AGM 2011

Mar 3, 2011

Good afternoon, everyone. Welcome to the RBC press conference. I think pretty well everybody knows everyone here. In addition to Janice, Gord, and David, we have a number of GE members in the room. If you'd like to address your questions to individuals other than Janice, Gord, or David, please let me know, and I will find the person in the room for you. We may have some media calls come over the phone as well. Why don't we start with the room, and does anybody want Doug Alexander. Just in regards to your international unit, you mentioned in the AGM and touched about the U.S. bank and its impact in there. First time that you've had quarterly profit in almost three years. I'm just wondering whether this is a blip, or is this a sign that you've actually turned it around? No, I think it's a sign of steady improvement. We've certainly said to the marketplace over the last number of quarters that we're starting to see some stabilization in the credit environment in the United States. The Caribbean and Dexia have been profitable through the piece. The challenge has basically been the banking business in the Southeast. It was still slightly unprofitable in the quarter. The unit was profitable because of the performance of Dexia and the Caribbean Bank. We're seeing steady improvement, and I think very consistent with what we said to the marketplace. The credit environment's taking a long time to turn around, and the challenge with that business is the results are much, because it's a fairly small business, it's so influenced by PCL. It's been a challenged environment, and it's certainly gotten less challenging, and it's starting to show some signs of improvement. I think what Jim Westlake said at our quarterly meeting the last time is our expectation for the unit would be to move to profitability sometime throughout 2011. I would say that it probably occurred a little sooner than we would have anticipated, but we think that trend over the year is going to continue. Just as a follow-up, is the reorganization finished then, or most of the work on that reorganization done for the- You mean the human reorganization, the people? Or any other aspects that you've been doing when you- Well, no, it's an ongoing process. There's still a lot of things that are current. There's been a lot of changes to the management team. We've got a very strong management team currently in place that's executing the transformation. We have a big project underway, which we actually call Client First, which is similar to what we launched in Canada back in 2004. There are a number of parts to that, including investment in technology, investing in product and processes, and branch upgrades, et cetera. It's an ongoing program of which we hopefully will continue to see results come through. But it's not over. I'm not sure it ever ends, but it's a program that's currently underway. Thank you. Yes, Grant. Question. Grant Robertson. Yeah. Globe and Mail. Grant. Gord, just to follow up to that on the U.S. operations. You mentioned the M&A market down there coming back to life now and various options, potentially looking for partnership or something like that. Have you had any interest expressed to you on those operations by others, or are you talking mainly RBC going out to others? I would say that there's always discussion through investment banks and others around options, whether that's us as an acquirer, us as a vendor, us as a partner. In terms of specific things, obviously I wouldn't comment even if there were. It's a very difficult question to answer other than we always have active files underway with respect to all of our assets, whether it's banking, asset management, those would be the two primary ones. I would say if anything, there's probably been a higher degree of focus on the asset management side as opposed to the banking side because as I keep saying quarter after quarter, priority number one, two, and three is to get our operational performance to give us more flexibility, and we're moving down that path, but we're not at the end yet. We think when we get there it gives us much more flexibility and creates a lot of value for our shareholders. As I said at our annual meeting, our return on equity this quarter was 20.5%, I think it was. Yet we still have a certain amount of capital earning virtually very little. If we can get the return on that capital up to a more normalized level it will create a lot of value for our shareholders. That's what our primary objective is. We're not spending a lot of time thinking about different options, but it's always something that we're reviewing. We're always prepared to talk to people. We often meet with investment bankers. I don't necessarily, but our people in the business do. That ongoing process is always underway. Before I take the next question, I just want to make you aware that we've got Morten Friis here, who's the head of Risk Management. We have Dave McKay, the head of Canadian Banking, Jim Westlake over here, head of International Banking, and Mark Standish, who is the co-CEO of Capital Markets. If you have any questions you'd like to direct to them. Sunny, you have a question? This could be for Jim as well as Gordon or anybody. Sticking with the international side of things, a lot of your peers have been very active in the acquisition in market and emerging markets. What are your plans for that? Do you have any plans for- Well, we just closed at the end of the quarter, we closed a CAD 1.4 billion acquisition of BlueBay Asset Management, which is primarily active in Europe and emerging markets. They run emerging market portfolios and monies. We think that provides us a good opportunity in Asia, as well as distributing their funds more broadly across our distribution networks in North America, Canada, and the U.S. We are very excited about that. We have also made some recent additions in Asia as part of our Asian buildup strategy. We have hired a new head of emerging markets who is located in Singapore, who is running our global emerging markets business through Singapore. Unfortunately, George Lewis is not here. He is the one GE member who unfortunately had to go to another appointment. Otherwise, I would turn the podium over to him. We have also added significantly in Hong Kong. We have just opened a new trading floor, which has 100-plus trading spots in Hong Kong. We are working very closely between wealth management and capital markets in Asia in particular, in terms of trying to develop strategies that are complementary to both those businesses because there is such a correlation between high net worth individuals and capital markets opportunities in that region, just the way the market operates. What we are trying to do throughout Asia, I am using Asia as an example. We are doing lots in South America and other emerging markets as well, but Asia would be our number one priority. What we are trying to do is to some degree replicate what we have been able to achieve in Europe and the United States in our wealth/capital markets business. As I say, there are a couple of recent hires that are going to be pretty instrumental in terms of developing that strategy. Do you have plans for future acquisitions of your own? I would say acquisitions is not necessarily the route for growth in that marketplace, although we just bought the Fortis Wealth Management business in Hong Kong. I view those small acquisitions almost as much as being investments in the existing business. People use the word acquisition very generously. If you invest CAD 100 million in buying a small franchise which you add on to your existing franchise, technically it is an acquisition. I tend to view it more as an implementation of a business strategy. In terms of a significant acquisition which really transforms a business or brings in a new business, et cetera, I would not rule it out, but it is certainly not something that is on the front burner or a priority. I think you're much more likely to see smaller acquisitions that would be additive to our existing global private banking franchise, our trust business, our emerging market wealth business, our Capital Markets business, et cetera. John Greenwood from the Financial Post. Gord, you sound a lot more optimistic about the U.S. business this time around. I think you said deposits are growing and you're looking at expanding assets. Am I right there? The tone. Well, you've heard me probably say this before. It is somewhat frustrating we get so many questions about the U.S., and it's always geared towards U.S. banking. As I said in our annual meeting, it's our third biggest business in the United States. Our U.S. business is doing incredibly well right now. Our Capital Markets business is, and Mark Standish and Doug McGregor are here, they'd be happy to ask them questions, is performing exceedingly well both on the trading side but in particular on the investment banking side, where earnings have been extremely strong and our focus has been to shift that business to be more weighted towards investment banking as opposed to trading. I think this quarter we saw more evidence of that. I can't remember the exact split, but I think it was about 60/40 in terms of contribution from the two businesses. There's been good growth in that business, very strong operating performance. The wealth management business in the U.S., again, significant improvement and better performance. So across the U.S. in general, the picture is quite positive. The banking business in the Southeast is still tough. As I keep saying, it's less worse. There are signs of improvement. The credit environment's improving. We're investing a lot in the bank. But the banking industry in the U.S. has been a low return industry for 10 years and the issue is that going to change going forward? We're focused on trying to get back to better performance and determining that. But I think from a performance perspective, there's still a lot of headwinds in the United States. You've got the fiscal imbalances and the impact of that. You've got Dodd-Frank, which is impacting credit card earnings, interchange, et cetera. The good news from our perspective is we have a very small retail bank, so we're not that affected. But I think the key strategic decision we address is we've got excess capital that we're going to invest in different businesses around the world. The big decision for us is how much do we want to invest it in U.S. retail banking or our existing retail banking business relative to other alternatives? That's an ongoing process that we constantly look at and constantly review. So I think the U.S. generally is much better. There's parts of it which are very strong and there's other parts that are starting to show much better signs of life. We have a question from Terry Kane of BNN. Question for Mr. Nixon. Mr. O’Brien may have a comment as well. What do you have to say to investors who may be disappointed that you didn't raise your dividend today? I don't think investors will be disappointed because the expectation was that we wouldn't raise our dividend this quarter. I think that it probably because the earnings were so strong, if they had forecasted those earnings, there might've been more disappointment. But I think when you looked at sort of street consensus and where our dividend was, where our payout ratio was, I think people were more focused on what was going to happen as we moved to the latter half of the year, et cetera. I don't think there's a significant disappointment. The expectation was that a couple of the other banks, TD in particular, would move earlier because their payout ratio, amongst other things, is lower. What we said to the analysts this morning and at the shareholders' meetings was we'll continue to monitor it throughout the year, and ultimately it's a decision for our board of directors, and it'll largely be driven by performance. But the key metric to watch there is earnings versus payout ratio because if you look at historically, that's been a pretty good indicator of when dividend increases come. And we're not changing our payout ratio unless the board decides to change it. I said to Gord that if it could produce in the next two quarters the results of the first quarter, we'd certainly have to look at it pretty seriously. Doug. Just to shift focus to Canada and the retail or domestic lending business, and specifically mortgages. I'm just wondering, in the environment we're in right now, how competitive the mortgage market is in Canada versus your rivals. Are you having to eat some of the borrowing costs to compete? Yeah. Well, it's the same competitive environment as our rivals. It's no different, but it is very competitive. Dave, do you want to make a comment? You're the expert on this business. Sure. I would say that I've never seen a more competitive marketplace right now. There's good volume in the marketplace. It's pretty much as we had forecasted last year. We're in the mid-single digit range as far as year-over-year growth. But the pricing is competitive in the marketplace right now. Absolutely. But I think we showed pretty clearly in Q1 that we're able to grow our business very profitably, and that we pursue profitable market share growth. Dave, are you finding you're actually having to absorb some costs from that just with the interest rates and the increases that you compete? Well, we look at the all-in cost to the organization, obviously. I'd say our strategy is to grow profitable market share. Not every competitor would do that, I would think, but it's very much our focus. But there's different market practices for different competitors out there, and we've got our formula. We're the number one consumer lender in Canada. We've got a formula that works with our distribution capability, and we continue to leverage our strengths. Advice is a core capability that really helps customers understand it's not just about price. It's about all the other options that some of the competitors might not talk about. Price is an element, but your paydown capability in a mortgage, your early prepayment ability, those are all aspects of mortgages that affect the cost to a consumer that don't always get disclosed very clearly. Our strategy is to make sure consumers are aware of the total cost of their mortgage and all their options, and not just what the final price is. The one comment that I would make, Doug, and you'll never write about it because it's not as fun media, but when you look at the environment in Canada, it's one of the most competitive markets in the world, which is great for consumers. If you want to measure that, then look at the price the consumer pays, whether it's interest margins, mortgages, credit card fees, ATM fees, the list goes on. It's a very, very competitive environment, and always has been, and there's certainly no sign of that letting up. The good news is you've got a great banking system with very good banks who are able to generate strong returns and earnings in that competitive environment. But there's no easy business out there. John, did you have a follow-up question for Dave? Yeah, actually. The CMHC insurance has a very big sort of presence in the Canadian mortgage market. Does the high level of insurance in that market, does that make the calculation of risk more difficult for the bank? No. I would say that it enhances the risk capability of the entire Canadian mortgage system. Well, certainly for you guys, it means you are much, much better protected. But as you look at the bigger picture No, it is not just us. I am saying systematically. If you understand the process, we adjudicate a client when they come into our network, into our branch. Then if that is a high ratio mortgage, we then send that application to CMHC or Genworth or the other mortgage insurers, and they re-adjudicate that based on their own criteria. So an insured mortgage in Canada actually has two separate filters before it actually gets booked, and they have every right to the client. So I would say systematically, that is an enhanced oversight, and I think that is one of the contributors to the strength of the Canadian mortgage system compared to other global systems. What I mean is that obviously the banks are protected from bad loans in the mortgage market because of CMHC insurance. But does anybody have any kind of clear idea because obviously people do not just have mortgage loans out there. Those people with mortgages also have credit cards, car loans, and all sorts of other loans. Do we know if there was a significant downturn in the mortgage market, if there was a bunch of defaults, do we have a clear idea how people would behave, how borrowers would behave? Where would the defaults, where else would the defaults happen? One of the sequelae you are saying? Yeah. Would there be other contagion risk to other credit sequelae? Yeah. I gather that is one of the issues. We really haven't been in a situation like that, so no one really knows. What borrower behavior would be in this country? No, I would say through a cycle, we can say our observation is consumers who hold a mortgage have the lowest overall default risk of anybody in the population. They tend not to be subprime borrowers for the most part. They tend to be very capable borrowers of servicing their entire debt, not just their mortgage debt, but their entire debt. Our observations through a cycle is your mortgage customers are your best customers. But we do stress the portfolio, and we do look at if the mortgage portfolio gets into trouble, where are some of the other problems. We do talk about that, and I think we've shown through a number of cycles now we really understand how the credit card portfolio performs in a downturn versus the mortgage portfolio versus some of the other consumer portfolios. And we've got a good handle, and I think it's performed pretty close to what we said it would even before going into this cycle. In the unsecured consumer side, in credit cards, you have about a 50% volatility going through the cycle historically, and that's pretty much what we saw from 2008 through to 2011, is about a 50% volatility from bottom to top. I think we've got good experience, and I think our credit models have performed very well. Where it would show up though, John, I think is it would likely show up in unsecured. Not with mortgage customers, it would just show up in unsecured portfolios, and that's pretty consistent with previous downturns. Terry, do you have a question? I do. Board, what do you think about the proposed TMX LSE merger? Well, firstly, I always declare my conflict upfront because we are an advisor to the London Stock Exchange. Although we have two conflicts because we're also an owner in Alpha, which is a competitor of the TSX. Maybe I have conflicts on either side, so I'm viewed to be neutral. I'd very cautiously say that I think that the business rationale behind the merger makes a lot of sense in a world where exchanges are globalizing. Whether or not London and Toronto as a combined global exchange can sell their story or not is up to them. I think it's a pretty good story, but ultimately, that's the story that they have to tell. I think the government has every, not just right, but every obligation to ensure that a transaction is in our national interest. That's up to the organizations to make that case. My personal view is it is a very compelling case in that in a world of globalizing exchanges, the alternative to Toronto being a co-head office, and it is a co-head office. 55/45 ownership is irrelevant. People forget most of our major companies in this country have less than half of their ownership held by Canadians. It's not an ownership issue. It's a question of where are the roles, where are the jobs, where's the technology, et cetera. I think having the co-head office of a global exchange for Toronto as a global financial services center is likely more attractive than the alternative, which is where does Toronto end up as an exchange if they don't do this deal? Because presumably, if they don't do this deal, they're going to stay a standalone local exchange. That's a very important debate. I think that when you weigh what the benefits could be relative to the alternative, I think that they put together a fairly compelling story. They're obviously going to have to sell that to the politicians. Who was waiting, Grant? You were being awfully quiet, Grant. I'll throw two in to make up for it. First on consumer loan growth, there's been a lot of talk about consumer loans slowing down. Looks like we haven't really seen that this quarter. Longer term, say looking out for the year, what are you forecasting that and then I'll follow up. Well, we're expecting sort of mid-single digits. It's been a little stronger than we would've expected in the first half of the year, and I suspect part of that is because of the amortization rules that came into force on March 1. So there's been some pent-up buying in the real estate sector. But our forecast, Dave, for the year is I think we've said publicly is sort of mid-single digits, and it's been a little stronger than that. But for the balance of the year, that's where we expect it to be. That's down from double digits. Right. Okay. Just a small one on Libya. I know you talked about it at the start of the meeting. Can you quantify any sort of impact from the freezes this week? I know you said it was small, but there's got to be some sort of impact there. Sorry, from the freezes? Yeah. From the OSFI advice to freeze assets. Oh, you mean on Libya and the Middle East. Yeah. Yeah. Sorry. I wasn't quite sure what our freezes were. Okay. Yeah, no, it will have no impact really from our perspective. Obviously, we would not disclose where we would have deposits. I think it has been well covered in the press. There are some deposits in Canada, I think proportionately probably about what you would expect given where the U.S. is. I think it was your newspaper who indicated that the vast majority was probably central bank deposits held across the system. We would not disclose exactly what we have other than to say very little in the way of exposure, and it will have zero impact in terms of our operations going forward, either on the deposit side or the credit side. Now, secondary impact with oil prices and everything else is a different issue, but in terms of primary impact, it does not have any. Is that fair, Morton, or should you clarify? Are there any other questions? Sunny. Are you concerned at all about the impact of consumer debt on PCL going forward? Not really. I think that if you actually look at consumer debt levels in this country, I do not think we are at levels that put us in significant concern or danger. I think the steps taken by the government were wise in that I think they were very much preventative, and I think that is how they sold them, that it is not a major issue right now, but we do not want it to become an issue. If you look at debt levels on a per capita basis, we are now at historically high levels. Although if you actually look at debt servicing capabilities, we are pretty much in the band. The issue is if interest rates go up, then it will impact debt serviceability. But the trends, we are seeing stabilization. We have seen relatively strong economic growth recently. We are expecting interest rates to go up, but we're not expecting them to go up to a level that is going to be significantly impactful. When we provide a mortgage, we stress test it against term rates, not against where short-term interest rates are. We stress test our portfolio. So we feel pretty comfortable, and if you look at the trends in terms of our provisions, et cetera, they're strengthening. Morton, again, I'll just ask whether you want to add anything to that. Well, I think that's a fairly complete answer. I think we feel very comfortable about our portfolio. I think we feel that we're likely to see continued growth in consumer indebtedness. I think we've not seen the de-levering in Canada that you've seen in the U.S. on the consumer level. It's also not been the pressure to do so. I think we're in reasonable balance. But we've just got to manage this thing going forward. But from a portfolio standpoint, I think we're in excellent shape, and from a Canadian macroeconomic standpoint, I think we just need to see this continue on a stable level and hopefully with some degree of reduced leverage over time. Any other questions? Terry. Last one. In the meeting, Gord, you mentioned that you think Canada may see a breakaway decade for the economy. Can you expand a bit on what you mean by that? I think when you look at the developed world, which on a comparative basis, I think that the fundamentals in Canada remain extremely strong. Part of that was on the premise that we focus on ensuring that we continue to make gains in areas like productivity, which has been a perennial weakness for the country. I had a paragraph or two in my remarks about ensuring that we don't allow our fiscal situation to deteriorate, and that we continue to maintain it as a competitive advantage. But when I look at the world today, there's massive fiscal imbalances in the United States and in Europe, and ultimately they are going to have to be dealt with in one fashion or another. It's not sure how we actually get to dealing with it, but the math does not work moving forward. We find ourselves in a position where there's very strong demand for commodities, and we're a commodity exporter. We have the strongest fiscal balance sheet in the developed world or in the G8. We've got housing prices, which is the biggest source of consumer individual wealth, at levels slightly higher than the pre-recession levels. What you don't want is a bubble, but I don't think we have a bubble at this point. There might be specific markets which are particularly high, but generally in very good shape. We've got other incredible assets as a country. One that I speak frequently about is immigration. We've got the ability to continue to have very high levels of immigration, which provides a source of growth in a world where a lot of countries are struggling with high rates of unemployment, political backlash as a result of, you've seen the comments by Prime Minister Cameron and Sarkozy on immigration issues in Europe. I just think when you look at the whole package for Canada right now, if we can invest in our weaknesses like productivity, and we continue to keep our foot to the pedal in these other areas, I just think that it's a wonderful opportunity for this country. We've got other areas we've got to work on. We've got to open more trade relationships with countries other than the United States, particularly Asia. There's a bunch of things we have to do. But I don't think we'd ever, on a relative basis, been better positioned than we find ourselves today. This is going to be the last question from Doug Alexander. I just wanted to get you, Gord, maybe to weigh in a bit on the debate in Ottawa on corporate tax cuts. What is your opinion on that? What would the impact be if there were a change in government and corporate tax cuts? I think that, again, one thing I forgot to mention, it was in my speech, but one of the reasons for being well-positioned for the breakaway decade, as I referred to it, is because, again, amongst the G8, we have the lowest tax rates. If you look at our business as an example in Toronto, and you look at the same business in New York City, the tax differential on earnings between those businesses is very significant, very much in favor of Toronto. Again, I think it is a competitive advantage we do not want to give up. I am not going to wade into the political debate because we are talking about the parties saying whether tax decreases should continue or not, and we will leave that to the politicians to sort out. I think from a positioning perspective, Canada wants to maintain the lowest levels of corporate taxes on small business, taxes on large corporations, even taxes on banks in the developed world because I think it provides a huge competitive advantage. You are starting to see some business decisions for international companies being based not just on the cost of labor, but on the regulatory environment, on the tax environment, on the political environment, et cetera. Canada has got a great story. We have got to sell that story, but I think we have got a great story. We do not want to lose that. If you were to ask me, if we have to increase revenues, I would rather see it come from other areas. Do not ask me the next question, which is which areas, because I am not wading in there. The last area that I would go after would be taxes on small business and major corporations because it does provide a great environment, and it impacts the decisions that we make as to where we want to operate from and locate people and grow businesses. Great. Well, thank you very much for attending. This session is now closed. Thank you.