are well-prepared to adapt to the new rules and continue to deliver long-term value to our shareholders. Now let me turn to our business segments. In personal and commercial banking, we generated earnings of over CAD 1 billion. Canadian banking delivered another solid quarter with earnings up 4% over last year, reflecting 7% volume growth across all businesses, including Ally Canada, as we continue to leverage our unparalleled size and scale to profitably grow market share. Although there were some unusual items, which Janice and Mark will talk about in their comments in our Canadian banking business, our core earnings this quarter continue to be very strong. We remain focused on achieving or exceeding our objectives of growing by a 25% premium to the market, given the strength of our distribution network and the largest and most diverse network of branches, ATMs, mobile sales forces across the country. For example, we have the most branches across Canada, with our network on average being 18% larger than our peers. We are rolling out new, smaller footprint branches in urban markets that allow us to reach more clients in key segments like small business owners and newcomers to Canada. Our product offering is unmatched, and we continue to develop new products and innovative solutions to extend our sales power and provide our clients with greater value, flexibility, and convenience to enhance their experience. For example, RBC Direct Investing was the first to introduce a flat-fee commission for equity trades to help eliminate barriers for clients with fewer assets to invest while keeping their costs down. As well, we launched the RBC Wallet powered by our secure cloud mobile payment solution, making us the first Canadian bank to provide clients with the choice of using debit or credit for their mobile payments. We were also the first North American bank to bring person-to-person electronic money transfers to Facebook Messenger. While we continue to focus on innovations, we also remain committed to controlling costs through a number of initiatives. For example, we are benefiting from significant synergies as a result of fully integrating our Ally Canada acquisition, which has been done well ahead of schedule. We continue to focus on streamlining our processes and eliminating costs by introducing new ways of doing business. Our innovative e-signatures technology, the first of its kind in banking in Canada, is being rolled out in our branches, freeing up our investment advisors to spend more time with their customers. It is these types of initiatives that will help manage the growth of our expenses and help drive positive operating leverage for the balance of the year. Let me take a few minutes to discuss our Caribbean banking business. We have mentioned before, we have been navigating through challenging economic and market conditions in the region over the last couple of years. We have been focusing on managing the business to drive better performance and recently completed a comprehensive review of our operations across the Caribbean to find ways to operate more efficiently and to ensure that we are able to be a competitive leader in the markets where we want to do business. As part of that review, we recently announced that we are selling our banking operations in Jamaica, a country where we did not have scale or a market-leading position necessary to compete effectively over time and to meet our hurdle rates of return. We are also restructuring our operations by consolidating certain branches, reducing our workforce, and streamlining our head office structure. These are important steps in repositioning the business, and we believe that these changes will improve our performance and competitiveness while driving efficiencies. The decision to restructure our Caribbean business was a difficult one, but one that will allow us to focus our efforts on those markets in which we can be a leading financial institution and operate on a sustainable basis with good returns. As I have said before, we have operated in the region for over 100 years. We remain committed to the region, and we are excited about the long-term prospects. Even this quarter, our core results continue to strengthen. Turning to wealth management, we had strong earnings this quarter, and we continue to focus on growing our global asset management business and delivering integrated global wealth management advice, solutions, and service to our high-net-worth clients. Our leadership position in Canada and our ability to go beyond traditional investments through collaboration with our partners across RBC continues to provide a strong foundation for global growth. Average fee-based client assets grew by 6% this quarter in our wealth management business, and we were able to capitalize on both improvements in global markets and strong net new sales across the region. As a result of the strength of our advisors and services we provide, we were recognized as having the best private banking service overall in four different regions by Euromoney in its 2014 Private Banking and Wealth Management Survey. In global asset management, we remain the Canadian leader in long-term fund sales, having captured nearly 18% of the market over the last 12 months and had another year of positive flows in both institutional and the retail segments. In recognition of our high-performing Canadian investment funds, we were recently recognized with five awards at the annual FundGrade A+ Awards. in January of this year, we added a team of 10 global equity specialists to our London-based investment management team in RBC Global Asset Management. We now have a significant U.K.-based equity capability in global emerging markets and European equities to complement our fixed income alternative capabilities in BlueBay Asset Management. Turning to insurance, we continue to innovate and tailor our product to meet our clients' needs. We believe our focus strategy serves to differentiate our performance as this business continues to make a solid contribution to our earnings stream and provide excellent claim service to clients during these challenging times. In addition to our ongoing focus on efficiency management activities and treasury services, we had strong client retention and solid growth in client deposits, and all contributed to solid earnings growth for this segment in the quarter. We have now repositioned this segment to adapt to the current operating environment. We continue to be recognized in the industry and were recently awarded Transfer Agent of the Year and Fund Administrator of the Year Luxembourg in the Custody Risk European Awards in recognition of quality service and products that we offer. Moving to capital markets, we saw solid earnings growth this quarter and remain focused on growing our corporate and investment banking businesses and rebalancing our global markets business by redeploying capital and managing risks. We grew our loan book by 8% this quarter and are leveraging our lending relationships to offer ancillary products and services to drive more sustainable fee-driven income. We had a solid investment banking revenue this quarter, although moderately lower than the robust levels we saw last year. Our deal pipeline remains strong, and we continue to win significant mandates and build new client relationships. We recently acted as joint bookrunner and sole swap manager on AT&T's $1 billion seven-year Maple offering, which is the largest single tranche corporate Maple bond on record. We also acted as joint bookrunner and global coordinator on Barrick's $3 billion common share offering, which was the largest bought deal, as well as the largest Canadian equity offering on record. We acted as joint bookrunner and sole lead manager in the $300 million initial public offering by Canadian Tire's Real Estate Investment Trust. In our global markets businesses, we remain focused on origination to drive greater earning stability and expand client relationships. We are seeing particular improvement in fixed income, commodities, and currencies, which has benefited our trading revenues. We are also seeing an improved run rate compared to 2013 across all asset classes. As you will recall, the Volcker Rule was finalized last December, and we have a strong team in place to oversee the adjustments to some of our businesses. Overall, we remain pleased with the performance of our capital markets. We led the Canadian league tables in 2013, sweeping the board across almost every major category: M&A, debt capital markets, equity capital markets, and loan syndication, as compiled by Bloomberg, Thomson, and Dealogic. We were again ranked number 10 in Americas investment banking fee league tables by Thomson Reuters in 2013. To conclude, our results demonstrate the earnings power of RBC, driven by our leading market positions, diversified business mix, and strong capital position. Our ongoing focus on developing innovative products and services, combined with our ongoing discipline in managing costs, remain, in our view, a clear competitive advantage in today's environment and position us well for long-term growth. With that, I'll now turn it over to Mark Hughes, who, as you know, became our Chief Risk Officer back in January. Mark? Thanks, Gord. Good morning, everyone. Turning to slide seven, our credit quality improved overall compared to the prior quarter. Provisions for credit losses on impaired loans were CAD 292 million, down CAD 42 million from last quarter, or down five basis points to 27 basis points. This decrease was driven by lower provisions in our wealth management, capital markets, and Caribbean portfolios, partially offset by increased provisions in Canadian banking. Our overall credit quality has remained relatively stable since the beginning of 2013, with provisions this quarter continuing to reflect the low end of our historical range. Let's look at our credit performance in some more detail. We incurred incremental provisions of CAD 19 million in wealth management this quarter related to the same accounts that were impacted in the fourth quarter of 2013. These accounts are now fully provisioned, and there were no new impairments this quarter. As was mentioned on last quarter's call, growing the credit book forms part of wealth management's long-term growth strategy. While we do anticipate incurring some provisions from time to time, as this portfolio continues to grow, we remain comfortable with its overall credit quality. With respect to capital markets, this quarter we had recoveries on a few accounts totaling CAD 2 million, net of impairments or one basis point, compared to provisions mainly taken on a single account in the prior quarter. This represents an improvement of CAD 13 million or nine basis points. In the Caribbean, provisions on impaired loans were CAD 16 million, down CAD 10 million from the previous quarter, largely driven by lower provisions in the wholesale portfolio. As we have previously highlighted, while credit quality in our Caribbean portfolio has been stabilizing, we believe that until we see a more sustained economic recovery, the credit environment will likely continue to be challenging. Provisions in Canadian banking were CAD 258 million, or 30 basis points, up CAD 9 million or one basis point from last quarter. While provisions increased, gross impaired loans decreased CAD 90 million, or 4% from last quarter. Slide eight focuses specifically on our retail portfolio within Canadian banking. The increase in Canadian banking provisions primarily reflected higher impairment in our small business and personal loan portfolios. This, for the most part, was due to the alignment of Ally Canada to RBC's methodologies. We expect to see some variability in our small business portfolio from quarter to quarter, and we remain comfortable with its credit quality. It is important to note that this portfolio only represents 1% of our total retail portfolio. Our Canadian residential mortgage portfolio, which makes up 64% of our total retail portfolio, continues to perform well with specific provisions this quarter of two basis points. This is consistent with our historical performance. The credit quality of our retail portfolio remains strong. Overall, as I've mentioned, our gross impaired loans reduced CAD 90 million, our new gross impaired loan formations decreased CAD 220 million quarter-over-quarter, and our coverage ratio increased 5% to 98%. Turning to market risk, in the first quarter, average market risk VaR was CAD 34 million, and average market risk stressed VaR was CAD 103 million, both down CAD 11 million compared to last quarter. The decrease in stressed VaR was largely driven by lower risk in certain mortgage-backed securities portfolios. This decrease was partially offset by the impact of foreign exchange translation on foreign-denominated portfolios. During the first quarter, we had no days with net trading losses, continuing the positive trend experienced over the past two years. With that, I will turn the presentation over to Janice. Thanks, Mark, and good morning. As Gord mentioned, we had first-quarter earnings of over CAD 2 billion, up CAD 45 million or 2% from the prior year and relatively flat from last quarter. Earnings were up CAD 137 million, or 7% from last year, excluding the specified items outlined on slide 29, which include the previously announced CAD 60 million loss on the sale of RBC Jamaica and after-tax provisions related to post-employment benefits and restructuring charges in the Caribbean of CAD 32 million this quarter and CAD 31 million last quarter. Our Common Equity Tier 1 ratio remains strong at 9.7%. As we disclosed last quarter, our ratio was negatively impacted by 32 basis points for the credit valuation adjustment and nine basis points for the new pension accounting standard. In addition, the depreciating Canadian dollar negatively impacted the ratio by 14 basis points. These factors were more than offset by strong internal capital generation and capital repatriation from our insurance business. Our risk-weighted assets were up 13% compared to last year and 7% compared to last quarter, largely due to the negative impact of the credit valuation adjustment charge and foreign exchange translation. I would like to highlight that this January, we were the first Canadian bank to issue Basel III-compliant preferred shares, which strengthens our Tier 1 capital position. Let me now turn to the quarterly performance of our business segments, starting on slide 12. Personal and commercial banking earned over CAD 1 billion, down CAD 33 million or 3% from last year, and relatively flat compared to last quarter. Canadian banking net income was over CAD 1.1 billion, up CAD 47 million or 4% last year, and up CAD 50 million or 5% sequentially, reflecting strong volume growth across all businesses. Margins in Canadian banking were up three basis points from last quarter, reflecting a favorable funding mix. We expect margins to remain relatively stable for the remainder of the year as we continue to manage through the low interest rate environment and competitive pricing pressures. Our reported efficiency ratio was 43.7%, and we generated positive operating leverage of 0.5%. I would point out that this quarter we were impacted by certain unusual expenses, including a litigation provision and higher share-based compensation, reflecting the annual accrual for employees eligible to retire. We continue to target an efficiency ratio in the low 40s and positive operating leverage through our ongoing focus on efficiency management activities. Caribbean and U.S. banking had a loss of CAD 66 million this quarter, resulting from the specific items I discussed earlier. We also expect to record a loss on foreign exchange translation when the sale of RBC Jamaica closes. The cumulative unrealized translation loss was CAD 40 million as at the end of our first quarter. As Gord mentioned, we are focused on improving the performance and competitiveness of our Caribbean operations for the long term. Turning to wealth management, we earned CAD 235 million this quarter, up CAD 6 million or 3% from last year, mainly due to higher average fee-based client assets resulting from capital appreciation and strong net sales. As well, we generated solid loan and deposit growth across most businesses in this segment this quarter. As Mark mentioned, we incurred an additional CAD 19 million of PCL on the same accounts that impacted our fourth quarter, which are now fully provisioned. Compared to the prior quarter, earnings were up CAD 33 million or 16%, mainly due to higher average fee-based client assets, semiannual performance fees received this quarter, and lower PCL. Moving to insurance, although this quarter benefited from two new U.K. annuity reinsurance contracts, net income of CAD 157 million was down CAD 7 million or 4% compared to last year, mainly due to higher disability and weather-related claims costs. Compared to the prior quarter, net income was up CAD 50 million or 47%, as the prior quarter included a charge related to the new tax legislation in Canada, which affected certain individual life policies. Investor and treasury services earned CAD 106 million, up CAD 27 million or 34% from last year, and up CAD 15 million or 16% from last quarter, reflecting the continued benefits from our ongoing focus on efficiency management activities and higher net interest income resulting from growth in client deposits. This quarter also benefited from higher funding and liquidity revenue compared to last quarter, largely from tightening credit spreads. In capital markets, we had earnings of CAD 505 million, up CAD 43 million or 9% from last year, largely from lower PCL and a lower effective tax rate this quarter. We delivered solid but moderately lower global markets and investment banking revenue compared to robust levels last year and saw continued growth in lending activity. I would note that last year's results benefited from a one-time gain related to the disposition of our London Metal Exchange shares. Compared to last quarter, net income was up CAD 36 million or 8%, mainly due to higher revenue in our fixed income, commodities, and foreign exchange trading businesses, which included a CAD 40 million loss on fair value adjustments on certain RBC debt and higher M&A activity and lending revenue. To wrap up, we are pleased with our performance this quarter as we continue to focus on growing our market share in Canada, the U.S., and selected international markets, expanding our client relationships, and prudently deploying our balance sheets. At this point, I'll turn the call over to the operator to begin questions and answers. Please limit yourself to one question, then re-queue so that everyone has an opportunity to participate. Operator? Thanks. If you have a question at this time, please press star one on your telephone keypad. There will be a brief pause while participants register. Thank you for your patience. The first question is from John Aiken of Barclays. Please go ahead. Good morning. Questions for Mark Hughes. Mark, in terms of the formations that we saw on the domestic retail, I understand it's coming off of a low base, but can you let us know what's driving that increase, particularly within the personal line, which did see an uptick in gross impaired as well as provisions? Yes. Thank you, John. The CAD 9 million increase in Canadian banking, of that, seven was related to a methodology change as we've integrated Ally Canada into RBC's methodologies. But that was in the small business. How about the personal loan? No, that part of it would be in the personal loan side. In the small business side, that was also actually related to Ally as we've moved what is called Ally Business Services out of indirect lending into the small business lending. That is where Ally was providing some fleet services to small businesses. So again, it's really just methodology changes as we're moving our portfolios and integrating Ally into our business. Great. Thanks, Mark. I would just emphasize that it really relates to the methodology as opposed to any. There's been no deterioration in Ally. It's just an accounting methodology shift. Okay. Thank you. A follow-on, if I may, in terms of the international provisioning now, I know it's lumpy, but can you give us a sense of what the provisions were for Jamaica over the last 12 months and what we may anticipate in terms of a drop in the run rate going forward? No, we don't know. This is Dave here. It's a small business for us with a very small lending book. So we were predominantly deposit-centric in Jamaica, so I don't think it would be a material change to our overall PCL profile in the Caribbean. Understood. Thanks, Dave. Thank you. The next question is from John Reucassel from BMO Capital Markets. Please go ahead. Thank you. Question for George Lewis. George, just trying to understand the numbers in the wealth management. If I look at what you have, your average AUA and AUM growth mid-teens over the last year, but your pre-tax, pre-provision earnings are up 10%, and even quarter-over-quarter, you do not seem to be getting a lot of operating leverage on the higher AUA or AUM. Could you just talk about what is going on in that business and why you are not getting more operating leverage, or if I am looking at this the wrong way? No, sure. Thanks very much, John. It is a great question. Not surprisingly, we have looked at that as well. You highlighted the PCL year-over-year difference. The other thing to keep in mind is we have been impacted by the impact of the RY stock price on our U.S. wealth accumulation plan. That is on page 10 of the supplementals, and that had a negative year-over-year and quarter-over-quarter impact. If you normalize for those items, our year-over-year increase in earnings is actually very much in line with our growth in client balances of 15%, in fact, a little bit higher. We do really have strong underlying growth in the segment, and we expect that to come through in future quarters. George, this compensation expense has to deal with the broker down there. Is that correct? It's a stock-based comp program, John. It's Janice speaking. Yes. Basically, it's a program that's based on our RY shares. So it's hedged, but we don't have hedge effectiveness because we hedge the whole program, whereas the expense is incurred as the people earn into it and as it vests. So we have had this volatility from time to time over the course of the years, but it's just acute this year, and you'll see the same thing to a lesser extent in all of our programs because of the volatility around the RY share price. But Janice, just to be clear, in the wealth, this is for U.S.-based employees only, correct? There's two programs that have an impact, John. The US wealth accumulation plan is for our U.S. financial advisors, and then we also have an impact from stock-based compensation for our overall employee base in wealth and across RBC, per Janice's comments. Okay. We should see operating leverage at some point? Yes, very much so. In fact, if you normalize for those items and also the impact of foreign currency translation, we actually had positive operating leverage within the segment of around 2% this quarter, year-over-year. Thank you. Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead. Thank you. First of all, before my question, Gord, happy retirement. Thank you, Michael. I have one more quarterly conference call, though. Pardon me? I will have one more quarterly conference call. Okay. Well, something to look forward to. Overall, you and other banks so far are generating strong business loan growth while consumer-related loan growth slows, as you mentioned in your opening comments. Can you give us some additional color on the business-related loan growth and what it implies about business conditions in the Canadian and U.S. economies? Michael, it's Dave here. I'll certainty comment about our commercial and small business in Canada, and then I guess hand it over to Doug to talk about the capital markets side. In Canada, our growth rates are still strong, but you have to remember, we're growing off twice the base that most of our competitors, with 26-plus percent market share in each of the commercial businesses we compete in. Our base to start with is much higher. We're happy with our loan growth. If you look at the slides in our presentation, we have gained market share in both the core categories that we focus on. That's really 0 to 5 million and 5 to 25 million. Where we might be losing a bit of market share is the 25 million-plus category, where we selectively pick our opportunities there. We're happy that in the core of our commercial business, which is 0 to 25, you'll see in the slide presentation that we're gaining share, and that growth that you're seeing is off the largest base in Canada. Just on the loan growth in the investment bank, it's running about 8%. I think this year it'll run less than 10. It'll be high single digits. The loan book's holding up in Canada. There's a bit of growth there. Most of the growth, as has been the case in the last couple of years, is in the U.S. That mix is still in the 70% investment-grade range. We have been growing some mostly investment-grade lending in the U.K. to support the fixed income business, and to a much smaller extent, we've been putting some money out in Australia as well. Michael, I would just say from a macro comment, the environment from a business and commercial and corporate perspective remains pretty good. It is better than it has been, I would say, over the last couple of years. I would say we are still experiencing moderately positive growth. It is not spectacular, but the base feels pretty strong in the U.S. and even in Canada. Are you seeing evidence of increased business investment in the U.S.? Well, a large part of that book is in the energy business, communications, and media side. You are starting to see in that sector in particular, there has been some significant deal flow recently. In the real estate area, it has been growing to a lesser extent than the communications business. I think the deal activity is starting to heat up a little bit. I think people are getting more confident in the U.S., and I think that will drive both lending and fee revenue. Thank you. Thank you. The next question is from Sumit Malhotra from Scotiabank. Please go ahead. Good morning. It's probably for Gord. In your comments early on the deployment of capital and the measured approach the bank has taken. Obviously, you're in very good position at 9.7% in terms of your capital, yet we've seen the bank be very quiet on the share repurchase activity for a number of months now. Could you maybe talk to us a little bit about what's caused that pause and whether we should read into that perhaps powder is being kept dry for something a little bit more exciting than just buybacks? Yeah, I wouldn't read that into it, by any means. We recognize that our capital levels have been creeping higher, and we've got in place a share buyback program. As you know, we've just increased our dividend, and our businesses are continuing to experience relatively strong growth. I would say that the utilization of that buyback program will continue to be a factor going forward and will likely increase and ramp up as we move throughout the balance of the year. I don't want to sound over conservative at this point in time, but in an environment like this, you'd just rather run with a slightly higher capital position than a bang-on sort of target capital position. But we will adjust accordingly as the year goes forward. I'm glad you brought that up because one of your counterparts yesterday made reference to the fact that perhaps they would like their capital position to be higher than they had previously stated before going or recommencing a buyback. Has there been a behind-the-scenes push from the regulator that maybe the 8% floor that was talked about, the padding that's required on top of that is higher? That's part A. Then part B, how would you describe the acquisition environment for areas of interest for Royal in your conversations in recent months? The answer to the regulatory front is there hasn't been a significant change. I would say that the capital levels are fairly conservative in this country to begin with. We've got lots of padding, and I think OSFI have made it clear that they expect that moving forward. There's not been a change behind the scenes, at least that we're aware of. I would say in the acquisition front, it continues to be an okay environment. If you were to ask George, he would admit that we've looked at a tremendous number of opportunities in the wealth management space over the last year or so, and the ability to execute is more challenging than the stated opportunities, a combination of price levels and performance levels. We're trying to be very disciplined to make sure that if we do invest through acquisition that we're confident in terms of our future hurdle rates of return. While there are assets available, it's very difficult to make them work. We'll continue to be selective and focused and, as I say, try to stay very disciplined. We'd love to do deals like Ally every six months or every year, but unfortunately, they don't come along that frequently. We continue to explore opportunities that are very consistent with our core strengths and our sort of disciplined approach. Thanks. Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Good morning. A couple of very quick questions. First, in underwriting and advisory, the number there looked- fairly light relative to what we've seen from some of your peers, and particularly from the U.S. investment banks. Was that just mostly volume, or was there a particular circumstance that would've caused it to be light this quarter? There isn't a particular circumstance. I think we had in the last quarter, Dell was booked in the previous quarter, so that would've helped there. Year over year, that first quarter of 2013 was particularly strong in the leverage finance business. I would say, in Canada, it's been a little slower in the mining business, certainty, as you would know, and oil and gas has been a little softer as well, but it is all holding up. We have some reasonably significant M&A transactions we expect to book this quarter. I think the run rate'll be fine on that side of the business. Okay. A slightly different question. In the federal budget, there was reference to captive reinsurance and the extent to which the government wants to crack down on certain practices. It would be helpful to understand the extent to which Royal uses captive reinsurance and might be impacted by any changes. Mario, it's Janice speaking. You're correct that there were references to those provisions in the legislation, and we're currently studying the legislation to size what the impact is. I think that it's clear that all of the Canadian banks have reinsurance operations that swap out the risk into a lower tax jurisdiction. With respect to our own operations, we're looking at going forward what impact that has on our after-tax earnings base and how we'll have to improve the revenue and earnings to make up for any potential shortfall. But I would say it's early days now in going through the details of the legislation. Right now you couldn't size it then? No, not at this point because as you know, with tax legislation, there's a lot of really detailed factors that we have to take into consideration. I would also say that every one of the Canadian banks' situation is different. Thank you. Okay. Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Yeah, I have two capital markets related questions. One is, in Europe, I noticed in the commentary you talk about quarter-to-quarter increase in capital markets revenue from Europe being due to investment gains on legacy portfolios. Just a little color on that would be helpful as well as just your outlook for Europe going forward. Definitely we've seen some more bearish comments out of the European Union lately. Then just secondly, in Canada, I see reference to private equity investment gains and a little more detail there would also be helpful. Thanks. We have some legacy assets that we've shown, I think in some of the financial disclosure we make, have been running off fairly vigorously. But we've had gains in some structured credit that still remains on the book. So I think that's what was being referred to in the narrative. In terms of what's going on in Europe, I would say that some of the lending activities that we're engaged in have been really quite good and are promising. We're restructuring our fixed income business. We exited many of the European government bond businesses that we had, and that we're redirecting our activities into our rates and credit business. I think that I'm reasonably optimistic that we're headed in the right direction there. We took a significant fair valuation charge against some securities held this quarter, about CAD 40 million, which impacted Europe's numbers. But I would say overall, we continue to work on that business. I think the competitive environment is also more favorable and is getting more favorable as some of the competitors take assets off. So we'll keep working at it and keep improving that business. Sorry, then in terms of the private equity gains in Canada, was that significant this quarter? Oh, it's Janice speaking. We have some legacy private equity portfolios that we have been running off for years. The gains are a little bit lumpy. If you look at our, you'll see through the disclosure in the available-for-sale securities additional disclosure, and if you look back, Manny, you'll see that from time to time we have those gains. It's not a strategic shift; it's a matter of the fact that those portfolios have very long tails, and we obviously opportunistically take gains whenever we can. Great. Thank you. Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead. Hi. Thanks. Janice, you referenced the very successful issue of non-viability contingent capital Tier 1 instrument this last quarter. That's part 1 of the resolution regime for systemically important banks. Part 2 and 3 would be Tier 2 NVCC and then bail-in debt. On bail-in debt, do you have any thoughts on where we might wind up in terms of framework and what market receptivity would be to bail-in debt and how that might impact your cost of market funding? Then part 2 would be just any thoughts on Tier 2 and market receptivity for those instruments. Those are good questions, Peter, and I think that it was a successful issuance that we did of the preferred shares because we managed to get some clarity around the non-viability contingent capital provisions. I would say that for us, the next step is looking at sub-debt, because as you know, we redeemed some sub-debt and we are very focused on strengthening all of our capital positions. Given what happened with the preferred shares, we are confident that we can get a pretty good position on agreement on the terms of non-viability contingent capital for sub-debt. I think that the term debt bail-in provisions will come after that. We are taking this one step at a time because it is groundbreaking for Canada and working with the regulators. I would say expectation would be sub-debt first, and then we will work on the other bail-in provisions. You have no insight on how the framework for bail-in might work until we get more from the government, I guess? Yeah, we have no insight, but the whole purpose of bail-in is to actually promote a recovery. Yeah. If that is the framework, then I think that any of the triggers and how they are actually set have to be around viability. Yeah and dilution. I think that we're all working with that assumption as we discuss the provisions with the regulators. Okay. Thank you very much. Thank you. The next question is from Robert Sedran from CIBC. Please go ahead. Hi. Good morning. I just want to follow up quickly on the answer on the wealth management side with those U.S. wealth accumulation plans. I seem to indicate, or at least I heard, that the impact in coming quarters will be less than it has been. Is that something we already know, or is that stock price dependent? No. It is stock price dependent. My earlier comments really related to the impact of that on this quarter. If you adjust for the impact of the US wealth accumulation plan and the stock-based compensation for our other employees, we did have very strong underlying year-over-year growth. So you are quite right, that will be a variability from quarter to quarter. In fact, that is why we provided the record on the supplementals that you can track that going back in time as well. Okay. Thank you. Janice, just following up on the investor and treasury services, the quarter-on-quarter increase was quite sizable. A little bit of color on the two bullets, I suppose, on the slide, a little bit more color in terms of whether that is anything particularly noteworthy in the quarter or if it is just business growth and good organic growth. Yeah, I think that there are two focuses on investor and treasury services, and Doug will comment. I will comment on basically the bullets in terms of the fact that you see the run rate benefits of a lot of the restructuring that was happening last year. So it is solid performance on the efficiency side, and I think from a revenue perspective, Doug, why don't you make some comments on the pipeline there? The two main businesses there, the investor services business, as Janice said, we have really been focusing on getting the cost right in that business. So we have reduced our FTE quite considerably over the last year, and so the run rate on the expense side and the efficiency ratio has improved dramatically. In terms of the revenue in that business, it is stable. We are really focused on growing that. I think that it is a competitive business. We do very well in our home market here in Canada, and we are a good offshore resource for funds, and so we are focused on where we think our natural fit is. So the selling side is something we are focused on now as we finish off taking costs out of the business. In terms of the quarter's performance, the bank's liquidity book is in that business, in treasury services. As I think was mentioned in the comments, we had some tightening in spreads in certain of the assets in that business, so we had improved results there as well. One comment I'd add to that business is that, and I think you hopefully remember my excitement about that business when we made the acquisition of the other 50% of RBC Dexia. I think the integration with our treasury services business and consolidating the sales activities and the product offerings, and the ability to drive costs out of that business has made a material difference in terms of its performance, and we continue to be pretty optimistic in terms of its ability to benefit from that going forward. Harry Samuel and the team on treasury services have done a really good job since that acquisition. It's fair to say, though, I guess, that we need higher interest rates to really get this business moving higher. Is that? Like our wealth management business as well, but treasury and investor services, they've had good deposit growth. Higher interest rates would be a real benefit. We've improved the securities lending side of the business, the FX side of the business. I mean, crossing over, as Gord said, with the investment bank, and also having the RY name attached directly to the business has improved its numbers. But higher rates would be good. Okay. Thank you. Thank you. The next question is from Steve Theriot from Bank of America Merrill Lynch. Please go ahead. Thanks very much. I apologize if I missed this earlier, but for Doug, I noticed on slide 25 of the deck a really nice lift in U.S. loans outstanding to 30 from 26. You've been sort of on track the last few years to add roughly CAD 5 billion a year, but you added CAD 4 billion in Q1. I suspect a touch of that is currency, but if you could talk a little specifically about the momentum you're having in U.S. corporate lending and what your expectations are for this year. Yeah. It is largely, or a good amount of that lift is currency. As I said earlier, I think that the growth in the U.S., it will be across the whole book, will be high single digits this year. Where we are is we're not adding substantially to the investment banking complement in the U.S., and so what you're finding is that the loan book is starting to reflect the loan book we need to have the proper number of customers for our investment bank. So we'll continue to look for opportunities with the loan book in the U.S., but the large part of the build-out really came when we added significantly to the headcount of our corporate and investment bankers over the last three years. Okay. Then just a follow-up for Dave, just a numbers question. The personal loan growth of 8% that you speak to this quarter, can we get that ex Ally? We'll have to. Yeah. We'll get We'll have to get back to you on one ex Ally. Steve, we'll get back to you on that. Okay. That's fine. Thank you. A good share of that growth will come from Ally. Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead. Thanks. I'd like to follow up on the bail-in and NVCC question. You said your next objective is sub-debt tier 2. So really two questions around this. What value does sub-debt have when it's not included in CET1 or pending leverage ratios? And doesn't sub-debt just become a relatively more expensive form of funding as opposed to deposit notes, let's say? And is there any daylight that you see for a tax-deductible form of NVCC, like an innovative tier 1 that would be NVCC? Thanks, Michael. I think that the reason we're focused on sub-debt is because it is a tax-efficient form of capital for us, and we would like to work through the current regime in terms of recovery. With respect to any innovative tier 1, that would be also on our roster. But I think that because we're dealing with inserting regulatory provisions into the instruments, we're trying to do this on a pretty measured and stepped basis. We know that there's receptivity in the market for sub-debt issuance for us, and that's why we're pursuing this. And we would like to actually pursue any sorts of capital instruments because as you know, we're focused on ensuring that we have strong, solid, tax-efficient capital base to rely on in terms of supporting our future growth. I think it is because we are stepping into new territory that we are doing things with this measured approach, and because we have heard from investors that there is demand for these sorts of instruments, particularly in Canada. Thank you. Thank you. Are there are no more questions? There are no further questions. There are not. Okay. Thank you. Well, that's very good timing because we have our annual meeting, which starts in 35 minutes. I would like to once again thank everybody for their participation on today's call. We look forward to our discussions next quarter. We do hope that many of you will join our annual meeting in about 35 minutes. I know it's a busy day, but hopefully you'll be able to listen in to our annual meeting where we'll have more to say about the bank. Thank you very much, and we'll see you all soon. Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.