Royal Bank of Canada at Barclays Global Financial Service Conference
Sep 12, 2017 AM EDT
RY.TO - Royal Bank of Canada
Royal Bank of Canada at Barclays Global Financial Service Conference
Sep 12, 2017 / 01:45PM GMT
==============================
Corporate Participants
==============================
* Rod Bolger
Royal Bank of Canada - CFO
==============================
Conference Call Participants
==============================
* John Aiken
Barclays PLC, Research Division - Director and Senior Analyst
==============================
Presentation
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [1]
------------------------------
Okay, ladies and gentlemen, we're going to started the next session. Pleased to have Rod Bolger, who is the Chief Financial Officer here at Royal Bank of Canada. And Rod is recent in your new role. First time you're at the conference, Rod. Thank you very much for making the time.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [2]
------------------------------
Thanks for having me.
==============================
Questions and Answers
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [1]
------------------------------
When we take a look at Royal, I mean, you've got a good, broad diversified banking model, a large geographic footprint. I was wondering, would you mind starting with an overview of what Royal strategy is? And I guess where you expect to see growth coming from over the next 3 years or so?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [2]
------------------------------
Sure. So first part of the strategy is strength in Canada, with our strong client franchise in Canada. And whether it's our Personal and Commercial Banking, our Capital Markets franchise, or Wealth Management franchise, our Investor & Treasury Services business and also our Insurance business, we have very strong market share, very high client satisfaction. We recently won the J.D. Power Customer Satisfaction Award for the second year in a row. And Canada has been a strong market for us. The GDP growth has exceeded 4% in 2 out of the last 4 quarters. And it's been the highest GDP growth in the G7. So Canada has been a very, very good market for us.
And also, the United States, where we bought City National Bank and merged with them last year, really to expand our presence in the U.S. Again, a good, strong Capital Markets business that we've been growing over the last decade or so, significantly in the U.S. We also have a broker-dealer in the U.S. based in Minneapolis. And that we merged into City National, which is headquartered in Los Angeles, but expanding in new markets. And our U.S. business has done quite well.
And then even moving to Europe, we've been able to reposition the business a little bit. Focus more on Investment Banking and -- as well as some fixed income, but simplify the business a little bit. We also have a strong Investor Services business there and Wealth Management business and our returns have improved significantly in Europe.
So we're seeing strength in all of our markets. To a lesser extent, we have business in Asia, but that is, really, mostly facilitating business with Canadian and U.S. and European clients as opposed to significant distribution in Asia itself.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [3]
------------------------------
All right then. You can touch on City National, which has been the most recent large acquisition that you've done. And it's actually been a very strong contributor to the success within your Wealth Management franchise. Can you talk about how you are going about integrating it into the legacy Royal platforms? How the interconnectivity is going there? And what else you're doing to drive growth within the U.S. Wealth Management platform?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [4]
------------------------------
Yes. So we've left City National largely as a standalone business. We have merged our retail broker-dealer in the U.S. into City National. And those 2 businesses are working very well together, bringing the brokerage business. And then the balance sheet that City National brings the table in. And just the U.S. Wealth Management business, for instance, our margins have doubled there over the last 2 years. And we've put new leadership in there. Michael Armstrong joined us from Morgan Stanley, and he reports to Russel Goldsmith, who runs City National and managed City National on a standalone basis for the last 20 years or so. And those 2 businesses are great complements and are growing together.
And then also with Capital Markets. City National is able to bring our Capital Markets business to their clients, where they couldn't bring that sort of M&A and underwriting expertise to the table previously. Strong complementary business is there.
And then across border with Canada, our commercial clients, a lot of commercial clients are doing business north and south of the border. Both our commercial clients from the U.S. do a lot of business in Canada, and then, of course, our commercial clients in Canada do a lot business with the U.S. So the Commercial Banking benefit, across both our Canadian PNC business as well as our City National business, is a good complement.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [5]
------------------------------
When you touched upon the integration of Capital Markets, and I think, one of the things that stands out for me, your project with Royal against your domestic peer group, is the contribution to Capital Markets. And some view that as the upsize nature being a bit of a negative, but you've shown some very strong resiliency and consistency within the Capital Markets performance. But when you look at Capital Markets on a global perspective, what are you -- how are you driving that strategy forward? And has that changed since the financial crisis? Is the evolution of that business or the strategy evolved somewhat?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [6]
------------------------------
Yes, we -- well, we added a lot of bankers since the financial crisis, and we added a lot of lending to our balance sheet, and brought in a number of new clients. We've moved up to ninth in the Global Lead Tables. We continue to be #1 in the market in Canada, and are involved in many -- in most transactions there. But then in the U.S., we have strong teams across most industries. And we've also reduced our trading business and our capital that we allocate to the trading business, optimized that, really. So we've focused our trading business more on client activity. And then our balance sheet, which we've grown. We've been able to grow our fee pools significantly. And we've reduced the volatility in that business, which I think is very important because Capital Markets can be a volatile business and, certainly, have been showing good, strong equity markets recently for the last decade or so. But we have a last three quarters in a row, we've achieved $2 billion of revenue and $600 million of profit. And basically, we've taken a lot of the risk out of that business. You still need to have some risk to make that sort of money. But that's a business that we are quite pleased with, and continue to grow in the U.S. as well as Europe. We also have some strength in Australia and Asia. But then Canada is really where we have the strong market share.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [7]
------------------------------
Well, I think some are surprised that after the initial push in Europe, that you're actually still legging it out there, given -- even with the difficulty in the markets. Can you talk to what the focus is in Europe? What businesses you're trying to penetrate? And why you actually didn't retreat or retraced that initial investment?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [8]
------------------------------
Well, we've grown our Investment Banking business as well as our FIC business. We had been broader in our FIC business in terms of some sovereign markets and being a market maker, and we've simplified that. And that has really improved our profitability. Our returns used to be lagging there, and we've been double-digit returns from an ROE perspective in Europe, which is lower than where we are, say, in Canada, or even some parts of the U.S. But that's a quite a high return on equity for a European Capital Markets business.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [9]
------------------------------
Fantastic. I guess, turning to the domestic marketplace, we had the Bank of Canada raise interest rates again for the second time last week. What's -- what does this -- how does this impact your view on, I guess, both margins, but also anticipated lending growth? If this -- is this going to lead to a slowdown in consumer borrowing, I guess, is where I am going?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [10]
------------------------------
Consumer borrowing has been slowing. It's still a bit strong. If you look at our mortgage book, it's -- you've been writing for years that our mortgage growth was slow and it has. A couple of quarters ago, we were down to 5.5% growth. And this past quarter, we're at 6.1% growth in our mortgage book. And that's pretty good, if that's a low point in a growth cycle. We had been high single-digits on the mortgage book, but that's come back. And I think it's healthy that it's come back. I think the Canadian consumer needed to take a little bit of a pause, but still good growth.
And as you look at the NIM expansion, it's been a decade or more of NIM compression. While the Bank of Canada has moved and increased rates rate, real rates are negative. The Bank of Canada rate is below the inflation rate. And the markets are pricing in almost 100% chance by January of another rate increase. And by next May, 2 to 3 rate increases. So there is the expectation that the Bank of Canada will continue to move. And that will benefit our margins, based on our deposit book and the lending, as the stock and flow of that rolls through.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [11]
------------------------------
So given the duration of the loan book, should we assume that the 50 basis points right now is going to take a couple of years to filter through the system?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [12]
------------------------------
Yes, it does. And that's why you would see. And Dave McKay, last week, basically mentioned that we would expect, for the 25 basis points, $100 million of NIM benefit next year. And in 5 years, approximately $300 million of benefit. So it does takes some time to roll through.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [13]
------------------------------
Yes. Well, I guess, when we're talking about interest rates, one of the biggest concerns, particularly with us being down in New York right now, is Canadian housing. And I would be remiss without asking a question around that. But I guess, what is the sense -- what's the outlook for Canadian housing at this stage in the game? And talking about the Toronto area in particular, given the policy shift and the impact that we have seen, at least on volumes, if not fully on pricing.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [14]
------------------------------
Yes. I moved to Canada about 6.5 years ago, and I...
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [15]
------------------------------
So you timed it right?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [16]
------------------------------
So I timed it right. And although I did sell in 2 down markets in 2 different cities in the U.S. So I've had a different experience than many Canadian consumers have had in terms of buying and selling homes at a profit. But the Canadian marketplace is different. The structural elements are very well defined to be different in terms of the security on the home as well as the right to go to the borrower, if they do walk away from the home, the tax rate -- the tax laws are different. Both on buying and selling homes, where there's no cap on the capital gains. But also, there's no deductibility of interest. And as a result, a good amount of ours, about 1/3 to prepay, and accelerate payments on their mortgages. So the tenure of our mortgage book is quite -- is a lot lower than what you'd expect.
And we underwrite. We've been underwriting and stress testing as we're underwriting. And about 90% of our mortgages had a 2% rate increase. So we want to make sure that our customers and clients can stay in their homes if rates do continue to go up. And we also stress test our book quite frequently. And if you think about our mortgage book, it's about $265 billion, $270 billion. And if you look at the loan to value, that's below 70%. So it could withstand a 30% or more decrease as well as the insured portion of our book, which is quite substantial. That's about $241 billion of that. So you're left with $26 billion that might pose some risk. And if you look at 3 components there, clients who are in over $150,000 as well as those who've had already longer tenure. And basically, you can take $20 billion that are lower-risk clients as well, and you are left with about $6 billion out of the $267 billion, that we really take a hard look at. And of those, the majority were almost $6.2 billion of that has FICO scores above 650. So you look at the lower FICO scores, where the -- and then the total debt servicing, which I didn't mention. It's part of that healthier cohort as well, where total debt servicing is less than 35%. So clients have been spending less than 1/3 of their income on their homes. So you're left, basically, to take out all of that out of the $267 billion, where you're left with $440 million, that you might call at risk. And the average LT we've on that, let's call it 75%. Even if there was a 50% decrease in housing prices in Toronto, which -- these are not all homes in Toronto. But we don't expect that to happen. So wouldn't want that out there. But you're still left with about $100 million and $110 million write-off for us, which is 4, 5 basis points. So you're talking -- and I was a skeptic moving up there. But this is a book, a loan book, that is quite strong, quite healthy. The Canadian consumer is quite healthy and paying their mortgages. And even in Alberta, where you saw the unemployment rate double a couple of years ago, we did not experience significant deterioration of our credit book, be it secured or unsecured.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [17]
------------------------------
And then what's a little bit different, and again, this is on the margins for Royal's mortgage book is, you are skewed more towards the uninsured mortgages. And again, low loan-to-value, not risky. But what was the driving force behind that? What's the philosophy behind actually retaining more uninsured versus the insured mortgages? Particularly with the legacy portfolio was actually priced reasonably the same.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [18]
------------------------------
Well, I think you're seeing less insurance in the market. So I think you're going to see that trend continue. And I think that's healthy for the market. We do see a number of our clients that do not need the insurance. And so if you're talking about the Greater Toronto or Greater Vancouver, most of those mortgages, many of those homes are priced at $1 million or more. And there you need a down payment of 25% or more as opposed to 25%. And so a lot of our clients do not need insurance to take out their mortgage. And really, the insurance is put in place so that people who should be able to afford homes can afford homes with the tough underwriting standards that we have. And so a lot of our clients don't need that. And so it's uninsured. It's insurance that we sometimes pay for, but we don't really feel that we need it.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [19]
------------------------------
And then I guess touching on credit quality, because the Canadian consumer has performed spectacularly well, much better than, at least, I was expecting. Particularly well, as you mentioned in Alberta. What is the outlook for credit quality on the domestic front first? And then we'll touch on the U.S.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [20]
------------------------------
Yes. Well, a lot of that depends on jobs, and the unemployment rate continues to improve. And it's still a little bit elevated in Alberta. In the rest of the country, it's approaching, what some might say, is full employment, similar to the U.S. So if you have strong employment and reasonable rate-wage gains, and the borrowing levels that we're at, the credit quality looks -- the outlook continues to be benign. We'll have, for those of you who are U.S. based, we're going to have to deal with this thing called IFRS 9 next year. So we'll see a little bit more volatility in our loan losses. But you've already dealt with some of that, probably, in the U.S. market. So it shouldn't be a surprise to you. But from an underlying creditworthiness and credit quality, we don't see any storm clouds on the horizon at this point. I think that will happen when you see the next recession.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [21]
------------------------------
Well then -- and you touched on IFRS 9, I know it's a little bit more technical, but do you think that implementing IFRS 9 is actually better in this type of environment, where you're already in, what are, historically low levels of credit-loss provisioning?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [22]
------------------------------
It will certainly mute the impact of adoption. And for us, we have a large capital buffer already under the Basel deduction for expected loss. It's $1.5 billion. It's not on our balance sheet. But it's on our regulatory capital balance sheet. Hopefully, I am not losing all of you, and to the extent that our transition adjustment is below that, which we would expect, given the benign environment that we're in and the strong economy that we're in, it would be, from that perspective, I guess a good time to adopt.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [23]
------------------------------
And then, if you can touch on your outlook for credit quality in the U.S.? Because your book of business is very different in the U.S. than it is in Canada?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [24]
------------------------------
Yes. Our credit quality is strong in the U.S. City National has a terrific risk appetite and underwriting standards and a strong -- very strong risk culture. And they -- in many ways, they look like a Canadian bank during the downturn and the Great Recession. They had very strong performance.
And on the Capital Market side, you see some lumpiness from time to time. We also see some recoveries as well. And that's been, again, below what you would expect over the long term. But clients are, I think, corporate and commercial clients have smarter balance sheets, if you will. And they take leverage, and they are taking leverage appropriately as opposed to too much of a cowboy-type approach.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [25]
------------------------------
Fantastic. I'll probably give you a break, have a sip. We will -- if we can queue up the polling question for the audience, please? And aren't you -- how do you view Royal's acquisition of City National: Very positive? Modestly positive? Neutral? Modestly negative? And no one is going to press 5, right? That's...
(Voting)
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [26]
------------------------------
Do I get to vote?
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [27]
------------------------------
No, that's for (inaudible).
Yes, and skewed towards -- it's funny actually, if I remember correctly, when I think, Janice was in after -- right after the announcement, it was -- the distribution was definitely more skewed, so the neutral, negative side. But I think that you have shown some exceptional performance. Both point and synergy is up, but then growing. Is there anything left to pull out on the expense side? Or are we just now on typical operating leverage within City National?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [28]
------------------------------
This has not been -- this has been a successful acquisition and integration. And not all deals are like that. Apologies to the investment bankers in the room. But I would say that this has not been a success as a result of expense synergies. We have basically left City National to do what it does well. To do more of it with the rest of RBC, and to bring City National clients to RBC and RBC clients to City National, and grow in new markets. So if anything, there's been, I would call it, maybe negative expense synergies, because you probably put City National under a more -- a greater regulatory spotlight, coming into the bigger RBC. Certainly our U.S. business is bigger. And as a result, the regulatory requirements are greater. And then we've probably expanded more rapidly than they might have as a standalone company, because the capital that they would've needed to grow organically to invest, we were -- we're basically taking that out, because they wouldn't have wanted to issue equity and dilute the shareholders. So we're probably growing a little faster than we otherwise would have had they stayed independent.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [29]
------------------------------
Can you talk about technology? And what Royal's doing? Because we -- I hear this from all global banks, but the Canadian banks seem to -- I understand, in the last 2 years, I know it's been longer than that, but fully embrace technology and change. And what is Royal trying to do and how is it accomplishing that?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [30]
------------------------------
Yes, we're -- obviously, but the way banking is handled today and the way our clients interact with us today is not going to be the way that we interact with our clients 5 or 10 years from now. And so we have to be ahead of the curve. We also have to be relevant to our clients. And if you look at commercial clients, banking is not something that's front and center of their mind every day. They're worried about clients and market share and competition. And so how do we be more relevant to our retail and commercial clients? And I think through digital means we can accomplish that. It is also absolutely necessary from an efficiency standpoint, that we are able to do things differently today than we did 5 years ago. And then again, in 5 years, we can't keep doing it this way. And we have to take out manual, low value-added tasks and automate those. And that's -- you have to do that in any industry, and banking is no different.
And so whether it's the way our clients interact with us, the way we operate in branches, the way we operate in call centers. Also cybersecurity is obviously front and center as a risk to any company, but certainly, a bank. So we are very committed to technology. And our CEO is a -- has a technology degree and started as a programmer. And he is very thoughtful about how we grow and how we invest. Our Chief Technology Officer, Bruce Ross, is also quite strong. And we've brought in a lot of talent around that, around how we're going to do business kind of the next generation. And when we think of different horizons, we used to talk about horizon 1, 2 and 3. But really horizon 3 is now. We have to be doing that now. We have to be making those investments today.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [31]
------------------------------
And then how does that change your budgeting process and the spend that you're doing on technology? I've got to believe that it's significantly higher today than it was even 3 years ago. How do you manage the process to make sure that the right priorities are getting funded? That you are not spending money on technology that may be obsolete in 3 weeks?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [32]
------------------------------
Yes, and that doesn't make my job any easier. But that's fine. It certainly is something that we focus a lot of time and attention to. And certainly, we're doing a better job of bringing all the initiatives together, and discussing them and seeing how does this initiative in Wealth Management impact our Retail Bank, for example, and how could we better leverage that. And so we are spending more time on that. And we are having to -- and we took some severance cost this past quarter, and kind of transform our culture a little bit. We have a great culture, but you always have to keep changing it, so that it makes it easier for us to do business. A lot -- we do a lot more of our technology and innovation labs in an agile manner. The way we roll out technology is very different than it was even 3 years ago. And we have to make that -- those investment dollars available to make those investments. And we are doing that.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [33]
------------------------------
And then, I mean, Royal has, in Canada obviously, a strong universal banking model. But I'll make the argument that you're approaching your universal banking model in the U.S. And then also have Wealth Management, Capital Markets operations outside of Kennedy, U.S. Does the breadth and diversity of Royal's operations, does that actually help with the technology? Are you able to lever it across these platforms? Or is it making it more difficult? Because you have to have separate systems for each of these areas or each of these regions.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [34]
------------------------------
I think, actually, you're right on both fronts. Certainly, with our scale, it helps us. If you look at the amount that we have to spend on cybersecurity, and the amount has doubled over the last 2 years. With our scale, we're able to absorb that a lot more easily than we would if we're a smaller player. But then when you look at the breadth of our businesses, as you mentioned, it does add complexity to it. And it means that we need -- again, back to that culture point, we need to be more agile. We need to be more nimble. We have to communicate better. We have to think about where different investments can benefit more areas of the bank, and pull that together. And have those conversations. And we -- Bruce Ross, as I mentioned before, is 2 doors down from me. And I talk to him just about every day if we're in town. And we talk about this as a leadership team across all the Business Heads as well as the Functional Heads.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [35]
------------------------------
And then, you talked about the restructuring that took place. How is -- how difficult this is for Chief Financial Officer, for yourself, with the spending that's going on here, trying to manage the cost controls and other areas to generate positive operating leverage? And can you please remind us what you are committed to in terms of operating leverage or expenses on a go forward?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [36]
------------------------------
Sure. Well, I think this is not new for us. We have been on this road for several years. And we have a lot of expense discipline. The owner-operator mindset, where you're spending and you act like you're spending your own money instead of some nebulous big company. And I think we've been successful with that. So we have been driving efficiency for several years. And we've done that with significant FTE takeout, which is something that we manage through a lot of the times, we move people to other roles. But we've been on that path for several years. So that helps and having that mindset. And it's necessary. And our stated efficiency objective. And we look at it by business. Because if you look at it as a whole, it's great to have positive operating leverage at the RBC level. But certain businesses, such as Capital Markets or Wealth Management, have higher compensation, and so therefore higher cost bases. So if we're growing those businesses faster, you could actually grow -- you could actually have positive operating leverage in all 5 businesses. But depending on the rate of growth by business, you could have negative at the top of the house. So we like it positive. It's top of the house. But we really manage it by business. And we're looking for positive operating leverage in all of our businesses. And Canadian Banking, which is almost half of our earnings, we have a stated objective of 1% to 2%. We'll be at the lower end this year, largely because of that reinvestment that we've been making. But we are committed. And I think a good case in point was 2016. We acquired City National. So take that out, because it wasn't in the 2015 numbers. But there we had revenue headwinds. The growth of lending had slowed. Fee income had slowed. Margins were under pressure. We actually had revenue growth of 1% as a whole. Yet our cost came down by 1%. So we were able to manage through that time. And now we're seeing growing revenue growth for the last 5 quarters. I don't know if that's going to continue. But that's been helping us as well.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [37]
------------------------------
A better environment for a positive operating leverage.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [38]
------------------------------
Absolutely, absolutely. But we were able to achieve. And I think, the hallmark is achieving it over a longer course rather than individual quarters. You might have an up or a down in an individual business based on what happened last year, what happened in the market this year.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [39]
------------------------------
And can we talk about capital? First off, where Royal sits on the quarter? I think yourself as well as the CEO, stated that you're very comfortable with your capital position. What -- what's the outlook and where do you see things heading? Because with the Canadian Banks, over the last 4, 5 years, we have seen inflation in the capital ratios, but it does look like in 2017, the management teams as a whole are more comfortable around the 11% mark, whereas I thought that by the end of the year, into 2018, we'll be inflating closer to 12%, based on where things were heading.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [40]
------------------------------
Well, our stated objective -- our stated comfort level is 10.5% plus. We're comfortable in the 10.5%. to 11% range. We don't feel -- we stress our book continuously, and we set our capital targets and ratios based on where that stress is, so that in a downturn, we don't have to issue shares and dilute the shareholder. And so we're very comfortable in that 10.5% to 11% range. And if you look, just since the City National, back to City National acquisition, we focused on capital very closely. And I call it the velocity of earnings versus the velocity of capital. And if you look, since the City National acquisition in Q1 of '16, our assets are risk-weighted assets, our leverage exposures are all flat. You could say that may not be a good thing. But a lot of that is through design, by adding balances that were really client-driven. And then optimizing balances that were not necessarily driving strong results or client-driven. And -- but during that time, we've grown our dividends by 15%. Our by EPS by 15%. We've also grown our CET1 ratio. It is [gross] diluted after the City National deal by 100 basis points. But even though we had a bigger capital, we've been growing ROE by 100 basis points over that timeframe, too. And so ROE, return on equity, is something that's very important to us and we manage that very closely. So we've had good earnings and capital, and then return to shareholders, at the same time as managing the balance sheet very closely.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [41]
------------------------------
And then it looks like velocity has put the City designation to rest, if and when that happens for Royal. But do you, as CFO, have any concerns about the other parts of the regulatory environment that maybe coming down, Basel IV, et cetera?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [42]
------------------------------
Yes. I mean, we constantly monitor all of that. And Basel IV, we're certainly waiting to see what happens in Basel, what happens. We read about it the same way you do. And hear the rumors. And the Europeans and the Americans are they going to come to the table together? We want to -- we're looking for a level-playing field. And I think that's very important. We don't want to be put at a disadvantage in the U.S. Capital Markets, if the U.S. doesn't come along, as an example. So really, we're looking for what's fair and prudent. And our regulator has done a very good job of balancing all of that and maintaining a strong financial services environment in Canada.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [43]
------------------------------
And then to paraphrase, though, with the 10.5% to 11% range, you're comfortable that will be able to absorb anything that may or may not come down the pipeline?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [44]
------------------------------
Yes. We basically set that so that we look at all the buffers you need, whether it's the 4.5% to the 7% to the 8%. And the 8% is where we are as a DCIB, where if we become a GCIB, we'd also need to be in. And we certainly look at the risk in the book and stress test it. Ten ways to Sunday through multiple scenarios.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [45]
------------------------------
Okay. As a Canadian, I can quite accurately use the phrase that I've been hogging the puck for most of this conversation. I want to see -- we'll open it up to the audience now and see if we have anything questions for Rod. Starting in the back first.
------------------------------
Unidentified Analyst, [46]
------------------------------
Just a quick question on your M&A appetite. I mean, I am staring at this slide, looking at kind of 60% of the people in the room had a positive response to the City National deal. And you guys have done a tremendous job with that, and I digested it. As we look forward, what are you interested in, in the U.S. right now, kind of building out that City National footprint? Or is it something at a larger scale? It doesn't seem like there is a lot of competition for you guys right now in the M&A side. So it might be an awesome opportunity for that. So just trying to get your thoughts on that.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [47]
------------------------------
And we'd appreciate if you're meeting targets too.
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [48]
------------------------------
So certainly something that we look at, I think, if you go back a few months, evaluations were very high. They've come back a bit. We are very comfortable with our strategy in the U.S. We are very comfortable with our businesses, our organic growth path in the U.S. I wouldn't rule out that we would do an acquisition. But we don't feel compelled to do an acquisition. There's no urgency to do one. If there is a good strategic fit, a good cultural fit, at the appropriate price, that would be a nice way to continue the growth in new markets, perhaps, for our City National business. That would be something that we would consider. But it's not something that we're racing out to do.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [49]
------------------------------
Sorry. The front row.
------------------------------
Unidentified Analyst, [50]
------------------------------
Just a couple of quick questions. You had mentioned the Securities business is now under City National. Is that within the IHC? Or is that actually been pushed into City, the U.S. banking entity?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [51]
------------------------------
So I was referring more to our management structure. From a legal-entity structure, it's still separate. So it's part of the broker-dealer. Both are under -- both the broker-dealer, which our -- which have Minneapolis business as well as our New York Capital Markets business is under. As well as City National Bank are both under the IHC.
------------------------------
Unidentified Analyst, [52]
------------------------------
Okay. So if you had to really separate that out...
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [53]
------------------------------
(inaudible) not from a legal-entity standpoint. Just from a management standpoint.
------------------------------
Unidentified Analyst, [54]
------------------------------
Okay. I know a lot of banks are having problems with that, that IHC and interlinking and separating the management structure. The -- in regards to the City National, I personally was quite surprised that you used cash, when you had, what appeared to be, a much more attractive currency. I guess 2 questions. Would -- if there were other M&A transactions, would you use cash again? Because the -- when you bought City National, I think, it was going to 6 or 7 ROE. And that seems to put a lot of pressure on the business. And then dovetailing of that, what were the growth targets for City National and are you hitting them?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [55]
------------------------------
So a couple of questions there. And just to clarify, we actually used cash and shares for...
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [56]
------------------------------
But you still used cash?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [57]
------------------------------
Yes, we used a fair amount of cash. I mean there is a diluted impact from the -- if we were to have issued all shares. And that would have put more strain on our return on equity. More strain on our EPS and share price, it -- just from the math. And so we did a combination. We've found what we believe was the right balance. And if we were to do another transaction, it would based on -- it would be based on the size of the transaction, what would be impact also to our CET1 ratio. We didn't want to have too much dilution to that. And we allowed that to fall to the 9.9%, 10% at the time of the close. And now we've gone from 9.9% up to 10.9%. So we wouldn't have done all cash so that, that would've fallen lower. And we would do that on a deal-by-deal basis. And for those -- some of you may recall, we had an Investor Day on City National last year, probably about 15 to 16 months ago. We set out some ambitious targets there. And we're tracking towards them. And we're -- although they are separate legal entities, we are managing those 2 businesses more closely aligned. And we do have a 5-year earnings targets of over $1 billion for those 2 businesses combined. And we're tracking towards those, some pretax numbers. And we're tracking towards that.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [58]
------------------------------
Only time for one last quick question. In the back row, please.
------------------------------
Unidentified Analyst, [59]
------------------------------
Maybe a fixed income question, if I might. Moody's downgraded your rating as well as a couple of your peers a few months back. And left your outlook on negative at that same time. Wanted to get a sense for what do you think is the outcome? Would -- do they stabilize the rating? Or do you believe your rating, it might be at further risk? And what are your overall corporate targets and goals for credit rating?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [60]
------------------------------
That was something we spent a lot of time on. And there is a disconnect between the rating agencies now. And the other rating agencies do have us higher. And if you look at our borrowing cost in the marketplace, the borrowing cost in the marketplace are more closely aligned to that higher rating. And so, I think, the marketplace is looking and understands the risk. And we do not -- we did not feel that the downgrade was merited at the time. And that's part of the process and part of the dynamics of the marketplace. And so they have their opinion and others have different opinions. And we look to funding the marketplace. And we are very comfortable with where we are funding it. That's the spreads that we're funding at right now.
------------------------------
Unidentified Analyst, [61]
------------------------------
Is a AA important for you?
------------------------------
Rod Bolger, Royal Bank of Canada - CFO [62]
------------------------------
It is important to us. It's going to be with bail-in and other regimes coming in. It's going to be something that we continued to look at, and will there be less appetite for rating agencies to give out those ratings? Potentially. But we -- again, the real story is where do we fund in the marketplace. And although, we were downgraded, there wasn't a big cost to us for that. Because our credit spreads didn't really widen very much. They've widened on a short end -- short term for a little bit. But the longer-end funding did not widen.
------------------------------
John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [63]
------------------------------
Fantastic. Well, Rod, we'll leave it there. Thank you very much. We appreciate it. For those of you that were too shy, I believe that Rod is going to be available in the Clinton breakout room. And we also have Bank of Montréal as the next presenter. 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.
------------------------------