Q4 2019 Earnings Call
All participants please stand by your conference is ready to begin.
Good morning, ladies and gentlemen.
<unk> RBC of conference call for the fourth quarter 2019 financial results.
Please be advised that this call is being recorded.
I would now like to turn the meeting over 10 ideas on its head of Investor Relations. Please go ahead and it's on.
Thank you and good morning, everyone.
You can do they will be Dave Mckay, President and Chief Executive Officer.
Bolger, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer.
Well open the call for questions give everyone a chance to ask the question. We ask that you limit your questions and then make you.
We also have with us in the room, Yeah, Mclaughlin group had personal and commercial banking, Doug Guzman group had wealth management insurance and Investor and Treasury services, and Doug Mcgregor Chairman capital markets.
Sure No nurse our group had capital markets is also with us today.
Note on slide one our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties.
Actual results could differ materially.
Just to remind listeners that the bank assesses performance on a reported an adjusted basis and consider supposed to be useful in assessing underlying business performance.
The results, it's like the items identified on slide 30.
With that I'll turn it over to Dave.
Thanks, Dan and good morning, everyone. Thank you for joining US today, we reported fourth quarter earnings.
$3.2 billion.
Largely driven by continued strength in our Canadian banking wealth management and insurance businesses.
I'm pleased with our results, particularly given the challenging operating environment, including low interest rates and continued trade attention.
Dan banking recorded strong volume growth as we continue to leverage our scale to take an outsize share.
Industry volumes.
And generate strong operating leverage and earnings growth.
Our wealth management businesses continued to extend their number one position in Canada.
Benefiting from constructive market since strong net sales.
Also driven by growing advisor base and are leading asset management platform.
Which continues to outperform.
The industry.
Investor and Treasury services had another challenging quarter impacted by secular industry trends and difficult market conditions and.
And this quarter, we took a number of steps to reposition the business, which I will speak to shortly.
Capital markets solid fixed income results were offset by the impact of declining global People's on investment banking revenue.
Stepping back and looking at 2019 overall, our diversified business model and disciplined approach to cost and risk management enabled us to deliver record earnings of close to $13 billion.
Our leading ROI of 16.8% allowed us to generate 60 basis points of capital this year.
Ending 2019 with a strong cetone ratio of just over 12%.
Our profitability and balance sheet strength enabled us to keep investing at her leading franchises and navigate and uncertain macro environment. While also returning over half over 2019 earnings to our shareholders through dividends and buybacks.
Let me now provide some highlights on our business segment performance.
Canadian banking generated record earnings of over $6 billion in 2019, nearly half of our total earnings we continue to leverage our scale and unique client value proposition to.
What chief strong client driven volumes.
We added approximately 300000 net new Canadian banking clients. This year. In addition to the 300000 acquired in 2018.
The momentum we're building where on the way to meeting our client growth target abiding 2.5 million clients by 2023 set at our 2000.
2018 Investor day.
We also delivered an all time low efficiency ratio of 41.8%, while continuing to invest in our future reflecting cost discipline.
Overall I'm extremely pleased with the segments continued momentum the fact that we're earning market leading client loyalty scores.
This year, we added an additional $50 billion of volumes to our market leading franchises.
Reaping the benefits of our significant multiyear investments in both cells power and innovative digital capabilities.
We added over 200 investment advisors and mortgage specialist in Canadian banking over the last year.
However, our strategy is more than just adding capacity. It's also about having the right talent and capabilities to deliver differentiated advice products and experiences across our channels.
But the number one brand in Canada.
One example of this is my advisor digital platform for clients to activate their personalized financial plans, which is which now has nearly 1.4 million clients online, 14% of which are nude RBC.
Our digital channel has now over 7 million active users and our mobile banking user base is up 16% year over year to nearly 4.5 million.
Across all key product categories, we continue to be a market leader with either a number one or number two market share in Canada.
A credit card business saw growth across both spend and land revenue streams with card balances and purchase volumes up six and 7% year over year.
Respectively.
Relationship with Petro, Canada continues to drive new clients to RBC, well also delivering fuel savings for RBC cardholders and any Petro Canada is 1500 retail locations nationwide.
With RBC ventures, we continued to move beyond banking.
The focus on engaging clients, a new and innovative ways to date, we've accumulated 3.2 million connections with Canadians across our portfolio ventures, including those we both built and acquired we now have 17 ventures in market and another 14 under development.
One of these moves now.
Digital coast years to help clients move from home to home, providing homebuyers with compelling insights and support as they make the significant investment in their future.
Be back has been very positive and our mortgage specialist saw this is an important addition to RBC is existing competitive advantage, we plan to scale this venture nationally.
In 2020.
Amply, our new loyalty program, which launched in July of this year already has active participation from over 40, leading brands and we're seeing good early signs of client engagement.
Excited about the possibilities there will be scaling up this venture as well and 2020.
In business banking or strong results are driven by a focused on high returns sectors that align with our risk framework.
Also reflect the benefit of multiyear investments, we've made and talented cash management solutions and increasingly and unique digital capabilities.
For example, the launch of RBC insight edge and industry first our Canadian business clients can now leverage aggregated data to gain relevant insights into their industry customers end markets to enable them to make more informed business decisions.
Turning to wealth management, where we also reported record earnings this year, even after adjusting for again this quarter.
With over 80% of our assets under management outperforming the benchmark on a three year basis RBC again continued to build on its leading market share in Canada.
$8 billion of retail net sales this year alone.
And these uncertain times, our clients are trusting us with more of their business solving their advice service capabilities.
Illustrating this RBC game was recognized for investment excellence in the 2019, Canada Lipper Fund awards.
Winning seven individual fund awards with ph in winning two group awards.
Our Canadian wealth management business remains an industry leader in both revenue and fee based assets per advisor.
Clients continue to benefit from the insights distribution and digital capabilities, we offered through our team of nearly 1900 advisors in Canada.
Our U.S. wealth management business generated pre tax earnings of $1 billion. This year.
Our U.S. private client group is a sixth largest in the U.S., but anyway and had a record year for advisor recruitment attracting a number of experienced advisors from large wirehouses houses across the industry.
Our momentum also continued at city national with double digit growth in both commercial lending and jumbo mortgages offsetting some of the industry wide margin pressure.
This year city National expanded further into our core markets of Los Angeles, New York, San Francisco, and Washington DC.
You are upgrading our treasury management systems and technology to streamline the onboarding of new clients. This along with our recent acquisitions of exact rules and Filmstruck are important steps and continuing to grow our U.S. deposit base.
Our insurance business had a strong year with earnings of over $800 million, our second highest year on record.
We continue to develop innovative solutions to serve our 5 million insurance clients, including a digital tool to simplify the application process for term life insurance offering.
The segment continues to generate higher we while serving diverse client base, including being a market leader in an individual disability insurance.
Moving to Investor and Treasury services.
You've highlighted in our prior quarters, it's been a challenging environment and this quarter, we took steps to reposition the business.
This journey is not easy as part of this process. This quarter, we made a difficult decision to reduce roles in Europe and reduce our footprint in Australia.
Looking ahead, we remain focused on key markets, where we can provide the most value to our clients where returns are most attractive.
It includes Canada, which continues to provide a diversified source of deposits.
Turning to capital markets against a challenging market backdrop, we generated over $2.6 billion of earnings this year.
Corporate investment banking was impacted by an industry wide decline in fee pools at some point stayed on the sidelines.
Given ongoing economic uncertainty our results were further impacted by delays and the completion of deals in our pipeline.
Within this context I'm proud of our teams continued.
Continued to be awarded some significant mandates, including as lead financial advisor to Blackstone on its recently announced 6 billion Cross border acquisition of Dream Global.
This and other recently announced deals highlight the strength of our franchise and add to a healthy pipeline heading into 2020.
In global markets, our client centric model drove robust results in a fixed income business and our fixed income business performed well, despite an unfavorable market environment [noise].
Before moving to the outlook I want to touch on the macro environment.
North America, our core markets continued to be supported by a healthy U.S. consumer and they're spending and resilient Canadian household sector, both backed by strong labor markets and low interest rates.
It can easing housing market has also stabilized.
Business investment intentions remain healthy in Canada, including spending to expand the workforce and up big technology to support higher demand.
As we look out to 2020, while we still see strengthen our core markets. There's no question is expected to be a challenging macro environment.
Certainly is weighing on both global growth and trade.
And with a key factor in the recent fed rate cuts bank of Canada is bouncing solid economic growth against elevated external risks, leaving the door open for an interest rate cut.
In 2020.
Based on what we're seeing today. The next couple of years are likely to be challenging given interest rate trends uncertainty around global growth trade tensions and normalized credit conditions amongst other factors.
With this backdrop, we're maintaining our medium term objectives, recognizing that our performance relative to these objectives will be largely dependent on the macro environment.
We believe we are well positioned to meet our medium term objectives around our OE capital strength and dividend payouts.
While meeting or 7% plus diluted EPS growth objective, maybe challenging in the near term. We are focused on meeting this target in the medium term as we've done in recent years.
Within this context, we remain well positioned to continue driving strong market share gains in our leading client franchises.
And the power of our leading scale balance sheet strength and diverse revenue streams will allow us to continue investing in technology and sales capacity.
This period of secular change, we will maintain a disciplined approach to balancing near term operating leverage with creating long term sustainable value for our clients and shareholders.
Also maintain a consistent and prudent approach to risk management through the cycle.
So to sum up we enter 2020 with strong momentum in all our Canadian retail franchise is driven by multiyear investments and our people products and technology. We believe our focus growth strategy positions us well to continue to deliver an exceptional client experience gained market share and return capital to our show.
Our holders.
To close I'm proud of what we've achieved this year I want to take this opportunity to thank all 85000 colleagues across the bank.
Our talented and engaged employees, who give back to communities and deliver leading advice and service to our clients.
With that I'll turn the call over to Rod.
Thanks, David Good morning, everyone, starting on slide seven against a challenging macroeconomic backdrop, we delivered solid fourth quarter earnings of $3.2 billion down 1% year over year.
Diluted EPS of 2018 cents was down 1% as well.
The last two quarters I've, given an update on our cost management progress and I'll do so again this quarter.
We are focused on driving efficiencies. So that we can continue to invest in future growth. During this prolonged low interest rate environment. This quarter expense growth was 7.4% year over year or 4.4% on an adjusted basis.
Over 40% of the increase was in client facing roles as wells technology and digital initiatives as we invested in serving clients and continued business growth.
Indicative of our expense discipline expense growth in second half of 2019 slowed to 3.4% on adjusted basis as compared to 6.6% in first half of the year in other words the growth rate was cut nearly in half.
Looking forward to 2020, we expect to continue to slow expense growth by leveraging our scale, while continuing to strategically grow our client base and deepening client relationships.
Turning to slide eight RCT, one ratio of 12.1% was up 20 basis points quarter over quarter strong internal capital generation was partly offset by organic are going to be a growth and share buybacks. This quarter, we bought back four and a half million shares for total $474 million.
That puts us at 10.3 million shares repurchased for the year were $1 billion.
Moving to our business segments on slide nine personal commercial banking reported earnings of $1.6 billion. This quarter, a 5% year over year Canadian banking net income of $1.6 billion was up 6% year over year, we continued to see strong volume growth of 8% year over year across our core products this quarter.
Residential mortgages grew up more than 7% year over year, driven by strong double digit more mortgage origination volume growth and strong retention results.
Business loan growth was up nearly 10% year over year slightly lower than the growth achieved over the last nine quarters.
Deposit growth was strong across both personal and business deposits. In particular, we continued to see strong growth of 14% and personal G.I. sees as clients continue to shift towards deposits in response to macroeconomic uncertainty.
Our net interest margin of 2.76% was down four basis points from last quarter due to the impact of competitive pricing pressures looking forward in 2020, we expect NIM to drop approximately 46 basis points for the year given current competitive mortgage pricing.
<unk> expense growth was nominal for the quarter due to strong cost management and our ability to leverage scale as a driver of efficiency operating leverage in Canadian banking was 4.3% for the quarter and 2% for the year within our previous guidance of 2% to 3% range for the year.
Looking forward to 2020, we expect operating leverage to be 1% to 2% given the impact of interchange and expectations for sustained low interest rate environment.
Historical operating leverage trends can be seen on slide 22.
Turning to slide 10 wealth management reported earnings of $729 million, which were up 32% year over year.
Adjusting for the gain on sale, a blue based private debt business earnings were up 8% year over year.
Global asset management revenues were up 39% year over year, excluding the gain revenues were up 10%.
This was largely due to higher fee based revenue on higher AUM, driven by market appreciation and net sale.
In Canada Global asset management increase its retail mutual fund industry market share.
70 basis points year over year to 15.8% as of September .
Canadian wealth management revenues were up 3% year over year, driven by higher fee based assets a market appreciation and net sales.
Over the course of the year, including Q4, we continue to we continued to add investment advisors to deliver more advice and insights to our clients.
Our non U.S wealth management sufficiency ratio was 60.8% adjusting for the gain our efficient efficiency ratio was 66.5%, which improved 220 basis points year over year.
You asked wealth management revenues were up 14% year over year in us dollars driven by 19% loan growth in city national and record fee based asset growth and our U.S. private client group.
Despite the declining interest rate environment in the us in the latter part of 2019 city National continued to generate solid growth in net interest income up 8% year over year.
Deposit growth in Q4 was up 14% year over year, reflecting funding benefits from higher sweep deposits as well as accelerating growth in business spot.
This quarter, we saw net interest margin declined 29 basis points quarter over quarter to 3.14%.
Moving the eight basis point gain on recoveries from legacy loans last quarter NIM was down 21 basis point.
Looking forward to 2020, we expect NIM to decline in the first quarter, albeit at a slower rate, reflecting a full quarter impact of the September and October us rate cuts as well as the impact from the implementation of IRS 16.
Absent any further U.S. rate cuts in 2020, and increasing competitive pressure on deposit pricing, we expect margins to lower before stabilizing in the latter half of 2020.
Moving to insurance on Slide 11, net income of $282 million was down 11% from last year, primarily due to lower favorable reinsurance contract renegotiations and less favorable annual actuarial assumption updates higher claims costs and lower favorable investment related experience also contributed to the decrease.
These factors were partially offset by the impact of new longevity reinsurance contracts.
From 2016 at 2018, approximately 60% of insurance earnings record in second half of the year in 2019, the percentage earned in the second half the year was also 60%, but with a higher proportion earned in Q3.
Moving to investment Treasury services on Slide 12, net income was $45 million.
As Dave mentioned earlier, we're committed to improving the profitability vine Ts and as such recognized $83 million aftertax repositioning costs in Q4 associated with repositioning the business.
During this charge net income was $128 million down 17% year over year.
Yes was impacted by lower funding and liquidity revenue, primarily driven by the short term interest rate environment and lower gains from the dispositions certain securities.
We also saw lower asset services revenue due to reduced client activity and lower client deposit revenue largely driven by margin compression.
On slide 13 capital markets earnings of $584 million were down 12% year over year.
Corporate investment banking revenues were down 14%, primarily due to lower M&A activity across all regions. This quarter saw investment banking fee pools decreased 13% year over year across most products with M&A down 21% year over year.
Despite a challenging quarter across the industry, we rose to 10 in the globally able for fiscal 2019 up from 11 in the prior year.
Mobile markets revenues were up 6% despite the challenging market environment, we saw solid fixed income trading, which was partially offset by lower equity trading revenues overall, our trading businesses performed well against our peers on a year to date basis, given our diversified geographic and product mix.
Looking ahead to 2020, our investment banking pipeline remains strong with the timing of several large deals expected to close in the first quarter 2020.
Conclusion, we are pleased with the resiliency of our franchise to manage through the challenging environment. Our core refit retail franchises continued to grow in Q4 offsetting market in wholesale industry challenges and macroeconomic headwinds our results reflect the strength of our diversified business model and commitment to long term value creation for our stakeholders.
And with that I'll turn it over to Graham.
Thank you wrote and good morning, everyone.
Starting on slide 16, this quarter, we had provisions on impaired loans of 434 million, which equated to 27 basis points. Additionally, we had we established provisions on performing loans of 71 million or five basis points for a total of 505 million were 32 basis points.
Coverages on performing loans increased by 41 million were three basis points from last quarter.
Unfavorable changes in our overall portfolio mix, including seasonal factors related to our cards portfolio and credit migrations contributed to the quarter over quarter increase.
These factors were partially offset by a more favorable macroeconomic forecast in areas such as Canadian housing and the impact of model changes for a few of our retail portfolios.
Provisions on impaired loans increased by 35 million or two basis points from last quarter, mainly due to higher provisions in Canadian banking and city national which were partly offset by lower provisions in Caribbean banking.
For fiscal year, 2019, PCL and loans totaled 31 basis points up eight basis points from last year.
Provision going impaired loans totaled 27 basis points up seven basis points from us here.
Which represented a shift from.
From the cyclical lows of 2017 in 2018 to more normalized levels. This year.
Yes.
Let me know provides some additional detail on three of our businesses.
In Canadian banking, PCL and loans of 400 million increased by five basis points from last quarter.
The increase was due to provisions on performing loans related to the factors already noted.
The remaining increase as a result of higher provisions on impaired loans, primarily attributable to our cards and personal lending portfolios.
And wealth management do you still on loans of 34 million increased by 7 million from last quarter, mainly due to a new impaired loan in the consumer discretionary sector in the us.
This sector has been the largest source of losses loan losses for city. The actual back in 2019 largely in relation to the quick serve restaurant industry requests are being impacted by rising labor and couple of course.
Notwithstanding higher provisions that are city national portfolio in fiscal 2019 that continues to perform ahead of our expectations.
In capital markets, PCL and loans of 78 million increased by 22 million from last quarter, mostly due to higher provisions on performing loans, reflecting downgrades in oil and gas portfolio.
Provisions on impaired loans were up 7 million from last quarter. This reflects ongoing weakness in the oil and gas sector as well as provisions in a few other sectors.
Turning to slide 17.
Gross impaired loans of $3 billion were relatively stable from last quarter as higher new impairments in Canadian banking were mainly offset by higher repayments and Caribbean banking as well as repayments and loan sales in capital markets.
Overall, we saw a decrease in new formations are a couple of markets portfolios, even though we continue to see heightened levels of formation in the oil and gas sector. This quarter.
We remain comfortable with exposure to the oil and gas sector, which represents about 1% of our total loans.
This portfolio is governed by borrowing bases in size the proven reserves the borrowers which provides good protection against credit losses.
Looking at our retail portfolio on slide 19, we saw an increased an increase of insolvencies, primarily in the form of consumer proposals in our personal lending and cards portfolios.
Prior years interest rate increases have impacted some of our clients by raising debt servicing carts notwithstanding the overall strong labor markets and income growth this past year.
We also saw an increase in delinquencies and insolvencies in our cards portfolio in Quebec.
This increase falls the implementation of a new rule on minimum credit card payments, which took effect in apartments last August .
Well these factors contributed to a moderate increase in PCL this quarter in our unsecured retail portfolios.
The overall credit profile of our retail clients remains strong with stable it stable levels of delinquencies high FICO scores and low ltvs.
Okay. This fiscal 2020, we would expect provisions on impaired loans to be in the range of 25 to 30 basis points and prisons on performing loans to be in the range of three to five basis points should credit conditions continue to normal ours.
As we've cautioned in past years, there will be inherent volatility from one quarter to the next particularly for our wholesale portfolios were provisions tend to be more concentrated.
We also expect some degree of volatility in our provisions on performing loans based on volume growth changes and macroeconomic variables and portfolio mix.
To conclude we maintained our prudent risk management approach and we're closely monitoring the macroeconomic environment. We're confident that our credit performance will remain resilient growth the credit cycle, given the strength of our underwriting standards the diversification of our portfolio and the quality of required base with that operator, let's open the lines for Q in it.
Thank you.
If you have a question and you are using a speakerphone. Please mr. handset prior to making your selection.
If you have a question. Please press star one on your telephone keypad.
At any time you wish to cancel your question. Please press the pound Jain. Please press star one at this time if you have a question there will be a brief pause while the participants Rochester. Thank you for your patience.
The first question is from Ebrahim Poonawala with Bank of America. Please go ahead.
Good morning.
Hi, there.
Just a two part question on expenses I guess, you mentioned exposed to succeed portal and then this is a key and have person grossman. So in the back half was 19, I guess does that imply some negative 2% expense growth expectations quick when you blend E.
As equal and just sticking to step back and just listening to Dave in terms of his cautious outlook on didnt have any environment.
Get anything bigger that the bank needs to do in terms of mixing the expense either more as we think about can you can see and beyond.
Thanks, Ebrahim yet on the expenses recall that we have a large wealth management business and capital markets business. So as revenue ramps up or down our we have a natural hedge on expenses. So if the first quarter ends up being strong for capital markets and are wealth management, you might see expenses.
Expense growth picked up a little bit or if it's weaker as it did.
For the year as it came down a little bit versus the growth in the first half of the year expenses will be a little bit lower so it does moderate we're taking the core rate of expenses down in terms of the growth rate and we took and you'll see that in a number of a line items. If you look in our supplement our marketing costs and and travel costs things like that we have taken.
In the rate of growth of that down.
Our technology investment, we have been growing that over the last five years significantly and over the last year. So and we expect to continue to take that rate of growth down and so given the macroeconomic environment largely the interest rate environment, now, which had been providing as tailwinds for two plus years, enabling us to invest in future gains.
And continued market share now we have a lot of the pieces in place both from a technology standpoint, and talent standpoint in distribution standpoint to continue to grow revenue.
Despite those macroeconomic uncertainties and expenses toggle down a little bit with it. So the guidance that I gave that we expect to continue to see it to moderate would hold and we'd expect to see low single digits.
And we shouldn't be expecting any be good actions on expenses like the restructuring you did I know it was specific to the investor casualty business, but anything much larger is something that you should invest and anticipate something like that over the course over the next year.
It's Dave and what I'd like to reinforces we continue to look at our cost structure and we're managing it over the same way across the organization. We have over the last five or six years, which has tried to get ahead of our cost structure invest in technology managed through various leavers overtime and bring our base down so we don't or.
Yes, I mean to take an aggressive short term repositioning because we are trying to get ahead of things you have a number of programs across their organizations. We saw this coming so I think you can expect from US generally a continued management of costs radically across the organization. So that's how we see the world right now having said.
That we did take a short term repositioning of Investor services, because we had to make a quick pivot a quick pivot.
From Europe into into Asia, and a number of roles and they're in and adjust our cost base more quickly given the things that we're trying to do in the business. So that that you might as quite quickly and I say that was more out of the ordinary for how we manage our cost structure than typical of what you've seen us during the past so core messages continue to expect system.
Manager base down programmatically across the organization that we've done in the past.
That's very helpful. Thank you.
Thank you and the next question is from Gabriel Duchaine with National Bank Financial. Please go ahead.
Good morning.
Scott Graham about your outlook for 2020 on the.
Ill.
Loss range I.
And then come across of near materials, but you were.
Image above your target range for this year I know there was some maybe some credit losses earlier in the year, but.
On the other hand, maybe some seasoning effect in the current portfolio capital markets seems to be in an upswing there for pcls.
Balance of factors, where do you see the original lining up in 2020.
Yes, I think as I made in my comments were forecasting the ratio Thats stage three to be 25 to 30 basis points.
At this stage three side of it that an additional three to five basis points in stage, one and two.
I think some of your observations.
In the comments I made all factor into that as you referenced certainly in the first half of the year. We saw some we're reducing cardica events in our in our wholesale portfolio, excluding both capital markets and in the.
And in commercial and Canadian banking in the latter half of the year I would say it's been a bit.
So it's been a bit more broad based but a bit more what we would view is more normal and so you look at longer term trends in retail at around 34 basis points and in wholesale around 31 basis points, we still feel we're certainly coming off a two very strong year. So if you sell perspective in 2017 18 were because of wholesale things you'd see a they were abnormally low.
But we're still.
Lower long term averages but.
Acceptable levels at levels that don't come through.
Are you also mentioned in the Cardium personal loans drivers.
Seasonality I always talk about as more of a Q4 thing.
Regulatory change there for making minimum payments.
Your five year phase.
Already having an impact we are seeing insolvency data moving higher.
And just wondering.
Is that where you see the most pressure coming in next year in terms of normalization or seasoning.
Perfect.
Well they normalization is not specific to retail again as I highlighted.
In wholesale 2017, and 18 were quite exceptional years, they would be more abnormal than what 2019 was one wholesale again I think we didnt you wouldn't expect to see.
A continuation of what we saw the latter half of 19.
Retail had continued with very little levels, we expect to see that tick up moderately but overall there'll be some puts and takes there that give us comfort to the that overall 25 to 30 basis point range retail more specifically, yes, we've seen some.
Factors I want to overstate the factors, we've seen incurred that was just starting to to highlight what we are seeing there no cards. Overall this year was up 12% year on year about half of that is related to growth. It was of course of tribute due to weakness in Alberta, and then the insolvency factor that I highlighted but overall and retail outside those factors, we continue to see very stable.
Equally profiles origination quality continues to be very strong. So again, we feel quite comfortable the profile there, but do reflect the fact that were probably coming off some very strong years, and we'll see a normal as to some degree.
Thank you.
Thank you. The next question is from John Aiken with Barclays. Please go ahead.
Good morning, taking look at your objective for us wealth management, given the challenging year that we've had as well as the margin compression that we've seen those operations with the level of confidence in achieving the stated objective for 2020.
We sit here today.
I think if you look at.
The progress we've made in city national real strengths as we've doubled the size of the core franchise over the past four or five years from a balance sheet perspective, we continued to maintain double digits lending growth numbers throughout the cycle, we dipped a bit on deposits, but you'll see our deposits strength came back nicely in Q4, two I think roughly.
14%. So our primary focus is to continue to invest in that core franchise expand geographically grower, our mortgage and our commercial business and continue to expand our private banking business. So from that perspective from a balance sheet growth perspective, a client growth perspective, we're out or a little bit ahead.
Of our overall targets, what we can't control in our forecast that we gave you when we did the presentation and know what 2016.
Was the level of interest rates. So we we made that forecast of where earnings were we had rates coming back and holding a bit longer than they have held.
We didnt forecast that the quick reduction in rates and fed rate cuts that you've seen over the past year. So if if rates continue to hold where they are and go lower its going to be tough for us to generate enough margin off balance sheet growth was has exceeded our expectations.
To to meet those targets. So we are looking at slowing cost growth. We're looking as I've talked about and our recent Investor conference. We have significantly ramped up our cost structure beyond where we thought we'd be to to try to meet the growth opportunities we saw in the marketplace.
The economy doesn't perform where it has potential you can see us pull back on some of that cost structure and deliver some earnings there. So we've got a number of leavers, but I think you should focus on the core franchise customer balance sheet growth has been significant it's double as it's ahead of where we thought it was the margins are a bit off and we can't.
Control that for the core franchise has performed.
Exceptionally well.
Thanks, David.
I have a follow on given what we're seeing on margins now I understand the overall profitability the platform remains quite strong, but as margins are under compression.
Is there any discussion about slowing the growth that we've seen over the past year.
Yeah, I just referenced side as we've talked about.
Heading out to L.A. tomorrow.
Yes, absolutely we've accelerated our growth we've opened in Hudson yards Weve opening other stores in New York, We're opening in Washington, and we can slow some of the.
The staffing of those stores, but we can certainly slower back office growth, which ramped up for a significant growth and if the growth doesn't materialize, but even having said that I think we've we've kind of run up or back office growth quite aggressively and there's an opportunity to reduce it through technology investments, but also just through kind of.
Managing that cost structure down in a slower growth environment. So we do you foresee the ability to grow our earnings by managing our cost structure.
As another lever that we haven't pulled to date, we've allowed that cost structure and move ahead.
To grow because we have not made an acquisition and therefore, we've got we've invested in organic growth, where we get the highest returns. So I think the answer is absolutely that's something that I'm focused on and Kelly coffee, our CEO of city National is focused on so thanks for your question I think we'll take.
The next question.
Thank you. The next question is from Denny Crum with Cormark Securities. Please go ahead.
Hi, Good morning, Rod in your commentary I know you talked about I think it was four to six basis points of additional margin pressure given competitive dynamics.
Just a clarification.
I assume that doesn't include any bank of Canada rate cuts, but I just wanted to see how that would change your outlook.
Yes. Thanks, Manny that's that's correct I mean, the market is not look casting.
Hi, likelihood of a rate cut until potentially the end of next year, So wouldn't really have an impact.
Certainly in the first three quarters and maybe marginally on this on the fourth quarter if it happens.
So a lot of that is really the stock inflow of the growth in the book in so I think it's important to step back and look at the strong volume growth, 8% in Q4, the strong net interest income growth, which was 5.6% in Q4 and over 7% for the year and so part of this is mix and.
And.
The mortgage market has come back and their state can indeed continue reports on that we continue to grow share in that in that space. Those products tend to have a lower spread than other unsecured products and so as we grow that book as the market grows at higher level, you're going to just see some mix issues caused that NIM to come down.
Down.
And overall with good volumes, it's still a positive and install a positive revenue story.
Part of this is a little bit of math when you look at the underlying rates versus five years ago. So a lot of our deposit the track during in the internal transfer pricing on that it is positive interest rates the five year rate actually despite the low rate environment today is still higher than it was five years ago. So structurally in the deposit side we're okay.
You know the mortgages is a competitive pricing element. So theres nothing that is that is actually.
Ominous in this outlook is just the it's just a factor of what's the market is bringing us and our continued market share growth. So I wouldn't look at that as a negative per se I think the business quite strong.
And just as a follow up on that you highlight to improve mortgage growth and Im just wondering your perspective on what's driving that and is there an element there that is concerning.
In terms of that Reacceleration.
That's Neal all I'll handle that one no definitely nothing concerning we would look at a strong mortgage performance in 2019 direct was directly as a result of review we did around some internal processes and just making sure that we were following up on better lead management.
We opened leads more quickly getting back to customers more quickly as well as.
And changes in our adjudication process that made sure that once we had a transaction in front of us.
We didn't lose that customers so.
Yes, Hi, Graham spoke to the underwriting which continues to be very strong and we would look at both house prices and.
Home sales across the country being quite quite balanced and starting to stabilize after btwenty. We have seen the fall have more activity and sort of the buying season, a little bit elongated, but as we look at it all round, we would we would feel very comfortable with the performance of the mortgage business.
Thank you thanks.
Move onto the next question.
Thank you and the next question is from Steve carrier with capital. Please go ahead.
Thanks, very much if I could just start with a quick follow up Rod last quarter you talked about.
40 basis points of NIM or thereabouts over five quarters given rate cut expectations.
Maybe does that still hold and if so should we be thinking of the Q4 impact of 29 basis points or the 21 basis points, you mentioned on a more adjusted basis.
Thanks, you guys I assume you're talking about city National Yes, sorry city National Yeah, Yeah. So I would think of in terms of 21 that eight was was a onetime gain and we tried to called that out last quarter as well as this quarter.
Not to build that in.
Yes. So we ended the kind of 314 I spoke to.
Last quarter that if the fed was cutting which the fed ended up doing.
Both in September and October that basically the fed, but fed funds rate was going to be back to levels that you'd seen in 2017 ish.
Which were which is when city national had spreads in the high twos the to wait five the two nine range and absence.
Big pickup in the five year rate, which would help with with with some of the asset pricing and the tractors on the deposits you'd expect the margins come into similar levels as what it was so on adjusted basis. You are at at 335 in Q3 40 basis points would take you down to.
To the to the 295 range I think your within that range as I mentioned I think my messages, we expect to continue downturn in Q1, given the two fed cuts.
But then we see it leveling off and we see modest spread compression from there and Thats what the markets are saying right now based on their expectations for fed activity.
But.
We'll see what happens with with the trade discussions and tariffs.
And future fed activity, one way or the other that that would change the outlook for us.
Okay. That's helpful and then just lastly.
A question on Investor and Treasury services post the restructuring and repositioning can you talk about the or what can you offer up in terms of the earnings power going forward what type of bottom line benefit we'll see from that 83 million of restructuring this quarter.
Yes, Doug.
A couple of things one is the.
The charge that we just took that his point to the effect of those fraud certain statements is really going to be seen leaking into the the CNL in terms reduced expenses over the course of the year. So as you get towards the back into the year you'll see.
More group, but on the expense side.
In terms of a the revenue side.
We have been struggling with.
Flattening yield curve of the short end and some margin compression.
We change tell the trading reports.
Put on some more term as the accrual book is is producing more regularly.
Right now and so we're just going to try to manage that so.
On the revenue side, we'll see what the market will give us.
On the Investor services side.
We're just working away in terms of trying to do more business with customers will sail laser.
Thanks, Steve will move onto next question.
Thank you.
The next question is from Robert Sedran CNBC capital markets. Please go ahead Hello. Good morning, just want a follow up fall with Neal on the mortgage question everything we hear is that mortgage spreads are at historic lows, but when the market leader is growing at market leading rates.
Suggest that this is something you're doing rather than something that is happening to you in terms of the competitive pressure. So I understand all the process issues, you talked about but I presume you're also not shying away from the price competition as well. So is this just part of a client acquisition strategy or are you comfortable with the mortgage as a standalone strategy that you can continue to grow at these rates.
This profitably as you'd like to.
Yes, thanks for the question.
I mean, our strategy is not obviously the lead the market down in terms of price I think.
Leading with advice and we're leading with distribution so Dave mentioned in his commentary we added.
Good specialists and my comments were more of what the productivity of those mortgage specialist in terms of.
Making sure they got back to customers more quickly mix, making sure. They got better leads and they can acts and those leads so.
Reality as we do participating in the in the market. We don't we don't have as much influences I think some some feel in terms of setting the price.
That said, we're not gonna have other customers come in and and put a mortgage into our customers hands. When we feel it should be with us. So we're going to remain competitive on price absolutely agree with your comments in terms of the level of competitiveness and spreads and.
I think there's just a lot of competition out there and especially in the last time last half of.
Last half of this year.
So given all that above average market growth is still what you'd expect.
We are maintaining kind of that we're in mid single digits and.
Thats still really are our target range.
Okay. Thank you.
Thank you.
Next question is from Sumit Malhotra with Scotia capital. Please go ahead.
Thanks, Good morning for Dave We've spoken many times about how the stars really aligned for the bank and the timing of the purchase of city National.
Lot of questions on this call about the interest rate environment in the growth of the business. If it's affecting your franchise, it's obviously affecting your competitors as well.
Especially with your capital ratio one of the stronger, especially for the quarter sitting something like 11 811 died on a pro forma basis does the.
Acquisition or external capital deployment.
Supplementing that business become more attractive given what's happening to some of your your competitors in this rate backdrop that it has been in the last few years or you can turn to whole capital and continue to buy back a larger amount of stock.
It's a great question I would say certainly leaning towards the latter than the former and that's we're going to continue to grow organically you've seen.
Double digit mid 14, 15, 16% loan growth, 14% deposit growth, we're investing in new branches vesting and expanded salesforce capability launching new products building or brand in the U.S. So the organic build we've invested heavily with and we continue to focus on that because that drives the highest are always.
For our shareholders.
Being patient and waiting has paid off already and I think it's going to pay off even more to continue to be patient and watch us marketplace as we.
As we watch the economy, we watch valuation of banks and we're being very careful where we would only look at something that drove a strong shareholder return grew our franchise geographically or grow a product capability and enhance the existing strong growth rate that we have right now.
And does an overly destruct management something that's too small so I think you know those are the same parameters, we've talked about organic growth first and with our strong.
C. One ratios it gives us an opportunity to return capital to shareholders, while meeting all our organic growth objectives across all our businesses. So we sit in a very strong position to continue to create.
Relative total shareholder return.
For our investors.
That's that's very clear thanks for that and then lastly for Bolger, we've talked a lot. This year on these calls about the the declining trend in the tax rate and the capital market segment and.
It took another significant step down this quarter is there anything I know theres. Some some competitive factors at play here. So I'd appreciate any insight you could give us as to what exactly has driven the tax rate down to something like 3% this quarter and are there any.
Risks to the bank.
In terms of embarked on revenue or normalization in this line and 2020 for how we think about earnings for the units.
Yes, thanks for that so I wouldn't I wouldn't call. It a risk the bank I would I would expect it to normalize a bit and be back into double digits in 2020 .
You saw some updated guidance out of the U.S., even this week on the.
On the beat tax for example, and I think the come out with more guidance. So there is there's a natural upward bias on the tax rate I think globally.
As as a as countries try to capture more of a tax base, especially and banks fall into that even when they're going after technology companies, but also there is that theres, an ebb and flow to this is the earnings were a bit off in Q4 in capital markets. The geographic mix ends up being favorable often times.
From a tax perspective, and so is earnings normalize going forward and increase as we highlighted with the strong backlog and strong pipeline I would expect that the geographic mix would be less favorable from a tax perspective than it was this quarter. So as a result.
All indications are that we would be back towards the norm more normalized double digit tax rate in this business in 2020.
Thanks for your time and Doug Mcgregor I think this is your final call. Thanks for your help over the years.
Thank you.
Oh.
Next question.
Thank you. The next question is from Doug Young with Chardan capital markets. Please go ahead.
Hi, Good morning, most of my questions have been asked and answered, but one I wanted to go back to I'm, because I think you address the adding two and a half million new clients by fiscal 2003 for Canadian banking, but I think it at the Investor Day, you also throw to target for RBC ventures of adding 5 million active users and converting no 10% to Royal Bank clients.
Hoping just thinking a bit of color how that transition is going because I think you added I think you mentioned 3.2 million connection.
You know that conversion to Canadian bank clients just wanted some color on that thank you.
Thanks, Doug Your question I'll start with the overall ventures targets and Neil will talk about.
The bigger impact of.
Two and a half million net new clients of which we said 500000 conversions would come from ventures. So now were a couple of years into this now and we've really focused on building those 5 million new connections that we would have had to buy and a social media and digital channel before now we have a connection to a new Canadian <unk>.
Actual client that we never had before they've come through those 17 venture. So we've really made that the primary focus and we actually haven't tried to convert.
Two RBC products holders as yet we're trying to build deeper relationships trying to get to know them and that's going to pay off over the long term, having said that 2020 is a big scaling year, where we are going to start the conversion process through a number of these ventures I gave the example of most snap, which we embedded into our overall mortgage process.
Our mortgage salesforce of over 1600 specialists side. It was one of the biggest tools. They had to help flows mortgages and I've been a price competitive marketplace. As you referenced I would say, though that RBC Detroit.
We did increase our mortgage rates over the past year at given the volatility I think twice right now and you can comment about further.
But having said that we're competing primarily on creating value for customers and boost that im into that frame. We have another five or six ventures in the mortgage space thats, creating value that.
We're ready to scale nationally so I think.
We focused on 3.2 million were already 60.
5% to warrants or 5 million target after a year and a half the two years. So we feel that will likely exceed the 5 million, but the conversion proves going to come over the coming quarters were very much focused on scaling amply I think when you can add 40 retailers over a two year period and it look if you looked at what it took air miles.
EMEA to add retailers over a decade effect that we have a team now of high profile brands, creating value for Canadian Youre going to see a scale that aggressively in 2020 and convert off of that so I think well work and we're really positioned well to start to show you some number.
On the bank conversion side, which is.
Still.
Not insignificant I think we've done over 50000 conversions just in pilot phase without any real marketing spend behind it already factored in marketing budgets into scaled leasing nationally. So I think that is a little more color on ventricle turns and Neil to talk about.
The overall client acquisition and how we're building on the 300000 over the past each year over the past two years.
Yes. So thanks, a question I think the ventures, we'd say.
Is where we is on plan Thats, where we wanted to be.
Dave talked about the.
The first play we needed to make is actually get the client engagement and so that's the first sort of the first milestone is to engage customers that we didn't have a relationship before have them coming back to these digital experiences. We're also been very cautious about managing what what we referred to as kind of the load factor how many times, we want to put the RBC brand or an RBC.
Value proposition in front of them is something we're really testing, we don't want to limit that engagement, we're having and you've seen us. Another other digital business models I think in terms of we have seen some of the ventures for example, owner which is focused that.
As the venture focus that new small business originations were seeing a very good conversion right there.
Small business owners can go into the end of the App. They can register the small business. There are immediately offered a small business banking package and we're seeing upwards of a 40% conversion rate on that venture things like the drive.
Venture, we've actually integrated that into our mobile app they've talked about the number of customers, we have logging into the mobile app.
Well times a month, so we're able to give exposure to the value proposition there.
Moving snap was one of the offers we put out to our customers.
Summer proved to be actually as or more more valuable than some of the more traditional offers.
Like like for example, just cash.
Cash incentive so we're feeling that.
Three three good examples already providing value in terms of amply, Dave mentioned the relationship with merchants.
We really look at this is key part of it to have the quality of the merchants. So right now in the amply App, we'd have for instance, like home depot and Rexall Westjet the CAG.
Indigo and so the key there is that we've got these relationships with merchants they are willing to put value on the table for clients and again, it's that virtuous circle of providing getting the engagement, providing the value and then testing into how we drive the conversions. So that's really how we're thinking about it.
Okay. Thank we should move to the next question. Thanks.
I know, we're almost at time, both try to get a couple more in.
Thank you. The next question is from so and we'll go ahead with BMO capital markets. Please go ahead.
I just wanted to kind of go back to that new clients stuff Neil.
300000, do you say I think you've added this year 300000 last year.
25 million target can you can you just I know we're short on time, but can you give us a sense of how that is translating into your segments results on whether or not.
Actually having to still provide incentives whether its ipod you a cash to pick up some of these customers.
Yes sure. Thanks the question.
So the new client acquisition those are both step ups from where we'd be running with net new client.
Acquisition in the in the previous three years. So we're feeling that we're we're on the trajectory we set out to your point incentive still are part of the strategy.
We are out again with the I pad campaign as we do the analytics those are those are well performing solid returning investments.
You will see us on a go forward basis.
There will be a mix there'll be some new value propositions that we feel.
And really start to drive an increase in the trajectory and we'll look for that in the back half of the year, but right now we're pleased with.
Our new client results and we're also seeing.
In terms of this the core checking account service fees, we were actually.
One of the drivers of other income so we're seeing it pull through and that life.
I appreciate that thank you.
Thanks, or I will take one more.
Thank you. The last question will be from Scott Chen with Canaccord Genuity. Please go ahead.
Good morning, just quickly on the oil and gas portfolio, maybe just a two part question just on the credit you cited.
Is that you asked for Canada and the.
The second part does in terms of the strong growth I know, it's modest are part of your portfolio, but I think was up 34% year over year is that kind of like it.
Growth trajectory.
With that book going forward. Thank you.
Sure. Thanks, a question. This is Graham will a little bit more commentary the oil and gas.
Our oil and gas portfolio is about a 70%, Canada and 30% other if you will the other being a mostly the U.S.
Of the portfolio about three quarters.
In production.
The mix between investment grade in non investment grade would be roughly I think 23% investment grade.
Leading non investment grade.
In terms of the growth the top in there just how that's a includes as credit quality.
Growth over the last year that we've seen I would say has been more balance to investment grade not invested roughly about 50 50, there. So we've actually seen the portfolio quality skew up a little bit over the last year.
At investment grade piece as I mentioned in my remarks is certainly a.
The credit risk, we really mitigate through a really high quality structure, the borrowing base structure, so that even though we see.
Impairments in those sectors are clients struggle with some of the headwinds there when a loan losses adults, we accrue to US minerals, we bought it I think are loan losses over the last five years there of their own just over 100 basis points. Despite the real difficulty that sectors facing.
So that would be just a quick summary on the credit profile there that will slugger Derrick wanted to comment on what's driving the growth.
It's Derek maybe comment just briefly I think as Graham said I.
I think I think the growth.
We feel quite comfortable with its been uneven balanced between investment grade names and some boring base names that would all be conforming part of the growth was driven by a couple of larger investment grade M&A related transactions that that came on to the books and so we think overall, it's a it's quite a comfortable risk profile.
Great. Thank you very much thanks Scott.
And.
Before I hand, the call I would like to recognize two of our leaders who are retiring shortly agenda for Tory was our current chief administrative officer.
For her illustrious 42 year career at RBC, which includes roles as you know as group had a CNCB and as I said, most recently as our chief administrative straight of officer really sincerely. Thank her for her contribution over her career and we're certainly miss or.
There is already acknowledged on the call Doug Mcgregor for his incredible 37 year career at the bank, including the past 11 years as group head of capital markets. Doug sincere. Thank you for everything you've done thanks for everyone on the call.
Thanks for the team for their leadership in for 85000 employees for their dedication to our clients communities employees and shareholders.
Thanks will close off the call and have a good entity or.
Thank you.
The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Okay. Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
This conference is no longer being recorded.
No. This is Tim obviously coffeehouse it does.
This conference is no longer being recorded no interest from other said coffeehouse it does WP.
Office depot.
Note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay.
Okay.
Okay Cushing with funding.
Okay.
Uh huh.
At this conference call has ended please disconnect your lines at this time. Thank you.
Okay.
Okay.
Yeah.
She was pending.
[noise] office before.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay.
Okay.
Yes.
55.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay.
Okay.
She was running.
Okay.
Uh huh.
This conference call has ended.
And that your line at this time thank you.
That's correct.
Yes.
Your next question with funding.
Yes, I thought process before.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay.
Yeah.
Okay, she with funding.
Uh huh.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Yes.
I mean.
She with funding.
I missed that 55.
At this conference call has ended.
Disconnect your lines at this time thank you.
Yes.
Okay.
Yes.