Q1 2020 Earnings Call
All participants please stand by your conference is ready to begin.
Good morning, Ladies and gentlemen, welcome to RBC is conference call for the first quarter 2020 financial results.
Please be advised on this call is being recorded and we're not linked stream meeting over to 19 on head of Investor Relations. Please go ahead. Please on.
Thank you and good morning, everyone.
In today will be Dave <unk>, President and Chief Executive Officer bought Bolger, Chief Financial Officer, and Graham Hepworth Chief Risk Officer.
<unk> question give everyone a chance to ask a question we ask that you limit your questions and then you.
Also have with us in the room, Neil Mclaughlin <unk> personal and commercial banking. So I'd use men group had wealth management insurance and highest yes, and there are no their group had capital market.
As noted on slide one our comments may contain forward looking statements, which involve assumptions have inherent risks and uncertainties.
Actual results could differ materially.
Ill remind listeners that the bank assessing the performance on a reported and adjusted basis I think if they're supposed to be useful in assessing underlying business performance.
With that I'll turn it over to Dave.
Thanks, and good morning, everyone and thank you for joining us.
We had a great start to the year delivering record quarterly earnings of $3.5 billion.
We reported record results in Canadian banking and capital markets and very strong results in wealth management. Despite.
Interest rate headwind and a good quarter in insurance.
Results were driven by strong volume growth across our leading client franchises.
Lower PCL and prudent expense management.
We continue to win market share, while maintaining our risk profile at the lower end of our appetite.
And generating an army of 17.
6%, a premium relative to our relative to our global peers.
I'm pleased to announce a three cents increase to our dividend, bringing our quarterly dividend too.
A dollar eight per share.
Our strong capital generation and robust 12% seats you one ratio are proof of our disciplined capital deployment strategy.
Which is one of RBC core strengths.
Along with the dividend increase we bought back 7 million shares this quarter supporting our focus on delivering long term value for shareholders.
Well share buybacks will always be an effective and flexible lever to improve returns.
Okay any capital for net income growth will continue to be our primary focus.
Our leading scale and diversity of revenue streams.
Enables us to invest concurrently and technology.
Sales capacity and client value positioning us to succeed in this period of secular change in macro uncertainty.
In addition, we constantly review our portfolio of businesses.
Sure they provide long term sustainable growth opportunities and meet our return hurdle rates.
Along with repositioning part of our international custody business as announced in Q4.
We entered into agreements to sell all of our banking operations.
In the eastern Caribbean this quarter.
Similarly, we actively manage our capital markets loan book to build sustainable relationships and returns.
Before moving to segment results I want to touch on the macro environment for a minute.
Started the fiscal year saw a reduction in global trade tensions, which was positively impact do market sentiment and yield curves.
Recent uncertainty related to the Corona virus is reigniting downside risks to the global economic outlook, given the potential for disruption to global supply chains.
We are monitoring the situation closely.
We have limited direct exposure to the regions impacted hardest by the virus. We are concerned for those affected by the recent outbreak.
Turning to our domestic business the bank of Kansas tone has become more cautious given recent economic data showing weaker business investment exports in consumer spending despite positive business sentiment and low unemployment levels.
He strength of the Canadian economy is housing.
We continue to see strength thing and channels housing market with low interest rates and constrained supply pushing prices higher.
We're also seeing signs of recovery in Vancouver, and high activity levels, continuing in Montreal and Ottawa.
With household demanding supported by economic and population growth, including immigration.
We would support measures to address an increasingly limited housing supply.
Against this backdrop I want to update you on our business segment performance.
Canadian banking reported another record quarter with net income of over $1.6 billion, we continue to leverage our multiyear investments in sales capacity and digital capabilities to drive strong client driven volumes.
Over the last year, we added over $60 billion and total volumes across loans and deposits.
With respect to deposits our growth in checking accounts accelerated to 6% over last year.
The key Canadian banking product. This has been a core focus for us as we continue to deepen relationships with their clients.
18% of RBC clients of all four transaction account all four of transaction counts credit cards investments and boring products with RBC higher than the pure average of 12%.
Along with a personal checking account Canadian residential mortgages are a core long term product and we're seeing strong client acquisition and retention.
Over the last year, our leading distribution and differentiated value proposition has added over $21 billion in mortgage volumes to our market leading franchise.
Nearly 95% of our mortgage clients have more than one product with RBC.
Well, our mortgage growth has impacted Canadian Bankings total margins.
These markets remain a high order, we product given their low risk weighting jetting returns well in excess of our medium term or are we objectives.
We're still originating prime Canadian retail credit the credit risk into to indicators and profile of our new mortgage originations are as strong as their existing portfolio.
With strong offers an integrated campaigns, we deepened the value proposition of our proprietary loyalty program, we're seeing higher credit card acquisitions year over year.
We remain committed to meeting our client acquisition target of 2.5 million, New Canadian banking clients by 2023.
With net new client acquisition is up 30% from last year, we've had a good start to 2020.
Turning to wealth management, we've got a third consecutive quarter with earnings over $600 million and revenue over $3 billion benefiting from strong both strong markets and net sales.
Global asset management, we added another 40 basis points to our leading Canadian retail market share over the last 12 months.
But an uncertain macroeconomic and geopolitical backdrop, our clients continue to come to us for trusted advice and exceptional service.
What 82% of AOL outperforming the benchmark on a three year basis.
We added to our track record of superior net flows.
Generating a further 11 billion of retail sales of retail net sales over the last 12 months.
And Canadian wealth management, we continue to grow our top tier distribution, adding more than 50 investment advisors over the last 12 months building on the capabilities of our existing team of over 2000 advisors.
Going forward, we expect to continue to leverage or distribution scale to drive sustained growth.
Our U.S. wealth management franchise continues to perform well despite headwinds from lower interest rates.
We continue to see very strong double digit volume growth across eight away.
Loans and deposits as we execute on our accelerated organic growth strategy.
With double digit growth in deposits, we're seeing the results of a wide range of initiatives. We spoke about in the first half in 2019, including the rollout of our new Treasury management platform and investments into exact rules film truck.
And data faction.
A priority for us is to grow our U.S. private client group and city National franchise is giving funding synergies and opportunities for increased client referrals, including over 1 billion of mortgage flow through our U.S. wealth management channels.
Similar to Canadian banking mortgages are an important low risk anchor product that allows us to build deeper long term relationships with our city national clients.
We're also increasingly focused on leveraging our strengths boost city national digital bank offerings.
We continue to expect strong loan and deposit growth given the multiyear investments in sales capacity.
Our capital markets business delivered record earnings this quarter more than 100 million higher than our previous record.
We benefited from the closing of a landmark of landmark transactions, including BB infuse merger with Suntrust Apollo's acquisition of Caulks media assets and Broadcoms acquisition of semantic assets.
Our strong results this quarter propelled us ninth in the global League tables.
The quarter provided a more favorable environment for the industry relative to last year narrowing credit spreads and low interest rates created a favorable environment for companies looking for financing.
Likewise, dovish global central banks, and low equity volatility help provide a constructive backdrop for equity markets and deal flow.
Our investments over a number of years strengthening our talent has been an important driver in the rising strength or capital markets franchise, the benefits of which can be seen by increased roles and global mandates.
Our investment banking pipeline remains healthy, reflecting reasonably strong market conditions. However, the condo conversion of deals to realize revenue remains dependent on market and regulatory conditions, which could be volatile through the year given the uncertainty around geopunch, the geopolitical landscape and concerns over the Corona virus.
Global markets had an impressive quarter with strong performance in our FICC business.
Reflecting healthy fine engagement and the strength of our client focused franchise.
Overall, we delivered a very strong quarter and are starting 2020 from a position of strength.
We have scale, leading market share and momentum across our core franchises. We are well positioned to continue providing value added advice and service to our existing clients, attracting new clients and gaining market share across our segments.
While we faced challenging headwinds from lower interest rates moderating global growth and normalizing credit conditions, we remain committed to balancing or investments and continuing to create long term value for our clients and shareholders.
With that I'll pass it over to Rod.
Thanks, Dave and good morning, everyone. Starting on slide five we had record earnings of $3.5 billion up 11% from last year diluted EPS in 2040 cents was up 12% year over year.
I'll start with a few comments on cost management expenses were up 8% year over year. However, most of the growth was driven by staff related costs, such as variable and stock based compensation, which was commensurate with strong revenue growth in capital markets and wealth management. Excluding these expenses were up 3% year over year.
Total head count across the bank declined from last quarter, as we remain vigilant on controlling costs and driving efficiencies.
Moving on to capital on Slide six as Dave noted with the C. E. T. One ratio of 12% remained well positioned to fund organic growth opportunities in our leading franchises and to return capital to our shareholders.
Our strong earnings allowed us to generate 38 basis points of internally generated capital more than offsetting the combined impact as previously disclosed accounting and regulatory changes.
Strong client driven our Wi growth in Canadian banking city National and capital markets as well as the impact of lower discount rates and determining pension and post employment benefit obligations was partially offset by normal course parameter and methodology updates.
We also distributed 2.2 billion dollar store common shareholders the form of share buybacks and dividends this quarter our share count is now at its lowest level since 2000 and.
Moving to our business segment performance on slide seven personal and commercial banking reported earnings of nearly $1.7 billion Canadian banking net income of over $1.6 billion was up 5% from a year ago.
Our commitment to exceptional client experience, an innovative digital offerings continue to resonate with clients.
Strong volume volume growth across our Canadian banking businesses led to 5% year over year growth in total revenue.
We are seeing increased momentum in our mortgage portfolio up a strong 9% year over year.
Total real estate secured lending was up 7%.
Net of lower he lot balances so.
Similar to last quarter mortgage volumes were driven by strong origination volumes, a 40% year over year and strong client retention of over 91%.
Following double digit growth in commercial lending over the last year as expected we saw a moderation in the growth rate across a number of sectors.
However, we still added over five and a half billion dollars of volumes.
Do you actually growth rates moderated somewhat to is still strong 10% year over year as our client shifted into mutual funds higher fee income. This quarter was largely driven by strong double digit growth in assets under administration, helping offset some pressure from lower margins.
Net interest margin declined four basis points from last quarter, largely from compressed spreads from competitive pricing on both mortgages ngs sees.
Should we see continued pricing competition and strong mortgage growth through the spring housing season, our NIM could compress a further three to five basis points for the rest of the year.
Expense growth was contained at 4% year over year driving positive operating leverage of 0.7%.
We saw a reduction in headcount through attrition and continue to reduce branch square footage.
We still expect positive operating leverage for the full year, but expect to see increased pressure in the back half year from upcoming changes in credit card landscape and continued pressures on loan and deposit spreads.
We do not expect any material impact to earnings from the sale of our banking operations in the eastern Caribbean, Dave highlighted earlier.
Turning to slide eight wealth management earnings of $623 million were up 4% year over year.
Adjusting for the favorable accounting adjustment related to Canadian wealth management in Q1, 2019 earnings were up 9% year over year largely in line with recent quarters.
Both global asset management, a U M and Canadian wealth management, a way were up double digits year over year, largely due to north American equity markets rebounding from challenging market conditions last year.
We continue to gain market share in global asset management, adding nearly $3 billion Canadian retail net sales this quarter.
While equity markets drove market appreciation the majority of our retail flows were long term fixed income and balance solutions.
In U.S wealth management revenues were up 12% year over year in us dollars.
Assets under administration grew a strong 16% year over year, reflecting both market appreciation and net sales partly to do to our successful recruitment of experienced financial advisers.
Net income was relatively flat year over year as robust volume growth was offset by the cumulative impact of the three fed rate cuts from July to October as well as by higher cost to support organic business growth.
Loan growth of 19% in city National continued to be led by commercial lending. However, we also saw continued very strong mortgage growth at 24% year over year.
On a geographic basis, we're seeing an increased contribution from an east coast expansion with loans in the region up 40% year over year.
Expansion in new markets contributed a quarter of total loan growth.
Total deposit growth and city national was up 19% year over year or 11% excluding sweep balances.
City National NIM was down 17 basis points quarter over quarter, largely due to the average spend fed funds rate declining 45 basis points.
Given the asset sensitive nature of city national balance sheet and continued competitive pressures on deposit pricing, we expect margins to take lower throughout the remainder of 2020, albeit at a much slower pace.
Moving onto insurance on slide nine net income of $181 million was up 9% root last year, mainly due to the long new longevity reinsurance contracts, partly offset by the lower impact from reinsurance contract renegotiations.
While insurance first quarter earnings are seasonally lower from a strong Q4 earnings. This Q1 were higher relative to prior first quarter results.
<unk> expenses in the segment are well controlled and remained fairly consistent at around $150 million over the last two years, even as we grow revenue.
Looking forward, we continue to target modest earnings growth for the full year. This segment continues to generate a high ROI, which is well in excess of our bank wide medium term objectives.
Investor and Treasury services results are highlighted on slide 10 earnings of $143 million were down 11% from last year total revenue decreased mainly due to lower client deposit revenue largely because of the short term interest rate environment.
Services revenue was lower due to reduced client activity and continued pricing pressures, reflecting secular market and industry headwinds.
Recall funding and liquidity revenue is seasonally higher in the first quarter driven by increased money market opportunities. The businesses also experiences some earnings compression when we see the flattening of the yield curve.
Going forward, we expect seasonally lower earnings next quarter, and hope to see increasing levels of profitability towards the end of 2020 and into 2021 as we work through the repositioning the business that we announced in Q4.
Turning capital markets and Slide 11 segment generated record net income of $882 million up 35% from last year benefiting from strong revenue growth as an unusually elevated number of transactions close in the quarter.
Earnings also benefited from lower PCL as the prior year included provisions related to one account in utility sector.
Also capital markets generated positive operating leverage a 4.7%.
Expense growth outside of the performance based compensation was modest Mitch record revenue.
Capital markets are are we expanded this quarter as we generated higher revenue off a lower RSV a footprint.
Corporate investment banking revenue was up 23% year over year as we realized revenue from the closing of significant transactions in line with guidance provided in our year end call.
The constructive market conditions that David Hi, Dave highlighted also drove higher debt and equity origination results, especially North America, we increased our market share in global fee pools across M&A DCM and DCM.
Global markets revenue was up a strong 18% from last year, largely due to higher fixed income trading revenue across all regions. We had particular strength in credit trading benefiting from secondary flow from strong debt underwriting results and narrowing credit spreads rates trending trading also performed well in.
Volatile interest rate environment.
In addition, we deployed balance sheet towards our repo business.
Equities trading had a solid quarter, despite lower volatility and recall the Q1 last year was a record quarter for this business.
Overall, we had a strong start the year, we continue to focus on our strategy of creating more value for clients and shareholders, while driving premium growth in a prudent manner and with that I'll turn it over to Graham.
Thank you Rod and good morning, everyone.
I'll begin my remarks, starting on slide 13.
This quarter, our provisions on performing loans of $83 million were five basis points were flat quarter over quarter, albeit at a higher and are expected range of three to five basis points.
This mainly reflects portfolio growth in the quarter, especially in our core cards portfolio, which typically see that increase following the holiday season.
It also reflects changes in our macroeconomic forecast were moderately higher long term interest rates weaker oil and gas markets and higher unemployment rates were offset by favorable housing trends in Canada.
On the other hand or provisions on impaired loans of 338 million were 21 basis points were down six basis points from last quarter and with lower expected range of 25 to 30 basis points.
This is really due to lower provisions and personal and commercial banking and wealth management.
Let me I'll provide some additional color on PCL for some of our businesses.
Three in banking fee selling loans decreased by 33 million from last quarter, largely reflecting lower provisions on impaired loans in our commercial portfolio across a number of sectors.
This was partially offset by an increase in provisions on performing loans this quarter, maybe in our cards and commercial portfolios factors I noted earlier.
Caribbean banking piece on loans decreased by 18 million from last quarter due to recoveries and our commercial portfolio and lower provisions in a residential mortgage portfolio.
In city National piece on loans decreased by 40 million from last quarter, reflecting provisions, we took last quarter in our consumer discretionary sector and high recoveries this quarter.
Lastly, well piece on loans and capital markets were stable quarter over quarter, we did have higher provisions in both the oil and gas and other services sectors.
Turning to slide 14.
Gross impaired loans of 2.9 billion was down 40 million from last quarter.
In city National we had higher impairments, mainly due to new formations that our consumer staples discretionary sectors.
Partially offset by repayments across a number of sectors this quarter.
In Canadian banking, we had higher impairments this quarter the level of new permissions in both our retail and commercial portfolios and the level of write offs in our commercial portfolio of declined from last quarter.
And Caribbean banking, we had high recoveries, which I noted earlier and lower allowances and a residential mortgage portfolio, which was partially offset by an increase in new provisions this quarter.
In capital markets, we continue to see alluded impairments in the oil and gas sector. This quarter as the sector remains under pressure however, consistent with last quarter, we're seeing the trend moderating with high repayments and fewer new for emissions this quarter.
Well impairment levels in capital markets and city National remained elevated this quarter the for material provisions were mitigated by the strength of our underwriting both in terms of collateral and guarantees supporting our loans.
Turning to slide 16.
You see all across most of our retail portfolios, including a residential mortgage portfolio were generally stable quarter over quarter.
We did see ongoing weakness in our unsecured portfolios in certain regions in Alberta unemployment levels remained elevated at 7.3% due to ongoing weakness in oil and gas sector, which most impacted our personal lending portfolio in qubec the impact of the minimum credit card payments implemented last August continued to lead to higher insolvencies, maybe the former consumer proposals.
Using both our cards and unsecured lending portfolios.
Well the impact of rising consumer proposal proposals was most pronounced in Alberta and today, we do see a modest relative weakness in other regions as well.
To conclude a retail portfolios continue to be generally stable and there is a weakness of a manageable.
Our wholesale portfolios continue to benefit from a strong underwriting practices industry diversification geographic mix.
However, ongoing challenges such as the weakest anyone got sector and global geopolitical risks as well as emerging concerns related to cope with my team and real blockades you create considerable uncertainty that we are monitoring closely and actively managing.
Overall, well well our portfolios have performed slightly better than expected this quarter and little bit noted uncertainty, we're maintaining our previous guidance on PCL.
With that operator, let's open the lines for acuity.
Thank you.
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Our first question is from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Good morning.
I guess my question is on capital allocation and just trying to understand.
Whether we should expect to see T. One two minutes from 12%.
In the context off I think Dave's comments shutdown.
Prior to you and capital allocation remains net income growth and whatever I understand is in the world where organic growth remains relatively steady state.
Do we assume buybacks ratchet up or is your motivation to do a deal values. If we can talk about that that'd be helpful.
Maybe I'll start and then I'll hand, it over rod for questions. So our strategy on capital allocation Hasnt changed over the last couple of years use you see the strong organic growth that we're generating we're investing and.
Further growth, which will require capital. So I think from that perspective, it becomes the best way to drive a shareholder returns and we'll continue to allocate.
Apple there you saw us buyback shares at a greater rate in the last quarter and returning capital to shareholders and you can expect that we'll use that tool as an ongoing.
Capability to two to manage our capital base and our and our returns for shareholders. So I don't think there's any real change in strategy.
We continually look for opportunities to grow our business Inorganically and we've got very strong credit tier for that and no. Other the time is not right or the opportunity is not right. So there is there's nothing in the pipeline right now that would cause us to allocate capital along those lines. So.
Hi, guys is generally consistence perspective of for US they are strong momentum.
Organic growth in driving shareholder value from it we're going to continue to run this playbook.
Got it and I guess, Dave or AUD, how should we expect a meaningful build up from the 12% PD one levels or if you or you are reluctant to do that just your thought process there.
Yes, I think its rod I think DRAM feed go back a couple of years, you know were 10.6% in mid 2017 by by mid 2018 were kind of at the 11% even a year ago.
We are at the 11 in the half for 7.4% in Q1 19, and so we got we'd be built up to 12% given some of the macro economic uncertainty that Dave was talking about and we're very comfortable 12%. We run all of our stress test, 12% gives us adequate buffer.
For even a most severe scenario so we're quite comfortable and do not see a need for to go up above it. It might go up Theres always 10 basis points up or down on a given quarter, depending on how are they comes out or interest rates with the pension discount rate, but we don't see a need to build from here.
Got it that it was helpful. Thank you. Thank you.
Thank you.
Our next question is how many Roman with Cormark Securities. Please go ahead.
Hi, good morning.
I'm wondering what you expect the impact of the changes to the stress tests on insured mortgages to be and then if you could also comment on.
What a change of similar change to uninsured mortgages trust us would be as well.
Thanks, two questions Neil.
I guess, maybe the first probably make on the stress test that we set in the past we've been quite supportive of the policies and.
Hi, both both the the governments and the regulatory changes I think our first priority is really have a strong housing market.
With that said the change there was announced recently we view it is actually quite.
Having quite a minimal impact.
Our analysis, so far it looks like you would be about 25 to 30 basis points reduction in the qualifying rate.
I don't really translate into a a fairly small increase in purchasing power for the average borrower probably in the neighborhood of about $20000 $25000.
On an average mortgage so I think right now focus still is the a lot of commentary in the marketplace is around supply and I think the lack of supply in the major urban markets is is still is the only real focus for for the policy needs to go.
And if the rule it looks like the rule will be extended to the uninsured markets.
Do you think that'll have a bigger impact.
I wouldn't I think you would have at this point, we've we would take it would have the exact same impact okay.
And then just as a related question.
You're now consistently growing mortgages well above the market and I'm wondering is there is there a gap between you and the market, where you would start to get concerned and what would that gap.
Well I think in terms of the market there.
Yes, there was a player a couple of years ago that was originating.
I Didnt exceptionally high clip.
And I would also look back in 2018, we were not wouldn't say we're at our best in terms of running the mortgage business. So we've commented in the past after 2018 the back half of that that year. We did a full end to end review and we're now really seeing the gains from that review right from.
Additional sales power.
With more met mortgage specialists on the ground meeting with customers.
Right through to our operational processes, how we underwrite and specifically.
How are turning around and getting back to customers or so one of the things. It's been a big improvement is just turnaround times and really having a customer centricity. So those would be the leavers, we've pulled Graham mentioned and Dave mentioned as well in his comments our origination profile, we've not at all gone down the risk curve, we have exactly the same FICO.
Profile and LTV profile is that we've had so.
At this point we're feeling.
So we're feeling really good about what we're originating some of what you're also seeing is that activity is up and in stressing the first quarter, you're seeing home price on prices jumping has also led to some increases.
So that's really I guess the underlying.
Your rationale for our performance and we'll have to wait and see what the back half of the year looks like.
Thank you.
Thank you next question, Vince Steve Korea with capital. Please go ahead.
Thanks, I had a question on capital markets, but maybe Neil since we have you just a couple of quick follow ups.
Could you speak just to the mix of few lock versus mortgages I use that has that come as a function of some of the some of the considerations. Since 2018 is it something proactive and limited to one question. So do you want to ask a capital markets question or retail question.
Huh.
Yes.
Also the Americas.
Alright fair enough.
The.
The fixed income and re trading.
You mentioned the strength, there, but it's pretty close to two X run rate levels.
Looking at the U.S. peers on what they did a FICC was up 40 or 50%. It looks like so it does seem to be on another level of growth. So maybe Derek you could talk a bit of both the drivers there and maybe remind us about the mix of credit versus rates.
Within your portfolio versus you know some of your competitors.
Sure. Thanks, Steve I appreciate the question.
I think if you obviously need from a starting point if you looked at the environment in the quarter. It was a very strong environment for the industry overall and as you noted a number of our US peers that reported saw increases in that business. So we did have a strong environment that we were working with then.
If I break that down into a few different components, obviously, the low rates and the tightening of credit spreads. We saw drove a very strong new issue environment that drove higher primary origination for us really across our various geographies on the back of that than we did see a heightened client trading activity building on the DC.
I am issuance as well just given the strong secondary markets in general so that drove very good.
Ongoing secondary trading revenue for us.
In credit and in rates I would say the third driver was an increased focus on our corporate and Fi.
Risk solutions group, so working on interest rate foreign exchange hedging and I think thats really been a function of just driving improved collaboration across our businesses and across our geographies.
As well I would say behind our trading businesses. The teams made a number of investments over the last year in people.
In some systems and frankly, I think has just broad.
Very good execution and risk management.
Being reflected in the trading results that you're seeing this quarter.
And is that for the most part carried on into the first few weeks of February.
Well, obviously the market environment in terms of low rates and credit spreads remaining tight has has continued.
To the extent that continues in place, we expect that will be a positive backdrop for us and others.
But as Dave and Rod mentioned, there certainly are some potential risks on the horizon and so we'll just continue to monitor that carefully and see how it impacts our client trading flow.
I would just maybe finally add related to one of your questions.
We are carefully managing the risk profile of the trading book and as you'll see in one of the slides are var for the quarter was actually down. So we don't we don't see the improved results being driven by any change to our risk profile or risk appetite.
Great. Thanks Bye.
Yes, please re queue for your retail question, we'll try to get through this.
Thank you. Our next question is from given an additional nine with National Bank financial. Please go ahead.
Good morning, My question's for Graham Thanks for the.
Look good commentary on the factors that could affect your your provisioning I'm wondering if maybe you can find to my guidance.
Over the nine team.
They'll blockade will keep your.
Loss rate on performing loans at the upper end of the range or maybe even above and are you seeing any.
Maybe.
Issues on the you mean nonperforming due to the rail blockades, probably a showing up.
Yes, thanks, Gabriel its great ammo.
Just a few points around over 19 of the real Black kids.
Our risk focus has been on kind of the three elements there.
One first and foremost or just the health and safety of our employees and then ensuring that we have the opportunity operational continuity and resiliency to to work through this period and work through a period, where it could potentially get worse.
So this is great leadership by our teams there and worked with historical bodies to deal with these challenges.
And then we look at the financial side of it.
In terms of the direct risk there, we're not to an operator player in mainland China as we have really no direct exposure to what's happening in the most acute for this in China itself and so that really brings us back to kind of the probably the area. We are focused on which is that kind of secondary risk as a consequence of what's happening and there's really two elements there that we're kind of focusing on.
In one is the impact of a of the Chinese consumer could have disappearing for a period here and in the second part would be the supply chain impact with China is a manufacturer to the world.
Right now I'd say, we're monitoring that we're looking at involving the sector that we think are most impacted we're engaged with our clients, but the reality is too early to soon to really have a view as to that really impact here I was going to really depend on the duration of this and the severity going forward.
No. That's that's highly uncertain, we're not seeing any impacts in our portfolio at this point in time and so we're really as I said, we're just wondering for potential.
Points.
You did comments on stage, one and two would whether it's called the 19 or or the real blockades that would be the place. It would manifest itself first and so that would be something we'll be considering in Q2, but right now it's as I said, it's too uncertain. It's too early to provide any guidance as to how material that could be.
And then the rail market is are you seeing anything at this stage three.
Near term horizon.
No I wait my comments would apply both the covidien even the railway. It's just it's too soon too soon to to see impact as it road talking to clients and certainly claims were being impacted but it really depends on the duration of this and whether it has at least info or not thank you might recall.
Thank you.
Our next question is from Sumit Malhotra with Scotia capital. Please go ahead.
Thank you. Good morning. My question is for for Rod, it's going to relate to margin and mix in the city national when the bank about that business a few years ago.
If you're according to my notes the the mixture of the loan book was was about 80% floating rate or adjustable.
Has that mix changed significantly since.
Since since Royal took over the business and related Lee I think your adjective Rod was you expect margins to take lower obviously, we've seen a substantial move over the course of the past year as we've had three rate hikes is the more moderate outlook for margin compression based on your view on what the fed does or.
As the variability of this this book based more on.
Let's call it market raised slightly exceed our as opposed to the fed.
Yes, so thanks for that.
I believe my comments, where that we'd expect to continue decreasing Q1 because of the fed decreases the two of them in our fiscal fourth quarter had the flow through for the full quarter, including the one in October.
And then we thought it would tick lower from there and we continue to see that we saw obviously the pronounced decreased to 70 basis points quarter over quarter. In Q1, we expect that to moderate right. Now if you look at the fed futures Theres, an 86% as this is as of yesterday afternoon, 86% chance of a fed cut by July.
That gets priced in the fed futures and so therefore that gets priced into our modeling into the into the out quarters.
So it might be three three to five basis points on the fed funds, which is not going impact us as much we still have a majority of our loans on the variable rate as you cited but part of this is also mix. So we've been growing that mortgage book in the 20 over 20% range, which tends to have a lower margin.
Than some of the other products also its funding sources. So yes, we've had very strong deposit growth but.
When when city National was acquired four plus years ago. The majority the funding was in noninterest bearing deposits and as we've continued to grow the loan book double digits on the mix of noninterest bearing deposits.
With over 50% as recently as first quarter last year, it's mid Fortys now so is that shifts a little bit.
It will have a modest impact on your NIM and caused a few basis points of NIM compression year in there, but overall your drug would would we're adding new profitable client relationships strong client relationships, bringing more product and more services from a from a stronger platform both with.
I am city National platform as well as RBC is platform. So this is all part of this strategy and we can't control the fed funds, but we're still very comfortable with the business that we're adding.
And just to be clear I'll stop here.
Your comments on what fed funds futures as far as pricing for your commercial portfolio is concerned.
Is it is it seed or thats, the governing factor or is it specific movements for the fed the drive the meeting market rates are actual fed fund movements for the most well, but you are most most lending in the U.S. is based off of LIBOR based product at this.
Well that changes.
But but that is influenced by fed funds and so it might be more direct in other countries than it is in the U.S., but there still is a correlation there.
Appreciate it thanks for time.
Thank you. Our next question is from Doug Young Ladies gentlemen capital. Please go ahead.
Hi, good morning, just.
Thinking about the U.S. wealth management business, we've seen some changes by some of your peers mean Goldman has come out and if they want to be bigger mass affluent we see Morgan Stanley going into the trade and I think Royals focus has been mostly high net worth just want to get a sense of the strategy for that wealth business and I think we always talked mostly about the banking side, but.
Yes, the strategy for that the wealth side of the business does that have to pivot here as well.
Thanks for the question I'll take it.
Certainly as we think about our strategy and how we want to grow the business and how we want balance sheet. The looked at 100 billion dollar bank in the U.S. versus the $50 billion bank. It is today.
Now as Rod alluded to and we talked in our comments we are shifting to.
Hi, net worth consumer balance sheet as a different balance from largely a commercial driven.
Cash management organization with a comes with a wealth management cross sell.
Since we know we're really focused on products like mortgage and cross selling into core checking and cross selling into advisory in wealth management products. So that strategy continues to build out we're opening branches in New York and expanding into Washington, and Nashville, as you've heard us tell that story and that that growth has accelerated at this.
Same time nowhere the loan book has been growing faster than deposit book, so growing or deposit strategy has become a paramount importance. So you'll see us likely launch a direct to consumer.
Bank in the United States sometime at the end of this your early next year really focused on higher net worth customer.
Just similar to some of our competitors into us what they've done.
We have a number of strategies to looking at that to move it from high beta to mid beta type relationships and I think that strategy will help us fund or longer term growth. So as we evolve in the US we shift from largely commercial.
Cross sold into wells to a balance between kind of an.
The high net worth Ultra high net worth client will move down a little bit down market into.
Super affluent.
And looked at the direct to consumer strategy filling in behind there, so you'll see us and bringing some some new capability around that to make sure that we're able to continue to grow both our loans and deposits at a strong ratio that you're seeing today, so that would be the shift for us and we feel good about the organic strategy.
The versus having to go out and acquired to pause this through an acquisition.
Great. Thank you.
Thank you.
Our next question is from Mario Mendonca with TD Securities. Please go ahead and good morning, probably program. When you look at the performing loan Pcls. The numbers have been small from the very beginning from one lease.
When these new standards came to be.
What I'm thinking about is when when you test the models when you run scenarios through the models what sort of.
What do you have to build in in terms of unemployment or and outlook for rates are oil and gas or any variable really to make these numbers meaningful and meaningful to me would be something not not five or five basis points more like 15, or 20 basis points, what sort of environment do we need to see to make these numbers meaningful.
Thanks to its a good question I think we.
A couple of they responded so.
What extent, we actually do build some variability into that we as part of our performing loan analysis, we build in five different scenarios into that Theres. The base case in the pessimistic, which we provided some disclosure on historically, but in addition to those we do run two other scenarios that when that focuses on kind of a much more depressed oil and gas a environment.
When it focuses on a much more depressed jose environments.
And so those are factored in and we wait those accordingly, because we do view as lower probability events and so when we bring those into play that is why our overall allowance is materially higher than our base case would articulate.
As the environment shifts.
Unemployment moves with us certainly unemployment.
Interest rates would be some of the bigger factors that would drive that allowance.
But you know the sensitivity, that's really going to be depended on the portfolio.
And and depend on the business mix that we're looking out but.
To date, we've really disclose the worse than what youve seen or disclosures at Q4. So if I could just paraphrase if royals business mix where to shift toward.
Say aggressively into leverage lending I'm, not suggesting thats whats happening, but if the business mix where to shift assumption. There was lot riskier and you moved youre waiting.
Toward the those unfavorable scenarios meaningfully because you saw big deterioration coming.
Is that the scenario or are those the scenarios or conditions under which those.
Performing loan Pcls would rise meaningfully.
Well, there's a lot of different sort of its its a.
If we adjusted our base case in a meaningful way that would drive it and as I said unemployment would be where the biggest factor there just because of the sheer size of our retail business.
This is like cards are inherently more volatile than other businesses. So again the factors there will be driving that will be things like unemployment.
On the wholesale side it is a factors like interest rates.
And actual market performance commercial real estate indices that drive the models that are more so so different factors driving different parts of our portfolio.
Quality, you will drive that so you see deterioration in our credit quality, we'll see a impact there, but as I said earlier comments a growth is what drove it on one side this quarter and some of the macro changes we made this quarter drove it.
For the quality this quarter for example wasn't really a contributor to the overall loans.
Thank you.
Thank you.
Next question the stems from a heavy with BMO capital markets. Please go ahead.
Thanks, Neil I'm I'm, sorry, if you mentioned this and I missed it but can you just provided a little bit affair.
Additional detailed last two geographically where the.
Where the mortgage growth is coming from.
And and when you share the statistics around.
I think Dave May have mentioned it around how many new customers you're picking up.
Is this is this a measure.
Against that in other words are you picking up new mortgage customers and its counting towards your.
I think goal of getting to around 2.3 million net new customers by 2023. Thanks.
Sure.
So the question.
Mortgage growth really being driven out of for the eastern part of the country, So, Ontario being the strongest we're seeing really strong performance around the Toronto.
Okay.
South Western Ontario.
Strong housing markets in places like Hamilton have been I've been very supportive.
And then in Quebec, Weve, where we have a very we're the number three player and come back we've got a strong footprint there.
And well well described as the strong housing market in Montreal, So those would be the fastest growing regions in the portfolio, we have seen DC.
Start to pick up as that market start to recover from from the price price corrections, we saw a little over a year ago in terms of I'm sorry. The second part of your question it was around new clients.
In terms of new clients.
I guess couple of comments, we'd make a building on Dave's commentary, we set out a plan to get to the targets that we laid out for 2023, we have a an action plan in place.
So we're feeling confident about the plan.
We're up about 10% in terms of new client origination and specifically your question around as you know is mortgage is new mortgage clients part of it it is but the primary.
Sort of first products are onboarding clients into would be the core checking account.
As well as a credit card so those would be the two largest but absolutely new mortgage clients would go into those total.
Thank you.
Thank you.
Next question is from Scott Chen with Canaccord Genuity. Please go ahead.
Good morning, maybe just switching to the west side other mortgage growth up 24% year over year.
Is that driven by kind of core city National Bank.
In terms of its correlate horror location or is it kind of.
Hi.
New branches or or is it just to you as housing fundamentals are picking up momentum as well.
Our growth is.
Across our markets.
Our core market of.
Loss Angeles in California in General continues to perform very well when you look at Emmis Saes, we're growing the number of branches, we have in New York and it's become a core and the lead product to acquire client relationships. Similarly, and our other cities that we have expanded to and that was part of the strategy that we articulated from day, one as we could access.
Laredo, our expansion and our breakeven expansion by bringing new products to bear. So this is part of strategy even talks about four or four years is fantastic to see the team executed. We've spent a significant amount of time building the back office to handle this type of volume growth and to deliver an exceptional experience and a quality.
Experience for our clients and.
You're acquiring a lower risk customers. So this is.
Exactly what we're looking for and how we want to grow the bank, we're adding new branches in New York City, this year and into next year, including into Hudson yards, and this will be a core part of the growth strategy for our business.
Thank you.
Thank you.
Our next question is from Mike Zenovich with Credit Suisse. Please go ahead.
Hi, Good morning, just wanted to go back to the margin guidance for Canadian banking.
And I think the guidance was for three to five basis points of further compression potentially if we see the same sort of trends.
With that incorporate not just the competition that was cited.
But also loan mix.
Yes, it's Ron.
It it factors in the pricing competition at factors in what we're seeing out of the bank of Canada in terms of the forward.
Eight curve.
As well as product mix and so similar to a year ago when in the kind of the the fall winter season mortgage fixed rate mortgage spreads kind of came to a low point they rebounded a bit last year in December and then into January and into the spring season. This year that that rebound was done.
Laid it didnt happen until January but we've seen that those spreads rebound.
In January and again in February.
So we would expect that to hopefully continue again, it's a dynamic marketplace. So yes, you have mix you have the markets and you have.
Competitive pricing pressure and competitive pricing pressure has been the biggest driver of the last two quarters decreases and what we're seeing in the marketplace right now is for that to abate somewhat for the rest of the year.
Okay. So that does incorporate some sort of spread pickup im just looking at what's happened the last two quarters and you've heard about an 80 basis point decline. So is it fair to say, you're expecting a little bit of improvement in the actual spread relative to where it was.
Or some some something to mitigate what we've seen the last two quarters I guess, one getting yet.
Well, what you're seeing the last two quarters.
In Q4, you saw a mix so that was mix and pricing competition. So that was a combination of the g. I see a growth and the mortgage growth being the predominance of our volume growth in Q4, which are lower spread products. So thats a mix issue you also so in some of the fall.
Into winter season spread compression that we've seen the last few years on the mortgage size that was the predominance of four basis point in Q4. This quarter. It is the again the weakness in the marketplace from a pricing perspective on the mortgage side is the print is the primary factor this quarter and now that we're seeing spreads north.
We realized a bet as we saw in January in into February as well as last year, we expect that impact to moderate similar to what we saw last year last year rates were still going up. So you didnt actually see all of this odd because you you thought rates were going up last year, all but now that rates are coming down with this is this is more dynamic.
I think in what you're seeing but we don't expect that four basis points each quarter to continue.
Fact, we think it's going to be the three to five basis points the rest of the way.
Helpful. Thanks, very much for that.
Thank you.
Our next question is from Nigel D'souza with Affairs doesn't investment research. Please go ahead.
Thank you good morning, if I could point you to slide or paid 16 after presentation slide.
So you mentioned Graham mentioned weakness in your own unsecured retail portfolios and what I'm looking at your personal lending 90 day delinquency rate, it's it's relatively stable along with.
PCL. So I'm wondering if you could provide some color first on.
What's driving that the ability.
Given also lower mix of he walks in that lending bucket and then second on credit cards.
There's a sizable increase quarter over quarter, and you're 90 day delinquency rate.
Im wondering if you could provide some insights onto how much of that is being driven by the rule change you noted in Qubec and also when we look at the Pcls and write off rates for credit cards, they actually down sequentially. So could you provide some color on what's driving that divergence there between delinquencies and be sales and write offs.
Yeah. So this is Graham I built the addressed that I mean, I guess I would just be returning some of the comments a degree I made my speech earlier that.
The two main effects were seeing more one in Qubec, specifically is the impact of the the change in the minimum card payment them out and so that's translating through both the uniquely to credit cards there.
But there's also impacting overall insolvencies in the form of consumer proposals.
As I said earlier.
The the personal lending.
We see.
Alberta influencing that in part.
And that's just the weakness in the Alberta situation. There and then Additionally, we are seeing rising the insolvencies and consumer portals were broadly than that.
Well, that's I think driven by a few things outside of Alberta, where say in Toronto, We've got a very strong employment situation trundle that youre seeing a rising cost of living there is a late in effect associated with rising rates from 2018, and then were recently you'd see rising rental costs that are influencing the cost of living for for clients.
Despite strong employment to his trickling through into the personal lending piece I'm. So those are some of the factors that that we're seeing.
So maybe I'll, we only have some common series, which is on the gross or there could be influencing that as well yeah that one other thing I'd just add to Graham's comments on the personal lending we talked in previous calls that was a portfolio that was flat to actually had negative growth and thats returned to about a 3% growth that you're starting to see kind of just the denominator.
In fact of growth.
On the on the PCL as well and then the credit card book I mean, just seasonality is one of the biggest drivers there and Graham it's not in his comments coming off the holiday season, you know very predictable.
Yes, Thats right I'm, just going to give you for what it's worth in Q1 of 16 in Q1 of 17 in Q1 of 18.
The nine days past due for credit cards with 80 basis points.
Each quarter, so very similar what we're seeing today I think what you saw last year in Q1 was was more of a cyclical low.
Okay. That's really helpful. Appreciate the color. Thanks.
If I didn't take one maybe two more I think theres a couple in the queue. So.
To answer quickly and as quickly as next [laughter].
Thank you. Our next question is 10 milligram when I went live with Bank of America Merrill Lynch. Please go ahead.
So would make a quick just.
Following up on credit I mean, they think of when you talk to sort of global Investor says a lot made out of the consumer proposals and insolvency utilizing I think you got a little bit and some of the questions you answered but outside of the current Elias outside of the means Craig just if you can talk about one should do proposal and told them fee income.
What is your shareholders and investors that down.
In closing condition, if cut on the consumer.
Or you think thats kind of a little bit more bouncing off the lowest idiosyncratic in nature and that would be helpful.
Okay.
We look at our consumer portfolio overall.
On the secured products.
Trends overall are very strong very consistent what we see our origination as it's been a very consistent profile. When we look at the mix of our credit ratings on the consumer books, it's been very consistent I'm in the delinquency trends have been stronger than so I called out specifically the effects that we're seeing on the unsecured because it's really the one pocket of weakness that we're seeing driven by the rising.
Consumer proposals and affects the drive those early the ones, we've talked about here weakness and Albert on one hand the card.
Payment effect in a in Quebec, and then you know the general cost of living.
Impact elsewhere, and so outside of those of those pieces that we've called out again I would say the consumer portfolios that are very very stable credit profile for us.
We have not changed origination strategies, there and so we've been very persistent inconsistent and what we're bringing into the front door.
So I think those are the key messages that I would continue to leave you with on the consumer side.
And do you think the three things that you pointed out they get worse or do you think distribute relatively stable.
Got you short there I'll take one more question sorry.
Thank you any question is fan stereo with eight cap from.
Yes, Steve.
Okay. Thanks firewall lots of license you.
Okay I'll keep a quick part part of it was asked and answered but Neil if you could just a complete the lucrative for us. So in terms of some commentary around the HELOC versus insurance like mortgage mix.
Yeah, I think brought actually made out I touched on it in his comments.
We have seen so there are the he'll talk book is actually a shrinking we're seeing customers move those into a fixed term mortgages.
Yes, partly because I think clients outlook on rates and you know really wanting to have a predictable payment and then also as they work with our team you know if that's the right advice for the clients. There is a there is rob touched on on a on business mix. There is a margin a reduction we take on that but we do focus on the client.
That's the best advice for the client then then that's what we do and we did see an acceleration of that in Q1 versus our sort of run rate for 2019.
Okay. Thank you.
Thank you.
I will now turn the meeting back over to Mr. Mckay.
So thank you everyone for for attending today's call and for your comments there. There's a couple of themes. We really wanted you to take away.
From a today's results and <unk> and call that we just to.
Finished and that is around strong volumes across all our core franchise as you look at what's capital markets results out of our global markets business out of our investment banking business, you look at or Canadian banking franchise for mortgages to cards to commercial you look at the wealth management results, which no one in Canada, which no one asked about.
But.
Generating great great core volume.
Great share gains a very strong results there that we didnt touch on than any other questions. You look at a city national volumes, just pushing 20% from both deposits and lending of that strong insurance results. So it really talks to core momentum from the investments, we've made and capacity in digital capabilities and investing in value.
For customers have really delivered core volume growth, we've done all of that while maintaining high are always so there's a lot of questions about margin, but at the end of the day. We drove 17.5% are always on a 12% C. One base is talks to the returns were getting off of the business.
We're booking the cross sell ratios were getting all done within a consistent credit appetite. So we feel very good about or start to there. Thank you for your questions. We'll look forward to speaking with you.
In Q2.
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