Royal Bank of Canada's (RY) CEO Dave McKay on Q4 2014 Results - Earnings Call Transcript

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Royal Bank of Canada (NYSE:RY) Q4 2014 Results Earnings Conference Call December 3, 2014 8:00 AM ET

Executives

Amy Cairncross - VP & Head, IR

Dave McKay - President and CEO

Janice Fukakusa - Chief Administrative Officer and CFO

Mark Hughes - Chief Risk Officer

George Lewis - Group Head, Wealth Management and Insurance

Doug McGregor - Group Head, Capital Markets and Investor & Treasury Services

Jennifer Tory - Group Head Personal and Commercial Banking

Zabeen Hirji - Chief Human Resources Officer

Bruce Ross - Group Head, Technology and Operations

Analysts

John Aiken - Barclays

Gabriel Dechaine - Canaccord Genuity

Brian Klock - Keefe, Bruyette & Woods

Doug Young – Desjardins Capital Markets

Mario Mendonca - TD Securities

Meny Grauman - Cormark Securities

Peter Routledge - National Bank Financial

Sohrab Movahedi - BMO Capital Markets

Steve Theriault - Bank of America Merrill Lynch

Sumit Malhotra - Scotia Bank

Operator

Good morning, ladies and gentlemen. Welcome to the RBC 2014 Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Amy Cairncross, VP and Head of Investor Relations. Please go ahead

Amy Cairncross

Good morning and thank you for joining us. Presenting to you this morning are Dave McKay, President and Chief Executive Officer; Janice Fukakusa, Chief Administrative Officer and CFO and Mark Hughes, our Chief Risk Officer. Following their comments, we will open the call for questions from analysts.

This call is 1 hour long and will end at 9:00 a.m. To give everyone a chance to participate, please keep it to one question and then re-queue. We will be posting management's comment – management's remarks on our website shortly after the call.

Also joining us for your questions are George Lewis, Group Head, Wealth Management and Insurance; Doug McGregor, Group Head, Capital Markets and Investor & Treasury Services; Jennifer Tory, Group Head Personal And Commercial Banking; Zabeen Hirji, Chief Human Resources Officer; and Bruce Ross, Group Head, Technology and Operations.

As noted on Slide 2, our comments may contain forward-looking statements, which involve applying assumptions and have inherent risks and uncertainties. Actual results could differ materially from these statements.

I will now turn the call over to Dave McKay.

Dave McKay

Thank you, Amy, and good morning everyone. And thank you for joining us today. It was a record year for RBC with record results in all of our business segments, reflecting the strength of our client focused strategy.

We met or exceeded all of our financial performance objectives. We earned $9 billion, up 8% from last year. We delivered a return on equity of 19%, while holding higher capital, and we increased our dividend 12% all of which helped drive strong share – total shareholder returns.

Let me start by sharing my perspective on the year. Beginning with Canadian Banking, we had record earnings up 7% from last year, reflecting solid volume growth, strong fee-based revenue, and market share gains across nearly all of our businesses.

Overall, I believe these results demonstrate the ability of our franchise to adapt to the forces of change in our business, like the shift from consumer borrowings to savings and investments, and changing client preferences driven by technology.

As expected, we saw consumer lending moderate following many years of strong credit growth, but we've been planning for this shift for some time. In fact, we spent the last decade enhancing our suite of savings and investment solutions and increasing the number of investment professionals.

We believe our approach is working. Over the last year, we achieved double-digit growth in mutual fund revenue and 6% growth in deposits, including 12% growth in core checking balances.

Turning to our business clients. This year we saw an increase in activity, in particular, in the small business segment, where RBC is a leader with over 30% market share. This is an important segment for us as we not only serve the needs of the business; we also provide advice and services to the business owner. Additionally, small business clients are a source of deposits and often grow into commercial accounts over time.

This is a competitive market. To differentiate our offering, we are leveraging our scale to create specialized industry verticals, which enable our account managers to provide targeted solutions.

We're also differentiating from a technology perspective. We're designing new products and services, specifically for mobile channels, including our app for business owners, which has seen 20% growth in subscribers each month since it launched. Additionally, we have a number of exciting product launches planned for 2015.

This is not new to us. We've been investing heavily in technology for the past 5 or 6 years. We've recently put in a new mortgage system, a new data center, and we've invested in our commercial lending systems. These costs are already built into our run rate.

We've remained vigilant about managing expenses to deliver positive operating leverage, and we've continued to drive our efficiency ratio even lower and I believe we can do more to further improve our productivity.

Overall, I feel good about the business. We've delivered strong results and our customer satisfaction ratings continue to climb to new highs.

Moving to the Caribbean. We've made significant progress repositioning our operations, including selling RBC Jamaica, a country where we did not have the scale to compete effectively or meet our hurdles.

We are starting to see an improvement in core earnings and in our operating efficiency, as we have a more targeted focus on core markets and clients. We believe that the business will return to profitability next year, although ongoing economic headwinds require us to continue to look for ways to strengthen our business for the long-term.

Turning to Insurance, excuse me. We had record earnings in 2014, even with pressure from persistently low interest rates and changes in the regulatory environment. I believe our results highlight the strength of our business model, including pricing and product enhancements we've made in recent years, as well as our strong focus on deepening client relationships and driving efficiencies.

Our Wealth Management segment had record earnings, which surpassed 1 billion for the first time and were up 22% from last year. Growth was underpinned by our global asset management and Canadian Wealth Management businesses.

Starting with global asset management, our results reflected continued leadership in Canada, where we have over 30% market share of long-term funds amongst the Canadian banks. They also reflected our success beyond the Canadian retail market. In fact, today, more than half our assets under management are now from institutional clients.

Further, roughly 30% of our institutional assets are from outside of Canada. This is largely due to BlueBay's growth since acquisition, our expanded institutional sales teams in the US and international markets, as well as team hires to enhance our investment capabilities, including in global equities.

Turning to our Wealth businesses. In Canada our franchise is exceptionally strong with Dominion Securities remaining the number one bank-owned brokerage firm. We have continued to grow our share of the high net worth market and we consistently deliver industry leading profits and margins.

In US Wealth, we've improved profitability by increasing fee-based revenue and we've continued to develop tools to improve advisor productivity. In international wealth, we recently decided to realign and restructure the business, with the goal of serving high and ultra-high net worth clients from centers where we have scale.

I would point out that none of these changes impact our Canadian and US domestic wealth business or our global asset management business. While these changes impact a small component of our overall wealth segment, representing less than 5% of revenue and a much lower percentage of earnings, I want to take a moment to explain the key changes.

We are exiting all of our international private banking businesses in the US and Canada, except for our Vancouver office, which we continue to serve – where we'll continue to serve our Asian client base. We are also exiting our wealth operations in the Caribbean, except for investment advisory businesses. This is separate from our banking business, which as I explained earlier, we are working hard to strengthen.

There were restructuring costs associated with these changes this quarter, but they were not material for the segment. While our restructuring efforts will take some time, over the long-term it will allow us to provide more value for our clients by serving them from key markets where we can better leverage the capabilities and infrastructure of other RBC businesses.

Moving to Investor & Treasury Services, our results this year demonstrate strong earnings growth and progress from our efficiency management program. After 2 years of extensive restructuring, we're moving to a more client and market-focused strategy centered on continuing to lead in Canada, and maintaining our momentum in Luxembourg and Ireland, where we have a strong presence. We've successfully grown deposits by over 20% since 2012, which helps support RBC's overall balance sheet.

Turning to Capital Markets, we had a record year with earnings exceeding $2 billion, and our results are a testament to the strong client franchise we built. We have maintained our lead in Canada and we solidified our franchise in the US by continuing to build on our investment banking capabilities, developing new lending relationships and doing more business with our existing clients. We are optimistic about the prospects for investment banking and a strong economic environment.

In the UK and Europe, notwithstanding a more challenging business environment, we continued to grow our corporate investment banking businesses by developing strong client relationships and by selectively adding talent to expand our capabilities.

For example, we recently recruited three new industry heads for industrials, consumer, and healthcare sectors. Europe continues to be a challenging market and we are being cautious with our build-out. But I am encouraged by the teams we've added and some of the mandates that we've won.

Turning to our fourth quarter, we ended the year on a strong note, with earnings of $2.3 billion, up 11% from last year, reflecting record earnings in Canadian Banking and Insurance and strong growth in Investor & Treasury Services and Wealth Management.

Capital market results were impacted by a few items, which Janice will expand upon, as well as market volatility in September and October. However, I do want to highlight the business' results for the year with earnings up over 20% and continued growth and improvement in the US and Europe.

Overall, I am pleased with the quarter, which caps off a record year and reflects our ongoing focus on developing and deepening client relationships.

I will now turn it over to Janice to provide more details on the fourth quarter, and following her comments and Mark's, I will provide some thoughts on our outlook.

Janice Fukakusa

Thanks, Dave, and good morning. Turning to Slide 9, in our fourth quarter we earned over $2.3 billion, up $232 million, or 11%, from last year. Earnings were down $45 million or 2% from last quarter, as solid revenue growth in our retail businesses was more than offset by lower results in capital markets, which I will expand on in a moment.

Starting with capital, our common equity tier 1 ratio increased 40 basis points from last quarter to 9.9%. The increase reflects strong internal capital generation and lower risk-weighted assets related to our exit of certain proprietary trading strategies, which reduced RWA by $6 billion, particular – partially offset by business growth in capital markets and Canadian banking. Overall, we're comfortable with our capital position which remains very strong.

Now let me review the performance of our business segments. Personal and commercial banking earned over $1.1 billion, up $81 million, or 8% from last year, and up $13 million or 1% from last quarter.

Canadian Banking reported record earnings of over $1.2 billion, up $123 million or 11%, from last year. This reflects strong growth in fee-based revenue of 14%, mainly from higher mutual fund distribution and credit card fees, as well as solid volume growth of 5%. Sequentially, Canadian banking earnings were up $25 million or 2%.

This quarter, our earnings were favorably impacted by net cumulative accounting adjustments of $55 million or $40 million after tax, largely reflecting a change in how we account for certain loan fees in our business portfolio.

This quarter our net interest margin was 2.66%, down 7 basis points sequentially. We had a 3 basis point decline from accounting adjustments which are not expected to recur. Another 3 basis points of the decline was from the change in how we account for certain business loan fees.

These fees were previously deferred and amortized over the term of the loan in net interest income. Effective this quarter, they are being recognized as received in other income.

This not only impacted our margins this quarter, but will continue to have an impact going forward. As an aside, as you have seen on Slide 32, the increase in other income is higher this quarter as it includes this catch-up.

Turning to expenses, costs in Canadian banking were elevated this quarter, largely due to higher marketing spend, as well as higher infrastructure costs in support of business growth, but we delivered positive operating leverage. We continue to target operating leverage in the 1% to 2% range and drive our efficiency ratio to below 40%.

Turning to Caribbean and US banking, our results this quarter reflect higher PCL in the Caribbean, which Mark will discuss in more detail, as well as a restructuring charge to reposition our operations.

Turning to Slide 12, Wealth Management had earnings of $285 million, up $83 million, or 41% from last year. This reflects higher revenue from growth in average fee-based client assets in our global asset management group, and Canadian Wealth Management businesses, reflecting capital appreciation, as well as strong net sales. Also, we had PCL on a few accounts last year, but none this quarter.

Sequentially, our net income was flat. Our results this quarter also reflect restructuring costs of $18 million after tax related to the repositioning of our US and International Wealth businesses, which Dave discussed.

Overall, Wealth Management businesses remained strong. Assets under management and assets under administration were up 17% and 12% respectively over last year. Our pre-tax margins continued to improve and this is our third consecutive quarter with positive operating leverage.

Moving to Insurance on Slide 13, net income of $256 million was up $149 million from last year. Excluding the prior year charge of $118 million after tax related to the new tax legislation in Canada, net income was up $31 million or 14%. Sequentially, net income increased $42 million or 20%.

This quarter, we benefited from lower net claims costs, including a favorable cumulative adjustment related to outstanding claims in our life retrocession business, as well as earnings from a new UK annuity contract.

Investor & Treasury Services had strong results with earnings of $113 million, up $22 million, or 24% from last year. These results largely reflect higher net interest income on our growth in client deposits, continuing benefits from our efficiency management activities and higher foreign exchange revenue. Sequentially, net income was relatively flat.

Turning to capital markets, this quarter net income was $402 million, down $67 million, or 14% from last year, and down $239 million or 37% from last quarter. I would remind you that last quarter was exceptionally strong and included about $100 million of revenue from a couple of outsized client transactions. Our results reflect the challenging market conditions that Dave highlighted, as well as two specific items.

First, we had $105 million pre-tax or $51 million after tax charge related to funding valuation adjustments or FVA on uncollateralized over-the-counter derivatives. I would point out that, as part of an industry migration to incorporating funding costs into security valuations, we have been recording FVA reserves on all significant trades since the beginning of 2013 and on all new trades since the beginning of this year.

The charge we took this quarter represents the impact of FVA on our entire portfolio over and above the reserves we have already taken. It's a one time catch-up that reflects trades done prior to 2014.

The second item I'd like to highlight is that we had $75 million or $46 million after tax, of lower revenue and costs associated with our exit of certain proprietary trading strategies which occurred in particularly volatile market conditions. We're well advanced in restructuring our proprietary trading activities in the US to comply with the Volcker Rule.

We've exited about half the trading strategies, we've transitioned market making strategies into our agency trading businesses, and we are restructuring our remaining strategies to comply.

We are actively redeploying capital from the strategies we exited into other businesses. We estimate that the impact of these changes won't be material to our earnings going forward.

Factoring these items into our results, we believe capital markets had a solid quarter and while corporate investment banking was down from a strong quarter and prior year, it continued to perform well.

With that, I'll turn the call over to Mark.

Mark Hughes

Thank you, Janice. Good morning everyone. If I could turn you to Slide 17. We continue to see favorable credit trends that remain near historic lows, reflecting our strong risk culture, as well as a supportive economic backdrop.

The Canadian and US economies continued to improve in the fourth quarter, underpinned by strength in the labor market with unemployment rates declining to pre-crisis levels. Globally, monetary policies remained favorable.

Provisions for credit losses on impaired loans this quarter were $345 million or 31 basis points. That's up $62 million or 5 basis points from last quarter, mainly reflecting increased provisions in Caribbean banking and capital markets.

In Caribbean banking, provisioning were $77 million, of which $50 million was related to our impaired residential mortgage portfolio. This additional provision reflects our experience with the ongoing challenging economic environment in the region. This was partly offset by provisions in our commercial and retail portfolios.

With respect to capital markets, this quarter we had provisions of $32 million related to a single account, which was newly impaired this quarter, but not reflective of any overall credit deterioration. The capital markets loan book continues to perform well and we ended the year with a provision for credit loss ratio of 7 basis points, the lowest level since 2011.

Provisions in Canadian banking were $236 million or 27 basis points and remained near historic lows. They were up slightly by $6 million or 1 basis, point from last quarter, driven by higher provisions in residential mortgages and business, mostly offset by lower credit card write-offs and lower provisions in our personal lending portfolio.

Turning to Slide 18, which focuses on our Canadian banking retail portfolio. Our credit card provisions remains near historic lows at 231 basis points, down 15 basis points sequentially, largely driven by seasonal factors in line with last year. The portfolio continued to perform well with low write-offs and strong recoveries.

Our credit card delinquency rates remained low during the quarter and we regularly monitor these rates as part of our early warning signals. Our small business portfolio increased to 92 basis points, up 16 basis points from last quarter, although last quarter marked a 7 year low for provisions. The increase this quarter was largely due to higher net write-offs.

Our residential mortgage portfolio, which is well diversified across Canada, as highlighted on Slide 19, makes up 64% of our retail portfolio. It continues to perform well with provisions this quarter of 2 basis points consistent with our historical performance.

Looking forward, our view remains that the Canadian housing market is moving towards a better balance of supply and demand. Generally speaking, we are seeing Canadians display greater fiscal conservatism by increasing their down payments and accelerating their mortgage repayments.

Additionally, clients are opting for our fixed rate mortgages, which now make up 75% of our books, up from 73% at the end of 2013, and the average amortization at origination has declined.

Across our entire portfolio, we continue to actively monitor our portfolio for early warning signs of credit deterioration and perform ongoing stress testing for numerous scenarios, including increases in unemployment and interest rates, a downturn in the real estate market and given current market conditions, the price of oil.

At this time, we are comfortable with our stress test results. We do not see signs of deterioration and the overall credit quality of our retail portfolios remains strong.

On Slide 20, gross impaired loans amounted to about $2 billion this quarter and were relatively flat from the third quarter. New impaired formations were relatively stable for the quarter amounting to $326 million, and included one newly impaired loan in capital markets for $33 million, which was fully provisioned for in the quarter and written off.

Turning to Slide 21. In the fourth quarter, average market risk (VaR) Value-at-Risk, was $26 million, unchanged from the previous quarter. Our fourth quarter average market risk stressed VaR was $78 million, down $9 million or 10% from last quarter, reflecting the exit of certain proprietary trading strategies in the fourth quarter referenced earlier.

We did have 10 days of net trading losses, totaling $46 million, which was highly unusual and largely reflects the fact that we exited certain proprietary strategies during a period of increased market volatility in October.

Market volatility also negatively impacted our fixed income trading businesses. We have returned to more normal results in November. We monitor the market risk positions we undertake on a daily basis and are comfortable with our market risk controls.

With that, I will turn the presentation back to Dave for closing remarks.

Dave McKay

Thank you, Mark. Before I open up the Q&A, let me comment briefly on our outlook and why I'm confident RBC is well positioned to serve our clients going forward. In Canada, we expect the economy to grow modestly next year, driven largely by a pick up in business investment, continued export growth, and steady consumer spending. We also expect the market to remain competitive and low interest rates to continue to be a headwind.

Within this context, let me highlight a couple areas where we see opportunities for growth. First, investment and savings products are forecast to grow three times faster than credit over the next decade. With the most extensive financial planning platform, including the largest mutual fund provider and the largest full service wealth management business, we are well positioned to capture a disproportionate share of market growth.

Second, over 45% of businesses are expected to change ownership in the next five to 10 years. With our market leading capabilities, we are well-positioned to help business owners plan their succession, by finding a buyer for their business, financing the transaction, and helping them manage their new wealth.

Third, we believe we can continue to extend our lead across all our domestic businesses by deepening client relationships through our proven ability to cross-sell more effectively than our peers.

Turning to the US, we expect the economy to outperform next year, which would benefit our businesses, as RBC currently generates approximately 20% of revenue serving two very attractive client segments, institutional and affluent, high-net-worth.

Within capital markets, the US business now accounts for more than 50% of the segment's revenue or approximately $4.1 billion. Over the past five years, this business has made considerable investments in people and infrastructure and expanded its corporate client relationships substantially by providing credit.

Following a number of years of investment, we are now focused on strengthening returns by doing more business with clients, winning new mandates, and driving greater efficiencies.

US wealth will continue to drive productivity and will look to enhance its capabilities to provide additional credit and deposit solutions to its clients.

Turning to the UK and Europe, although we expect conditions to improve as stimulus measures take hold, we believe economic growth continue to be relatively slow. Within this context, we will selectively expand our investment banking sector and geographic coverage and we'll continue to prudently extend our loan book where it makes sense to help drive new origination.

In global asset management, we will focus on growing select international investment strategies, including global equity and alternative assets, and extending our reach to more institutional investors in the US and select global markets.

Across all of our businesses, we will continue to strengthen customer relationships, manage costs, and leverage investments in technology to drive efficiencies and enhance the client experience.

To conclude, I believe that RBC is well-positioned to manage through industry headwinds and capitalize on the opportunities created by the changing environment. I am confident that we'll continue to deliver long-term value to shareholders, given the strength of our diversified business model, our strong capital base and importantly, our clear strategy for building long-term, sustainable client franchises.

With that, let me open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from John Aiken from Barclays. Please go ahead.

John Aiken

Good morning. Janice. I was hoping that we could revisit the charges taken on the prop desk to because of the Volcker Rule. The $75 million, can you let us know how much of that actually related to charges for exiting the position and if any of that amount actually related to run rate earnings that were previously embedded?

Janice Fukakusa

I think that we haven't bifurcated the amount that we would have taken in terms of the timing of the positions going down. But if you look at the net results of the charges that we cite, the $75 million, that would be mostly one-time costs and some losses on trading positions.

So on a go-forward basis, we still have effective strategies and we said that we don't think it will impact us materially going forward. Doug, would you like to say something?

Doug McGregor

In particular, we were exiting – what we determined was we were going to exit about half the strategies we've been running for more than a decade. And in particular, we have credit opportunities or credit strategy which really revolves around corporate credit and what we found was we determined – well, we wanted to exit by year end and I think as you know, credit backed up and rates were pretty volatile as well through the month of October.

So the bulk of the loss was in selling credit books which we have sold. So we have – of the strategies we exited, we have sold about 99% of the assets. There's one or two remaining.

John Aiken

Thanks, Doug. And when we talk about half of the positions presumably then the other half are the ones that are being transitioned into other areas or being made Volcker compliant?

Doug McGregor

Yes. So we transferred some of the businesses meet the market making exemption. And so we have transferred those businesses into our cash equities and our securities funding business. And we're just repositioning the remainder.

John Aiken

Great. Thanks. I'll re-queue.

Operator

Thank you. The following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Gabriel Dechaine

Hey, good morning. Just a follow-up on that topic. So you mentioned that half of the strategies have exited. I'm trying to tie that into some of the historical guidance that you've given that prop trading overall was about 2% to 3% of total bank revenues.

So should we assume then that half of that amount is gone and that over time you're going to replace it and that you know, what's going to happen to the other half?

Doug McGregor

Well, as I just said, the remaining strategies will be Volcker compliant.

Gabriel Dechaine

Okay.

Doug McGregor

Or we wouldn't have kept them. And I would say that between redeploying the capital that we've just recovered from exiting certain strategies and what we have left on, I think Janice said in her remarks that there wouldn't be a material change in our run rate which is what we believe.

Gabriel Dechaine

Okay. So there should be no, like the way I kind of understood, it was that over – you would take a short term reduction in your revenues but that as you redeployed the capital and that you would replace it, but that takes a little bit of time or have you already effectively deployed that capital?

Doug McGregor

Yes. I mean, I suppose it's possible that during the quarter if that, that might occur, I would say so far with the returns on what we've retained have been certainly satisfactory and we have put out a reasonable amount of the capital we recovered. So could it be a bit softer by the end of the quarter? I guess that's possible, but so far, so good.

Gabriel Dechaine

Okay. And my next question's for either Dave or Jennifer. On the Canadian P&C business, good quarter there, good loan growth, just wondering about the outlook for operating leverage in 2015. And then some of the comments you've made recently kind of backing off a bit of that industry growth, plus 25%.

What does that say about your expense management strategy next year? I know in previous periods, 2008, 2009 for example, when the going got tough you did really pull back on expenses. Should we expect that next year because this year for Royal and other banks there's been quite a bit of expense inflation?

Jennifer Tory

Thanks very much, Gabriel. I'll first start by saying we're pleased that our record quarter and going forward as we invest, continue to invest in the business, we're still targeting operating leverage of 1% to 2% and continuing to drive our efficiency ratios to the low 40s.

As far as overall expense management, it continues to be a focus for all of the Canadian banks because we want to continue to invest in our business. And as far as our premium, we have come off somewhat as the overall industry volumes have declined. But we're continuing to see market share gains across all of our businesses as Dave said and we're also maintaining as Mark said our strong credit performance, a very good margin and industry leading efficiency ratio.

So going forward, we remain committed to growing at a premium and we're seeing good momentum in a few areas. For many example, as Dave highlighted, we are very well positioned to capture disproportionate share of the deposit investment growth and in fact our market share has grown over 80 basis points over the past two years.

And in mutual fund business, we have in excess of 30% share of all mutual funds sold. So we think that, that part of our business is going to continue to have great momentum and in addition, we're pleased with improved momentum in our business, lending business this quarter.

Gabriel Dechaine

Okay. Thank you.

Operator

Thank you. The following question is from Brian Klock from Keefe, Bruyette & Woods. Please go ahead.

Brian Klock

Good morning. My question is for Doug. Doug, I was thinking about the weakness in oil pricing. Can you comment on what you think about the contribution that sector has done for capital markets revenues for this year and is there any expectation of some weakness going forward in volumes related to the weakness in oil?

Doug McGregor

Yes. From the slides in the deck, you can see that energy is about 15% of our loans. So there is some revenues associated with that. In terms of the overall capital markets revenues, I mean, it varies, but it's between 5% and 10%.

Energy is an important business for us, both in Houston and in Calgary. The run rates in the business has been pretty good recently, frankly. And whether lower energy prices will slow that or not, we'll just have to wait and see.

Brian Klock

So let me just clarify. So when you said 15% of loans, 15% of your capital markets loans, the 100 – the 68, 69…

Doug McGregor

That’s correct. Yes, I think the slide shows I think draw on loans about $61 billion, and I think it shows us at what percent…

Dave McKay

12% to 13%.

Doug McGregor

12% to 13%...

Dave McKay

And for oil and gas and energy in total including mining would be 15%.

Doug McGregor

Right. And the energy business includes the pipelines, as well as the exploration companies and the pipelines, the CapEx as they have been spending they've been a big contributor to our revenues. I don't see that slowing in the near term.

Brian Klock

Okay. So and I guess maybe as a follow-up, and maybe this is related to Mark. The capital markets, the GLA [ph] formation this quarter there that was one company was – can you comment whether or not that was in the energy or mining and metals sector?

Mark Hughes

As it turns out it was actually in the energy sector, but I would say that it was completely unrelated to the oil price or the energy prices moving up and down. It was actually a fire at the facility itself. So totally unrelated to where the commodity prices are.

Brian Klock

Okay.

Mark Hughes

And just to add a bit more on the percentages, for oil and gas it's around 12% to 13% of the corporate banking capital markets book. In terms of the overall bank credit book, it's around 2% to 3%. So obviously it's how you look at the numbers.

Brian Klock

Okay. And maybe just while you're on that, and then I'll get back in the queue. If you can just comment how much of that energy portfolio is E&P reserve based versus the suppliers which is a little bit more risky? Thank you.

Mark Hughes

We have about half or just over half of the numbers that I've been quoting is in E&P and about 13% of it would be in the drilling and services business which in my mind is where the risk will start to take an effect first, as and when the E&P firms start to cut back or if they do cut back on CapEx.

Brian Klock

Okay. Thank you.

Operator

Thank you. The following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young

Hi, good morning. Just the first question is on the Caribbean and David, you made a comment in your prepared remarks that you're comfortable that it's going to return to profitability next year. I'm just trying to get some detail around where that comfort comes from.

And within the Caribbean, obviously you have RBTT. Just wondering how comfortable you are with the carrying value of that investment. And then I wanted to – third part of this is I just want to clarify. There was a $17 million restructuring charge in the Caribbean, Janice. I think. Is that independent of the $18 million that was related to the wealth? Thank you.

Dave McKay

Well, I'll make – I'll cover the first part of that question, Doug and then Janice will talk to the carrying value of the Caribbean bank. We've done a lot of work in the Caribbean in restructuring our operations, focusing on core markets and core clients. You saw us this year exit RBC Jamaica which was a significant decision for us along that line.

So as we look at our core operating earnings in the business, they've been improving quarter-by-quarter-by-quarter to a point where we did take some one time credit charges this quarter, particularly in our mortgage book as Mark referenced.

As we look forward, we expect that core operating strength to emerge next year and we're confident, albeit the economy is tough, but we look at our revenue run rates, look at our expense control and the repositioning of our cost base in the Caribbean and we're confident we'll return to profitability next year.

Janice Fukakusa

Great. And Doug, this is Janice. I'll answer the question on the carrying value of the investment. We constantly review the Caribbean for any indication of impairment and we didn't see any. In addition with respect to this quarter we performed our annual goodwill testing.

And so a lot of the details of the assumptions we made are actually in our disclosure in the consolidated statements, which describe how we've then looked at the cash flows and how the discount rates that we've used. And so we continue to be comfortable with the carrying value of the investment and that's why you see that we did not consider any impairment at all.

The $17 million charge that's in the Caribbean is totally independent of the international wealth management charge and it relates to our continuing restructuring of the domestic banking businesses down there in an effort to improve efficiency.

Doug Young

And then if I can just sneak just a clarification. On the insurance side, I guess for George maybe, was there any benefits that came through from actuarial assumption changes, methodology changes? I know there is some big changes coming through with the Lifeco [ph] industry, and just wondering if there was any noise in the insurance results that boosted earnings this quarter.

Dave McKay

Sure, Doug, I'll take that. The Q4 does tend to be a seasonally strong quarter for us in RBC insurance because we do conduct our annual review of actuarial assumptions and all sorts typically lower claims cost quarter as well. But within the annual review of actuarial assumptions there was no significant impact from the URR change, either positive or negative.

So to a large extent several years ago we had instituted a program to more closely match our assets and liabilities in insurance. And so working with finance and risk management in that respect before interest rates declined. So we did not benefit from the URR formula change to the same extent as some other players.

Doug Young

Okay. Thank you.

Operator

Thank you. The following question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca

Good morning. First, Janice or whomever, the bank's is sticking with the 7% EPS growth target for 2015 and looking forward. First, what base would you say the bank is using, base in terms of EPS for 2014 from which to drive the 7% growth?

Janice Fukakusa

I think, Mario, I think that by base you mean what is that growth rate teed off. We're using our actual results, and saying that we believe in our medium term objectives we can achieve 7% growth in the future going forward from 2014.

Mario Mendonca

Using just…

Janice Fukakusa

Reported…

Mario Mendonca

Yes, the reported number.

Janice Fukakusa

Right.

Mario Mendonca

And I know there are medium term objectives, but in each Q4 you do assess the results of that year against those objectives. So they tend to have – it tends to feel like an annual target as well because of the way you assess those results into Q4. Is that 7% something you would point us to for 2015 as well?

Janice Fukakusa

Well, I think it is a medium term objective and we've managed to over the past few years meet most and this year all of our medium term objectives. So I think that our encompassing medium term objective is to achieve top performing total shareholder returns and then we encompass the financial metrics in that and we measure on an annual basis.

So I would say that if you look at it, we're not putting out annual guidance with medium term objectives, but we have been very successful in meeting them over the past few years.

Mario Mendonca

Does 2015 seem a little more challenging, though, than in prior years in getting to that 7%?

Dave McKay

I think, you know, this is Dave. Based on my comments I made earlier, we see a good Canadian economy with growth across the consumer, commercial and corporate sectors. We see a very strong US economy that will help drive Canada through exports.

We're well positioned in the US in our capital markets business and in our wealth business to capitalize on that growth. So we have number of ways to grow the organization.

In addition to the secular trend though seeing a shift towards deposits and investments, we see significant opportunity in our franchise to capture the core areas of growth in Canada, the US, and emerging Europe. So I think you look at our franchise and diversity – diversification that we have across our businesses, we will stand by our medium term objectives.

Mario Mendonca

Okay. And then just one final point on energy. So if it's 12% to 13% of the corporate book, it sounds like oil and gas would be something like $7 billion to $7.5 billion. Would be helpful to know if you could break that down between the reserve based lending and the covenant or the cash flow lending, does anyone have that handy?

Dave McKay

I don't duly have that handy. I would say that a large proportion of our loan book is to investment grade large corporate. But we do have a sizable amount as well to borrowing bases. We would have to get you back the exact split on how that works.

Mario Mendonca

Okay. Thanks very much.

Operator

Thank you. The following question is from Meny Grauman from Cormark Securities. Please go ahead.

Meny Grauman

Hi, good morning. My question is also dealing with the impact of lower oil prices. But I was wondering about as you think through the implications for the Canadian P&C business in particular, and wondering, maybe it's a leading question. But wondering sort of what are the – are there positive implications from that for Canadian P&C business, specifically, and where do you see those impacts hitting?

Dave McKay

With respect to positive drivers being lower gas prices driving consumer spending, which is some of the commentary you see in the United States. I think it will be modest at the end of the day. Job creation is one of the critical drivers in the economy. Business spending and exports I think will be the predominant drivers.

We're seeing very strong export growth in the country. We're still waiting to see more private sector investment in the economy. Those will be the primary drivers I think rather than lower gas prices at the pump stimulating consumer spending. It will be marginal, I would say.

Meny Grauman

Thanks a lot. And just a follow-up on that. At what point or at what price or what duration do you have to start to reappraise your outlook for 2015 when it comes to oil prices, wondering if you could add a little bit of insight into that?

Dave McKay

On the – in the credit book are you asking specifically or…

Meny Grauman

On the credit book specifically?

Mark Hughes

Yes, I mean, at the moment we're doing constantly lower oil price sensitivities. We have actually gone in an overall stress test portfolio significantly below the current market prices. We're also doing individual name by name stresses against where the prices are currently and a little bit below where they are currently.

And based on what I'm seeing so far, given the expectation for what we have with either hedging in the E&P producers or the amount of credit availability that they still have for liquidity or the ability they have to cut CapEx at this point in time, we're not seeing a future deterioration.

With oil price of course it's always about how long it goes on for and at the moment we are stressing out one year, two years and we still at this point remain seeing things within our overall risk appetite.

Meny Grauman

Thank you.

Operator

Thank you. The following question is from Peter Routledge from National Bank Financial. Please go ahead.

Peter Routledge

Yes, I'll pick up from that last question. Page 19 you give us the geographic diversification of your mortgage book. It looks like 34% of your mortgages are in BC and Alberta. Is your – do you have the same basic geographic mix for your unsecured household lending?

Dave McKay

I don't know if we have that right at hand here. We can get back to you.

Peter Routledge

Yes.

Dave McKay

But our credit strategies wouldn't change, secured or unsecured, against that region. We have a client strategy at the end of the day on the credit side. So I would expect to see an equal distribution in that, our strategies don't change, between secured and unsecured would be my answer. Mark, do you have anything to add to that.

Mark Hughes

I think that would be exactly how I would answer. I don't have the specific number at hand which we can get you. But certainly my understanding of our strategies and how we're managing is consistent across the country, not geographic.

I would also add on this oil price point, I mean, we've talked a lot more about on the corporate type and commercial type of exposures. We are looking also on the retail side. We are able to monitor at even a community type basis of where our exposures are. So far, we have not seen outstandings or delinquencies increase in, say the Alberta region. But that is part of our early warning signal approach. So we are monitoring that as well.

I think what I would say from a risk perspective is until you really see unemployment hit, caused by some form of lower CapEx or lower spending by the corporate side of the E&P side, you will not see that dramatic an impact or negative impact on the retail books.

I think you'll see initially a positive impact. They'll have more cash flow, better gas prices and all of that and the negative impact would be if people start to be unemployed as the industry cuts back which at this point we have not seen happen.

Peter Routledge

Do you have any sense of how your PCLs might look a year from today if oil is still at $65 or in and around that range? PCLs from Canada I mean, specifically.

Mark Hughes

Yes. At this point they would still be within the range of our normal expectations.

Peter Routledge

This is a slow issue.

Mark Hughes

Yes.

Peter Routledge

Dave, just a question for you on capitalized, your CET1 is about 9.9. So it feels like the industry is trending towards 10%. In your view, what's the likelihood it goes above that or are we finally going to stop at 10%? And then – I'll leave that question. I have a follow-up.

Dave McKay

I think as you've heard us comment on quarter-to-quarter, we're targeting 9.5% plus a buffer. So you've seen us trend into that range right now at 9.9%, little bit higher than our buffer. I think we see good opportunity to deploy capital into organic growth next year and we see growth in our lending book in Canada and the US. So I think that is obviously a factor.

And we have overall capital deployment opportunities. We've renewed our share buyback of 12 million shares and we have all the tools available that you expect to manage our capital base including organic opportunity to deploy capital into growth.

Peter Routledge

So if you're at comfortable level, will you start – restart, I should say, your NCIB this quarter or next quarter?

Janice Fukakusa

Peter, it's Janice. We're always looking at the levels and opportunities to do that and we did renew the NCIB because of our intention to use it as an active capital management tool.

Peter Routledge

All right. Thank you.

Operator

Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi

Good morning. Janice, just maybe a bit of a difficult question to answer. But if you think about the overall tech spend budget looking into 2015, how much higher do you think it's going to have to be versus 2014?

Janice Fukakusa

Because of the way that we do technology projects in that we have multi year projects and we're always reinvesting, I would say that our tech spend budget will be very consistent next year to what we have just gone through this year.

We - because of the nature of our programs and our commitment to invest in new technology in terms of simplifying our processes for our clients, innovation, all of that, we don't see any major shift in that.

We started to see programs, a lot of them two or three years ago, some of them are midstream and we continue to invest because we're investing in basically on a medium term to ensure that we are always at the front end of anything happening. I don't see any shift.

Sohrab Movahedi

And do you see any shift in the mix of that spend between the business segments?

Janice Fukakusa

No, we don’t or I don't see any shift at all in the mix.

Sohrab Movahedi

Okay. Thank you.

Operator

Thank you. The following question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead.

Steve Theriault

Thanks very much. First for Doug McGregor, the decline of fixed income trading, I apologize if this is a repeat question, by the way. But the decline of fixed income trading looks to be more than slower client activity to meet anyway.

So I guess what I'm wondering is, were there material mark-to-market losses in the fixed income books through that mid-quarter or that mid-October period of high volatility with spreads widening or would you really insist that it was more client activity levels?

Doug McGregor

Well, if you look at the fixed numbers, the headline item first of all is the FVA. Second, that I described earlier, is that we had a credit opportunity strategy in our proprietary business that we determined to take off and I think it was a result of just marks, as a result of liquidity in early and mid-October.

I would say overall the rest of the weakness was rates was gapping up and down for the better part of 30 days and we had – I think if you look in the disclosure, 10 or 11 days of trading losses, they would have been $5 to $10. but that was a mix of in gap in Europe, sorry, in Europe and the US and I would say our credit books in the US also were just – we were just marking inventory and trying to provide liquidity to our clients and our customers, and – with that expenses. And so I think as the numbers come out, you will see a trend that it was a difficult trading environment in fixed income.

Steve Theriault

Okay. That credit opportunity strategy you took off, is that Volcker related or that was – that's taken off for some other reason?

Doug McGregor

Yes, yes.

Steve Theriault

Got you.

Doug McGregor

It was part of – it was part of the proprietary business, as I said we've had for a long time and we didn't see that any way that was going to comply with Volcker longer term. So the strategies that we determined would not comply. We have wound down and the people have left.

Steve Theriault

Okay. That's helpful. And thanks, Doug. And Janice, just to – just a point of clarification. Earlier on the call did you talk about the efficiency ratio in Canadian banking being below 40%? I thought I caught that relative to the – what I thought the low 40% target rate?

Janice Fukakusa

No, Steve, it was low 40s. Consistent with what we've been targeting.

Steve Theriault

Okay. Thanks very much.

Operator

Thank you. The following question is from Sumit Malhotra from Scotia Bank. Please go ahead.

Sumit Malhotra

Thanks, good morning. Question in relation to the wealth management segment and the restructuring, as well as the outlook going forward. So if I got your comments correct at the beginning, Dave, I think you said the businesses that you're disposing of are about 5% of revenue, but it sounds like not a very big contribution to earnings. Is that correct?

Dave McKay

I'll let George maybe comment on that. But yes, that's correct, it's not material.

Sumit Malhotra

Before George jumps in, I'll just ask. As you think about the wealth segment going forward, are there other areas of the business, particularly outside of Canada that are under review in terms of the potential restructuring or potential attempts at restructuring those as well going forward?

George Lewis

So, Summit, I'll take that. And as Dave commented in his remarks, this restructuring activities in our international wealth business, it does represent a very small component of our wealth segment and this will not impact our global asset management business which to your point has a very large footprint outside of Canada, it's growing well, positive flows and it won't affect our Canadian and US wealth domestic businesses either.

So stepping back for context, these international businesses at one point in time in 2008, 2009 represented about 20% of our segment earnings are now close to breakeven. As we've invested in strengthening the infrastructure front and middle office during a period of extended period of low interest rates.

So what we've done is taken a look at this which is negatively impacted our trust and deposit revenues and decided to narrow our country and client focus and concentrate on serving those international cross border clients from our key international center in British aisles where we do have scale.

So that will take some time to implement. We're looking at all strategic options for the various components of the international wealth business including identifying interested parties to purchase portions of those operations.

But this will not impact our large high performing businesses in global asset management or Canadian wealth or US wealth which really drove an excellent year for us this year in terms of earnings up 22%.

Sumit Malhotra

So George, to wrap it up, I know we've had this discussion a few times over the years, but when you think about the pretax margin in the segment this year, just under 24% and specifically again some of the targets that you provided in the past that you wanted the segment to get to, and taking this first step to reposition the business, where do you think margins in this business improve to. I can probably do some of the math myself, but wanted to get your outlook on what's a more reasonable goal now that you've taken this step on the wealth side.

George Lewis

Yes. Sure. So I think we anticipate continuing to make progress in improving our pretax margin. Our global asset management business which represents about 60% of our earnings is a very high margin business, 50% pretax margins. It's why we are intent on continuing to grow it.

Obviously as we exit lower margin businesses in international wealth that's going to naturally improve our pretax margin which remains our principal goal. I'd also say that looking forward to next year, we're conscious that we benefited from robust markets in both 2013 and 2014.

Our earnings were up 18% last year, 22% this year and our plan is based on normal markets and we intend to aim to deliver positive operating leverage in a lower revenue growth environment in 2015 if that comes to pass.

Dave McKay

Sumit, the only comment I would add is you see a theme across our wealth and Caribbean businesses and even ITS [ph] going to focus on core markets, core clients. We understand where the growth's going to come from and I think it's good discipline for the business to really focus on where that growth's going to come from.

So these are important moves for us to manage areas that don't have scale and we don't believe have long-term potential for us.

Sumit Malhotra

Thanks for your time.

Operator

Thank you. That is all the time we have for questions today. I would like to return the meeting to Mr. McKay.

End of Q&A

Dave McKay

I just wanted to thank everyone for joining us on the call today and I do wish you a happy holidays and we will see you again in the New Year. Thanks very much, everybody.

Operator

Thank you. That concludes today's conference call. Please disconnect your lines at this time. And we thank you for your participation.

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