Royal Bank of Canada at Scotiabank Financials Summit

Sep 06, 2017 AM EDT
RY.TO - Royal Bank of Canada
Royal Bank of Canada at Scotiabank Financials Summit
Sep 06, 2017 / 02:25PM GMT 

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

==============================
Conference Call Participants
==============================
   *  Sumit Malhotra
      Scotiabank - Analyst

==============================
Presentation
------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [1]
------------------------------
 All right, ladies and gentlemen, I think we are ready to get going with our next presenter. We are going to do two more this morning before we break for lunch. And let me -- let me get it going by introducing our next guest. Very pleased to be joined by Mr. Dave McKay, President and CEO of the Royal Bank.

 Dave joined Royal in 1988 and was appointed as CEO in August of 2014. First off, thank you very much for joining me. I always appreciate you taking the time. I thought I would start, as we've got a room full of your shareholders and potential shareholders here today, I think it's important to hear the view from the top as I call it.

 It's been a very good year operationally for Royal. As I was saying to you before, the market does what the market does on a day-to-day basis. But leaving that aside, what should shareholders take comfort in in terms of the key areas of focus for the management team at RBC right now?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [2]
------------------------------
 I think for us, as you referenced, it's been a very strong operating year coming off a strong operating year last year. All our businesses are producing good results for us. You've got a very strong Canadian retail momentum on volumes. You've got good margins.

 So we are seeing strong performance with a great backdrop to a good Canadian economy and you saw 5% profit growth there and revenue growth. So you see a performance in the Canadian marketplace. Strong capital markets operations, Canada, particularly in the US and in Europe, even in the trading book. So we are seeing a balanced franchise there across many geographies.

 And then the wealth franchise I think really has differentiated itself in the last couple quarters. Not only City National, which is a story I'll probably talk about, but very strong Canadian wealth results and global asset management and in our Canadian wealth franchise which continued to distinguish itself.

 So we had record results both inside Canada and outside Canada in wealth leading to a 25% growth which is helping fuel our strong performance. So again, what you're seeing -- these client franchises that are balanced in Canada, the United States and Europe are driving a premium ROE. So we've got a strong balance sheet, we've got a premium ROE in the marketplace. We've got client franchises that are built to endure over the long term. They are producing synergies on the client side.

 It's really nice to have a Canadian retail consumer of investment products in your branch or in your commission channels and you're offering a top quartile. 79% of our mutual funds beat the benchmark. So when you are offering top-quality performance and products to the largest distribution base in the country, the synergies between that drive the highest ability to meet client needs and a cross sell and the highest satisfaction.

 We are number 1 in JD Power; so it's the combination of distribution with manufacturing, with great products like Avion, synergies with capital markets across our franchise. It's that universal bank model driving premium ROEs, very strong balance sheet, ability to deploy capital that creates I think the long-term trajectory that we've been enjoying and we'll continue to drive towards.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [3]
------------------------------
 Good. A few things that we can delve into there. I want to start with some of the themes in the Canadian personal and commercial bank. For a lot of us in this room, myself included, the first time I met you was when you were heading up the residential real estate lending operations at Royal. And we don't necessarily think of the Bank this way, but you are by far the biggest resi real estate lender in the country.

 A lot of talking points in the housing market. You offered some interesting disclosure on the call, your CRO did, about, hey, there's some musing about B20 rule changes. We are already originating 90% of our mortgages at 200 basis points over the posted rate.

 I want to give you the floor here and, as someone with a deep background in resi real estate lending, how have you and the management team thought about the housing trends in Canada and adjusted your lending practices accordingly?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [4]
------------------------------
 That's an important question because, when you are lending against an asset in certain markets that's gone up by 30%, it should cause you time to pause and make sure that you fully understand the type of risk you're putting on. And that type of asset inflation does create a little bit of -- should cause concern and why we've advocated for regulatory change to kind of slow down that growth and I think it's had a positive effect -- welcome that change.

 But as we think about the risk in our portfolio we segment the portfolio very clear to where we feel the tale is and the risk items are. So if you just do some really quick big picture math that I don't think we've done publicly before, you take a $260 billion portfolio and you take off immediately roughly $100 billion as insured business that really you have very limited operational risk but no real credit risk on. That leaves you with roughly $160 billion portfolio of uninsured mortgages.

 So how do you think about the risk of your uninsured mortgage business? Well you start to look at a number of drivers that segment out that risk. One, your largest risk segment is loan-to-value between 70% and 80% where your insurance normally kicks in. That's your highest risk. We are a 30% market correction. Anything above that -- anything above a 20% but you start to get into a 30% market correction, you could be exposed in some of the cohort you've originated.

 So if you take away everything that has greater than or less than loan to values of 70%, you take away another $140 billion of our portfolio that has less than a loan-to-value of 70%. So that's quite significant. So now you're left with a $30 billion portfolio between 70% and 80% LTVs that are uninsured. So how do you think about that risk?

 Well there's a number of dimensions that start to mitigate that risk. Income is very important. Families with income greater than $150,000 have much greater flexibility to manage shocks to cash flow -- job loss, illness, divorce -- than families under $150,000. Families or homeowners that have levered up greater than 35% total debt service have a much higher history of defaulting than families/individuals that have less than 35% TDS.

 So those are some of the variables that you look at of where does the risk lie. So when you start to carve out and you look at FICO scores -- when you start to carve out these risk elements and you look at recent cohorts versus old cohorts, you get down to a cohort of risk that's roughly $6 billion in size, which is uninsured, between 70% and 80% loan to values, higher than 35% TDS, less than $150,000 in income, and originated in the last couple of years where you've seen the asset inflation. We focus on that portfolio and we start to stress it.

 We stress it against job loss, we stress it against potential default. And even if you took that $6 billion and applied a default ratio of 3, 4, 5 times what you've seen historically, let's take 10% default rate, you've got $600 million of risk. And if market prices correct by 50% you might lose 30% of that $600 million. So you're talking about a couple hundred million dollars of that cohort of risk that you should be concerned about.

 We go through these segments, but that is the area of the tail that you start to think about. So when you hear us talk about we are comfortable with our portfolio it's because we go through these segmentations and we look at our historical experience, we look at what happened in Alberta and we say, okay, this is where the risk lies. How are we adjudicating against that portfolio?

 Well, increasingly we are doing full appraisals against those -- that type of cohort, full walk-throughs to make sure we are more confident of the value of that home, particularly in a rising house price environment. We increasingly flow those adjudications to our most senior adjudicators and do a full manual review of them. Obviously we are verifying income and doing all of this things.

 So, we have LTV criteria based on the price of that home in the Street. If it's at the high-end we might not want to be in the same LTV band on it. So, by segmenting your risk that way we get comfortable with how we are adjudicating, but we also get comfortable and the reason -- how do I get comfortable with presenting my confidence to you and I get these questions on every analyst call and every conference, it's because I segment that portfolio and I have a history against those default rates and I understand where the risk lies.

 And so, for the first time I think I've articulated how that waterfall works and how we think about segmenting the risk and why you can break it down pretty quickly to a more focused area that you manage. When you apply default rates and you have a higher risk portfolio in the hundreds of millions of dollars versus the hundreds of billions, you can see why you quickly get down to a kernel of what you need to focus on as an organization and why we can express the comfort with where we are.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [5]
------------------------------
 So two observations. Number one, that is excellent disclosure and new disclosure. And number two, I will have to read the transcript thoroughly before I have the first glass of wine at dinner tonight.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [6]
------------------------------
 Too many numbers.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [7]
------------------------------
 Because there's a lot of good stuff there, so I appreciate that and we will break that down. That's the credit side of the equation. The flipside would be what if I'm an investor and I say to you, Dave, I hear you. I've looked at mortgage losses for Canadian banks over a long period of time going back to the early 1990s. And we haven't seen these banks lose money in residential real estate.

 My concern is growth because loan growth in Canadian P&C used to be 10% a year; now post the crisis it's been about 5%. New rules coming in, rule of large numbers on a bigger base. Is 5% mortgage growth, which is in and around where RBC has been running, a sustainable or achievable growth rate as the market continues to shift?

 And I say this -- and you know the numbers better than me -- resi real estate I believe -- resi real estate lending is 70% of your aggregate loan book in Canadian P&C. So, is the growth angle the one that we should be more concerned about than credit quality?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [8]
------------------------------
 Yes, I think there are two impacts. One, as we see this house price inflation as Canadians put more and more debt into their homes and have more and more disposable income against their home, it manifests itself in slower growth in the economy. And I think the concern you see out of the government and the Bank of Canada and increasingly myself is we are sacrificing longer-term growth in Canada taking on short-term debt. And that's always a concern when you take on debt in the economy.

 So that's one of the effects we don't talk enough about is as rates rise, as they did this morning, a greater amount of disposable income is coming out of purchasing power which will slow down economic growth in other sectors. And that's not a healthy thing in the long term, which is why we have to constrain house prices and balance house price growth and not have too much disposable income go into the housing sector.

 So that's about moderating growth for the health of the long-term economy. So I think that's the context you should think about it, that you could see faster growth in mortgages but you might see slower growth in other products. And our commercial customer base might grow at a slower rate. So there's always a knock on effect of one sector versus the other.

 So I would say that, yes, I would expect more just growth to slow somewhat. If mortgage growth comes from housing price growth and therefore mortgage volume growth and unit growth and you are seeing -- you should expect to see the price catalyst in mortgage volume growth slow down a little bit.

 Now Vancouver, to the contrary, has come right back again and we're still trying to understand why such a quick rebound in growth there again. Is it supply shortage. House prices continue to surprise us, particularly on a single-family home given the lack of supply to demand factors are persisting. In a relatively low rate environment you're going to get aggressive bidding for that stock.

 So, I would say I'm not expecting a significant moderation just because of consumer behavior right now. And you talk to builders -- but maybe a slight moderation, but I don't think it's going to cut in half. I think up near that 4% or 5% range is still part of the future that we see.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [9]
------------------------------
 Two more on Canadian P&C then we'll move on, and not really that related but I will bring them together. Obviously if loan growth is around 4% or 5% this sector has proven adept at managing the cost base to ensure that earnings grow at a faster pace.

 One aspect that could help the revenue side even with slower loan growth is margin expansion. As you referenced, we did get that second rate hike from the Bank of Canada this morning. Are you in a position to help us think through how a 25 basis point increase in NIM helps either RBC on the top of the house level or within Canadian P&C?

 And then my second question while you think about that is in the credit card space. 2013 there was some very interesting conversations had between the -- or regarding the relationship with EMEA and CIBC. Obviously a made in Canada solution was formed. This is me talking. I think that made in Canada solution was in large part to keep RBC at Bay because I think if it was a free-for-all Royal's credit card customer base would have benefited handsomely from that.

 There's another potential shift that's happening in the travel space. Just curious as an interested observer how you view a potential move by Air Canada to bring that business in-house. So two -- not our Canadian P&C but very disparate.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [10]
------------------------------
 As you well understand, as you look at NIMs and you look at yield curve, it's not just the short end of the curve where we earn NIM. The shape of the curve is important. Five-year and four-year rates are part of that as we lend long and as we fund it in different ways.

 So, as you think about taking a short end shift in the curve through your book it doesn't manifest itself overnight. So I would say a 25 basis point increase in rates should benefit our retail franchise in the first year roughly by $100 million, but increase to upwards of $300 million by year five as it takes a while to blend into the portfolio as we roll off assets, we refinance assets at the higher rate.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [11]
------------------------------
 I'm sorry, Dave, are those numbers net interest income or earnings?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [12]
------------------------------
 That is -- that's revenue.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [13]
------------------------------
 That's revenue, okay.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [14]
------------------------------
 Now there wouldn't be a cost to that revenue, so you think it would flow into [NIBIT], but that would be NIM expansion.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [15]
------------------------------
 Perfect.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [16]
------------------------------
 And should fall largely to the NIBIT line and then apply your tax rate to it. So I think that is how you think about blending in a rate increase over time. The same way that as rates came down quickly in Canada bank NIMs didn't fall down stepwise; they took a while to blend in the lower rate.

 So you would expect they'll take a while to blend in the higher rates over time. But for us $300 million for 25 basis points is quite meaningful overtime. So that's how I would think about it.

 As far as the credit card portfolio, we've got significant momentum in our credit card business. We've been gaining share for a number of years now particularly very strong performance again in the first three quarters of this year. We have $17 billion plus in credit card revolving loans out there.

 We lead the market and purchase volume and that's driven by two flagship products, but a very strong portfolio. Our Avion product is the market leader and the number three product in the marketplace. But best rated card is the RBC WestJet card -- co-brand card which would be similar in structure in many ways to the co-brands out there.

 You've heard me say a number of times that we have a structural advantage to our business. I think that structural advantage has manifested itself pretty clearly over the last couple years. And the way it plays out is we run our loyalty business as a cost center to drive benefits for our customers and we make profit on lending on the cards, the revolving credit part of the product, we make profit on fees and purchase volume.

 But we don't have to layer on a profit the way some of our competitors might do as an intermediary in the loyalty business, which makes them long-term potentially uncompetitive to someone who runs an equivalent service as a cost and makes their money in other ways.

 So I think that structural advantage continues to play out in a premium value proposition and the customers are responding to that, whether it's the WestJet card or the Avion card or other rewards cards in our portfolio. But prominently those two cards are growing quite significantly and are gaining share given the uncertainty over the future loyalty partnerships that may emanate out of Air Canada in the future given their announcement.

 So I think the volatility has been good for us. I think we've long had a partnership. And Avion in particular gives us enormous flexibility to deal with uncertainty in the market as we can reposition that value proposition quite easily. We have enormous flexibility with that product.

 We have a very strong partnership with WestJet. WestJet is a franchise that's growing significantly. They are adding increasing long-range capability to go more head to head on international routes, which will be more attractive I think to loyalty consumers going forward as you can now redeem not only in domestic but on long-haul, Europe long-haul, Asia.

 So the attractiveness of the WestJet product to a loyalty holder will increase over time and it will become I think more competitive with Air Canada through that sphere just on their business model they've articulated to the public. I think that is a positive for the co-brand on that side.

 I can't speculate on who and how Air Canada is going to play this. They obviously have recognized an enormous monetization opportunity for a very strong loyalty program and a very strong brand and a strong company and I think it's a smart management move. I think there will be a number of interested players to partner with that, but it will come at a significant cost I would imagine. And we've got that cost embedded already historically in building Avion and building WestJet.

 So, for us it's not about paying up to play with a new partner; it's about investing in the future growth with that partner that we are very excited about. So I think we are in a very different part of our evolution versus however the EMEA/aero plan/Air Canada rolls out will require I think a fairly sizable monetization of that event before you can start to reacquire. So we feel pretty good about where we are.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [17]
------------------------------
 I hear you. 2020 seems like it's a long time away but it's not really that far. So wait and see on that one. We'll keep moving, a few topics to cover. I want to get into the wealth management business.

 I feel like you and I have sat up here a few times and just in my coverage of the Company have thought for a long time that wealth is the middleman, if you will, between the capital markets and the Canadian P&C and we've been waiting to see some momentum particularly in the pretax margins.

 I want to get into the numbers; that's where I live. But before we do that let's talk qualitatively -- City National and how it fills out the RBC franchise in the US. This is me talking; I just thought this was a much better fit with who RBC is than maybe your previous retail franchise in the US. So from a perception and almost a qualitative perspective what have City National and Russell brought to RBC in the US?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [18]
------------------------------
 First of all, the numbers are fantastic.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [19]
------------------------------
 We are going to get there. That's where I live so we are going to get there.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [20]
------------------------------
 It's not just the City National standalone. It is what Russell has brought to the entire US wealth franchise. We printed a $200 million Canadian P&L this quarter with momentum growing. A big chunk of the improved performance at our legacy broker franchise that I asked Russell to run is because of Russell and his team and bringing in a new leader in Michael Armstrong from Morgan Stanley who has brought a different playbook and a different strategy that he's run successfully for other brokerage firms.

 It's executing on the synergies we asked them to. Russell is a 20-year tenured public company CEO. So he is an incredible asset to me as a leader, he is an asset to our organization. He is well-connected into Washington given his previous roles on various roundtables. So he helps us in Washington. He is very well known in the California and particularly Los Angeles community which is one of the fastest-growing areas of America.

 So that experience of Russell and his team coming in, they've already executed against a transformational plan. They've brought the wealth division together holistically and they are executing on those synergies. Our best year with our legacy US wealth franchise was around somewhere USD100 million, USD120 million over the last decade. And we are going to do combined, if you just annualize Q3, upwards of USD800 million.

 Now you've got a material contributor to RBC in the US that is growing significantly, has leveraged the higher rates and we reaffirmed, as you heard in the call, the Investor Day we put together last June 16 and our forecast to have a very aspirational growth rate and we reaffirmed that growth rate and in our confidence in continuing to provide material growth in our US wealth franchise.

 So Russell has brought -- has created a very similar culture and is building long-term client franchise. Putting together top-performing teams, he's got great savviness for hiring talent and bringing Michael Armstrong in I think is a real example of that. He's built a strong team and a dedicated team around himself.

 So he brings all those intangibles as part of -- and as a counsel to myself it's really nice having a 20-year tenured public company CEO on your team and has been through cycles before and has a deep understanding of the US marketplace. So -- brought a lot and the performance I think is there without a doubt.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [21]
------------------------------
 Let's go into the numbers on both those pieces. City National by my math is going to make something like -- just the City piece is going to make something like CAD475 million this year. The goal that you had communicated to us last June was CAD1 billion by 2020. It's still a pretty impressive growth rate that's required to get you there in three years. Can that be done organically or do you feel there will need to be some bolt-on acquisitions to get you there?

 And then just to wrap this up, the second piece. You referenced the standalone -- or the US wealth -- can we call it retail brokerage? Is that the right way to --?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [22]
------------------------------
 US brokerage, yes.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [23]
------------------------------
 We had talked about this over the years that maybe that was the business that was most in need of some high grading to get to the RBC standard. This hire you made from Morgan Stanley, one of the industry leaders in US retail brokerage, aspirationally the Bank had talked about pretax margins getting over 30%. You are at about 25% now which is a step up in and of itself. Is that goal still an achievable number for the entire wealth division going forward?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [24]
------------------------------
 Yes, so if we just start with the second question, absolutely. We've done a lot of work around migrating the customer base as we have in Canada -- we hadn't done it in the US --from a transaction-based fee model to an advisory-based fee model, creating greater stability, greater client satisfaction and overall holistic relationship has strengthened for that reason. I think that has been a part of it.

 We've obviously benefited from rates, but we've also benefited from synergies with City National where we were unable to unlock the value of our large suite deposit book without a strong retail balance sheet to lend against. So City National has unlocked enormous value in that franchise. That's before we got into the cross-sell and deepening relationships by bringing private banking in, by bringing commercial banking in.

 You are growing the relationship holistically and therefore your attrition rates are lower. So those are all some of the short-term measures that have helped the margin perspective.

 The thing that will continue to help benefit margins is we never pursued a lending strategy -- a margin lending strategy within the business believe it or not. Even though when you look at our competitors and we benchmark margin against US competitors, they outperform us solely on the NAI they get from margin lending, which is a low-risk activity of you do it properly.

 We didn't even have a product. So we are investing in that product to launch to create some NAI in the business which will further improve margins because it flows right to the bottom line as a cost structure. So again, part of the strategy shift that you are seeing with Michael and the team are better aligning ourselves to things that he's executed in other businesses. So I think all of that will contribute to continued higher performance in the business.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [25]
------------------------------
 If I could interject there, I would think to attract somebody out of the Morgan Stanley franchise into your retail brokerage, the fact that RBC Capital Markets has become as strong as it has in US capital markets. Every retail broker I've ever met meets product and the fact that you've got a stronger let's call it origination machine there now obviously should allow you to -- I'm going to use the term high grade your retail brokerage network going forward.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [26]
------------------------------
 Great example, particularly in the muni business. And muni product is very popular with investors and we are one of the top muni underwriters and originators in the marketplace, I think top five if not even better. So I think that product has been important.

 Other obviously equity underwriting opportunities and product flow structured product is obviously very important. Structured equity is you deal with more sophisticated investors in looking to customize product for their portfolio and our [GELP] businesses. So you're right, that partnership with capital markets in a growing US franchise, the synergies are important.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [27]
------------------------------
 And City Nat, just to square the circle on that, $500 million or so this year, getting to $1 billion. You and I talked on the call about --.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [28]
------------------------------
 No acquisitions in that number. So that is 100% organic growth broken down into three buckets that we talked about. One that assumes we can keep growing at a roughly 10% compounded rate and we are outperforming --.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [29]
------------------------------
 Loans?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [30]
------------------------------
 Lending deposit growth funded by deposits, which we feel given the markets we are in and the market expansion that we see, he's been doing that historically at a much higher rate. We think we can do that and better, but that assumes a roughly 10% compounded growth rate which will produce about a third of that gap.

 Another third of that gap comes from rate increases. We've been seeing that. And so part of that is baked into that trajectory as you'll see that roll into the portfolio over time. You don't see it overnight as you see in the Canadian portfolio.

 And then the other third is executing against expense synergies, organic growth synergies into markets like Washington and New York, which are -- and Minneapolis which are core focuses where [we'd rather] have a strong brokerage -- brokerage customer base or we see opportunity in New York and Washington where we are building out offices and growing organically that hasn't been built in this previous growth rates.

 So it's very simple. Roughly three buckets of organic growth where we want to deploy capital and people that -- we've added 15% growth year-over-year in FTE and still achieved very, very strong 15% plus growth numbers. So we're already funding growth in our front-line, growth in our back office.

 We added 400-plus employees on a 3,500 employee base to achieve this growth and we haven't really seen the material production from those private bankers, from those commercial bankers yet in those new markets. It just takes a while to get traction against this customer base. It's not some customer base you walk in and you get a transaction the next day. You have to cultivate a relationship.

 But we've got experience, we see the curve and it's building. So I think that is -- that growth is being funded out of current revenues. And I think it's great that we're able to achieve these excellent financial outcomes and still invest in that growth, in [NA] growth to drive longer-term --

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [31]
------------------------------
 Good.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [32]
------------------------------
 -- success. So that's organic. And we can keep doing this and we plan as strategy one and two is organic growth, market expansion, put your (inaudible) into great people. You don't need a lot of physical footprint in this business. It's wonderful so your expense growth is really going into great private bankers and great commercial bankers and that's where you extract value.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [33]
------------------------------
 Let's do this next one quick because I want to -- I always like talking to you about technology. I think you were early on that side and I always like to get your thoughts. Capital, I feel like every year you and I are up here it's a couple months before the GSIB list comes out and there's been some consternation on the part of the market.

 Yourself and Rod were very specific on the call. Based on everything we know, we don't think there's any official extra buffer that would be required if we are included on this list. You've made it clear to me we're not going to shrink our way to greatness; that's not the way we operate.

 In your opinion and taking the temperature of the market so to speak, do you feel there's any expectation that as the Canadian bank that would be on this global list you should manage capital at the high end of the group or no?

 And part of that, and I know this is a long question, I apologize for that, you used a great term with me a couple years ago, balance sheet repurpose thing. It's a very CEO type -- repurposing. Is there more of that to do? And what I took that to mean was there was some trapped capital on the balance sheet. We've seen that in your market risk weighted asset decline. Is there more of that that can be done?

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [34]
------------------------------
 It is lower RWA growth. There is. It's a cycle. I'll walk through how we've grown the business and we are in a point where we are really managing our customer base and our customer relationship. So capital markets grew in the United States very aggressively from 2008 through 2012 at 10%-15% compounded RWA growth.

 We had a unique opportunity to acquire clients through -- or traditional competitors didn't have the balance sheet to meet their needs. We put our balance sheet out there. We grabbed as many good clients as we could and we ramped up aggressive growth knowing that we were going to try to cross sell those customers equity debt underwriting, M&A advisory, FX.

 But we acquired a lot of customers and put a lot of balance sheet out there very quickly because it was a unique opportunity to do that. And we hired great people and we built relationships and for the most part we've done a really good job in cross-selling that customer.

 But there are customers for whatever -- they didn't transact or they transacted with somebody else where we haven't received the other side of the equation, the fee-based side that we feel we need to round the square of driving the ROEs that we want.

 So because we grew so quickly there is a bit of a refinement of customers that aren't going to fit the long-term relationship model. And we've been able to take that capital and reinvest it in acquiring new customers and therefore have produced very strong results out of our investment banking group and our underwriting groups without having to put a lot more RWA out there.

 I think that's a cycle over time as long as it's mature that you can continue -- you can't do it forever, but there's still some -- but that's the genesis to why we find ourselves able to drive very good fee-based growth. We moved up again to number nine in the world in the global fee pool which is outstanding without having to put a lot more RWA on the table.

 We will grow RWAs in this business; it's a very good business and it's a strong global business for us. But that's why you are seeing strong performance without the relatively flat [RJs].

 As far as GSIB, I think I don't have a lot to add other than the call. We do not expect a GSIB surplus. That's in addition to the DSIB 100 basis point surplus. We do not benchmark ourselves against needing to be at the top end of the Canadian DSIB group. The Canadian DSIB group is already benchmarked against the global GSIB group. Therefore why would you put yourself at a premium to that group?

 Each bank has a different capital strategy. Some may accumulate capital for different reasons, so why would you benchmark yourself at the top end of a bank that has a very different strategy than yours? So we are constantly reiterating we are comfortable our surplus is sufficient. Were comfortable with the 10.5 target that we have.

 We are managing capital above that as surplus capital right now. And we do not feel if we get designated a GSIB that that dictates a different strategy than the current DSIB strategy we are in. I think we feel very strongly we have dialogues with all the people required to be able to present that strong view to you.

 The change -- if we get designated a DSIB, and there's a lot of moving parts, it's you relative to the other global GSIBs and how you stack up in that pool. So there's a lot of moving parts. But we are creeping towards that 130 hurdle as everybody can see given how we grow our business.

 Leverage ratio is uncertain whether there would be a premium leverage ratio above the 3% to 3.5%. Now we are carrying, what, a 4.4% leverage ratio, so we've got lots of surplus already. So we are unsure of where the leverage ratio target will come. There will be clarification I think this fall from the FSB where GSIB leverage ratios are going to come from.

 And I think we've been pretty clear that if you are designated a GSIB there's obviously resolution planning and greater disclosure requirements that are required of a GSIB that will add a little bit of cost overall to the organization, but not material. So I think consistently messaging that -- we are giving is the messaging that -- in our dialogue with all the stakeholders is what we are seeing. So we are comfortable with our capital management strategy regardless of where we end up, DSIB/GSIB.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [35]
------------------------------
 I know we are a little bit late. We do have lunch after the next one, so I'm going to exercise my poetic license here and ask one more. This is your topic. It's obviously on the technology front. I feel like you were -- I asked you this before. You were very early in communicating to at least the Canadian market where the fintech business was going.

 I want to layer this in expenses and we'll wrap it up here. First off, from a pure numbers perspective are you in a position to share with us how much is Royal spending when it comes to technology? How fast is that expense growing? And if you had to split it what do you see as being the proportion to run the Bank versus change the Bank, if you will?

 And lastly we've had a lot of conversations about restructuring. You've been pretty clear on how you feel about that. At a point in time when the market seems to be so focused on operating leverage as a differentiator, how does that spend towards technology get managed against the overarching objective of reducing the overall efficiency numbers? So a big question for the last one, but you're the man for the job.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [36]
------------------------------
 I think we are in, again, a secular change as part of the business [world] and consumers are changing so fundamentally. And that at the end of the day we are trying to manage our leverage ratios -- our operating leverage, but first and foremost we are transforming our business.

 And our technology spend is at a heightened level. A, it's more expensive to do some of those things than we thought, but you're really starting to see the benefit of that technology spend. We've rolled out more functionality in the last six months than the rest of the industry combined. You are just starting to see the benefits from all the research we are doing, the AI research, the [blotching] research that we are doing in products, the digital spend.

 We just received the JD Power award for number one in digital customer experience, which is an important signal to say things are building or having traction and you're just starting to see [First Bank North America] to launch a Siri-based banking capability.

 Natural language processing is one of the core capabilities. For any of you who watched any of the U.S. Open or college football on the long weekend -- I did unfortunately -- you couldn't get away from an Amazon Echo add or a Google Home add and having a device in every room where you are interacting in the social media stack, you're interacting in the e-commerce stack, you're interacting in the entertainment stack through this device connected to the world and banking has to be a part of that.

 So we are in this elevated transformational period where there's so much opportunity to differentiate yourself but it requires spend. We've gotten enormous scale. So our technology spend is elevated and it's stressing our operating leverage. Having said that, we are still forecasting to produce operating leverage greater than 1%, but off the 2% that we thought we'd be at the beginning of the year.

 But we are not going to sacrifice a year for what we see as a secular opportunity to transform our business to create long-term competitive advantage and to build out our franchise. You're starting to see that strategy play out and I think we are trying to do both.

 But the first part of the strategy is to transform this organization to meet a rapidly changing world but seize the opportunity to create long-term competitive advantage. So it's stressing the organization honestly, it's complex, there's a huge opportunity here. We are trying to do both. We are a bit lower in the range than we had hoped, but the priority is to transform. So our technology spend is elevated.

 As far as the one time -- the cultural transformation that we've been through and the severance we took, yes, we probably moved two years worth of transformation on the people leadership side into a quarter. And we moved a lot of things that we were going to do probably in 2018 into the last six months and we took that charge, which was $120 million in Q3, we earned through it and you should expect to see much less severance next year, probably the year thereafter, as we've really looked at skills which affected over 600 people.

 And we are not going to fill those 600 roles. We are looking to fill them over time or redeploy into technology. You'll probably see a little bit of run rate savings in Q4 as we leave a lot of roles vacant as we look for different skill sets and we try to find different skill sets in the market.

 But was really designed for us to increase the whole speed of the organization, increase the transformation, give us room to reinvest without increasing future NIA and I think we achieved that. It was difficult but we achieved that and we gave ourselves more operating leverage and room to transform the organization.

 One thing you have to do as a CEO, and I'll stop here, is you are constantly trying to measure the cadence of change outside your organization versus inside your organization. And I sense that we are getting off scale a little bit. We had to increase the cadence of change inside to match what I see as an increase in cadence led by nontraditional competitors with our own customers.

------------------------------
 Sumit Malhotra,  Scotiabank - Analyst   [37]
------------------------------
 Saved by the Bell. We went a little long, but I think we hit the high notes.

------------------------------
 Dave McKay,  Royal Bank of Canada - President & CEO   [38]
------------------------------
 Thanks a lot. Thanks, everybody.




------------------------------
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.
------------------------------