Executives
Gordon Nixon - President and Chief Executive Officer
Morten Friis - Chief Risk Officer
Janice Fukakusa -Chief Administrative Officer and Chief Financial Officer
George Lewis- Head of Wealth Management
Doug McGregor - Chairman and Co-CEO, Capital Markets
Dave McKay - Head of Canadian Banking
Mark Standish - President and Co-CEO, Capital Markets
Jim Westlake - Head of International Banking and Insurance
Zabeen Hirji - Chief Human Resources Officer
Amy Cairncross - VP & Head, Investor Relations
Analysts
Rob Sedran - CIBC
Gabriel Dechaine - Credit Suisse
Peter Routledge - National Bank Financial
Darko Mihelic - Cormark Securities
Michael Goldberg - Desjardins Securities
John Reucassel - BMO Nesbitt Burns
Cheryl Pate - Morgan Stanley
Royal Bank of Canada (RY) F3Q12 Earnings Call August 30, 2012 7:30 AM ET
Operator
Good morning, ladies and gentlemen. Welcome to the RBC 2012 Third Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Amy Cairncross, Head of Investor Relations. Please go ahead, Ms. Cairncross.
Amy Cairncross
Good morning, and thank you for joining us. Presenting to you this morning are Gord Nixon, our CEO; Morten Friis, our Chief Risk Officer; and Janice Fukakusa, our Chief Administrative Officer and CFO. Following their comments, we will open the call for questions from analysts. The call is one hour long and will end at 8.30. To give everyone a chance to participate, please keep it to one question and then re-queue. We will be posting management's remarks on our website shortly after the call.
Joining us for your questions are George Lewis, Head of Wealth Management; Doug McGregor, Chairman and Co-CEO, Capital Markets; Dave McKay, Head of Canadian Banking; Mark Standish, President and Co-CEO, Capital Markets; Jim Westlake, Head of International Banking and Insurance; and Zabeen Hirji, Chief Human Resources Officer.
As noted on slide two, our comments may contain forward-looking statements which involve applying assumptions and have inherent risks and uncertainties. Actual results could differ materially from these statements.
I will now turn the call over to Gord Nixon.
Gordon Nixon
Thank you very much, Amy, and good morning everyone. I am sure you are all very tired given the active days of yesterday and today. But it?s a pleasure to be here this morning. We reported our results, as you are aware, in the third quarter with earnings of over $2.2 billion which is an increase of 73% compared to last year. Excluding certain favorable items this quarter, we had earnings of $2 billion, which again very strong, driven by exceptional growth in our Canadian retail franchise as well as strong capital markets and insurance results.
We also have record results year-to-date with earnings of $5.7 billion and based on our performance we expect to meet our medium term financial objectives in 2012. These results clearly demonstrate the earnings power of RBC and the strength of our diversified business model, with the right mix of retail and wholesale as we highlight on slide six.
I am also very pleased to report that today we announced a $0.03 or 5% increase to our dividend, bringing the quarterly dividend to $0.60 a share. This is our third dividend increase in the past 15 months. As shown on slide seven, our capital ratios remain strong. Our tier one capital ratio stands at 13%, reflecting solid retained earnings growth and risk weighted asset management, offset somewhat by the impact of our acquisition of the 50% stake in RBC Dexia, which we are very excited about and we closed at the end of the quarter.
As we noted in Q2, based on our current interpretation of the rules which is yet to be finalized, we already meet or exceed the Basel III capital requirements that become effective in the first quarter of 2013. Currently, our estimated Basel III pro forma tier one common equity ratio is 8.3%.
Turning to the performance of our business segments. Overall, we are extremely pleased with the strong momentum in Canadian banking and we are also proud that these results were achieved while simultaneously reaching new heights in customer loyalty measures. Canadian banking had a record quarter with earnings of over $1 billion accounting for half of our total earnings. Even in a slowing environment, volume growth was strong at 8% and we continue to leverage our size and scale to take disproportionate share of industry growth and profitability and to gain market share.
Once more we achieved these results while demonstrating relative margin stability. As part of our enterprise wide cost management program, Canadian banking is focused on eliminating cost and reinvesting in the future. This quarter Canadian banking delivered strong operating leverage ahead of schedule and an efficiency ratio of under 45%.
Moving to wealth management, as you know we have an ambitious growth objective to this segment and while we are behind schedule as a result of the uncertain markets and low interest rates, we are well positioned and have good leverage to benefit from market stability. Notwithstanding the current environment, which I should say has improved over the last month or so, we continue to extend our number one position in Canada in both wealth and asset management and are investing to strengthen our competitive position outside of our domestic market during a period of challenging industry conditions.
We are confident that we are investing in a foundation that will provide strong future growth, particularly as markets begin to stabilize and client activities increase. Turing to insurance. We had another strong quarter. This business continues to make a consistent contribution and complements our overall retail offering, providing innovative, client focused solutions through our multichannel distribution network.
We continue to strengthen our business for future growth by improving our products, mix, pricing, distribution and claims management process. For example, this quarter we made changes to our priority distribution channel which we expect will drive greater efficiencies over the long-term.
Moving to international banking. While disappointed by the performance of our Caribbean banking which continues to reflect the prolonged weak economic conditions in the region, we believe that this remains an attractive region for RBC and the strategic investments we have made in recent years position us well for a long term growth. Our market position is strong, our margins are strong, but we have been impacted by reduced demand for loans and the credit cycle which Morten will cover of. In the near-term we are aggressively managing this business and we believe our performance will improve significantly in 2013.
In RBC investor services, our performance this year has been relatively solid. However, our results have been impacted by the accounting treatment for the acquisition as I believe you are all aware. You may recall that we were required from an accounting perspective to take a write-down on our current investment in RBC Dexia to reflect the purchase price, the majority of which we took last quarter and the remainder recorded this quarter at the time of close. As a result, despite investor services being profitable, no earnings have been recorded in the quarter.
Looking ahead, we believe investor services is well positioned as a top ten global custodian in an industry with solid long-term fundamentals. And while this business is impacted by market and interest rate pressures similar to wealth management, it provides good leverage to market stability. Furthermore, we believe we can leverage our reputation, brand and financial strength to win additional business, improve earnings trajectory, and drive long term growth.
In capital markets we had another solid quarter of earnings reflecting the successful repositioning of the business which we have been discussing over the past few years. As we have highlighted, we have aggressively reduced risk and eliminated complex assets from our balance sheet. We have reduced trading inventories in response to global uncertainty and we?ve narrowed our focus and breadth of training products. We have grown our lending to corporate clients significantly, especially in the United States and that has supported substantial growth in our investment banking as well as loan revenues. And we have continued to execute our focus strategy in our key geographic regions without expanding our footprint.
Looking specifically at Q3, our corporate investment banking business had solid results demonstrating our strength in Canada and the success of our build-out in the United States and the United Kingdom. In Canada, we are acting as financial advisor to Nexen on the second largest Canadian energy M&A transaction in history and the largest foreign energy acquisition in Canadian history. In the United States, we had a very active quarter and we?re involved in multiple capacities in a number of key mandates.
As an example, we acted as lead advisor in Apollo $7 billion acquisition of El Paso Exploration & Production Company, as well as joint book runner on the financing. Another notable transaction was Penn Virginia Resource Partners acquisition of Chief Gathering where RBC was the M&A advisor, equity placement agent, and lead arranger of the credit facility.
Our strength in the U.S. was most evident in the latest Dealogic League tables. Measured by fee revenue, RBC ranked as the tenth largest global investment bank for the first half of 2012, and we?ve jumped seven spots to number 10 in U.S. loans bookrunner ranking increasing our market shares to 2.4%, up from 1.1% in 2011. Within the Americans ranking overall, our market share has increased over the past two years to a record 3.9%, up from 2.4% with more than half of this increase coming in the United States.
Moving to Europe, RBC acted as financial advisor to a consortium that acquired Open Grid Europe from a German listed utility for ?3.2 billion. We were also lead arranger on this deal providing the supported credit facilities. This transaction represents our largest U.K. cross-border M&A transaction involving a German [target] and is a testament to the successful build-out of our investment banking business in the U.K. even in the face of these challenging markets.
Although trading was down on a sequential basis, it was a solid quarter reflecting the success we?ve had in repositioning our business, particularly in the fixed income area and our focus on the customer. It is worth highlighting and emphasizing that we generated solid trading revenues from a base of securities which is approximately 25% lower than it was a year ago and our VaR is down 50% or close to 50% from its peak which was in Q3, 2011.
Looking ahead, while market conditions remain uncertain, RBC has good momentum and a strong competitive position in our core markets as well as a solid pipeline. To conclude, our results and dividend increase this quarter continues to demonstrate our earnings power. Our long-term diversified business model of retail, wholesale and other businesses combined with our geographic presence provides in our view the right mix of earnings and risk diversifications which will continue to translate into strong earnings.
Going forward, we believe we?re well positioned to continue to expand our lead in Canada and building on strong client relationships in select U.S. and international markets while delivering long-term growth to our shareholders.
With that I?ll turn it over to Morten.
Morten Friis
Thank you, Gord. Starting with credit on slide ten. Overall credit quality improved compared to the prior quarter. Provision for credit losses of $325 million declined $23 million or 5 basis points from the prior quarter to 34 basis points. This decrease was driven by lower provisions, primarily in Canadian banking but also in capital markets, partially offset by higher provisions in the Caribbean due to the ongoing difficult economic conditions in that market.
With respect to the Caribbean, we continue to face challenging credit environment given the region?s dependence on tourism from both the U.S. and Europe. These challenges are likely to persist in the near-term until we see improvements in the economic environment in the region.
With respect to gross impaired loans, new formations have improved significantly at $261 million. This is the lowest level of new impaired loans since the third quarter of 2006. Gross impaired loan balances were $242 million lower than the prior quarter largely due to lower impaired loans in our residential mortgage portfolio, as well as in our business lending portfolios in Canadian banking and capital markets.
Turning to our Canadian retail portfolio on slide 11. Overall loss rates improved this quarter to 30 basis points of PCL, down from 34 basis points last quarter. Our mortgage portfolio continues to perform well with provisions on residential mortgages remaining low at 2 basis points, consistent with our historic performance. We continue to actively monitor and stress this portfolio and remain confident in its ability to withstand significant movements in the key underlying economic parameters.
Turning to slide 12 on our European exposure. Compared to last quarter our net exposure was up approximately $4 billion or 10% reflecting the acquisition of the remaining 50% stake in RBC Dexia which added approximately $6 billion, primarily lower risk investment portfolio assets as deployment of funds from client deposits. This increase was partially offset by our continued risk management and balance sheet optimization efforts including a further reduction in holdings of some European securities in the investor services business. We remain comfortable with our exposure and continue to transact in a prudent manner with well-rated counterparties predominantly in the larger European economies.
Turning to market risk, average management value at risk was $37 million and average stress VaR was $60 million, with both remaining stable compared to last quarter. One element of our ongoing risk management activities is the active management and further reduction in trading inventory primarily in fixed income.
As shown on slide 13, inventories in the fixed income business have decreased by 25% over the past year as we have narrowed our focus and breadth for trading products and shifted our focus to more traditional investment banking activities. We had a total of eight days with net trading losses during the quarter with no losses exceeding the value at risk.
With that I?ll turn the presentation over to Janice.
Janice Fukakusa
Thanks, Morten, and good morning. Turning to slide 15. As Gordon mentioned, we had a record third quarter with earnings of over $2.2 billion. Our results included three items of note outlined on slide 21, which had a favorable net impact of $262 million after-tax. Excluding these items, net income was $2 billion, up $295 million or 18% from last year and 12% from last quarter. These results were driven primarily by record earnings in Canadian banking and strong performances in capital markets and insurance.
Turning to our business segments starting on slide 16. Canadian Banking had record earnings of over $1.1 billion. Excluding the favorable mortgage prepayment interest adjustment of $92 million after-tax, earnings were still a record at just over $1 billion up $147 million or 17% over last year, primarily reflecting strong volume growth of 8%. On the same basis, net income was up $98 million or 10% compared to the prior quarter, primarily due to the positive impact of seasonal factors as well as solid volume growth across all businesses.
As shown on slide 16, Canadian banking delivered strong adjusted operating leverage of 3.5% this quarter. Looking ahead, while we expect to deliver positive operating leverage in the fourth quarter, it will be at a lower level than what we achieved this quarter given the current low interest rate environment and the timing of [initiative spend]. In keeping with our medium term efficiency objectives, we continued to drive our efficiency ratio lower. This quarter, our adjusted efficiency ratio was 44.8%, an improvement of 150 basis points from last year, reflecting progress on a number of initiatives. For example, our staff levels remained flat over the last year despite adding 27 new branches and extending branch hours.
In regards to margins, notwithstanding the low interest rate environment, we continued to achieve relative stability. On an adjusted basis, net interest margin was relatively flat from last year and increased 2 basis points over last quarter. This sequential increase over last quarter reflected lower mortgage breakage costs and a favorable change in our product mix. Our margin performance reflects our strict pricing discipline as well as our ability to grow volumes at a premium to the market and profitably gain share.
Going forward, we expect margins to reflect the competitive landscape and prolonged low interest rate environment. I would note that the change in our estimation of mortgage prepayment interest is not expected to have a material impact on margins in future quarters.
Turning to wealth management on slide 17. In Q3 we earned $156 million. Certain regulatory and legal matters unfavorably impacted our results this quarter by $21 million after-tax. Excluding these items, net income was down $15 million or 8% from last year largely due to lower transaction volumes reflecting continued investor uncertainty. On the same basis, earnings were down $35 million or 17% over last quarter, largely due to the decrease in the fair value of our U.S. stock-based comp plans and lower transaction volumes. As Gord noted earlier, our wealth management results continue to reflect challenging market conditions and investments we?re making over the long term.
Moving to insurance on slide 18. Net income of $179 million was up $38 million or 27% compared to last year driven by lower claims costs in our Canadian insurance products and a favorable adjustment of $24 million after-tax, related to changes we made in the quarter to our proprietary distribution channel. Compared to last quarter earnings were up $28 million or 19% largely due to the favorable adjustments. International Banking results this quarter reflect the $11 million after-tax loss related to the RBC Dexia acquisition.
Compared to last year, this quarter also had higher PCL in the Caribbean banking, lower brokerage commissions in RBC investor services resulting from weak market conditions in Europe and higher staff cost. Compared to the second quarter which included the $202 million after-tax loss related to the RBC Dexia acquisition, we also had higher PCL in Caribbean banking which Morten discussed.
Turning to capital markets on slide 20, we had a strong quarter. Net income was $486 million, up $227 million over last year due to higher fixed income trading results, reflecting improved market conditions and higher corporate and investment banking results driven by strong client growth in our lending and loan syndication businesses.
Compared to last quarter, earnings were up $37 million or 8% due to the strength in our corporate and investment banking businesses. This quarter strong growth in our lending and loan syndication businesses largely in the U.S. and higher M&A activity, more than offset lower equity trading and equity origination. To wrap up, we are very pleased with our record performance this quarter which demonstrates the strength of our diversified business model and the earnings power of our organization.
At this point, I?ll turn the call over to the operator to begin questions and answers. Please limit yourself to one question then re-queue, so that everyone has an opportunity to participate. Operator?
Question-and-Answer Session
Operator
(Operator Instructions) The first question is from Rob Sedran of CIBC. Please go ahead.
Rob Sedran - CIBC
Morten, but for the addition of Dexia, I guess the exposure to Europe would have declined. So is the plan to continue to whittle that down? Or is it now in the range where it needs to support the ongoing business there?
Morten Friis
So I?ll start and then I?ll let in my colleagues who want to add in some business perspectives. So, I mean we are continuing to, as I said, actively look at the exposure that we have and ensure that they are appropriate and relatively low risk. We continue to do business out of our U.K. operations that involve transacting with well rated counterparties, primarily in the better rated countries. And that will generate depending on our success in the transactions [some] variability in the exposure. And given the counterparties we are dealing with, I?m quite comfortable to see that number move around somewhat because the mix of it is with better counterparties.
I think what we?re focusing on is making sure that the weaker end of the exposure scale or the areas where there is not a strong strategic rationale for being there, that we take proactive action to dealing with that. So I would say that depending on our business success you may see some ongoing slight reductions in portions of the portfolio, but with any luck we?ll have that offset by some growth in business activities with well rated counterparties that we?re looking to do business with.
Rob Sedran - CIBC
So you don?t see any need to high grade the portfolio at all, you?re perfectly happy with the counterparties as they said today?
Morten Friis
On balance I?m quite satisfied with the exposure that we have. I mean there is always opportunities to whittle out some of the weaker pieces, but I would say we?re close to the end of dealing with those issues.
Operator
Thank you. The next question is from Gabriel Dechaine of Credit Suisse. Please go ahead.
Gabriel Dechaine - Credit Suisse
Another one for Morten. The Caribbean PCLs are still elevated and I?m wondering when you expect that to tail off? And then just on the trading, over the past two quarters how much of the trading results have been benefitting from just the whittling down of your trading assets? Are there any substantial gains going in there? And then I guess, just to confirm, Janice, the operating leverage of 3.5% is now sustainable in Canadian retail?
Morten Friis
It?s Morten. So I will start with the Caribbean and Janice probably will handle the other parts of the question. So on the Caribbean, I guess a couple of points there. I mean the performance continues to be somewhat disappointing but I want to emphasize a couple of points here. One of the things we did during the quarter was have a thorough look at our portfolios in terms of allowance coverage across the region, particularly for the retail portfolios. So reasonable portion of the provisions you saw this quarter represents an effort or a result of our review of those portfolios ensuring consistency in approach and appropriate level of coverage ratios for those portfolios. So the $66 million worth of PCL for the Caribbean, a good chunk of that is more in the nature of catch-up and reflective of the view of the quarter.
I commented on impaired loans formations and they remain relatively high in the Caribbean, but I think it is also worth noting that both impaired loans formations are down $20 million plus for the quarter. The overall level of impaired loans is also starting to come down. So, while asset quality remains a problem in that business, we are generally seeing movement in the right direction. And so from an asset quality standpoint, I would expect to see slow but gradual improvements.
I guess the balancing part to that, I would say the performance from my perspective on the Caribbean Banking business, is now more dependent on seeing revenue and net revenue improvements than further improvements in asset quality. I think that will take a while. As I said in my comments, with the economic environment we cannot expect to see a quick turnaround there but the trends are generally moving in the right direction. And if we have an economic improvement, the recovery piece on asset quality will speed up but it will take some time to work through the problems.
Gabriel Dechaine - Credit Suisse
Thanks for that response.
Gordon Nixon
Hi, Gabriel. On the trading question, as we?ve talked about really for a couple of years now we had been very focused on reducing our legacy exposures and reducing complexity in the business. So really what you?re looking at is, from a trading perspective, very clean numbers. I?d refer you to Morten?s slide 13 where you can look at declining inventories from a year ago. You?ll notice that really Q1, Q2, 2012 and Q3 that we just reported, really have not significant change.
What really has happened as we?ve talked about is we?ve refocused the business around this very keen focus on plans and origination. And what you don?t see in these numbers is around that a significant pickup in velocity, that is the amount of secondary flow that we?re doing in the business to support client activity. So velocity has doubled from Q3 last year to Q3 today.
And that?s really what?s driving the numbers even though generally in the market we?re looking at very difficult environment, especially on the equity side volumes are down significantly but we?ve been able to gain market share and what?s been driving that is the focus that we had a year ago on the clients. We talked about supporting our clients through very difficult markets and that?s paying off. And then as Doug has talked about our focus on origination and year-on-year we?ve seen about a 24% increase, for example, in DCM revenues. So, the model has shifted and it?s proving to be in this environment certainly more resilient than a pure trading model.
Dave McKay
Hi, Gabriel, it?s Dave McKay here. I?ll answer your operating leverage question. Reflecting on Janice?s comments, we are just forecasting slightly lower operating leverage given the timing factor around expenses and the volatility there. But still forecasting positive operating leverage.
Gabriel Dechaine - Credit Suisse
And is that a Q4 comment, or like (inaudible) the timing of investment?
Dave McKay
Absolutely.
Operator
Thank you. The next question is from Peter Routledge of National Bank Financial. Please go ahead.
Peter Routledge - National Bank Financial
Just a quick question on capital and what might be the governing concerns. So it?s clearly not Basel III common equity given where you are in the ratio, but looking at the assets to capital as the CMHC securitization funding rolls-off I imagine, yes, it?s the capital multiple trend up, all else equal. If you can give us a sense of what the order of magnitude of that might be just on the securitization rolling off? And then how constraining do you think gross leverage ratios whether it?s the OSFI version or the Basel III version? How constraining will they be over the next couple of years and will it change the way you?re looking at the marginal profitability of your variety of activities?
Janice Fukakusa
It?s Janice, Peter. Why don?t I start with that and maybe my colleagues from capital markets can give some business color. When we look at capital in terms of constraining factors, we don?t see leverage being a concerning factor. The roll-off of the mortgages and securitization funding is not that significant because as you know we have the lowest insured ratio mortgages of all of the Canadian banks. And when we manage our balance sheet, we?re really managing for risk return. So as you saw us deleveraging our balance sheet, it was all about ensuring that we were doing the right activity around balance sheet optimization.
With respect to capital, we are maintaining very conservative buffers in anticipation of Basel III because we?re waiting for some additional guidance around areas like [national and OSFI] You?ve seen us on our segment reporting allocating a lot of capital down into the segments to ensure that we get the right behavior around our balance sheet leverage and our use of the balance sheet in optimizing activity. So why don?t I turn it over to Doug, you and Stan, to discuss how we?re optimizing at the margin in capital markets.
Doug McGregor
Yeah, Pete, I?ll just comment on gross adjusted assets. As we?ve shrunk the trading inventory of business that we?ve grown and it has proven to be very successful as our secured financing business. And so that?s picked up a lot of the balance sheet slack that has been reduced on the inventory side. And I echo Janice?s comments that we don?t see leverage constraints as any issue to that business. It?s right sized for our size and the activity levels and the risk profile that we want to maintain there. So we?re very comfortable and don?t see it as a constraint.
Mark Standish
The [RWA] pickup in the investment bank?s balance sheet is really around the loan growth. And so if you look in this up, you?ll see that we?ve had significant loan growth and it was in Janice?s slides as well. And most of that?s in the U.S. and it?s about 75% investment grade, and that would be the largest use of balance sheet or the largest increase of balance sheet year-over-year.
Peter Routledge - National Bank Financial
But, Dave McKay, do you have any concerns on how leverage ratios might impact your own capacity for growth?
Dave McKay
Absolutely not. We are capable of growing whatever we feel attract into our business.
Gordon Nixon
Yeah, as Janice said, just to emphasize, we did have the lowest level of securitization of the bank. The other comment that I would just make from a general perspective, and I think this applies to all of the Canadian banks, that the bad news about the way we are operating today is we are operating with fully loaded capital and liquidity rules compared to a lot of other banks around the world. The good news of that is it puts us in a very strong position as the world unfolds going forward and these rules are applied most strenuously to other institutions. And so when you look at how we are running the businesses today, it?s with pretty much fully loaded capital and liquidity rules.
Operator
Thank you. The next question is from Darko Mihelic of Cormark Securities. Please go ahead.
Darko Mihelic - Cormark Securities
Just a point of clarification. First of all, I think it was, Janice, in your remarks you were suggesting that you were -- the FTE count was flat year-over-year. When I look at the overall FTE count in Canada, it looks like it?s up quite a bit. I understand the other is probably Dexia related, but were these people brought in at the end of the quarter? And can you talk about the expense hit at the top of the house for Q4? Then I?ll sneak a real quick one in for George Lewis as well. George, when I look at your results, I tend to always think of Royal as having the premier wealth management franchise, but your results just don?t look as good as your peers. And it hasn?t looked as good as your peers in the last few quarters. I wonder if you can talk about what is it that you are finding challenging with your business and what is it that you?re going to do to fix it?
Janice Fukakusa
Darko, it?s Janice. I?ll start with the FTE question. So when I talk about FTE, at the end of the quarter I think in total we added about 6,000 FTE related to our acquisition of the other 50% of investor services. Remember that we have a significant presence in investor services in Canada. We have the dominant market share. We have 2,400 FTE in Canada. So almost half of the total of 6,000 in investor services that we added. So when you look at potential expense or revenue you?ll see what will be flowing in Q4 would be a fully loaded 100% pickup of the investor services business, both revenue and expenses. There are no other net adds anywhere else in Canada in any other businesses.
Darko Mihelic - Cormark Securities
Okay. Thank you.
George Lewis
Darko, it?s George. Thanks very much for the question. And I guess I?d start by disaggregating the wealth management segment we have here at RBC and making the point that our Canadian businesses on a peer-to-peer basis continue to perform extremely well both in wealth management and asset management. So we continue to gain share in both of those businesses, and those are our highest margin businesses. Where we are differentiated in our strategy is we have a large U.S. wealth management business and a growing U.K. and emerging market?s wealth management business as well.
And overall, when you look at our revenue sources, we are trying to drive a greater proportion across our segment and fee business. That?s why we?re growing asset management in particular and within our geographic businesses emphasizing that. But fully one-third of our revenues remain transaction based revenues and a large portion of that is reflected in our U.S. wealth management business, which is making progress in improving revenue per adviser. But I?d say the most differentiating factor you?ve seen in last couple of quarters in our results would be the investments we?re making in building our U.K. and emerging markets business.
So, for example, we attracted 40 advisers into those platforms in the third quarter alone and we?re taking advantage of the strength and stability of RBC, our global focus on wealth management. But we?re investing in a very challenging environment as Gord mentioned, and while clients are coming over, they are largely staying in cash balances at the moment as opposed to long-term investments. So it?s taking longer for that revenue and positive impact, income impact, to flow through on our results from that positive activity. So that would be the big differentiator because we have those global businesses which our Canadian peers would not.
Operator
Thank you. The next question is from Michael Goldberg of Desjardins Securities. Please go ahead.
Michael Goldberg - Desjardins Securities
Just want to confirm a couple of numbers that I think were mentioned. You said with respect to the $51 billion of wholesale loans that you have, there is a percent in the U.S. that I didn?t catch and 75% is investment grade. You had 40% year-over-year growth and 9% quarter-over-quarter. So how you?re getting that strong growth in this lending? What kind of margin are you getting and what kind of ancillary fee income do you build into your pricing expectations?
Doug McGregor
So the total loan book is $51 billion and you?re right on the growth numbers. I think year-over-year it?s gone from about $37 billion to $51 billion which is roughly 40%. Which is a significant increase and most of that increase has occurred in the U.S. The exact amount I?d have to give you, but I would say that probably about 90% of the increased loan book is in the U.S.
Michael Goldberg - Desjardins Securities
(inaudible) quarter?
Doug McGregor
Over the last year and over the last quarter. I mean, the Canadian loan book has been basically stable over the last year and the growth you?re seeing in the loan book is largely in the U.S. And the margin -- so that you have to keep in mind that we have a sort of 300, plus or minus 300 investment bankers in the U.S., 150 corporate bankers, a couple of 100 municipal bankers. We have a lot of people in front of clients and a lot of opportunities to lend. And I think one of the best opportunities is that a number of our competitors especially European competitors have been backing off of that market and the number of the customers in the U.S. would like to do business with the Canadian Banks. So it?s been a reasonable opportunity at least.
I would say in terms of the margins, we?re lending to the average customers BBB, BBB minus public company, and we would be lending between L plus 125 and L plus 150 with some fees upfront. What we try to get to is the 2:1 ratio in terms of ancillary versus core lending revenue. Because we?ve been growing the loan book as quickly as we have, that will come. We?ve also, as was noted earlier in the comments we?ve been doing a fair, more leveraged finance, and we?ve been able to distribute what we?ve underwritten and that?s also been lucrative.
Gordon Nixon
Michael, it?s Gord. The other thing that I would emphasize, because I think it?s extremely important is that if you remember back to what we were doing in the early part of the 2000s, we intentionally drove our loan book down in the United States and internationally quite dramatically. And it was on the basis that we weren?t getting paid to extend credit, covenants were light to say the least, and to some degree we didn?t have the ability to generate the same level of ancillary business. So if you actually look at our loan book today in the United States it?s still lower than it was back in 1999. I think that?s correct, isn?t it, Doug? Yeah, it?s lower than it was back in 1999 and it remains lower than many of our other Canadian competitors even as we sit today.
So we?ve had a lot of capacity to extend our credit because of the decisions that we have made over the last ten years or so. And the big difference is not only do we get paid today to extend credit, the returns in the loans themselves are much more attractive but the terms and conditions are also much more conservative, and our ability to leverage those corporate and commercial relationships is much more significant today. So while the growth appears to be very high which we believe is a very good thing, it?s off a very low base because of some of the decisions that we took over the past ten years.
Operator
Thank you. (Operator Instructions) The next question is from John Reucassel of BMO Capital Markets. Please go ahead.
John Reucassel - BMO Nesbitt Burns
My question is for Dave. Dave, could you talk a little bit, you said the operating leverage is going to be less in Q4, can you talk about your plans for next year? And then just give us an update on your outlook for NIMs? And are you seeing any more slowdown in mortgage originations as a result of the new rules that will be going into place?
Dave McKay
Thanks, John. It?s Dave. So as we look at what we?re trying to do, certainly our goal is to drive positive operating leverage and we have always talked about that. So we will continue to manage our expenses and our revenues carefully. We are in a bit of a volatile world and there is pressure on deposit margins. We have been able very successful in offsetting that with good growth and higher margin commercial and credit card lending over the last quarter. So we have got a lot of offsetting forces going on. So it?s tough to predict exactly where things are going, but overall I think the comment was that it?s going to get a little bit tougher to manage that but our target is to drive efficiency ratio down into low 40s and we?re, as you can see, we?re continually quarter-over-quarter and year-over-year making very good progress towards that and we?ll continue to focus on that goal.
And the important part of that driver is to make sure you manage your revenues and your expenses carefully. Now we?re heading into, I think continuous, as we?ve talked about over the last year, lower rate environment pressures are very large deposit business. And that pressure won?t alleviate.
As far as the mortgage business, you have to expect some slowdown. We have come through a very strong spring mortgage season. We?re extremely happy with our results and significant market share gains that we?ve seen. We?ll continue to compete. There is not a lot of evidence of a slowdown right now, but you have to expect with the B20 rule is really kicking in and some of the price appreciation that won?t be there in the marketplace around housing. Those are some of the key drivers you see in mortgage growth, you?d have to expect some type of slowdown from the strong, strong rates that we?re seeing today.
John Reucassel - BMO Nesbitt Burns
Okay. And just, Dave on the spreads. I think in the past you?ve said, with the prospect of maybe Bank of Canada raising rates, but now that prospect looks diminished. Are we just looking at a sustained period of a few basis points or 1 or 2 compression in margins over the next year? Is that a fair assumption to make or...?
Dave McKay
We?re not projecting anything drastic here. As we roll off higher rate mortgages and put on lower rate mortgages and we don?t have the ability to use our very strong checking account DDA deposit base to fund, it puts downward pressure on overall margins without an increase in the rate environment. So we will continue to operate in that challenging environment and the key is to keep growing your credit card business, your commercial business to try to offset that. But you?re right, I think you?re on the right track to say that there will be somewhat of a downward pressure there but we don?t expect anything drastic.
Operator
Thank you. The next question is from Cheryl Pate of Morgan Stanley. Please go ahead.
Cheryl Pate - Morgan Stanley
Just a quick question from me. Just wondering, probably for Janice or maybe Dave, is there anything unusual in the credit fees this quarter, pretty significant increase both on a year-over-year and Q-over-Q basis?
Janice Fukakusa
Cheryl, this is Janice. We?ll have to get back to you on that because there is nothing unusual that we?ve seen across the board and we?ll look at the split. So why don?t we get back to you, sorry.
Operator
Thank you. There are no further questions registered at this time. I would like to return the meeting over to Mr. Nixon.
Gordon Nixon
Okay. Well, I would like to thank everybody. I don?t think we?ve ever had a meeting end early. So that?s either a very good sign or it?s a sign that you?re all very tired and have a busy day in front of you. I?m sure it?s a combination of both. But I?d like to thank you for your participation. I would just close, as I said earlier, we?re certainly pleased with what we think is an outstanding quarter and we look forward to getting together in approximately three months. So with that, we?ll end the meeting. Thank you very much for your participation.
Operator
Thank you, Mr. Nixon. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
Source: http://seekingalpha.com/article/838371-royal-bank-of-canada-s-ceo-discusses-f3q12-results-earnings-call-transcript?source=feed
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