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 12, 2016 / 01:35PM GMT 

==============================
Corporate Participants
==============================
   *  Dave McKay
      Royal Bank of Canada - President & CEO

==============================
Conference Call Participants
==============================
   *  Darko Mihelic
      RBC Capital Markets - Analyst

==============================
Presentation
------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [1]
------------------------------
 So for my guest here is CEO of RBC, Dave McKay. Good morning.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [2]
------------------------------
 Good morning. How are you doing?

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [3]
------------------------------
 How are you?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [4]
------------------------------
 Good morning everybody. I think the weather and the Globe and Mail headwinds were kind of coordinated this morning. It seems like it wasn't.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [5]
------------------------------
 Now, before we start I do have to do this for virtually every conversation we have. So, please bear with me. I have been asked to say that Dave comments today may contain forward-looking statements which involve applying assumptions and have inherent risks and uncertainties. Actual results could differ materially from these statements. Listeners can find additional details in the public filings of RBC.

 Okay, with that formality out of the way, Dave, we can start. And why don't we just start off with the most topical thing that's out there which is the price of oil and the impact on mix?

 So I'll just throw it over to you and maybe we will just kick off the discussion, if you can just provide an outlook on RBC with respect to the impact of low oil price.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [6]
------------------------------
 Sure. I mean, we're in a very different place today than we were a year ago and I think we sat down and talked, and we're a little more hopeful for the price of oil then and we see ourselves in new territory. We've been managing this sector over a long period of time, very active in the energy and commodities industry and we've been through a number of cycles. And we know how to manage this sector.

 So, maybe I'll start by putting our portfolio into context and how we're managing it and then give you some flavor for what we see is the potential outcomes over the coming years.

 So, our portfolio -- our energy portfolio in the wholesale side is only 1.6% of our total portfolio or roughly 10% of the wholesale lending portfolio, the CAD80 billion portfolio. So, we've around CAD7.7 billion drawn. Two-thirds of that are to the E&P, about 20% to drilling and services, and about 15% roughly to refining, marketing, distribution. So that's really the size of the portfolio.

 We look at our portfolio and how we lend. The majority of that portfolio is secured, particularly when you look at the E&P portfolio, two-thirds of that C AD7.7 billion and overall, when you look at drawn and undrawn, roughly.

 [So our] secured portfolio, we're very senior in the overall debt stack, so we'll have most senior position. We're secured against on the E&P side, certainly against proven and producing reserves, generating cash flow. And again, we have a borrowing base against that which we re-evaluate twice a year. So the structure is very -- it's senior, it's secured, it's margined and we have an ongoing dialogue with our lending partner and borrowers.

 We are often in syndicates in north and south of the border. And very much, you go through an ongoing dialogue, you look at cash flows, you look at programs and you manage that portfolio very carefully through a cycle. You stress that portfolio, you've got watch list that you manage customers through. So it's a very active management process as you can imagine.

 So, as you look at that portfolio and you look at where we are, we would expect that portfolio to be more challenged over the coming year than we saw in 2015. And if I were to look at where are our estimates of potential loss in the entire CAD80 billion wholesale portfolio, I think we might, largely driven by challenges in the energy side, be in a roughly 40 basis point expected loss range over the coming year on the larger portfolio, the majority driven by that energy portfolio of CAD7.7 billion.

 The rest of the portfolio is strong and I think that belies the economy that while we have severe challenges in the Alberta economy, the contagion back to the rest of the country is nominal right now. And you're seeing that weaker Canadian dollar drive great strength in BC, the BC economy is a very strong and multi-faceted economy. You're seeing great strength in Toronto, you are seeing increasing strength as you see Poloz signal -- Governor Poloz, in Central Canada and Ontario, Southern Ontario and Quebec as we start to find new customers and new markets for our products.

 You are seeing retail a little bit stronger in Canada as Canadians stay at home to shop. Over the holidays, you are seeing tourism stronger. So you're starting to see that lag effect of that weaker dollar, which often takes somewhere between 12, 18 and 24 months to really start to kick in as an impact, starting to drive employment, starting to drive exports and creating an offsetting positive impact that will altogether lead to somewhere between 1.5% and 1.8% growth, not an incredible growth, obviously, but stable growth and stable employment. So the key is that this still remains rather a contained within the promise of Alberta challenge.

 So when we look at our overall portfolio, when you look at the retail portfolio in Alberta, certainly we're starting to see signs of weakness. As you go through normal cycles, there is layoffs, there is CapEx reductions that we've seen, roughly 30% reductions, severance packages are starting to wind down. So you're starting to see a little bit of retail stress and it always manifests itself in the auto lending portfolio and in the cards portfolio first and lags again 24-plus months into the mortgage portfolio, which remains very, very strong.

 So, again, the real risks are these are contagion into the rest of country where it doesn't appear to be. So, it's largely contained within that Alberta portfolio. So, overall when we look at expected credit losses, we've talked about in our Q4 calls, we still see the stressed environment that we're in in commodities and energy returning us from very low kind of mid 20s credit loss in the overall bank back to a more normalized range of 30 to 35 basis points, largely driven by that 40 basis points we expect on the wholesale portfolio, but some creep within the retail portfolio in Alberta, but largely contained into the high 20s, maybe you might say from the low 20s or mid 20s. So again, overall, still within that 30 to 35 range in the current context given other parts of the economy are performing well.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [7]
------------------------------
 Okay, so a lot of numbers in there. Let's examine some of those. So we're talking of 40 basis points on the CAD80 billion within the wholesale, largely coming from I guess the CAD7.7 billion oil and gas portfolio. What is the assumption there on the oil price and the oil decks and is this kind of like a one-year event and we think it's done or could this persistent into 2017?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [8]
------------------------------
 We do see oil coming back, albeit, probably not above $50 for 2016 and where it's mid $50s and $60s and what's going to suppress that recovery is how quickly the shale oil can come back on stream and those rigs can come back on stream in the US. So, certainly, that is a mitigating factor. But you're seeing a lot of instability in the Middle East.

 I've been quite wrong in predicting the price of the oil. But certainly when we look at stresses we're moderating our expectations for 2017. And it's a little softer than anybody, I think, predicted right now. There is a lot of negative sentiment out there which could bounce back. But certainly you've seen the reduction of rigs in the US, but (inaudible) production to come on stream pretty quickly and in a little bit more of a difficult periods of recovery in Canada as that CapEx is withdrawn and can't be put back to use quite as quickly as the US rigs can come back on stream. So, again, we think moving towards $50 or slightly above $50 potentially over the next 18 months, but moderating around $60.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [9]
------------------------------
 And you touched on some of the secondary impacts which was auto lending, cards. It sounded modest. Why is that modest? Is it just a function of the fact that Alberta is just a smaller portion of the portfolio or is it that it's just not that bad out there?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [10]
------------------------------
 Well, first your consumer works through their severance package. So they have cash flow to service that. They have equity in their homes that they can draw down upon in a home equity product to pay. So there is significant amount of equity in those homes in Alberta to leverage. There is cash flow coming from severance and there still is a relatively good employment in the province. Their unemployment went from 4.5% to 7%. So it's at the national average. It might creep up above that. Again over the coming year there is more CapEx reduction which we expect. So they're at the national average now of roughly 7% unemployment.

 So one of the reasons it's lower for RBC is that we don't participate in the subprime auto business nor in the subprime cards business. So we're entering these challenging times in Alberta with one of the lowest loss rates in cards in the low 200 basis point range which is quite low for the cards business and we haven't participated in the subprime auto which was the first segments to go. So we have a relatively conservative book.

 If you size our retail book, Alberta is 15% of the entire Canadian retail book. So we're not oversized for the most part in Alberta and we don't participate for the most part in the sub-prime segment. So it will lag into our portfolio a lot longer as we're more of a prime-based lender across the country, and particularly in Alberta.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [11]
------------------------------
 What about other portfolios, so beyond cards and auto? We are a little concerned about other things like, I don't know, construction in Alberta or you name it. Is there any other -- it didn't sound like but presumably --

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [12]
------------------------------
 No, the overall commercial portfolio was relatively benign surprisingly across all sectors and again when we look at constructing multifamily res properties, it's all in a pre-sell basis. And you can imagine those projects aren't getting started not getting funded. So, there is no overhang and no excess supply coming on market because this has been an issue for quite some time. So projects haven't been started over last year or 18 months. So it's not like we're waiting for a lot of capacity to come on market, it's not the case.

 So, surprisingly a resilient commercial marketplace right now as you've got very liquid lower leverage borrowers in the commercial side. They've been through these cycles so many times. They know how to manage their business, they know how to manage a variable cost base very well. So you've got an experienced group of leaders in this province who know how to manage these cycles, albeit, it's more stress now than I think anybody thought a year ago.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [13]
------------------------------
 Fair enough. I think we'll leave a topic there, so anticipating some questions from the audience on it. So, why don't we shift gears here a little bit and talk about a few things here that are a little more unique to Royal?

 One of the things that struck me in 2015 was the degree of the restructuring that was occurring with most banks. And in fact by the end of last year, I think every bank had taken a restructuring charge, Royal did not. So could you talk about, A, why there is no restructuring charge at Royal and, B, what your intentions are on the cost control side?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [14]
------------------------------
 So we start from a basis we are the most efficient bank in the country, both at the corporate level, [bank] level, and in the retail bank side and it's part of our DNA. I mean that has been our goal since we declined first more than 10 years ago, in 2004. That's to embed cost management within our DNA, continue to take out cost and look at our cost every year rather than growing and taking this let's research the shareholder. But it's also very disruptive to your customer and to your employee base.

 When you're giving a large shock to the organization, it hurts your customer at the end of the day. So we decided that evolution before revolution is our model. And we really tried to evolve our cost base over time to maintain that leadership and our commitment is to maintain that leadership as the most efficient bank in the country.

 So we've done it as part of our culture.

 If you look at the retail bank where we haven't taken charges, if you look at it over the 18 months, we've reduced FT by 1000, 1000 FT, and we've grown that business significantly as you've seen and continue to improve our efficiency ratios even with our margins coming off quite significantly over the past year. So, that's just going to continue to be our model.

 We are going to continue to look at efficiencies in the back office. We've generated a lot of efficiencies on the service side, and we think there's still long-term secular opportunity to reduce cost, but it's going to be through attrition, through performance management of our weaker-performing employees and it's going to be an evolutionary basis to continue to take out on an ongoing basis and not have to shock the system.

 Having said that, there are a couple of examples where we've had to take more aggressive action and we've done that. If you look at the Caribbean where weren't happy with the performance, we've taken out 37% of the FT over the last two and a half years. So, over 2,000 employees were reduced over a two-year period and we returned that business from losing CAD50 million to CAD100 million a year to making little over CAD120 million last year and we feel we can improve on that significantly again in 2016. So, again, we identified a business, changed the strategy.

 And I'd say another good example is investor and treasury services where we certainly went after and looked at and we reduced that FT component by over 400 in Europe to drive better profitability and to resize the operations for what we saw was a revenue environment. So, it's part of our DNA. We have had to act on that basis in a more aggressive basis in some of our smaller businesses, but certainly we plan on continuing to digitize our business to look at our cost base and to move that productivity ratio down to continue to be best in class. But if you can do it on an evolutionary basis, it's the best way to take your organization, your customer with you, it's the least disruptive and for you it's the most shareholder friendly, not having to take severance charges. So, we're very proud of that. We see long-term secular opportunity to continue to do that and that's how we manage our business.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [15]
------------------------------
 And as a follow-up to that could I imply then that the times haven't changed so harshly? In other words one could argue, hey, times have changed really tough, maybe now is the time to take one or could we imply, basically from what you are saying, that times aren't that tough, we don't need to do and just continue going on in this path?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [16]
------------------------------
 I fully believe that we can manage this process over an evolutionary time that there is no material shock to the system that requires us to act and react in such an aggressive way that hurts our customer at the end of the day. We can take our customer and our employee base, continue to maintain the significant customer loyalty and reduce our cost base over time. So, I think we're on a good path.

 We got ahead of this eight years ago. We've bought ourselves some time. We haven't let our cost base get out of control. So we've given ourselves the latitude and strategic flexibility to continue to manage this over a period of time. There's nothing that shocked our margins, shocked our revenue stream, we don't see a massive shock to our business model that would require us to do that. Having said that, we absolutely have plans if that ever happens.

 So we sit down and we strategically plan for a shock to the system and we look at our branch network and we say if there was a material shock to our system and a radical change in our revenue environment, what would we do and we have plans. So we don't sit here and pretend it would never happen, but we plan for it, but we don't see a need for it going forward right now.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [17]
------------------------------
 Okay, great. So, I'd like to touch on all the businesses, if we may. And given the volatility in capital markets today maybe just open up a wide open question, capital markets, all the volatility, can you provide sort of an updated view on what your expectations are for 2016 and beyond for the cap markets business?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [18]
------------------------------
 So, the capital markets, we're incredibly proud of our capital markets business, particularly our build-out of our US strategy which continues to drive our business when you have less than a constructive market in Canada with the energy and commodity markets where they are. But certainly saw some nice activity on the investment banking side, particularly with Hydro One recently.

 So if you look at, we are coming off a record year in capital markets, CAD2.3 billion of earnings, great strength coming out of our corporate investment banking side. If you look at where M&A activity is in North America, it's up 7% year over year. So we're coming into the year with relatively strong M&A activity, good corporate investment and banking activity. So, overall I would say we expect to build on that CAD2.3 billion. Despite the headwinds in Canada, despite some of the challenges we have, despite the credit loss that we just talked about in the previous question, we expect to build on that CAD2.3 billion in 2016.

 So, how we're going to do that? Well, we have relatively constructive markets in M&A. We have relatively better FIC markets, believe it or not. So the trading environment is a little more constructive on the FIC side. Sales and trading that it has been in the previous year which were very difficult. We have a little bit more strength coming out of Europe than we expected and we started to build our European franchise and those investments are starting to come into full.

 We've got obviously a very strong US operation and we're seeing good pipeline there and good activity across multi-sector. So, while we face challenges we always face challenges and this business has always been very flexible at redeploying capital from one sector to another sector, one client group to another client group, one product to another product. So, it's about efficiently allocating capital where there is growth and removing capital.

 So, while we have challenges we've always had challenges with certain product sectors or trading strategies. We showed in Q4 that we were able to optimize that capital, reduce it from some segments, redeploy it where necessary. So, overall I would say we see a challenging market in some whereas constructive in others and overall we expect to grow year over year.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [19]
------------------------------
 And just sticking with other market-sensitive businesses, how about the wealth business and maybe you can touch on acquisitions and such --?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [20]
------------------------------
 Sure. Wealth business at the core performed very well last year, but that was masked by a significant amount of restructuring that we did in the international wealth segment. A two-year process that is -- that phase is largely, about 90%, done now as we restructured. We are about to sell -- close or sell our Caribbean offshore operation. We've shut down our US offshore operation and closed out office in the US to focus on onshore clients. So that was a drag of about CAD75 million after tax last year that we didn't take a one-time charge for, as we don't do many times, and it's embedded into our operating earnings.

 We saw a good core strength in our global asset management business and a good core strength in our Canadian wealth franchise. So, the secular opportunity in Canadian wealth is to continue to capitalize on the commercial trend as our commercial entrepreneurs start to reach the end of the life cycle of managing that franchise and sell it and want to monetize that and how we finance the buyer of that, but also manage the wealth creation from the sale of that properties. So there is a long-term enormous opportunity as the largest wealth franchise and the largest commercial banking franchise in the country to create enormous opportunity for growth there. So, we're very excited about that and we're really well positioned.

 And that's the beauty of our universal banking model. When you're number one or number two in everything you do, when you put two synergies together, you don't have big gaps to capitalize on that synergy. So there is a great opportunity within the Canadian wealth franchise to continue to add FAs, to continue to cross sell with the retail bank and to create AUA growth and the AUM growth for the franchise.

 The largest opportunity within the wealth franchise is certainly within the US wealth franchise. So, we've made a very significant strategic acquisition of City National where we did it at absolutely the right time and we closed that in the first week of November, and we're incredibly excited about our long-term journey. And if you look at our US wealth franchise and our US capital markets franchise, it's the storybook for the strengths of the universal banking and the microcosm there. And we see that the customer flows back and forth between our US wealth franchise, that's now significantly transformed with the addition of our private and commercial banking -- a world-class private and commercial banking capability from City National. We're incredibly excited about the long-term growth opportunities in the US marketplace.

 So, when you'll have a capital markets franchise and a wealth franchise now with that type of customer profile, you're seeing certainly new origination business flow and distribute through your FAs and your private bankers and you see more structured product come out of your US capital markets business that you can distribute through your private banking and wealth franchise.

 You have an opportunity certainly with that commercial franchise now with City National to work with the capital markets franchise and take larger positions to cross sell customers, fee-based underwriting, whether it's debt, equity underwriting, IPO, could never do that before, to grow with that client base, to cross-reference, particularly in the entertainment, [hot] technology sectors, healthcare sectors, across the US. So, these synergies that are flowing back between commercial and capital markets already in the first quarter they are quite significant. And then the whole cross-sell of our private banking services into that the very large high net worth US wealth franchise that we had. So, you look at the synergies, the organic synergies, are very significant and on top of that we've very high leverage to increasing rates in the US.

 These are both asset sensitive, rate sensitive franchises, both are existing wealth franchise in the $16 billion-plus of sweep deposits that we have there that we're going to put to work. But also this very significant balance sheet and we talked about it in Q4 call where if you have a 200 basis point shift to the yield curve in the US, which if you look at most forecasts may change slightly, but we don't. We've seen a lot of changes. Somewhere in 2017 you should reach that point. That's $279 million of earnings in year two for City National alone.

 Two-thirds of their deposit base is non-interest bearing core checking deposits and it's a very attractive deposit base to invest. They've got most of their lending base re-prices on a variable rate basis. So you've got a very strong and immediate impact into that P&L. So, you can see why we're so excited about. The crown jewel franchise, you see the synergies in the cross-sell across all our customer base and you see the lift in business and the growth that's happening and you see the interest rate sensitivity. When we first talked about the transaction in January, we said we expected this to be earnings accretive in year two, given all the closing charges. We are now very confident that that will be earnings accretive this year in 2016.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [21]
------------------------------
 Okay.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [22]
------------------------------
 In a meaningful way.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [23]
------------------------------
 So, now that is closed -- by the way before I ask this question if there is any questions out there in the audience, maybe Brendan can bring them up for me. But I will go on and ask the question. Since you closed the acquisition, let's shift gears a little bit and talk about capital for a moment, common equity Tier 1. Can you maybe just remind us kind of where you sit and do you feel pressure to have a higher common equity Tier 1 ratio, higher than the notional 10% that's out there?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [24]
------------------------------
 No, we don't right now. We think 10% is our target with our buffer and our plan is to rebuild towards that. So, just to recap, we closed Q4 at 10.6%, we had a material build in our capital as we optimized some of the capital and we had good earnings streams. We built capital to 10.6% at the end of Q4 as we've disclosed. We expect somewhere near a 75 basis point reduction as we closed City National in November which takes us roughly down to around 9.8% and then with our normal capital build we expect to rebuild that quickly over the coming quarters to 10% and kind of keep it there, which then allows us to go back to our normal capital allocation and capital management strategies this year. So, I'm feeling really good about the fact that we made a transformational acquisition for the organization and create a great earning stream for the organization and [we will rate] back within two quarters to our target capital level and plans to grow this business. So, I think that is kind of where the capitalization.

 And while there is still regulatory change coming within the market risk side and the trading risk side and there's still some talk of [risk rate flows] on a prospective basis within the retail book as it stands now, we're managing towards that 10% level.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [25]
------------------------------
 So, shifting gears here, I have a question from the audience, so I thought I'd ask it. Due to liquidity coverage ratio and net stable funding ratio requirements, US banks have pulled back from providing the repo financing. What is your view on the attractiveness of that product? And then secondly, will compliance with the US CCAR in 2016 impact it?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [26]
------------------------------
 So, certainly there are changes around capital levels, around LCR levels that are affecting the margins and the profitability of some of the activity in the repo marketplace and there is a chance that some more balance sheet in capacity as an industry will come out of that business and there is some stuff written in The Wall Street Journal about it yesterday. So, I can't really size that yet right now on the portfolio and particularly our central funding business. But overall, we'll have to see how that impacts and if margins accommodate that and weather trading strategies can still be profitable with your counterparties. So it would be premature for me to comment, I think, on the overall impact that I don't have the detail off the top of my head.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [27]
------------------------------
 I seem to remember doing some math on it and I think your repo balances last year were up something like 29% year over year. So, it's quite a year for repo balances. So it's an interesting question.

 Maybe shifting out to the longer term and I try to sneak in some longer-term questions here. One of them is for Canada. I think when you go back to the retail business here, maybe you can talk a little bit about from our perspective we looked at Canada and we thought to ourselves kind of an over-levered consumer, we've got slow, sluggish economic growth. Could this be a long-term slowing of Canadian retail banking, part one of the question?

 And then part two, maybe you can talk about some of the changes that weave in, some of the recent change in the mortgage rules and how that might impact the business and should we be preparing for a long-term slower growth rate for Canadian P&C banking?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [28]
------------------------------
 I think you have to break it down to how is the consumer changing and where growth is going to come from. So, we certainly do see a levered consumer, an aging consumer, a demand for consumer credit moderated into that low to mid single-digit range. And take anyone constituency, it's going to boom the way it has in the past. However, the aging consumers' needs are shifting more to savings and investment and therefore there is a long-term secular opportunity and growth coming out of the investment side of the businesses which is where we've invested so heavily over the last decade to grow our financial planners to give them special tools to create and experience for -- a unique experience for that investor that we are very excited about.

 So, you will see greater growth coming out of the savings investments which you'd expect from an aging demographic who moves into the later end of their work and into the early end of their retirement phase. So, there's going to be greater growth coming out of that. Margins are uncertain in that area as you look at technology and CRM2 and regulations. So, it's hard to predict revenue stream, but certainly volume growth and activity should continue to grow.

 The other sector that has still been conservative and has a room to grow is commercial. So, we still have commercial balance sheets that are at lows as far as to draw and revolving credit and utilization of revolving credit to build inventory and receivables. You should see some growth there. We're still seeing very conservative balance sheets with lots of deposits which has been in the double-digit growth range and we continue to lead that market with a wide range, and I think we saw 8% or 9% growth in our CAD100 billion-plus deposit growth. And we are at record low margins in that business. So, one of the things, that I think is a potential tailwind is if we eventually get some increased rates here over the coming years, there is an enormous embedded profitability in our commercial deposit book and our retail deposit book which combines significantly the marketplace. This is a difficult environment for a bank that has grown core checking business the way we have which is normally incredibly profitable, record low margins as we sit today. So all that work has not been rewarded, but will be rewarded over time as rates and margins start to expand.

 So, when I think about the headwinds, yes, definitely it's lower consumer credit demands on cards, mortgages, auto loans, even though we've gone through an incredible boom in auto loans over the last two years with record auto sales. It's been a very attractive (inaudible) to moderate off its peaks, but they will be replaced by commercial deposits, commercial lending growth, better consumer investment and deposit growth and then particularly to our franchise an embedded strength in all the core checking business that we've raised and grown, non-interest bearing that will unlock over time.

 And then the third secular trend that makes this segment still very attractive is a long-term cost rationalization of the platform as we digitize the back office, as we digitize some of the service frontline capability. This is a long-term opportunity to evolutionary wise without the need for a shock in the foreseeable future, manage this cost base down, a very significant cost base over time. So, those are long-term opportunities to continue to drive shareholder value in this segment notwithstanding what drove us for the last 10 years won't be the driver likely for the next 10 years.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [29]
------------------------------
 So, what I am going to do with all the speakers here is it's pretty gloomy out there in terms of outlook, and we've seen some pretty tough movements in the stock prices and we noted in our research and I still would reiterate it today that the stock prices are beginning to get very hard to ignore. So, I don't want this to all end on a gloomy note. I want to pass it over to you for any final thoughts and what you think the key message here should be for the shareholders in the room today and for those listening on the webcast.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [30]
------------------------------
 I think the strength of our universal banking model really shines through. When you look at the synergies between capital markets, the wealth franchise that I just talked about in the US, the synergies between the wealth franchise and the retail franchise in Canada, North/South Commercial, when you are able to build franchises in at least two markets that are so strong, but particularly in Canada when you have the number one wealth franchise, the number one capital markets franchise, the number one retail franchise, the number one commercial franchise, you've got the core strength and they are at scale and when you start to cross sell that customer all these services which we have proven definitively over the last decade that we are 30% or 40% better than our next closest competitor in cross selling into our customer base it feeds into the amount you can spend to acquire a customer. So, the better you cross sell a customer and the greater that individual profitable at the customer level, at corporate, commercial, retail, the greater you can spend in acquiring that customer, which feeds into our promotional strategies that we've activated across the network. So, we do that very well in Canada.

 We picked up the one piece that we were really missing in the US, which is a private commercial bank that really levers the value in those customer franchises and capital markets, levers the value of that US wealth franchise that was significantly underperforming for us, and we have picked up the crown jewel, an absolute crown jewel, commercial private bank in City National which has great potential. So, it's that cross-sell, it's that universal banking model, really I think the strengths have come to life in 2015 and you'll see them in 2016. And we're very much focused on organic growth in cross-sell and unlocking the value from these customers that we've acquired.

------------------------------
 Darko Mihelic,  RBC Capital Markets - Analyst   [31]
------------------------------
 Okay, on that note, I would like to thank you for your participation today. Thanks very much (inaudible).

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [32]
------------------------------
 Thank you.




------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------