Earnings Call: Q2 2013

May 30, 2013

Good morning, ladies and gentlemen. Welcome to the RBC 2013 second quarter results conference call. Please be advised that this call is being recorded. I would now 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, President and CEO, Morten Friis, 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 is one hour long and will end at 9:30 A.M. To give everyone a chance to participate, please keep it to one question and then re-queue. We'll be posting management's remarks on our website shortly after the call. Joining us for your questions are George Lewis, Group Head, Wealth Management and Insurance, Doug McGregor, Chairman and Co-CEO, Capital Markets, and Co-Head of Investor and Treasury Services, Dave McKay, Group Head, Personal and Commercial Banking, Mark Standish, President and Co-CEO, Capital Markets and Co-Head of Investor and Treasury Services, and Zabeen Hirji, Chief Human Resources Officer. As noted on slide 2, our comments may contain forward-looking statements, which will 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. I'm pleased to announce that RBC earned CAD 1.9 billion in the second quarter, up 26% from last year. Excluding certain items pertaining to our acquisition and the integration of RBC Investor Services, which Janice will expand on in her remarks, our earnings were approximately CAD 2 billion, up 13% from last year, and excluding amortization of intangibles, earnings per share were CAD 1.31. We had solid earnings growth compared to last year across all of our business segments, with Canadian banking and our corporate and investment banking and asset management businesses being particularly strong, but I would emphasize that all of our businesses were up. Year to date, RBC has earned just over CAD 4 billion, delivering a return on equity of 19.1%. Our all-in common equity Tier 1 remains strong at 9.1%, and that's notwithstanding the 45 basis point reduction as a result of Ally. That strong ratio gives us flexibility in deploying our capital as we strive for the optimal balance between investing in our businesses for longer-term growth and returning capital to our shareholders through dividends and share buybacks, which we started this past quarter, as well as pursuing acquisitions like Ally. The strength and complementary nature of our diversified business continues to contribute to our earning power. Even as the Canadian banking industry is facing slower growth, we remain confident in our ability to successfully execute on our strategy, extend our leadership position, and invest for long-term growth. In fact, during the quarter, we were recognized by Bloomberg in their annual list of the world's strongest banks. RBC was ranked the fourth strongest bank in the world, up 2 spots from last year. Let me now turn to our business segments. Personal and Commercial Banking had a strong quarter with earnings of CAD 1.1 billion. Our momentum in Canadian banking continues. Each of our businesses had solid volume growth compared to last year as we continue to leverage our size and scale to take a disproportionate share of industry growth while profitably gaining market share. Our integration of Ally is well underway. We are seeing good progress as we have retained over 95% of commercial clients since closing this deal, and our pipeline remains strong. These results reflect our ability to meet our customer needs with superior advice, convenient service, and value for money, even as market dynamics shift. As we bring our advice and solutions to our clients precisely when and where they need the most, we remain focused on innovation through new partnerships, online features, and mobile applications. As an example, we recently partnered with Bell to provide secure integrated mobile payment solutions for both debit and credit transactions, and with McDonald's, Moneris, and BlackBerry to deliver the first Canadian mobile debit transaction using mobile Interac Flash. We expect both of these applications to be rolled out more broadly by the end of the year. I'm also pleased to note that our innovative approach to meeting our clients' needs was recognized recently by Retail Banker International as we took the top spot for the first time in the highly competitive Innovation in Customer Service category. For the second consecutive year, we were awarded best retail bank in North America in recognition of the strength of our Canadian banking operations, including the size, scale of our distribution network, and breadth and quality of our product offerings. In Caribbean banking, while our performance improved this quarter, reflecting some signs of stabilization in credit quality, results do continue to reflect a prolonged weak economic conditions in the region. Turning to wealth management, we continue to see good momentum in both our global asset management and wealth management businesses across most of our regions, and we delivered another solid quarter of earnings. In global asset management, we remain the leader in mutual fund sales in Canada, capturing 23% of the market, and net flows strengthened in Canada, the U.S., and BlueBay, which benefited our institutional asset management business. RBC Wealth Management continued to gain market share and as the largest full-service wealth manager, asset manager, and mutual fund provider in Canada, remain the clear leader. We rank first among bank-owned brokerage firms in Canada in Investment Executive's Brokerage Report Card, and we're recognized in Canada for best private banking services overall by Euromoney. in the U.S., we continue to make good progress on increasing advisor productivity and efficiency to capitalize on improving market conditions. We were ranked the highest in investor satisfaction among all full-service brokerage firms, according to J.D. Power and Associates. Internationally, we continue to expand our high and ultra-high net worth market share and leverage our capabilities to win more business. Moving to insurance, we had another solid quarter of earnings, and this business continues to make consistent contributions to our diversified earnings stream. In Investor and Treasury Services, we continue to make solid progress towards integrating RBC Investor Services and strengthening the business model to adapt to the changing operating environment. While we continue to improve our efficiency and streamline our operations, we are also leveraging our reputation, brand, and financial strength to win new clients and business. Our commitment to delivering superior service to our clients was once again recognized by the R&M Global Custody Survey, where we recently won Best Overall Custodian for the third year in a row. We also retained our title as Fund Administrator of the Year in Canada as part of the 2013 Custody Risk Americas Awards. Excuse me. Moving to Capital Markets, we continue to see strength in our corporate investment banking business as we remain focused on origination-led and client-based lending and fee-based activities in our target sector and geographies. Our diversification is key strength and reflects what we believe is the right balance of business and geographies to derive growth while managing risk. Our U.S. business now generates significantly more revenue than our Canadian business, and we continue to focus on building client relationships and increasing our market share. Our solid results in that market are helping offset the impact of the prolonged recession affecting many European countries, as well as some softness in commodity markets in Canada. As an example of our strong momentum in the U.S., RBC acted as lead financial and technical advisor to SandRidge Energy, a U.S.-based oil and gas E&P company, on the sale of its assets in the Permian Basin to U.S.-based Sheridan Production Partners for $2.6 billion. This transaction represented the largest single onshore conventional oil divestiture in the past 10 years. As part of this transaction, we also acted as lead arranger and joint bookrunner on the $1.7 billion five-year senior secured revolving credit facilities used to fund Sheridan's acquisition of SandRidge. Turning to Global Markets, while we have shifted the balance from trading to more lending and traditional investment banking, and continue to realign our fixed income and global equities business to a more originated-led model, results can be impacted by changing markets, new regulations, and slowing economies. While our second quarter results are typically lower than the seasonally adjusted strong first quarter results, trading was particularly soft in the latter part of the quarter due to persistent weakness, particularly in Europe, and a reduction in market volatility and some emerging regulatory reforms. We have started to see trading volumes tick back up in May, and we seem to be off to a good start. We remain focused on our originate-to-distribute model and increasing our relevance to both issuing and investing clients to produce sustainable fee-driven income streams. We're happy with our progress thus far. We've increased our global fee market share for our debt capital markets business by 38% from last year, according to Dealogic, and we have increased the number of book run deals in North America by 23% in the last 6 months. To conclude, our results this quarter demonstrate our ability to extend our leadership position by successfully executing our strategic initiatives and making focused investments that deliver long-term shareholder value. Looking ahead at the remainder of 2013, the industry will continue to face some economic and regulatory headwinds. However, we do remain confident in our ability to deliver solid results, and we are on track to meet our financial objectives. With that, I'll turn it over to Morten. Thank you, Gord. Starting with credit on slide 7, overall credit quality improved compared to the prior year and prior quarter. Provisions for credit losses on impaired loans were CAD 288 million this quarter, down CAD 61 million over last quarter or 6 basis points to 29 basis points. The main driver of this decrease was lower provisions in Capital Markets, where provisions were CAD 40 million or 31 basis points, down CAD 69 million compared to the prior quarter. Provisions this quarter related to a couple of accounts within the technology and media sector. Loan loss provisions within our wholesale portfolio should be expected to show some degree of variability from period to period, with this quarter's provisions falling at the better end of the range. Overall, we remain comfortable with the quality of the wholesale loan book. With respect to Canadian Banking, provisions were CAD 234 million, up CAD 21 million over last quarter or 3 basis points to 29 basis points. We continue to see stable performance in our retail portfolios, with provisions on residential mortgages of 2 basis points and 279 basis points for cards. Provisions in our commercial portfolio were up slightly this quarter at 33 basis points. Overall, provisions of 29 basis points in our Canadian Banking portfolio will remain near historic lows, reflecting very strong credit performance across all products. In the Caribbean, provisions on impaired loans were CAD 19 million, down from the prior quarter, which we believe represents sustainable level of loan losses for this portfolio. Conditions in the Caribbean remain challenging, and achieving ongoing stability and asset quality will depend on improving economic conditions in the region. With respect to gross impaired loans, new formations increased slightly over last quarter but remained within our historical range. Turning to market risk, Value at Risk was CAD 42 million, and average stressed VaR was CAD 84 million, both at similar levels to last quarter. During the period, we had 3 days with net trading losses totaling CAD 5 million, none of which exceeded market VaR, with the largest loss of CAD 2 million driven by RBC's credit spread tightening. With that, I'll turn the presentation over to Janice. Thanks, Gord, and good morning. Turning to slide 10, we had a strong second quarter with earnings of approximately CAD 1.9 billion. Excluding the restructuring charge in the current period related to the integration of Investor Services and a loss in the prior year related to the acquisition of the remaining 50% interest in that business, earnings were close to CAD 2 billion, up 13% over last year. Overall, it was a clean quarter. As Gord mentioned, we had solid earnings growth in each of our business segments, with particular strength in Canadian banking, as well as our corporate and investment banking and asset management businesses. Turning to our capital discussion on slide 11. As you know, RBC, along with five other big Canadian banks, was designated a domestic systemically important bank by OSFI. As a result, we are required to maintain a 100-basis-point capital buffer on top of the Basel III minimum common equity Tier 1 ratio of 7% by 2016. At 9.1%, our common equity Tier 1 ratio remains comfortably above the 8% combined requirement. Our Ally acquisition, which closed February 1st, negatively impacted our ratio by 45 basis points. As well, we began repurchasing shares this quarter under our normal course issuer bid. Turning to the performance of our business segments, starting on slide 12. Personal and Commercial Banking earned over CAD 1 billion for the fourth consecutive quarter, up CAD 117 million or 12% from last year, reflecting 9% volume growth in Canadian banking, with growth across all of our businesses and particular strength in personal lending. Net income decreased CAD 63 million or 6% sequentially, largely due to the negative impact of seasonal factors, including fewer days in the quarter. Turning to our Canadian business, margins in Canadian banking were down five basis points from last quarter due to lower spreads reflecting the continued interest rate environment and competitive pressures, particularly in business lending. The Ally Canada acquisition negatively impacted our margins by approximately one basis point, primarily due to costs associated with the unwind of the deposits. We also experienced some accounting volatility this quarter, which negatively impacted our margins by approximately two basis points. Of the five-basis-point decline, about half is not recurring. As I mentioned on our last quarterly call, we expect margins to remain under pressure for the remainder of 2013 given the interest rate environment, slowing consumer lending, and competitive pressures. Let me briefly comment on Ally Canada. Ally contributed earnings of CAD 12 million this quarter, or CAD 24 million when you exclude the CAD 12 million of integration costs and amortization of intangibles. Integration of the business is proceeding well, and we continue to expect that it will generate earnings of around CAD 120 million on a standalone basis, excluding integration activities within the first 12 months after closing. Our reported operating leverage and efficiency ratio were 0.7% and 45%, respectively. Excluding the impact of the Ally Canada acquisition, our operating leverage was 1.8%, driven by solid revenue growth and continued benefits from our cost initiatives. On the same basis, our efficiency ratio was 44.6%, down 70 basis points from last year, and we remain committed to driving the ratio down to the low 40s in the medium term. Turning to Wealth Management on slide 13. Net income was CAD 225 million, up CAD 13 million or 6% from last year due to higher average fee-based client assets resulting from net sales and capital appreciation and improved transaction volume. Sequentially, net income was down CAD 8 million or 3%, as higher average fee-based client assets this quarter were more than offset by the seasonality of performance fees earned in the first quarter. As a reminder, we typically recognize performance fees in the first and third quarter. Moving to Insurance on slide 14, net income of CAD 166 million was up CAD 15 million or 10% over last year, driven primarily by a favorable change in actuarial adjustments, investment gains, and favorable life experience. Compared to the prior quarter, results were relatively flat. Turning to Investor & Treasury Services on slide 15. Earnings were CAD 67 million this quarter, compared to a net loss of CAD 121 million a year ago. Excluding the restructuring charge in the current quarter related to the integration of Investor Services, primarily in Europe, and the related acquisition loss in the prior year, as noted on slide 15, earnings were CAD 98 million, an increase of 21% over last year and were up 23% over last quarter. Earnings grew over both periods, reflecting improved results in Investor Services as we benefited from ongoing cost management activities, higher foreign exchange revenue, and higher fee-based client assets. Our results were partially offset by lower funding and liquidity revenue. As Gord mentioned, our Investor Services integration efforts are well underway. As the majority of our integration costs occurred this quarter, we anticipate these costs to decline for the remainder of 2013. Turning to Capital Markets on Slide 16, earnings of CAD 386 million were up CAD 15 million or 4% from last year, driven by strong growth in our corporate and investment banking businesses, particularly in loan syndication and lending in the U.S. This strong performance was largely offset by lower fixed income trading in Europe, particularly in the latter part of the quarter, driven by challenging market conditions. Compared to last quarter, net income was down CAD 78 million or 17%, mainly due to lower fixed income trading results driven by challenging market conditions and a seasonally strong first quarter. While our corporate and investment banking results were solid, they were not as strong as the robust levels we saw last quarter when we closed a number of large M&A and loan syndication deals. To wrap up, we're very pleased with our performance this quarter. Every business segment grew earnings compared to last year, demonstrating the continued strength of our diversified business model. At this point, I'll turn the call over to the operator to begin Q&A. Please limit yourself to one question and then re-queue so that everyone has an opportunity to participate. Operator? Thank you. We will now take questions from the telephone lines. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from John Aiken of Barclays. Please go ahead. Good morning, Janice. A couple quick questions on the personal commercial margins. Can you give us a little more context about the accounting volatility that you mentioned? In the Caribbean, can you give us some flavor as to what's going on with the margin compression there? It looks to be fairly significant this quarter. Should we look at that in context with the improving provision for credit losses coming out of the region? Thanks for the question, John. I'll first address the margins in Canadian banking. The accounting volatility that we're talking about is on cash flow hedging, and it's basically with respect to our mortgage book. It is basis risk that we were exposed to, and going forward, we don't see that happening. So it was a one-time adjustment that we have. When you look at the issue with respect to Ally, it is about the deposits and some of the high-cost deposits and the wind-down of that business. When you look at what we're looking at in terms of margin compression, we've always signaled that there would be around a two-basis point compression as we went through the year because of what was happening with interest rates. I think that we are on where we thought we would be with respect to the margins. John, it's Dave. On the Caribbean, you're seeing a similar core impact on the lower rate environments in the Caribbean with the struggling economies and the interest rate environments and the rollover of our loans into lower yields in general. So a very similar type of impact in the Caribbean right now. Dave, in the Caribbean, though, when you are rolling over those loans, as we are seeing the provisions decline, are you moving back on the risk? Or is this purely just the environment in terms of low-risk environment and what you actually can charge in the region? That is a great question. I would say yes, we are moving back on the risk as we have cleaned up our book and taken charges over the last four to six quarters as you have seen. Certainly, our risk appetite is one of caution on the commercial side given the challenges in the economies right now. Great. Thank you very much. Thank you. The next question is from Robert Sedran of CIBC. Please go ahead. Good morning. I guess it's a question for Morten. We've seen credit card loss rates at some of your competitors this quarter actually come down, albeit from higher levels. I'm wondering if the increase in your credit card loss rate this quarter is just related to seasonality? Perhaps what your thoughts are about the direction of these loss rates overall. Are we basically at trough levels and are just going to bounce around a little bit, or is there some kind of trend still taking place? I'll start, and Dave may want to fill any. There is a seasonal feature to this. I guess from a risk management perspective, I would say that having the cards portfolio perform at loss rates below 300 basis points is a good place to be in this part of the cycle. I would say, seeing the levels at 279 basis points, while it's up a bit from last quarter, it still reflects very strong performance. I would see it bouncing around at those levels if the economic conditions remain where they are. All I would add is that we have very strong origination growth. Normally, cards exhibit a little bit higher rate the first year they're on the books, that first year vintage. A little bit of the strong acquisition trend we're on. But as Morten said, the absolute rates of the card portfolio given the yields are in the 11%-12% is a very profitable place to be. No concerns there whatsoever. Thank you. Thank you. The next question is from Peter Routledge of National Bank Financial. Please go ahead. Hi. A quick question for starters on page 22, you give the average LTV of 47%. I will make an assumption that that is an average LTV weighted by property value. One of your peers disclosed the LTV if it was weighted by mortgage balance. It is quite a bit higher when you weight by mortgage balance, at least for one of your peers. Would it be 5 to 10 percentage points higher if you weighted by mortgage balance? Yeah. Peter, it is Janice speaking. We will have to go back and confirm that particular metric. We will try to get some information during the call. Why don't we get back to you on that? No problem. Just on mortgages, there has been a lot of rhetoric about put back risk in some corners. The risk being there would be systemic put backs by CMHC to the banks, and therefore you would have higher mortgage losses than historic norms. The trigger often cited is just faulty appraisals. Is there any reason to think that there is a systemic issue with appraisals that might redound on the banks, in the form of the CMHC refusing claims? How likely an outcome is that? Well, one, most of the banks, including ourselves, use the emili appraisal service, which is CMHC's own appraisal, as they would do their own due diligence with emili. I don't think it would be the nature of the appraisal service. I think where operational risk evolves is the representation of the facts. So if they were to go back to the loan application and find that the facts on income or on rental versus costs, other costs are different than what was presented during the adjudication process, then I think you have technically an opportunity to negate the claim. But I don't think it's just on how you use appraisal. It's really the adjudication process that would create most of the operating risk, which is why our bank, including I'm assuming most others, are very careful about our facts that are being submitted and how we put those applications together. Thanks. Just on- I would just reiterate, I think that in summary, the likelihood of that is almost nonexistent. Thanks. Just to clarify, the emili system, that's a technology service that CMHC generates revenue from, right? Right. Yeah. Which I would assume they use for their own appraisals. Exactly To make their own adjudication decisions themselves, right. All right. Thanks for that. I appreciate it. Peter, it's Morten. Yeah. Just in terms of the use of emili, it is one of several tools that we use. Depending on the property, we have full appraisal. So emili is a supplemental tool that we use in the appraisal process. To reiterate Dave's point, the risk around refusal on the insurance all relates to the accuracy of the documentation that we provide. We have ongoing audits and reviews with CMHC, and our track record with them is extremely strong. The point on the risk of put back here, first of all, would be completely inconsistent with our historical experience with them. As Gord is saying, I think it's an extreme tail risk, where they obviously as an insurer, have some ability to dispute claims. But I think our track record on accurate documentation is pretty strong. Thank you very much. Thank you. The next question is from Don Ruecklesen of BMO Capital Markets. Please go ahead. Thank you. Question for Mark, just on trading. Gord mentioned that trading has picked up since quarter end. Could you just give some flavor on the Zec because volatility's picked up? Were you missing something on client flow or is client flow picking up? Then just on the regulatory issues in Europe, do you expect Europe to respond to kind of how the U.S. has imposed stricter rules on foreign subs? If so, is it prudent to expect that? If not, why not? How does that impact Royal's European business there? Okay. Thanks, John. I'll handle the market question first. I'd refer you to page 33 of the report to shareholders where you can see the revenue and VaR chart, and you can see there that the second half of the quarter was very quiet indeed. As we've mentioned, Europe was extremely quiet. We basically didn't make any money there. But also the rates business in the U.S. was also quite quiet. One of the reasons for that is we had the U.S. 10-year down at 1.63%, and when down there was very little secondary activity. On the positive side, however, we did see very good debt capital markets, DCM activity. Corporate bond issuance in the U.S. now accounts for about 45% of our global DCM revenue. Two years ago, it would've been 25%. Now, what's different with that than usual is at such low rates, we were advising clients to issue fixed debt and not to swap back to floating. So we didn't get a lot of that additional secondary flow activity that we would normally see. Now, coming into May, as Gord mentioned, we've had a pickup in volatility and rates. We've had a 60 basis point increase in 10-year U.S. governments. We've had a lot of volatility in other markets, Japan in particular. So now we've seen certainly a pickup in secondary flow. Other products performed quite well through the quarter. Foreign exchange credit and municipal products performed quite well. I think as Gord said, May is off to a fairly strong start. In terms of the European question. Yeah, I mean, It's hard to know which is the chicken and which is the egg. The U.K. was the first to introduce Vickers, which was their form of ring fencing, and obviously now with the potential legislation with respect to FBO in the United States, you're seeing some of that obviously in the U.S. I think from our perspective, we would be more focused on how the U.S. is going to unfold rather than the U.K. I don't think it will have much of an impact or much change with respect to the U.K., and certainly the nature of our operations in the U.K. because it's primarily capital markets and wealth management. To answer your question specifically, with respect to the U.K., we don't think it will have much of an impact, but we're obviously watching the U.S. very closely in terms of how the rules may unfold with respect to subsidiary regulation in the United States. And we're quite comfortable in terms of our ability to manage that, as we've said in past quarters, but it will obviously have an impact on structure. But John, it is definitely weighing on activity levels in Europe, all of this regulatory uncertainty. And now you can add to that, given the results in the U.K. and the strength of UKIP with respect to exiting Europe for the U.K., there's that added uncertainty in there that the market has to deal with. And it's probably not going to improve much in the short term either. Okay. Thank you. Thank you. The next question is from Michael Goldberg of Desjardins Securities. Please go ahead. Thank you. I want to follow up on a question I had last quarter, and that relates to Ally. At the end of January, the personal demand and notice deposits in ResMor were just under CAD 1.6 billion, and the latest number is about CAD 630 million, so you've lost about 60% of those deposits. My question is, why didn't you just sell the deposit business? I know these numbers aren't significant, but it would seem to me that getting something would've been better than getting nothing. Yes, it's Dave here. The piece that you're not seeing is that we've been able to retain a significant amount of those deposits in our traditional business. While those high-interest savings accounts migrated from 180 basis points to 120, we were able to migrate many of those balances over to our own high-interest savings account. On the GIC side, we've been in the market with offers to our Ally clients, very attractive offers, and we've retained a significant margin of those clients. We felt it was much more economical to retain that business and RBC product than to try to go through an extraction and sale of ResMor, which would have been extremely costly, and our retention numbers bear that out. How much of that CAD 900 million in the first two months would've moved over to RBC? We've retained, I would say between 70% and 75% of total HISA and GIC balances. As you look at those decline in balance, take 75% of the delta, and they would've moved over to RBC. The additional benefit of this is we've had really broad conversations with those deposit customers, and we've been extremely successful in broadening our relationship on the investment side at the same time as we've put our best investment retirement planners in front of that client base. We've seen significant investment cross-sell in addition to retaining over 70% of the GIC and HISA balances. Overall, I think the strategy to retain that business through our organic channels has been very good for us. Okay. I'll requeue for another one. Thank you. The next question is from Stefan Nedialkov of Citigroup. Please go ahead. Yeah. Hi, good morning. It's Stefan Nedialkov from Citi. I had a question on the insurance business. It's quite a volatile P&L this quarter. It looks like investment income was quite strong, but of course, the disability benefits were much higher as well. Some of your peers are also taking charges for low interest rates. Could you just give us a sense of how the P&L is likely to evolve over the rest of the year? Should we be expecting sort of high investment income being offset by being marched by higher benefits, or is this really just a one-off type of performance? Sure. Thank you. Thank you. Thanks, Stefan. Oh, right. Sarah, do you want to take that? Stefan, why don't I first of all take you through some of the accounting where for some of the life policies that we have, of course, we increase the revenue and then the policy holder claim is the contra or offset. Those two lines, we actually look at them together and look at the net number. George will take you through some of the business color, but there is that nuance on the insurance business, and that's why when you look at our metrics, we're always saying what a metric is without that in terms of revenue growth. The policy holder benefits claims and acquisition, some of that reflects the policies that are owned by our policy holders, where we pick up the volatility or the mark in the revenue and the claims line. I think that if you look at the business going forward. George, would you like to talk about that? Yeah. Just to build on that. Yes, please. What you're seeing is actually from an earnings point of view and a net revenue point of view, really a lack of volatility for the reasons that Janice just outlined. I think overall for the quarter, it was a fairly solid quarter, and one that I think reflects the run rate for the business. The only thing I would point out from here going forward to the balance of the year is that we did not benefit in the first half in insurance from any new U.K. annuity contracts, and that's the business where we take on longevity risk as pension plans are immunized. That is a source of upside, I would say, for the second half beyond what you're seeing in the quarterly run rate in Q2. The one thing I would also add is with respect to interest rates, we've spent a lot of time neutralizing the business over the past seven or eight years for the volatility of interest rates. Of course, lower interest rates will have an impact on the valuation of the liability, but we have put a lot of rigor around asset liability management in insurance. So you would've seen over the past few quarters where comparable insurance companies have had way more volatility than we have because of the rigor we put around managing our assets and liabilities, and we started that about seven or eight years ago. Okay, great. Very clear. Thank you very much. Thank you. The next question is from Mario Mendonca of Canaccord Genuity. Please go ahead. One quick question on the domestic NIM. I want to make sure I understand what you mean by half of the deterioration NIM being non-recurring. Does that mean that all things held constant, you would get a two, call it 2.5 basis point lift in the NIM next quarter? Or are you just saying that that just will not reoccur? Yeah, Marielle, Janice. We are saying that will not reoccur. So when you are measuring NIM, it depends on where you are quarter-over-quarter or year-over-year, but we are saying that our expectation, given the low interest rate environment, is about a one to two basis point decline per quarter as we move to the end of the year, just because of our asset portfolios, of course, running off and the repricing that has occurred in the market. It has to do with actual runoff and duration. We have always signaled that that would happen over the course of the year. Just real quickly on the reference that you were making to the regulatory issues impacting your trading revenue, what message are you trying to send us? That if everything were precisely the same next year as it is this year, and I know that is not really possible, but everything the same except for the change in regulatory, how much of your business would be impacted by the regulatory changes? I think you've got to look at that, Marielle, by geography. In terms of Canada, which performed quite well in the quarter, it's steady as she goes. In terms of the U.S., while there is a lot of uncertainty, the only thing that really is looming for us is the Volcker rule, and we don't have the final rule to look at yet, so it is still tough to comment on that. The question, I think, really comes back down to Europe, which is where we've struggled for some time now, given the uncertainty from a credit perspective around sovereigns and not just corporates. I certainly think in the short term, we'll see some sort of improvement there. We've seen that as we come into May, as volumes have picked up. But from a headline number perspective, I think what we've talked about in the past is still good. I think you'll just see more of it come from the U.S., and more of it's going to be linked to activity in debt capital markets and less of it coming from Europe. But the jury's still out in terms of what we've got to do going forward there. Thank you. Thank you. The next question is from Gabriel Dechaine of Credit Suisse. Please go ahead. Hi. Good morning. Going to also have a follow-up from last quarter. Mortgage risk weights in Canada. You're the only bank that actually focuses on the mortgages. You don't lump in HELOCs in the exposure. I estimate for Canada, so I have to strip out the Caribbean mortgages, there's about a 6% risk weighting on the Canadian uninsured mortgages. It's at odds with what Julie Dickson was saying about Canadian mortgage risk weights, uninsured mortgage risk weights in the mid-teens. I'm wondering if you can shed some light on the discrepancies between what I'm seeing and what she's seeing, perhaps. Also in your commercial loan book in Canada, you've got CAD 16.8 billion of real estate-related loans. The growth there has been pretty substantial like other banks. I'm just wondering if you can break down what components are in that 16.8, REITs, commercial mortgages, development, apartment buildings, whatever. Thanks. Doug, you go first. Okay. In terms of the mortgage activity, what we have been doing is we've been making some larger drawn loans against to primarily REIT customers, where we're very active. We're the market leader there. It's all against large office buildings and shopping centers for public REITs and some of the pension funds, for instance, OMERS. It's a concerted effort really to take reasonable loan-to-value, certainly under 70% against high-quality properties at spreads that we find attractive. Most of that growth has been coming from REITs, which I've seen your And most of that's a lot of it by Canada. Yeah. That is the Canadian book. In the U.S., we lend to about 50 REITs. We have a fairly significant real estate practice, which is ramping up quite nicely. We have a full research capability. We have been lending again to the REITs and some of the private equity funds. Two that come to mind are Lone Star and Blackstone, which we think are probably the market leaders, and we have done significant business with both in the U.S. and Europe over the last 18 months. Okay. What is the 16.8 REITs versus other stuff? Can maybe you get back to me on that? Yeah. It is Gabriel. Dave, in Canada, our commercial real estate book on the P&CB side is around CAD 13 billion. That is largely developer risk, high-rise condo, mid-rise condo, some single-family home. We have been doing that for decades, as you know. The growth in that portfolio is not disproportionate to the growth in the overall commercial portfolio of 9%. Some of the characteristics that we are seeing in the commercial real estate development side are longer time to get to pre-sales. As you know, 80% pre-sale. Some projects are slowing down. A general slowing, but still relatively good demand on the developer side, but not disproportionate growth to the overall commercial portfolio. Thank you very much. On the mortgage risk weights? Well, on the mortgage risk weights, we probably will need to get back to you on the detail. The average is 5%, which is heavily weighted by the fact that the predominant part of our book is in Canada. I cannot comment on Julie Dickson's comments. But if you look at the loss rates in our supplementals, you will see that the loss rates suggest a risk weighting lower than what we have on the book. But on the details, we will have to get back to you. Okay. It is a bit unfair to single you out because your peers actually lump in HELOCs, which make the risk rates look higher, and it is not a fair comparison. Anyway, if you could get back to me this time, that would be great. Thanks. Thank you. Once again, please press star one if you have a question. The next question is from Sumit Malhotra of Macquarie Capital Markets. Please go ahead. I think that is me, so I will give it a shot. I am a bit flustered now. If it's not, we'll take our chance. Yeah, I'll come up with something. Let's start in Canadian banking for Dave McKay. Your credit cards growth has been amongst the best in the industry over the last year. You've been one of the only banks that's actually been growing it. This quarter we saw a decent-sized pullback of CAD 400 million. Anything you can point to on that side, whether that was driven by customers or whether that was an initiative that the bank is looking at given consumer debt levels in Canada? Hi, Dave. No, we're very happy with the growth in our portfolio. It's a combination of the acquisition of the Shoppers Drug Mart portfolio from MBNA and good growth in that portfolio. Very strong growth in our core platforms such as Avion. Good acquisition growth overall, which I referenced in earlier comments. The growth is strong. The pullback is more seasonal than anything. You always see very strong growth in Q1 because purchase spend is high and then revolve rates go a little bit higher in Q1. You see a bit of a seasonal pullback, but there is no change in risk strategy, appetite, or outlook. We are bullish on credit cards and spend. We're leading the market in spend. We have new product in the Target co-brand coming to market, is in market now, and we have high hopes for that. We're looking to this sector and this product to continue to drive our business, and it's the leading growth business that we have right now at 20% year-over-year. We are very happy with our credit card business. Yeah, Dave, you're right. As I go a little bit further back in the file here, it seems to always dip from Q1 to Q2. Thanks for that. If I just stay with you on this same product, we were on another call an hour ago, and there was a lot of talk about the future of the travel credit card market in Canada. At least from my seat, it seems like you're pretty well positioned if that particular product scene would your competitive response as potentially one of the bigger competitors may be changing hands. We do believe in the Avion product. We have the best product in the market. That's what customers are telling us. It is a very large portfolio. With the WestJet co-brand product it will create customers to re-point of significant opportunity for us to present our solutions to a large number of Canadians who might not consider them otherwise. So from that perspective with Avion, WestJet, and our co-brand portfolio. I'll leave it there. On your share repurchase program, you're approved for one. Is the level this quarter the amount you're comfortable in using as a run rate, or is this something we should expect the bank to step up given where your capital position is? Hi, Sumit, it's Janice. We started the program later on in the quarter because we felt that we were at optimal capital levels, so we will continue to execute on the program. So it's a matter of timing last quarter because we didn't start it until the third month of the quarter? We felt it was important to absorb the Ally capital. Absolutely. Yeah. And we've earned the bulk of that back now. Yeah. I don't know where we are on the queue here, Jim. Do I have time for one more or should I jump back in? I don't think there is a queue, so you better go. Okay. So very quickly on, it's for George Lewis in wealth management. Kind of surprised to see wealth revenue flat quarter-over-quarter and what looked like a month or a quarter of very good sales in Canada and obviously a very strong market in the U.S. Particularly with your U.S. wealth management operations, I've always thought of those as being more transaction oriented. So can you help us understand why revenue was basically unchanged sequentially despite what looked like some pretty good operating trends or operating backdrop? Sure. Thanks, Simon. I think it's a couple things to highlight. One would be it is a quarter with fewer days, and so our fee-based assets are done on that basis. So Q2 over Q1- Canadian banking is always a little bit down in terms of revenue. The second thing would be we did have performance revenues that Janice highlighted in the first quarter, and that didn't occur in the second quarter. So the underlying volume trends, to your point, are very encouraging. I mean, year-over-year, our AUM is up 15%, our AUA is up 8%. So apart from those two factors influencing the quarter-over-quarter, I was very pleased with our revenue growth. And we're setting up, I think, for much better year-over-year comparisons for the second half given the trends that we're seeing in the business. Those performance fees for BlueBay, I think it's mentioned in the literature that they get booked in Q1 and Q3. Are you in a position to tell us how much that added last quarter? How much the sequential increase would have been X of that? What I can say is that they are recorded in the first and third quarters. The bulk of them are recorded in the first quarter, so Q3 is not as large an impact in terms of as they were in Q1. But it was a significant impact for our asset management business in the first quarter. Having said that the second quarter revenue continued to increase in that business as well. Thanks for your time. Back to Thank you very much, operator. I'd like to thank everyone for joining us again on this call, and we look forward to presenting to you again next quarter. Have a good day. Thank you. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.