Royal Bank Of Canada at RBC Capital Markets Canadian Bank CEO Conference

RY.TO - Royal Bank of Canada
Royal Bank Of Canada at RBC Capital Markets Canadian Bank CEO Conference
Jan 14, 2014 / 01:35PM GMT 

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Corporate Participants
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   *  Gordon Nixon
      Royal Bank of Canada - President, CEO

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Presentation
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Unidentified Speaker   [1]
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 So with that our first presentation or speaker is Gordon Nixon, so Gordon if you can come up and we will start this right away.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [2]
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 Morning everyone.

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Unidentified Speaker   [3]
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 Okay, oh and one last thing before we actually begin, I have to say something, here. I have been asked to tell you that Gordon's comments today may include forward looking statements. Actual results could differ materially from forecasts, projections, or conclusions in these statements. Listeners can find additional details in the public filings of RBC Financial Group.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [4]
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 That can be for everybody speaking today.

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Unidentified Speaker   [5]
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 I was hoping I could do that but apparently I have to say it every time.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [6]
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 Oh do you? Okay.

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Unidentified Speaker   [7]
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 Okay, so Gordon, you are the largest bank in Canada. I thought that maybe we could start with a discussion of the state of Canada. The consumer over levered, borrowing needs declining, how long do you see this lasting, what is RBC's response and so on?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [8]
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 Yes, I think that and firstly I would say that the play around the consumer is to some degree over done, in that we are still seeing growth in the consumer market in Canada. Our expectation is that we will have mid-single digit growth, which is down significantly from the double digit growth that we have experienced over the last few years. But we still have growth. I think that is extremely important. I think to some degree it is healthy. There is no question that the consumer has been leveraged up over the last number of years.

 Largely as a result of low interest rates and the ability to carry higher levels of debt and as I remind people, if you actually look at debt servicing capability we are very much in our normalized, in fact in the low end of a historical range. But absolute levels are high, interest rates will go up at some point in time and as a result we are probably going to go through a period here of slower growth of consumer leverage and debt.

 And as I said, I think that is healthy, I think that was intended. Some of the policy decisions made by the Finance Minister and the regulators, I think have pushed the consumer in that direction and I think it is playing out to some degree as anticipated.

 So, I think it will last for an extended period of time, particularly if interest rates start going higher. But as I say, our expectation is growth rate will probably be in the mid-single digit levels, which I think will continue to pressure the banks to make sure that on the cost side that we are doing a good job and hopefully we will have some of the slack picked up in areas like the commercial side. Certainly, if you look at the positive in the investment side the growth rates are very strong and we would anticipate that to pick up some degree of the slack.

 But in terms of pure consumer lending we will probably be operating at a much lower rate than we have been over the last few years in terms of growth levels.

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Unidentified Speaker   [9]
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 And it sounds like an industry comment, but do you mean for RBC in particular? And one of the things that we have noted in the past for RBC is that you tended to grow a little bit faster than peers. Do you still target that, is it still realistic?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [10]
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 Yes, it's my favorite objective in Canadian banking, because it is very simple, people understand it, which is to grow at a 25% growth premium. 25% premium to 5% is easier to achieve than 25% to 10%. But you know, very much that is our objective and something that we continue to believe that we can and will achieve going forward.

 We have been able to do it for the last significant number of years and you know, I think, when you look at the breadth of our product offering, the strength of our distribution network, our branch network, our ATM network, our mobile sales forces. We are rolling out new smaller branches, the Ally acquisition, I mean there is a number of things that we are continuing to invest in. But just the strength of our franchise and our distribution network, we think, provides us with the ability to achieve a higher growth rate than the overall industry growth rate.

 We target a 25% premium and that is something that is embedded very much into our objectives and our targets going forward and it is what we hold ourselves accountable to.

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Unidentified Speaker   [11]
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 That almost suggests, I mean, I guess the question can also be asked another way. The scale of RBC is a thing that has been discussed at length. How low can you bring the efficiency ratio? If you are going to grow that fast relative to your peers, you targeted the low 40%, is anything below 40% possible and what...

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [12]
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 You know, 40%, we are a long way off from 40%. If we get to 40% we will have that discussion in a more relevant way. Certainly, when you look at certain banks around the world, particularly pure retail based banks, or personal and commercial banks, you do have some banks that are below 40% in terms of efficiency. And when you look at a more universal bank, like ourselves, it is slightly harder.

 But I think again, we try to keep our objectives very simple and very straightforward, we have been trending down in terms of our efficiency ratio over the last 10 years plus. We have got an objective of the low-40%. I think the last quarter we were somewhere around 44% and we continue to have that as a hard embedded objective and we think we can get there.

 There is obviously two ways to get there, I mean if we generate positive operating leverage, which is one of the things that again is built into our objectives, the revenue line will help and at the same time we have to continue to ensure that the cost side is moving in the right direction, as well, to generate that positive operating leverage. We have a number of initiatives.

 The big one that will start to kick in this year is our retail credit transformation, where we built a new mortgage origination fulfillment system on the technology side. It has been a big investment. We have been investing in that over the last number of years. We are now in the stage where that starts to roll out in the early part of this year and it is something that certainly over time we are quite excited about in terms of improving the efficiency with respect to our retail credit business.

 So, absolutely our objective is to continue to move towards that low 40% level and I assume when we get there we will continue to try to move in that direction, but we are a long way off.

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Unidentified Speaker   [13]
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 One of the things you mentioned earlier was that you were hoping that rates would rise and that would help out the bank. I was a little astonished at how sensitive some of the other banks actually were to higher rates. Can you give us an idea of how sensitive of how you would be, especially on the retail side to a rise in rates and how would that flow to the bottom line?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [14]
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 It would be obviously very positive to have an increase in rates. As I always respond to that question, I think it is very important to have rates rise in a reasonable fashion. There are pros and cons to higher interest rates, obviously, it puts more pressure on the consumer. And I think what would be the most healthy outcome for the market place is for there to be a steady orderly increase in interest rates to a reasonable level. Which is asking a lot but obviously that would have a very positive impact.

 We obviously have very good leverage particularly across our retail and wealth management business to an increase of interest rates. And if we got over a period of time an increase of 150 to 250 basis points it would certainly be very positive from an operating perspective.

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Unidentified Speaker   [15]
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 And then maybe switching gears a little bit. One of the things that would help or has been helping many of the banks. Many things that they are chasing after is a greater exposure to wealth management. Last couple of quarters we have seen some funny results on RBC's wealth management. There were some high PCL's. It seems to be that there is a little bit of (inaudible) in some of the expenses. Can you talk a little bit about what is happening with the wealth division. Are we going up the risk spectrum? Is it getting riskier or should we expect that those kind of results will stop?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [16]
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 No, I mean we are not going up the risk curve significantly. Although, if you look at our private banking business and our global banking business there is a credit component to that business. Now if you look at credit across our wealth business relative to most of our competitors. It is actually very low. But it has been growing and it has been increasing. And if you look at what happened last quarter and it was disappointing in a couple of senses. One, because of the credit loss that was taken in one of the emerging markets but also because if you looked across wealth management, it was a very, very strong quarter across all of the businesses with the exception of the one time credit event.

 As we talked about at the end of last quarter, it was disappointing, it is part of the business, it was a traditional margin type situation, but clearly it is something that we would not expect to repeat certainly on a frequent basis. You never say never in the banking business but it is clearly there were some things that we could have done better in terms of the monitoring of this particular situation.

 So, I think it was more of an event. Certainly, it was something that we have adjusted some of our risk policies. There were no risk policies that were out of line or were violated. But we have made some refinements and some changes, particularly with respect to our global private banking business with respect to lending and margin loans in general.

 If you look at the wealth business, the big issue that we have been dealing with from an earnings perspective because our asset management business has been doing outstandingly well, our brokerage business both in Canada and the United States has been very strong.

 We have said that one of the things that we are doing is we are investing in our global private banking business, particularly in certain emerging markets such as Asia, which is going to have a drag and a cost associated with it. We are not acquiring we are investing and as a result we built into our plans some drag with respect to that business so hopefully we will generate some positive operating leverage with respect to that business.

 And as I say it was larger than we would have expected last year, largely because of the credit event.

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Unidentified Speaker   [17]
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 And that drag is going to dissipate?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [18]
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 The drag will obviously be a lot lower this year than it was last year. And the idea of this investment and it was very much built in to our business plans that we would start to generate positive operating leverage and returns from it down the road.

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Unidentified Speaker   [19]
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 I am going to switch gears here a little bit and maybe ask some questions on the cap markets business which is one of your (inaudible). It produces 20% to 25% of earnings but it does have a lot of assets. Almost 50% of the RWA. Where do you think you can take that business? Can you take that business to 75% RWA of the bank? What is the monitor that you look at. I know you look at earnings, but we are looking at assets. Is there a point in time where you have to slow down growth of the cap markets business?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [20]
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 Well, the answer is hopefully not. Because if all of our businesses are growing then we would hope our capital market business to grow accordingly, and that has very much been our objective and strategy over the last number of years and it has panned out pretty well. We have been able to maintain that 25% contribution within a responsible range over the last number of years. And we have stayed very much focused on making sure that we didn't take it to a significantly higher level.

 The risk adjusted asset side there is a couple of issues there. The first one is that just from a raw numbers perspective you have got a business where RWA has grown significantly simply because of regulations. So the balance sheet hasn't changed. RWA has changed because they risk weighting associated with different products and the capital markets business have grown.

 Now, one would...there is obvious reasons for that, it is the views of the regulators and particularly under international regulatory rules which has put a much higher risk weighting on different capital market products. Now, whether that is right or wrong, will certainly payout over time, but it has had an impact in terms of that one measure with respect to our capital markets business. So same balance sheet today as five years ago you would have much higher RWA but you are not carrying any additional risk you just have a higher risk rating with those assets so that is one component to it.

 The other issue with respect our capital markets business, while the RWA is high you've got a very high degree of liquid assets with respect to that business and a lot of, if you will, incremental capital within the bank ultimately flows into that business. Whether it is the securities portfolios or areas where we can deploy that capital. So it will always have a higher asset level relative to its contribution, just because of the nature of that business.

 You know, I personally believe that RWA is higher than it should be with respect to risk but simply because I think that the regulators have pushed the calculations so hard on that front. But which is one of the reasons we tend to zero in on the 25% revenue earnings contribution rather than just the asset levels. But I think you will see it roughly in that range.

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Unidentified Speaker   [21]
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 I see, okay. Maybe we can talk now, since we are on cap markets of the Volcker Rules, it is early days we have got some inclination for Royal but maybe here on the record you can talk about Royal and where you are today. What you're seeing, early indications of how much impact it will have.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [22]
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 Me personally, we have taken down the amount of revenue, if you will, that would be derived from quote, unquote, propitiatory activities to a level where it is less than 1.5% of our overall revenue. So it is a very small absolute number relative to the overall institution.

 In addition to that and as you say it is early days and we have to be careful in terms of interpreting what the impact will be. But clearly the rules as they have come out have certainly been more beneficial, if you will, relative to what they might have been in terms of some of the early drafting. Certainly, with respect to the (inaudible) Rule, which is solely outside of the United States. There is a much higher degree of flexibility in terms of ability of institutions to trade things outside of the US marketplaces even with respect to US securities and US settlements.

 So certainly it has been more positive from that perspective, there is certainly some flexibility around things like managed accounts and so forth. There are businesses like some fixed income securities, government securities, etcetera which are exempt under the rules, that weren't necessarily under the early draft.

 So when we -- and in addition to that they have obviously extended the implementation period until the middle of 2015, although with clear direction that banks should be moving as quickly as possible towards adjusting their business. When you throw all that in the mix, what I would say from a macro level is we think it is a manageable, the rules are manageable and we will adjust some of our businesses and the way we do things but in terms of overall impact over a period of time we think it will be fairly de minimis.

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Unidentified Speaker   [23]
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 So 1.5% goes away over the next 20 --

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [24]
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 No not necessarily because it all depends on how we structure the businesses. And how we restructure some of those businesses and how we adjust to insure that we comply with the rules.

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Unidentified Speaker   [25]
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 Okay, fair enough, thank you. And the bottom line impact? If it is 1.5% revenues is the bottom line?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [26]
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 It is not material.

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Unidentified Speaker   [27]
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 No, it is not material?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [28]
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 If you look at our material numbers, it wouldn't be material. You are assuming those earnings are going to go away, they are not necessarily going to go away. If for some businesses where they will go away, we will reinvest that capital in other businesses. So the issue really becomes an issue of capital deployment and are we going to be able to earn as high a return if we have to deploy capital in another business relative to that business. And when we build all that into our plans we are very comfortable.

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Unidentified Speaker   [29]
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 So one of the areas in growth in cap markets has been lending. Do you still see that going into a high growth rates that we have seen.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [30]
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 The growth rates will clearly slow. We have been growing our loan books since 2008 roughly, a very high level, roughly 25% or 20% compounded growth. Part of the reason we have been able to do that is because 2008 we took our loan book, this is US loan book, we took our loan book in the US down significantly. So, if you look at where we are today in terms of our assets in the United States we are roughly where we were back in 1999 or 2000.

 So, you know what, you have heard me say this before, I think it has been an incredible trade that we have done as an institution. Basically, moving out of the lending space in the US when you weren't being paid to take risks. We didn't have the ability to leverage lending relationships.

 Lending terms, covenants, were very light and as a result we very aggressively reduced our exposure. It gave us the ability in 2008 to grow our lending book at a faster pace with good customers, we have good relationships were we have the ability to leverage those relationships by providing additional investment banking advisory financing product. And as I say as a result when you look at the overall balance sheet we are in pretty good shape.

 I think what you will see with our business going forward is you will see growth, you will continue to see growth in investment, but the growth rate will slow down to some degree with respect to balance sheet. What I hope we see happen is a slow down in terms of our lending growth but an increase in terms of our growth in products, like advisory, financing, high yield, etcetera.

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Unidentified Speaker   [31]
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 Okay so then roughly speaking, we have a challenging environment in retail. Still hoping to grow our 25% premium to peers. Wealth we are seeing some dissipation in terms of some of those initiatives that you spent on the wealth. Cap markets is still growing at a very strong speed.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [32]
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 Treasury investors services is growing quite well.

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Unidentified Speaker   [33]
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 Treasury investor, absolutely smaller but important. Insurance is doing well. You are going to have excess capital. If you don't already. What do you do with the excess capital? Sounds like a buy back, but doesn't seem very large. So what should investors think about that?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [34]
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 You know when I look at our capital and our plans going forward. We think that we can invest roughly half...if you assume our capital levels are where they should be, we pay out about 45% of our earnings in dividends, we think we can invest roughly half of the balance back into our businesses. Just growing our businesses, whether it is retail banking, whether it is capital markets, whether it is wealth, investing directly back into our businesses.

 And that leaves roughly 50% of the 55%, which in theory going forward would be excess capital, if you assume from a regulatory perspective and everything else, ratios remain the same. Which may be a bold assumption but if you make that assumption.

 And I would say with respect to that, as I said may times, you heard me say that CAPA allocation is one of the most important roles that management and the Board ultimately plays. And we will certainly be in a position where we have more investable, incrementable capital going forward then we have over the past number of years where a lot of that in theory excess capital has just gone to building up higher capital levels, higher regulatory ratios.

 And so with respect to that capital allocation, as I say, you know, the options are obviously investing in new businesses. Investing in businesses that would be additive to our existing platforms. Clearly we have said wealth management, particularly in the asset management side is a priority. We have been saying that for a couple of years.

 We have made a couple of acquisitions, but we have looked at a significant number and have not been able to identify something that we felt has met our return objectives and our strategic objectives. But clearly, that is still a priority, particularly on the US and European side and the asset management side would certainly be an area that we would be interested in doing something if we found the right asset level.

 Clearly, there are other businesses as well, whether it is some of the retail businesses, treasury and investor services where we think there might be opportunities to buoy capital that would basically bolster our current and existing franchises.

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Unidentified Speaker   [35]
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 Would you consider going back to the US in retail?

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [36]
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 I think what we have said with respect to US retail is that it would be very, very unlikely that we would go back in the traditional retail banking business. Firstly, I happen to be of the view that the US is going to continue to move to some degree in the direction of Canada, where margins and traditional banking products are low and those banks that are going to be able to generate superior returns are those banks that have wealth management products, deposit products, credit products, insurance products. To some degree the full sweep that we enjoy in the market place like Canada.

 I think the traditional banking business is going to be a fairly low margin low return business in the United States and I think the higher returns are those -- available to those that have the ability to leverage their overall networks, whether it is distribution or product networks.

 What we have said is when you look at the evolution of banking it is going to continue to evolve. Certainly, technology is going to play a significant role in terms of how banking evolves both in the United States and in Canada. We are obviously in a very different position in Canada than we are in the United States. In Canada we have a very large and dominant legacy business. In the United States we have a very strong capital markets business, over 50% of our revenues in capital markets come from the United States. And the wealth management side over 30% of our revenues come from the United States.

 We have our internet based bank in the US, which again is very small but provides us with certain flexibility and capability and I think if we were to do something in the United States it would be more related to how retail distribution is changing and evolving than the traditional banking space.

 Now having said that, there is certainly nothing that we are looking at that are on the front burner at this point in time, but in terms of our strategic thinking around the US, it would be more from the perspective of the attacker rather than the defender, which is very different from the position we would be in, in Canada.

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Unidentified Speaker   [37]
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 Okay, and we have 30 seconds left Gordon. You are retiring this year, what can you tell us about succession planning, how is it is going, who is the person replacing Dave McKay, all these things? Maybe you can talk about that.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [38]
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 Yes, I talked about it at the end of last quarter. I am not sure what I have to add to it. Obviously, we are very excited about the whole succession process and certainly I feel very good about it. I think what was very important to us around succession was to make sure that transition took place very smoothly, that over a period of time it took place in a very orderly fashion and I think Dave moving into the role is incredibly positive. I think he will do an absolutely terrific job. I don't think there is a better retail banker that I have come across in this country or any other country around the world.

 It was very important that on the capital market side that Doug, who is here, was embedded down for a period of time and I think there are some changes with respect to our capital markets business which are very positive in terms of moving forward over the next number of years. And overall from a succession perspective when you look at (inaudible) today, the additional of Bruce Roth, which I think will be fabulous in terms of our technology platform. Not just in terms of technology execution but in terms of strategic thinking around technology and so forth. He brings incredible strength and background to our business that will be very positive.

 So when you look across our overall management team and you sort of look at the next three to five years we feel very, very good about it.

 In terms of retail banking, one of the things we said was that we wanted to come out with our preliminary announcement to give Dave a period of time to discuss retail banking succession in an open environment rather than a closed confidential environment. Dave is going through that process right now and some time over the next month or so we will be making an announcement with respect to his successor on retail.

 I would say that the issue that we have on retail is an abundance of alternatives which is a good problem to have and I think what he is trying to sort through is that he has a very strong management team, there is a lot of very strong people who are a part of his team and what he is trying to do is to determine what the best structure going forward for that business.

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Unidentified Speaker   [39]
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 Thank you very much for your time Gordon, it has been a pleasure and best of luck.

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 Gordon Nixon,  Royal Bank of Canada - President, CEO   [40]
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 Thank you.






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