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Royal Bank of Canada (NYSE:RY)

2013 Scotiabank Financials Summit

September 04, 2013 10:15 AM ET

Executives

Gord Nixon - President and CEO

Analysts

Unidentified Analyst

Our next speaker is Gord Nixon, President and Chief Executive Officer of Royal Bank. Mr. Nixon began his carrier with Dominion Securities in 1979 after graduating from Queen University. Royal Bank acquired Dominion Securities in 1987 with Gord progressing to Head of Global Investment Banking in 1995 and CEO of RBC Capital Markets in 1999. Mr. Nixon was appointed President and Chief Executive Officer of the Bank in 2001 and Gord has been awarded the order of the Order of Canada and the Order of Ontario. Gord?

Gord Nixon

Thank you, Kevin and good morning everyone; nice to have the opportunity to present this morning. As noted on our first slide all remarks including those made during the Q&A session may contain forward-looking statements which involve the planned assumptions that have inherent risk uncertainties that may differ from actual results.

Turning first to Slide #3, last week as you’re well aware RBC reported third quarter earnings of $2.3 billion and year-to-date earnings of $6.3 billion. Our third quarter results were underpinned by strong fundamentals with record earnings in personal and commercial banking and record earnings in wealth management and strong earnings across our other platforms. We also announced $0.04 or 6% increase to our dividend bringing our quarterly dividend to $0.67 per share, the 5th dividend increase in nine quarter representing a 34% increase.

The increase in the quarterly dividend is higher than most recent increases, which clearly demonstrates the confidence that we have and our ability to consistently grow our earnings. We’re tracking well ahead of our objectives with year-to-date earnings per share growth of 12% and return on equity of 20%. We have a diverse and strong portfolio of businesses that generate significant earnings which we can invest in new growth opportunities while also returning capital to our shareholders.

In Canada, we are the largest Bank and a market leader. Outside of Canada we are leveraging our domestic strength and expertise to grow our businesses globally. We are focused on the largest markets and serving the complex and evolving needs of key global client segments, institutional, corporate and high and ultra-high net worth individuals. These claims value that strengthen stability of RBC and our ability to deliver a broad suite of financial products and services and we are well positioned to serve them through capital markets, wealth management and treasury and investor services.

Banking is a people business and our focus is on hiring the best, not just in Canada but globally, as it is key to winning new business and deepening our client relationships. RBC’s strong risk culture is also an important strength and helps build our strong brand and reputation and underpins our strategy and business activity. We are focused on delivering high quality and sustainable earnings growth, which means pursuing profitable growth. It also means we will pursue opportunities that are aligned to our view of global trends build on the strength and we will deliver strong returns to our shareholders.

Turning to our segments, I’d start with personal and commercial banking on Slide 7. Canadian banking remains the cornerstone of our business representing a little over half of our total earnings. We are number one or two in market share across key product categories and we will continue to expand this lead. We also continue to lead the industry in volume growth taking a disproportionate share of the market. We believe, we can continue to achieve or exceed our objective, which is to grow at a 25% premium to the market for several key reasons.

First, the unparallel size and scale of our multi-channel distribution network allows us to reach more clients when and how they want. We have the largest branch network and mobile sales force leading online banking capabilities and innovative partnerships with top retailers and we continue to invest in expanding our distribution network. For example, we recently opened a small branch in Downtown Montreal something we're look into doing more of, which is the third size of a traditional branch with just 1,500 square feet and with only five employees. But it does provide all the same services of our large branches. This means we can operate cost effective branches in high growth and high value to urban markets.

Second, we're also growing faster than our peers simply because of the breadth and quality of our product offerings. We have excellent financial planning and investment capabilities and an extensive card portfolio and a strong commercial franchise. We're also focused on developing innovative and differentiated products and services to capture greater share of high growth client segments such as retirees, business owners and newcomers to Canada are priority for us.

Finally, RBC has a proven ability to cross some more effectively than our Canadian competitors. We lead the industry with close to 22% of our clients having at least three key products services with us, checking investments and lending compared to a peer average of 15%. We also see opportunities to meet our customers changing needs and provide even more banking products as they shift from borrowings to savings and investment. While growing volumes is a priority we're committed to controlling cost and improving efficiency and productivity.

Particularly, in what it could be a slower growth environment and we remain focused on driving our efficiency ratio to the low 40s and we're moving in that direction. Emerging payments and mobile-based technology is a trend that will significantly reshape our industry and RBC is investing significantly and at the fore front. In the last few months, we launched a number of payment solutions such as Internet Flash and our mobile payment partnership with Bell, Canada.

More recently we launched the first cloud-based secure mobile payment solution in Canada. These innovations are part of a longer term strategy to lead in this space and to meet the changing needs of our customers. Looking ahead, the Canadian economy, although moderating continues to perform reasonably well relative to economies globally. I am confident we can continue to expand our overall retail banking lead in Canada given our strong momentum and leading market positions.

Turning to Slide 9, we’re transforming the way we sell insurance by moving to a more direct-to-consumer model by providing our comprehensive product offering to our own retail insurance stores, proprietary sales forces, contact centers and online presence. Our approach allows us to reach clients more efficiently, deepen the client relationship and cross sell more products. We now sell 1.5 insurance products per client and our goal is to double that number over the next several years.

We also continue to invest in doing things faster and better for our clients. For example. our auto (valley) program reduces the number of client touch points to two. It makes it quicker and simpler for clients in filing an auto claim while significantly improving our productivity and reducing the cost. And our claims clearly value these programs. We rank number one in customer satisfaction in the JD Power and Associates, first Canadian study of auto insurance claims experience.

Turning to wealth management segment on Slide 10; as global economic in market conditions moderately improve, favorable industry trends offer attractive growth opportunities. To start an ageing population is driving demand for more retirement related products, solutions and service. Also the number of high and ultra-high net worth individual globally is growing significantly, up almost 10% in the last year alone according to this year as world wealth’s report which we published in June in partnership with Capgemini.

And those individuals are increasingly looking for wealth management advice and solutions on a global basis. I believe that our asset in wealth management businesses are extremely well positioned to capitalize on these trends.

In Canada, global asset management is the largest retail fund company and continues to extend its lead in mutual fund market share. By leveraging our Canadian Bank distribution network, we consistently ranked number one for both all in and long-term fund assets quarter-after-quarter.

We’re also a leading Canadian institutional asset manager and continue to grow in the United States. Internationally, we’re focused on brining our BlueBay asset management fixed income experience to institutional and retail investors in Canada and U.S. and globally. As we have mentioned before, we would also look at complimentary international acquisitions in asset management to add global equities capabilities to our portfolio mix.

Turning to our wealth management business, RBC is the largest and most comprehensive wealth manager in Canada. We are the leader in fee-based assets more than double than our closest competitor and our revenue for advisors 45% higher than the Canadian industry average.

Overall RBC has industry leading high net-worth market share of 18% and we continue to extend this lead by offering superior advice and best-in-class solutions and effectively collaborating across RBC.

In the United States, we are the seventh largest full served brokerage firm by advisor. We continue to shift towards the fee-based model and average fee based client assets are up 10% this year alone.

Outside of North America we’re building our UK presence by establishing strong international wealth centers in Singapore, Hong Kong and Switzerland to serve the offshore wealth management needs of our high and ultra-high net worth individuals.

We are investing in these markets, which is a drag on earnings but what we believe is the best way to maximize returns over the medium term. I believe our ability to leverage a superior asset management solutions to Canadians and clients globally positioned as well to benefit from favorable industry trends.

Turning to investor and treasury services on slide 12; we are focused creating a specialized custody bank that provides excellence in asset serving with an integrated funding and liquidity business for financial and other institutional investors around the world.

In Canada, we have the leading custody business with more than 40% of the market share of assets under administration. We also have offshore experience primarily based on Luxembourg while we have that largest third party asset servicer. This region is an important market as Luxembourg is the world’s biggest fund distribution center after the United States. Since acquiring the 100% ownership of investor services just year ago, we have been improving the operating efficiency and streamlining the operations while at the same time building revenue opportunities by leveraging RBC’s strong reputation, brand, financial strength and cross-selling activities.

For example, we were recently appointed global custodian for Polaris, a large Italian fund management company. Also we are exploring a number of opportunities with our capital markets clients, opportunities we didn’t have under the joint venture. Looking forward, we are excited about this prospect for this segment, given the long-term fundamentals of the global custody business and the opportunities to deepen client relationships.

Finally turning to capital markets on Slide 13, as you know shifting dynamics in capital markets globally including increased regulation and higher capital requirements continue to present new challenges that they also present for us great opportunities. We believe our strategic business mix, targeted geographies and strong and stable earnings is real competitive advantage and a distinguishing factor from other Canadian banks wholesale operations.

Our rebalancing towards a more corporate lending and traditional investment banking activities and originate to distribute model is reducing our reliance on the secondary trading activities. Our disciplined growth in corporate lending also generates opportunities for our origination and advisory businesses and is important for anchoring customers.

Once a lending relationship is established, our borrowing client will typically use RBC capital market for at least three more products while in the first three years following the loan. However it is important emphasize that our lending is disciplined and underpinned by strong risk management and governance practices.

In terms of our geographic footprint, we are strategically located in the largest investment banking fee pools around the world, namely Canada, the United States, the UK and Asia Pacific. This represents approximately 85% of the global fee pool. Most of our businesses are franking concentrated in North America where over 80% of our people and assets are located.

In Canada, we are the clear market leader and we remain committed to extending our lead and capturing greater market share by focusing on execution, building long-term relationships and expanding our cross-sale opportunities and we have had some significant wins lately. We are advising Shoppers Drug Mart on their $13.8 billion sale to Loblaws and Hudson’s Bay on their $2.9 billion purchase of Saks, ranking as number two globally in retail M&A.

In the U.S. by far the world’s largest market we are a significant player and growing. Our market share is close to 2.5%, a significant share in a highly fragmented region. With more employees now in the United States and in Canada and with over half of our capital markets revenues, the U.S. provides both diversification and an attractive growth opportunity as the economy rebound.

Recently, we have been involved in a number of high profile U.S. deals, including our role in the financing of the proposed $24.4 billion privatization of Dell and serving as financial advisor for two of the largest pure play TV broadcasting deals announced in the last decade.

In the UK and Europe, we are selectively building our investment bank in core areas where we have key strengths. Similar to the U.S., our goal is to shift from trading to a more lending and origination with primary focus on clients in the United Kingdom, Germany and France.

Global capital markets continues to face increasing regulatory reform and we are successfully adapting our businesses to the changing landscapes while many of our global peers have had to restructure and exit certain markets. As an example, between 2000 and 2008, we significantly reduced our U.S. lending book while others where growing because we viewed it as a poor risk reward investment. Since 2008, we have taken advantage of better spreads, stronger capabilities and the exiting of many global banks to grow our U.S. loan book at a compounded growth rate of about 15%. Yet our asset base is about the same size today as it was back in 1999.

Going forward, I believe our capital markets is well positioned to drive consistent, sustainable, profitability while flexibly growing in corporate markets. In closing, our financial strength diversified business and leading market share remains a clear competitive advantage in today’s environment it gives us the flexibility to find the right balance between investing in our businesses for the longer term growth as well as returning capital to our shareholders as we have been doing. Capital deployment is a key role of management and our discipline and varied opportunities gives us a great opportunity to invest in businesses that have reasonable return threshold.

I believe that our domestic leadership and global strategy combined with our focus on delivering high quality and sustainable earnings positions us extremely well going forward. I will end with that and I am happy to take your questions.

Question-and-Answer Session

Unidentified Analyst

Gord maybe if you’ve heard that, just sort of recap your sort of competitive positioning in the capital market side in both the UK and the U.S. and what are the changes to the interest rate business or what some of the regulatory risk is to your platform segment in this market?

Gord Nixon

Yes I man starting at the tail end I mean regulatory risk and I tend to perhaps look at it (inaudible) past full I mean there is regulatory challenges there is also regulatory opportunities. I mean on the challenge front you have got the various capital leverage rules et cetera that all of the banks are managing. My sort of general comment on that is we will manage through it, I mean we have the capacity the ability to manage through the various regulatory rules around liquidity, around capital, et cetera. There are other more direct rules like Dodd Frank and Volcker in particular which could potentially have an impact on different parts of our business and again while the rules are clearly still in a somewhat certain stage I mean we have got a game plan to deal with the various outcomes of specific rules like that.

Again bank holding company rules in the United States will have an impact on different businesses in the United States we have excess capital in the United States and have certainly since the sale of the bank because we left our capital level down there. So our ability to manage and around the financial holding company rules is very good and very strong particularly again relatively to a lot of other non-U.S. corporations that clearly in a very difficult capital position in the United States. So when you put all of the various regulatory challenges together and my advice to most market analysts and people is don’t get overly granular because these rules are influx I mean they are probably going to get worse for the industry before they get better. But I think the issue is the response is that we will just have to manage around the various issues that ultimately are implied by either domestic or (inaudible) or international regulatory regimes.

In terms of our capital markets business again I would emphasize just a couple of things strategically; firstly, we say that our capital market’s business we don’t want to represent more than about 25% of Royal Bank. If you saw from last quarter, if you look at where we are in the quarter in the year we’re somewhere just near 20% to below 25% which is exactly where we would like to be from a positioning perspective. My view is the capital market business provides good opportunities, a good opportunity to generate a strong return but in today’s environment one doesn’t want to be overly weighed in the capital market’s business because it does stress things like whether it’s credit rating because of volatility whether it’s liquidity rules et cetera., so we are very comfortable in terms of where we are.

We are first and foremost in North American capital market’s business, I mean, we have three big markets really which is Canada, the United States, and the U.K. Our biggest market now by a fair margin is United States followed by Canada followed by the U.K. but the vast majority of our business is North American center and when you look at what we were doing internationally Asia is an example, you know, it’s largely to support as a distribution network our activities within North America and Europe and business has been growing as I outlined if you looked at our strategy from a credit perspective in the United States, we’re taking advantage of that.

We have grown our market share to about 2.5%. It doesn’t sound like a large number but if you look at the bulge bracket U.S. firms they’re not significantly higher than that. There is one or two are big banks they’re around 6.5% to 7% but generally speaking a lot of the big bulge bracket firms would be as you think of them are big international banks will be somewhere between that sort of 2% and 5% range. So we have been positioning ourselves quite effectively and transitioned away from an overweighting trading towards a much different model going forward and if you look what we were trying to do in U.K. it’s very similar to that.

The, U.K., I would say is at an evolution which is probably four to five years behind the United States which we have been working on that strategy for a long time. We’re moving to originate distribute module in the U.K. and Europe focused on corporate customers. We announced that we are getting out of sovereign debt markets in a number of countries where we didn’t have seen enough market shares simply because the returns are too low, I mean, you don’t get paid for providing liquidity in capital to those sectors and we have a history of making very strong decisions to deploy capital where we think we can generate better returns.

So the Europe and the U.K., we’re focusing more toward origination and corporate and distribute models and we sit slightly slower stage in terms of evolution and in terms of capital market’s performance again the corporate investment banking side has been going very-very well and the trading side has had some volatility because of well last quarter as we talked about at the quarterly call, there was some impact as result of the tapering announcement by the U.S. government, you simply saw spread widened against treasuries which is challenging for a fixed income business.

And most of that is starting to normalize and but as I say I think when you look at what we’re trying to do strategically in that market is to move much more toward originate, distribute, corporate leverage our relationships with a much lesser dependence on trading and it provides us with a high-degree of optimism in terms of that business going forward.

Unidentified Analyst

On that notice, thanks Gordon to the Royal Bank. Thank you very much.

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