Q4 2007 Royal Bank Of Canada Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

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 MOFFAT, HEAD, IR, ROYAL BANK OF CANADA: 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; Barb 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'd 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'll now turn the call over to Gord Nixon.

GORD NIXON, PRESIDENT, CEO, ROYAL BANK OF CANADA: Good afternoon, everybody. I'm pleased to report that RBC had record financial results this year in 2007 with earnings of CAD5.5 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 nondomestic operations.

In a 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 to 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 slow.

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

Our US and international banking businesses continue to evolve and grow. RBC Dexia delivered record revenues this year. This segment had great results if you isolate the effects of the US housing environment on our US 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 CAD160 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'm 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 US subprime exposures in a few topical areas. We do not originate US subprime, and our net exposure to it is minimal. We have CAD216 million of net exposure to US subprime CDOs of ABSs. We also have CAD388 million of exposure to US subprime or MBSs, which is classified as available for sale and which we intend to hold to maturity. Combined, these amounts represent less than 0.1% of our assets.

In addition, we have de minimis dealings with structured investment vehicles, or SIVs as they are referred to, and Canadian nonbank sponsored ACB with general market disruptions. 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 details in our various disclosure documents. And Morten is going to elaborate on these following my remarks.

Turning to our 2007 performance, the table on slide five 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% compare favorably to our stated annual objectives and were due primarily to strong performances across our Canadian Banking Global Wealth Management businesses.

We returned 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 remains 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 costs supporting our growing businesses and investments in future growth initiatives including acquisitions.

Slide 6, you'll 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 years 15%. Relative to our peer group, we delivered top-quartile returns over the past three and 10 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 in banking, Wealth Management and Capital Markets in the United States' and to be the premier provider of selected global financial services. We think we made great strides in 2007 towards achieving these long-term goals, and I would like to highlight some of those areas.

In Canada, our retail businesses 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 Banking-related 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 Synovate as 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 2006. 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 of 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 US 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 US banking operation in 2007, and I'm encouraged by the work we have done to build a foundation for future growth, especially in the face 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 US banking business is managing through the effects of the recent downturn in the US real estate market, particularly our builders' business, we're confident in it. 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 US 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 over 450 branches following the acquisition, providing us with a solid platform in our priority regions.

In US Wealth Management, we continue to build scale by attracting new financial consultants and increasing their productivity. We also acquired JB Hanauer, which expanded our Wealth Management presence in high-growth

markets in New Jersey, Florida and Pennsylvania. In our US Capital Markets business, we continue to leverage our bulge bracket position 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 enhanced our capabilities in cash equities, municipal finance and US mergers and acquisitions.

Turning to our third goal, most notable development, was 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 trust services in Wealth Management is helping us drive success as a 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 Markets strength by focusing on select areas where we have competitive strengths, including fixed income, infrastructure, mining and energy. Overall, we're certainly pleased with our achievements in 2007 and we're looking forward to 2008 from a position of strength.

Looking ahead, slide 8 outlines our annual performance objectives for 2008. 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 US slowdown -- sorry, the slowdown in the US housing market.

Our 2008 objectives for ROE, defined operating leverage, Tier 1 capital and dividend …