Earnings Call: Q4 2010

Dec 3, 2010

Good morning, ladies and gentlemen. Welcome to the RBC 2010 fourth quarter results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Josie Merenda, VP and Head of Investor Relations. Please go ahead, Ms. Merenda. Thank you. Good morning, and thank you for joining us. Presenting to you this morning are Gordon Nixon, our CEO; Morten Friis, our Chief Risk Officer; 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 end promptly at 9:00 A.M. To give everybody 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; Barb Stymiest, Head of Strategy, Treasury, and Corporate Services; 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 the call over to Gordon Nixon. Thank you very much, Josée, and good morning, everyone. Before I begin, you'll recall this summer, we announced that Zabeen Hirji was appointed to our executive committee, and this is Zabeen's first meeting, so I'd like to welcome her to our conference calls, and she, of course, is available as well for questions. Turning to slide 4. In the midst of continued significant changes in financial services sector, RBC executed on our long-term strategy. We grew our franchise both in Canada and internationally. Our progress this year illustrates, once again, the power of our diversified business mix and our commitment to putting our customers first. We delivered strong earnings of more than CAD 5.2 billion, which was up 35% from a year ago. Of course, excluding the loss on the sale of Liberty Life and more importantly, the goodwill charge of 2009, earnings were CAD 5.3 billion, up 10% from the prior year. With the exception of our U.S. bank, I am very pleased with the strong results in each of our business divisions, and our earnings of 5.3 were pretty much in line with our expectations at the beginning of this year. Canadian banking had record earnings for the year, and we had solid business growth in our wealth management and insurance segments. Trading results remained strong considering the unfavorable market conditions, particularly in the latter half of the year, although they were, of course, down from the strong performance of a year ago. In our investment banking business, we had strong revenue growth and increased deal activity. This year, we took significant steps to advance our leadership in Canada, to expand globally, and strengthen our competitive positions, and invest in future sources of growth, all while maintaining reasonable risk management policies. As shown on slide 5, we delivered top-quartile shareholder returns for three- and five-year time periods compared to our global peer group, reflecting our strong and consistent financial performance and strong capital base. With respect to our dividend, we are maintaining our dividend at CAD 0.50 in the first quarter of 2011. We ended the year with solid capital ratios. Our Tier One capital ratio was 13%, and our Tier One Common ratio was 9.8%. We, like everyone else, are awaiting further clarifications from regulators with respect to the Basel III capital regulations. Having said that, given our strong capital base, we are well-positioned and quite confident that we will be in excess of the new capital requirements by 2013, as they are currently specified. The expected growth in risk-weighted assets and related capital requirements from Basel III rules, as well as IFRS transitional adjustments, we will be well-supported by our current surplus capital as well as our retained earnings growth. Our focus remains on investing capital into product and business lines that deliver the highest levels of risk-adjusted returns. As an example, this quarter, we announced the sale of Liberty Life in our insurance segment, as it lacked the scale needed to build significant presence in the U.S. and produced inferior returns in relation to our other business activities. Over the past two years, we have also focused on selling legacy trading and credit positions on our balance sheet to reduce risk, as well as free up capital. As an example, this quarter, we disposed of all of the remainder of our correlation trading book in capital markets. There has been a lot of talk about systemically important financial institutions and a lot of speculation as to whether our organization in this context. We have received assurances from our banking regulator that all Canadian banks will be treated equally, and while the interpretation of systemically important banks is highly definitional, none of the Canadian banks, at least in my view, should be designated. At the recent G20 meetings, regulator announced the formation of a working group mandated to assess the implications of systemically important institutions and develop qualifying criteria. I'm pleased that regulators are undertaking a full examination as a great deal of groundwork is required before definitive lines can be drawn around different types of institutions. Turning to slide 6, let me take you through the specific performances and achievements of our businesses over this past year. Maintaining leadership position across all of our businesses and domestic markets is critical to our strategy. Virtually all of our Canadian lines of businesses have advanced their position in each market and product category. By leveraging our leading Canadian-based franchise, we've been able to build strong competitive positions in our capital markets and wealth management businesses outside of Canada, both which are significant in scale and expanding their global reach. Canadian banking, of course, underpins our results with record performance this year, earning over CAD 3 billion. We had strong revenue growth in all businesses, driven by strong home equity and personal deposit volume growth, increased credit card transaction volumes, and improved mutual fund distribution fees. Accompanying the revenue growth, we made significant strides to manage our costs and reinvest those savings to drive growth in market share and to better serve our customer needs. We made investments in our distribution network to deliver high-quality advice faster, cheaper, and more effectively. We were the first Canadian issuer of both Visa and MasterCard, and we launched our new retail store concept, which transforms the branch experience into an interactive learning and shopping opportunity for both existing as well as prospective customers. We will continue to leverage our size and scale to drive revenues and further efficiencies, which we believe will fuel superior earnings growth as the Canadian economy continues to recover. In wealth management, we had strong earnings growth of 15% from the prior year, driven by higher average fee-based client assets and higher transaction volumes as market conditions improve and investor confidence returned. During the year, we announced a number of transformational changes to better align our operating structure with our goals and to accelerate our growth strategy. We are extending our leadership position in Canada, leveraging our position in the U.S. as the sixth-largest full-service wealth manager, and expanding our presence in targeted international markets to solidify our position as a global leader in wealth and asset management. We announced our intention to acquire U.K.-based BlueBay Asset Management, which will expand our global asset management business and aligns with our global expansion objectives. We also acquired the wealth management business of Fortis Wealth Management Hong Kong Limited, reaffirming our intent to significantly expand our operations throughout Asia. Our focus on advancing our global leadership in wealth management will be a key driver of RBC's long-term growth, as favorable demographics have the potential to generate attractive returns in this business. Our insurance business continued to make solid contributions to our diversified earnings stream. It complements our retail product offering by providing a full suite of products to better serve our Canadian banking and wealth management customers. As I mentioned earlier, we did announce the sale of Liberty Life in the fourth quarter, and this of course reduced our earnings. Throughout the year, we improved profitability, however, by streamlining our processes and deepening our client relationships, and we continue to refine and improve efficiencies. We also expanded our retail insurance network to 52 branches, providing customers with more access to our insurance services. Looking forward, we plan to increase client attraction and loyalty, as well as efficiency and employee engagement through more cross-platform collaboration. International banking. Overall, we are certainly disappointed with the results of our international banking segment, which comprises the U.S., the Caribbean Retail Bank, as well as RBC Dexia Services. Our U.S. retail bank drove the losses in this segment over the year, and as you know, it has been severely impacted by the weak U.S. economic and credit conditions. Asset quality in the U.S. is stabilizing, and we are encouraged by this positive sign. We certainly feel that the worst of the credit cycle is behind us and that credit quality should continue to improve. We continue to be proactive in the management of our loan portfolio, and we are focusing our efforts to restructure our operations and improve our operational efficiency. We believe we are taking the necessary steps to restore profitability to this segment in the coming year. Our Caribbean Bank and RBC Dexia made positive contributions despite the challenging operating environment. In the Caribbean, we made solid progress in implementing new technology and leveraging the capabilities of the broader RBC network to enhance the clients' experience. In RBC Dexia Investor Services, our global custody investor services joint venture remains a top 10 global custodian and was awarded top-rated status across three major categories in the 2010 Agent Banks, according to Global Custodian Magazine. Moving to capital markets, we had solid results in 2010, with earnings over CAD 1.6 billion, down 7% from 2009 as trading revenues were impacted in the latter half of the year by lower client volumes and tighter credit spreads. Although trading results were down from strong levels in the prior year, our investment banking business delivered strong results across all products and geographies, reflecting a significant pickup in this business and deal activity. The run rate of both our trading and investment banking businesses continue to improve. However, given the ongoing issues in Europe, our European debt trading business is operating in a difficult environment. However, we are taking the necessary steps to minimize adverse financial impacts by actively managing our inventories within proper levels and therefore minimizing our direct exposure to certain European sovereign credits and banks that have come under financial pressure over the past several weeks. As a result, trading profits improved this quarter, and we have very little direct exposure to countries the likes of Ireland, Portugal, Spain, and Greece. Looking at our global business over the course of the year, we have advanced our position in each of our respective markets we operate in. In Canada, we continue to be the leader and have distinguished ourselves as Canada's only truly global investment bank, which is a distinct competitive advantage for us. By leveraging our strong Canadian franchise, we continue to build our global capital markets platform in all geographies. We significantly deepened our U.S. franchise and increased market share by winning key mandates from both mid and large cap companies, and we expanded our trading floors. In Europe, we grew our investment banking, equity, and research business and now have primary dealer status in France and Germany, in addition to the U.S., Canada, the U.K., and Australia. In the U.K., we extended our capabilities in fixed income and currencies and are a top five gilt-edged market maker. Our credit trading business in Europe received top rankings from institutional investors in several categories, including Best Bank for Fixed Income e-Trading and Non-Core Currency Bonds by Credit Magazine. We continue to make strategic hires, and just last month, we opened our new trading floor in Hong Kong, a key focus of our global expansion. Capital Markets is growing its business in this region by partnering with our Wealth Management division, and we intend to dramatically expand our distribution capability of products across this region. We look forward, and we believe that our Capital Markets will come from maintaining our leadership position in Canada, but also growing client relationships in the U.S. and Europe through an enhanced product suite, investment banking coverage, and the prudent use of our balance sheet. As I have said previously, we continue to manage our retail banking to retain our leading market positions and deliver top market share performance. Looking ahead, the recovery of economies will take time, and the global banking industry will undergo significant changes in response to both the economic climate and changing regulations. An extended period of slower economic growth and a low interest rate environment will make revenue growth more challenging, and equally important are the global shocks that can potentially result from situations like the ones we are currently experiencing in Europe. Given the global span of our business across several markets, client segments, and products, we feel we are well-positioned for the ongoing turbulence in these various markets. While we certainly hope for effective resolution of these issues, we are managing our businesses prudently and have the ability to evoke plans to mitigate any potential impact. Increased regulation of financial institutions, capital and liquidity requirements will add more complexity and raise operating costs, making business mix and capital deployment an increasingly important driver of future success. In my view, many financial institutions around the world will be forced to change their strategic and business priorities. While well-capitalized and stable institutions like RBC will be positioned to take advantage of emerging opportunities and differentiate ourselves in the marketplace. In the face of increasingly scarce capital, long-term business building, our commitment to disciplined capital deployment, and generating efficiencies will be essential. Despite our track record of success, we certainly are not complacent. We will continue to help our clients reach their goals by staying committed to finding new ways to innovate and by being proactive in adapting to clients' changing needs with service at the highest levels of operational excellence. Our strength and stature provides us with a wide range of strategic opportunities in the coming year. As a result of changes in financial services industry over the past few years, they present both Canada and globally, we have refined our strategic goals. Our aspiration is to be a top-performing, diversified financial institution that delivers sustainable, profitable growth, and top-quartile returns for our shareholders. Turning to slide 7. Our new strategic goals are firstly, in Canada, to be the undisputed leader in financial services. Globally, to be a leading provider of Capital Markets and Wealth Management solutions. In targeted segments, to be a leading provider of select financial services that are complementary to our core strengths. In closing, RBC is well-positioned to drive long-term growth and success. There's no doubt that the environment we operate in will continue to be challenging. However, guided by a clear long-term strategy, the strength of our franchise, and our strong financial position, I believe it puts us in a better position to weather these economic challenges and navigate the changing industry as we continue to strategically invest and grow our businesses throughout these times. With that, I will turn it over to Morten. Thank you, Gord. Overall, credit quality improved significantly compared to last year and was stable compared to last quarter. Turning to slides 10 to 12, specific provision for credit losses was relatively flat from last quarter, and we incurred a very small general provision related to our U.S. banking business this quarter. Looking at credit performance in our business segments in Canadian banking, specific provisions were essentially flat to last quarter. Provisions in our personal portfolios were up marginally, but this was partially offset by improved performance in our commercial and card portfolios. Credit card specific provisions as a percentage of average loans improved to 364 basis points from 407 basis points last quarter, driven by portfolio growth and improved asset quality. In Capital Markets, we had a recovery of CAD 22 million, comprised of recoveries on a few large accounts that more than offset new provisions for credit losses in the quarter. This compared to recovery of credit losses of CAD 9 million in the prior quarter. Specific PCL in International Banking was flat due to lower provisions, primarily in our U.S. residential builder finance and commercial portfolios, offset by higher provisions in the Caribbean commercial portfolio. We see signs of asset quality stabilization in the U.S., resulting in improved PCL this quarter. The economy remains under pressure, and ongoing declines in the real estate market have contributed to continuing losses on foreclosed assets in Commercial Banking. Continued weak conditions in the Caribbean economies have resulted in reduced banking volumes and contributed to higher PCL this quarter. We expect the economic conditions in our Caribbean business to remain challenging until we see some improvement in the economic environment. While the asset quality metrics reflect the challenging conditions, there are signs of stabilization in the overall Caribbean portfolio. Now turning to market risk. This quarter, improvements in global capital markets led to lower volatility in equity and fixed income markets, and as a result, we had 6 days with net trading losses compared to 20 days last quarter. We had one trading day in the quarter with a net loss but exceeded value at risk, reflecting the loss related to the fair value adjustment on RBC debt due to tightening in RBC's credit default swap spreads. We're coming off a year in which overall provisions for credit losses declined significantly, reflecting the high levels they were at one year ago and the general improvement in the global economic environment. Looking to 2011, improvements in credit quality will continue to be driven by the economic conditions of the regions in which we operate, including any future gains in employment levels. In Canada, we expect slower growth reflecting moderate consumer and business spending. While labor markets are expected to strengthen, the improvement will be gradual, which may limit the pace of additional improvements in credit quality. In the U.S., moderate consumer and business spending, additional fiscal stimulus, and low interest rates are expected to provide support for the economy, and we expect to see improving trends in PCL in U.S. banking through 2011, although the level of impaired loans will likely remain high. Further detail on our economic and market outlook can be found in our 2010 annual report. With that, I'll turn the presentation over to Janice. Thanks, Morten. Moving to slide 14, we reported net income for the fourth quarter of CAD 1.1 billion, down 9% from last year and down 12% from the prior quarter. Excluding the CAD 160 million loss on Liberty Life, earnings were flat compared to the prior year and down 3% from the prior quarter. Year-over-year, our earnings reflect solid volume growth in Canadian banking, favorable actuarial adjustments in insurance, and higher fee-based client assets in wealth management. This quarter, we saw improvement in our sales and trading revenue compared to last quarter, although they were lower compared to a strong period last year. As Morten mentioned, credit quality improvements resulted in lower PCL compared to last year, in line with levels we had last quarter. Non-interest expense increased on a year-over-year basis, primarily in our Canadian banking business. Compared to last quarter, non-interest expense increased CAD 440 million. About half of the increase relates to variable compensation in our capital markets and wealth management businesses related to stronger business performance. Of the remainder, one-third relates to certain one-time year-end adjustments, and the balance relates to investments we are making in efficiency and effectiveness. Our ongoing focus on cost management has generated significant cost savings, which are being reinvested into new initiatives and infrastructure to support business expansion and drive further efficiencies. While we may see expense levels fluctuating quarter to quarter as these reinvestments are made, we are committed to making the optimal decisions necessary to support our objectives. With regard to the impact of IFRS adoption, we've identified areas that we think will have the most significant impact in our MD&A beginning on page 60. For these areas, our preliminary estimate is a reduction of our Tier 1 capital of something less than 1%. Since we are still in the process of quantifying this impact could change. The decrease will mainly arise from the treatment of employee benefits as unrecognized benefit costs are deducted from retained earnings. Other key areas of impact relate to securitization and special purpose entities. Securitization income previously recognized will be deducted from retained earnings, with earnings being recognized in the future on an accrual basis. With respect to special purpose entities, certain entities will be consolidated on our balance sheet, with the full impact dependent on the entity's level of assets and liabilities. Now let's move to slides 15 and 16. Starting with Canadian banking, net income was CAD 765 million, up 7% from last year, driven by revenue growth across all businesses and lower PCL, partly offset by higher costs in support of business growth. We had solid growth in personal deposits, home equity products, higher credit card transaction volumes, and mutual fund balances. Moving to slide 17, net interest margin increased five basis points from the prior quarter, reflecting higher short-term rates on core deposits and Prime BA expansion. NIE was up 8% from last year and 6% from the prior quarter, driven by higher initiative spend, higher marketing and staff costs, as well as the full impact of the harmonized sales tax. In the quarter, we had higher operating costs as we extended hours of business and increased spend on special marketing campaigns, which combined drove an increase to sales results and higher performance-related compensation. There were also a number of non-discretionary costs this quarter related to increased pension costs due to the lower discount rate on our actuarial valuation, as well as the sales tax impact mentioned earlier. To counteract this rise in ongoing non-discretionary expenses, we will continue to drive efficiencies and reduce costs. We remain focused on lowering our efficiency ratio into the low 40s and reinvesting savings back into the business to drive further growth by improving and adding new products, services, and channels of distribution. Moving on to wealth management, net income of CAD 175 million increased 9% over last year, reflecting higher average fee-based client assets, partially offset by the impact of a stronger Canadian dollar. This quarter was impacted by higher money market fee waivers, largely in our U.S. wealth business, and we foresee continued fee waivers in 2011 as the low interest rate environment continues. Net income was down 5% compared to the prior quarter, as last quarter benefited from an accounting impact and income tax adjustment. We had higher transaction volumes and average fee-based client assets this quarter, reflecting improved market conditions and investor confidence. Turning to insurance, net income was CAD 27 million, down CAD 77 million from last year. Excluding the loss on Liberty Life, net income was CAD 143 million, up 38% from last year, reflecting favorable actuarial adjustments. We also experienced volume growth across all businesses and higher investment gains. International banking's net loss of CAD 157 million compares to a net loss of CAD 125 million last year, and a net loss of CAD 76 million last quarter. As Gord mentioned, our U.S. retail bank continues to be challenged by the weak economic and credit conditions. Although credit quality and PCL have stabilized, both revenue and earnings were impacted by higher losses in foreclosed assets in commercial real estate. We also had higher costs in compensation and increased infrastructure investments in the Caribbean as we continue to build out and integrate our platform. Improving the operating performance of this business segment remains a key focus for us. Capital Markets net income was CAD 373 million, down CAD 188 million from last year's strong results. This was primarily due to lower trading results, partially offset by lower provisions for credit losses and growth in our investment banking businesses. The strengthening Canadian dollar also contributed to the decrease. Compared to last quarter, earnings were up CAD 172 million. Looking at slide 18, sales and trading revenue was CAD 889 million, reflecting higher fixed income in U.S.-based equity trading results. We also had gains related to MBIA and BOLI this quarter. As mentioned last quarter, the valuations of these portfolios can fluctuate from a quarter-to-quarter basis. However, if you look at the full-year impact, it is quite minimal. Further details on these and other market and credit-related items, along with historical comparatives, can be found in our financial supplementary on page 8. In Corporate and Investment Banking, we had another strong quarter with revenues of CAD 604 million, reflecting growth in most of our businesses, particularly in debt origination and M&A activity. During the quarter, we also had recoveries of credit losses reflecting improved credit quality. Expenses were up CAD 107 million from last year and CAD 259 million from the prior quarter. Over the year, we had increased costs in support of business growth and new regulatory requirements. There was also a year-end adjustment last year which lowered the prior year's variable compensation expense. Over the sequential quarter, we had higher variable costs reflecting stronger results and higher costs supporting business growth as we expand our platform in all major geographies and continue to make strategic hires. At this point, I will turn the call over to the operator to begin the Q&A session. Please limit yourself to one question, then queue so that everyone has the opportunity to participate. Thank you. Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please mute your handset before making your selection. To register, please press *1 on your telephone keypad. If any time you wish to cancel your question, please press the pound sign. Please press *1 at this time if you have a question. There will be a brief pause while the participants register for their questions. Thank you for your patience. Our first question is from Robert Sedran from CIBC. Please go ahead. Hi there. Good morning. Janice, you talked a fair bit about expenses in your commentary, but if I leave aside the increase in variable comp, I still have expenses up quarter-on-quarter about CAD 230 million. I couldn't tell how much of that was special Q4 kind of stuff and how much stuff of that we should assume in a new run rate. Can you give a little bit more color just in terms of what you might expect going forward, please? Sure. I think that what we have there is some special year-end adjustments and one-time costs. About a third of what's there would not be considered run rate. I think that we do have a run rate increase in expenses related to a number of the initiatives that we've talked about over the past year and our cost takeout to fund those initiatives. Robert, perhaps to give you more color on our expenses, because it's so important for Canadian banking, I'm going to let Dave speak specifically about Canadian banking because it is the bulk of a lot of the run rate increase. Dave? Sure. Thanks, Janice. Hi, Robert. As far as our growth and expenses, year-over-year was 8%, and a third of that would have been non-recurring. Non-recurring being heavy up in our marketing and advertising spend in Q4 and some true-ups from our operational partners. Going forward, I would say that we're going to face headwinds in the form of pension and HST costs, which is a common theme I think you're hearing across a number of areas. Roughly a third of that year-over-year growth would be non-reoccurring. Say two-thirds would be potentially our run rate going forward. Does that help? It does help. Thank you. Thank you. The following question is from John Reucassel from BMO Capital Markets. Please go ahead. Thank you. Question for Gord. Gord, you mentioned that you refined your strategic goals and just looking at your refinement in the presentation here and what you said in the annual report in 2009, just want to make sure the message is clear. What I am hearing is less emphasis on U.S. and banking and more emphasis on wealth management and capital markets globally. Is that a fair summary of what your future plans are? Yeah. I would say, John, it is more of a tweak of our goals to be consistent with what we have been building over the last period of time. I think if you look at our global businesses, our truly global businesses are wealth management and capital markets. They are our two businesses where we operate in every region of the country. We think that both those businesses are businesses that we will continue to build global platforms. We have an initiative in Asia, which is very much a joint initiative between wealth management and capital markets in terms of building both our manufacturing, but also distribution network across that region, the way we have done it in the United States and the way we have done it in Europe. We wanted to reflect our global goal as being very consistent with the businesses that we are going globally. The third objective really reflects the fact that we do have our specific businesses like our U.S. banking business and our Caribbean banking businesses, and Dexia fits into that category as well, which tend to be businesses that are important to the organization. They are very complementary to the businesses that we are in. It is not to suggest that we are not going to continue to invest in those specific businesses. In fact, we are. But it does reflect the fact that our aspiration is not to build a global retail banking operation. If you look at what we are going to do in China and India and South America and Europe, it is going to be geared towards wealth management and capital markets. If you look at our specific niche businesses like banking, we are totally committed to the Caribbean, which we think is a great region and will be very strong for us. We are going to continue to invest in. As you have heard me say with respect to the U.S., our priority is to get that bank performing at a much, much higher level, then we will make a decision in terms of how much more we want to invest in the U.S. banking sector generally. It is not a major shift as much as it is a refinement to really reflect the way we are currently growing our businesses. Okay, just to follow on that, Gord, about a year ago, you said on the expansion of the Capital Markets business that you thought pricing should get better because of less competition and higher capital requirements. Is that what you are seeing today? Or is price competition back, and is that going to change as the new capital rules come out? Or what is the effect of all that? I am going to turn it over to Doug and Mark to respond specifically. I would say that we continue to be in an environment where we are able to achieve things in the marketplace because of the strength of our relative franchise compared to some of our competitors. But like every other market we operate in, it continues to be very aggressive, and I think that is particularly reflected on things like credit spreads, where you are seeing corporate lending spreads come down from very lofty, attractive return levels now to levels that are much, much more competitive and with less margin. But we are certainly making gains, and I think you see that reflected in things like investment banking market share and investment banking revenues, which has grown very significantly, notwithstanding the fact that trading revenues have come down. But I will let Doug comment. I will comment on credit and some of the things that we are doing in the investment bank, then Mark Standish can talk about the trading spreads. I would just say, following on Gord's comments, that while credit lending spreads have come in over the past six to 12 months, certainly over the past six months, depending on where you are, Europe or the U.S. or Canada are the primary places we lend. I would still say that when you compare the spreads that we are lending at now to what we were putting on in 2006 and 2007, they are reasonably attractive. In fact, the overall spread of our loan book as we roll to different spreads has improved year-over-year. Lending money is still attractive now. That is the good news. It's finding clients with credit you like that want to borrow is a bit more of a challenge. But frankly, we're fortunate because we have a footprint in the U.S. now with a large corporate banking group and a large investment banking group. So the loan book is growing there, and it's really helping our investment banking revenues, which have grown very significantly over the past year. So on the credit side, I'd say PCL is good. The spreads are in good shape. We are growing our loan book to support our origination business in the U.S. and the U.K. in particular. And so far, so good. Yeah. I'd just add, Robert, that if you turn the clock back a year and predict what the trading environment would look like, I think people would've been surprised that the new capital rules would be phased in over such a long period. So I think that some firms are able to compete more aggressively than we would've anticipated. And then secondly, we're still seeing very fierce competition from essentially government-owned or partially owned foreign institutions, which has also added to the competitive nature of the markets. Just geographically, I think the U.S. is and remains a very attractive market with very attractive spreads for us. Obviously, Europe is very difficult at this point, and it's less a matter of spreads and more a matter of illiquidity and just keeping risk very tight. Thank you. Thank you. The following question is from Michael Goldberg from Desjardins Securities. Please go ahead. Thank you. Can you please give us some idea of how much your almost CAD 25 billion of market risk-weighted assets would increase under the new market risk regime that goes into effect in fiscal 2012. How much would it reduce your Tier One and common equity Tier One ratios? And what actions do you expect to take to mitigate this impact? And what impact could this have on the economics and revenue from your trading businesses? Thanks. Michael, it's Morten Friis. Let me just start off, and I'll see if some of my colleagues may want to help out on the details here. But in terms of the market risk amendments, which take effect at the end of the current fiscal year, the impact on the capital supporting our Capital Markets business is about a 20% or around a CAD 2 billion increase. If you look at the overall capital of the bank, we have sufficient surplus capital to accommodate that. Linking it specifically to the Tier One capital ratio is not, I don't think, directly meaningful at this stage. And then in terms of mitigating actions, I think I'll let Mark Standish speak to the specifics. But clearly, as we move into this environment, there will be some aspects of the businesses that attract RWA and capital that we will look to be running on a more balance sheet efficient basis to mitigate somewhat the impact. Stan, I don't know whether you have- Yeah, I think the biggest impact relates to our fixed income and currencies business, specifically derivatives. And what I think you're going to see in the marketplace is, as this business attracts more RWA, there will be more coordinated efforts between institutions to sort of mitigate risk and balance sheet usage down. Right now these are sort of very balanced and okay numbers the market can absorb, and obviously as capital goes up, there'll be a much more focused effort by the industry, both participants and issuing clients, to reduce the effect of this. And that'll help us manage it going forward. Just to repeat, Michael, to make sure you have got the answer you want. With respect to the platform, capital in the platform, it is going to go up by approximately 20% at year-end. I just find it interesting that yesterday on another conference call, TD, the comment was made that the impact of this adjustment would be to increase that risk-weighted asset component by a factor of about three to fourfold. Michael, we read that, and I think we talked about that. We do not understand it, so we cannot really comment. I think you are going to have to ask the other institution, because we could not make sense out of it. They might have been referring to a different- Michael, this is Morten again, just to provide a little bit more color on the detail, because part of this is driven by the fact that from an RBC standpoint, we have a higher proportion of our book on the standardized approach for regulatory capital. So a significant amount of our market risk capital, in effect, is unaffected by this change. There may be some of those factors that make it look like there is quite a bit of difference from one institution to the next. Thank you. Thank you. Following question is from Gabriel Dechaine from Credit Suisse. Please go ahead. Hi. Just on the comments that Gord you made on the current trading environment in Europe. Just want to get a better sense of what you mean by managing the exposures. What are you doing differently now that you weren't doing in Q3, I guess, which was a similar environment? Then just a clarification on the risk-weighted assets. What about the counterparty credit risk-weighted assets? Any impact there from Basel III? Okay. I'll take a first shot, then I'll let Mark Standish talk a little bit about the Euro trading, then Morten can come back on the capital side. I think when we talked about our results in the third quarter, I think we were pretty candid about the fact that the sovereign crisis in Europe was a challenge for us, given the size of our trading operations in Europe. Partly because I think we were probably not as well-positioned as we could have been. I think partly as we talked about at the time, a desire to, if you will, stand in in the marketplace to support our customers in a marketplace that essentially lost its liquidity. I would say we also made the comment at the time that we are going to significantly look at our trading positions and ensure that we were prepared given the turmoil in Europe. I think that's exactly what has happened. If you look at the Euro fixed income market, it continues to be very tough. If you look at our inventory levels and positions and how we're managing it, we're managing it to a standard which has resulted in obviously much better performance. If you look at the overall business, including the other products, business continues to be pretty good. The Euro bond market per se is tough. Mark, who has, I would say, spent a lot of time on that business post the third quarter, might like to comment specifically. Yeah, I would only just add to Gord's comments that obviously during the quarter, we became a primary dealer in both Germany and in France. It fits very nicely into our global primary dealer network, part of our sovereign supranational and agency business, which is a very global business. Away from Europe, that business performed extremely well, but Europe is an important part of that. We took a slightly different approach to the market while we've been standing up and doing a lot of business with clients. We've been really very tightly controlling our inventory positions. We've sort of lowered our expectations for that region, just simply to build what we see as a really good long-term franchise. In short, we've just been managing our risk very aggressively. As Morten's on, in terms of counterparty risk management and Basel III, I'm not quite sure if I understand your question precisely. We are obviously continuing to manage, particularly in areas like the Eurozone, our overall counterparty risk exposure quite carefully to ensure that we have positions that are at the low end of what we need for normal business purposes. I'm not quite sure what your question referred to. I'm referring to similar to market risk-weighted asset inflation. You've got similar for counterparty credit risk, especially in the derivatives book. I don't have specific numbers for how those will change as we move through the various regulatory regimes. But obviously, we will continue to manage, and the profitability associated with that activity will be affected by the level of capital that's attached to it and will be managed accordingly. Okay, thanks. Thank you. Following question is from Brad Smith from Stonecap Securities. Please go ahead. Thanks very much. I had a couple of quick questions on the domestic bank. Wondering if I could just get some comments from you in terms of your outlook for consumer and commercial loan growth. There was a comment, I think earlier, about cost being escalated relating to some extended hours. I was wondering if you might elaborate on that strategy. Then finally, I note that the residential mortgage portfolio looks like it suffered some deterioration in the quarter with gross impairs rising about 8.5% sequential. I was wondering if you could speak to that issue. Thank you. Yes, Brad. It's Dave McKay. As far as the outlook for consumer loan growth, it really hasn't changed from our investor day a month ago where we talked about mid-single-digit growth across most consumer lending products, consumer deposit products, maybe a little bit higher than that. Commercial lending, probably in the upper mid-single-digit range. Really, that's the forecast that we gave a month ago, and we still believe that will hold for the coming year. So mid-single-digit growth. As far as our cost management program and reinvesting savings in our business going forward, I feel that the cost control and the runway of the business has been very good. As I said, a big part of our cost escalation going forward are in the pension and HST range, which will account for a big part of our cost growth going forward. We are reinvesting the savings that we've obtained from the automation programs that we've implemented and technology that we've implemented. We are reinvesting them in hours of business in hundreds of branches across the country, opening on Saturdays, opening at nights during the week. The customers want to shop then, and we see that as a very productive use of our savings, and we expect to get incremental sales from that. We are also reinvesting those savings in opening 15 to 25 branches over the next year and again in the following year into high-growth areas in Canada. We sat down before we invest that, and we look at do we take the savings and income, or do we reinvest it in capacity that will generate revenue and NIAT growth? Our first objective is always to take it into growing our business prudently. If that growth doesn't materialize the way we expect, then we'll be able to remove some of that cost at a later date. But that's our operating strategy, Brad, around how we look at the savings and how we deploy them. So I would say we're extremely happy with our ability to grow our network and manage our cost base going forward. As far as the mortgage book, I'll let Morten answer the GIL growth. But as you realize that a big part of our book is insured, and while gross impaired loans do or could grow, they rarely materialize into significant PCL because of the insurance with Morten. Right. Let's see if this answers your question. But in terms of the overall level of impairment in the residential mortgage book in Canada, in basis point terms, it's basically stable quarter-over-quarter for the total real estate, the residential property-related piece at around 32 basis points, which is consistent with what we have seen for the last several quarters. PCL in this portfolio continues to show in at a basis point or less on the overall. We've had over the last year a few regions where we've had some small spike up in delinquencies and impairs in that portfolio, but it's at levels that get absorbed quite easily, and as I said, it has had no impact on provisions. Actually, the current environment on the straight residential mortgage piece is actually looking like it's trending down somewhat. Okay. I'm sorry. Just to be clear, I was just talking about the CAD 544 million of gross impaired loans you show at the end of the year, which was up about CAD 41 million or 8%. Right. Maybe the better place to look perhaps in terms of that, I think this is more of a quarter-over-quarter sequential look. If you look in the supplementals on pages 30 and 31, you start to see somewhat of a story around the overall level of new impairments. At the bottom of the page, you get the breakdown by geography and portfolio on a net impairment basis. We are looking at basically around the CAD 600 million mark for overall Canadian retail, and it's relatively stable through the year at those kinds of levels. Okay. Thank you. Thank you. The following question is from Cheryl Pate from Morgan Stanley. Please go ahead. Oh, hi. A question for Dave McKay on the Canadian banking net interest margin. Saw some good expansion this quarter and obviously Prime BA spreads up. I am just wondering if you could give some color on whether the increase was more driven by improvement in the deposit margin versus how the lending margin looks this quarter, and if you can give some color around the competitive environment on the lending side. Sure, Cheryl. It is Dave. The 5 basis point NIM increase, as you referred to, was driven primarily by BA rate increases year-over-year and over the quarter. A little bit by expansion of Prime BA spread. We had a small Prime BA spread expansion, but the majority of that would have been a positive impact on our deposit book. So that really is the explanatory side of our NIM expansion. As far as competition and spreads going forward, a common theme you are hearing in the market is increased competition, particularly in the mortgage markets and in the commercial lending markets. I think they will serve to hold margins in check on what expansion we do see could get pulled back by competition. So my view is that margins should be largely flat over the coming year. Great. Thank you. Thank you. The following question is from Brian Klock from KBW. Please go ahead. Good morning. Just one quick follow-up, Morton, for you on the U.S. gross impaired loans. From the severity perspective, it looks like the net write-offs and the provisions for credit losses related to wholesale have started to decline. It looks like the new impaired formation is still increasing, and maybe just the pace of resolutions are slowing. It's still kind of remaining stubbornly high at the level of GILs in the States. Is there anything you see in the pipeline or maybe the fourth quarter? Obviously, it's seasonally slower. Is there anything you would expect to see in the first quarter that may improve some of the resolutions and help to kind of bring that net balance down more? What's driving that dynamic is really the external environment. Coming into this year, we'd hoped to see a bit more of an improvement in the second half of the year. That has been delayed somewhat. I would say when we look at some of the migration that we look at, both in terms of our criticized and on non-accrual loans, we do see a trend line across most of the portfolios for the level of criticized assets to start reducing. We've had a period of a few months of that occurring at this stage. As you can see, overall PCL did come down this quarter. If the economic conditions continue, and if all we have is a delay of a couple of quarters of the patterns that we'd hoped for coming into this year, you should see both level of overall non-accruals and provisions start to come down through 2011. As I said in my comments, we're seeing signs of stabilization. It's highly dependent on particularly the real estate market in the U.S. and more general, the level of economic activity. But if things evolve according to the sort of common economist view, we should see fairly clear improvements in PCL. I would say on non-accruals, I would expect the progress to be somewhat more slow. Unfortunately, the reality is in this market, I think the improvement in credit quality metrics in the U.S. is going to be slow. But if the economic outlook is what is confirmed, we should over 2011 see improvements in all the key metrics that you're looking at. All right, great. Thanks for the color. Thank you. The following question is from Mario Mendonca from Canaccord Genuity. Please go ahead. Good morning. I don't want to put words in your mouth. I'm not sure if it was Janice or Gord, but there seemed to be a suggestion that you felt it was possible for the U.S. International Retail Banking business to be profitable in 2011. Is that fair? Yeah. Mario, it's Jim Westlake. I think that certainly our expectation is that we will start having quarterly profit in the segment as a whole during fiscal 2011. Is that mostly PCL related, or is there anything else you would point us to? No, I think that we've got a combination of things. In our custody business, things are coming back in that, and we're seeing regular growth again. Certainly in the U.S., it is primarily a PCL story as that continues to come down, but we're seeing some signs of renewed business growth and some positive items. In the Caribbean, we also see partially a story of PCL, but also just our business efforts there are improving. These higher foreclosure costs on the commercial side this quarter. Was there something, a bit of a true-up this quarter, where you sort of got around to actually foreclosing? Was there anything specific that pushed it into this quarter? No. We think that was a little bit unusual. Of course, in the U.S. that ends up flowing in through the expense line instead of as a provision. It just was the way it unfolded. We don't see that as a trend and would certainly expect it to be lower in Q1. Okay. Then just one final thing. On the exiting the correlation trading book, I'm trying to get a sense for whether this was an important part of what drove the very high trading results, trading revenues in 2009, specifically those quarters when we saw CAD 1.3 billion plus. Was correlation trading an important part of that? That's the first part of the question. The second part is, in exiting the business, do you get much capital relief? Does the RWA actually come down as a result? It's Mark Standish. As we talked about, I guess, a year and a half ago, when we sold the bulk of that book off, I think we mentioned at the time we were going to manage the residual down. We exited the residual positions essentially flat to reserve, so there was no positive or negative P&L impact in the quarter. There is some small reduction in capital associated with that. But I think the key thing was just to mention that we had exited what was one of the focus legacy businesses. Okay. The question was, though, in 2009, was it a big part of the profits and- No, it was not, no. Thank you. That clarifies it. Thanks. Thank you. The following question is from Steve Theriault from Bank of America. Please go ahead. Thanks very much. Just a couple of numbers questions. Gord, you said earlier that troubled Euro debt exposure is manageable in your view, but can you give us some numbers on this front? How much sovereign, non-sovereign derivative related exposure do you have at year-end to Greece, Ireland, Italy, Spain, and Portugal? Secondly, just for Janice, you mentioned the cumulative securitization gains that have to get backed out. Can you give us a number on that, please, under IFRS? Thanks. I'll let Morten. Do you have the list? The answer is very little exposure. I've got a sheet somewhere. It's almost negligible to those countries. Do you have the specifics, Morten? Well, I do have some specific numbers here, and it's somewhat dangerous to get into too much detail here on the numbers. I mean, it's basically to Greece, when you look at it, we're rounded to the nearest number. We got about CAD 1 million worth of exposure, 10 to Italy. We've got somewhere around CAD 80 million to Italy, sorry, 10 to Portugal. Spain and Ireland is a bit more of a complex story. If you look at between mark to market on derivatives, money market placements, and lending, we've got around CAD 500 million to both. I would emphasize that in both cases, you've got for Ireland, about 58% of it being mark to market derivatives with a very small number of that being to actually Irish bank or other or Irish sovereign entities. It more reflects the mix of financial institutions that have operations in Ireland. In Spain, the number is driven more by money market and inventory positions weighted more towards the sovereign. I think the way I tend to look at it, and the question I ask of Morten is, if there was a problem in Europe, what would the impact be? I think the answer is de minimis. The economic impact of restructuring in any of these countries from direct exposure would by the time the restructuring happens, be very small. Clearly, the second order impact is really what we're more focused on in that context. Steve, with respect to the securitization business, our securitization activities are actually sized in note 5 to our consolidated financial statements. But just to give you an order of magnitude, and it's one of the areas that we're still working on with respect to our transition adjustment, our securitization has come down significantly. If you look at the IFRS potential impact on Tier One capital that I spoke about, the impact of backing out the securitization income and re-recognizing it over the course of the mortgages would be probably less than 10% of that Tier One adjustment. So that just gives you order of magnitude, and as we work through the details of what our transition adjustment will be, we'll expand our disclosure to encompass some of the items that we're still working on. Is it fair to say that then most of that 100 basis points that you referenced on the call is employee benefits related? A significant portion is employee benefits related, probably about half, and then we have all of our consolidation activity as well, and some other adjustments that we are working on sizing at this point. Like VIEs? VIEs. I am talking about, you are right, SPEs and VIEs, and a lot of that depends on where we will stand when we actually size them and put them on balance sheet. But we should have more clarity over the coming quarter or two. Great. Thanks very much. I appreciate the color on the sovereign debt. Thank you. This concludes today's question and answer session. I would now like to turn the meeting back over to Mr. Gord Nixon. Okay. I would just like to thank everybody for participating, and we look forward to the next conference call, and we particularly look forward to moving on to 2011. Thank you very much. Bye. Thank you. This concludes today's conference call. Please disconnect your lines.