Royal Bank of Canada 3Q16 Earnings Call Notes

Royal Bank of Canada’s (RY) CEO David McKay on Q3 2016 Results

Regulatory bodies are responding to the combination of rising house prices and record levels of consumer leverage

“On housing, we continue to closely monitor the greater Vancouver and Toronto areas. A short supply of single family homes in both cities, coupled with strong demand fueled by household formation including net immigration has driven strong price [appreciation] (Ph). We have prudent underwriting practices in place with the necessary technology to closely monitor these markets and quickly react as situations may materialize. Regulatory bodies are also responding to the combination of rising house prices and record levels of consumer leverage. We support the Canadian federal government’s recent action to form a working group to study the housing market and develop appropriate recommendations.”

Mark Hughes

Moderate increase in oil prices provided some relief to clients

“With the moderate increase in oil prices over the last quarter, now in the high 40s has provided some relief to our clients. It remains well below 2014 level and continues to challenge the profitability of the sector. A number of our clients took proactive measures to strengthen their financial position. This included selling assets, reducing expenses, accessing capital markets to raise additional funds and refreshing hedges at higher oil prices. In particular, we saw an increase in asset sales in the drilling and services sector.”

Sustained low oil prices impacting retail portfolio in oil exposed provinces

“The sustained low oil prices and higher unemployment rates continue to impact our retail portfolio in oil exposed provinces and we have seen an increase in provisions in delinquencies in these regions. However, it has been more than offset by improvements in economic conditions in other regions such as Ontario and BC as reflected by reduced delinquencies on a national basis, which demonstrates the benefit of our diversified portfolio.”

We remain comfortable with our exposure to Canadian housing market

” Greater Vancouver and Toronto markets are being closely monitored due to alleviated house prices. However, we consistently have the highest customer credit scores in these markets. We also continue to closely monitor our mortgage portfolios in oil exposed regions. Overall, we remain comfortable with our exposure to the Canadian housing market for the following reasons. We did not participate in the second lien market and do not originate sub-prime mortgages. We utilized proprietary channels for mortgage origination allowing for a centralized credit adjudicating process and enhanced monitoring. We are diligent in income verification, which is a key component of our mortgage approval process.”

Alberta does see continued softness but Ontario and BC are strong

“I would say on the Canadian banking side, it’s a matter of two halves a little bit, we have Alberta, which does see continued softness. The unemployment rate in Alberta is certainly higher, but in the rest of Canada particularly Ontario and BC, we continue to see very strong growth and that is performing well.”

Vancouver has cooled off a bit in recent weeks

” Certainly from our view of Vancouver and/or Toronto is the same, obviously with the house price deprecation that we have seen over the previous quarters. We are monitoring it quite close, Vancouver has actually cooled off a little bit in recent weeks. But I think in our case, it’s just really about continuing to maintain our discipline and risk posture as to how we approve loans and the type of origination that we put on.”

Unlikely that the price of oil goes above 100 any time soon

“The chances of getting back to a 100 in the foreseeable future I think would be fairly slim unless there is a change in some of the producers globally and in their attempts to maintain their production levels. So 40 to 60 level I would have thought would be the range we would expect to see if it goes below 40, it’s a tougher environment, if it goes above 60, it’s maybe a bit more of a positive environment.”

Royal Bank of Canada FY 3Q15 Earnings Call Notes

Bank of Canada has cut rates twice this year

“Starting with the economy, in the recent months, we have seen mixed economic data and weaker than anticipated growth which led The Bank of Canada to cut interest rates for a second time this year. Looking ahead, we still forecast modest growth in Canada in the second half of the year as the strengthening US economy and lower Canadian dollar are expected to drive export growth, and consumer spending continues to be steady.”

Declining oil prices causing economic uncertainty

“Declining oil prices is causing economic uncertainty, particularly in the west with lower levels of investment. As we expected, lower oil prices are challenging for some of our clients. ‘

Lower housing activity in the oil exposed region

“Offsetting some of this growth is lower activity in oil exposed region. It’s important to remember that many areas of Alberta are coming off several years of hyper growth. So the recent slowdown is in part a return to more normal growth levels but we do recognize these markets remain vulnerable to lower oil prices.”

Credit quality remains strong

“credit quality remains strong this quarter as credit trends stayed near historic lows reflecting our strong risk management, low interest rates and strong employment trends”

Stressing oil portfolio for $35 oil could see some uptick in provisions at these levels

“As the price of oil has continued to decline through the year we’ve updated our stress scenarios. From a wholesale perspective, we stress test on a name-by-name basis. Our most recent scenario assumes a $35 oil price for the remainder of 2015 and uses the forward price curve for 2016 which currently averages $45. Based on this scenario, we are now monitoring a handful of additional loans compared to our prior scenarios. If the price of oil stays at current levels, we could see an uptick in wholesale provisions. However, we have seen a number of companies raise capital, delay capital spending or cut dividends which should help mitigate some of the impact.”

Our original expectations for redeterminations was $53

“One factor we will keep a close eye on is this fall’s borrowing-based redeterminations. Our price deck used for our spring redetermination expected the average annual price to be closer to $53 in 2015 with small increases to the mid $60 over time. Should the oil prices remain below $45, we would expect to see further challenges for these clients as our price deck would be reflecting these further depressed prices.”

Have seen a slight uptick in delinquencies in oil exposed provinces

“Delinquencies remain near historical lows and we have not seen an increase in delinquencies for Canada as a whole but have noticed a slight uptick this quarter in oil exposed provinces. This increase is insignificant at this point and it’s too early to say that this is a trend.”

Focused on managing expenses to a lower revenue growth outlook in ’16

“We are very focused as we go into 2016 Doug and myself on a more modest revenue growth outlook given market conditions. And so the completion of our international wealth restructuring program is allowing us to accelerate our expense program. So we are bringing that expense profile in line with our revenue growth, so that we are able to deliver positive operating leverage even in a more modest revenue environment.”

Not seeing deterioration in retail or commercial credit

“On the retail side, across all of the portfolios as I reported we’re not seeing deterioration in our impairment rates and in fact in some cases we are actually still seeing some improvements. So I am not really seeing either in retail or commercial significant concerns at this point, it’s just — I overlay of course, the market conditions that we’re operating in and so that’s why I’ve tried to express a cautious view.”

Fixed income new issue flows are down in high yield because of recent volatility

“I can start with the trading conditions currently. I think starting with fixed income, we are seeing because of the recent market volatility high yield for instance in the U.S. new issue flows is down, investment grade credit is steady but down a little bit, and in rates trading I would say it hasn’t changed.”

Equity trading has been robust recently as completing trades on an agency basis

“In the equities trading side of the business, it’s really just agency trading. We are not really putting capital to work for to offer liquidity. So the equities trading business has actually been as you might imagine reasonably robust especially over the last several days.”