Royal Bank of Canada F4Q07 (Qtr. End 10/31/07) Earnings Call Transcript

Nov.30.07 | About: Royal Bank (RY)

Royal Bank of Canada (NYSE:RY)

F4Q07 Earnings Call

November 30, 2007, 1:30 PM ET

Executives

Marcia Moffet - Head of IR

Gordon M. Nixon - President and CEO

Morten Friis - Chief Risk Officer

Janice Fukakusa - CFO

W. James Westlake - Group Head, Canadian Banking

Charles M. Winograd - Group Head, Capital Markets

Analysts

Jim Bantis - Credit Suisse

Robert Sedran - National Bank Financial

Brad Smith - Blackmont Capital

AndrÈ-Philippe Hardy - RBC Capital Markets

Mario Mendonca - Genuity Capital Markets

Michael Goldberg - Desjardins Securities

Shannon Cowherd - Citigroup

Ian de Verteuil - BMO Nesbitt Burns

Sumit Malhotra - Merrill Lynch

Darko Mihelic - CIBC World Markets

Operator

Good afternoon, ladies and gentlemen. Welcome to the RBC 2007 Fourth Quarter Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Marcia Moffat, Head of Investor Relations. Please go ahead, Ms. Moffat.

Marcia Moffet - Head of Investor Relations

Thank you, operator, and good afternoon everyone. I would just like to caution you that this call may contain some forward-looking statements.

I'll introduce the speakers of the call and the other participants in the room here today. We have Gord Nixon, President and CEO; Barbara Stymiest, Janice Fukakusa, Morten Friis, Chuck Winograd, Jim Westlake, George Lewis, Peter Armenio, and Marty Lippert in the room today. Our call will end at 2.45 PM this afternoon, and I would like to just ask all of the analysts to limit themselves please to two questions each so that we can make sure that everybody gets a chance to have their questions answered.

Thank you very much, and I will now turn the call over to Gord Nixon.

Gordon M. Nixon - President and Chief Executive Officer

Thank you Marcia, and good afternoon everybody. I am pleased to report that RBC had recorded record financial results this year in 2007 with earnings of $5.5 billion which is 16% up from a very good year in 2006. This performance reflects our leadership in our core Canadian businesses and growth in our non-domestic operations.

An year that was marked by some challenges in the financial markets all of our businesses continue to perform extremely well. Canadian Banking and Wealth Management continue to underpin our franchise delivering record earnings for the year. We are on a strong path for the future. We have invested heavily in our Canadian Banking platform and should begin reaping the benefits of our investments as we move into the upcoming year. We expect to see Canadian Banking's revenue growth accelerate and expense growth flow.

Wealth Management delivered outstanding earnings growth of 26% driven by our leadership in Canada, and we are also seeing results from our target investments outside of Canada.

Our U.S. and International Banking businesses continue to evolve and grow, and RBC Dexia delivered record revenues this year. This segment had great results if you isolate the affects of the U.S. housing environment on our U.S. residential builders finance business, which we will talk about in a moment. We also had good results in capital markets with broad based revenue generation across most businesses. Capital markets earnings were at record levels if you exclude the $160 million after-tax write down that was announced earlier in the quarter.

Our solid performance reflects the diversity of our businesses across geographies and products and our strong risk management practices. I am certainly pleased with how we manage the business in 2007. We succeeded in delivering solid returns to our shareholders while continuing to significantly invest for future growth in all of our business segments. I would like to briefly comment on our U.S. subprime exposures in a few topical areas.

We do not originate U.S. subprime and our net exposure to it is minimal. We have $216 million of net exposure to U.S. subprime CDOs of ABS. We also have $388 million of exposure in US subprime RMBSs which is classified as available for sale and which we intent to hold to maturity.

Combined, these amounts represent less than 0.1% of our assets. In addition, we have de minimus dealings with structured investment vehicles or sales as they refer to, and Canadian non-bank sponsored ACB with general market disruption. We are not and have never been a significant distributor or liquidity provider for these products. Our exposure to hedge funds is modest and our underwriting commitments to pre-correction LBOs are also minimal.

In aggregate, these amounts are very manageable and we have provided further detail in our various discloser documents and Morten is going to elaborate on these following my remarks.

Turning to our 2007 performance, the table on slide 5 shows our 2007 performance compared to our financial objectives. Our diluted earnings per share growth of 17%, ROE of 24.6% and dividend payout ratio of 43%, compared favorably to our stated annual objectives and were due primarily to performances across our Canadian Banking global wealth management businesses.

We return capital to our shareholders through dividends, which we increased twice this year for a total increase of 26% and we repurchased 11.8 million shares. Our capital position remained strong with our Tier 1 capital ratio of 9.4% which is comfortably above our target. Our defined operating leverage was below our annual objective, reflecting higher cost supporting our growing businesses and investments in future growth initiatives, including acquisitions.

On slide 6, you will see that our total shareholder return was 16% for the year ended October 31. Our three-year returns were 25%, five-year 19%, and 10-year 15%. And relative to our peer group, we delivered top quartile returns over the past three and ten years and second over the five-year period.

Our results were made possible by a clear focus on three strategic goals. They are; to be the undisputed leader in financial services in Canada, to build on our strengths and banking, wealth management and capital markets in the United States, and to be the premier provider of selective global financial services. We think we made great strides in 2007 towards achieving these long-term goals and I'd like to highlight some of those areas.

In Canada, our retail business has demonstrated leadership throughout the year, setting an excellent foundation for future growth. This past year, we generated profitable revenue growth and positive operating leverage in our Canadian Bankingrelated operations, while investing in client facing staff and branches. We also introduced a new suite of personal deposit products. We grew Canadian Banking related lending volumes by 11% and deposit balances by 6% over 2006, and we were recognized by Sinavate [ph] is the best among our large Canadian competitors for service and value we provide to our customers in our branches.

In Canadian Wealth Management, we increased assets under administration by 9% over '06. In global asset management, we grew assets under management by 13% over the year and maintained our lead in net sales of long-term funds in Canada for 16 consecutive quarters. Our broad-based capital markets businesses led in most elements for the Canadian market and we continue to differentiate ourselves from our Canadian peers by leveraging our global capabilities.

Turning to our second goal, our progress in the U.S. does continue. In 2007, we made significant steps towards our goal of becoming a preeminent bank for businesses, business owners and professionals within our footprint. We grew loans and deposits in our U.S. banking operation in 2007, and I am encouraged by the work we have done to build a foundation for future growth especially in the phase of today's demanding market conditions.

We grew our branch network by 24% over the last year through acquisitions and de novo branches and invested in our technology platform to support our expanding network. While our U.S. banking business is managing through the effects of the recent downturn in the U.S. real estate markets, particularly our builders business, we are confident and that we will... and Morten will elaborate a little on that, and we certainly remain committed to our long-term strategy of building a strong retail banking operation in the U.S. Southeast.

Our pending acquisition of Alabama National is evidence of this commitment and will extend our branch network by one-third in key states. Alabama National fits extremely well within our existing footprint. We will have our over 450 branches following the acquisition providing us with a solid platform in our priority region.

In U.S. Wealth Management, we continue to build scale by attracting new financial consultants and increasing their productivity. We also acquired J.B Hanover, [ph] which expanded our wealth management presence in high growth markets in New Jersey, Florida, and Pennsylvania.

In our U.S. Capital Markets business, we continue to leverage our bulk bracket positioning in Canada to provide expertise and product breadth to companies in the United States mid-market. In 2007, three acquisitions helped us expand our client base and enhance our capabilities in cash equities, municipal finance and U.S. mergers and acquisitions.

Turning to our third goal, most notable development; with the announcement of our intention to acquire RBTT Financial Group, this is a perfect complement to our current footprint in the Caribbean, and will create one of the most extensive banking networks in this very good region. Also our core strength in international truck services and wealth management is helping us drive success as the top 20 global private bank, and we continue to expand our presence by opening offices in different international cities.

Finally, we continue to build on our global capital market strength by focusing on select areas, where we have competitive strengths including fixed income, infrastructure, mining, and energy. Overall, we are certainly pleased with our achievements in '07 and we are looking forward to 2008 from the position of strength.

Looking ahead, slide 8 outlines our annual performance objectives for '08. These are based on our three strategic goals and our economic outlook for next year, and we are defined by measures that we believe will generate strong returns for our shareholders. Our economic outlook is detailed in our annual report. Generally speaking, we anticipate a slower economic environment next year, and expect the financial market volatility will persist into early 2008 as lenders and investors remain cautious given the U.S. slow down... sorry, the slowdown in the U.S. housing market.

Our 2008 objectives for ROE defined operating leverage Tier 1 capital and dividend payout ratios are unchanged, reflecting our continue commitment to strong revenue growth and cost containments as well as sound and affective management of capital resources. In addition, our objective is to grow diluted earning per share by 7% to 10%. Our objectives factor in the affect of our pending acquisitions of Alabama National and RBTT. We intend to fund these partly through common shares and expect to unclear related upfront costs. We expect Alabama National will close in early 2008 and RBTT to close in the middle of the year.

We expect our provision for credit loss ratios to trend up towards historical averages, which is inline with our view of the overall credit environment and part of our planning process. While we look ahead with some caution given the economic environment and understand the current market volatility and certainly, we nevertheless have confidence and the capabilities of the organization, our management team and our people to deliver on our 2008 objective and our commitment to generate top quartile total shareholder returns over the medium term.

With that, I'll turn Morten.

Morten Friis - Chief Risk Officer

Thanks, Gord. I will start with the review of key areas of investor focus, and then I will provide an update on our credit portfolio.

In October, the credit markets deteriorated dramatically after rating agencies downgrade the broad group of U.S. based subprime residential mortgage-backed securities and collateralized debt obligations of our asset-backed securities. Following these events we've recognized losses in our capital market segment of $357 million pre-tax or $160 after-tax in compensation adjustment. This charge consisted of two components. One, write downs of the fair value of direct holdings of U.S. subprime RMBS and CDOs of ABS; and two, write downs on a fair value of related credit default swaps.

Our capital markets holdings of RMBS and CDOs of ABS rose primarily in relation to our roll and structuring CDOs of ABS and classified has held for trading with unrealized changes in fair value reflected non-interest income.

On other holdings of RMBS... our other holding or RMBS on a classified is available for sale and unrealized changes in fair value are generally reflected in other comprehensive income that are reflected in non-interest income only as management determines that it's appropriate that the value be written down.

Slide 10 outlines U.S. subprime exposures in other areas in recent investor focus. As of October 31, 2007 capital markets had $216 million of net exposure to U.S. subprime CDOs of ABS after taking into consideration protection provided by credit default swaps. The credit default swaps with counter parties rated less than AAA by S&P and Moody's providing protection of $240 million recorded at their fair market value of $104 million. Other credit default swaps provide an additional $1 billion of protection against our growth exposure and either collateralized or with counter parties rated AAA by S&P and Moody's.

Capital markets had no net exposure to U.S. subprime RMBS after taking into account credit default swaps that provide $1.1 billion of protection, and are either collateralized or with counter parties rated AAA by S&P and Moody's.

Finally, we had $388 million of exposure to U.S subprime RMBS recorded as available for sale, which we intend to hold them to a maturity.

Looking at Canadian non-banks sponsored asset-backed commercial paper, the liquidity is contingent on a general market disruption. Our participation in this market is nominal. As of the end of October we had $4 million of direct holdings, we are not a significant distributor or liquidity provider in this market, and we do not have any Canadian non-bank asset-backed commercial paper in our money market funds.

We respect the structured investment vehicles or SIVs we do not manage any and at the end of October we had $1 million of direct holdings, $140 million of committed liquidity facilities, and $88 million of normal course interest rate derivatives. Our liquidity facilities remain undrawn as of October 31st, as we do not consider any of our positions [ph] to be uncared.

Turning to leverage buy-out loan underwriting commitments, at the end of Q4 we had $1 billion in pre-correction underwritings, many of they were structured and price before the credit environment changed in the summer. No single commitment is over $250 million. We continue to sell this down and overall we are optimistic and our ability to place our outstanding commitments at appropriate prices.

Our exposure to hedges funds in minimal predominantly collateralized and not concentrated in specific funds or strategies. We conduct regular extensive due diligence on our hedge fund counter parties and have prudent limits on our exposure to individual names and sector as a whole.

In order to alleviate any concern investors have about Alt-A exposure in RBC and Centura we have only $100 million that could be classified in as Alt-A in the residential first and home equity portfolio is of $4.2 billion.

Looking at slide 11 trading losses at the of October reflects the write-downs in capital markets that I described earlier, resulting in one day of net trading loss that exceeded the daily global VAR. The volatility and daily trading revenue in Q4 reflected difficult market conditions in both interest rate and credit related products. Overall, we remained well within our VAR and stress limits. The outcomes from a risk and P&L perspective during the quarter were consistent with our risk measures.

The volatility also created opportunities, and we experienced several days of significant trading gains across different businesses. Our trading businesses are well diversified across asset classes and geography, which is helpful and managing through demanding markets.

Moving onto credit, on slide 12, the overall quality of our loan portfolio remains steady for most of 2007. We remained well within acceptable range for loss rates although we did see credit quality weaken in certain areas. In our U.S. & International Banking wholesale portfolio of the U.S. residential builder finance business was impacted by the housing environment. Higher impaired loans particularly in California and Georgia are largely contributed to the increase in PCLs in this segment. The increase in PCL is reflective of us taking steps earlier on to address the credit environment.

We believe we are well equipped to manage through this environment or build the financial clients a reputable well-established and duration of the portfolio is relatively short. Over the last 12 to 18 months we have actively reduced our business production in some of the less favorable markets across the U.S. Also to give some perspective to this portfolio was small in the context of RBC representing approximately 1% of our total loan portfolio.

I'll also make a few comments about our pending acquisition of Alabama National Bank Corporation. We have performed stringent due diligence on ANB's loan portfolio and continue to monitor it actively. We can not publicly disclose the size of ANB's residential builder finance portfolios since this information is provided to us confidentially as part of our due diligence process. However, ANB has publicly disclosed that they have $2 billion in construction land development and other land loans, and their residential builder finance loans are part of this portfolio. The remaining 60% of their loan portfolio consist primarily of mortgages, home equity lines, commercial real estate and commercial and industrial loans

ANB has a very strong credit culture with excellent risk management and loan underwriting practices. They diversely no unsecured lending and historical charge-offs are well below their peers. We are comfortable with a quality of their portfolio.

In the Canadian wholesale portfolio, we have no major sector-specific concerns, and there are no negative trends as credit quality remains well within acceptable levels. Overall, the credit quality of RBC's retail portfolio remains in acceptable range and relatively stable.

On slide 13, you will see total provision for credit losses increase compared to the prior year and over Q3, and retail loans in business specific provision for credit losses compared to prior year was primarily attributable to higher credit card provisions, which are tracking to levels we expected. Volume growth also contributed to the increase in specific provisions for retail loans. The corporate loan portfolio continues to perform well with no significant negative trends and continue to have net recoveries.

In summary, our loan portfolio is stable with business [ph] confined to specific areas. Going forward into 2008, we expect overall loan portfolio loss rate to trend higher towards the historical averages, largely because of increases in the areas referenced today.

At this point, I'll turn the call over to Janice Fukakusa

Janice Fukakusa - Chief Financial Officer

Thanks Morten. Slide 15 provides an overview of our quarterly performance. Net income was up 5% from last year and largely driven by strong performance in Canadian Banking and global wealth management. Our results were affected by three headings that we announced in mid November. Morten addressed the write downs, and I will explain the other two items when I review the Canadian Banking segment.

Appreciation of the Canadian dollar against the U.S. dollar reduced our earnings in the quarter by 4% over last year, and 2% over last quarter. Non-interest expense rose 5% from a year ago because the prior cost supporting business initiative. We grew our client facing staff, made acquisitions and added branches. Expenses were down slightly from Q3 versus, reflecting lower variable compensation in capital market and the moderating pace of investment in our businesses.

Turning to slide 16, our Tier I capital ratio in this quarter was 9.4%, which is comfortably above our objective. I would like to add that our access to liquidity has not been impacted by the market conditions this quarter. We are a regular issuer in a variety of markets globally, and this quarter we continue to have access to both short and long-term funding.

I'll now review the quarterly performance of our four business segments. Starting with Canadian Banking on slide 18, this quarter, we have recorded a gain of $326 million pre-tax, $269 million after tax from the exchange of our membership interest in the Visa Canada Association, the shares Visa Inc. We also recorded a charge against revenue of a $121 million pre-tax, $79 million after tax and an increase in our credit card customer loyalty reward program liability. The adjustments to our loyalty reward liability reflects higher redemption rate assumptions, consistent with our strategy of encouraging clients to more fully use the RBC reward points that they accumulate by providing them with a broader range of redemption options. We expect no significant change in our run rate cost.

Canadian Banking related net income was up 40% over last year, and 34% over the third quarter. Excluding the Visa gain and adjustment to our royalty reward liability, net income grew 7% and 2% from last year and last quarter, respectively. We had strong volume growth, particularly in residential mortgages and personal deposits. Offsets included a higher provision for credit losses which Morten discussed. Compared to last year, expenses were higher, reflecting the significant reinvestments we have made over the year. Our pace of investment has moderated from the third quarter, and resulted in our NOI [ph] being flat from Q3.

On slide 19, you will see that we experienced some margin compression compared to the previous year and previous quarter. This reflected two factors; one, ongoing changes in product mix as we continue to have higher growth in lower yielding products, such as, home equity lending, and two, narrower spreads on prime-based lending products in the quarter, resulting from dislocation in the credit market. It's worth noting that with our significant volume growth, we grew our net interest income by 7% over the last year.

Turning to global insurance on slide 21, we have solid results this quarter. Business growth was off set by claims experienced, which was less favorable than a year ago. Our insurance net income was consistent with the third quarter. Slide 22 shows wealth management, which grew earnings 10% from a year ago, and 2% from last quarter. Appreciation of the Canadian dollar against the U.S. dollar reduced earnings by 4% compared to last year and 2% compared to last quarter.

Strong performance across all our business lines contributed to the increase in revenue over last year, reflecting growth in fee based client asset, the inclusion of J.B. Hanover, and loan and deposit growth in our international Wealth Management business. Our earnings are up 26% over last year; and since 2006, we have increased the proportion of fee based revenue to total revenue from 50 to 53%. Non-interest expense grew from the last year on higher variable compensation commensurate with higher commission based revenue, cost related to J.B. Hanover and investments for future growth. These include adding investment advices and other client fee professional and opening international offices.

Moving on to U.S. and international banking on slide 24; earnings decrease over last year and last quarter, primarily reflecting the deterioration in the U.S. housing market, which accelerated in fourth quarter. Revenue in our banking increased for the year on loan and deposit growth from both acquisitions and organic growth. Revenue decreased over the third quarter as growth was offset by the reversal of accrued interest on impaired loans, early redemption of trust preferred debt and the strengthening of the Canadian dollar against the U.S. dollar.

You will see that U.S. net interest margin decrease by 15 basis points from the third quarter. This is because of the two items I just mentioned, early redemption of trust preferred debt, reduced NIM by 9 basis points and the reversal of accrued interest related to loans that were classified, reduced NIM by a further 6 basis points. The impact of early redemptions in shorter-term and we will get the benefit going forward. RBC Dexia's revenue was up 20% from last year due to a growing client fees and higher transaction of business. Revenues declined over last quarter because of seasonally higher results in third quarter.

Non-interest expense was up over the prior year reflecting investments in U.S. banking including adding 56 branches through acquisitions and opening 10 de novo branches. Business growth in both banking and RBC Dexia also contributed to higher expenses. Compared to last quarter, non-interest expense was down due to the favorable impact of the stronger Canadian dollar on U.S. dollar denominated expenses and lower expenses in RBC Dexia reflecting seasonally lower business activity.

Turning to capital markets on slide 26, as Morton explained, we recorded a charge of $160 million after tax, which produced our net income. Also appreciation of the Canadian dollar against the U.S. dollar and British pound reduced earning by $28 million from last year and $19 million from the third quarter.

As a result of these two factors, revenue and net income were down over last year and last quarter. The strength of our diversified portfolio have mitigate the impact of these factors. Many businesses performed well in the quarter, including equity derivatives and foreign exchange trading, M&A and our daily cash equities business. Non-interest expense decreased over last year in the third quarter largely due to lower variable compensation.

On slide 28, you'll see a break down of RBC's total trading revenue. Compared to last year and last quarter, interest rate in credit revenues were down due to the valuation charge. Equity derivative, foreign exchange, and commodity trading results were up over last year and last quarter on the expansion of certain equity trading strategies that benefited from the higher market volatility.

And at this point, I'll turn the call over to the operator to begin questions and answers. Operator?

Question And Answer

Operator

Thank you. We will now take questions from the telephone line. [Operator Instructions]. The first question is from Jim Bantis from Credit Suisse. Please go ahead.

Jim Bantis - Credit Suisse

Hi. Good afternoon. Question for Jim Westlake regarding the Canadian banking operations; Jim, the operating leverage was about 100 basis points when you isolate of the insurance operations and Gordon had already said in his commentary that the revenues were going up and expenses were going to moderate. So I guess, we're going to see some improvement in the operating leverage, but if you could just kind of isolate where you're seeing the expenses dropping off with particular buckets of expenses and when you think of your three product areas, personal business and cards, where do you see the revenue pick up coming from?

W. James Westlake - Group Head, Canadian Banking

Well, thanks, Jim. Look I just... I think I should go year-over-year. For three consecutive years we've had 4% operating leverage across those three core banking businesses and that was included for this year. And I wish we were good enough to time everything perfect every quarter, but we didn't; and we kind of picked that on expenses last quarter in our investments. It mainly evolved with opening new branches, adding new client, facing people. We think we'll see a very balanced revenue growth over those three business areas. We are... we feel very good about the market momentum and the volumes that we are doing across all of them.

Particularly, I would say if I had to highlight, I am encouraged have been very consistent. The home equity financing and the personal financial and the commercial segment of our business financial services. And as we peaked on our expenses we expect the revenue growth to continue and just on a quarter-over-quarter basis we expect it to continue to decline as we go through next year and we are holding ourselves to that same standard in terms of the strong operating leverage going forward.

Jim Bantis - Credit Suisse

Jim, could you give us an update with respect to the personal deposits market share or the strategies you put in place reaping some rewards?

W. James Westlake - Group Head, Canadian Banking

We feel very good. The last number I saw at the end of October of $4.6 billion in terms of the assay [ph] account and still roughly 50% coming from that new money. So, that certainly is not having any kind of negative impact on spreads, but it is having a very positive impact on deposit market share. We are also seeing a reasonable pick up in terms of new product line up where we are seeing core deposits through checking accounts coming up as well.

Jim Bantis - Credit Suisse

So, just specifically as the personal core deposits market share the GAAP between you and number one do you actually see closing, you haven't disclosed that this quarter?

W. James Westlake - Group Head, Canadian Banking

I... well I think we, it's hard for us to necessarily know by individual product it's more of an aggregate number for us. We can give you our individual numbers, but certainly if we look at the trajectory over the last quarter our numbers grew consistent with the leading companies in the market, I think we may have had the highest rate of growth, although I can't confirm that entirely.

Jim Bantis - Credit Suisse

Great. Thank you. I'll re-queue.

Operator

Thank you. The next question is from Robert Sedran from National Bank Financial. Please go ahead.

Robert Sedran - National Bank Financial

Hi, good afternoon. Just a couple of questions; first on if I am looking at credit quality in the U.S. is it fair to say it was a number of credits that would have deteriorated during the period or was it one or two specific names that were problem? And second are you able to tell us in terms of the increase in provisions what percentage or what number may have come from the old Centura kind of network versus some of the more recent acquisition?

Morten Friis - Chief Risk Officer

This is Morten Friis. First in terms of numbers of credit it was as we said entirely almost restricted to the builder finance portfolio, but within the builder financial portfolio there were a number of names double-digit names moving into non-accrual that cost you the provision to go up. In terms of the distribution of problem accounts as we said in the comments they are predominantly in the more difficult markets, and for us it is showing up in Georgia and California, and there are in the Georgia numbers there is a reasonable representation of assets that came with the recent flag acquisition.

Robert Sedran - National Bank Financial

Okay.And just turning quickly to the added disclosure you have given on the hedge portion of some of the subprime RMBS and CDO exposure, one of your competitors provided a little more detail in terms of exposure to some that they are a little bit more concerned about versus others that they are not concerned about. Can you breakdown the exposure in terms of number of counter parties and whether there is any that you maybe particularly concerned about?

Morten Friis - Chief Risk Officer

We can't comment on individual names, I think beyond the numbers that I went over in my comments where I highlighted the fact that we have credit default swaps of $240 million recorded a fair market value of $104 with counter parties late as less than AAA. I can't provide any detail beyond that.

Robert Sedran - National Bank Financial

And in terms of the AAA, I guess you are not interested in going any further in terms of the number of counter parties or --?

Morten Friis - Chief Risk Officer

No.

Robert Sedran - National Bank Financial

Okay. Thank you.

Operator

Thank you. The next question is from Brad Smith from Blackmont Capital. Please go ahead.

Brad Smith - Blackmont Capital

Thanks, very much. Just couple a quick questions on credit derivatives as well I just noted in your trading data that after adjusting for the write downs the interest and credit trading profits it looks like they came in around $170 million in the quarter, which I gage to be about a $100 million below the run rate I was just wondering were there particular losses incurred in that book of business and could you quantify them for us?

Unidentified Company Representative

Well, again looking back to August you'll recall that in a lot of fixed income businesses there were basically repricing of spreads that resulted in losses and that was spread over a number of portfolios.

Brad Smith - Blackmont Capital

And is the aggregate about the $100 million shortfall from run rate?

Unidentified Company Representative

Yes, I mean, it's probably if you added up all the business might be a bit more, but because basically we also had business going on during the quarter in the run rate sense. But, it was the August affect primarily.

Brad Smith - Blackmont Capital

Okay. And then last question just in reviewing your disclosures in your recently published annual report, credit derivatives really took off it looks like in terms of notionals in terms of credit equivalent amounts and risk weighted asset allocation, so I was just wondering because we only see that really on an annual basis, can you give me some sort of timeframe is that a steady build through the year or with that been isolated in the back half of the year. Can you give me some sense for that?

Morten Friis - Chief Risk Officer

So, it's Morten Friis calling, I'm not quite sure exactly what disclosure you are referring to, if you are talking about increases in credit protection bought and sold there have been some increases associated with some specific capacity related hedges, but I am not sure.

Brad Smith - Blackmont Capital

Morten, I am referring to the notional amount of credit derivatives, which increased from about $220 billion to $399 billion at the end of the year reflecting a fairly substantial increase in activity level. And I am just wondering if that activity was building throughout the year or if it was concentrated in the back half for the last quarter of the year.

Morten Friis - Chief Risk Officer

To the extent we are talking about the disclosure in credit derivatives provisions on our lending portfolios. There were a couple of transactions towards the end of the year. Transaction specific capacity related hedges, but there was no particular timing pattern to that activity. We may have to get back to you on further details. They are much rather connecting with the question you are answering?

Brad Smith - Blackmont Capital

Yes, the question is related to your trading of credit derivatives, so I disclosed the note 7 in your annual report. Thank you.

Operator

Thank you. The next question is from AndrÈ Hardy from RBC Capital Markets. Please go ahead.

AndrÈ-Philippe Hardy - RBC Capital Markets

Thanks. Two questions back to you Morten please on the credit. You isolated Georgia and California, but you didn't mention Nevada, Florida, Michigan, Arizona, which are all areas that have had issues. Is that because you are a smaller player there or it's just a matter of timing? And secondly probably for Chuck with a lot of questions about bond insurers, the muni market would seem at risk from an underwriting standpoint and perhaps write downs on inventories. I suspect I am not the only one who sees that coming, so can you maybe talk about how big a business it is for the Royal Bank, and what the Bank may have done to hedge itself or not against the detail rating environment in the muni market?

Morten Friis - Chief Risk Officer

In terms of the... it's Morten again, on the credits, in terms of geographic spread in the US, I guess, I would say two things. Number one, we have as we noted taken some action over the last s12 to 18 months to scale back origination end of the markets that look troublesome and some other ones that you mentioned are ones where we have scale back our production significantly.

Unidentified Company Representative

With respect the muni market, I am just sizing at it. It's a very attractive business for us when we expect to have an excellent future and just sizing at it. It's over 5% of our overall business, and one of the bigger fixed income businesses we have. With respect to the bond insurers, there have been a number of things happening in muni market. In the trading side over the last year, we've reduced our portfolios dramatically between spring and fall, and while we... well again, as part of what I was describing earlier, there were some hits in the third quarter. We would not have had a substantial... wouldn't been a substantial part of the fourth quarter. And basically, we don't expect any impact really whatsoever from the bottom line impact in the muni business. A lot of it is already been are go to the marketplace and the standpoint of places are there. And as I say we've very small portfolios and we don't expected to change the issuing pattern. And the issuing part of that business is the bigger part of the business for us that where we have very little inventory.

AndrÈ-Philippe Hardy - RBC Capital Markets

Okay. Thank you. Back to you Morten, are you willing to give us geographic mix to so called trouble states?

Morten Friis - Chief Risk Officer

We are, broadly speaking, not in the more troubled markets. I mean in terms of providing you a geographic portfolio breakdown, we are not prepared to go there. But I can let you know that from a current portfolio standpoint, our participation in the more difficult market is relatively modest, beside from the two that I mentioned.

AndrÈ-Philippe Hardy - RBC Capital Markets

Thank you.

Operator

Thank you. The next question is from Mario Mendonca from Genuity Capital. Please go ahead.

Mario Mendonca - Genuity Capital Markets

A question about the AAA rated insurers covering... covering a subprime exposure. Could you let us know if any of those happen to be AAA rated mono lines?

Morten Friis - Chief Risk Officer

They are... the... it's Morten again. In terms of the credit derivate protection, it is predominantly from mono line insurers rated AAA by S&P and Moody's.

Mario Mendonca - Genuity Capital Markets

All right. And you talked a little bit about the issues in the U.S., the builder finance. It would be helpful us to understand whether this quarter that the move to $72 million from $17 million this past quarter, was there any sort of catch up there that would cause it to look so large in one quarter and we sort of migrate back down to something more, something we're used to or is 72 really the new way to look at this?

Morten Friis - Chief Risk Officer

No. I guess, first of all we don't provide forward-looking statements on provisions. So it's a little bit hard to answer it too exquisitely. The way the market has evolved there is, was clearly a significant movement during the fourth quarter of builders that ended up recognizing that they could no longer service their debt or close to that point, so there was a fairly rapid movement towards the later end of the quarter. We continue to see some movement of builders that whether or not... I would say that from RBC's portfolio standpoint as a whole and the statements that we have made around expecting to trend towards more historical levels continue to be accurate. And the builder finance issues will be part of that, and I would anticipate it would normalize over the near to medium term. But, it's... I can't provide comments beyond that.

Operator

Thank you. The next question is from Michael Goldberg with Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

Thanks. I also have the questions about credit quality. Your gross formations were up quite dramatically this quarter. Would you characterize that as a bulge where you would expect to fall back to a lower level, or should we look at the full year gross formations of $1.6 billion last year as really just the likely to be well exceeded this year, given that you have almost $600 million in the fourth quarter.

Morten Friis - Chief Risk Officer

Well, in terms of the formations, it might be I assume you have already have looked at it. But if you look at the pattern displayed in supplementals in terms of where the increase in formations largely have come from, you can see that a large chunk of it is out of the builder finance portfolio. The overall view for the year, as I said, it's that our run rate of 40 basis points in PCL is a level that we are likely to see coming out of the formations that we have coming over the next little while.

Michael Goldberg - Desjardins Securities

Okay. And I have one other question. You noted your nominal participant as distributor in Canadian asset-backed commercial paper, but can you actually quantify how much of this paper that you sold is still in the hands of clients just so that we can gauge litigation risk for you and for other banks?

Morten Friis - Chief Risk Officer

It's difficult to call much beyond what was in our comments, I mean it's a de minimus amount, predominantly to large sophisticated institutional investors and we frankly have no concern about our litigation risks.

Gordon M. Nixon - President and Chief Executive Officer

Yes, I mean Michael, it is a very, very small amount. I mean we don't disclose the specifics, but we were just not a large distributor of that I think it's isolated to one name and that's not a large number.

Michael Goldberg - Desjardins Securities

Okay that's great.

Gordon M. Nixon - President and Chief Executive Officer

Nor a difficult structure.

Michael Goldberg - Desjardins Securities

Okay. And if I could one more... actually this is just a number question. Page 5 of the sub-pack and I've asked Amy this; if you take the 326 Visa gain out from the other non-interest revenue, you are left with $226 million in that number, it's an amount that's quite a bit higher than prior periods. I am wondering what else is in that number to have caused to it increase?

Janice Fukakusa - Chief Financial Officer

Hi Michael, it's Janice speaking. In that number, we have our mark-to-market gains and losses on our credit loss. And also our structural rate derivative hedging is the gains and losses are marked through here. So and of course regular other income might come ongoing sundry income of the various business platforms.

Michael Goldberg - Desjardins Securities

So, is it the mark-to-market that on the CDS that really boosted that number? I think it was up by about $75 million from prior periods?

Janice Fukakusa - Chief Financial Officer

Last year or last quarter?

Michael Goldberg - Desjardins Securities

Last quarter.

Janice Fukakusa - Chief Financial Officer

Last quarter, it would be some derivative mark-to-market. Last quarter, we also had positive mark-to-market on our credit default slot. So while there would be an increase, it would create cause some of the positive variance. If you're looking at trailing rate quarter, some of that has to do with also a structural book swaps [ph].

Michael Goldberg - Desjardins Securities

Is it possible to actually quantify these amounts just so that makes it easier to follow what... follow the numbers?

Janice Fukakusa - Chief Financial Officer

We don't normally quantify them, because on a quarter-to-quarter basis there is a bit of volatility, but they're fairly consistent.

Michael Goldberg - Desjardins Securities

Okay. Thank you.

Operator

Thank you. The next question is from Shannon Cowherd from Citigroup. Please go ahead.

Shannon Cowherd - Citigroup

Hi. The newest detail the various types of the IE sitting up there [ph] for the $40 billion in multi-seller conduit, what percent are Canadian assets versus non-Canadian?

Janice Fukakusa - Chief Financial Officer

This is the Canadian asset-backed commercial program.

Shannon Cowherd - Citigroup

Is it all Canadian, because it doesn't exclusively say.

Janice Fukakusa - Chief Financial Officer

Yes,it's about a third; two-thirds is U.S. and one-third would be Canadian.

Shannon Cowherd - Citigroup

Thank you.

Operator

Thank you. The next question is from Ian de Verteuil from BMO Capital Markets. Please go ahead.

Ian de Verteuil - BMO Nesbitt Burns

Thanks. Gord, could you imagine what the questions would be like if didn't do 23% and 23% ROE in the quarter?

Gordon M. Nixon - President and Chief Executive Officer

Thank you, Ian.

Ian de Verteuil - BMO Nesbitt Burns

And we all are being very cynical here, but I'm going to join in the bandwagon, you have... your disclosure is very good and very much and very detailed on subprime CDOs and various structures like that. I am sort of struck. Other have disclosed all the CDOs whether it be subprime near prime Alt A or even prime. Can you provide any light on that although the meaningful numbers beyond the subprime?

Gordon M. Nixon - President and Chief Executive Officer

I think we talked about that earlier, Ian, because of the question. And I think there was a specific question with respect to Centura that came up this morning, I think from you. And Morten referred to that in his comments, where I think it's a de minimus very small number. I will be honest if it's not an issue that... I mean it's not a large number that we are worried about there is nothing that's non-performing. And we are hesitant to give any number out whether it be small or otherwise, because there is a lot of different businesses around the organization. But it's not something that is an issue to us at this point, and it's not a large number. I mean you are talking about Alt A.

Ian de Verteuil - BMO Nesbitt Burns

Yes, I am just talking about... because your terminology is subprime and others have used CDOs, so I am just wondering if there is a difference between the two. I presume there is.

Unidentified Company Representative

We consider Alt A between subprime and agency.

Gordon M. Nixon - President and Chief Executive Officer

But our CDOs... our CDOs exposure, they are all our CDO exposures. We don't have any other CDO exposures, which are just Alt A.

Ian de Verteuil - BMO Nesbitt Burns

Right.

Unidentified Company Representative

We have no CDOs of Alt A.

Ian de Verteuil - BMO Nesbitt Burns

Right. So, the CDO numbers you... your total exposure to CDOs is nothing else.

Gordon M. Nixon - President and Chief Executive Officer

That is correct.

Ian de Verteuil - BMO Nesbitt Burns

Okay, thank you. The second question relates to taxes. It looked as if the taxes this quarter came down a bit, Janice, forgive... I apologize for the minutiae of the question. If we removed all the unusual, because it's tough to get at the tax implication that all unusual, what was the tax rate have been, and was there anything unusual this quarter?

Janice Fukakusa - Chief Financial Officer

Basically, the rate came down because of mix for the one time items, first of all, the Visa gain that is capital gain as opposed to income and then the Visa point accrual would be...

Ian de Verteuil - BMO Nesbitt Burns

So far remove that what's the tax rate? The tax rate is still down.

Janice Fukakusa - Chief Financial Officer

If you remove that I think that just had about 2% from the rate 2% to 3% and so the balance would be the business mix. We had some of our dividend trading activities that has higher volumes this year than it has in previous years and it was ramping up that sort of thing. So, I think that, when we look at our tax rate, we are always looking at on an ongoing basis, and we look it on an annual basis, of somewhere in the low 20s, in terms of ongoing chipping out all the unusual, but we have had our share of the unusual items.

Ian de Verteuil - BMO Nesbitt Burns

Thanks.

Janice Fukakusa - Chief Financial Officer

Okay.

Operator

Thank you. The next question is from Sumit Malhotra from Merrill Lynch. Please go ahead.

Sumit Malhotra - Merrill Lynch

Good afternoon. This one is for Jim Westlake. Jim winning the economic outlook, it sounds like the bank is expecting Canadian economy to slow a little bit. Other than slowing though your residential mortgage growth seems to be accelerating as we head into 2008. Can you give us a little bit of idea, how you think, housing market in Canada is trending, specifically what it means for your business going forward? And on that same point, how is your book right now in terms of mix, fixed floating and how is that position you from a margin perspective?

W. James Westlake - Group Head, Canadian Banking

I think, our volumes have been very, very good and that was standing all of the noise around residential mortgages, it continues to this point. We are very fortunate that we are well distribution across Canada and particularly not withstanding any of the economics that we are talking about in Central Canada, Western Canada in particular it continues to be very robust.

For our economic forecast well we have moderated slightly that is all been in manufacturing sector in Central Canada, so I think that is well contained in all of our forecast. We will also see a lot of debt consolidation within our home line product, and so that is having a good growth effect on our overall home equity financing.

So, we are... you are certainly concerned that they will be slower going into the year, but we think that we are very well positioned in terms of the distribution we have against the marketplace, and where we deploy geographically in order to take advantage of that. We might be a little less convinced to that if we were more completely focused in Central Canada. In terms of the other part of your question on the fixed and the floating, can you just repeat I didn't quite get what that was you are looking for?

Sumit Malhotra - Merrill Lynch

Yes. This one it might be for Janice, I mean just in terms of the mix of the book right now in terms of how much is fixed rate, how much is floating rate, what that could mean if we start to get some movement in rights going forward from a margin perspective?

Janice Fukakusa - Chief Financial Officer

I think that our typical mix up to this time was about two-thirds fixed, and a third floating with the duration of about two to three years. So, as if interest rate start to climb up there maybe more of a propensity for the new product specifically, it takes several months of origination to really shift the duration, but that's what's we have been seeing.

Gordon M. Nixon - President and Chief Executive Officer

I must just add, it's Gord speaking, because this call is often well listened to [ph] is that... our official forecast for 2008 well for a slow down it's still fairly reasonable in Canada I think our official forecast is somewhere around 2% GDP growth. And level of unemployment continue to be low, which is a key driver of real estate, which hasn't been overflated in Canada. So, as we look at '08 and the domestic retail business, I wouldn't over emphasize the word slow down I think it's still going to continue to be a reasonably good market there hasn't been the real estate inflation unemployment rates are low and well there parts of particularly Ontario that I think we are little tougher I think rate across the country its not about outlook.

Sumit Malhotra - Merrill Lynch

Okay. Thanks for that color. Lastly for me on the... in the capital market segment, if I look at loan growth there and slowing down the last couple quarters seem to accelerate again in Q4, is this M&A related or are you starting to see more corporate loan activity in place of debt issuances and along with that still an another year of net recoveries here. I know you have not forgotten into you said that before, but just maybe an update on some of the health of your corporate borrowers and where that trend is going along with the robust loan growth you've had for the last couple of years in the corporate side?

Morten Friis - Chief Risk Officer

It's Morten, and Chuck may have a couple of comments there to fill in. I mean there are... they have been a few larger investment grade M&A related transaction we've been and this contributed to some of the growth I mean overall the... if you look at the health of the corporate borrowing base ratings actually remain quite stable. We have been quite careful in selecting our clients over the last cycle, and so for the large part of the corporate portfolio leadings migration is relatively minimal and as we noted we still continue to see recoveries in the portfolio overall. So, the current environment obviously drives us to look more closely at the portfolio, but I would to emphasize that when you look at our borrowers and the health of our portfolio actually there it remains remarkably strong and stable in that segment.

Charles M. Winograd - Group Head, Capital Markets

And I would just say that if you look at... if you look at the fourth quarter, I don't think it affects from what Morten mentioned there was very much a couple of deal related loan. And if you look over the longer period of time the growth that occurred really in two places in the U.S. and in the UK where we've essentially reallocated loans from sort of seven or eight years ago, which used to be made what I would called a pure step [ph] basis to loans where we have strategic intention and we are doing a lot of other business with those clients.

Sumit Malhotra - Merrill Lynch

Thanks very much.

Operator

Thank you. The next question is from Darko Mihelic from CIBC World Markets. Please go ahead.

Darko Mihelic - CIBC World Markets

Hi, good afternoon. My first question is for Chuck. Chuck, I realize this isn't going to be an easy one to answer, and I am just hoping that you don't give me the usual answer, but...

Charles M. Winograd - Group Head, Capital Markets

To remind you with the usual answers...

Darko Mihelic - CIBC World Markets

Well my question is I mean we have gone through a pretty rough period and you could see in the trading results. I just want to... maybe you can give us an update. Where you think you sit now with the pipeline of deal flow? Do you see trading back to normal parameters? Can you give us any sense of how you feel so far into the first quarter, and maybe give us a general outlook for your part of the business.

Charles M. Winograd - Group Head, Capital Markets

I can't say how we are doing thus far in the quarter, but I think it's going to be a matter of the trade off between... depending on what happens in the house temporary the year end phenomenon and the brokers in the banks in the U.S. and global bank. I think that you have got a combination of repricing... continuing repricing of risk, which at times can reprice portfolio with what I consider are better spreads out there to grab from the standpoint of ongoing trading activity. And I think that would be sort of the race in the first quarter.

Secondly, in terms of the deal side, clearly it's not as visible as it was particularly from an M&A side in at this time last year. But at the same time, there seems to be deals that are getting done everyday, and we still have a very busy M&A platform. So, while I wouldn't... I hesitate to characterize this period as normal, because there is not that much nor on the [ph] capital markets these days. There is opportunity here and that's what we are looking at.

Darko Mihelic - CIBC World Markets

Okay. I appreciate it. I mean, I know these questions always are tough to answer, but trying to get a feel for your part of the business and what your outlook is for '08.

My next question is more of a broader question, I think for Gord. I am looking at page 10 of the supplemental, and the second line, the annual columns, which is... a second line from the bottom, sorry, which is economic profit. And I look at that for the last four years, you've basically... according to this, you have destroyed shareholder value in the U.S. And you are about to acquire more in Alabama?

Gordon M. Nixon - President and Chief Executive Officer

Sorry, we haven't destroyed shareholder value. I think you are talking about Centura.

Darko Mihelic - CIBC World Markets

Well, I am looking at the overall division, I mean U.S. and international banking, the overall economic profit for the last four years nets out to a negative 84. So with that, I would presume that includes everything in that division. And if you are saying that it's all coming from Centura, I guess that's exactly where my question is going.

Gordon M. Nixon - President and Chief Executive Officer

What I will say, just for clarification again, is that we have businesses in the U.S. capital markets, and Dain Rauscher wealth management business that have all generated positive economic capital. So, if you look at the U.S. in general, the number is not negative. It's not divided that way. But, you are looking at the U.S. platform.

Darko Mihelic - CIBC World Markets

Exactly, and my question relates to that platform. And specifically the question is, what is your outlook for that given that you are going to be acquiring Alabama ALAB I guess, very shortly, what are you shooting for, do you even care about that measure, or how should we look at your plans for investing more capital in this business.

Gordon M. Nixon - President and Chief Executive Officer

It's a great question, and yes, absolutely we care about that measure. I will tell you that there is no foreign bank in the world that has acquired banks in the U.S... sorry I shouldn't say no there may be some that very few that would show positive economic capital, given the way that economic capital is a attributed. I would view it as being a strategic growth opportunity for us that we've got to ensure that as we move forward, we focus on hitting our ongoing operational metrics.

And I think unfortunately with RBC Centura, as a result of the builders write-down in the fourth quarter, a lot of a very positive things that have been going on over the last year or so, that pushed by the way side, I mean we have done a lot of restructuring in that business over the last year, which has brought with us some restructuring charges, portfolio restructuring, etcetera. But we have invested a lot, both in... not just in terms of... we have not only made some acquisitions, but we've invested in de novo branch expansion. And we think we are building a platform that when we are able to move away from some of those expense... heavy expenses will allow us to reach the benefits, if you will, of that investment. It's a... it does take time, and the more one invest the more economic capital is impaired, if you will, in the short term, but hopefully is building for positive economic growth in the long term.

We are very positive on the Alabama National acquisition. We think this is an organization. It's very complementary to Centura. It gives us a good footprint in the region that we are focused on. And I think a reasonably strong platform. As Morten said, they've got a very disciplined and strong risk culture of that we're quite complementary of. And I should say that even RBC Centura as you look at their builders business within footprint, their performance has been very, very strong, if you look at the legacy Centura business. And that is clearly strategically the direction that we are moving.

So, if you look at our plans for that business over the next year or so, it's to do a good job in terms of integrating Alabama National to ensure that we manage the real estate issues the best that we are able to. And we think we'll come out of that with a good platform and a good asset base. And if we can get up to reasonably a good industry metrics in terms of return on assets, we'll add a lot of value to our shareholders. And that... are we disappointed that we are not overhead because of the fourth quarter? The answer is yes. But we remain very committed to that. We think ultimately the numbers will come on side. But it's very... I mean economic capital is a great discipline. We do pay a lot of attention to it, but it's very difficult to compare a new business where you have been making acquisitions to a 139 year old business, where your cost base is well paid for. So, you're comparing a little of apples and oranges, but we clearly have to get those numbers more positive.

And I would say the same thing with respect to RBTT. I mean, we feel that that is an acquisition that with the economics will be very attractive longer term from our perspective. And it's a very good natural fit in terms of building up our overall platform. So, I think you will see those numbers get better, but as I say it's very difficult to compare some embedded historical businesses with some new businesses where you've got goodwill under being driven by acquisitions.

Darko Mihelic - CIBC World Markets

All right. Thank you very much for that. And I think, maybe if I could paraphrase then, so I think of it in the following terms, which is you're not alone. I mean TD has got... actually TD has much bigger decline in economic profit, bigger loss I should say. But their response was... invest a very large sum and build scale. It doesn't sound like that's your response. Should I take... could I paraphrase it that way?

Gordon M. Nixon - President and Chief Executive Officer

I think you can para... no, I think you can paraphrase either way. What I have said for quite some time, which is we don't believe that we have to invest significant amounts of dollars for the sake of scale and growth. We think the platform, the size, 450 branches is an opportunity to generate good value for our shareholders. I think acquisitions with respect to scale should be driven by value, and strategy as opposed to just the desire for scale. There is clearly an inverse correlation in the world between scale and performance. You know that better than I do.

Just look at the big banks around the world, and look at the big banks in the United States. I mean those would have been serial acquires. There is an inverse correlation between performance and scale. So I will not be convinced that scale as a necessity. Having said that, I think that scale does provide an advantage if there are attractive strategic acquisitions that allow you to not only get economic efficiencies, but frankly give you revenue efficiencies, because you've got a stronger brand and a stronger distribution platform and more products etcetera.

So I think from our perspective, we will be very cautious unless we feel that that opportunities meet those various criteria. But as I say, with I think in this five states that we are represented with any significance and the platform that we have particularly post the Alabama National transaction. If we can get our operating performance up to good industry levels we will add lot of value to our shareholders.

Darko Mihelic - CIBC World Markets

Okay, great. Thanks very much for the color.

Operator

Thank you. The next question impact from Mario Mendonca from Genuity Capital. Please go ahead.

Mario Mendonca - Genuity Capital Markets

Question about the U.S.; Morten, you've given us some color on builder refinance. Do you see any other areas? I read virtually everyday about this contingent and how it could be filling into commercial real estate generally of the U.S. what's your perspective on that, and is there any indication to that... any indication of weakness in the rest of Centura's portfolio?

Morten Friis - Chief Risk Officer

Thank you. Actually, when you look at the risk of Centura's portfolio, it is performing remarkably well. There is minimal ratings migration; we have very modest write-offs and in paired loans and the other portfolio. So while like you we all read the press about the worries about the contingent in to other areas, it has yet to show up in any of those portfolios. I would also add that when it comes to the consumer portfolios, they are all high-quality, well secured. The business in commercial portfolios are we have relationship clients and also well structured and well secured. So current performance is strong, and we don't anticipate the spread into these portfolios any time soon. Obviously, if there is a broader market deterioration, it will impact... have some impact.

Mario Mendonca - Genuity Capital Markets

Why is that you don't really anticipate it's spreading into the other portfolios? And the reason I am asking is several large U.S. banks are sort of pointing in that direction already?

Morten Friis - Chief Risk Officer

Well, I think it probably speaks to the size and quality of the portfolios that we have. I mean they are... the portfolios are not that large, but they are with relationship clients, high underwriting standards, well structured and well secured. And so absent broad deterioration in terms of employment levels, consumer confidence, and so on we do not see. I mean we do not for instance in terms of credit card exposure and the areas that you see being hit first, we have little to no exposure. I think to the extent you have contingent, it will take a little bit longer before it reaches portfolios to the type and quality that we got in Centura.

Mario Mendonca - Genuity Capital Markets

Thank you.

Marcia Moffet - Head of Investor Relations

I am just going to step in there; It's Marcia Moffet. We are just about to wrap up, but we are going to clarify two of the questions that came up on the call. The first one is the question that was asked by Brad Smith regarding the note 7 financial statements and we are also going to just provide a bit more color on the question that Shannon Cowherd asked about asset-backed commercial paper. So what I will do is I will first turn it over to Morten to respond to Brad's question, and then he'll pass the baton on to Janice.

Morten Friis - Chief Risk Officer

Thanks Marcia. So, in terms of note 7 in the credit to full swap growth that is consistent with we are trading liquid vanilla [ph] full swaps similar as to how we are trading bonds with capital relief on that volumes have increased and it's a notional number I should emphasize. It reflects buys and sells and does not reflect spreading or netting. Janice?

Janice Fukakusa - Chief Financial Officer

And now with respect to the multi-color conduit, the question was with respect to the composition and I wanted to emphasize that all of the liquidity facilities are global style meaning that liquidity is not contingent on the general market disruption. There are pretty vanilla, the asset quality in all of the conduits is very strong, 96% of those conduits are sponsored by us, RBC. And as I said before, a third of them are Canadian and two-thirds are U.S.

Gordon M. Nixon - President and Chief Executive Officer

And all are financing without any problem.

Janice Fukakusa - Chief Financial Officer

Yes, and they are all financing and rolling their paper without any problem.

Operator

Thank you very much. Would you like to make any final comments?

Gordon M. Nixon - President and Chief Executive Officer

No, I would just like to once again thank everybody for participating in the call. Clearly, it was a noisy quarter given some of the events out there. I would just emphasize that while the last quarter has had a lot of issues with respect to the financial services globally, generally I think we feel pretty confident about the way we have been able to manage through it given both our domestic and our international operations.

And as I said in my remarks, we certainly look forward as we move into 2008. We try to provide a tremendous amount of disclosure at year-end. I think we have, I hope the analyst feel that we have, we certainly... if there are any further questions, we are certainly prepared to take them, but we are certainly have attempted to provide as much color with respect to the different businesses that are under the spotlight both the domestic, but more importantly the international markets.

And with that, I hope everyone has a relaxing and enjoyable weekend.

Marcia Moffet - Head of Investor Relations

Thank you.

Operator

Thank you. This conference is now ended. Please disconnect your lines at this time. Thank you for your participation and have a nice day.

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