Earnings Call: Q1 2011

Mar 3, 2011

Please be advised that this call is being recorded. I would like to turn the meeting over to Ms. Josie Merenda, Vice President and Head of Investor Relations. Please go ahead, Ms. Merenda. Good morning, and thank you for joining us. Presenting to you this morning are Gordon Nixon, our CEO; Morten Friis, our Chief Risk Officer; and Janice Fukakusa, our Chief Administrative Officer and CFO. Following their comments, we will open the call for questions from analysts. The call will be one hour long and will end promptly at 8:30 A.M., as this call is followed by our annual general meeting. 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 for your questions are George Lewis, Head of Wealth Management; Doug McGregor, Chairman and Co-CEO of Capital Markets; Dave McKay, Head of Canadian Banking; Mark Standish, President and Co-CEO of Capital Markets; Jim Westlake, Head of International Banking and Insurance; and Zabeen Hirji, Chief Human Resources Officer. As noted on slide 2, our comments may contain forward-looking statements, which involve applying assumptions and have inherent risks and uncertainties. Actual results could differ materially from these statements. I'll now turn it over to Gordon Nixon. Thank you, Josie, and good morning, everyone. Following this call, we have our annual meeting, and we're hopeful that you'll all join us for that event. As you can see from our results, RBC is off to a great start in 2011. We generated record earnings of CAD 1.84 billion. These results were driven by record performances in Canadian Banking and Capital Markets and in Wealth Management, as well as very strong performance in Insurance and a significant improvement in International Banking, which was slightly profitable in the quarter. Our results were impacted by a few one-time items amounting to just under CAD 60 million. We grew earnings across all segments, demonstrating the strength and diversification of our businesses and the earnings power of this organization. We believe that our diversified business model differentiates us today and will set us apart from competitors over the long term. Having the right business mix diversifies our earnings and drives strong, consistent results through the cycle, as we saw this quarter. Much of this performance can be traced back to the groundwork laid over the past few years in building our domestic and global businesses. We extended our leadership position in Canada, and we used this strength to build our global platforms, and we are investing resources to grow market share in each of the markets in which we operate. As the global economy gained ground this quarter, we were well-positioned to capitalize on improved investor confidence, stabilizing asset quality, and stronger capital markets activities. Looking at current levels, the political unrest in the Middle East is having a macroeconomic impact. I'd like to make a quick comment. Simply put, we have minimal exposure to the impacted countries, and the situation has had a minimal impact on any of our businesses. In addition to sustaining momentum and building earnings capacity across our business, our focus remains on strengthening our balance sheet, optimizing our capital position, and prudently redeploying capital in each of our businesses. Our capital position at the end of the quarter was strong, with a Tier 1 capital ratio of 13.2% and a Tier 1 common ratio of 9.9%. Of course, that was after factoring in the BlueBay acquisition, which was a cash purchase of about CAD 1.4 billion. Over the past years, we have taken many steps to de-risk, strengthen, and improve the liquidity of our already strong balance sheet. As an example, in Capital Markets, we sold the remainder of our correlation book, and we restructured our BOLI portfolio. This quarter, we settled our claims with MBIA, thereby reducing accounting volatility. We continue to hold the underlying assets, which we believe are appropriately provisioned. However, we are taking the necessary steps to sell down these assets when opportunities arise with favorable outcomes. In International Banking, we de-risked our AFS portfolio in both the U.S. and the Caribbean. In Insurance, we have set the path to reduce our exposure to long-term U.S. annuities with the sale of Liberty Life, which is scheduled to close in the second quarter. We have significantly reduced our exposure to Level 3 assets, which currently represent 2% of our total assets as of January 31st, 2011, significantly down from the 5% peak at the end of 2008. Optimizing our balance sheet has always been important, and even more so now in the light of the changing capital regulations. Notwithstanding these new regulations, we believe that our strong liquid balance sheet underpins our financial strength and provides us with a high degree of flexibility and reduces risk. Our estimated pro forma Basel III common equity Tier 1 ratio already meets the 2019 minimum of 7%, even without the benefit of the phase-in of capital deductions outlined in the Basel guidelines. This pro forma assumes that certain internal counterparty credit risk models will be approved by the regulator. In preparation for the new rules, every business has done a tremendous amount of work to optimize capital usage and focus their efforts on products and businesses that generate higher risk-adjusted returns. As an example, we have been preparing for the changes arising from the new market risk framework and allocating additional capital against our trading book. We believe the expected growth in risk-weighted assets associated with the new framework will, on a relative basis, have less of an impact on RBC as compared to some of our peers, as we have a significant portion of our book on the standardized approach for regulatory capital. Therefore, a significant amount of our market risk capital is unaffected by these changes. I will address the new regulations and capital rules first during my AGM presentation. In short, my view is that strong banks like RBC will adjust to the new regulations and the changing economic landscape with minimal impact, and there will be an unprecedented range of opportunities for us to grow and invest in our businesses and continue to earn superior returns. Before I turn to our business segments, I want to point out that we are maintaining our quarterly dividend at $0.50 per common share, which puts us right at the low end of our payout ratio. We will monitor our earnings growth in the coming quarters and continue to review our dividend policy with our board of directors. Turning to our businesses, Canadian banking delivered record earnings with double-digit earnings growth. These results reflect our leadership and our proven ability to outperform in the marketplace. We managed to generate solid volume growth while expanding our net interest margin in a competitive environment, resulting in strong revenue growth both on a year-over-year and quarter-over-quarter basis. Although consumer credit is expected to moderate, we are beginning to see a pickup in commercial loans as companies regain confidence and begin to invest and build their inventories. We are making the necessary investments in changing the way we deliver products and services to better serve our customers' changing needs. We believe this, in turn, will differentiate us in the marketplace and grow our market share further. For example, we have partnered with Microsoft to introduce their innovative Surface technology in our new branches, allowing customers to improve their financial literacy by navigating through interactive advice-based applications. We also introduced the RBC Mobile banking application for smartphones, which has proven to be a market leader. Within the first 2 months of its release, half a million clients downloaded the application and signed in over 3 million times. 20% of those signed-in clients use this app to carry out their daily banking transactions. Our unmatched size and scale gives us enormous potential to continue to drive efficiencies and selectively reinvest across our businesses to drive top-line growth. We believe our leading market position, coupled with our unprecedented distribution capabilities, will allow us to stay ahead of the competition and achieve our target of 25% volume growth premium to the market. In wealth management, we had great momentum across all of our businesses, which resulted in record earnings this quarter. We were able to capitalize on the improvement in the global markets to grow fee-based client assets and generate strong transaction revenues. In our global asset management business, we led the Canadian market in net sales of long-term funds and are in an excellent position to continue to drive further growth in assets under management. Our fund families continue to outperform, and we have been recognized for this performance. PH&N won Best Bond Fund Family, Best Equity Fund Family, and Best Overall Fund Group at the 2011 Lipper Awards. Our asset management business continued to expand its capabilities and distribution beyond North America, with the closing of the acquisition of BlueBay, providing us with increased product offerings and greater reach in Europe and Asia. For our geographic wealth management businesses, which serve affluent and high-net-worth clients, taking the success and strength we have built in Canada and the U.S. and replicating that proven formula in other select markets is pivotal to our global growth strategy. Specifically, in addition to our world-class global trust capabilities, we are seeking to leverage the expanding investment solutions capability of our asset management business in the U.K. and emerging markets, and those of RBC Capital Markets, to broaden the reach of our wealth management business to serve clients in these markets. Our growing international presence is building momentum. Euromoney recently ranked RBC not only the number 1 for best private banking services in Canada, the Caribbean, and Barbados, but also 13th for the best global private bank globally, a significant improvement from the 24 spot in 2009. As a global leader in wealth and asset management, we are well-positioned to leverage our strong position and continue to grow this attractive business. Insurance contributed another very strong quarter to our diversified earnings stream. We are growing market share by continually innovating and tailoring products to better suit our customer needs. In international banking, credit quality strengthened in the quarter, reflecting stabilizing asset quality from the improving economic conditions. The largest factor at play in sustaining profitability in this segment is credit quality, as the timing and levels of PCLs are difficult to predict and highly dependent on the pace of the recovery in the United States and, to a lesser extent, the Caribbean economies. The results in this segment are encouraging, and we are moving in the right direction. We are seeing some positive signs of underlying business growth in all three businesses, and we remain hopeful that the performance of these businesses will continue to improve in tandem as the economies recover. Based on these current expectations, we feel this segment will likely sustain levels of profitability in the latter half of the year. Capital Markets also delivered record earnings and generated a return on equity of over 25%. With a strong franchise in Canada, the United States, and the U.K., and select global markets, we are winning more mandates as deal flows pick up and origination levels improve. During the quarter, we extended our Canadian leadership, and we were involved in a number of key U.S. and international mandates. We acted as joint bookrunner on the combined $22 billion USD common convertible offering for General Motors, the largest equity offering in U.S. history. We were financial advisor to both Borealis and Ontario Teachers' Pension Plan on the joint contract to purchase the High Speed 1 from the U.K. government for £2.1 billion. Joint bookrunner and lead manager of financing for General Growth Properties' $2 billion USD IPO, the largest REIT equity offering on record. Joint bookrunner on the syndication of the U.K. government's £3.25 billion index-linked inflation-protected bond, which is due in 2055. Also, at the end of the quarter, a few large deals came through the pipeline. We were joint bookrunner on the World Bank's $5 billion U.S. dollar and 5 billion global fixed-rate note, the largest-ever five-year offering, and the province of Ontario's successful CAD 3.5 billion three-year global fixed income note, which had strong international interest. Our league table standings continue to portray our clear leadership in Canada as we ranked number one in debt equity and M&A in 2010. In the U.S. and internationally, we are seeing excellent market share gains and continue to move up the league tables. In 2010, we ranked 12th in global M&A, up from 15th in 2009, ninth in U.S. IPOs, up from 12th in 2009, and 20th in EMEA equity and equity-related, up from 48th in 2009. Along with our growth in our investment banking business, our trading businesses were up substantially from last quarter, although down slightly from the robust levels of the early part of last year. Our trading business this quarter benefited from increased new issue mandates, especially in Canada and the United States, and strong client volumes and spreads primarily in the U.S. and European fixed income and equity businesses in the latter part of the quarter. You have heard me speak about our desire to increase our investment banking component of earnings this quarter, and the results are a testament to the strides we have made. Over the cycle, we target balanced contributions from both our trading and investment banking businesses and broad geographical coverage in order to produce strong, consistent returns. As our investment banking and lending coverage grows, its increased client business benefits both our trading and investment banking results. In the appendix of this presentation, you will find additional information comparing our wholesale businesses to our Canadian peers. No doubt, when you look at RBC's Capital Markets business on an absolute basis, we are the largest wholesale business. However, looking at our Capital Markets business in the context of the rest of RBC, the relative size of the business falls somewhere in the middle compared to the relative size of the wholesale businesses of our Canadian peers. Our trading revenues as a percentage of investment banking revenues are also close to the average. Our Capital Markets strategy is premised on diversification and maintaining a highly liquid balance sheet, both at the segment level and in each of our individual businesses, which we believe is important and differentiates our performance. We focus on all key services, trading, investment banking, and corporate lending. Simply put, we are more diversified than our peers. As Canada's most diversified and only truly global investment bank, we believe we have the right mix to deliver strong and consistent earnings. In conclusion, the majority of our businesses had strong results this quarter, demonstrating the earnings power and diversification of the organization. Our longstanding strategy and business model continues to serve us well as we extend our leadership position in Canada and invest and build our global platforms. With that, I will turn it over to Morten. Thank you, Gord. Turning to credit on slides 7 to 9. Overall provisions for credit losses decreased $98 million over the last quarter as economic conditions improved and asset quality stabilized. Over the quarter, the Canadian economy continued to show signs of strength as the unemployment picture improved. Additionally, while the unemployment rate in the U.S. remained elevated, it reflected a slight improvement from the prior quarter. Specific provision for credit losses was down $86 million from last quarter, reflecting lower provisions in our Caribbean, U.S., and Canadian wholesale portfolios. During the quarter, the general provision was a credit of $8 million compared to a provision of $4 million in the prior quarter. Now let's look at credit performance in our business segments. In Canadian Banking, specific provisions were down $30 million from last quarter, mainly due to lower provisions in our business lending portfolio. Credit card specific provisions as a percentage of average net loans and acceptances improved to 345 basis points from 364 basis points last quarter. Specific PCL in International Banking decreased by $60 million over the quarter, largely due to lower provisions in our Caribbean and U.S. commercial portfolios. In Capital Markets, we had a recovery in PCL of $27 million comprised of recoveries in a few large accounts. This compared to recovery of $22 million in the prior quarter. Turning to market risk, during the quarter, we had a total of three days with net trading losses, one day of which exceeded VaR. This was largely due to a month-end credit valuation adjustment on the MBIA exposure. The largest gain this quarter was related to our legal settlement with MBIA. As Gord said, we've settled all claims against MBIA and eliminated our exposure. We continue to hold the underlying assets in our trading book and we're in the process of reducing our holdings and selling positions when favorable opportunities arise. These assets have been previously written down, and we feel they're appropriately provisioned to reflect their realization value. Effective this quarter, in addition to VaR calculated using the internal model-based approach, we have disclosed management VaR, which include additional products under the standardized approach. We have provided these additional details to better align external disclosure with internal management measures. Average management VaR decreased by $2 million quarter over quarter, largely driven by a decrease in interest rate risk, reflecting the continued runoff of volatile 2008 scenarios from the VaR model. With that, I will turn the presentation over to Janice. Thanks, Morten, and good morning, everyone. Turning to slide 11, as Gord mentioned, we started the year with record first-quarter earnings of $1.84 billion, reflecting strong performances across our segments and record results in our largest businesses, Canadian Banking, Capital Markets, and Wealth Management. Comparing these results with prior periods, earnings grew 23% over last year and 64% over last quarter. It's quite clear that although we did benefit from a decline in PCL, as economic conditions improved this quarter, the majority of earnings growth was driven by solid top-line growth across our businesses. Slide 12 outlines in detail a number of small items that benefited earnings this quarter, totaling approximately $60 million, that Gord spoke about earlier. On a reporting basis, revenues increased about 1% over last year and 3% over last quarter. However, if you factor out the impact of the fair value changes on investments backing our life and health policyholder liabilities, which is largely offset in PBCAE, revenue on an adjusted basis grew by 7% over last year and 13% over last quarter. Our businesses were well-positioned and benefited from improving economic conditions and the rebound in global financial markets this quarter. We continue to have solid volume growth in Canadian Banking, higher fee-based revenue and transaction volumes in Wealth Management, and strong origination activity in Capital Markets. Turning to expenses, the year-over-year rise in non-interest expenses corresponds to the growth in revenue and the associated cost of ongoing business growth, expansion initiatives, and the related staffing and compensation costs. Compared to last quarter, expenses were up 3%, largely due to higher HR-related expenses, primarily reflecting higher variable costs consistent with improved revenues and increased pension costs. Counteracting these increases, we had reductions across all other expense categories in the quarter. A number of projects are underway in each of our businesses to drive our cost base down and improve efficiency. Realized savings from these projects will in turn be reinvested into new initiatives and infrastructure spend to support business growth, along with initiatives aimed at achieving greater efficiency gains. Before moving to our segments, I will point out that this quarter we realigned our Capital Markets disclosure to better reflect how we manage these businesses. As you can see on slide 23, we have created two main business lines, Global Markets and Corporate and Investment Banking. Our legacy businesses are contained in other. More details about these lines of business can be found on page 7 of our Q1 report to shareholders. Now let's look at our segments, starting with Canadian Banking. Canadian Banking had record net income of CAD 882 million, up 14% from last year, largely driven by solid volume growth across all businesses and lower PCL, partially offset by increased staff costs and higher pension expenses due to the impact of lower interest rates. Compared to last quarter, we also saw seasonally higher credit card transaction volumes, higher mutual fund trailer fees as equity markets improved, and a pickup in business lending volumes. Looking at slide 15, net interest margin expanded over the last quarter, reflecting improved deposit spreads. Expenses were up about 8% from last year, with approximately half of this growth related to higher pension costs and the impact of harmonized sales tax. The other half relates to costs associated with business growth and includes higher staff and operating costs related to expanded branch hours and days of business. One of our key priorities remains the prudent management of costs and reinvesting cost savings into our businesses to drive further efficiency and top-line growth. Our efficiency ratio this quarter stood at 46.7%, one of the lowest levels over the last two years, despite the headwind of increased pension and HST costs. Factoring out the increase in pension costs, our efficiency ratio dropped 130 basis points to 45.4%. We remain committed to driving this ratio down to the low 40s over the medium term. Turning to Wealth Management, net income was CAD 221 million, relatively flat over last year. Compared to last quarter, earnings were up CAD 46 million or 26%. The strong underlying year-over-year earnings growth in this segment is clouded by a number of one-time items in the current and past periods. For instance, this quarter included a positive cumulative impact of $11 million after tax related to our deferred comp liability, whereas last year included a favorable accounting impact with a favorable income tax adjustment, which together improved the prior year's earnings by $64 million. Factoring out these items, earnings increased by 35% over last year, which provides some clarity to the run rate of this business. As a result of stronger market activity, fee-based revenues were higher and transactional volumes increased. Moving to insurance, net income was $145 million, up $27 million over last year, primarily reflecting lower claims costs. Net income increased $118 million from last quarter, largely due to the loss on Liberty Life recorded in the prior quarter. International Banking, net income of $24 million compared to a net loss of $57 million in the prior year due to losses on available-for-sale securities in the prior year and lower PCL in the current quarter as credit quality improved. Both of our retail businesses within this segment experienced some underlying business growth this quarter, and we had improved spreads and higher fee-based assets in RBC Dexia. As Gord indicated, generating profitable results in this segment hinges on a sustained improvement in credit quality, and we believe the performances of these businesses will continue to improve as economic conditions improve. In capital markets, net income was $613 million, up 7% from the prior year due to strong growth in our origination businesses, particularly debt origination, driven by stronger new issue activity and higher loan syndication fees. Compared to last quarter, net income was up $240 million, largely driven by substantially higher trading revenue and growth in our investment banking businesses, mainly in the U.S. and Canada. Marginally lower trading revenue included a gain of $102 million related to MBIA, which was partially offset by an impairment of $50 million on U.S. student loan auction rate securities. We had a strong origination quarter, and as Gord outlined, we booked a number of large deals at the tail end of the quarter. Over the prior quarter, our trading business significantly benefited from improved client volumes and spreads. In particular, we saw substantial improvement in our U.S.-based trading and investment banking revenues. Expenses were higher over last year and last quarter due to higher costs in support of business growth, as well as higher variable comp reflecting higher earnings. In conclusion, our businesses had strong performances this quarter as we saw solid business growth in Canadian banking, wealth management, and capital markets as economic conditions and global markets strengthened and confidence returned to the market. We also had strong performance in insurance and an improvement in international banking, which returned to profitability this quarter. Continued success will come from growing our market share in Canada, the U.S., and in select markets, and by expanding our strong client relationships and by prudently deploying our balance sheet. At this point, I'll turn the call over to the operator to begin the Q&A session. Please limit yourselves to one question and then queue so everyone has the opportunity to participate. Operator? Thank you. If you have a question and you're using a speakerphone, please mute the handset before making your selection. To register, please press *1 on your telephone keypad. To cancel a question, please press #. Please press *1 at this time if you have a question. There will be a brief pause while participants register. Thanks for your patience. The first question is from Yves Theriault from Bank of America Merrill Lynch. Please go ahead. Thanks very much. Just a couple of quick questions for Jim Westlake. Lowest credit loss number in international we've seen in quite a while. How comfortable do you feel that this is a sustainable drop-off in PCLs, or could that number still bump around a decent amount the rest of the year? Secondly, just quickly, any reserve releases in the insurance division, or is that earnings in the 150 range relatively clean? Yeah, maybe I'll start with insurance, Yves. For insurance, I would say that that is a relatively run rate number. We had our normal modest changes both ways. We had a couple of little ups and downs, but it would round out to about level. In the U.S., certainly we've said the PCL is still the thing that is of most concern and the Caribbean as well, and we do think that there could still be some volatility. We are seeing underlying improvement both in our business, in our sales numbers, and in the underlying economies. While we can't make predictions about what could happen in the next couple of quarters, we generally feel that the business environment is getting better. That was it. Thanks. Thank you. The next question is from Robert Fineran from CIBC. Please go ahead. Good evening. Morning. I guess for Dave, I am looking at the card service revenue line, and it seems to have jumped back to the old run rate before 2010 when it was down meaningfully. I can hear you. Okay. I am curious if we have moved back to that old run rate or if there was something unusual. I know some of the other banks have talked about the impact of regulations and all the rest perhaps being a bit of a headwind on that line, and you seem to have had a nice quarter-over-quarter move. I would say, though, that there's two factors at play there. The headwind would be predominantly on net interest income as the regulations impacted the calculation of your income. Okay. I think that there's two separate effects going on there. The fee impact that you're seeing is very strong purchase activity on our market-leading Avion product. We're very happy with the market share gains that we've seen on the purchase activity side. Very strong credit results. It's a business we've really focused on in the past year, and we've seen very good balance growth in addition to purchase volume. I'd say those are kind of run rate activity that you're seeing on the balance side in particular. Purchase volumes always peak in Q1 because you've got the Christmas season of November, December in there, then come off in January. You won't see that level of purchase volume and fee repeat itself in Q2, but then we'll build again through the year. There is some seasonality in that number. Does that help? Yes. Thank you. Thank you. The next question is from John Reucassel from BMO Capital Markets. Please go ahead. Thank you. Just a question for Gord or Mark. The trading business, you talked in the past that Royal has a bigger better counterparty can continue to gain market share, and the pricing in this market should improve with less players in it. Has that transpired, or does it remain quite a competitive market? Could you give us some sense of the pricing in your trading businesses? Well, certainly on the competitive side, it is still very competitive. We do anticipate over time, as the new rules come into effect, as trading books need more capital to support them, that we will start to see an advantage. But for now, prior to those rules coming into effect, it is still very competitive. I think the dynamic that I have talked about in the past is the requirement on the secondary trading side to support primary issue. For the quarter, that worked very well. Certainly a big improvement from what we have seen in the last six months. Debt capital markets activity was extremely strong, as was equity capital markets. But on the debt side we certainly had a much better experience in supporting our issuing clients and in terms of general secondary flow. I hope that answers your question. Was there a better balance geographically? There certainly was. The U.S. and the Canadian businesses performed extremely well. We did have very good new issue in Europe, and we saw a big improvement from the last six months in Europe, but we are still running below our planned levels in Europe, but we have modified our expectations just because the environment is tough. Asia had a soft quarter, but that was really from a very strong Q4. We are still benefiting from the fact that we have a global business, and we are seeing those benefits especially on the debt capital markets origination side. The only thing I would add to that is that, and I am going to be commenting on this during my AGM remarks, but we are in a little bit of a holding pattern here from a regulatory perspective. What we have tried to indicate to you is that we have positioned our bank to be at the leading edge of meeting any regulatory requirements. There is no question that there are many banks in the world who are in a very different position. At some point, if there is consistency across the world, there is going to be a big impact on the business mix and the ability of some of the European banks in particular, Adam, and some of the American banks in these marketplace. But we are sort of in this holding pattern where people have not yet had to necessarily comply with whatever the new rules are going to be. I just trying to make sure I understand because some European banks have talked about ROE in this business going down. Do you believe that, or do you think the pricing will eventually equal that out, or could you comment on? That is a very complex answer because I think you really have to look at the mix of business across the various banks. As you know, some of the banks who have commented on that have very different balance sheet makeups than we would have, and in many cases, very large asset levels on their balance sheet relative to their capital position. But I think that gets to this issue of people are going to have to make decisions around business mix. When we look across our mix, some of it, I think, will be reflected ultimately in pricing. We will continue to target at a very high minimum ROE requirements across our capital markets businesses because we feel that from a risk-reward perspective, the ROEs have to be attractive in that business. If you look at the environment we're in today and the returns continue to be quite solid, and I think they'll continue to be that way going forward as long as people manage their balance sheet effectively. I think that's a key issue because I think a lot of people have added assets without necessarily generating the same levels of returns. That's where I think a lot of the restructuring will take place. Thank you. Thank you. The next question is from Darko Mihelic from BMO Securities. Please go ahead. Hi, thank you. One really quick question, maybe for Janice. In Gordon's opening remarks, he talked about some items that affected the quarter. Could you give me a headline of that for us? My higher priority question is really for Jim Westlake. When I look at the U.S. division, I see a bump up in the revenue run rate. I wonder if you could talk about and there's a lot of things in your press release that talks about the. Maybe you could talk about the sustainability of your international revenue stream. Darko, it's Janice. I will answer first. There is a slide 12 that has the items impacting, and by segment. There is an adjustment in wealth for the deferred comp that I talked about in international banking litigation provision release in Caribbean banking, a tax adjustment in Caribbean banking, and then also on that slide you will see the CVA adjustments in capital markets and then for MBIA and the auction rate security impairment. So it is all there. It adds up to $60 million after tax. Yeah. Darko, it's Jim Westlake. Certainly on the revenue line, I feel more confident in being positive there because it does not have the same volatility that the PCL could have. We are seeing more new businesses, particularly on the commercial side in the U.S., but retail is starting to pick up as well. The only caution I have on the revenue side is that there is still a lot of regulatory issues coming at us in the United States through Dodd-Frank and through Durbin. But we have tried to pick up most of the impact of that, and it would be the only other area I would caution on the revenue side. What was the derivative impact there that I see in the Caribbean? Not sure what you are referring to, Darko. Well, you mentioned in the higher gains of sort of derivatives and Caribbean banking during the current quarter in page 10 of your report to shareholders. Darko, I think we're going to have to get back to you on that one because we need to see what. The second paragraph on the right-hand side. Yeah. I heard gains on certain derivatives of your hedging positions. I think, actually, it's not its hedging positions, but I think it's this comment relates to available securities portfolios. But we'll get back to you. Okay. It's probably not material, but thank you. Okay. Thank you. The next question, Mr. Michael Goldberg from Desjardins Securities. Please go ahead. Thank you. I just want to make sure that I understand what you're saying on the trading side. On balance, would it be fair to characterize the strong Q1 trading revenue as indicative of a run rate or above run rate, at least in the near term? When we look at 2010 and sort of look forward to 2007, and it's clear that, sorry, 2011. It's clear that 2011 will be better than 2010. I would look at the quarter as really defining the upper boundary of the range. I did mention that Europe was certainly soft from what we would hope it would be, but certainly, we're very comfortable with what Europe's doing, given the market. The thing I didn't talk about is the performance on the equity side. Our equity results were very strong, not just from the cash trading side, but also from ECM. We did roll out a new electronic product into the marketplace floor, which is getting tremendous market traction, and you'll notice that our performance, our revenues on the equity side have certainly picked up. But I would characterize it as the upper end of the range for the time being. Thanks. Jim, now that you are seeing underlying improvement in U.S. commercial banking, do you have a clearer idea of your direction beyond fixing what you have in the United States? Well, I am still pretty focused on that. This is early signs of some better news, but I am focused on growing our business and making things happen in what we have. I would add to that, Michael. You have heard me say in the past, priority number one, two, and three is to get the returns back in that business. If you look at the equity that we have allocated to that business, to international banking generally, which is essentially earning no return, if you can get the returns in that business back to a more normalized or even a reasonable level, it generates a tremendous value of earnings growth and benefits to shareholders. That is what we are focused on, is ensuring that we are getting a return on that capital. Therein lies the challenge, but therein lies the opportunity as well. In terms of larger strategic alternatives and opportunities, we continue to monitor a lot of different things, as we have said in the past. From a priority perspective, the focus is very much on getting returns back from the equity we are deploying in those businesses. Do you feel comfortable that the window for opportunities will remain open for a reasonable amount of time going forward if that's the direction? I think given the turmoil in the U.S., both currently and in the future, is going to result in incredible opportunities for many years to come. Thank you. Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead. Hi. Thanks very much for the capital markets revenue break-up by geography on slide 22. Just a question on your U.S. business. How has QE2 impacted your revenue coming from the U.S. and capital markets? That would be sort of, if you can, break it up into directly, i.e., via your status as a primary dealer and perhaps participating in the open market operations, and then indirectly via the liquidity injection that initiative does that provide. Thanks. Yeah. I think if you look at QE2 relative to similar activities done a year and a half ago, for example, in the U.K., it is very different. If anything, it has been very difficult to manage through that. If you look at the performance of U.S. auctions, they have actually been very volatile. So, no, it has actually created, on the primary dealership business, a very different environment for us to It is not a lift to the U.S.? No, it is not. I would say that the thing that is really driving the increase in the revenues in the U.S. is that we are getting more origination activity. For instance, yesterday, we broke ground a $900 million high yield deal, and I think that you are seeing it reflect in the trading numbers and the investment banking numbers, is that we are just doing more client business. Quickly for Dave, I noticed that gross impaired for consumers are up in Canada. Any trends there that you are concerned about? No, I think when you look at the gross impaired loans, the majority of that, and Morten may want to comment, is in the mortgage home equity book, in the insured portion. I think it reflects a bit of an elongated cycle to move some of the homes. So nothing of great concern there as far as our credit losses in that portfolio continue to average one basis point. So gross impaired loans are not translating into PCL. Is it translating into slower growth? Well- Just falling back. Is that a separate question on what the loan growth is doing? Certainly, I think you are seeing declines from double-digit home equity growth down to the single digits as we talked about in our investor conference in the fall. We are still at the higher end of our forecast of mid-single-digit growth. I think we still maintain that forecast that we will see solid mid-single-digit growth in the home equity side. We are waiting to see what the effect of the regulatory changes are, particularly around amortization periods. Effect is yet to be determined, but certainly there is a noticeable slowing as you look at the quarter-over-quarter trends and the year-over-year trends in our consumer lending business. It is slow. Peter, it is Morten. Just one additional comment on the impaired side, and I would say that the quality in Canadian banking remains quite stable. If you look at new impaired and net impaired formation, they are actually coming down at a very encouraging pace. You will see relative stability in the impaired levels in the retail books, improvements in the commercials. It is consistent where we are in the economic cycle, and if the environment continues to be relatively positive, I think one can expect further improvements, but it is obviously very dependent on where the economy goes. Thanks. Thank you. The next question is from Gabriel Dechaine from Credit Suisse. Please go ahead. Hi. Good morning. Quick question for Gord or Mark. Gord, a quarter or so ago, you suggested that the prop trading was about 3% of your total revenue on average. How did that shape out this quarter? On the Basel III, did I hear you correctly saying that you are already at a 7% pro forma quarter 1, but you are also including some reduction to counterparty credit risk-weighted asset inflation. Could you provide a bit more disclosure there? Yeah, absolutely. With respect to the prop trading, the answer is about the same. With respect to the second question, the answer is yes, but I am going to turn it over to Janice to provide a little more detail. Sure, Gord. So for Gabriel Dechaine, are you talking about any specific item in terms of RWA? What our estimate reflects is both on the numerator, the deductions that go through the phase-in to 2019, and on the denominator, an increase in RWA for things like Basel 2.5 and items like an increase in CVA. Okay. I got that Basel 2.5 would be less than peers, and I get that. The other RWA component is counterparty credit risk-weighted assets. What is the expected inflation there, and what are you suggesting in terms of offsets via some of the new guidance that has been provided? Am I right, did I hear that you are at 7% now, including all of this? We are at 7% now on a pro forma basis at January 31st, if you include all of the deductions to capital through to 2019 and all of the increases in RWA through Basel 2.5 and Basel III. Our RWA growth is on a gross basis what it would be measuring it to date. We would have in there the 2.5 adjustment plus increases in things like CVA, some of the counterparty exposures that on the trading side require more underpinning in terms of market risk. It is basically where we stand today with the metrics. What it includes at the margin on trading is that OSFI will approve some of our modeling for some of the trading book, which we do not think that will be an issue for us. What it does not include is a lot of the mitigation that Gord talked about in terms of the fact that we are constantly retooling our businesses to have the highest and best use of capital. Because we have these new metrics coming on board, including the growth of RWA, we are actively looking at how to manage those businesses through to when we have to implement this from a regulatory perspective. For us, it is a reasonable estimate based on other approvals from OSFI, but also based on us not doing anything today, but our intent is of course to manage our capital actively through the next couple of years. Okay. Thank you. Okay. Thank you. The next question is from Brian Clarke from KBW. Please go ahead. Good morning. Just a quick question. In the U.S., like I said, it seems like the first quarter results were positive, a little bit sooner than you were expecting. Just looking at the total loan growth from a wholesale perspective, first time we saw a pickup in wholesale ending balance. Maybe you guys can discuss what you're seeing as far as in the U.S. in the fourth quarter, and what are you thinking as far as pipeline and business demand in the U.S. here in the first quarter going forward? The wholesale loan business, we're working pretty hard to acquire more corporate customers in the U.S. As we grow the investment bank, and as we expand the various industries that we're covering, we're making more loans. I would say that our new names in the U.S. run rate is sort of 30 or 40 a quarter. A lot of that is focused in energy. Some of it's real estate, and some of it's industrials and communications companies. I would say there's a good opportunity for us in terms of our brand with the corporate customers and their willingness to see us and wanting us in their banking groups. It's been very good. We'll continue to do that as long as we feel good about the credit and as long as the spreads hold up. The sponsor business. Well, the sponsor business, the leverage finance business has been, as you know, has picked up quite considerably. We have participated in a number of leverage finance deals. The bridges are clearing well. We are able to syndicate the loans well, but the holes in the leverage finance business are quite modest. I just wanted a quick follow-up. You talked about some good positive trends overall with GIL formations down and the loan stands you have had in paradise, you were somewhat stable. They have picked up slightly overall from the fourth quarter. Anything to think about when you look at the retail one to 29-day spend, so the earliest stage, someone can see it in that bucket. We are up. It is only marginally, but is that anything in Canada or is that U.S. driving that increase? Is that unsecured consumer in Canada? Maybe just a quick comment on that. Warren, just make sure that I get your question. It is on the trends of impairments in the retail book across the spectrum? Because I would say, from a Canadian standpoint, in dollar terms, because of the size of the mortgage book, a fair bit of the increase is in mortgage related, as you can see. That still translates into a PCL in the one basis point range. I think we feel quite comfortable that that relationship is quite stable. As Dave McKay was indicating, you end up with slightly longer time periods to work through problem issues, but so that is contributing somewhat to the level of impairments. The level of impairments in the unsecured retail book is actually improving slightly in basis point terms. In the U.S., again, we have got reducing levels of growth in impairments, but overall, relatively stable to slightly higher levels. When you look in dollar terms across the board, it has actually contributed from a fair number of sources. But it does not, in my view, point to specific areas of concern in the Canadian book. As I indicated, in terms of the U.S. retail book, it is really consistent with where we are in the cycle. If the environment continues, we should see these numbers start to come off. But there is a certain amount of vulnerability, and as Jim Westlake was indicating, there is volatility in those numbers given the size of PCL relative to overall revenue streams. Small movements have some impact on the bottom line. They are greater than you would see in the Canadian business, for instance. I do not know whether that answers what you were after. No, that's great. That's great. Thanks for taking my question. Operator, it's Josie here. We've only got a couple more minutes, so one more question. Thank you. The last question will be from Brad Smith from Stonecap Securities. Please go ahead. Blake, it looks like your net interest margin actually basis points sequentially, which is encouraging. I also know that you are adding your market share position in your core deposits and appear to be willing to cede a little bit of share in your business loans. Could you talk a little bit about how you're seeing the competitive environment develop here in Canada and how that's influencing your willingness to actively pursue deposits and be more selective in your commercial lending? That's a great question. There's a couple of answers there. One, we constantly manage at the margin our trade-off between margin and share. In our core banking offering, we launched our RBC Mobile apps this quarter, as you heard. It has very strong momentum and strong growth. We're taking share there, and that's adding to some very strong revenue growth for us. We also talked about how we manage the GIC book very carefully, and we've done a good job in increasing spreads in that business and in managing pretty decent stabilized share. I find the environment to be very competitive right now, probably as competitive as we've seen it in a number of years, not only on the deposit side, but I would say more so on the mortgage and consumer lending side with some very difficult pricing environments as we head into the spring mortgage season. We manage both sides of those equations very carefully, and I think, as you see, our NIMs have increased. We've done a good job in being able to grow profitable share, which is always our core objective. We feel good about that. Just a quick comment about the commercial lending area. It is an area of key focus this year for us as cards was last year, and we are extremely happy with the turnout on our cards business last year. I think I would say we're not happy with that performance in Q1 in the commercial lending area. We have a big focus on it, and we're building the pipeline, and we expect that to do better over the coming two and three quarters. Again, that's an area for us to improve, an opportunity. Does that help? Brad? Oh, yes. I'm sorry. I said thank you. You're welcome. Okay. I guess that's it. We apologize. We have to cut it off as we have our annual meeting, which commences in just under a half an hour. Hopefully, some of you will be able to either listen in or join us in that meeting. We thank you again for joining this call and look forward to our presenting to you next quarter. Have a good day.