Royal Bank Of Canada Earnings Call Nuggets: Personal Commercial Margins and Credit Card Loss Rates

Royal Bank Of Canada (NYSE:RY) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Personal Commercial Margins

John Aiken – Barclays Capital: Janice a couple of quick questions on the personal commercial margins. Can you give us a little more context about the accounting volatility that you mentioned? In the Caribbean can you give us some flavor as to what’s going on with the margin compression there it looks to be fairly significant this quarter and should we look at that in context with the improving provision for credit losses coming out of the region?

Janice R. Fukakusa – CAO and CFO: Thanks for the question, John. I’ll first address the margins in Canadian Banking. The accounting volatility that we are talking about is on cash flow hedging and it’s basically with respect to our mortgage book. It is basis risk that we are exposed to and going forward we don’t see that happening. So, it was a one-time adjustment that we have. When you look at the issue with respect to Ally it is about the deposits and some of the high cost deposits and the wind down of that business. So when you look at what we’re looking at in terms of margin compression, we’ve always signaled that there would be around 2 basis points compression as we went through the year, because of what was happening with interest rate. So, I think that we are on where we thought we would be with respect to the margins.

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David I. McKay – Group Head, Personal and Commercial Banking: John, it’s Dave. On the Caribbean you are seeing a similar core impact on the lower rate environments in the Caribbean with the struggling economies and the interest rate environments and the rollover of our loans into lower yields in general. So, a very similar type of impact in the Caribbean right now.

John Aiken – Barclays Capital: Dave, in the Caribbean now, are you – when you are rolling over those loans, as we are seeing the provisions decline, are you moving back on the risk or is this purely just the environment in terms of low risk environment and what you actually can charge in the region.

David I. McKay – Group Head, Personal and Commercial Banking: That’s a great question. I’d say yes, we are moving back on the risk as we’ve cleaned up our book and taking charges over the last four to six quarter as you have seen. Certainly our risk appetite is one of caution on the commercial side, given the challenges in the economies right now.

Credit Card Loss Rates

Rob Sedran – CIBC: I guess it’s a question for Morten, we have seen credit card loss rates as some of your competitors this quarter actually come down, albeit from higher levels and I’m wondering if the increase in your credit card loss rate this quarter is just related to seasonality. And perhaps if you can – what are your thoughts are about the direction of these loss rates overall, they were basically at trough levels and are just going to bounce around a little bit or is there some kind of trend still taking place.

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Morten N. Friis – Chief Risk Officer: I’ll start and Dave may want to fill in. There is a seasonal feature to this, but I guess for me, risk management perspective, I’d say that having the cards portfolio performed at loss rates below 300 basis points is a good place to be in this part of the cycle. And I’d say so seeing the levels that 279 basis points well it’s up a bit from last quarter, it still reflects very strong performance and I’d see bouncing around of those levels as the economic conditions remain where they are.

David I. McKay – Group Head, Personal and Commercial Banking: All I’d add is that we have very strong origination growth, so normally cards exhibit a little bit higher rate the first year they are on the books that first year advantage. So, a little bit of the strong acquisition trend we’re on. But as Morten said, you know the absolute rates of the card portfolio given the yields are in the 11% to 12% to is a very, very profitable place to be. So, no concerns there whatsoever.

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