Dave Mun - SVP and Head, Investor Relations Dave McKay - President and CEO Rod Bolger - CFO Graeme Hepworth - Chief Risk Officer Neil McLaughlin - Group Head, Personal & Commercial Banking Doug Guzman - Group Head, Wealth Management & Insurance Doug McGregor - Group Head, Capital Markets and Investor & Treasury Services

Ebrahim Poonawala - BofA Merrill Lynch Meny Grauman - Cormark Securities Inc. Gabriel Dechaine - National Bank Financial, Inc. Sumit Malhotra - Scotiabank Global Banking and Markets Doug Young - Desjardins Securities Inc. Sohrab Movahedi - BMO Capital Markets Scott Chan - Canaccord Genuity Nigel D'Souza - Veritas Investment Research Corporation Mario Mendonca - TD Securities Stephen Theriault - Eight Capital

Good morning, ladies and gentlemen. Welcome to the RBC 2018 Second Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dave Mun, SVP and Head of Investor Relations. Please go ahead, Mr. Mun.

Thanks, operator, and good morning. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. We'll open the call for questions following their comments. To give everyone a chance to ask a question, we ask that you limit your questions and then re-queue. In the room we also have with us today Neil McLaughlin, Group Head of Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; and Doug McGregor, Group Head, Capital Markets and Investor & Treasury Services. As noted on Slide 2, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. With that, I'll turn it over to Dave.

Thanks, Dave, and good morning, everyone, and thanks for joining us today. The second quarter with earnings of $3.1 billion, up 9% from last year and EPS was up 11%. Our franchise is driving growth with a focus on maintaining lowering volatility and a premium ROE, which reached 18.1% this quarter. We saw good results across our businesses as we benefited from strong volume and sales growth as well as higher interest rates. While uncertainty over NAFTA remains a concern on both sides of the border, clients and markets have continued to work through this uncertainty. We remain in close dialogue with governments as with our clients, and we continue to remain hopeful for both sides to reach an agreement. We are transforming the bank and our mission is to create more value per clients and to leverage our size and scale in everything we do. We are investing broadly for future growth including in technology and the best talent. This quarter we grow our leadership in fundamental and applied machine learning by opening another Borealis AI research lab this time in Vancouver. The lab concentrates on computer vision, a subfield of machine learning, focused on training computers to see and understand the visual world. We also launched the RBC developers portal, which allows eligible external software developers, industry innovators and clients to accept select RBC APIs or Application Programming Interfaces. This initiative will increase connectivity with developers and create new tools and experiences for clients. Just two of the many projects in place as we transform RBC into a digitally enabled relationship bank. As we innovate and make banking easier for customers, we know that our clients privacy is of utmost importance. And we will continue to dedicate significant resources towards data protection and cybersecurity. Turning to the second quarter. Canadian Banking continue to benefit from a strong Canadian economy and healthy employment, which helped to drive strong volume growth and low PCL. Notwithstanding monetary tightening and regulatory changes that affected some homeowners, we continue to see solid mortgage volume growth this quarter. We also saw momentum continue in business lending as a result of our focus on growing commercial client base. Our RBC rewards program combined with our partnership with WestJet and Petro-Canada has created significant value for our clients and led to strong purchase volume growth in credit cards. Even investing in our people to better serve our clients, and I'm proud that RBC was awarded highest in customer satisfaction among the big five retail banks by JD Power for the third year in a row. This speaks volumes about our employees and I like to thank them for putting the client at the center of everything we do. This quarter two of RBC's digital initiatives also won Model Bank awards from Celent. NOMI Insights and NOMI Find & Save won in the Personal Financial Experience category, and RBC's digital employees activation strategy won in the Employee Productivity category. Turning to Wealth Management, we had another quarter of double-digit earnings growth with very strong operating leverage. In Canadian Wealth Management, we added client facing advisers and grew net sales. RBC DS received the highest overall rating by investment advisors among all full-service brokerages in Canada in the 2018 brokerage report card by investment executive. In Global Asset Management, we continue to lead a AUM growth, and 84% of GAM's Canadian retail assets are beating their benchmarks on a 3-year basis. I’m pleased that this quarter GAM launched the only Canadian Investment Fund, which focus exclusively on board diversity in Canada. We also saw strong results in our U.S Wealth Management business. Even as we made investments for future growth by adding new bankers and expanding into new markets. Our U.S Wealth Franchise continues to grow its client base currently at over 480,000 clients. This has contributed to consistent loan growth of 13% to 15% at City National over the past 2.5 years, well above the industry average as we continue to see strong margin expansion. Our Insurance business also continues to grow. This quarter our term life business gained 7.5% market share and we continue to be the market leader in individual disability insurance with 38% share of the market. Our Investor and Treasury services business has seen the benefits of our technology investments made over the last 3-years with increasing client growth driving revenue. This quarter we saw notable client wins and renewals in key markets such as Luxembourg and Australia, which have driven higher revenue across a broad range of product offerings. We are committed to continued investments in our global platforms. Our capital markets performance was stable from last year. We saw strong corporate lending in Canada and in Europe and continued momentum in European investment banking. However, the North American fee pool was down in the quarter and we saw lower equities in fixed trading revenue in a more challenging trading environment. We made notable market gains in power and utilities, real estate and high-yield in the U.S and M&A in Europe. And we continue to build our franchises in those geographies by adding investment bankers across sectors and products, which we expect will drive origination activity. This quarter, RBC acted as joint lead arranger and joint book runner on the $38 billion debt financing in support of T-Mobile's merger with Sprint, which is expected to close in the first half of 2019. This represents one of the largest U.S wireless transactions and one of the largest M&A transactions globally. In conclusion, I'm very pleased with our record second quarter results, which resulted from execution of our strategy and strong economic fundamentals. Looking forward, we expect strong earnings growth to continue into the second half of the year, and we are tracking wealth and meet our financial objectives for the full-year. I’m also excited that we will share more details about our digital transformation and how we're creating more value for clients at our upcoming Investor Day on June 13. And now I will turn it over to Rod to discuss our second quarter financial results.

Thanks, Dave, and good morning, everyone. Starting on Slide 6, we had strong second quarter earnings of $3.1 billion. Earnings were up 9% from last year and EPS of $2.06 a share was up 11% reflecting the benefit of share buybacks. We had strong revenue growth in our retail bank and wealth management franchises as well as in investment treasury services. However, market related revenues were down in some businesses due to less favorable market conditions. Our expense growth was contained a 3% from a year-ago even as we continue to invest heavily in talent and technology, including digital initiatives to support client business growth. Our credit quality was stable as the current economic environment and outlook remain favorable. Last quarter we recorded $178 million write-down due to U.S tax reform and we're still on track to earn that back by the end of the year. Given our business mix outlook, we're expecting our total effective tax rate to be at the low end of 21% to 23% range. Turning to Slide 7, or CET1 ratio of 10.9% remains comfortably within our target range of 10.5% to 11%. A strong internal capital generation [technical difficulty] higher RWA, reflecting good growth in client relationship business across our segments. We also had an update to our retail lending risk parameters which was partly offset by the reversal of the Basel I floor adjustment. Consistent with our expectations, the new Basel II floor did not have an impact this quarter and we do not expect it to impact our capital ratio in the foreseeable future. Moving on to our business segments on Slide 8, first one commercial banking reported earnings of almost $1.5 billion, and Canadian Banking net income of $1.4 billion was up 8% year-over-year. This was driven by a 9% increase in revenue from solid volume growth across most products, including card purchase volumes and higher spreads from interest-rate hikes. Business lending, in particular, was strong, up 12.8% from last year as we continue to gain market share. Following the implementation of the B20 guidelines, we saw solid volume growth of 6% in mortgages, amid a backdrop of lower average home prices in Toronto. Mortgage growth stayed relatively stable quarter-over-quarter. However, we did see a modest decline in HELOC balances as clients migrated variable-rate balances into fixed rate mortgages in a rising rate environment. We continue to expect mortgage growth in the mid single-digit range for the full-year. And even if mortgage growth slows more than expected, over -- the overall NIM benefit from rate hikes more than offset the revenue impact from slower growth. For example, if mortgage balances grow at half our expected rate, the impact on 2019 revenue would be less than the benefit we received from one Bank of Canada rate hike. Net interest margins increased 12 basis points year-over-year and 6 basis points quarter-over-quarter, largely benefiting from higher interest rates. And we expect NIM will increase a further 2 to 4 basis points by the end of the year given the current rate outlook. We continue to make investments in talent and technology to support business growth and digital investments putting our expense growth at 8% year-over-year. This led deposit operating leverage to 0.7% just shy of our annual 1% to 2% target range. On a year-to-date basis, operating leverage was 2.1% after excluding last quarter's gain related to the Interac reorganization and last year's gain related to Moneris. For the second half of 2018, we expect our operating leverage be in the 2% to 3% range. Turning to Slide 9, Wealth Management reported earnings of $537 million with double-digit earnings growth of 25% year-over-year. This was the second highest quarter on record in spite of choppy market conditions. Revenue in Global Asset Management and Canadian Wealth Management increased 6% and 7% respectively, primarily reflecting higher fee-based assets and solid net sales and capital appreciation. In U.S Wealth Management, including City National, revenue was up 9% year-over-year in U.S dollars due to strong 15% loan growth at City National, benefits from higher U.S interest rates and higher fee-based assets. As a reminder, when comparing quarter-over-quarter results, last quarter included a one-time $23 million favorable accounting adjustment for City National. Moving on to Insurance on Slide 10, net income of $172 million was up 4% from last year largely due to favorable investment related experience. Quarter-over-quarter figures were positively impacted by favorable investment related experience and lower disability claims. On slide 11, Investment Treasury Services had double-digit earnings growth of 10% year-over-year to $212 million. This was driven by higher revenue in our Asset Services business, including custody, improving margins from recent rate hikes and growth in client deposits. In Capital markets on Slide 12, we had stable net income year-over-year and this was our third highest quarter on a -- on record despite less favorable market conditions. We benefited from a lower tax rate due to the U.S tax reform and lower loan-loss provisions. We also -- saw higher muni banking activity, a record quarter for European investment banking revenue and increased lending business largely in Canada and Europe. This quarter RBC Capital Markets advised Melrose on its acquisition of GKN plc in Europe and also underwrote the associated debt financing. This transaction represents RBC's largest ever industrial advisory role in Europe and demonstrates a full-service offering across all products to support clients on their highest profile transaction. Despite these wins, our results were lower in global markets and corporate investment banking, mainly in U.S partly due to comparables from strong prior periods. Global fee pools were down, which led to lower equity and debt origination and loan syndication in North America as well as lower M&A in the U.S as some deals were pushed to the third quarter. Now looking ahead, we have a very robust deal pipeline. We have some deals converting in future quarters as reflected in our strong RWA growth and expect our lending relationships to generate more ancillary fees. Although fixed income trading revenue was down, we did see increased fixed income trading in Canada due to higher client activity in our commodities business. In conclusion, we are pleased with our results this quarter as we continue to invest in future growth and create value for our clients. And with that, I will turn the call over to Graeme.

Thank you, Rod, and good morning. Happy to be here. Overall, the credit quality of our portfolio is strong as we continue to operate in a benign credit environment. The macroeconomic environment in Canada and the U.S remains favorable with low unemployment and solid GDP growth. Starting on Slide 14, total PCL of $274 million was down $60 million from last quarter. This includes PCL on impaired loans of $298 million, down $27 million from last quarter mainly due to lower provisions in capital markets. Our total PCL ratio on loans was 20 basis points, down 4 basis points from last quarter, while PCL on impaired loans was 22 basis points, down 1 basis point from the prior quarter. Let me provide some additional color on our businesses. In Canadian Banking, PCL loans decreased by $11 million from last quarter. This reflects a decrease in PCL on impaired loans of $7 million mainly due to lower provisions in our commercial and personal lending portfolios, which was partially offset by an increase in credit cards, and a decrease in provisions for performing loans mainly in our personal banking portfolios. In Caribbean and U.S Banking, PCL on loans increased $5 million from last quarter, mainly due to higher provisions on impaired loans on a few accounts that were unrelated to the hurricanes last year. This was partially offset by lower provisions on performing loans in the Bahamas, and Trinidad and Tobago. In Wealth Management, PCL on loans decreased $18 million from last quarter, primarily reflecting lower provisions on performing loans in City National due to repayments and maturities, which was partially offset by volume growth. In Capital Markets, PCL on loans decreased $34 million from last quarter primarily driven by lower provisions on impaired loans across multiple sectors. Turning to Slide 15, gross impaired loans of $2.7 billion were up a $128 million or 5% from last quarter. A growth impaired loan ratio of 47 basis points was up 2 basis points from last quarter, the most sizable increase in gross impaired loans is in capital markets and was due to additional impairments on a few oil and gas loans. On Slide 16, we have more detail on our Canadian Banking portfolio. Overall, delinquencies remain relatively favorable across our retail portfolios. PCL was largely stable across all Canadian retail products with the exception of cards, which was seasonally higher. The credit quality of our Canadian Residential Mortgages continues to be strong with provisions at 1 basis point. We remain comfortable in our clients' ability to service their mortgage in this rising rate environment given our strong underwriting and credit monitoring practices. Overall, we are pleased with the performance of our lending portfolios, while we expect to see some volatility quarter-to-quarter, we continue to expect our PCL ratio to be in the 25 to 30 basis point range for the balance of 2018. With that, operator, let's open the lines for question-and-answer.

Thank you, Mr. Hepworth. [Operator Instructions] Our first question is from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.

Good morning. I just wanted to start out with a big picture question in terms of -- it sounds like you were relatively constructive macro outlook as you look out over the next 12 months. But at the same time, when we tie that with what’s happening in the housing market and the slow down we’re seeing there, Dave, I think you mentioned about the NAFTA uncertainty and it doesn’t look like that’s going to be resolved anytime soon. I’m just wondering how do you think about sort of the downside risk to GDP growth relative to current expectations, and how does that feed into your expectation for the bank, both in terms of business banking growth or in terms of credit outlook?

It's a good question. Certainly the uncertainty around NAFTA cause us -- some investment decisions to go on hold. So it is not without impact. Largely we are seeing customers continue to work through that, find new markets, find new client segments, we are seeing business investment in machinery and equipment still on a healthy pace so that points to productivity increases in the economy and creates a business lending operation as you’ve seen on the business banking side, and driving strong results. So we’re still seeing the current economic activity to be strong, and I think the Bank of Canada is signaling very much the same when you think about 3 plus years, are we doing all the right things to ensure this growth, there's more that we could be doing and we talked about that. But all-in-all, time is still strong and you saw from our comments that we are seeing healthy business pipelines both on the commercial and capital markets side. You're seeing a good deposit growth. You're seeing very strong results out of our U.S Wealth Management franchise with very, very good margins, good lending volumes. Deposit volumes have come off a little bit given sophisticated clients are looking at other opportunities with their deposit base. But you're still seeing good growth in the mid single-digit range and we're long deposits there as it is. So, overall, a healthy environment. So I think those macro environments are causing some. Some slowing of the economy for sure, but overall we are -- as you’ve heard in my comments, we are feeling good about the second half of the year.

Got it. And just if I can tack to that in terms of business banking, I think I heard you say some of that growth is coming from market share gains. Would love any color that you can provide around who are we wining that market share from? Is it nonbanks, are certain banks pulling them up back, just because it seems like it's pretty strong growth and I’m trying to handicap the sustainability of that growth as we look out in the next 12 months?

Yes, thanks, Ebrahim. We will try to keep it to one question, but Neil will answer that question, then we will move on to the next.

Thank you.

Yes. The market share growth we've been about six quarters where we are gaining growth -- gaining share. And it is consistent with the strategy we talked about last quarter, which is looking at our policies about 2 years ago, and then the addition of commercial account managers into our commercial business just calling out to more customers. So that's really the source of the growth. In terms of where we are growing, it's really -- as we looked at it, it's across sector. We did have a couple of sectors that we targeted specifically where we thought there was opportunity, but the result has been across every credit segment in terms of loan size and well diversified across geography and industry.

The next question.

Thank you. Our next question is from Meny Grauman with Cormark Securities. Please go ahead.

Hi. Good morning. The question is about B20. From the sound of it, it doesn't look like it's having real impact on your business on your mortgage volume, specifically and just the real question is why do you think that is? Thanks.

Well, I think that the dynamics are consistent with what we’ve spoken about previously. We are still feeling the -- we are having deals closed that were part of some of these clients trying to get ahead of it. So this pull forward effect had as expected pushed into Q2 and we had never really believed that this would be a significant impact on our mortgage business. So we continue to target mid single-digit mortgage growth, which is what we're on plan for now. And the impacts just we're seeing minor skew to the portfolio, but nothing significant.

Can you just comment on your renewal pattern if that’s changing, and then just on originations as well?

Yes. So renewals we have seen -- renewals with a nice increase year-over-year. Part of that we would attribute to B20 and part of that we would attribute to some process improvements we made just to make it more seamless for customers to renew their mortgage with us. So we believe that the combination, but that's definitely helping the business. In terms of originations, we're up year-over-year for the first half of the year. But we are looking for that trend to start to slowdown in the back half of the year.

Thank you.

Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Hi. Good morning. Actually, I just want to follow up on that question, a bit more granularity. I did some rough math and it's consistent with what you are saying on the originations being up in the first half, actually more on Q2, specifically, they seem to be up year-over-year. Is that the case? And b, do you -- what do you expect for the clients in the second half and are you still comfortable with that -- whatever, 5% decline in originations from B20?

Yes, I think we will just connect those dots. Q2 was up more than Q1 in terms of originations and when we look at that original estimate of 5% we’re still looking at that being probably in the target range, but skewed more to the back half of the year.

Okay, perfect. And if I could just throw something in there on the commercial side of things, commercial real estate, that portfolio in the wholesale book, it's about 33, $8.4 billion in the Canadian segment -- or in Canada, I should say, and about 80% of that I think is in PNC. It looks to be growing up at around 20% year-over-year. Can you give me some granularity in the PNC segment on what's driving that growth and how do you see that playing out as the housing market slows down?

Sure. So it's, I guess, the continuation of the previous response on overall commercial lending. Our commercial mortgage business was a place that we did look at some policies, really took our time to understand where the market was, where we were. We got comfortable with the risk and made some policy changes more than a year-ago. This is also a business where we’ve a specialized sales force that specializes in commercial mortgages. So we’ve grown that team somewhat in a combination of those two things what’s really driving the commercial real estate growth. It's an asset class we feel very comfortable with and at this point it's really distribution led in terms of how we're growing it.

So you were previously, maybe dialing back and then you studied a bit more, got more comfortable with it and then added -- allocated more capital to that business?

Yes. We had looked at where we were versus the market. Understood what the incremental risk would be, we will be taking on by changing our policies, and once we got comfortable with that, we made the change and then coupled that with additional commercial account manager capacity and commercial mortgage specialist sales forces.

Okay. Thank you.

Thank you. Our next question is from Sumit Malhotra with Scotia Capital. Please go ahead.

Thanks. Good morning. Just a question on capital to start. It was mentioned in the release that there was an update of risk parameters. I think that was on the retail portfolio if I’m remembering correctly. Just hopefully, you can give us a little bit more detail on what exactly was being reviewed and is there another component of this that will follow on other parts of the book?

I think Rod can answer that.

Yes. Sumit, we look at fees every year and part of this is looking at our own historical data and part of it is looking at industry data. And on this one, our historical data was better than industry data, but we took our parameters up to the industry data. So it basically makes the risk weighting more conservative and also more conservative than what our historical loss data has been. So this is normal course of business in accordance with the Basel requirements. We're -- we undergo these annually. You would see these usually once a year or so, both in the retail book and the wholesale book. We are currently undertaking a look at the wholesale book right now. We don't expect significant changes coming out of that, but that would be an impact of less than 10 basis points in the future quarter plus or minus.

And just to be clear, Rod, was that Canadian consumer or was it across the -- that’s the bulk of your exposure, you have some U.S., some Caribbean, but it was Canadian consumer updates?

Yes. Sumit, this is Graeme. It was primarily a big Canadian consumer at the Canadian retail business.

And this one is going to be for Neil, I’m sorry if I missed it in the prepared remarks, I was a little bit late coming on. Just on the expense growth in Canada this quarter, obviously it looked a little bit heavier. I know the timing of project spend can have an impact there, but I don’t want to bury the lead. Your revenue was obviously very strong as well and maybe that influenced some of the allocation expenses. Anything specific from a project perspective that drove the larger increase and what are you forecasting or what are you thinking about in terms of the level of expense growth going forward?

Thanks for the question. Yes, this quarter we had some lumpy expenses partly due to the year-over-year comparison of a credit card credit -- credit in our credit card business that we received last year which is a one-time or so, that made up about 2% of the growth. The rest of it was just timing of expenses, a couple of them in our sponsorships and donations line and the rest of it would be sort of normal course expense growth related to FTE in technology. So talent and technology as per Rod's comments. In terms of the outlook for Q3 and Q4, as Rod mentioned, we are targeting the sort of the higher end of 2% to 3% operating leverage. And our NIE growth would be more into the range of 4% to 5%.

Thank you for your time.

Thank you. Our next question is from Robert Sedran with CIBC Capital Markets. Please go ahead.

Hi. Good morning. Just to follow-up quickly on that operating leverage comment. I remember last year toward the back half there were some fairly meaningful severance expenses that were affecting some of the year-on-year comps. Is that 2% to 3% confidence largely from those falling away this year or is there further expense control beyond those?

The 2% to 3%, its -- we saw -- so that is an opportunity for us in terms of not expecting to have a severance expense of that size this year. It's also the benefit of the rate hikes that Rod had mentioned in his prepared comments. And then, we are obviously making sure we keep an eye on where we are investing into the business.

Okay. Thank you. And I just wanted to follow-up quickly on the -- some of the mortgage commentary because the sequential growth in mortgages and part of this may just be the way averages play out, but particularly with some of the pull forward effect you described, the sequential growth in mortgages is comfortably below the annual run rate. Are you expecting mortgage growth to accelerate in the second half? Am I -- I can imagine that’s the case, but is that what you're adjusting?

No.

I’m starting to think into '19 and I know it's early to talk about '19, it's still not even halfway through '18, but when you think about the trajectory of the mortgage growth, is it going to slow still further from what we saw in H1 or are you expecting stability?

I think what we’ve -- how are we looking at the business is that we are benefiting right now from this pull forward effect. We do believe there will be a modest slowing, partly due to the B20. And so the back half of the year we will see slowing growth and in 2019 I think we're really still waiting to get the data point somewhat Q3 and Q4 we are going to be before we start really putting out an outlook for 2019.

For -- refinance activity down and resales are down across the country, right about 5%.

Yes, exactly.

I think that would be part of the slow down you would see.

Okay. Thank you.

Thank you. Our next question is from Doug Young with Desjardins Capital Markets. Please go ahead.

Hi. Good morning. Just in Canada on the credit card book, I just noticed the PCL sequentially did increase, your balances were down sequentially, and maybe this is seasonality and maybe you can kind of elaborate on that. But Royal has a unique insight into the Canadian consumer, given your size. I’m just -- maybe you can talk about the sequential change in the credit card PCLs and then what are you seeing from the Canadian consumer because obviously every day we read about the strained Canadian consumer. Can you give us any other data points that you're seeing to give us for the comfort or suggest there is things that we should be watching? Thank you.

Certainly. Thanks for the question. This is Graeme. On the card, certainly, what we see in Q2 is what we will view is seasonality. We saw that tick up last year. It's very consistent in kind of following the holiday season to see that, that tick up in Q2. So we do expect that to come back down in the future quarters. And we don’t really see anything coming out of our cards portfolio that would indicate any concern at this point in time. I mean, overall on the Canadian consumers, certainly it's something everyone is very mindful of. I think we’re trying to take a very consistent approach in our policies and in our risk strategy. So we haven't made any significant changes there and then continue there to drive a very good origination profile. Certainly our client base is a prime client base as well, and so that again is reflected in the originations you see. So at this point in time, between the macroeconomic backdrop that Rod reflected earlier, where you're seeing rising rates but that's consistent and offset, if you will, by strong unemployment environment and robust GDP. So certainly in the near-term, I think we continue to be quite comfortable with the profile of our clients.

So in a nutshell, no real strain, nothing that’s concerning at this point in time?

We don’t see, I think an early warning signal at this point in time, no.

Okay, great. Thank you.

Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Thanks. Rod, you were talking about RWA growth as one of the reasons why the CET1 ratio was held back a little bit. We’ve seen the commercial loan growth in Canada, lots of talk about it over here. So I guess, I am just trying to kind of get a sense of, are you trying to use the balance sheet a bit more now to win business, and so that RWA growth is coming more through balance sheet leverage, whether it's in the Capital Markets business or otherwise? And is that RWA growth because you're adding new clients or is it largely because existing clients are going down, let's say, on existing lines?

Yes. I will start, and I will hand it off to Doug because most of the growth was in when you strip out the retail parameter change, which impact the Canadian banking. Most of the growth was in capital markets and mostly a lot of it -- I mean, it was across the board market risk, credit risk, but there were significant underwriting risk-weighted assets that were added and that’s some of the pipeline of the deal that Dave mentioned, but I will hand it off to Doug.

Yes, so in Capital Markets the growth in RWA was sort of in the mid-teens. There was about five of it that was really underwriting related, some that’s in connection with the transaction Dave mentioned in his remarks, some from others. So that's good business. It's I think well compensated for those underwritings. And we happen to be putting on some loans in the U.S., and U.K to continue to build out the investment bank. And so we haven't really seen that loan book grow much the last couple of years, we are getting a bit more growth there now. And the balance is in some trading securities and in our repo business. So we have been putting more balance sheet to work over the last quarter and we expect that we will receive the benefits of that over the remainder of the year.

So Doug, and this would be all in -- I shouldn't say all, but given the nature of your business, usually in the U.S. and the U.K., this would be more in the high yield end of the credit spectrum?

Well, the underwriting is a combination. It's usually -- its in the DD range on average. And so some LBOs and some corporate deals like the T-Mobile deal that Dave mentioned earlier. In terms of the lending, the average credit is a DDD.

Okay. Thank you.

Thank you. Our next question is from Scott Chan with Canaccord Genuity. Please go ahead.

Hi. Good morning. Just switch to the U.S side, when I look at the NIM at City National Bank, it got really strong sequential margin increase and also year-over-year well above peers that seem to be slowing. What’s different at City National Bank that’s driving more of an incremental increase and then how do we look at that going forward I guess, with further rate hikes expected down there?

I will give you the high level kind of growth view, and then I will hand it Rod for any specific fill in of more detail. Certainly you are looking at our ability to not only benefit from -- at the short end of the curve with the fed rate increases as we have a highly variable rate lending book and placing that -- those excess deposits into the market, but also we're adding customers, we're growing and we’re creating a little more duration of what -- as we land on the longer end and benefit from the steepness of the curve. So you’ve got both effects going on and our client franchise is doing fantastically well. The operating environment in LA and California is very strong. Our expansion into New York and Washington is going very well. We will be adding more to that. We invested significantly in more sales in private banking. In commercial banking resources, which we talked about, you’re starting to see that. So it's that 14% to 15% loan growth creating some duration. It's also the short end of the curve creating a lift there. So when you combine that healthy loan growth with the significant deposit franchise we have, you get that type of effect.

Yes, and we’ve also -- we’ve a large amount of basically, checking accounts that pay no interest rate. So as interest rates move up it does accelerate the spread improvement. And the forward markets are, call it, for two or three rate increases by next year. So if those due take place, we should see continued spread improvement in that business.

Great. Very helpful. Thank you.

Thank you. Our next question is from Nigel D'Souza with Veritas Investment. Please go ahead. Nigel D'Souza: Thank you. Good morning. I wanted to follow-up on a comment Rod made on your HELOC book. So you mentioned that your HELOC book declined sequentially and that was attributed to customers shifting from the variable floating exposure to the fixed kind of debt, and could you clarify what exactly is happening there?

I think Neil can take that question.

Yes. We just have customers as they’re watching rates increase, saying that their appetite for interest rate risk, they preferred to lock it into a fixed rate and just have the certainty of a payment. So we’re seeing about $300 million a month move from the line of credit portion into a term portion of the HELOC. Nigel D'Souza: Okay. Does your HELOC book include amortizing term HELOCs and floating consolidated? Is that captured in the $40.5 billion number? I’m asking that because it's a shift to really what's driving the decline or are both those type of loan categories included in the total HELOC balance?

Revolving credit piece.

Yes. Yes, no, our structure is a pure revolving credit line segment. The customer can have multiple segments. And then they could also have multiple segments of a fixed term or a variable term mortgage. Nigel D'Souza: Okay, got it. And just a last quick question, if I could, just on your PCL guidance to clarify. You mentioned 25 to 30 basis points, much of that was back half of '18 or over the full-year, but it indicates an uptick in PCLs, and given the current benign credit risk environment, what do you see driving that uptick there?

This is Graeme. I will take that. So that’s a full-year guidance I was giving there. Why I’m indicating that range, I would say, twofold. One, certainly, in the kind of Stage 3 pieces we saw at lower levels this year, particularly coming out of Capital Markets and that can be lumpy, but we are still in the Stage 1 and 2. We had some releases this year and all being equal, we would expect that to kind of grow in line with the overall volume growth of the business and so that could be a couple of basis point there. And so I think when you put those together, that’s why we get back to that 25 to 30 basis point range, because we had some factors this quarter, I think, that helped reduce that below our expectations. Nigel D'Souza: Okay, great. Thank you.

Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.

Good morning. Before I get into the question I want to ask on capital, Rod, if I could just follow-up on something you said about margins in the U.S. You referred to the potential for two or three more rate hikes and how that would continue to benefit the margin? That caught me a little off guard largely because of some of the comments I’m hearing in the U.S from U.S banks on how deposit betas have moved materially higher and how the benefits just won't accrue the way they have in the past. Are you seeing anything on deposit betas that would cause you to revisit that guidance?

I think it's the construct of the book of business and the construct that we have is that we generally don't pay up for deposits, for large deposits like that because we don’t have -- we don’t get the liquidity value and we have more deposits than loans. So we're really looking for the transaction accounts and payment accounts, which tend to have a lower interest rate and a lower beta. So, yes, we are seeing that competition. We are seeing deposit pricing being much more competitive than it was in the past, but at the same time because of the construct of our book, it doesn't have the same impact that it might have on other institutions.

That explains that. Then into my actual question, this might be for Rod and Doug. I’m -- the banks CET1 ratio is perhaps the lowest in the group right now which throws me off in part because you're the only global SIFI. Where I’m going to with this is -- could there come a time and perhaps this is for Doug, where that lower CET1 ratio relative to global peers, and I understand there are differences in the way these things are calculated. Does it ever -- does there come by time when that puts you at a disadvantage relative to some of these other large global players in big capital markets decisions?

Well, in terms of the CET1 ratio at 10.9 versus a 11 or a 11.1, I think really that's affected by a number of things including how much stock we buyback. And so I think that’s a capital allocation that Rod and Dave make and we bring forward investment opportunities in our business and to date we've always been supported and so I’m not in a place where I'm concerned about finding capital to do attract business. It's more of an counterparty rating, I think, Mario.

Yes, it means we’ve very strong debt ratings and we’ve seen as a strong counterparty in the global industry and when you look at the buffers above the local minimum plus the G-SIB buffer, we are at Stage I versus some that are higher. The average is right around 300 basis points and we're currently at 290, last quarter we are 300. So we're right in there and we also believe that we tend to have lower risk. Graeme talked about our nonprime. We don't play in that space. We tend to have lower risk trading activity. So we are quite comfortable with this level. In fact, we had previously stated that our capital ratio objective was 10.5% plus. I think because of the market competition and kind of the upward escalation of some of the peers, we up that to 10.5% to 11%. So we are carrying capital above what we would need in a stress scenario. So we're quite comfortable with our capital ratio.

So one final quick point on this. Could you stomach CET1 ratio of 10.5% to do -- to make an acquisition as long as you knew that would only be a temporary condition. Could you stomach 10.5% for a deal?

Yes, this is Dave. Absolutely. And I think we’ve taken it down there in other instances over the past 18 months. I think we are at 10.6%. We had some opportunity to buy back some shares. So our returning capital or investing in inorganic growth, absolutely we would take it down to 10.5% and rebuild it from there.

Thank you.

Thank you. Our next question is from Steve Theriault with Eight Capital. Please go ahead.

Thanks very much. Just a quick one for me. Neil, you flagged earlier this year initiatives you expected to help personal lending in the back half of the year. So maybe is that underway, can you give us a little color here on what you're doing, what you're working on? Is that in full flight yet? Should we be expecting personal lending to show some meaningful growth in H2 after being pretty flattish for the last little while?

Thanks for the question. I'll break it down into the two segments. Our auto lending business is actually up 6% year-over-year. So we are feeling quite good about how we are computing in that category. The strategies we spoke to last quarter where really around our branch unsecured lending. Those strategies are underway. Things like refreshing our preapproved credit offers that will put out customers and second one just to re-engage our branch based account managers. So they are underway. I think, it will take us a while to really start to grow that branch unsecured lending channel. So auto right now we are feeling good about. We have a longer run to really drive competitiveness, but we are well underway with the strategies.

When you say it take us a while, does that feel like more of a next year when we will start to see it actually come through the growth numbers or sooner rather one? Go ahead.

We'll start to -- my expectation is we will start to see some of this pull through especially from the preapproved offers as well as some of the work we are doing around digital loan acquisition into the Q4 range, and then built from there into 2019.

And so you -- last thing, you mentioned auto lending was 6% up, so ex auto lending is it and we sort of 3-ish percent down year-on-year?

A little less than that. We are about 1.5% down in branch based unsecured lending.

Okay. Thank you.

Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Yes. Dave, I just wanted to get a reminder on when you think about capital allocation and mix of business, how big Capital Markets can get?

I think as you're seeing integrated diversification in our global businesses, particularly with our U.S wealth franchise if you extrapolate the first half of the year, we will approach it not to exceed $1 billion of earnings, which wasn’t the case. You are seeing greater diversification in our earnings. We still -- from an overall revenue and earnings and capital allocation mix, we are still targeting Capital Markets to be in that 20% to max 25% range. I think you're seeing downward thrust on that given the success of the U.S wealth franchise and diversifying that growth, and that's still our objective is to diversify and grow our wealth franchise and our retail banking capital markets has lots of room to grow as we have been able to build other business lines and we will continue to do so. So I think it fits with how much capital we want to put in the business. It fits with the volatility we are trying to drive through a cycle and what our investors are looking for. And therefore it remains a core tenant of our strategy.

Okay. And for Neil, just one clarification, Neil. You talked about commercial and six quarters of good growth and picking up market share. Can you just talk a little bit about the pricing, if you will, of new deals versus the back book and how competitive that is and whether or not market share is being picked up based on pricing?

No, we're not computing on prices. The lever we are pulling to generate that volume, it's the two things we had referenced earlier, really being making sure we are in market on policy and risk appetite and really leading with distribution strength. Hiring up 80 new commercial account managers, including some more specialists. So that's where it's really coming from. In terms of spreads, I think the spreads are more from -- we’re seeing more spread impact from the mix of business rather than competitive pressures. We had felt a lot of competitor pressure in commercial about a year-ago, it feels like that has started to become a little bit more reasonable.

Thank you.

Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Hi. Just had a follow-up on the capital question there and specifically on buybacks. Last year, we saw you -- about 30% almost of your earnings were a return to shareholders to be a buyback, we saw that at pace again in Q1. This quarter -- or this past quarter, it kind of fell below 10%, I believe. Given your relative positioning, not versus global, but versus other banks, do you feel pressure to maybe retain more and not buy back as much stock so that you don't fall too far behind some of the other big six banks?

Yes, it's Rod. I think you saw that this quarter a little bit where we didn’t do a lot of buybacks and that’s largely because our preference would be to allocate the capital to client driven business. And we had that opportunity this quarter. We saw good markets and we saw good activity and good relationships from our client facing teams and that’s where we allocated the capital and we would expect to do so in the future as well.

Okay. So more organic opportunities, less buyback -- or supporting organic growth, less buyback?

Yes. In the hierarchy, client driven organic growth would always be above share buybacks.

It's always been that way. We’ve commented that way for the last three or four years.

Okay. Then the other one, on the unsecured, the branch strategy, unsecured lending, you lump in auto lending with unsecured lending. And I am just wondering the brand strategy, are we talking about selling more auto loans to the branches or the unsecured personal loans type of thing?

Yes. No, we’re not targeting branches to be a real source of auto loans. No, that would be auto loans really are being sold through our dealer relationships and the branches are unsecured, installment loans are unsecured revolving lines of credit.

Okay. Can you remind me how big that portfolio overall is, like don’t have that in front of me right now? The [indiscernible] a little bit and how big it is in the branch?

Our branch based is about $22 billion.

With -- excluding auto?

That’s right.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question is from Nigel D'Souza with Veritas Investment. Please go ahead. Nigel D'Souza: Hi. Thank you for taking my follow-up. I just wanted to circle back on the HELOC question. And you can correct me if I’m wrong, but my understanding is that your HELOC book includes revolving and non-revolving HELOC lines, so when that shifts out from variable to fixed, is that portion that included in your res mortgage book or can you just walk me through what exactly is happening there on the balance side?

Yes, that’s exactly what happened. So if a customer went from having, let's say a tranche of revolving secured -- secured revolving credit line and decided to take a fixed segment, it would move from the credit line reported segment, secured credit line [indiscernible] segment into the residential mortgage line. Nigel D'Souza: Got it. And does that have any material kind of impact on sequential increase you saw in Q2 versus Q1, that shift?

It's been our -- the migrations have actually been happening for a while, really since interest rates started to go up. So it hasn't been that this quarter has been out of line with what we have seen since rate start to move. Nigel D'Souza: Okay, got it. Thanks. That's very helpful.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back to Mr. McKay.

I want to thank everyone for their questions. I think the themes that you’ve heard over the last hour are consistent that we are feeling good about our growth. We are feeling good about the pipeline of growth and continuing that momentum. We have seen good margin improvement and we are expecting to see a little bit better margin improvement over the year. You’re going to see a little bit better cost control and better operating leverage out of the bank going forward and with the constructive economies that we are working in, in our primary markets of Canada, the U.S and Europe, we still are forecasting as you saw from our 25 to 30 range of that fairly benign credit environment. So we are feeling good about the operating momentum we have and look to continue to perform. So thank you and we will see you again in Q3.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.