Royal Bank of Canada at Barclays Global Financial Services Conference

RY.TO - Royal Bank of Canada
Royal Bank of Canada at Barclays Global Financial Services Conference
Sep 08, 2014 / 01:00PM GMT 

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Corporate Participants
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   *  Janice Fukakusa
      Royal Bank of Canada - Chief Administrative Officer, CFO

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Conference Call Participants
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   *  John Aiken
      Barclays Capital - Analyst

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Presentation
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 John Aiken,  Barclays Capital - Analyst   [1]
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 Okay, ladies and gentlemen. I think we will get things started. I'm delighted to have Janice here kicking off not just my section of the conference but the Barclays conference in totality. Janice is Chief Administrative Officer and Chief Financial Officer at RBC Financial Group.

 But before we begin I've been asked to tell you that Janice's comments today may include some forward-looking statements. Actual results could differ materially from forecasts -- not mine though; they are usually right -- projections, or conclusions in these statements. Listeners can find additional detail in filings in RBC's Financial Group.

 So Janice, first of all thank you very much for agreeing to do this, not only the presentation but the fireside chat. I much prefer this.

 Congratulations on what I felt was actually a very strong third quarter. But what I'd like you to open up with is, in your opinion, what are the strengths that you saw in the quarter, where you think that RBC can go forward within each of the various segments?

 I know that I'm one of the ones who raised the question in the quarter, but are the issues about your relative performance in Capital Markets and the contribution to the overall, is that overblown? Is that something that RBC, you yourselves, are concerned about? Or is it just an external issue?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [2]
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 Those are great questions. And thanks for having me, John; I really love the format of fireside chat.

 I will start with the quarter. I think that what I thought was particularly good about the quarter -- of course, the record earnings. But the fact that -- solid performance across all of our platforms.

 And also you saw that we increased our dividend, so with the two 6% increases, the 12% increase over the year. And I think the increase now in the dividend is a function of the fact that we feel confident in our earnings outlook, and our performances, and our capital position at 9.5%, which is well above the statutory minimum.

 So what I'm hoping to do, if you are okay with this, is go through the five platforms generally, because they are totally different businesses. And I'll leave Capital Markets to the end.

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 John Aiken,  Barclays Capital - Analyst   [3]
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 Fantastic, because I only prepped with one question. So that's good.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [4]
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 Good, good. So if you look at our retail performance, we had record earnings in the Canadian bank. And when you look at the volumes, the volumes are still about 4%; so we know that on the asset side volumes are growing at a lower rate.

 Very excellent cost performance. We had operating leverage of about 2%, driving our earnings growth there.

 When you look at what is happening in the Canadian retail presence, you see that the assets are coming down; the rate of growth is lower. And it's a reflection of everything from the consumer wanting to deleverage or not take on as much leverage, which has been one of the thrusts of the government, and about where we are in the cycle.

 When you look at our volumes, we have actually gotten our -- a pretty consistent share of the overall growth. But because the growth is lower it doesn't look as high.

 If you look at the decomp -- and it's always about the details -- you'll see that on the investments and deposits side we are actually growing at double digits for our deposits and our mutual fund sales. For us, that's where we are shifting because, despite the fact that, for example, on deposits it's a lower-spread business, those are really core, excellent anchor products. We can cross-sell two to three products.

 And it also positions us very well in terms of the potential for rising interest rates on our balance sheet. So that is where you see the shift in our numbers, so it is about the de-averaging.

 And we are continuing to have that thrust in our originations, and we are also, of course, very vigilant on the cost side. We continue to have very high expectations of performance on the cost side because we believe that we should still continue to grow earnings despite what the revenue environment is.

 When you look at Wealth Management, of course another record quarter for Wealth. On the volumes we saw very solid growth in AUA and AUM.

 In the past you've seen some one-offs that we've had; we actually had pretty stable performance across the board in Wealth. And as markets are growing, we are growing more than the markets because we are getting new client acquisition; in particular our asset manager, very strong. A lot of what you see on the Canadian retail side in terms of mutual fund sales, you see that on the asset management side in terms of the growth in AUA and AUM.

 Then on our distribution it continues to track well. Our US distribution, we are getting pretty solid pretax margins there.

 We are continuing to strive for that growth in the market and in addition looking at a lot of the cost side. So that's asset management.

 The Insurance is our other retail platform. What you see in the Insurance is another record quarter.

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 John Aiken,  Barclays Capital - Analyst   [5]
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 Do you tire of seeing that?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [6]
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 No, I don't; but you can only say it for like a few weeks after the quarter when you report, and then it is back to business, right?

 You look at the Insurance earnings, and what you see in there is 70% of their offering is creditor, but they are retooling in terms of having more distribution-led, other product like disability, life, those sorts of products. And you see that, despite the fact that the rate of growth of mortgage volumes has come off, they are having higher penetration in creditors.

 So you see some pretty solid performance there. I think it is a distribution-led model, like a lot of our other products.

 Turning to our wholesale side, Investor & Treasury Services, for us what you are seeing is the result of a year and a half to 2 years of reconfiguring the back office, getting our efficiency in place. We had a lot of consolidation of our operations; I think that we took down about 25% of the FTE across the board and rationalized our production.

 It's a tough industry to be in. So what you see basically is solid performance, CAD110 million. We are pretty happy with that.

 The focus on that business is about revenue, and growing revenue, and ensuring that we put our arms around the clients that we have. Because you know it is a tough business.

 Now of course in wholesale I won't even say the record quarter, John. But we earned over CAD640 million, which is outstanding.

 The one thing I would say about our Capital Markets results is that everything that possibly could go right went right. Generally speaking it's 50-50; so we had a couple of outsized trades, but generally what you see in the Capital Markets trajectory is really a result of the business rebalancing and retooling.

 So more of a focus on corporate investment banking, the loan and the spread income, and then the fee generation through M&A and issuance. Our trading platforms have -- are still being reconfigured, but are at the stage now where you see more client flow there, so supporting client flows.

 They are less than 50% of our overall platform. So I would say that when you look at Capital Markets, to your question about the earnings profile, overall year-to-date it's about 25% of our total earnings, which is about where we said our strategic guideline is, about 25%, and that is where it's tracking.

 If you look at the underlying quality of earnings, what I would argue is that I'm seeing more and more our investors getting it, in terms of the fact that by going into more traditional corporate investment banking hopefully the earnings volatility is lower -- which we think it is, because we've looked at the earnings trajectories and what has happened over the past 2 years -- and it's more in line with our client focus, our client-driven focus and our focus on making sure that we don't do, for example, trading for trading's sake; but it has to form part of the whole mix of supporting our clients.

 So I think that it's more of a prove-it-to-us sort of thing. But I think that the message is out there and that you have actually written it in your reports, and it's very good to see that. Because we've been, as you know, talking about repositioning for a long time, and we think this is the benefit of the repositioning.

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 John Aiken,  Barclays Capital - Analyst   [7]
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 Fantastic. Janice, earlier in the summer when we met with a couple investors, we had a great discussion on capital. I apologize, because you are probably sick and tired of talking about capital.

 But we've seen a lot of change and there has been a lot of regulatory burdens being placed on global banks. But the Canadian banks continue to actually do very well, and Royal is part and parcel of that.

 But not only do you have strong capitals, but your returns on equity have managed to hold in quite well. Now, we are not nearly as high as we were circa 2006; but that's a world away.

 Can you tell us what the impact of the regulatory changes or the capital has been in terms of profitability, what measures Royal has undertaken to try to manage this? And are there any levers left to pull?

 Or are you tapped out now and anything coming down the pike would be, I guess, negative on the capital or the profitability front?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [8]
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 That's a great question, and you know we spent a lot of time on regulatory metrics and capital and how to optimize. So let me just talk a little bit about our regulator.

 Our regulator is pretty conservative, but very committed to the Basel III framework. So if you look at any metrics we have, the measurement has to take place really fast, like way in advance of what others are doing in other locations and what Basel is speaking to. The actual guide points in terms of the ratio guidance always has to be there for Canadian banks way in advance of the other Basel III banks.

 So when you take that construct against how we manage capital, I would say that for us we optimize against three criteria. And we've been doing this for the last 2 to 3 years because, as you said, it's important and it's not like they are all additive.

 Common equity Tier 1, we are pretty comfortable with the 9.5% ratio we have. When you think about that in the context of the last 5 years, that's a huge amount of capital.

 We are also really happy with our return on equities of over 19%. So I think that when you look at that paired together, it's hard to complain about the level of capital. But we still do.

 And you look at -- the next metric would be leverage. Leverage is the gross balance sheet, whereas the common equity Tier 1 is about risk-adjusted.

 When you look at the gross balance sheet, at the margin when we look at our own leverage constraint, 3% is the Basel minimum. OSFI has said that we all have to conform with the Basel minimum. We are well ahead of the Basel minimum.

 I think that the issue with our regulators has to do with the fact that there are certain things on our balance sheet that are different than others. For example, securitized mortgages went back on our balance sheet when for IFRS accounting they are not on US bank balance sheets. For us, that was a 25% growth in our mortgage assets.

 You know the risk profile, pretty low, went to 3 basis points. But leverage is still a constraint for us so we are trying to optimize and run a very healthy buffer just in case our regulators decide to do what others have and set a higher metric.

 Then the third thing is liquidity. Liquidity is more about a cost of doing business. You can always get liquidity and make liquidity, but it costs you more.

 We optimize around liquidity. So for all of the -- we have about -- we have more than 50 businesses; but if you take these segments and go one layer down, we have 50 businesses.

 We review on a quarterly basis that optimization between common equity Tier 1 ratio -- is it additive, or does it take away leverage? Is this leverage-neutral, or does it create leverage?

 And then liquidity: Are the underlying assets that are generated liquidity-friendly? Or do we have to put liquidity on for them? And is that an additional cost?

 And then return on equity.

 So it's a moving target all the time but our intent is to, at the margin, take down businesses where it's highly negative to any of these constraints. For example, structured credit exposure which is really capital-intensive, and it may be yielding and pulling to par on some of the legacy exposures. But you would have seen this past quarter we took out a structured credit exposure because there was some liquidity; it was the right thing to do in terms of capital.

 That is the kind of exercise we do at the margin. Our override against all of this is that we do not -- we will never restrict loan growth on the retail side at all, and for that matter on the wholesale side. The restriction will always be a credit quality test; and if you look at our own credit quality performance, it has been pretty consistent across the cycle.

 So if we are optimizing at the margin, what that would mean is that it's everything from different product characteristics -- for liquidity, for example -- and to looking at some of the businesses typically that we do in Capital Markets that may be ones that, because the portfolios are more liquid and based on securities, we can get in and out of them. So I think that's in a nutshell how we look at the reg metrics and optimizing our returns.

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 John Aiken,  Barclays Capital - Analyst   [9]
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 Great, thanks. Before I throw it out to the audience I think we're going to start with our polling questions, where we ask you guys out there what you think. So if we can throw the first question up there, and then for those of you that are listening on the webcast, you are going to have to listen to my voice a little bit longer.

 What do you believe is the biggest risk to the Canadian economy? One, impact of global geopolitical events; two, strengthened Canadian dollar weighing on business credit and exports; three, greater than anticipated weakening of Canada's housing market; four, slowing recovery of consumer spending and consumption; or five, weaker-than-expected demand for commodities?

 And for those of you that have the remotes, type in your answer and we will see what everyone thinks. I know Janice thinks it's number three.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [10]
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 Oh, you were right. You predicted.

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 John Aiken,  Barclays Capital - Analyst   [11]
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 Well, we are in New York.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [12]
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 Okay.

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 John Aiken,  Barclays Capital - Analyst   [13]
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 I'm not going to have Janice speak to this in particular, unless somebody else does. But is there any questions out there in the audience that you would like to ask Janice?

 No? I guess moving forward then, Janice, one of Royal's differencing strategy amongst the Canadian peer group is that while everybody -- well, your peer group by and large are focusing on wealth management and capital markets, Royal has made a very concerted effort to expand -- I am going to say fairly aggressively, and I don't mean that as a negative -- on global markets, US and Europe as well. I like the strategy of doing both Capital Markets and Wealth Management at the same time.

 But how do you balance the allocation of capital on the growth of these businesses between the two, and also within the various geographies that you are operating?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [14]
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 I think that when you look at where our growth platform is, we are thinking it is the US, which is like a second home market to us; and to some extent in Europe, although we are waiting for that market to turn; and then longer term in areas like Asia. So when you look at the capital attribution it's really about the construct that I talked about on the business level.

 And in addition to that I think it is about deployment and whether or not your growth is about organic growth and acquiring teams, versus the example of actually taking on acquisitions and putting capital there. When we look at that construct, we of course never restrict any organic growth.

 In Capital Markets we believe that there is more value to acquiring teams and growing organically and using our own infrastructure. We spent a lot of time in the last 3 to 4 years building our own control and risk infrastructure. So it's easier for us to do that and actually roll out the products and services to our clients on a quicker basis than acquiring anything there.

 When you look at the allocation in terms of where we are building, you would've seen that. The US, we spent a lot on infrastructure in the US. So if you look at the different allocation of capital and the profitability, you will see there is a higher expense load in the US because we created a lot of stuff that we didn't have to create in Canada.

 So that is sort of how we do the apportioning of capital.

 When you look at Wealth, wealth is one platform where we will look at acquisitions because Wealth -- the acquisition is not capital-friendly. Of course it is mostly goodwill and intangibles. But the actual business growth is very capital-friendly in that it doesn't use balance sheet.

 So we think that in terms of looking at -- we call them bite-size acquisitions, where we are not betting the bank, but anywhere in the CAD1 billion to CAD3 billion range, round about, those are good acquisitions. Like a BlueBay, that can be accretive in a 3- to 5-year time frame.

 What's critical when we look at acquisitions is that we know that they are likely going to be ROE-dilutive because of where our ROEs are. They are pretty strong.

 So what we look at is: What's that path back to an ROE that's, say, we're tracking 19%? Our goals are 18%-plus. But what is that path back to, say, a mid-teens return on equity? When can we expect to get there?

 And then actually measuring and ensuring that we are getting the right execution against that. So that's how we look at the capital attribution.

 And when you look at that from a growth perspective, the other thing that we look at in terms of our capital allocation is, of course, our shareholders and making sure that we also reward our shareholders through very consistent dividend increases, in line with our earnings growth, and also looking at the prospect of buybacks. We did some this past year; I would say that it should be in our line of sight over the next year or 2.

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 John Aiken,  Barclays Capital - Analyst   [15]
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 Open it up to the floor. It is early in the morning; no one has had their coffee yet.

 In terms of Royal, along with a lot of the Canadian peer group, there has been a change in the guard at the top of the house. With Gord's departure and Dave McKay coming on board, you have with Gord a legacy investment banker -- and I know he was more; CEO for a very long time in that, and I think he wanted to eschew that title. But now Dave McKay who comes most recently from the retail side of the operations.

 I found it interesting that -- some commentary from Dave about US retail banking strategy for Royal. After the sale of your US retail banking operations, I don't think it is necessarily top of mind.

 But I think Dave has talked about a couple times the virtual presence and just going through. Can you talk, discuss, exactly what that is and what prospects are for potential growth outside of just the operations that you have at present?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [16]
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 I think that Dave is very focused on our client base. When you look at our US presence on the retail side, we have a pretty robust Wealth Management network. So when we look at, in the US, the potential for growth -- because it is like our second home market -- what we won't do generally speaking is any mass-market consumer banking. Because we actually have that in our Southeast bank, and we don't have a lot of synergies or leverage because we don't have a presence there.

 So when we look at the Wealth side, it is building out a product presence. So that you look at our distribution network there, and we sell bank accounts for example of other banks and deposits from other banks.

 So it is looking at maybe more core banking as a product to sell into our Wealth Management network. So that is one area that we see of growth.

 In terms of virtual I think we look at the potential for joint ventures with nontraditional providers of services on the payment side or credit card side, and where we can add value in terms of our execution and marketing vis-a-vis that distribution that they already have. So it is things like that, and I would say it is early days now for what we are doing.

 But we think that it's the right strategy to look at, at Wealth, and more of a product-enhancement focus when we are looking at areas in particular in the US.

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 John Aiken,  Barclays Capital - Analyst   [17]
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 Fantastic. I think we will go with our second polling question if we can.

 How do you think Royal Bank will perform against its Canadian peers over the next 12 months? One, significantly outperform; two, modestly outperform; three, in line; four, modestly underperform; or five, significantly underperform.

 It wasn't Canadian housing this time.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [18]
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 Wow.

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 John Aiken,  Barclays Capital - Analyst   [19]
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 That's not too bad. It doesn't -- so then moving forward, Janice, in your response to my first question you talked about the slowdown in the Canadian or the domestic consumer lending growth. I think that when we sat here last year the expectations were that the slowdown would be a little more dramatic than what we actually saw in 2014.

 Now we actually are starting to see evidence of this. But are you looking for, is Royal looking for, a dramatic slowing going forward? Or are we just going to continue to trundle down into 2015, 2016? And at some point do you actually envision it possibly going negative?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [20]
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 Well, I think that it depends on GDP growth, which could be dependent on what happens in the US. So I think that --

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 John Aiken,  Barclays Capital - Analyst   [21]
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 Now you are starting to sound like an analyst.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [22]
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 Yes, exactly. I would say that last year at this time we did think the growth was going to come down and be more dramatic. But I think that a lot of that was also premised on thinking that interest rates were going to go up towards the end of the year, and that didn't happen.

 So we see the growth moderating, and we see GDP and the Canadian environment pretty moderate. It is not going gangbusters, but it is moderate growth.

 I think that what we are looking back is more of that moderate growth on the asset side. So we think that, when you look at mortgages for example, it's the Law of Numbers, too. Interest rates have been low for now 3 years, and people who have refinanced are refinancing -- or current refinancings are refinancing on fixed-rate mortgages, which is what they should be doing given that everyone thinks rates are going to go up.

 That's why on the asset side we will still go after our proportionate share of the growth and the share of that total growth in the market -- and not even our proportionate share, but a higher share than what is in the market. But that is why we are also focusing on the deposit and investment side.

 And you'd think you see that that also will help us from a liquidity and funding perspective. So we are always thinking about: How can we align our client strategies with our business strategies? And then, where do we think the growth engines are going to be that we have tailwinds and we can outperform?

 I think that is where you see areas like Wealth. And I think when you look at also Capital Markets within our strategic guideline, we still expect pretty solid performance from that platform.

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 John Aiken,  Barclays Capital - Analyst   [23]
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 Then -- but even within the retail banking segment, what at least from my perspective gets lost in the discussion is the growth that we are actually seeing on the commercial balances. So not the corporate, but the commercial.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [24]
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 Right.

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 John Aiken,  Barclays Capital - Analyst   [25]
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 Granted the mix of the business is such that you can have very strong performance in commercial and you are still going to have slowing growth in the overall portfolio. But what are the prospects that you are seeing in terms of that business?

 I know it is not necessarily in your wheelhouse, and I apologize; but are you seeing any change in terms of the competitive pressure, or pricing, or covenants, etc.?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [26]
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 Right. We actually looked -- and thank you for mentioning commercial because I absolutely --

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 John Aiken,  Barclays Capital - Analyst   [27]
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 It was not set up, I swear.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [28]
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 No. I absolutely should talk a bit about commercial.

 And you are right. It is about the tiering of where we are selling into versus what our competitors are doing.

 At the CAD25 million and under exposure level, we still have maintained a number-one marketshare on that. That is our sweet spot in terms of commercial markets, because it's by and large all of the businesses and the small business and medium-size business exposure. And that is where we can get deposits as well as maintain our share in the loans, and it helps our retail side with the business ownership. That is an area that we continue to focus on and grow in.

 The commercial markets I would say above that level is the larger commercial markets. Some of that for us is in Capital Markets; but it's very competitive in terms of pricing.

 Where you see growth are in areas like real estate, maybe infrastructure, the kinds of exposures that can be competitive. And with respect to those particular exposures and industries, we are trying to stay competitive in the market. There is price pressure, but we want to make sure that we also maintain our net interest margins and don't grow marketshare for marketshare place, for marketshare value without getting and making sure that our net interest margins aren't impeded.

 So that's what you see in the overall mix. But it is an extremely important segment for us.

 I would say that, given where the GDP growth is, we had expectations for higher growth there because we thought the Canadian GDP would ramp up. And we are hoping over the next 12 months that will happen, as the US recovery is taking shape and there is more confidence in that segment of the market.

 I think that what you need is confidence of the Canadian small and medium-size businesses and business owners to actually ramp up inventories because they think that the recovery has taken hold.

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 John Aiken,  Barclays Capital - Analyst   [29]
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 I am going to open it up to the floor again. Okay; well, I am still going to make you guys work. So we will go to the next polling question.

 How can Royal Bank best maintain its premium valuation? One, becoming a top-five global capital markets dealer; two, pursuing stronger growth markets outside of North America; three, strengthening its dominant domestic retail banking position; four, establishing its Wealth Management -- sorry -- expanding its Wealth Management business to a greater degree on a global scale; and five, maintaining a balanced portfolio of businesses and maintaining a hard cap on Capital Markets of a maximum of 25%.

 They can't vote for one and five. Oh, we're actually a little more spread out. Okay. We will be sure to send that to the Board.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [30]
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 Yes, I think we should have that slide. Thank you. It's pretty balanced.

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 John Aiken,  Barclays Capital - Analyst   [31]
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 So, Janice, I guess since I was unfair and asked you a commercial question, I will give you something that as CFO is much more in your purview. Royal Bank, to the best of my memory, was one of the first banks to publicly talk about operating leverage and control of expenses in context of revenue growth.

 Right now, how do you balance the spending on initiatives and growth that is not necessarily going to impact the next couple quarters, versus revenue growth particularly when expectations are, at least on the retail banking side, that revenue growth is going to face pressure? I mean it has got to be -- from my standpoint as an outside critic, it's got to be easier to have positive operating leverage when your revenue growth is 10%-plus. At 5% it becomes much more difficult.

 How do you balance that, and how do you prioritize? Or what do you look for?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [32]
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 That's the tough nut to crack, and particularly in our retail bank, because you are making fixed-cost investments where the payoff period is long and you won't see the impact on expenses for 2 to 3 years. During the financial crisis, when we were having pretty good performance on our retail bank, we actually started a lot of programs that would be investments of CAD100 million to CAD200 million a year.

 And ramped up, for example, digitized our mortgage process; so that was a 4- to 5-year project, and we are just seeing the benefits of it in terms of its completion. We've seen benefits throughout the piece.

 So what is fundamental to us is -- for all of those transformations that take longer it's mostly about digitization. Getting faster at doing things; taking -- improving client satisfaction by less pain points; that sort of thing. We started a trajectory of investments, and we don't take down that trajectory.

 So I would say even in Capital Markets with a lot of the build on infrastructure we had -- when we were investing in Capital Markets up to CAD100 million to CAD125 million a year in building risk management infrastructure, operational infrastructure, a lot of the common trading platforms -- that has not come off. So we have set a trajectory of doing this investment, and by targeting in large programs smaller bite-size pieces we are able to slow the trajectory if we think revenue is really off, or speed it up when we see revenue increasing.

 If you look at the capital spend, we are not backing off on capital spend. But what you would see more to the forefront now is more of a focus on expenses. If we see revenue trajectories coming up, we will actually put some of the revenue projects more in focus.

 We focus on operating leverage and efficiency ratios in the retail bank. Mostly in the Capital Markets-sensitive businesses like Wealth we look at pretax margins and -- because of the impact of variable cost on our total expense ratios.

 But I would say this. Even in Wealth we are looking very carefully at how we can optimize the other-than-comp expenses and the operational networks there, and how we can leverage more of what's being built in, for example, our Investor & Treasury Services platform and also our Capital Markets platform. So we don't want to sacrifice capital spend in the short run because it won't pay off in the long run.

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 John Aiken,  Barclays Capital - Analyst   [33]
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 Janice, we've seen some exceptional performance in the credit at Canadian banks, and Royal in particular. I've got to believe that we are at cyclically low levels. I've learned very painfully in terms of forecasting higher provision levels that credit can always go lower.

 But in terms of where we stand in the cycle, how do you manage the risk that too-low levels of credit are being priced into products? And how do you try to maintain that in a competitive environment where people actually are still trying to clamor for loan growth and the last marginal dollars?

 Is that something that's topical within the bank? And if it is, how do you as CFO try to manage, not as a Chief Risk Officer?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [34]
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 I think it is topical in terms of the fact that we are all doing our operating plans now. We look at expected loss profiles. We want to make sure that everyone, when they are looking at allocating their resource, puts an expected loss load in.

 Of course you can argue a lot about whether that expected loss has actually taken a step down, because it is a metric over the full cycle, and we don't know how long this cycle is going to last.

 But ensuring that, when we actually get our operating plan commitments, that we can still drive to our medium-term earnings growth objectives but put that full load in, it creates some discipline on the pricing side to make sure that as we are looking at the businesses we always are cognizant of the fact that the cycle could turn. And we should be able to bear that full load and still grow our earnings at the levels that we are making commitments to.

 Of course it's difficult on the granular loan-by-loan basis as people are going out. But even our individual client profitability models have that sort of an expected loss metric, especially for larger exposures, so that you know exactly what could potentially happen.

 I would say the same as the disbelief you are going through is what we are looking at, in terms of the fact that we look across our portfolio, and we haven't seen any conditions where there is any indication in watchlists and things like that where you could see something happening. I mean, there is the odd exposure that happens; it's atypical of what's happening in the portfolio.

 But it is something that we are cognizant of. Because you don't want everyone to make their operating plan because they are forecasting a low PCL, and then it's out of my control when it came in higher because I thought it was going to be the same as last year. No.

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 John Aiken,  Barclays Capital - Analyst   [35]
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 Fantastic. We've got the amber light. This is your last chance to ask a question that doesn't emanate from my pages.

 All right, Janice, just one; I guess I will take the liberty of asking the final question. But something I think that with Royal also flies under the radar is the Investor Services business. You had the joint relationship with Dexia and then bought out.

 What I would love to know is how has the relationship clients in that business progressed since Dexia stepped away. Because when you set up the JV that was a very important point, to be able to access their relationships.

 And two, with the European nature of the business, what's happening in the near term in terms of the revenue growth outlook?

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [36]
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 Those are great questions. I think that when you look at the Investor Services business 50% of it is in Canada, and we have 50% marketshare and in fact pretty solid relationships.

 When you look at what happened during the financial crisis and our partnership, everyone was impacted; but it was one step removed in Canada. We spent a lot of time with our Canadian clients, and so we have a pretty solid client base there.

 In Europe, Dexia was closer to the European side, Dexia Bank. So what we -- in terms of the client and mix, what happened actually when we acquired 100% is a lot of the clients were very happy. Because I think that they knew that we were totally committed to the business, but we did have another partner who was also totally committed; it was a very high-performing business for Dexia Bank.

 But when you are in that sort of partnership, it is hard to demonstrate making investments when you are trying to work with your partners. So they were very happy to be aligned with RBC because of our solid credit rating, our stability and safety and soundness throughout the financial crisis.

 What we started to do in Europe was look at how we operated. When we talk about the streamlining of the business, some of that happened in Europe.

 And then also making sure that, for the clients that we had there, that they understood what was happening. We had one major client attrition that was actually pre- us buying it. It takes 2 years, as you know, for any client to sort of leave your platforms.

 We've been pretty stable. There maybe was one other that -- I don't know; we're in the stages of thinking about that. It's a tough business, and we know that it's tough because the margins are pretty thin. But the service that we offer in that business is way more customized than some of the biggest providers, and we get very high client satisfaction ratings.

 For us, it's about putting our arms around the clients in particular and making sure that our service is actually better than what they'd be seeing if they switched providers. And making sure that you don't give your clients any excuse to switch.

 Plus we can now actually market new clients, because we have our platform fairly stable now, and we can go out with the offering and with the backing of RBC. So it is a pretty good story for us.

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 John Aiken,  Barclays Capital - Analyst   [37]
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 Okay. Well, I think that we are -- oh, wow, 26 seconds; fantastic. Janice, thank you once again for presenting. We really appreciate it.

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 Janice Fukakusa,  Royal Bank of Canada - Chief Administrative Officer, CFO   [38]
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 Okay. Yes. Thanks for having me, John.




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