Royal Bank of Canada (NYSE:RY) Q1 2015 Earnings Conference Call - Preliminary Transcript

Feb 24, 2015 • 04:00 pm ET


Royal Bank of Canada (NYSE:RY) Q1 2015 Earnings Conference Call - Preliminary Transcript


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Dave McKay

growth every quarter for more than two years. The second key highlight is Caribbean Banking, which was profitable this quarter following two years of restructuring, during which we repositioned the business and took out significant costs. While there are ongoing economic headwinds, we believe our Caribbean business can continue to deliver strong performance. The third highlight is the strength of our global businesses.

Capital markets generated particularly strong trading results, especially in the US, as client activity increased on improved market conditions and increased volatility. We also had higher M&A activity and solid growth in our US and European investment banking and lending activities. Investor and Treasury Services also had an outstanding quarter, driven by high levels of client activity in the foreign exchange markets and higher custodial fees. In addition, global asset management performed well with strong growth in client assets and we continue to extend our reach to institutional investors in the US and select global markets through several new mandate wins this quarter. While we're pleased with our first quarter results, recent changes in the macro environment have created some headwinds and let me provide you with some insight into how we are navigating through the environment ahead.

The price of oil declined 40% in Q1, while we've seen some stabilization recovery over the past weeks, the price of oil remains at levels that challenge the profitability of the sector. To date, we haven't seen any significant weakness in our oil and gas credit portfolio or in the retail portfolios. Within this environment, we're conducting extensive stress testing to help us understand the potential impacts of persistently low oil prices on our business and we are actively monitoring on an ongoing basis which provides us significant visibility into early warning signals. I would highlight the potential for some positive effects from oil and gas prices. For example, lower energy prices are expected to lead to increased consumer spending, which will help support GDP growth.

Additionally, a weaker Canadian dollar and an improving US economy benefit our manufacturing sector, for example, in Ontario exports in Q4 up 17% year over year, the national level we saw wholesale volumes rise nearly 9% from a year ago in December, the strongest annual rate of growth since April 2010. The impact of a lower oil price has also contributed to the depreciation of the Canadian dollar relative to the US dollar. We expect our dollar will remain under pressure in the US as the US economy is projected to outperform the Canadian economy. This quarter we benefited from translating our strong US earnings into Canadian dollars. As we'll touch on in a moment, there was a negative impact on our capital ratios from foreign exchange. However, we hedged our balance sheet outside of Canada to offset much of this impact.

As you saw, at the end of January, the Bank of Canada unexpectedly cut the overnight rate. partly in response to the macro headwinds I've just discussed and it's possible we