Royal Bank of Canada F3Q07 (Qtr End 7/31/07) Earnings Call Transcript

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Royal Bank of Canada (RY)

F3Q07 (Qtr End 7/31/07) Earnings Call

August 24, 2007, 1:30 PM ET

Executives

Marcia Moffat - 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

Peter Armenio - Group Head, U.S. and International Banking

Analysts

Jim Bantis - Credit Suisse

André-Philippe Hardy - RBC Capital Markets

Sumit Malhotra - Merrill Lynch

Mario Mendonca - Genuity Capital Markets

Darko Mihelic - CIBC World Markets

Michael Goldberg - Desjardins Securities

Presentation

Operator

Good afternoon ladies and gentlemen. Welcome to the RBC 2007 Third 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 of Investor Relations

Thank you very much operator. Good afternoon everyone and thanks for joining us. Presenting to you today are Gord Nixon, our CEO; Morten Friis, our Chief Risk Officer and Janice Fukakusa, our Chief Financial Officer.

Following our formal comments, we will open up the call for questions from analysts. We ask that you please ask one or two questions and then requeue so that everyone has an opportunity to participate. In addition, I would like to thank our shareholders who emailed questions to us. Our management team will be addressing your questions in their remarks. The call will be 1 hour long and we will be posting our formal comments on our website shortly after the call.

Joining us for your questions are Peter Armenio, Head of our U. S. and International Banking segment; George Lewis, Head of our Wealth Management segment; Marty Lippert, Head of Global Technology and Operations; Barb Stymiest, our Chief Operating Officer; Jim Westlake, Head of our Canadian Banking segment and Chuck Winograd, CEO of our Capital Markets segment.

Please note that our comments 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 describes factors that could cause results to differ materially from what is expressed in these statements.

I'll now turn the call over to Gord Nixon.

Gordon M. Nixon - President and Chief Executive Officer

Thank you, Marcia, and good afternoon everybody. Before I turn to RBC's performance, I would like to make some opening comments on the Canadian economy and then address what is happening in the financial market.

As you know, we have experienced strong economic growth in Canada in recent years. This growth has been largely driven by an extended period of low and stable rates, strong consumer spending, low unemployment and a robust business environment. Today, the fundamentals of our economy continue to remain solid as unemployment is at historically low levels and retail sales remain strong. Overall, the Canadian economy is expected to grow at 2.6% in '07 and our outlook remains positive. As we examine what is happening in today's financial markets, I do believe it is important not to lose sight of those fundamentals.

Global financial markets, as you well know, have been reacting to issues in the U. S. subprime market for some time now. Until recently, they have been largely contained; however, late in the third quarter, these concerns escalated and spilled over into other markets including high quality debt markets that are not directly related to the U. S. subprime market. The result has been increased volatility, wider credit spread and a lack of liquidity in certain assets. We have enjoyed robust capital market conditions for an extended period of time and now credit markets are experiencing a correction.

During a sustained period of low rates, access to capital has been relatively easy, which created a surplus of liquidity in the market. The excess liquidity led to some disconnect between debt prices and the associated risk. Investors are now reevaluating their portfolios, and as some reduce or eliminate certain positions, it is causing general flight to quality. Those who hold higher risk, more complex investment products are having difficult finding buyers and these markets are going through this period of illiquidity.

It is important to recognize that for the vast majority of investments, the underlying assets have not deteriorated in quality. And I expect that it will take some time before we return to more balanced conditions. Now the bad news is that this recalibration process brings with it challenges, not just with respect to balance sheet management, but it will also impact business activity in certain areas. The good news, though, is the volatility that we are experiencing will also create opportunity. Risk is now more appropriately priced, which we believe will have a positive long-term impact on our return on asset. During periods of turmoil in the past, the strength and breadth of RBC's capability have allowed us to grow our rate of client acquisition and market share.

There are a few points I would like to emphasize. First, we have a solid capital position and our Tier 1 capital ratio is well about most global financial institutions. We have prudent risk management practices designed to proactively manage exposures and control risk. And our current liquidity and funding position is sound and we have a comprehensive framework for managing liquidity and funding.

I am very comfortable with the quality of the businesses that we are in. In fact, the diversity of our businesses across and within banking, insurance, wealth management and capital markets is a core strength and I believe a competitive advantage of RBC.

I'll briefly common on a few topical areas of recent concern: The U. S. subprime market, leveraged buyouts or LBOs, hedge funds and non-bank sponsored asset-backed commercial paper program. Morten will elaborate and cover other issues of interest with respect to balance sheet and risks following my remarks.

First, we do not originate U. S. subprime and peer our exposure to U. S. subprime residential mortgage-backed securities and collateralized debt obligations is minimal. Our underwriting commitments to LBOs are also quite minimal as is our exposure to hedge funds. We are not anticipating any significant impact on our results from these areas.

Turning to asset-backed commercial paper, the sector that has been illiquid in recent weeks is the Canadian non-bank sponsored conduit with general market disruption facility. Our exposure as an owner of this paper, a distributor of this paper or a liquidity provider is nominal. With respect to bank-sponsored conduits, our Canadian-based asset-backed commercial paper program is among the smallest of the Canadian banks. Over 70% of our conduits are U. S.-based and all of our programs have and always have what are referred to as global or U. S.-styled liquidity, meaning that they do not require market disruption to occur for backup liquidity to be available. None of our conduits have required this backup liquidity.

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