Q1 2021 Royal Bank of Canada Earnings Call
I know some of the brands, we lapped the silty duckenfield the VITAS soup the level of pre owned at the end of who I had the honor of again it gives us the renewable isn't there some of the best loyalty.
[music].
This conference is being recorded so it calls for homes that don't go as you see.
Yeah.
Okay.
Okay.
Okay.
Okay.
Operator.
Good morning, all the participants please stand by your conference is ready to begin.
Good morning, ladies and gentlemen, welcome to of the Rbc's Conference call for the first quarter 2021 financial results.
Please be advised that the dish call is being recorded I would've liked the trend of meaning of return Nadine on head of investors Relations. Please go ahead Miss on.
Thank you and good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graeme Hepworth Chief Risk Officer also joining us today as to your question yeah on the.
The Laclede group head personal and commercial banking, Doug Guzman group head wealth management insurance and I N T S.
And Derek Neltner group had top of the market.
As noted on slide one our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties actual results could differ materially I'd also remind listeners that the bank because of its performance on a reported and adjusted basis and considers both to be useful in assessing underlying.
The performance.
To give everyone a chance to ask the questions. We ask that you limit your questions and then re queue.
With that I'll turn it over to David.
Thanks for the Dana and good morning, everyone. Thanks for joining us today, and we hope you and your loved ones are keeping safe and well.
Today, we reported very strong earnings of $3 $8 billion with earnings per share up 11% year over year. Our results are a testament to our diversified business model.
And revenue streams.
Benefited from higher fee based revenue in our capital markets on the wealth management businesses and strong client driven volume growth on both Canadian banking and city national.
Expenses remained well controlled and top of mind, even as we increasingly saw heightened client activity levels across the bank.
You also saw a small release of reserves this quarter, which Graeme will speak to later.
These factors, partly offset the impact of the 150 basis points of rate cuts in March of last year.
Which negatively impacted our earnings by approximately $400 million.
The strong volume growth elevated client activity and our diversified business model allowed us to earn through the significant headwind.
Our strategy is also delivering results in the U S, where we are capitalizing on our investments across capital markets and wealth management.
This quarter, we reported record results for our U S operations generating over $2 5 billion U S dollars on revenue.
And over 650 million of U S dollars and earnings.
Our robust capital ratio of 12, 5% was flat quarter over quarter as record of internal capital generation was effectively deployed to drive strong organic growth across our business as well.
So of paying $1 $5 billion on dividends.
Our CET one ratio provides the significant 19 billion surplus over the current osophy minimum.
Furthermore, our ACL on loans is over 2 billion higher than pre pandemic levels in Q1 'twenty 'twenty.
We remain well positioned to continue funding organic growth opportunities that create value for our clients.
I will now speak to how we see the macro environment unfolding.
As we approach of your integral into the global plan Deneke.
We're encouraged by both the number and efficacy of vaccines.
That's in addition to significant pent up demand rising prospects of further stimulus programs expectations of a gradual easing of lockdown measures and pledges of continued low interest rates to support the sustained economic recovery.
Recent data shows CEO confidence of corporate America has reached a 17 year high.
Also seen the benefits of increasing public private partnerships in the U S. As companies are engaging with governments to distribute vaccines effectively in a timely manner.
Canadian housing activity also remains elevated of ryzen permit issuance is building up the new construction pipeline, we expect the lack of supply low interest rates elevated savings rates continuing work from home arrangements.
And the potential resumption of immigration to underpin continued demand.
While the timing of path of vaccination programs has been uncertain and on even so far particularly in Canada, we expect an accelerated pace of vaccination distribution over the coming months to drive a strong economic recovery through 'twenty and 'twenty, one, resulting in GDP growth of four to five per cent across North America.
Against this macro backdrop, we will continue our unwavering support for our clients as global economies of pivot the recovery.
I now want to speak to the strong volume growth and increased momentum across our largest businesses.
Part of our competitive advantage is how we leverage our scale investments in technology, and our talented teams to deliver differentiated value and experiences to our clients.
Our Premier Global capital markets platform crossed a record 1 billion of quarterly net income driven by very strong performance in global markets.
Your opinion by robust equity trading and continued strength in credit trading.
The corporate investment banking surpass 1 billion in revenue for a third straight quarter benefiting from a constructive environment for new restaurants, and mergers and acquisitions.
I mean, it continues to be awarded significant mandates by some of the largest global clients, including serving as M&A advisor to Blackstone and providing fully committed financing for the recently announced $6 billion acquisition of signature aviation.
Canadian banking recorded strong volume growth year over year, adding over $100 billion of average volumes across lending and deposit products.
Well expanded central bank balance sheets government support and reduced spending of added significant liquidity to the system and.
The increase the savings rate of Canadians. We have also seen market share gains of over 50 basis points on personal core deposits over the last two years, which is the reflection of our technology investments client support and distribution strength.
We are similarly added 100 basis points of market share the residential mortgages over the last two years, our strong mortgage growth has been partly underpinned by the reengineering of the entire end to end process over a number of years from adjudication to fulfillment to retention.
Which reached an all time high of 94% this quarter.
We've also seen elevated activity in our wealth management businesses, which have remained resilient over the turbulence of the last 12 months.
Our diversified RBC global asset management assets under management of our AUM grew by $60 billion from last year to a new high of 540 billion as more clients chose RBC is a trusted steward for their investments.
Our retail funds captured over 25% of industry wide Canadian net sales over the last 12 months.
Adding to our leading 32% market share amongst bank on fund companies.
Yeah.
Along with market appreciation. Our recent growth has been the result of investment outperformance with over 80% of AUM outperforming the benchmark on a three year basis.
Assets under administration of <unk> in Canadian wealth management crossed the $450 billion for the first time.
The net sales and industry, leading recruiting efforts added towards number one high net worth on ultra high net worth market share in Canada, which is built on the trust of our clients.
Similarly U S wealth management, the seventh largest wealth advisory firm in the U S surpassed 460 billion U S dollars, an EUA for the first time.
Benefiting from our proven ability to bring both in both net sales and attract experienced advisers to meet the needs of our clients.
The city National continued to report double digit loan and deposit growth as we continue to execute on our organic plus growth strategy.
Our expanded jumbo mortgage platform is yielding results growing over 15% year over year.
Our market share gains across our businesses are not only a reflection of our scale.
But also our continued investments in technology and client facing colleagues.
We've seen an acceleration of digital trends as Canadians are increasingly reaching for their phone to fulfill their banking needs.
Our act on our active mobile user base increased 12% year over year over $5 million this quarter as mobile sessions Cross 100 million for the first time.
New clients to RBC can now complete the full end to end account opening minutes on the RBC mobile app.
And now over 50% of personal deposit accounts are opened through on mobile browser.
Since the launch of Nuomi in 2017, our mobile clients of benefited from actively reading more than $1 5 billion financial insights using predictive analytics to help manage their finances.
Over the years. We've also made significant investments you on digital functionalities and into the digital businesses.
The adviser of digital platform for clients to activate their personalized financial plans was launched in 2017, and now has $2 3 million clients online and.
<unk> AUM at Investees, a robo advisor has continued to trend higher.
Our success in commercial banking has also been underpinned by multi year investments in cash management solutions and technology, where we expect insight edge fueled by our data analytic capabilities to be a key differentiator.
Aiding our AI based electronic trading platform in capital markets continue to gain traction during these volatile times.
The number of shares of notional volumes traded on the this plot for them are up over 45% and 75% year over year, respectively.
Investments in sales power of also being a key driver of the growth of our personal and commercial franchises, whether mortgage specialists advisors and commercial account managers benefiting from the investments that we've made on technology.
And similarly, we've made investments in the bench strength of managing directors in capital markets, which helped us deepen client relationships and win he mandates.
Despite the significant increase in capital ratios, we delivered a premium on ROE of over 18%. This quarter. We are focused on the continued creation of long term shareholder value.
Going forward, our priorities have not changed with respect of deploying capital we remain focused on building on our momentum and driving accretive organic growth.
The capital markets, we will continue to deepen client relationships and further diversify our revenue stream towards less capital intensive investment banking advisory revenue.
We will also look to further strength in senior coverage teams in key sectors.
The Canadian banking, we expect continued high single digit mortgage growth and significant pent up demand to drive of consumer led recovery.
And with commercial utilization rates are low pre pandemic levels higher Canadian commercial volumes could further support the acceleration of economic activity.
Continuing our innovative approach to loyalty linked partnerships with leading Canadian partners, such as Petro Canada.
RBC on Rexall recently announced the new strategic partnership that will allow our clients to earn and receive even more value on savings, while accessing rexall health and wellness resources.
And as we see increased online shopping RBC.
RBC has launched pay plan offering Canadians yet another solution for purchases at participating retailers and merchants throughout Canada.
And our U S wealth management platform, we expect to see further benefits from our recent expansion into new geographies the investments in our Treasury management platform and the hiring of the hiring of experienced private bankers and financial advisors.
We're also expanding and deepening our existing client relationships through the interconnectedness of our businesses.
Over 65 per cent of Canadian wealth management clients now how about Canadian banking product and we expect this to continue to grow over time as we expand the continuum of offerings to our retail and wealth clients.
Also <unk> 19 per cent of our Canadian banking clients have all for transaction accounts, all four of the transaction accounts Craig.
What cards investments and borrowing products with RBC.
We're also looking to increase the collaboration between our capital markets on wealth management franchises to provide a broader set of capabilities for both sets of clients, including acting as book runners for debt and equity issuances.
City National has seen almost $2 billion of mortgage flow through of U S wealth management channels benefiting from our team of bankers covering RBC wealth management offices in key markets.
Looking forward of city National is looking to make a focused push into the mid market lending in the U S.
Not only on my proud of what we delivered but also of how we continue to deliver on our purpose of helping clients thrive and communities prosper.
In wealth management alongside of our existing RBC vision ESG funds the <unk>.
RBC I Ishares brand as launched new ESG focused Etfs.
And of RBC capital markets is playing a leading role in helping clients meet their goals and objectives, serving as exclusive financial advisor for both Eni S. P. A and the green coat U K wind on acquisitions of offshore wind farms and demonstration of our growing role in Europe related to renewable power.
RBC capital markets also acted as joint book runner on Enbridge is $1 billion sustainability linked revolving credit facility. The first such issuance by the energy bar in the North American market.
Also I'm proud to share of RBC has received this year's global Catalyst award on honour of recognizing business is dedicated to increasing the representation of women in leadership and promoting equal access to career opportunities.
RBC is also recognized as an ESG leader by third party rating agencies with a high 86 percentile ranking on priority priority ESG indices.
And as a reminder, today, we're kicking off our first ever RBC capital markets Global ESG Conference.
So to sum up our scale innovation and talent are our competitive advantage as we create even more value for our clients.
We continue to execute on our strategy with purpose to prudently invest in sustainable growth and strong returns for shareholders.
I'll now turn it over.
Thanks, David Good morning, everyone.
Starting on slide nine we reported quarterly earnings of $3 8 billion earnings per share of $2.66 was up 11% from last year.
Despite operating in the near zero interest rate environment, we generated nearly $5 billion and pre tax pre provision earnings this quarter.
Moving to slide 10, we reported a robust CET one ratio of 12, 5% unchanged from last quarter.
We had record internal capital generation of 41 basis points this quarter higher than our historic average of 30 to 35 basis points. This was largely offset by higher risk weighted assets.
Outside of the impact of foreign exchange RDA R. W. A growth was underpinned by four key drivers first strong client driven volume growth in Canadian banking and city National second elevated client driven trading derivatives and underwriting activity and capital markets.
Third approximately $3 billion of transitional methodology changes to our securitization framework and an additional $2 billion from maturities of existing securitization notes.
For these factors were partially offset by a modest 1 billion dollar benefit from net credit upgrades. This partially offsets the.
Cumulative 13 billion dollar impact from net credit downgrades over the last three quarters of 2020.
Our CET one ratio was also impacted by a partial reversal of the boss vs. Transitional capital modification, primarily driven by the reduction of the scale of rate from 70% the 50%.
The remaining 19 basis points cumulative benefit should reverse over time, given further reductions in scalar and migration the PCL on impaired loans.
We expect to continue generating significant cash capital as the economy recovers our strategy for capital allocation has not changed we will invest additional capital to support accelerated and prudent organic growth in order to further expand our market share in key businesses.
Now moving on to Slide 11, all bank net interest income declined 4% year over year as strong volume growth in Canadian banking of city national where more than of offset by the impact of lower interest rates and the impact of fiscal and monetary stimulus, which continues to drive excess liquidity into the financial system. However, after adjusting for trade.
The results net interest income has been steadily increasing after bottoming out in Q3 of 2020 up 3% on the back of strong volume growth.
All bank NIM declined two basis points from last quarter, primarily due to changes in asset mix, including towards the lower yielding securities.
At the segment level Canadian banking NIM declined two basis points quarter over quarter as the impact of low interest rates and asset mix more than offset the benefit from strong deposit growth.
Looking forward, we expect Canadian banking them to continue to decline modestly throughout 2021.
City National NIM was down 12 basis points relative to last quarter, largely due to the influx of deposits being investing in low yielding short term securities. However city National net interest income increased for the second consecutive quarter recall the city national is the more asset sensitive balance sheet with approximately 50% of.
Of its loans being floating rate commercial loans also approximately 50% of deposits are noninterest bearing.
We expect the narrowing of city National NIM in Q1 to largely reverse in Q2, given expectations for accelerated paycheck protection program loan forgiveness as well as an improved balance sheet mix as we redeploy our strong deposit growth in the higher loan balances.
Following this benefit in Q2, we expect city National's NIM to return back to current levels in the second half of the year.
More importantly, we expect strong volume growth of Canadian banking and city national the completely offset the headwinds of lower interest rates by Q3.
And as a reminder, our results get impacted by fewer days in Q2, particularly Canadian banking.
While we don't expect short term rates to increase in the near term the steepening yield curve serves as a good reminder of the value of our low beta core deposits, including substantial noninterest bearing checking accounts.
Now turning to slide 12, noninterest income, which represented 60% of revenue was up 4% year over year, providing an important counter cyclical offset to the impact from low interest rates.
Our diversified business model is performing as it should in times of stress with strong trading results across our businesses and our wealth management business has continued to provide a growing revenue stream for.
The more we expect upside from our M&A advisory business as the economy strengthens.
In contrast, we continue to see certain fee based revenue streams in Canadian banking being impact by COVID-19, particularly those affected by lockdown measures and restrictions on travel targeted lockdowns of also lowered wholesale loan demand, which in turn decreased credit fees.
Looking forward, we would expect to see some of these revenue streams begin to pick up as economies open.
Now on to Slide 13 expenses were up two six per cent year over year, largely commensurate with strong performance.
Excluding variable and stock based compensation expenses were down 1% from last year. This follows on a similar year over year decline last quarter after adjusting for severance and related costs associated with the repositioning by and see us in Q4 19.
We also continued to benefit from reductions in discretionary costs, such as marketing travel stationary of printing, which were down approximately $80 million from last year. However, we are cognizant of some of these costs could start to increase as economies begin to open back up.
We will continue to balance investments in key growth areas, such as technology and innovation with project prioritization and other areas.
We already have a number of cost containment programs in place across our businesses and we expect to generate efficiencies from the accelerated digital adoption that Dave spoke to earlier looking ahead, we expect full year expense growth, excluding variable and stock based compensation to remain well controlled and the very low single digits.
Moving on to our business segment performance beginning on slide 14, personal and commercial banking reported earnings of over $1 7 billion Canadian banking quarterly net income was up 8% from last year as the impact of lower interest rates and service charges was more than offset by strong volume growth elevated market related client activity and results.
The leases largely in our retail portfolios.
The loan growth of 6% was largely driven by continued double digit mortgage growth, which was a function of both the strongest tension rate as well as new originations, which were up over 40% from last year.
<unk> on credit card growth continues to be constrained by the impact of COVID-19.
Growth in business deposits remained robust at 25% on growth in core personal checking accounts was also very strong up over 30% year over year and.
In RBC direct investing also saw a material increase in client activity by individual investors with average trading volume is up nearly 200 per cent year over year.
Turning to slide 15 wealth management reported quarterly earnings of $649 million up 4% from last year.
Canadian wealth management revenue was up 7% year over year benefiting from higher average fee based fine assets with a UA in AUM up 7% and 12% respectively.
Global asset management revenue increased 17% year over year, primarily due to higher average fee based client assets.
<unk> also benefited from higher performance fees as a result of strong investment performance.
These are generally earned in Q1 if at all.
Favorable changes in the fair value of seed capital investments also contributed to the increase GAAP AUM increased by 13% or over $60 billion year over year with nearly 60% of the increase coming from total net sales net.
Net sales were $7 billion for the quarter Canadian long term retail net sales remained strong at over $5 billion in Q1, particularly in the fixed income and balance products.
Long term institutional net sales largely from bluebay, partly offset money market outflows.
Strong volume growth of the city National's continues to be more than offset by lower interest rates deposit growth remains exceptionally strong at 36% outpacing double digit retail and wholesale loan growth.
We also saw solid growth in U S wealth management with a UA up nearly 50 billion in U S dollars from last year.
Turning to insurance results on slide 16, net income of $201 million increased 11% from last year, primarily due to improved claims experience and higher favorable investment related experience.
These factors were partially offset by the impact of lower new longevity reinsurance contracts and lower international light volume.
Turning to slide 17, Investor and Treasury services net income of $123 million decreased 14% of your from a year ago earnings were up 35 per cent quarter over quarter, partially due to seasonality.
The funding and liquidity, implying deposit revenue declined year over year as they were negatively impacted by the current interest rate environment and elevated enterprise liquidity. This was partially offset by higher gains from the disposition of securities.
Turning to slide 18 capital markets reported quarterly earnings of over $1 billion. This was the fifth quarter in a row with pre provision pretax earnings in excess of a billion.
Corporate and investment banking reported yet another strong quarter M&A advisory fees generated this quarter were the second highest after the record fees reported in Q1 from a year ago. We continue to see strong equity origination fees underpinned by increased confidence and constructive markets.
While debt underwriting has come down from elevated levels in 2020. They remained strong this quarter given the low interest rate narrow credit spread environment.
Looking further into 2021, we remain actively engaged with our corporate investment banking clients across all regions with respect of their strategic objectives, our ECM and M&A pipelines are strong.
Global markets had yet another strong quarter with revenue up 12% from last year, the $1 6 billion benefiting from favorable market conditions across multiple asset classes as well as from an increase in primary activity.
Net trading remains strong as credit trading benefited from tightening spreads.
Interest rate FX and commodity trading all saw increased client activity on.
Market volatility client activity was also strong in equity trading.
Looking ahead, we expect trading activity to moderate over the coming quarters.
In conclusion, we remain committed to improving productivity, attracting new clients through our differentiated products and services and continuing to increase our market share over time and with that I'll turn it over to Graeme.
Great. Thank you Rod and good morning, everyone.
Starting on slide 20 allowance for credit losses on loans of $5 9 billion was down $201 million compared to last quarter.
This reflects PCL on impaired loans of 218 million or 13 basis points, which was down two basis points from last quarter as lower provisions in couple of markets and wealth management were partially offset by higher provisions in Canadian banking.
It also reflects the $97 million release of reserves on performing loans, notably this is the first quarter since the onset of the pandemic, we have released reserves in relation to of performing loans for.
For context, though this represents less than 4% of of the reserves taken during 2020.
Or at least balances of more optimistic economic outlook driven by the introduction and approval of the vaccines in December of last year with concerns around the new variance and challenges with the rollout of vaccines.
Turning to the credit performance of our key businesses, starting with capital markets.
Compared to last quarter gross impaired loans of $857 million decreased 348 million.
PCL on impaired loans of $18 million decreased $50 million.
These decreases reflect limited new formations as clients continue to benefit from access the debt markets and substantial liquidity.
As well we saw good resolution of previously impaired accounts, mainly in the oil and gas sector as prices have rebounded from the lows we saw in 2020.
We also released 37 million of reserves on performing loans falling of 38 million really pretty $8 million release last quarter.
This reflects continuing improvement in our credit outlook for this business.
In wealth management gross impaired loans of 289 million decrease of 56 billion from last quarter due to lower new formations of city national mainly on the consumer discretionary and consumers people sectors.
Improvements in these same sector has also led to $27 million of recoveries on previously impaired loans.
In Canadian banking gross impaired loans of $1 4 billion was up 95 million, primarily on the residential mortgage and personal lending portfolios.
PCL on impaired loans of $217 million was up 48 million from last quarter with increases across all portfolios with the exception of our card portfolio.
As expected delinquencies and impairments have begun to the increase from the exceptionally low levels that were experienced last year when clients benefited from our deferral programs.
Well the delinquencies and impairments are increasing the continue to be at or below historical levels of government support programs remain in place benefiting many of our clients.
We do expect delinquencies and impairments to increase through the remainder of 2021 as many of government support programs are scheduled to conclude this summer.
Additionally, this quarter, we released $63 million of reserves on performing loans from Canadian banking. This lease came primarily from our cards portfolio, reflecting lower outstanding balances and from our residential mortgage portfolio, reflecting very strong housing market conditions.
Before concluding let me touch on the overall credit outlook.
As you recall in Q2 last year, we materially increase the reserves against performing loans at that time, our expectation for credit losses, we're guided by a rapid deterioration of economic indicators caused by the significant uncertainty around the pandemic.
In particular, there was uncertainty around the speed and timing of an economic recovery. The degree of government support the size and duration of additional waves of the virus and the availability of efficacy of the vaccine.
The date bank of government support programs have been robust and beneficial to our clients, resulting in better than expected credit performance.
Additionally, the economy has outperformed our expectations since the onset of the pandemic with economic indicators, such as GDP and unemployment faring better than we originally expected.
Although some sectors continue to be severely impacted by containment measures are there other sectors are experiencing robust growth in this current environment.
Despite these positive developments concerns around the new versions of the COVID-19, including the efficacy of the vaccine against these new beds on current vaccination delays could negatively impact the timing and pace of the economic recovery.
Over the course of this year, we expect PCL on impaired loans to rise, but timing and level will be dependent on the success of the vaccine rollout and how and when the government support programs come to an end.
Concurrently we would also expect for allowance on performing loans. The decline is performing loans migrate to impaired.
As well are performing performing loan allowance could be positively impacted by the uncertainties of rone vaccination of Rollouts of abate and the reopening of the economy supports more competent O works on unemployment rates from GDP growth.
The reported eight five per cent of loans and acceptances are ACL of continues to be well above our pre pandemic levels reflect the noted uncertainty.
Thus far we have been very pleased with the resiliency of our portfolio, which reflects our disciplined approach to underwriting and the quality and diversity of our lending portfolios.
As we've done since the start of the pandemic, we will continue to actively work with our clients to help them navigate through these uncertain times.
And with that operator, let's open the lines for Q&A.
Thank you.
We will now take the questions from the telephone lines.
If you have a question on you are using a speaker phone please lift the handset before making your selection.
If you have any question. Please press star one on your telephone keypad.
You may cancel your question at any time by pressing star two.
Please press star one at this time, if you have a question.
Will be a brief pause of all the participants register for questions. Thank you for your patience.
Okay.
The first question is from the Abraham the Puna, while low from Bank of America Securities. Please go ahead. Your line is now open.
Good morning.
So David if I heard you correctly, you talked about on me.
Making a push at city national particularly on the mid market side I was wondering if you can elaborate on that a relative to my sense was of the add a little bit more for emphasis on private banking recently, so just talk to us if you don't mind that on both the middle market push that you're making what it entails and how the from the outside should measure.
The success of that strategy.
Okay. Thanks for that question those of you know.
Two important parts of our growth strategy and the city National where were very excited how we've grown the business over the last five years and as we look to the next phase of growth.
Say you bring on the first point is really important that of balancing the growth between private banking jumbo mortgages in the commercial bank because of it's a big priority of ours and we've made significant progress on the mortgage strategy.
The 15% growth year over year, we originated $5 billion of more jumbo mortgages last year in the U S and if your annual annualize the first quarter, it's up closer to seven 5 billion. So we're well under way.
That strategy to grow the balance sheet on and to balance the balance sheet off between private banking and commercial banking and we're doing a good job cross selling those customers into into core banking. So the strategy as we've talked about for the last five years is really starting to play out and accelerate we built the strong back office to get creative.
Great client experience and that we're executing the way I'd hoped we'd execute.
That leaves us on the ability to to continue to grow our commercial franchise and what were thinking there is we have some really strategic advantages. We think a couple of fronts. One we have this fantastic capital markets business Global capital markets business was very strong industry verticals that create ancillary fee based opportunities on the advisory side for.
The clients that will bring.
Bring in through the mid market strategy, we're thinking in a range of between 500 million of $2 billion in revenue was the target market to give some guidance there corporates and we've also just reinvested in our Treasury management capabilities. So when you think about using our balance sheet and then cross selling into fee based products, which is our strategy across every business globally.
This is very consistent with that we put our balance sheet out to a new client we come in with Treasury management capabilities and great capital markets capabilities, and we drive the premium ROE vs that we're looking to drive within our credit risk appetite. So this is certainly within our credit risk appetite and therefore, the ability the balance off private banking and in mid market allows us to grow and accelerate growth.
At our targeted ROE vs.
Got it and just guide to that day is M&A of distraction on.
Potential contributor to the strategy.
Well, the M&A would have to be meaningful enough to take management's attention away from the incredible opportunities we have to grow and we were growing at double digits. You know pre the strategy is really taking off so we feel very good about our organic opportunities in the U S and the more M&A that happens with our competitors in there of distracted from their clients of the more or China.
Copper Attunity, we feel we've had the work we've been growing around a growing our private banking sales force in commercial banking sales force anticipating some disruption in the marketplace, but if something fits that accelerates growth along those paradigms.
<unk> private bank, then well look at it but we've got significant organic opportunity to deploy capital in front of us.
That's great. Thank you.
Thank you.
The next question is from John Aiken from Barclays. Please go ahead. Your line is now open.
Good morning, Rod since I don't really have any significant complaints on the results I was hoping that you might be able to walk me through the the wealth accumulation plan in the U S. Wealth management now I know the net impact is not overly material, but it does drive some variability within the segment's metrics can you remind me what the purpose of the plan is.
And then also of what the mechanics are of that caused the variability in both revenue and expense lines.
Yeah sure. Thanks, Jonathan the purpose of the plan as a part of our compensation model and pay for performance and it allows our employees on our financial advisers to basically put some of their deferred income into the markets and inhabitant earned in the market and since that's what their profession is Ah that makes perfect sense and then as of.
Company, what we do is we hedge that.
So if because of the compensation expense will rise and fall as markets move up and as they've been moving up recently, especially in the first quarter of this year, our fiscal first quarter, our compensation expense would mark to market or mark up and the hedge that we basically buy a basket of securities to offset what is what are quiet.
Our financial advisers and employees of put into the market and you can see that on page 10 of the Sop and we spell out the impact of revenue and expense there quite clearly and you can see for the last two quarters, they've almost match perfectly, but they won't match perfectly because of the compensation expense amortize in it as it vests over the three years.
Whereas we have the by the securities the hedge it immediately upfront and you would've seen that dislocation in Q2, and Q3 last year, where there was about a $20 million difference, but year over year, you'll see a big increase in revenue and a big increase in expense for that and that's why we adjusted out when I talk about noninterest expense growth year over year, because it has no.
Economic impact except for the financial advisers, where it's a positive because it allows them to invest in the market as the salaries and compensation as the bird.
That's great I think I almost got it thanks.
Yeah.
Thank you.
The next question is from Paul Holden Holden sorry from CIBC. Please go ahead. Your line is now open.
Good morning.
Rajiv.
You provided some very helpful commentary around the NIM outlook as well as.
For perspective on the on the slides.
There is.
But there is an increasingly bullish narrative for the banks broadly around the steepening of the yield curve and I'm. Just wondering if there is you know beyond the deposit.
The positive benefit you highlighted if there is any treasury opportunities or other opportunities within.
Today, given that that curve steepening.
Yeah sure. Thanks, Paul.
As the yield curve steepens its important that you look at the five year, maybe even the seven year swap rate, we don't play out of the 10 and 30 year.
End of the curve of acceptance and of our own pension plan and in our insurance business, but when you look at the benefits of the deposit book it largely relates to the assets that we deploy those into and those are largely you know five year fixed rate mortgages in the in the retail book here in Canada on variable rate mortgage of variable rate commercial.
In the U S, but also growing our impact to the mortgage book in the U S.
And so and credit card balances also will benefit us and that has hurt us from a mix standpoint, as those balances have come down substantially the spending down on those yields are usually much higher so that help that will help them as it goes up for us to take treasury actions, we would have to be hedging basically at the five year.
Swap rate these days or longer if we wanted to take the long and long term interest rate position, but we would rather.
Put those deposits into client facing assets and we think the impact year over year of interest rates is really going to start moderating after the second quarter remember the rates were cut by 150 basis points about halfway through our fiscal second quarter. So, we'll see a little bit of year over year headwinds this year.
This quarter, but starting in Q3, those headwinds are largely going to be behind us and we're gonna start to see more revenue growth from the strong balance and market share growth that we've been achieving and I think that's going to be an important driver of our growth and an important driver of our growth story going forward.
Right. So if I hear you correctly. The NII story, starting Q3 will be closely tied to revenue growth, but not necessarily tied to the NIM expansion.
Correct, Yeah, mimic NIM is going to start to level off.
I ask of dropping precipitously since Q2 of last year with the 450 basis points cut by both the U S and bank of Canada are now volume growth and translate better into revenue growth and more directly on so that will be of a significant positive for us as we continue to grow that market share got it got it that makes sense.
Thank you.
Thank you then.
The next question is from many Grumman from Scotia Bank. Please go ahead. Your line is now open.
Hi, good morning.
It's another quarter of outsized growth in the mortgage book and I'm, just wondering I understand why it's happening, but I'm wondering is there a point, where it's suboptimal to have that kind of a I'll call. It a lopsided growth Oh in the Canadian banking business.
Yeah. Thanks, it's Neil Thanks for the question, we definitely don't look at it as a negative a couple of couple of reasons. There I mean, one it's a really sticky product we like the risk.
And Oh, there's horror higher always on on the on mortgages now a relationship of our our strategy is to is the one the entire relationship of the customer and the mortgage plays a huge part of that is one of the most profitable products.
The we can anchor with the clients so.
No we still feel very strongly about the strategy and where you.
So really I think encouraged by market share gains and just the volume we're able to pick up in.
In the last three quarters.
And just a follow up on that at what point when you look out in your forecast when do you see the business mix balancing out a little more what quarter when when do you think that'll happen.
Yeah, well I think in terms of the market in terms of the of the housing market I mean, we feel good about the about the dynamics, we expect the as Dave mentioned still see strong growth throughout the rest of the year high single digits.
The immigration was was dampened and we expect to see that come back in Q4 and provide some more demand in terms of other you know other parts of the business and your credit card business Rod touched on in terms of the NIM impact we were down <unk> three.
$3 billion in balances there so that's providing some real headwinds not only on our NIM, but just in terms of revenue.
Credit card spending will also we expect the bounce back that will provide a tailwind of revenue there and I think part of the of known as Dave mentioned, you know utilization down in terms of commercial revolvers entrepreneurs need to have the confidence to invest in the tap into those revolvers. So I think as the economy opens up entrepreneurs getting confidence you'll start to see.
<unk> lending start to come back hopefully in the back part of the year.
Thanks for that.
Okay.
Thank you.
The next question is from Matt Gabrielle day, Shane from the National Bank Financial. Please go ahead. Your line is now open.
Good morning.
Again from a sticking with Neal just looking at the your deposit growth in Canadian Bank.
Banking has been phenomenal.
I'm just wondering about the seven 8 billion or so the increase in deposits over the past year, how should we look at the retail commercial in terms of inhibiting your loan growth, meaning it.
It could push back consumer borrowing of few years, because they are just kind of tap into there.
Savings before they start borrowing again and I'm talking about everything excluding mortgages, obviously, because that's going on.
And if you could make a similar comment on commercial lending just trying to figure out behavior and how that affects your loan growth outlook.
Yes, great question Gabriel.
I mean, we are seeing obviously the this liquidity buildup on the consumer side was somewhat of a attached to the the comment I made about the credit card book, there just isn't a place for consumers to choose to spend right. Now you know travel and the dining and entertainment travel is our biggest category and we're just not seeing the consumer spending there so.
Some clients in terms of our credit cards or paying it down more quickly we've had customers that used to revolve with us. The I don't have the revolver, they're able to pay in full and we have seen of of decrease in utilization of the.
The credit lines as well so so they are paying down debt.
In terms of mortgage to your point that Hasnt dampened that at all I think this will be it will release over time, I think is probably the outlook and in terms of the trajectory.
All of that coming back tied the liquidity I think it's going to be tied to the economic recovery.
On the change your outlook I think last quarter, you said the second half you'll have positive revenue growth in Canadian banking or something along those lines that.
Could it be a couple of years before the non mortgage categories start to grow again.
No no no I mean.
In terms of just.
Terms of of the consumer lending portfolio.
Yeah, I mean the flow.
The two categories within there there's there's lending we do direct to consumer through our branches and then the auto our auto business auto last year was down dramatically and if you look if you take a an indicator from the commercial book, we were down over $1 billion of about 30% in terms of floor plan finance, so as that auto business starts to come back you'll see that.
That horse portion of consumer lending spiked back and then just utilization of and consumer activity.
In terms of branch based lending yeah. That's part of the year is probably a fair bet alright. Thanks.
Thank you.
The next question is from sort of high Mohan Henry from BMO. Please go ahead. Your line is now open.
Yes. Thank you.
Maybe a question for both David and Graham.
Yes.
Back in December I sort of your tone was a lot more cautious.
Just around the outlook the operating environments and of the lifetime of it is today.
And obviously with the I don't remember I think I don't know if Graham they have it off the top of this that I don't remember the last time total bank P sales would've been.
You know low single digits from mid single digits, what has changed and the claim what what should we be expect I understand it's incredibly difficult environments to two to prepare for but.
What caught you off guard of what was the pleasant surprise.
And how is how are those I guess surprises going to manifest through the balance of here do you think.
Sarah Thanks for that I'll start with kind of the macro view of what we're seeing on why or certainly we.
Becoming more confident and the trajectory of that we're seeing now for.
First and foremost of my points around the vaccines the effectiveness of the number of vaccines the plans coming together for the progress Europe's making particularly the U K of core market for us the progress at the United States is making an vaccinating as high risk population and its ability of reopened its economy and now when even though Canada has been delayed.
We're talking months here, we're not talking quarters. So are we're growing in confidence in the trajectory of of the vaccination of our population and the mitigation of risk we're not there yet so we're still waiting to see the execution of this but we're getting more confident that the timing of starting to narrow around this when this will happen.
That's certainly it's no shock there. It's just an evolution of the process that we're going through in a very complex operational process, but it's coming together and I think that that allows us to see through to more normal economic activity.
Increased credit card spend.
In the fall as Neil referenced even that surplus cash there's $200 billion of cash sitting on Canadian consumers accounts right now waiting for a place to use it some of it has gone into the market. Some of it's gone to pay down debt as we just talked about but a lot of it is poised to grow that service sector. That's been shut down and most of this most of the.
<unk> bye.
Uh huh.
The variance in Covid right now so I think that's leading us to the feel very good of boat, where we are as an organization where the economy is and how this should play out the rest of the year Graeme why don't you talk about on your view on on risk from that perspective sure. It's simply the few comments I would say.
What's different now versus Q4, well I would say by far and away of the most notable event is when we sat here at the end of Q4, there was no known vaccines, nor approved vaccines and so that is absolutely a huge game changer in terms of kind of putting of different lands on the uncertainty here you know I think one of the biggest issues that we were facing in 2020 was just the uncertainty around the timelines for this.
Pandemic and that was a huge factor in it and so with the introduction of vaccines in Q4 that certainly is the easy huge point of optimism now the flip side of that is we're obviously seeing challenges on getting vaccines rolled out we're seeing variance come into play and that's still does leave a significant level of uncertainty.
And caution in play with us, but that is really I would say the biggest point, but kind of toggles of this quarter last quarter versus this quarter.
That's the whole that translates through the provisioning I mean, you quoted the total bank PCR I would really kind of the.
Dissect that into the two components you know what we're seeing in stage three and then kind of of the dynamics of of the first nine and how we treat performing loan loss allowances the <unk>.
Certainly the stage III 13 basis points of the very low number I think that would certainly be at that kind of the bottom end of our historic range and that's really a byproduct of I would say two significant things. We're certainly seeing the benefit of the effects of the deferral programs that we put in place as well as certainly the the positive implications of the support programs were provided by the government.
Across the board.
You know as deferrals come to an end, we're starting to see those delinquencies picked back up and so we do expect the stage three impairments and delinquencies the trend positive for trend upwards over the remainder of 2021 government supported of the big part of the store and you know right now as it stands government support is expected to conclude largely this summer.
And that really is what will what kind of influence our expectations going forward is to the degree that that's extended or it's worked into the new forms of support that will really drive kind of of the expectations and implications for our credit performance of the latter half of the year.
When it comes to the performing loan loss allowances. This is more about kind of the expectations as opposed to the actuals that we're experiencing.
So certainly the vaccine is positive and that's translated to a more positive macroeconomic forecast with the robust recovery really starting in the latter half of 'twenty 'twenty, one as Dave referenced.
But still some degree of caution on that of displacement certainty that I referenced and so these are all of the things that are in play but.
You know when it comes to the stage one and two that's why we did make a small release on.
This quarter is because that's the ACL of that tool quantum of risk. We see is abated to some degree of since the since where we were standing at the end of Q4.
Just for posterity.
Our last time at this level of Q1 of 2005 at 12 basis points.
Okay. Thank you.
Thank you.
The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.
Good morning, the Graham I, just I wanted to put out maybe a slightly finer point on what we just went through a free.
We look at credit cards as a proxy for the Canadian consumer credit card loss rates were like.
150, 160 basis points of this call this quarter about half of what we saw.
Before the pandemic even played out.
When you think about credit card losses on how they.
Play out over the next say year or two.
How should we think of that should we think of the deferrals as the expiry of the deferrals and the and maybe the end of the government support, causing those loss rates to go through the 300 basis points and then migrate back down to normal or do you think of that as the upper of bad that we're on.
Likely to even get through what we were before the pandemic I guess, what I'm trying to get out of it has the government support essentially.
The gated that that spike in PCL of is that we're all sort of racing for earlier on in 2020.
Yeah. Thanks, Mary I think it's a really good question I think this whole debate around the degree to which loan losses have been deferred or mitigated them. It was a really great question right now and it's part of the uncertainty that I think we're facing so well, yes, right now we are experiencing exceptionally low levels of loan losses, and quite contrary to where you'd expect it to be at this point of the cycle that is certain.
A byproduct of the deferrals and the government support as you've noted.
Yeah.
Putting the governor of support aside for a second.
You know credit cards was down for us as a supporter of this quarter, which is different than the other retail products, but that's a byproduct of the fact, the credit cards of a 180 day of impairments as opposed to the 90 day of impairment. So we would expect the.
The flow through of deferrals, the start to tick that up over the coming quarters.
On the implications of the government support part or the other and very material part of those rate and so as I indicated earlier, we do expect the on the retail side of our delinquencies of impairments across the board to increase throughout.
Throughout 2021 the <unk>.
Level that gets to the degree of that that's deferred versus mitigated I think is really dependent on on this bridge of the government's created and whether it's not just robust enough for whether it really extends the owner side and the rows fully mitigate losses or whether these are really just deferred to kind of more elevated levels of the latter half of the this year and early 2022, but that is the big for the <unk>.
The that's really difficult to work out for this point in time.
The real quickly then for Ross Rock help me think through.
What's going on with the the non loan earning assets. So think of all of the liquid assets of the bank had dropped last quarter increased a little bit this quarter. What is what else what are the big drivers of that is it simple of saying if loan growth reemerge as in the second half of that loans of all sort of crowd out some of this liquidity.
Or is it really being driven by just client demand right now.
I think it is it's a combination of both I mean, if you look at city national in particular.
You know, we don't pull the all the money because of of.
You know different bank requirements and regulations and and the you know the fact that we of legal vehicles and in government requirement. So if you look at just city national over the last year, we've had $9 billion of loan growth, which is very strong, but we've also had $18 billion of deposit growth so that extra nine.
Billion is basically displaced wholesale funding and we've done the same thing in Canadian banking of numbers for slightly different but we displaced wholesale funding with that loan growth, but the deposit growth has been much higher so as we kind of grow loans into that that will be able to take the lower yielding securities down.
And put and replace those with higher earning client asset.
Thank you.
All of those in there when.
We're going to run over to get ahead of getting through the.
The next question please.
Okay.
Thank you.
The next question is from Lamar Prasad from the core Mark Securities. Please go ahead. Your line is now open.
Thanks, maybe for Rod I think you had mentioned that some of the discretionary costs could be coming back in as we begin two of the economies of began to reopen how much of that I think it was $80 million and discretionary costs are you baking back coming back post pandemic in your expense outlook.
A portion of it you know some of that is certainly travel, which you know may not return to pre pandemic levels.
We'll see some of that is marketing.
On which you know as the economy opens back up as people venture out there will be more opportunity to grow the client base. So some of that certainly will return, but I wouldn't expect all of it to return. So you get that you can factor of portion of that coming back, but again, we're going to grow earnings and revenue faster.
Other than that our expense growth has been our reserve is going to resume.
So then where where what areas are you expecting expenses to grow in your in your low single digit expense outlook on.
So this is everything outside of variable comp and stock based comp is that very low single digits. That's basically all of their expenses and that includes you know our continued investment in technology and digital capabilities, we still have to invest in new regulatory requirements invest in people. So I'm not excluding people for.
On that very low single digits, and we've continued to add head count on.
So that we can continue to grow market share. So we've you know we've added over 500 people over the last year or two to respond to the market growth.
The Roz point. This is Dave Neil's added private bankers, Kelly Coffey and the team of out of private bankers, writing commercial bankers. So we are growing our capacity to serve clients are expecting you know the market to surge in client demand to surge yet again. This is on top of the standing growth that we've got now so we've been seeding growth.
Spectrum in the recovery.
And it's playing well for us right now.
Thank you.
Yeah.
Thank you.
The next question is from Scott Chan from Canaccord Genuity. Please go ahead. Your line is now open.
Good morning.
David in your opening remarks, you talked a lot about wealth management, specifically on the U S side, and if I look at slide for you've on boarded 40 billion plus with new advisors over the past few years, which is the significant amount.
Maybe you can kind of talk about that onboarding processes of benefiting from new geographies and end and kind of looking out over the next two years.
Is that going to continue.
We've been doing that both in Canada, and the U S is of course strategy. So I'll talk to the U S of maybe Doug can talk to the Canadian process, but certainly I think of the value proposition, we've invested heavily in financial planning technology of <unk>.
Core margin lending capabilities. So the infrastructure that was lacking on the platform five years ago, we have a very strong advisor offering platform right now with a great culture, and we're attracting advisors from the big platforms and that's been a consistent consolidated effort cultures of big part of it.
We sell the culture that we have in Canada and the U S.
The capabilities, we have the team work, we have the cross selling and referrals that we get through our banking partners on both north and south of the border all of that combines two of be a very attractive off for two two financial advisors and the phase I as in Canada, and the U S. So that's been of course success of ours and <unk>.
Canada and in the U S for for many years and we see an opportunity to really accelerate that so we've got plans to increase that growth, particularly in the United States over the coming years and of ramping up our branch manager and sales efforts to do that so.
So we're pretty excited about that opportunity Doug do you you've been executing this in your team day of Agnew for the years. It says, it's a well proven formula for US Yeah. It is and it's the story for those of you who were at the Investor Day, a few years ago of the flywheel that I've put up is really working and I'd add in the U S to Dave's comments.
A couple of things one is the shift to P.
P based.
Is the discretionary assets and the addition of the credit product because a lot of our advisors to have more to serve for the for their clients, but in Canada. The story, we told the Investor day was and the ability of that exceeds our competitors to investing in highly skilled subject matter experts of the center, allowing our advisers to become.
I'm much more than the investment advisors, obviously anchored in goals based discovery and planning, but bringing in real expertise in insurance and philanthropy.
Interest in the state and giving advisers frankly more to sell than our competitors have are more to provide funds for our competitors.
Which makes us the destination of choice for advisers. So we're seeing through the the last number of quarters of disruption.
As of a stronger than ever interest from other firms' advisers to join our platform because we've got more more firepower for them just as the client base.
Alright, Thank you very much.
Yeah.
Thank you.
The next question is from Mike, who is one of which from the credit Suisse Securities. Please go ahead. Your line is now open.
Hi, Good morning, a quick one for Neil just wanted to go back to the gains that you've been making on the deposit side of the retail deposit share in Canada and it seems like it's the it's a pretty competitive market like with the incentives provided whether it's like the 300 all of our cash upfront or or I guess over time for a new checking accounts.
It seems like a very competitive market and I'm wondering given the you have to pay for that growth to some degree how long does that typically translate into gains in other areas like we've clearly seen in the mortgage side, but I havent seen it in the other retail loan balances. The in terms of your share so how is that trending.
Is that just the lag or do you expect that to maybe accelerate at some point in the near term.
Yeah. Thanks for the question absolutely.
Absolutely it's competitive.
We've had.
Since Investor day, we put out our goals in terms of new client acquisition.
It's been a real focus we were really pleased with the the trajectory of acquiring new consumers and making the RBC their home bank.
Pre COVID-19, obviously, we needed to really kind of shut things down once that hit we have open things back up you know really starting late Q3.
And I've been really pleased about the rebound in terms of being able to go out and connect with consumers in and have them join the franchise.
In terms of the the incentive costs and our ability to cross sell which we track it literally by cohort and channel. So we're able to get down to understand.
What product the the consumer came in on what channel. They came in on what offer they came in on and then we see the curves in terms of when we know you know over what period of time, what investment products barring products card products or mortgage products, they're gonna add and you know at this point, we continue to invest because those cross sell rates continue to hold real.
Really solid and so our conviction around the strategy and ability to consolidate.
The core of bank and earn that extra business is exactly where it was a couple of years ago. The other thing.
Underpinning that strategy to Doug's point, we talked about at Investor day. Unlike some of our competitors, we actually incent the client to consolidate their business. We don't have a minimum balance deposit product and we would point to that as one of the reasons that we're able to cross sell at a higher rate.
So you are seeing some some good cross sell of I guess, we just don't see in the numbers of any metrics you could offer on that.
I mean, the the metrics are essentially as we look we break it down into four categories. The transaction account investment accounts boring accounting card.
And we have the highest cross sell rate both in terms of a third.
Third party benchmarking studies and like I said the across each of those for product categories. We've seen consistent cross sell rates over time, so that's probably the best way to describe it.
Okay I appreciate the color. Thanks.
Thanks.
Go ahead operator.
Hang on to him.
That is all the time, we have today for questions I would now like to turn the meeting over back to Dave.
Thank you thanks, everyone for for your questions today, a few themes that we really wanted you to take away and it you.
You know first and foremost the very strong client franchise growth that we saw across capital markets wealth platforms, both north and south.
In the U S and Canada and are obviously of retail bank with over $100 billion of client growth that really allowed us to earn through very significant interest rate headwinds, we talked about of 400 million night impact to the interest rates on our U S and Canadian businesses, and we're very happy to of earn through that and that positions us very well.
As those as Rod references those headwinds start to diminish through Q2 into Q3 that strong momentum that we have is going to be even further accelerated by a return of the credit card business return of the commercial businesses as we reopen the rest of the economy in the second half of the year. So we feel very good about where we are R. R.
<unk> of 18, 6% standout so we're earning a premium on on the capital we're investing in the business because of the cross selling because we got multi product relationships and stands out in our fee based revenue while the NII was challenged you saw very strong fee based growth, which I think there's a proof point of the cross sell off of our.
She'd activities. So all of that we feel very good we're very proud of per quarter. Thank you for your questions and we'll see with them in three months.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
The conference has now ended the please disconnect your lines at this time and we thank you for your participation.