Dave Mun - SVP & Head, Investor Relations David McKay - President & Chief Executive Officer Rod Bolger - Chief Financial Officer Mark Hughes - Chief Risk Officer Neil McLaughlin - Group Head, Personal & Commercial Banking Doug Guzman - Group Head, RBC Wealth Management & RBC Insurance Douglas McGregor - Group Head, Capital Markets and Investor & Treasury Services

Robert Sedran - CIBC World Markets John Aiken - Barclays Capital Sumit Malhotra - Scotiabank Meny Grauman - Cormark Securities Mario Mendonca - TD Securities Gabriel Dechaine - National Bank Financial Steve Theriault - Eight Capital Management, LLC Sohrab Movahedi - BMO Capital Markets Doug Young - Desjardins Capital Markets Nick Stogdill - Credit Suisse

Good morning, ladies and gentlemen. Welcome to the RBC 2017 Third Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dave Mun. Please go ahead, Mr. Mun.

Thanks, operator, and good morning. Speaking today will be Dave McKay, President and CEO; Rod Bolger, Chief Financial Officer; and Mark Hughes, Chief Risk Officer. We’ll open the call for questions following their comments. [Operator Instructions] Joining us in the room are our business heads, Neil McLaughlin, Group Head of Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management & 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 applying assumptions and have inherent risks and uncertainties. Actual results could differ materially. With that, I’ll turn the call over to Dave.

Good morning, everyone, and thanks for joining us today. This morning, we reported solid earnings growth or solid earnings of $2.8 billion and grew our CET1 ratio to 10.9%. As part of our commitment to drive long-term shareholder value, we’ve returned approximately $7 billion to shareholders through buybacks and dividends this year. I’m also pleased to announce a $0.04 increase to our dividends this morning, bringing our quarterly dividend to $0.91 per share. Before discussing our highlights this quarter, I would like to spend a few minutes on the macroeconomic backdrop. Canada is leading the G7 and economic growth, reflecting fiscal stimulus, increased business investment and strength in consumer demand. This is partially reflected in our results this quarter with Canadian Banking recording strong growth in business lending, mortgages and cards. Labor markets are also strong with the unemployment rate down to 6.3%, the lowest level since 2008. Fairly benign credit conditions, which Mark will expand on are supported by this healthy employment environment. The Bank of Canada affirmed its confidence in the economic outlook and raised interest rates in July for the first time since 2010. Our core deposit franchise is a key strength for us and is the foundation of our client relationships. This deposit base positions us to gradually benefit from a rising rate environment. On Canadian housing, we’ve seen a healthy moderation in housing activity in Toronto and Vancouver, supported by policy actions by provincial governments and a regulator to create a healthier and more balanced market. We continue to prudently grow our mortgage portfolio with strong FICO scores at origination and are seeing low delinquencies. Household demand should continue to be supported by economic and population growth, including immigration. We want Canadians to own homes they can afford and we remain well-positioned to help newcomers and first-time homebuyers. And now turning to our results, we had a solid quarter. All of our businesses – all our business segments performed well. Canadian Banking reported solid volume growth driven by strength across our products, including cards, mortgages, business lending and deposits. For the second year in a row, we ranked highest in customer satisfaction among the big five retail banks as part of the J.D. Power study while also maintaining high Net Promoter Scores. We are launching new long-term relationships with flagship companies to drive sustainable growth. For example, we secured a new partnership with a major international auto manufacturer to provide subvented financing to its dealerships, and also clients who use our RBC credit card will instantly receive a discount for their Petro-Canada fuel purchases at the point-of-sale. You will hear more about how we are adding value to our clients in the weeks to come. This quarter, we also achieved a significant milestone. Our customer’s mobile sessions surpassed that of online banking. We saw 40% increase in mobile financial transactions over the past year. And to support increasing mobile adoption rates, we released more than 20 new app capabilities to 3 million-plus mobile customers in the past year. RBC clients are now the first in Canada who can ask Siri to pay their bills. We also launched e-Transfer payments within iMessage, giving our clients another innovative payment solution. In the coming weeks, you will also hear more about two new tools, [NOMI INSIGHTS and NOMI FIND & SAVE,] [ph] which will use artificial intelligence to provide personalized advice, helping clients manage their day-to-day finances and make savings simpler. We are proud that our focus on innovation has awarded us the highest in customer satisfaction among Canadian mobile banking apps in the inaugural J.D. Power Canadian bank mobile app study. Turning to Wealth Management, we had another strong quarter across the wealth franchise. Our diversified businesses are poised to benefit from rising interest rates, volume growth and continued investments in people and technology. Last quarter, you’ve heard me talk about MyAdvisor, partnering with Canadian banking we’ve launched our online wealth advice platform to select mutual fund investment clients across Canada with positive feedback. And in U.S. Wealth Management, including City National, we’re tracking well towards the 2020 targets that we highlighted in our 2016 Investor Day last summer. Capital Markets had another solid quarter, demonstrating the quality of our client franchise. We remain committed to supporting our clients’ financing needs with Canadian corporate and investment banking benefiting from increased syndicated finance deals this quarter. RBC advised on the $4.8 billion sale of DH Corp. to Vista Equity Partners, the largest acquisition of a Canadian company by a U.S. firm in the last couple of years. Our focus to deepen client relationships helped us drive market share upwards in the United States. Investor and Treasury Services posted strong results. Over the past two years, we’ve made meaningful investments in technology to enhance the client experience and position the business for success. We are seeing the benefits with new client relationships and record levels of assets under administration. Underscoring the impact of our efforts, we were recently recognized at the Global Investor Awards, including the #1 Global Custodian and the #1 Global Fund Administrator of the Year. Across the organization, we have a tremendous amount of work underway to be a digitally-enabled relationship bank. This means, speeding up how we do business and reducing complexity to deliver an exceptional client experience. This journey is not always easy. As part of this process, we made the difficult decision to reduce a higher than normal number of head office roles with the goal of reinvesting in areas like data analytics and artificial intelligence. We also created opportunities to move employees to different roles and bring in new talent. In my view, diversity and inclusion are core to an innovative environment. Of the promotions to executive roles, approximately half were women, and women now represent 40% of our executive positions. We remain committed to change in the way we work in a world where client needs and the competitive landscape are evolving. In short, we have a tremendous group of engaged employees. And we expect the investments in our people and digital capabilities will set our organization up for sustainable growth. Before I conclude, I’d like to mention the wildfires in British Columbia. It’s a devastating situation. I know many Canadians have been affected. I’m proud of our teams for pulling together to provide much needed support to our communities. We are committed to helping clients by providing financial assistance, including short-term payment deferrals and we’ll continue to provide support where needed. And with that, I’ll turn the call over to Rod.

Thanks, and good morning, everyone. As Dave mentioned, we reported solid third quarter earnings of $2.8 billion, as shown on Slide 5. Earnings were down 3% due to last year’s gain on sale of our home and auto manufacturing insurance business. Excluding the gain, net income was up 5% from the year ago and EPS was up 8%, reflecting the benefits of our share buybacks in the first-half of the year. We saw another strong quarter of underlying revenue growth, and net of the insurance fair value change, our adjusted operating leverage was positive 1.5%. Our expense growth included higher than normal severance costs, which were $120 million pre-tax in the quarter, or $0.06 per share after-tax. Of that amount, the majority was related to head office groups. More than half of the total severance, or $70 million pre-tax impacted the corporate support segment. As we allocate more resources into technologies for our clients and given increasing requirements for cybersecurity and regulations, we accelerated severance outside of our normal range this year. We don’t expect to have as much severance next year. Turning to Slide 6. Our common equity Tier 1 ratio increased 30 basis points from last quarter to 10.9%, driven by strong internal capital generation and benefits from a higher pension discount rate. In addition, we were able to reduce RWA in certain portfolios, while supporting client-driven RWA growth. We manage our capital tightly and remain very comfortable with our CET1 ratio. Our strong earnings generation and capital ratio growth provides us flexibility to redeploy or return capital to shareholders. And as Dave mentioned, we announced a $0.04 dividend increase this morning. In the past, we received a number of questions around capital requirements if we were ever designated a G-SIB in the future. Earlier this week, OSFI released for public consultation its guidance if the Canadian bank was designated a G-SIB. Given this current guidance, we do not anticipate an additional CET1 ratio G-SIB buffer on top of the current 100 basis point D-SIB surcharge for large Canadian banks. Let me turn to our business segment performance. All businesses performed well in the quarter. Starting on Slide 7, Personal & Commercial Banking earned $1.4 billion. Canadian banking net income of $1.35 billion was up 5% from a year ago, reflecting solid client volume growth of 7% and fee-based revenue growth of 6%. Our business deposit growth was strong up 14% and business loans grew a 11%, as we added commercial bankers and continue to do more for clients. Mortgage growth remained solid at 6%. We expect our personal loan volumes to improve as the Allied portfolio runs off and as we gain momentum from the new auto partnership that Dave mentioned. We achieved these results despite NIM compression of 2 basis points year-over-year and 1 basis point from last quarter. We expect some NIM pressure to continue in Q4, but we do expect NIM to stabilize starting in the first quarter. Adjusted operating leverage in Canadian banking was 0.7% year-to-date, or 1.3% excluding severance, which was higher than normal this quarter. For the full-year, we expect to be at the low-end of our 1% to 2% range for adjusted operating leverage, excluding severance due to higher investments in digital and technology. Turning to Wealth Management on Slide 8, earnings of $486 million were up 25%, reflecting strong performance across all of our key businesses. In Canadian Wealth Management, we recruited experienced investment advisers over the past year and benefited from higher client activity and higher equity markets. In global asset management, investors continued to trust our lineup of investment solutions with over three quarters of our funds outperforming the benchmark on a three-year basis. As the market leader in Canada, we continued to track investments with a market share of over 30% amongst banks. Our U.S. Wealth Management business performed well, benefiting from the Fed rate hikes and strong loan and deposit growth, which drove revenue growth of 16%. This year, we also added over 450 colleagues at City National and expanded our footprint in Washington DC, Minneapolis and New York to support our customers. Moving on to Slide 9, insurance earnings were $161 million. Excluding last year’s gain on sale, net income was up 25%, largely due to higher investment-related gains. As we strengthen our customer relationships, we’re pleased that our net promoter score in the insurance business remains among the best-in-class at over 53%. Investor & Treasury Services results are on Slide 10. We delivered net income of $178 million, up 13% from last year on higher foreign exchange market execution, driven by an increase in client activity and higher funding and liquidity results. We’re pleased with these strong results as we continue to invest heavily to deliver the right technology solutions for asset services clients. On Slide 11, Capital Markets again delivered solid results, generating over $2 billion of revenue and $600 million of net income for the third quarter in a row. While market volatility remain low, our client businesses performed well as we remain ninth in global fee pool rankings. Net income was down 4%, as last year’s third quarter benefited from Brexit. This quarter, lower fixed income trading was offset by higher equity trading results and increased corporate investment banking activity, particularly in loan syndication and M&A. While we remain cautious in our outlook on the trading side, given low market volatility, we expect momentum to continue in our investment bank through the end of the year. To conclude, while our results were impacted by significant investments and severance costs this quarter, we’re pleased with our performance. We believe, we’re well-positioned to continue our momentum in the fourth quarter. With that, I’ll turn it over to Mark.

Thank you, Rod, and good morning. Turning to Slide 13, total provisions for credit losses of $320 million were up $18 million, or 6% from last quarter. The PCL ratio of 23 basis points was flat quarter-over-quarter. Overall, our credit quality has remained strong and stable year-to-date. Let me discuss the performance of each segment on Slide 14. In Personal & Commercial Banking, provisions of $273 million increased by $11 million from last quarter. Canadian Banking provisions of $259 million increased by $3 million quarter-over-quarter, reflecting higher commercial lending provisions, largely related to one real estate account, partially offset by seasonally low credit card write-offs. Caribbean and U.S. banking provisions were up $8 million from last quarter, reflecting fewer recoveries this quarter. Wealth Management provisions of $6 million decreased by $9 million quarter-over-quarter, reflecting a recovery in one International Wealth Management account offset by higher provisions in our City National portfolio. Capital Markets provisions of $44 million increased by $20 million compared to last quarter, largely due to a couple of accounts in unrelated sectors. Turning to Slide 15, gross impaired loans of $2.9 billion were down $353 million, or 11% from last quarter. Our gross impaired loan ratio of 53 basis points was down 6 basis points from the prior quarter. In Capital Markets, gross impaired loans decreased by $200 million from last quarter, largely driven by foreign exchange translation, repayments and accounts returning to performing status in the oil and gas sector. In Wealth Management, gross impaired loans decreased $105 million, mainly due to repayment, a decline in acquired credit impaired loans in City National and the impact of foreign exchange translation. In Personal & Commercial Banking, gross impaired loans decreased by $32 million, reflecting the impact of foreign exchange translation and repayments in our Caribbean lending portfolio, partially offset by new impaired loans in our commercial lending portfolio. Let’s now turn to our Canadian retail exposure on the Slide 16. We continue to see solid underlying credit quality with delinquency trends and provisions benefiting from an improving microeconomic backdrop with solid GDP growth, along with low unemployment rates, particularly in Ontario, B.C. and Québec. On Slide 17, we discuss the performance of our Canadian mortgage portfolio. As Dave mentioned in his opening remarks, recent policy actions have led to a cooling of the housing market in the GTA over the last few months. Overall, our portfolio remains healthy. Delinquency rates in the GTA remain below average at only 6 basis points. Year-to-date, the average LTV of new uninsured mortgage originations in the GTA was 65%, with a portfolio LTV of 43%. This provides a solid buffer should Toronto house prices continue to moderate. Given the recent interest rate hike, we continue to monitor the debt serviceability of our clients. We remain comfortable with our portfolio, given a significant proportion of our mortgage origination have been underwritten at the Bank of Canada Qualifying Rate, which is approximately 200 basis points over the contract rate. Fixed rate mortgages represent approximately 75% of our mortgage portfolio and lastly, our clients have a strong credit profile with the average FICO score of our uninsured mortgage portfolio remaining over 790. Overall, I’m pleased with the performance of our lending portfolio this year, as we continue to see PCL come in below historical levels. Turning to market risk on Slide 18, notwithstanding ongoing geopolitical risks market volatility declined to historically low levels. Our average VaR remained relatively flat at $24 million, and we had zero days of trading losses this quarter. With that, operator, we’ll open the lines for Q&A.

Thank you, Mr. Hughes. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Robert Sedran with CIBC. Please go ahead.

Thanks, and good morning. Dave, it’s a question on the dividend back-to-back, I guess, in terms of dividend increases of $0.04. I’m wondering when you think about your payout ratio and when you think about it in the context of IFRS 9, which I know we haven’t had a whole lot of disclosure on this yet, but our expectation is, it’s going to be some lumpier provisioning and perhaps higher provisioning at trough as well. When you think about that payout ratio, are you just going to run it basically on the old accounting methodology of, which is closer to economics, or are you taking IFRS 9 into account when you set the expectations there?

Yes, good question. Thanks, Robert. Yes, certainly, as we look forward in our financial results and model IFRS 9 impact through cycles of kind of stage one, two and three provisions, your dividend policy has to take that into consideration. So there’ll be more volatility without a doubt and – but we have very strong capital generation ability as you saw again this quarter as we generated 30 basis points of CET1 ratio giving us flexibility to absorb the volatility going forward. But – so certainly IFRS 9 will introduce some volatility through a cycle into earnings and that will sort of manifest itself in your outlook on dividends. As you see that, we’ll have to sit down with the Board and talk about dividend policy in that context. But we’re working through that now and you’ll hear more from us in the coming quarters, obviously, on the impact of IFRS 9.

But for now, you’re still comfortable at the higher-end of that 40 to 50 range?

Right.

Okay.

Absolutely, we wouldn’t have made - recommended to the Board to increase dividends to that ratio if we weren’t comfortable with our trajectory going forward.

Okay.

I think, it’s shows a confidence in the underlying strength and diversification of our businesses; very, very strong wealth results, strong Canadian banking; very, very good capital markets results, particularly in the context of the market environment, allows us to increase the dividend at the upper-end of our range.

Okay. And just – thank you. And just a quick clarification from Rod, Rod I know the whole D-SIB/G-SIB thing, I guess, it’s finally been settled. But we’ve kind of become accustomed to you guys operating well above the regulatory minimums anyway. So we basically saying, we’re comfortable that even from an operating level nothing changes in a G-SIB world compared with a D-SIB world, is that fair?

Yes, that’s fair. We’re – our reported minimum is 8% as a D-SIB, and based on the consultation that came out should have become final. It would also be 8%. We also have buffers on top of that, but the stated buffer that we have is 290 basis points, and the global G-SIB buffer is around 250 basis points, so we’re comfortable with where we are. We don’t think we need to go much higher. To your earlier question, IFRS 9, we’ll also have to consider that into our stress testing and will – where we require a slightly higher buffer for that perhaps. But we think with the 290, we can largely encompass any changes that would come from IFRS 9, given the current environment.

Thank you.

Thank you. Our next question is from John Aiken with Barclays. Please go ahead.

Good morning. Rod, in terms of the severance costs that came through this quarter, there was no discussion in the prepared remarks about what this means in terms of cost savings going forward. Can I assume that this is a one-off, but that as you talk about the investments that you’re making in your platforms that – side of this, we shouldn’t really see any real change in the expense levels side of this one-off severance costs this quarter?

Yes, I think it’s a – it’s pretty dynamic, right, because we’re going to have some savings from the severance costs from reduced run rate there. But we do have increased costs from digital investments from AI, as Dave mentioned, from cybersecurity, from regulation. So we could – we kind of look at it all as a mix. And if we’re not constantly vigilant about taking costs out, you’re not going to see positive operating leverage. And so we have to take some costs out to be able to invest in what we need to invest in. So I wouldn’t say that there’s a parallel shift down in our cost base from this. I would say that, it is necessary for us to maintain cost discipline and positive operating leverage going forward.

Now in context, Rod, these ongoing investments that that you’re making, you also said that you didn’t expect severance costs to be as high next year. What in context can we – is this causing even greater pressure on operating leverage, or is this all part and parcel with your guidance and your expectations?

I mean, just if we have lower operating – if we have lower severance costs next year, that will benefit our operating leverage. But putting severance aside, the regulatory pressures, the competitive pressures put downward pressure on an inability for any company to achieve positive operating leverage. And so we have to, like I said, drive costs out and deliver results from that investment to automate things to make things easier for our clients and to increase our retention rates, which does help revenue. So there we should continue to target positive operating leverage next year even with these severance costs.

This is Dave. We’ve talked a lot about an ongoing program to manage costs and to reinvest and to create leverage, as Rod said, and we’ve been really focused on our distribution network. So over the last six, seven years, and we found ourselves a need to accelerate our transformation and our head office functions and head office roles. And we’ve really moved forward what would have been a two to three-year plan into the current first two quarters and largely took the severance this quarter in a accelerated way. So you should expect, next year will come down quite significantly as we move kind of two years of work into two quarters. And therefore, it gives us flexibility to reinvest in the business, might give us some short-term OpEx relief, as it will take time to replace some of those roles and reinvest those roles differently and start different projects. So, as Rod said, it really gives us operating flexibility to make the investments we need to create long-term sustainable growth. And you start to see the results of that this quarter – first six months and particularly this quarter 20 new app releases. But the first real deployment of artificial intelligence in the Canada into the [NOMI FIND & SAVE] [ph], examples, starting to roll out some of the value propositions we’ve talked about with Petro-Canada. So you’re starting to see an increase cadence of roll out, which as a result of the investment we’re making, while we continue to drive very, very solid results as we reported today.

Great. Thanks for the context. I’ll requeue.

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

Thank you. Good morning. Just one point of clarification for Dave or Rod on the comments you made on the G-SIB versus a D-SIB. Have you gotten any indication from OSFI that while the official stated buffer, the G-SIB will replace the D-SIB and if you’re in the first bucket then it won’t have any kind of major change on the official stated buffer? Is there any indication from them that your inclusion on this or on this list would result or they would want you to manage capital at the high-end of the Canadian group, or do they feel that status quo wherever the bank is as long as you fulfill the buffer requirement is fine?

Yes, I mean, first off, we can’t comment on conversations with OSFI. But when they treated us as a D-SIB, the intention is to treat us as if we were the lowest rung on the G-SIB level. And so I would not expect us to have any difference versus where we are now as a 100 basis point G-SIB or a 100 basis point D-SIB, I don’t think behind the scenes there we would have to manage our buffer any differently.

Our communication to you in the market is consistent with our understanding of the situation around us. So we would not communicate with you unless we had confidence and what our understanding of the situation is, and we’ve been very consistent for two years now in articulating this. And now, we’ve had more formal communication from the regulator on D-SIB/G-SIB buffer. So I think, we continue to hear a consistent message.

That’s fair. Thanks for that. And then my actual question is for Doug Guzman and looking at the City National numbers. So just quickly here want to go to the play between NIM and loan growth, we’ve heard from a lot of banks in the U.S., particularly post-election that loan growth has stalled somewhat as there’s clearly been some policy uncertainty. It doesn’t look like that’s been the case for City National, at least, based on the numbers we’re calculating here. So more specifically, for your business and not the industry, what is – what are the key areas that you feel are driving your loan growth at such a strong pace? And do you think double-digit loan growth in this environment remains a reasonable expectation, especially since there’s been an increase in loan yields that are now being derived?

Maybe I’ll ask Rod to take that question on the loan growth side, because it’s a little bit closer to Rod than I. And maybe I’ll make some color commentary afterwards.

Sure. Thanks.

Sure, we – yes, we’ve seen the lower C&I loan growth in the U.S. in the last several quarters. Part of this is our investments in new markets, part of it’s growing in California, and bringing in new bankers, and part of it is our specialty approach in the industries that we’re in California, is still seeing some good growth. So we expect to outperform the C&I growth in the U.S. We’ve done that in City National since the acquisition of City National, it’s doing that well before the acquisition as well through their specialized approach. And from a NIM perspective, we actually saw a lift this quarter that you would see on Slide 22 of about 9 basis points on the one metric, or 11 basis points on the other. And really most of that was the Fed. And we also had a little bit of runoff in the legacy acquired portfolio, but on the impaired side. But we also saw an improved mix, because we’ve been growing loans faster than deposits. We’re actually to take – we were able to take down some securities investing in client lending and increase our spreads that way as well. So we’re seeing reasonably healthy margins and continued strong loan growth.

The only additional color I would add is that, we are seeing synergies with the Canadian businesses, with our Capital Markets businesses, I think, we booked upwards of $1 billion of preferred loans now. So we’re starting to increase the cadence there, using a larger balance sheet to take and grow our relationship with clients, where we would have had single name limits under a standalone City National. So all the synergies that we saw, including lifting out teams from competitors, we’re really starting to gain traction in some of those niche businesses that Rod referred to is leading to a significant outperforming of U.S. C&I growth.

I think, operator, we have another question.

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

Good morning, Dave. You talked about you’re seeing moderation in Toronto and Vancouver housing. I wondered, in that context, the B20 revisions, that proposal, do you see that as being necessary, or is there a risk that another piece of regulation here could have too big of an impact on the downside curious of your thoughts? And then a related question, just B20 – the B20 proposal, how does it impact you specifically, and how do you think about it in the context of the market as a whole?

I’ll make some comments about health of the housing market and maybe I’ll ask Neil to comment on adjudication of mortgages and how we look at things. Certainly, we’ve been calling for a coordinated effort to slowdown the growth of house prices in the Canadian markets. We’ve really want to make sure that we have a sustainable Canadian housing market for our economy in particular. And therefore and we welcome the changes that have happened so far and the slowing in unit purchase volume slow and also now you’re starting to see certainly a slowing in small areas reduction in prices. Now we’re still are talking about a trifurcated market. You’ve got Canada then you’ve got Vancouver, and you’ve got Toronto. So we continue to talk about kind of three different types of marketplaces, and particularly, the changes were needed in the housing in Toronto and Vancouver. You’re seeing a slowdown in prices in Toronto, a slight decrease in some areas if you start looking through the numbers. But what we also saw in Vancouver is, activity picked up about six to nine months after the policies went in. So we’ll watch the Toronto housing market carefully. Therefore, additional measures may be needed to maintain a healthy balance out there. And we’re encouraged by the existing measures and the effect they’ve had in creating a more sustainable marketplace. I think adjudicating at higher rates with some of the B20 changes calls for is prudent lending in the asset growth that – the price growth that we’ve seen in those marketplaces. So, some of the fine tuning that is coming may be required, given the bounce back we’ve seen in Vancouver and Toronto, we’re seeing activity pick up in Montréal and increased activity as some of the investor money shifts there. So, Neil, do you want to comment on our business?

Yes, in terms of B20, I guess, how we’re looking at it is, it’s still relatively early, it’s in draft. So it’s up for a public consultation at this point. We do think there could be some very modest impact on the business. The main point that we think about is requirement to have a stress test for uninsured mortgages up to 200 basis points over the contract that the client’s paying. The reality is, Mark had mentioned, the vast majority of our applications upwards of 90% are already adjudicated at the Bank of Canada posted rate, which is about 200 basis points higher than the client’s contract rate. So we think that’s – that will be a quite a modest impact if that’s where we end up. It could – if it gets implemented, it could influence some preferences around term or am, but that’s all yet to be determined.

Thank you.

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

Good morning. I have a couple of questions, so I’ll be fairly quick. The strength in equity trading this quarter, would it be safe to say that that was essentially Canada, or with some of that have been in the U.S. as well?

Yes, the equity trading numbers in Canada were pretty good. The cash equities business in particular held up. We had a number of large new issues associated with M&A transactions that helped. And in the U.S., the cash equities business was a little bit slower. Where we’re struggling a bit is in the equity derivatives business and the options business where the volatility is down. But the trading results both in FIC and equities have actually held up during the last quarter pretty nicely.

Okay. If I could just on CNB, this 455 an increase of personnel 455 caught me off guard a little bit. I don’t know how big that is in relation to the total amount. But that’s a fairly big number. Where would you expect that to be in the next, say, 12 months like an similar increase or?

That’s a good question. So part of that increase is obviously front-office employees, and part of it we plan to handle kind of regulatory change and CCAR and growing our back office to prepare for an expanded growth trajectory organically as we’ve talked about new markets. We’ve talked about new products. We’ve been building up the back office. So I think, roughly, it’s a two-third back office, one-third front-office to-date. You’ll see kind of more front-office growth going forward as we continue to see growth in existing footprint, New York, Washington, and in California, we said significant opportunity to grow. And you’ve seen the success of our franchise model growing at multiples of what the industry is doing, encourages us particularly as we see their early success in Washington, the success we’re having in New York, it’s a huge market and we’re just getting a small toehold in there. So you’ll see us continue to hire private bankers. You’ll see us to continue to hire commercial bankers. We’ll continue to lift out teams, because the model is really working. So I think, it’s an organic growth trajectory that we talked about extensively or a little bit ahead of our forecast that we gave you last year and we’ve got significant momentum. So you’ll see us continue to hire frontline people.

So this is – that we shouldn’t be overly surprised if we see that kind of growth in personnel?

You’re seeing the returns from that growth already.

Okay.

So you’re seeing strong revenue growth. You’re seeing strong income growth. You’re seeing the volume performance. You’re seeing good NIM. So, yes, absolutely, it drives great shareholder value and returns and the highest ROE you can find in the market as far as organic. So I think, absolutely, we’re going to continue to expand our model. That was the whole strategy in acquiring City National was to grow organically.

Okay. And then finally, you expressed a lot of optimism on Canada early on in your opening comments. Has that – is that what’s playing out in the auto loan growth and in the card growth we saw this quarter just pushing more aggressively? And did it really – did it result in some market share gains?

I’ll let Neil answer that.

Thanks for the question, Mario. In terms of auto, yes, the couple of things going on in the book. One is the pretty much getting to the end of the runoff of the Allied portfolio that was acquired a few years back, and that’s been something that we needed to move an awful lot of originations to supplement as those paydowns came up with portfolio. Then just the underlying business we’ve made some changes just to improve kind of our used book. But David mentioned a new manufacturer relationship and we’ve recently launched a new OEM with Hyundai and we’re starting to see that come on the books and that will provide some growth into 2018.

And then market share gains in cards, do you think you had some this quarter?

Yes, we feel really strong about our cards portfolio. We’re seeing part of it in terms of the reward marketplace. Our Avion sort of our marquee Avion product continues to stand out. We had almost 10% lift year-over-year in purchase volume, which is really strong and that’s translating into other fee income. So credit cards, we’d say, absolutely one of the businesses we’re feeling very good about.

Okay. Thank you.

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

Good morning. I have a few quick ones as well. First one for Doug. A lot of banks are quantifying costs of relocating out of London in response to Brexit. I’m wondering if you have outlined any plans and if there are any costs associated with that. The – also the Allied runoff, could you just give a quantification of how much you’ve runoff, how much of that weighed on your personal loan growth, I guess? And then lastly, Rod, you mentioned the IFRS 9 impact on your capital management. You said, you’re thinking about a buffer that you might have to operate under, is that something that you’re willing to discuss a bit more in detail?

This is Doug. I’ll start with the European footprint and Brexit. We have a fairly robust footprint in Europe, mainly through the Investment Bank and also through our Investor & Treasury Services business. So, our main jurisdiction for both businesses, we have a dealer in London. The issue, of course, is, can we fast-forward to Europe from there and we’ll see how that evolves. But we have subs through that dealer and people on the ground in Paris and France, approximately 20 front office people in both locations. And we opened those locations a couple of years ago, not for Brexit, but really just to provide better local coverage to customers in those countries. We have about 75 people in Dublin and that’s a branch of our Investor & Treasury Services bank out of Luxembourg. So we’re well-established in Dublin. And in Luxembourg, we’re the fourth largest bank in Lux. RBC Investor Services has about 1,500 people. So, the footprint is robust. we have options. We’re exploring them. But I think, given where we stand now, we’re going to wait and see how this evolves.

Like just intuitively, would you think, because I’ve seen some pretty big numbers, but I wouldn’t think that there would be a big for Royal as they would be for HSBC or something like that?

I really don’t think that’s going to be the case. I don’t think we’re going to be spending a lot of money there.

Okay.

In terms of the Allied runoff question, I guess, one of them would be there was a few dealerships that were originally acquired that contractually we had to get to a threshold. So that – so a few dealerships were traded. We still maintain all those relationships and it was the legacy portfolio that have to be replaced. So we’re trying to grow into a much larger portfolio. So just to give you a sense, quarter-over-quarter, the books are a little over $15 billion, we’re up about 1% quarter-over-quarter. Year ago, we would be running negative growth in the portfolio. So we’d say, really in the auto book, sort of hitting the bottom and then growing from this point on is where we’re seeing it.

Maybe not running off the floor plan, are you?

No floor plan, it’s actually been quite strong. We’ve actually been adding floor plan volume quite – in our commercial book auto has actually been quite a strength. We’ve been targeting the consolidators, the larger dealers who are picking up rooftops and adding manufacturers, a number of probably about a dozen or so large acquisitions. So we’re feeling quite strong about the floor plan business.

How big is that one?

The floor plan business, I wouldn’t have that number offhand.

Okay. And Rod, on the IFRS 9, on your capital management?

Yes, I wouldn’t want you to – our target is 10.5 plus, and I wouldn’t want you to print that our target is increasing as a result of IFRS 9. I still think we’re comfortable with the 10.5 plus. I think as we model out IFRS 9 and adopt it, it will come into play in our stress testing. If you think about what we went through a few years ago with oil and gas instead of losses coming in over several quarters or several years, you’ll see an accelerated under the new accounting and then ease up in the later years and actually we would – and potentially see reversals if the losses are not as bad as expected, which would have been the case in this – in the recent downturn in oil and gas. But that will come into play in terms of our buffers and our stress testing and setting our capital threshold, which is probably why you’re seeing us 10.9 now versus 10.5, and so we probably have a little bit of extra buffer there. But our target is still at the 10.5-plus, and we would expect it to continue that way absent other changes.

Thank you.

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

Thanks very much. A few smaller ones for me as well. Just to follow up for Rod, I think, on IFRS 9, Rod, can you remind me is there much in the way of accretable yield coming through City National? I know it would be small, but can you confirm that if there’s some of that disappears completely under IFRS 9? I guess, what I’m really wondering is, will we notice anything in the revenue line for City National next year on the back of this?

That’s a good question. So, we’re going to reset our allowance, which we had to set to zero in purchase accounting. The accretable yield wasn’t that significant that you are seeing – you do see increase in PCL quarter-over-quarter as we grow the loan book. But we would expect to see that in IFRS 9 as well. So we don’t think that will change, because you’re stage one, your new loans you’re going to have to put a one-year expected loss for any new loan. So as we continue to grow that loan book, we’ll see PCL increase even if losses aren’t coming through. And from an accretable yield standpoint, I do not believe, it will have a significant impact.

Yes. So if I look at this quarter, the revenue growth was 12%. There’s not really any material accretable yield lift in that?

No.

Okay.

The most of the yield increase, like I mentioned, was the Fed increase and then also the shift in asset mix more – from out of securities a little bit into loans.

Okay, thanks for that. For Neil, HELOCs had been, I think, down year-on-year in some recent quarters. But I noticed through the footnotes a bit of a turn there, right? So some quarter-on-quarter, some year-on-year HELOC growth has been talk about preferences and shifting away into fixed in the longer-term, but maybe a bit of color as to what’s going on there in terms of preference-wise, or maybe it’s pricing?

Yes, thanks for the question. Yes, we’re – I wouldn’t say, it’s dramatic. We’re seeing a slight preference out of borrowing via mortgage. Our home line product is still our most popular home equity product. But it’s something that customers are starting to shift their preference. But I think, we’re just starting to see the trend.

Okay. And then lastly, for me, Treasury – going to Treasury Services, we focus a lot on the capital markets trading revenues and rightly so. But I did note that the trading revenue allocated to Treasury Services has been down each of last three quarters, it’s less than half of what it was a year ago. It’s not a big number, but I don’t think we hear about that too much. So maybe a little detail on what’s driving that and if you can give us an outlook?

The Treasury Services trading results are most affected by credit spreads. And so I think this time last year, you had a pretty good gapping in of credit spreads, you’re at the back-end of that. And last quarter, we had similar strong credit spread performance. That portfolio is high-quality liquid assets, mostly sovereigns and covered bonds. And so that’s where the outperformance will come from. In this quarter, credit was continued to be tight, but you didn’t get the same amount of tightening.

So we’re just going to continue to see that bounce around somewhat between, I guess, 1,500 is where it’s been the last year or two?

Yes, I mean, if credit goes the other way then depending on how well we trade, you could see somewhat reduced results.

Okay. Thanks for that.

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

Thank you. Dave, last year this time, you would have had some amount of outlook for the business and the business lines that you operate. Year-to-date, you’re up around double digits anyway as far as your EPS. You’ve deployed capital with buybacks and what have you. Which one of the businesses in the diversified mix that you have? Are you most excited about over the next year from an earnings and growth perspective? And have you softened on any one of the other ones versus last year?

That’s a bit of a leading question. I think right off the top, I continue to talk about the diversification of our client franchises, diversification by type of client corporate, institutional, commercial, consumer, but diversification geographically, Canada, U.S. and Europe and really the strength of our franchise. And you saw that yet again this quarter with all three client franchises performing strongly across a number of different geography. So I think that is the strength and thesis of our franchise and we continue to demonstrate that with the growth you’ve seen in the strong internal capital generation to allow us to grow our balance sheet and to grow our client relationships organically, which is driving a premium ROE in the marketplace. So that is the combination of capabilities that makes us strong. You saw a significant momentum in the Wealth Management franchise with record results, both in the United States, we had our best ever quarter and in – outside United States, we had a record quarter. You’re seeing a very strong flows into our Canadian asset management business. You’re seeing exceptional performance out of City National and the entire U.S. wealth franchise, seeing that great organic client franchise growth. And I think that marks the RBC franchise – organic client franchise growth in Wealth Management and Capital Markets. You’re seeing the benefit of that as we’re continuing to build those relationships. We put our balance sheet out there. We’re providing more advisory and underwriting services and fee-based services to those clients that we’ve nurtured over the last decade. You’re seeing really balanced performance out of the retail platform. You’re seeing – with the backdrop of our franchise operating in markets with strong stable economic growth Canada, the U.S., UK, and Europe predominantly. And so you look at the markets we operate and the strength and breadth of the client franchise causes me to feel really good about where we are and the momentum we have. And it’s not just one business, but it’s the multitude of what we’re able to bring to bear.

But you’re generally feeling better today than you would have about a year ago, it sounds to me?

Yes, I’m very excited about the cultural transformation. I’m really excited about the cadence you’re seeing of technology deployment. We talked a long time about the R&D we’re doing, the patents we’re filing. Now you’re starting to see a cadence of client value proposition and client technology come to the market, that’s really exciting. The Petro-Canada deal that you might have caught is not insignificant and the value we’re creating for customers every day. So you’re starting to see the AI research, the block chain research, the value proposition with rewards. You’re seeing the investment in City National come to play. So we’ve done a lot of heavy lifting over the last two years. We’ve spent money. We’re delivering now momentum on that investment across a number of fronts. You’re seeing quite an incredibly well-run and resilient capital markets operation with strength in the United States that goes from strength to strength and great balance out of Canada. So, as a CEO, when you have that type of diversification to drive your franchise, it gives you a lot of optionality, along with a very strong balance sheet and capital generation ability to return capital to shareholders. At the same time, as I said, right off the top, I think in my second comment, we’ve returned over $7 billion to shareholders and continued to drive that EPS growth that you referenced. So our focus now is to keep it – keep building and keep going. But we’ve got a great mix of franchises.

Thanks. Thank you.

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

I think, I’ll be fairly quick here. But Rod, I guess, I think, in the past, what we’ve heard is $90 million to $100 million, I think, it’s pre-tax in terms of annual severance charges. Can you remind us where you stand in total severance charges year-to-date?

Sure. Thanks, Doug. So you may recall, last year we were elevated up close to $130 million. The previous two years, we were at that $90 million level. So we increased that last year. And this year on a year-to-date basis, we had about 55 in the first-half of the year and then 120, so about 175 on a year-to-date basis.

And when you….

We’re elevated to the tune of about $40 million to $45 million versus the full-year last year.

And when you think of next year, you’re talking more about in the $100 million range when you think of normalization?

I would expect us to get back on a normalized basis to the $90 million to $100 million. But because of the acceleration that Dave mentioned, I would expect this to be well below that next year.

Okay. And these are pre-tax numbers, is that…?

Correct.

Yes, okay. And then you – and you talked about, I think, $70 million of the – this quarter going through corporate, the remainder – and again, this would be pre-tax, remainder would have gone through Canada, is that correct?

It would have gone – this was not, I mean, this was something, the cultural transformation that Dave mentioned was enterprise-wide initiative. So portions in Canada, portions outside of Canada, and then all of the businesses would have seen elevated severance this quarter versus the prior year or the prior quarter. And we did cite the with and without operating leverage in Canadian banking specifically, which was about – it took us from about 0.7 year-to-date to 1.3 operating leverage if you adjust for it and on a quarter basis we would have been negative and we’re flat if you adjust for severance just in Q3.

Okay. So I can do the math to get the number there. The last one just on insurance, I think, it was mentioned investment gains were elevated. Was it a significant amount? And can you quantify?

Well, we don’t generally quantify too much of it, but it’s nothing really out of the normal. I mean, we’ve had a very conservative – it’s Doug Guzman, by the way. We’ve had a very conservative investment side of our portfolio and we just thought that we had a little room to lengthen duration. And so you’re seeing the accounting benefit of, I think duration on a small slice of the asset mix.

Okay. All right. Thank you very much.

The other thing I’d add just to Neil’s prior answer on the question on Canadian momentum is, certainly on the investment side, we’re seeing the same thing. Dave mentioned the numbers quickly at the start. But when we’re doing 30% of the volume of mutual fund sales in the branch channel – of the bank channel, that equates to something like 20%-plus low, 20%-ish overall. Our underlying share is 15%. So that forces that share up over time. And similarly in brokerage, we would expect the tailwind in market share just given what’s going on in the world in terms of technology and the need to have a broader-based planning and the benefits of having deep expertise across specific areas of interest to their clients philanthropy trust and estate and those kinds of things. So I think, the sentiment that Dave expressed that was Neil followed on, I’d share that in terms of our Canadian investments business as well.

Thank you.

Thank you. Our next question is from Nick Stogdill with Credit Suisse. Please go ahead.

Hi, good morning. First, a clarification. Rod, I believe you mentioned after Q4, you expect more stability in the Canadian NIM. Does that incorporate any future rate hikes?

We do believe that we should see stabilization just based on the rate hike. But the market is pricing in a good likelihood of another rate hike before the end of the calendar year, that would also benefit the NIM for next year. But we have seen some volatility. As the market anticipates a rate hike, you see some compression on our NIM and we saw that a little bit in Q3 in early July. And we are seeing it right now as we lead – as we’re in the fourth quarter. And so as the rate hike takes effect, we expect to see benefits next year.

I’ll just add to that. it’s Neil, a couple of other things. We’ll see – we had fixed rate mortgages that we’re booking into the last quarter on quite tight spreads. We increased rates a couple of times, took back about 50 basis points of spread on the mortgage book. As those pull through in fund into Q4, that’ll also give us some stability in NIMs. And also our deposit book – our Canadian consumer deposit book will start to see an end of quite a successful campaign and that’ll provide some spread back into Q4 and Q1.

Thanks. And just a second question, maybe for Neil, again, the branch count year-to-date down about 2%. Could you give us a little more color on where the closures are taking place rural versus city centers? Are you offsetting that with the opening of smaller branches? And then, should we expect net reductions to continue at a similar pace for the foreseeable future?

Yes. So, I mean, year-over-year, we’re down about 25 branches. There’s a combination, I mean, the – I guess, the core focus right now is thinning out in sort of dense urban branch footprint, where we’re not really impacting the convenience for customers, where you may go from a two-minute drive to your branch to a three-minute drive to your branch, and those have been, I think, quite benign in terms of reaction. There has been a small number of rural, but we’re definitely not on a path to really look at that as the focus. In terms of your question about small footprint, absolutely, we have a very successful pilot we’ve launched in McMaster University, just making sure where our customers are. And we are going to see the amount of real estate that a branch takes up continue to shrink. So trajectory, down 25 year-over-year, we’re down 10 quarter-over-quarter and probably a similar trajectory moving forward.

Are any of the severance costs this quarter coming from branch reductions or…?

No, that’s not really an impact at all.

Okay. Thank you.

Sorry, I think, we’re out for time, operator. So we’ll need to end the call there.

Certainly.

So, thanks, everyone, for joining us for the Q3 call and for your questions today, and we look forward to seeing you at the end of Q4. Thank you very much. Have enjoy the rest of your summer.

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