Q3 2006 Royal Bank Of Canada Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Please be advised that this conference call is being recorded. Good afternoon, ladies and gentlemen, welcome to the RBC third quarter earnings release conference call. I would now like to turn the meeting over to Ms. Janice Fukakusa, Chief Financial Officer. Please go ahead, Ms. Fukakusa.

JANICE FUKAKUSA, CFO, ROYAL BANK OF CANADA: Good afternoon and welcome everyone. Presenting today will be Gordon Nixon, our CEO, who'll provide an overall summary of the quarter's results, followed by Barb Stymiest, our COO, who will discuss our financial performance in detail.

Our three business segments heads will then briefly review their respective segment's performance; Jim Westlake of RBC Canadian Personal and Business, Peter Armenio of RBC U.S. and International Personal and Business, and Chuck Winograd of RBC Capital Markets. We will then wrap up by taking your questions. Also joining us today are Marty Lippert, Head of Global Technology and Operations; Elisabetta Bigsby, Head of Transformation and Human Resources; Morten Friis, our Chief Risk officer; and Dave Mun, Investor Relations.

Please note that our comments made today may contain forward-looking statements which involve applying material factors and assumptions and which have inherent risks and uncertainties. Slide 2 of today's presentation contains our caution regarding forward-looking statements, which describe a number of factors that could cause actual results to differ materially from what is expressed in these statements. I will now turn you over to Gord.

GORDON NIXON, CEO, ROYAL BANK OF CANADA: Good afternoon everyone and thank you for joining us for this call. I am pleased to report said after two very strong quarters so far this year we continue to sustain our momentum in growing all of our businesses. And we delivered record results for the quarter, as you can see on slide 5. Our earnings of 1.18 billion, $0.90 cents a share, an increase of 20 and 22% respectively from a year ago. Our return on equity was 23.1%, and revenues again reached a record level of 5.2 billion, rising 6% from the strong third quarter that we had a year ago.

This was an excellent quarter, and there were no specified items that are noteworthy. All three of our business segments contributed to our strong earnings growth this quarter, which you can see in the next slide. RBC Canadian Personal and Business delivered record earnings, driven by strong growth in our Wealth Management and banking businesses. In fact our Canadian Wealth Management banking businesses, when you exclude the onetime special item in the third quarter of last year, and our insurance business, our core banking business was up over 20%, which Jim Westlake will address in his remarks.

We're also very pleased with the progress made in the United States and international businesses as net income from continuing operations grew 39% despite the negative impact of the strengthening of the Canadian dollar. In U.S. dollar terms its earnings were up over 50% from a year ago, driven by solid revenue growth in both Wealth Management and banking.

RBC Capital Markets had another great quarter with strong results -- trading results and other results in a number of broad categories supporting a 29% increase in its income from a year ago.

Our performance reflects the strength and diversity of our businesses. And I'm pleased that we continue to make progress in the third quarter to achieve our strategic goals to enhance our leadership position in Canada and to grow our business in the United States and abroad.

Some examples, our initiatives and recognitions are also provided on slide six. For instance, we're proud to have been named the most valuable brand in Canada by Interbrand, and also that RBC Capital Markets won the Euromoney award for Best Canadian Debt House, Best Canadian M&A House, Best Canadian Equity House. This is the first time that we won all three of these in one year.

In the United States you heard a few weeks ago that RBC Centura intends to acquire Atlanta-based Flag Financial Corporation. While there have been few acquisition opportunities that certainly we wanted to consider in the Southeast, Flag, we believe, is an excellent strategic fit with RBC Centura for many reasons. It allows us to quickly strengthen our position in one of our key markets, which is the Atlanta area. And it brings a seasoned management team and a very productive salesforce and local market expertise. Peter Armenio can elaborate on this transaction during his comments.

Internationally, we also continue to expand our business and broaden our product capabilities. For example, Global Private Banking added almost 100 client facing professionals so far this year, of which half came from Abacus. And RBC Capital Markets recently opened an office in Edinburgh to strengthen our presence in Scotland following Global Private Banking's acquisition of Abacus last November, which had an office there.

On slide 7, you can see that we are on track to meet most of our objectives for 2006. Diluted earnings per share growth, ROE, revenue growth, portfolio quality, and Tier 1 capital ratios are all meetings our objectives. Operating leverage remains flat, and Barb will discuss the reasons for this in her comments, but I can assure you that our core expense base is in very good shape. In addition, in light of the high-level of earnings this year our dividend payout ratio of 39% is just slightly below our target range for payout.

Our shareholders benefited from a 22% total return over the past 12 months, including 19% increase in our common share prices, as shown on slide 8. Our medium-term goal is to generate top quartile shareholder returns, and we remain focused on achieving that goal. Our common share dividends are up 18% from a year ago. And this morning we announced an additional $0.04 increase to our quarterly dividend to $0.40 in the fourth quarter.

What those comments, I will turn it over to Barb.

BARB STYMIEST, COO, ROYAL BANK OF CANADA: Good afternoon. Looking first at slide 10, our revenues continued to grow reaching a record 5.2 billion in the third quarter, as Gord said. The 6% growth over the prior year resulted mainly from stronger trading results on improved market conditions, and strong volume growth in our Wealth Management and banking businesses. Excluding the impact of the stronger Canadian dollar relative to the U.S. dollar, revenue growth would have been 9%. Compared to the second quarter, we experienced a 2% increase, largely from growth in our corporate and retail banking businesses, partially reflecting the three additional days in the quarter.

Our net interest income was up 6% from a year ago as shown on slide 11. RBC Canadian Personal and Business' net interest income rose 11% from the third quarter last year, mainly due to strong loan growth and improved deposit spreads. In U.S. and international personal and business, the impact of the stronger Canadian dollar reduced net interest income, but in U.S. dollars it grew 6%, reflecting strong loan and deposit growth in the platform.

RBC Capital Markets' net interest income remained low this quarter, primarily due to higher funding costs related to certain equity trading strategies. Slide 12 shows our year-over-year growth in noninterest income. You'll note that the growth in the third quarter came mostly from trading, investments, and banking-related revenues. The decline in other revenue that you see on this slide is primarily due to higher mark-to-market losses on derivatives relating to certain economic hedges, and lower private equity gains in the current period compared to the prior one. The decrease also reflected a 37 million favorable accounting adjustment related to an investment recorded last year.

The decline in insurance-related revenue was primarily due to lower investment income on equity backing the Canadian universal life policies, lower revenue from our U.S. life operations due to the negative impact of the strong Canadian dollar, and lower annuity sales.

On slide 13 you can see that total trading revenues in the third quarter were 537 million, an increase of 43% from a year ago, reflecting stronger trading results, primarily in our equity businesses on improved market …