Q1 2021 Royal Bank of Canada Earnings Call
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Operator.
Good morning, all participants please stand by your conference is ready to begin.
Good morning, ladies and gentlemen, and welcome to the Rbc's conference call for the first quarter 2021 financial results.
Please be advised that this call is being recorded.
And I liked the trend of meaning of retail Nadine on head of investors Relations. Please go ahead and missed 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. That's your question.
Neil Mclaughlin group head personal and commercial banking, Doug Guzman group head wealth management insurance and I and yeah.
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 also remind listeners that the bank and says its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.
To give everyone a chance to ask the question. We ask that you limit your questions and then re queue with that.
I'll turn it over to Dave.
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.
It's also a testament to our diversified business model.
And revenue streams.
Benefited from higher fee based revenue and our capital markets and the wealth management businesses and strong client driven volume growth and 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.
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 and 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 and 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 businesses, while also paying $1 $5 billion and dividends.
Our CET one ratio provides a significant 19 billion surplus over the current osophy minimum.
Furthermore, our ACL and loans is over 2 billion higher than pre pandemic levels and Q1, 'twenty and '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 the year integral and until the global plan Deneke.
We are 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 of sustained economic recovery.
Recent data shows CEO confidence of corporate America has reached a 17 year high and we are.
Also seen the benefits of increasing public private partnerships and the U S. As companies are engaging with governments and distribute vaccines effectively and a timely manner.
Canadian housing activity also remains elevated of rising 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 and path of vaccination programs and uncertain and and even so far particularly in Canada, we expect an accelerated pace of vaccination distribution over the coming months and drive a strong economic recovery through 'twenty and 'twenty one.
<unk> and GDP growth of 4% to 5% across North America.
Against this macro backdrop, we will continue our unwavering support for our clients as global economies 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 and 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 and quarterly net income driven by very strong performance and global markets underpinned by robust equity trading and continued strength and credit trading.
Corporate investment banking surpass 1 billion and revenue for us.
The third straight quarter benefiting from a constructive environment for new issuance and mergers and acquisitions.
And we continue to be awarded significant mandates by some of the largest global clients <unk>.
<unk>, 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.
While expanded central bank balance sheets government support and reduced spending of added significant liquidity to the system and.
And increased the savings rate of Canadians. We have also seen market share gains of over 50 basis points and personal core deposits over the last two years, which is the reflection of our technology investments client support and distribution strength.
We have similarly added 100 basis points of market share and 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 fulfillment to retention.
Which reached an all time high of 94% this quarter.
We've also seen elevated activity and 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 as 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 owned fund companies.
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>, and Canadian wealth management across the $450 billion for the first time.
The net sales and industry, leading recruiting efforts added to our number one high net worth and ultra high net worth market share and Canada, which is built on the trust of our clients.
Similarly U S wealth management, the seventh largest wealth advisory firm and the U S surpassed 460 billion U S dollars and EUA for the first time benefiting from our proven ability to bring both and 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 continued to execute on the organic plus growth strategy.
Our expanded jumbo mortgage platform is yielding results growing over 15% year over year.
Yeah.
Our market share gains across our businesses are not only a reflection of our scale.
But also our continued investments and 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 <unk>, our active mobile user base increased 12% year over year over $5 million this quarter as mobile sessions crossed 100 million for the first time.
New clients to RBC can now complete a full end to end account opened and minutes on the RBC mobile app.
And now over 50% of personal deposit accounts are opened through a mobile browser.
Since the launch of Nuomi and 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 have also made significant investments beyond digital functionalities and into digital businesses.
The advisor of our digital platform for clients to activate their personalized financial plans was launched in 2017, and now has $2 3 million clients online and.
And the AUM at Investees, a robo advisor has continued to trend higher.
Our success and commercial banking has also been underpinned by multi year investments and cash management solutions and technology, where we expect insight edge fueled by our data analytic capabilities to be a key differentiator.
Eight and our AI based electronic trading platform and capital markets continued to gain traction during these volatile times.
The number of shares of notional volumes traded and the this plot for them are up over 45% and 75% year over year, respectively.
Investments and sales power of also being a key driver and the growth of our personal and commercial franchises, whether the mortgage specialists and advisors and commercial account managers benefiting from the investments that we've made and technology.
And similarly, we've made investments and the bench strength of managing directors and capital markets, which helped us deepen client relationships and win key mandates.
Despite the significant increase in capital ratios, we delivered a premium 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 and 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 and rates below 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 and Rexall recently announced the new strategic partnership that will allow our clients to earn and receive even more value and savings, while accessing rexall health and wellness resources.
And as we see increased online shopping 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.
<unk> and our Treasury management platform, and our hiring and 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% of Canadian wealth management clients now how 'bout 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 19% of our Canadian banking clients have all four transaction account all four of transaction accounts credit cards investments and borrowing products with RBC.
We're also looking to increase the collaboration between our capital markets and wealth management franchises to provide a broader set of capabilities to 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.
Going forward the city National is looking to make a focused push into the mid market lending in the U S.
Not only am I proud of what we delivered but also of how we continue to deliver on our purpose of helping clients thrive and communities prosper.
And wealth management alongside of existing RBC vision ESG funds the.
RBC Ishares brand as launched new ESG focused Etfs.
And RBC capital markets is playing a leading role in helping clients meet their goals and objectives, serving as exclusive financial advisor to both Eni S. P. A and to green coat U K wind and acquisitions of offshore wind farms and demonstration of our growing role and 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 and energy bar and the North American market.
Also I'm proud to share RBC has received this year's global Catalyst Award and honor 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 and sustainable growth and strong returns for shareholders.
I'll now turn it over to Rod.
Thanks, Dave and 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.
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 <unk> growth was underpinned by four key drivers first strong client driven volume growth and 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 benefit from net credit upgrades. This partially offsets the accumulative 13 billion dollar impact from net credit downgrades over the last three quarters of 2020 of.
Our CET one ratio was also impacted by a partial reversal of Bos vs. Transitional capital modification, primarily driven by the reduction of the scale of rate from 70% the 50% the.
And the remaining 19 basis points cumulative benefit should reverse over time, given further reductions and 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 and key businesses.
Now moving on to Slide 11, all bank net interest income declined 4% year over year as strong volume growth and Canadian banking and city national were more than 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 and 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 NIM 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 impacted and low yielding short term securities. However city national net interest income increased for the second consecutive quarter, where call. The city national is the more asset sensitive balance sheet with approximately 50%.
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 and the higher loan balances.
Following this benefit in Q2, we expect city National NIM to return back to current levels and the second half of the year.
More importantly, we expect strong volume growth at Canadian banking and city national to 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 and 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 businesses continued to provide a growing revenue stream. Furthermore, we expect upside from our M&A advisory business as the economy strengthens.
In contrast, we continue to see certain fee based revenue streams and 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.
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 6% 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 TFS and Q4 and 19.
We also continued to benefit from reductions in discretionary costs, such as marketing travel stationary and 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 the balanced 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 reserve releases, largely and our retail portfolios.
Loan growth of 6% was largely driven by continued double digit mortgage growth, which was a function of both the strong retention rate as well as new originations, which were up over 40% from last year.
Commercial and credit card growth continues to be constrained by the impact of COVID-19.
Growth and business deposits remained robust at 25 per cent and growth and core personal checking accounts was also very strong up over 30% year over year and.
And RBC direct investing also saw a material increase and client activity by individual investors with average trading volume up nearly 200% 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 client assets with a UA and 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 and 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 and Q1, particularly in the fixed income and bounce 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 the <unk>.
<unk> growth remains exceptionally strong at 36%.
Pacing double digit retail and wholesale loan growth.
We also saw solid growth and U S wealth management with a UA up nearly 50 billion and 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 year from a year ago earnings were up 35 per cent quarter over quarter, partially due to seasonality.
And while funding and liquidity and client deposit revenue declined year over year as they were negatively impacted by the current interest rate environment and elevated enterprise and 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 $1 billion.
Corporate and investment banking reported yet another strong quarter M&A advisory fees generated this quarter for 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 day remains strong this quarter, given the low interest rate and narrow credit spread environment.
Looking further into 'twenty and 'twenty, one we remain actively engaged with our corporate investment banking clients across all regions with respect to 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 and primary activity.
Net trading remains strong as credit trading benefited from tightening spreads and.
Interest rates FX and commodity trading all saw increased client activity and market volatility.
And activity was also strong and equity trading.
Looking ahead, we expect trading activity to moderate over the coming quarters and.
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.
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 and capital 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 the reserves taken during 2020.
Or at least balances of more optimistic economic outlook, driven by the introduction and approval of the vaccines and 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.
And 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 and the oil and gas sector as prices rebounded from the lows, we saw in 'twenty and 'twenty.
We also released $37 million of reserves on performing loans. The following of 38 million and really pretty $8 million release last quarter.
This reflects continuing improvement and our credit outlook for this business.
And wealth management gross impaired loans of $289 million decreased 56 billion from last quarter due to lower new formations at city national and mainly in the consumer discretionary and consumer staples sectors.
Improvements in these same sector has also led to $27 million of recoveries on previously impaired loans.
And Canadian banking gross impaired loans of $1 4 billion was up $95 million, primarily and 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 cards portfolio.
And as expected delinquencies and impairments have begun to 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 and there's many of government support programs are scheduled to conclude this summer.
Additionally, this quarter, we released $63 million of reserves on performing loans and 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.
And particularly there was uncertainty around the speed and timing of and economic recovery. The degree of government support the <unk>.
Size and duration of additional waves of the virus and the availability and the efficacy of the vaccine.
To date bank and 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 and this current environment.
Despite these positive developments concerns around the new versions of the COVID-19, including the efficacy of the vaccine against the Zubair ads and current vaccination delays could negatively impact the timing and pace of the economic recovery.
Over the course of this year and 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 and.
Concurrently we would also expect for allowance for performing loans. The decline is performing loans migrate to impaired.
And as well are performing performing loan allowance could be positively impacted the uncertainties of rone vaccination of Rollouts of beat and the reopening of the economy supports more confident and <unk> and unemployment rates and GDP growth.
So the 0.85 per cent of loans and acceptances are ACO 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 and.
And 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.
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Okay.
The first question is from Ebrahim <unk> from Bank of America Securities. Please go ahead. Your line is now open.
Good morning.
So did and if I heard you correctly, you talked about of me.
And making a push of city national and particularly of 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 and our recently so just talk to US if you don't mind around both the middle market push that you're making what it entails and how we from the outside should measure.
And the success of that strategy.
Okay. Thanks for that question those are.
Two important parts of our growth strategy and city National and we're very excited how we've grown the business over the last five years and as we look to the next phase of growth I would say for the first point is really important that of balancing the growth between private banking jumbo mortgages and the commercial bank is a big priority of ours and we've made significant progress.
On the mortgage strategy.
15% growth year over year, we originated $5 billion of more jumbo mortgages last year and 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 and and to balance the balance sheet off between private banking and commercial banking and we're doing a good job cross selling the.
<unk> customers into and to core banking so the strategy as we've talked about for the last five years is really starting to play out and accelerate and we built the strong back office to create a great client experience and that we're executing the way I'd hoped we'd execute.
That leaves us and the ability 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.
And clients that will bring.
Bring in through the mid market strategy, we're thinking and a range of between $500 million and $2 billion and revenue was the target market to give some guidance there corporates and we've also just reinvested in our Treasury management capabilities and 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 or ways that we're looking to drive within our credit risk appetite. So this is certainly within our credit risk appetite and therefore, the ability to balance off private banking and and mid market allows us to grow and accelerate growth.
At our target of Rovs.
Got it and just guide to that day is M&A of distraction or of.
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 and the U S and the more M&A that happens with our competitors and they are distracted from their clients of the more or kind of.
Opportunity, we feel we've had so we've been growing area and a growing our private banking sales force and commercial banking sales force anticipating some disruption in the marketplace, but if something fits that accelerates growth along those paradigms.
Commercial and private bank and then we'll 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 from the results I was hoping and she might be able to walk me through the the wealth accumulation plan and 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 what the mechanics are that caused the variability in both revenue and expense lines.
Yeah sure Thanks, John and the purpose of the plan as a part of our compensation model and pay for performance and it allows our employees and our financial advisors to basically put some of their deferred income into the markets and and have it and earned in the market and since that's what their profession is that makes perfect sense and then as the.
A company what we do is we hedge that so.
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 and hedge that we basically buy a basket of securities to offset.
What is what are client or a 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 amortization.
Sizes and 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 and 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 the big increase and 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 and the market is their salaries and compensation as the FERC.
That's great I think I almost got it thanks.
Yeah.
Thank you.
The next question is from Paul Holden Holden and sorry from CIBC. Please go ahead. Your line is now open.
Good morning.
Rajiv.
And you provided some very hopeful commentary and around the NIM outlook and as well as from her.
For perspective on the on the slides.
Yes.
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 that the positive.
The positive benefit you highlighted if there is any.
The treasury opportunities or other opportunities within NIM.
Given that the 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 rates, we don't play out at the 10, and 30 year and of the curve the acceptance and of our own pension plan and and 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, a variable rate mortgage of variable rate commercial product and 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.
And that has hurt us from a mixed standpoint as those balances have come down substantially the spending down all of 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.
<unk> 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.
Basis points about halfway through our fiscal second quarter. So, we'll see a little bit of year over year headwinds this year. This.
This quarter, but starting in Q3 of those headwinds are largely going to be behind us and we're going to 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.
Alright, 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.
And 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 so that will be of a significant positive for us as we continue to grow that market share got it got it the makes sense.
Thank you.
Thank you then the.
Next question is from many Grumman from Scotiabank. Please go ahead. Your line is now open.
Hi, good morning, it's and.
Another quarter of outsized growth and 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 and the Canadian banking business.
And 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 there's higher oes on on the on mortgages.
Our relationship of our strategy is to is the one the entire relationship of the customer and the mortgage plays a huge part of that is the one of the most profitable products.
So we can anchor with the clients so no.
No we still feel very strongly about the strategy and where the.
So really I think and encouraged by market share gains and just the volume we're able to pick up.
In the last three quarters.
And just to follow up on that at what point when you look out and your forecast when do you see the business mix balancing out a little more and more quarter when and 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 as we expect the as Dave mentioned and still see strong growth throughout the rest of the year of high single digits.
Immigration was was dampened and we expect to see that come back in Q4 and provide some more demand in terms of other and other parts of the business and your credit card business Rod touched on in terms of the NIM impact and you were down three.
And $3 billion and balances there so that's providing some real headwinds not only and our NIM, but just in terms of revenue.
Credit card spending will also we expect to 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 and to tap into those revolvers. So I think as the economy opens up entrepreneurs getting confidence you'll start to see a <unk>.
<unk> lending and start to come back hopefully in the back part of the year.
Thanks for.
Okay.
Thank you.
The next question is from Gabrielle day, Shane from the National Bank Financial. Please go ahead. Your line is now open.
Good morning.
Again from a sticking with Neil of just looking at the your deposit growth and Canadian Banking's been phenomenal.
I'm, just wondering about the $70 billion or so.
And deposits over the past year, how should we look at the retail commercial and terms of inhibiting your loan growth meaning it.
It could push back consumer borrowing of few years, because there's just kind of tap into there.
Savings before the start borrowing again and I'm talking about everything excluding mortgages, obviously, because that's growing and.
And if you can 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 of when the consumer side was somewhat 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 and travel is our biggest category and we're just not seeing the consumer spending there so.
Some clients and 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 and full and we have seen of of decrease in utilization of the.
Retail credit lines as well so so they are paying down debt.
In terms of mortgage to your point that hasn't dampened that at all and I think this will be it will release over time, I think is probably the outlook and in terms of the trajectory.
Of that coming back tied the liquidity I think it's going to be tied to the economic recovery.
And does it change your outlook I think last quarter, you said the second half you'll have positive revenue growth and Canadian banking or something along those lines could.
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.
Some of the consumer lending portfolio.
Yeah, I mean, the the.
And there's really 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 and indicator from the commercial book, we were down over $1 billion of about 30% in terms of floor plans and finance. So is that auto business starts to come back you'll see.
The that.
The horse portion of consumer lending Spike 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.
Okay.
Thank you for it.
Next question is from sort of high Mohan heavy from BMO. Please go ahead. Your line is now open.
Yes, Thank you and.
Maybe a question for both David and Graham.
If the back in December I sort of your tone was a lot more cautious.
Just around the outlook and the operating environment in terms of life and it is a two day.
And obviously with the I don't remember I think and I don't know if Graham and they have it off the top of the shall I don't remember the last time and total bank P sales would've been.
You know low single digits from mid single digits, what has changed and our claim and what should we be expect I understand it's incredibly difficult environments to to the to prepare for but.
What caught you off guard or what was the pleasant surprise and.
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 and why or certainly becoming more confident and the trajectory of that we're seeing the first and foremost of my points around the vaccines. The effectiveness of the number of vaccines of plans coming together for the <unk>.
The Aggress, Europe's making particularly the U K of core market for us the progress at the United States is making and 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 growing and competence and the trajectory of of the <unk>.
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 and so I think that's certainly it's no shock there, it's just and evolution of the process that we're going through and 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 increase.
Increased credit card spend.
And the fall as Neil referenced even that surplus cash and 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.
And the variance in and Covid right now so I think that's leading us to the feel very good about 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 other view on risk from that perspective sure simply of the few comments.
The you know what's different.
Now versus Q4, well I would say by far and away of the most notable event as and 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 of your you know I think one of the biggest issues that we were facing in 'twenty and 'twenty was just the uncertainty around the timelines for this pandemic.
And and that was the huge factor in it and so with the introduction of vaccines and Q4. That's certainly is the easy huge point of optimism now the flip side of that is we're obviously seeing challenges and getting vaccines rolled out we're seeing variance come into play and so that's still does leave a significant level of uncertainty.
And and caution and play with us but.
But that is really I would say the biggest point of that kind of toggles of this quarter last quarter versus this quarter and.
That's the Hell that translates to the provisioning I mean, you quoted the total bank PCR I would really kind of.
Dissect that into the two components you know, what we're seeing and stage three and then kind of the dynamics of of the first nine and how we treat performing loan loss allowances, So certainly and stage III 13 basis points of the very low number I think that would.
Certainly be it could cut of the bottom end of our historic range and that's.
Is it really a byproduct of I would say two significant things, we're certainly seeing you know the.
Benefit and the effects of the deferral programs that we put in place as well as certainly the the positive implications of the support programs that were provided by the governments across the board.
Hum.
And as deferrals come to and and we're starting to see those delinquencies pick back up and so we do expect the stage three impairments and and delinquencies the trend positive or trend upwards over the remainder of 2021 government supported of the big part of this though and and you know right now as it stands government support is expected to conclude largely this summer.
And that really is what will kind of influence our expectations going forward is to the degree that that's extended or it's worked into new forms of support that will really drive kind of the expectations and the implications for our credit performance and 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 and as I said. So we 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 2021 as the reference.
But still some degree of caution on that at this point of uncertainty 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.
This quarters, because that's that ACL to total 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 of.
Our last time at this level of Q1 of 2005 at 12 basis points.
Thank you.
Thank you.
The next question is from Mario Mendonca from the T. D Securities. Please go ahead. Your line is now open.
Good morning, the Graham and I, just I wanted to put a maybe a slightly finer point of what we just went through.
And we look at credit cards as a proxy for the Canadian consumer credit card loss rates were.
150, 160 basis points of this call this quarter about half of what we saw.
Before the pandemic even played out.
And when you think about credit card losses and how they.
The 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 late and maybe the end of the government support, causing those loss rates to go through and 300 basis points, and then migrate back down to normal or do you think of that as the upper bound that were on <unk>.
And even get through what we were before the pandemic I guess, what I'm trying to get at is has the government support essentially.
Negated that that spike and PCL was that we were all sort of bracing for earlier on in 2020.
Yes, Thanks, Mary I think of some really good question I think this whole debate around the degree to which loan losses have been deferred or mitigated and is it 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 certainly.
<unk> of byproduct of the deferrals and the government support as you've noted.
Putting the governor and support the side for a second.
Credit cards was down for us as a supporter of this quarter, which is different and the other retail products, but that's sort of byproducts 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 pick that up over the coming quarters.
The implications of the government support part or the other and very material part of those right and and so as I indicated earlier, we do expect on the retail side of our delinquencies and impairments across the board to increase throughout.
And throughout 2021 the <unk>.
Level that gets to the degree that that's deferred versus mitigated I think is really dependent on this.
And this bridge at the government's created and whether it's not just robust enough, but whether it really extends and the other 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 the.
The big sort of the uncertainty that's really difficult to forecast at this point and 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 has dropped last quarter increased a little bit this quarter.
What is what are what are the big drivers of that is it simple of saying if loan growth reemerge as and the second half that loans of all sort of crowd out some of this liquidity or is it really being driven by just client demand right now.
And I think it is it's a combination of both I mean, if you look at city National in particular, and and you know.
We don't pool, all of the money because of of.
Different bank requirements and regulations and and the you know the fact that we of legal vehicles and and 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 9 billion.
He and his basically displaced wholesale funding and we've done the same thing and Canadian banking the numbers are 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 or a lower yielding securities down.
And put and replace those with higher earning client asset.
Thank you.
And when we're going to run over and get them to get through the <unk>.
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 and as we begin two of the economies and began to reopen and how much of that I think it was $80 million and discretionary costs are you baking back coming back post pandemic and your expense outlook.
A portion of it some of that is certainly travel which may not return to pre pandemic levels. We will see some of that is marketing, which you know as the economy opens back up as people venture out and 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 and so you get that you can factor of portion of that coming back.
But again, we're going to grow earnings and revenue faster than that.
The expense growth has been our reserve is going to resume.
So then where where what areas are you expecting our expenses to grow in your in your low single digit expense outlook then.
So this is everything outside of variable comp and the stock based comp is that very low single digits. That's basically all other expenses and that includes our continued investment and technology and digital capabilities and we still have to invest and new regulatory requirements invest in people. So I'm not excluding people.
And that very low single digits, and we've continued to add head count.
So that we can continue to grow market share. So we've we've added over 500 people over the last year to respond to the market growth.
The Roz point. This is Dave Neil's added private bankers, Kelly Coffey and the team of added private bankers, writing commercial bankers. So we are growing our capacity to serve clients and expecting the market to surge and client demand for surge yet again and this is on top of the outstanding growth that we've got now so we've been seeding growth and.
Expecting the recovery and.
And it's playing well for us right now.
Thank you.
Thank you.
The next question is from Scott Chan from Canaccord Genuity. Please go ahead. Your line is now open.
Good morning.
Dave in your opening remarks, you talked a lot of belt wealth management and 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 and and kind of looking out over the next two years of.
Is that going to continue.
We've been doing that both and in Canada and the U S is of course strategy. So I'll talk to the U S and maybe Doug can talk to the Canadian process, but certainly I think of the value proposition, we have invested heavily in financial planning technology of <unk>.
Core margin lending capabilities. So the infrastructure that was lacking and 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 culture is a 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 sell and and referrals that we get through our banking partners on both north and south of the border all of that combines two of the up 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 and the U S for for many years and we see an opportunity to really accelerate debt. So we've got plans to the 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 we're pretty excited about that opportunity Doug do you you've been executing this and your team.
Dave Agnew for for 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 put up.
And is really working and I'd add and the U S to Dave's comments, a couple of things one of the shifts to.
The base.
And some cases of discretionary assets and the addition of of credit product because a lot of our advisors to have more to serve for the for their clients, but and Canada. The story, we told the Investor day was and the ability of that exceeds our competitors to invest and and highly skilled and subject matter experts of the center, allowing our advisers to beat.
Some of them much more than investment advisors.
The anchored and goals based discovery and planning, but bringing in real expertise and and insurance and philanthropy.
And trust and estate and giving advisers and frankly more to sell than our competitors have are more to provide clients and our competitors have.
And 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 and advisers to join our platform because we've got interest more more firepower for them just as the client base.
Alright, Thank you very much.
Okay.
Thank you.
The next question is from Mike redesign of Itch from the Credit Suisse Securities. Please go ahead. Your line is now open.
Hi, Good morning, and a quick one for Neil just wanted to go back to the gains that you've been making on the deposit the retail deposit share and Canada and it seems like it's and 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 account.
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 and other areas like we've clearly seen it and the mortgage side, but I havent seen it and 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.
It's competitive.
We've had.
Since Investor day, we put out our goals in terms of the new client acquisition. It's been a real focus we were really pleased with the trajectory of acquiring new consumers and making RBC their home bank.
The pre Covid, obviously, we needed to really kind of shut things down once that hit we have open things back up and 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 and 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 and understand.
What product 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 and we know over what period of time, what investment products barring products card products or mortgage products, they're gonna add and at this point, we continue to invest because those cross sell rates continue to hold Ria.
Really solid and so our conviction around the strategy and the ability to consolidate.
To be the core of bank and earn that extra business.
And 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 I guess, we just don't see the numbers and 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 count boring accounting card and we have the highest cross sell rate both in terms of.
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 and.
That's probably the best way to describe it.
Okay I appreciate the color. Thanks.
Thanks.
Go ahead operator.
Anything out of him.
That does all of the time, we have today for questions I want to like to turn the meeting over back to Dave.
Thank you and 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.
And the U S and Canada and are obviously of retail bank with over $100 billion of client growth of that really allowed us to earn through very significant interest rate headwinds and we've talked about of 400 million night impact to the interest rates on our U S and Canadian businesses, and we're very happy to have earned through that and that positions us very well.
As of 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 and the second half of.
The year. So we feel very good about where we are our ROE of 18, 6% standout. So we're earning a premium on the capital we're investing and the business because of the cross selling because we got multi product relationships and stands out and our fee based revenue while the NII was challenged and you saw very strong fee based growth, which I think there's a per.
<unk> point of the cross sell off of our balance sheet activities. So all of that we feel very good we're very proud of our quarter. Thank you for your questions and we'll see you at and 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.