Q2 2021 Royal Bank of Canada Earnings Call
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Please standby your meeting is about to begin good morning, ladies and gentlemen, welcome to Rbc's conference call for the second quarter 2021 financial results. Please be advised that this call is being recorded I would like to try and meal Virgin of Dean on head of Investor Relations. Please go ahead Ms 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 for your questions Neil Mclaughlin group head personal and commercial banking, Doug Guzman group head wealth management.
Insurance and I N T S and Derek Dubner group head capital markets.
As noted on slide 1 our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties actual results could differ materially I would also remind listeners that the bank assesses 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 questions. We ask that you limit your questions and then re queue with that I'll turn it over to Dave.
Thank you and a day and good morning, everybody. Thank you for joining us.
And our Q2 call.
Today, we reported earnings of $4 billion, driven by strong client activity across our businesses.
Our results reflect market share gains and Canadian banking and wealth management as well as record investment banking and equities performance and capital markets.
Even with heightened client activity, we leveraged our scale.
Past investments and disciplined approach to cost management to drive positive operating leverage free.
Provision pre tax earnings increased 11% year over year despite absorbing.
Approximately $450 million of headwinds.
Related to lower interest rates and a stronger Canadian dollar.
Although uncertainty remains credit and market risk indicators are relatively benign when compared to the start of the pandemic.
Our portfolios have performed exceptionally well through the cycle with very low P. C O unimpaired loans.
And we're confident there are wide range of strategic initiatives will enable us to continue growing our balance sheet well within our current risk appetite.
We remain very well capitalized with a CET 1 ratio of 12, 8%.
In addition next quarter, we expect the implementation of parameter updates net of other items to add 55 to 70 basis points to our capital ratios.
Pushing our CET, 1 ratio well above 13%.
Even with these elevated capital levels, we generated a premium ROE of 19% for the first half of 2020.1.
We will continue to leverage the strength of our balance sheet and recurring internal capital generation to further accelerate organic growth across our businesses.
In addition, when regulatory restrictions are lifted.
We will look to accelerate capital return to our shareholders through a mix of share buybacks and higher dividends.
Given our payout ratio is currently at the bottom and.
Of our 40% to 50% range.
Highlighting our organic value creation, our book value per share grew 8% from last year with tangible book value per share up over 11%.
I will now speak to how we see the macro environment unfolds.
While we were in the early stages of and economic recovery. There is still uncertainty about the risk posed by new variants and stresses and supply chains.
Time horizon for how the recovery will evolve continues to be correlated to the success of the vaccination rollout.
And it remains uncertain when international borders will fully reopen.
Although there is still work to be done.
So open up all parts of the economy, we are encouraged by the progress so far.
And as vaccine distribution gains momentum, we anticipate and acceleration of economic activity alongside easing virus containment measures.
And then fiscal and monetary stimulus remains in place to bridge, the gap and stimulate the recovery.
However, the combination of these actions and supply shortages is increasing the risk of inflation and certain asset classes.
Consequently, there was a higher likelihood of central banks, raising their benchmark interest rates and the second half of 2020.2.
With respect to Canadian housing, we continue to monitor supply demand imbalances across Canada, and we support recent actions taken by regulators to adjust mortgage stress tests and it takes some pressure off the demand side of the equation.
And we encourage policymakers to also address the problems have limited supply, which are exacerbating house price inflation.
As always we manage risk through a cycle and.
And the credit metrics of our most recent mortgage originations remained strong and our.
Consistent with our existing high quality portfolio.
Next I will speak to a number of drivers that position us for strong performance going forward, starting with 2 Canadian banking businesses that are poised to rebound.
And then I will highlight the embedded profit growth and our core deposit and U S wealth management franchises.
And by a number of initiatives, we have to accelerate organic growth.
I'll start by commenting on our credit card and commercial banking businesses.
Which have just proportionately and impacted by suppressed economic activity.
Over the last 12 months total revenue associated with our credit card business was down approximately $400 million year over year.
Largely due to lower net interest income as utilization rates fell 300 basis points.
A stimulant macro backdrop sets the stage for higher yielding card balances and purchase volumes to recover alongside economic activity.
This relationship is 1 that is highly correlated and.
And we are confident that it will hold coming out of the pandemic as.
As a result, we expect that are leading credit card franchise will see total revenue rebound towards pre pandemic levels.
Business lending activity has also been restrained even though we have added $60 billion of business deposits over the last 2 years.
Commercial banking utilization rates on operating lines are fallen below pre pandemic levels. However, we do expect to see commercial activity resume over the coming quarters fueled by client investments.
And inventory and receivable growth and rising utilization rates.
In addition, we have 2 businesses, which are better positioned than most to benefit from rising interest rates, our strong growth and personal core deposits and Canadian banking has increased our sensitivity to higher interest rates and will drive outsized revenue growth and a rising rate environment.
U S. Wealth management is also well positioned to benefit from rising interest rates given the asset sensitive nature of city national bank's balance sheet, combined with nearly $40 billion and sweep deposits.
I will now speak to the second pillar of our future performance.
Our investment and technology goes well beyond just adding digital functionality. These.
These investments have helped create differentiated digital businesses and additional client touch points accelerating cross sell of existing clients and new client acquisition.
We expect to see accelerated client growth through and my adviser Investees inside edge, Nomi, RBC ventures, and 8 and which have been and market for a number of years now.
We made early and continuous investments and our distribution network and client facing talent, including mortgage specialists commercial account managers and investment advisors.
The combination of these investments over a number of years is driving better outcomes for our clients strong volume growth deeper client relationships and increasing scale and profitability.
We are proud to note that RBC is yet again and been ranked number 1 and overall customer satisfaction among the big 5 retail banks by J D power.
So specifically Canadian banking added over $55 billion, and mortgages $45 billion and personal deposits and increased weight by over $50 billion over the last 2 years, leading to market share gains and these anchor products.
Our long term strategy to grow our core deposit business and provide exceptional service and advice is a core driver of our differentiated ability and building deeper relationships.
The result is roughly 65% of our Canadian banking clients up more than just a transaction account with us many of which are also end up getting a credit card and mutual fund or a mortgage.
And our mortgage relationships up higher retention rates for these multi product clients with mortgage profitability up roughly 2 times higher when a client is retained for a second term.
Going forward. We're also excited about the potential of 2 new strategies to further accelerate client acquisition and growth and Canadian banking.
We recently announced the national launch of RBC vantage, our new everyday Canadian banking offering that brings together a comprehensive suite of powerful benefits for RBC clients incentivize and even deeper client relationships.
Our new offering gives clients the ability to use their debit cards to earn RBC rewards save on monthly account fees and earn more rewards and savings when they take advantage of partner offers.
We launched our exclusive multi year strategic partnership with the Royal College of physicians, and Surgeons and Canada to support the unique needs of Kansas Medical specialists.
And Furthermore, 45% of our Canadian high net worth retail client base as our relationship with both Canadian banking and Canadian wealth management, we expect this ratio to increase.
Over time as more of our clients shifts surplus deposits into investment products further accelerating the growth trajectory.
Moving now to wealth management.
We've added to our leading scale by investing and hiring experienced investment advisors and technology investment capabilities and meet our clients' evolving needs.
And this quarter RBC global asset management posted its strongest quarterly long term mutual fund net sales performance ever.
And has increased its assets under management by over $100 billion over the last 2 years.
Furthermore, Canadian wealth management.
And it has increased more than $80 billion over the last 2 years.
We expect to similarly benefit from trends and U S wealth management, where our past investments have included strong advisor recruiting.
This quarter alone we added a further $4 billion of assets under administration by hiring more experienced advisor teams.
This is on top of the U S. Dollar 22 billion added over the prior 8 quarters.
These seasoned advisers are attracted by our client first culture, coupled with our capabilities and resources of a large bank, including and integrated technology platform.
We also expect the strong loan growth and city national to continue as the U S economy opens up leveraging past investments to add private and commercial bankers and expansion to new markets, including our office and Hudson yards, and New York City.
Growth will be further accelerated by the recent launch of city National's, New National Corporate banking Division, which specializes in meeting the complex needs of larger commercial and mid size.
Companies across the United States.
As you've seen and the last 5 quarters, we have benefited from the strong earnings provided by our capital markets business, which has delivered consecutive quarters of record results.
Over half of RBC capital markets revenue was earned out of the United States and will continue to benefit from and improving economic outlook constructive equity markets and structural trends and technology and ESG mandates that are creating further opportunities and the worlds deepest and most active market.
To better leverage this opportunity, we've continued to strengthen and expand senior coverage teams and key sectors.
We are already seeing strong results with a solid pipeline of mergers and acquisitions and advisory and equity underwriting revenues.
We have also reorganized our global markets unit and 2 newly created cross platform groups, including the sales and relationship management group to further strengthen our client centric approach.
And the digital solutions and clients insights group.
And we'll work to further scale RBC data science artificial intelligence and digital expertise across product lines.
Some up and we have strong momentum across our core franchises and we will continue to focus on providing holistic solutions to grow and deepen client relationships with a goal of delivering long term sustainable value.
While we will continue to invest and new strategies, we remain committed to running our bank efficiently and emphasis on driving productivity.
We're also committed to delivering on our purpose of helping clients thrive and.
And communities Prosper.
This includes our commitment to play and active and accelerated role and addressing climate change supporting and financing our clients efforts and the transition to net zero central to our strategy.
I'll now turn it over to Roger.
Thanks, Dave and good morning, everyone. Starting on slide 9 we reported quarterly earnings per share of $2.76 up from $1 per share last year.
Pre provision pretax earnings of $5.1 billion were up 11% year over year, despite significant headwinds from lower interest rates and a stronger Canadian dollar.
Moving to slide 10, our CET 1 ratio of 12, 8% was up 30 basis points from last quarter.
And a strong quarterly return on equity of over 19% go record internal capital generation of 43 basis points, even after paying out 1 and a half a billion dollars and dividends to our common shareholders.
This was partly offset by our EBITDA growth largely due to robust volume growth and Canadian banking and city national and higher trading activities and capital markets.
I'll now spend some time discussing the outlook for our CET 1 ratio heading into the back half of 2021.
We expect the implementation of model parameter updates to increase our CET 1 ratio by approximately 70 to 80 basis points next quarter.
This benefit is expected to be modestly offset by an increase and S. Far multipliers effective next quarter, which is estimated to decrease our CET 1 ratio by approximately 10 to 15 basis points.
Also we have seen net credit upgrades of approximately $3 billion and the first half of 2021 only.
Only partially offsetting accumulative 13 billion dollar impact from net credit downgrades between Q2 and Q4 last year.
For the second half of this year net credit upgrades could continue at the same pace as in the first half contingent on the economic recovery.
And we expect to continue generating 15 to 20 basis points of capital per quarter net of dividends and our DDA growth.
Now moving on to Slide 11, net interest income was down year over year, largely due to the impact of lower interest rates, including lower repo and secured financing revenue and capital markets.
More importantly, all bank net interest income continued its strong recovery after bottoming out and Q3 of last year, driven by strong volume growth and Canadian banking and city National and we expect core net interest income to continue to grow in 2022.
Moving to segment level performance Canadian banking NIM increased 1 basis point quarter over quarter, but was down 1 basis point, excluding the higher than average mortgage prepayment revenue.
While lower interest rates and credit card balances lowered Canadian banking, NIM 15 basis points year over year higher card payment rates have been positive for credit quality looking forward, we expect strong Canadian banking volume growth to drive higher net interest income even as NIM modestly contracts over the back half of 2021.
And partly due to a continued shift in asset mix.
City National NIM was up 4 basis points relative to last quarter with the paycheck protection program loans contributing most of the increase net.
Net interest income and city National was up 4% year over year, driven by continued strong volume growth and.
And we expect this trend to continue going forward, even if city National's NIM continues to narrow over the next 2 quarters, partly driven by a continued build in excess deposits.
City Nationals average loan to deposit ratio of 75% is decrease from pre pandemic levels of 84% in Q1.2020.
Turning to slide 12, while we don't expect short term policy rates to increase and the near term we have strong leverage to rising interest rates as have our deposits are zero, although rate core deposits and.
In addition, the economic recovery is expected to see further growth and higher yielding asset classes as credit cards and commercial loan utilization rates begin to tick higher and Canadian banking.
City National has a more asset sensitive balance sheet with roughly 50% of its loans and floating rate commercial loans looking forward and 25 basis point increase in interest rates across the curve and a stable deposit beta could generate an additional $135 million and Canadian banking net interest income over a 12 month period.
And a 25 basis point increase and U S interest rates could generate a further U S 90 million dollar of revenue and U S wealth management, including the benefits from our sweep deposits.
Turning to slide 13, our results this quarter continue to highlight the benefits of a diversified business model is market related revenue across our large largest segments benefited from elevated client activity and constructive markets. This continued to offset pandemic related headwinds and our personal and commercial banking businesses.
Strong capital markets activity boosted underwriting and advisory revenue, resulting in higher credit fees and continued growth and both <unk> and AUM helped drive higher mutual fund and investment management fees and wealth management and Canadian Bank.
Now on slide 14, noninterest expenses were up over 7% year over year, largely driven by higher compensation commensurate with strong results and wealth management and capital markets, along with market related movements and our U S wealth accumulation plan our results and the current quarter also included a favorable sales tax adjustment of approximately.
And <unk> 40 million across all businesses.
Excluding variable and stock based compensation expenses were down 4% from last year and further adjusting for FX, our controllable costs were largely flat year over year and this is after already lowering the growth rate over the last 2 years.
And as economies reopen and we remain focused on controlling key discretionary expenses like travel and prioritizing investments that drive find value. We will also continue to execute our zero based budgeting program. This has resulted in a number of cost and any initiatives being implemented across RBC.
Now moving on to our business segment performance beginning on slide 15, personal and commercial banking reported earnings of over $1.9 billion, largely driven by Canadian banking and Canadian banking pre provision pre tax earnings were up 8% from last year and.
Indian banking revenue growth was up 4% year over year, driven by double digit growth and mortgages personal and business deposits higher mutual fund distribution fees and continued strength and.
And direct investing volumes card service revenue was also up due to higher purchase volumes as well as lower cost related to our rewards program.
Canadian banks banking expenses were well controlled and 1% from last year, helping to drive operating leverage of 4.7% historically, we have targeted 1% to 2% operating leverage and Canadian banking through the cycle and we would expect to be above the top end of that range over the next few quarters.
Turning to slide 16 wealth management reported quarterly earnings of $691 million up 63% from last year Canadian wealth management revenue was up 15% year over year with a UA up 22% or nearly $90 billion.
Global asset management revenue increased 26% year over year with au went up 15% or over $70 billion RBC Gam net sales were nearly $15 billion and the quarter with continued strength and institutional mandates including Bluebay.
And long term retail sales of over $7 billion remained healthy and a quarter, where the Canadian mutual fund industry recorded a strong RRSP season.
The majority of our retail net sales flow into bounce mandates with lower net sales into fixed income strategies, partly related to a pullback and north American bond returns.
U S wealth management growth was also strong up over 30% and U S dollars turning to insurance on slide 17, net income of $187 million increased 4% from a year ago, mainly due to lower travel and disability claims costs and the favorable impact of actuarial adjustments total.
Slide 18, Investor and Treasury services net income of $120.120 million decreased 47% from a year ago funding and liquidity and asset services revenue declined year over year as the prior year reflected a more constructive environment as well as higher gains from the disposition of securities lower interest rates.
And you did negatively impact client deposit revenue.
Turning to slide 19 capital markets reported another record quarter with earnings of over $1 billion corporate investment banking reported record revenue of $1.2 billion, reflecting strong deal flow and elevated client activity M&A advisory fees were the third highest on record and improving macroeconomic climate is.
Increased buying confidence levels.
And boardrooms robust ECM revenue was underpinned by strong IPO activity and constructive equity markets looking forward, we're seeing increased client activity and momentum and our M&A advisory and ECM businesses.
Global markets had a very strong quarter with revenue of $1.6 billion. We saw record equities results this quarter benefiting from our participation and strong primary activity and derivatives flow trading results were down from last year with lower volatility impacting rates and FX tradings. This was.
Shelley offset by increased client activity and client trading which benefited from constructive markets.
Lower spreads hurt the repo and secured financing business, which benefited from elevated client funding demand and rate cuts last year.
While primary issuance and a positive implications for secondary activity, we do expect both debt underwriting and FIC trading results to moderate from strong results over the last year to close with strong momentum across our core franchises and with a robust capital position disciplined expense management and leverage the high.
The rates, we are well positioned to continue delivering long term growth and with that I'll turn it over to Graham. Thank.
Thank you Rod and good morning, everyone.
Starting on slide 21 allowance for credit losses on loans of $5.5 billion was down $389 million compared to last quarter.
This reflects PCL on impaired loans of 177 million or 11 basis points, which was down 2 basis points from last quarter is at its lowest level and over 15 years.
It also reflects a $260 million release of reserves on performing loans, primarily in Canadian banking and capital markets.
From a macroeconomic forecast shows continued economic recovery as government support remains in place and vaccine distribution accelerated and our key markets this quarter.
This is further supported by the significant level of savings Canadian households, and accumulated since the onset of the pandemic and it.
And estimated 212 billion these savings should help support a strong economic recovery.
While the release of provisions this quarter was more than double or at least from Q1, our ECL remains above pre pandemic levels at zero with 79% of low include acceptances.
We continue to take a prudent posture allowance given the uncertainties associated with new COVID-19 variance.
And you'd lockdown measures and a number of regions and a significant government support and a suppressed default.
And I'll speak to the credit performance of our key businesses, starting with capital markets.
Compared to last quarter gross impaired loans of $700 million decreased $157 million as we continued to see good resolution a previously impaired accounts, largely and the oil and gas sector, which benefited from a more supportive oil price environment.
PCL on impaired loans with a net recovery of 3.9 million this quarter, reflecting recoveries on loans and the oil and gas and other services sectors.
Partially offset by an impairment on our commercial real estate loan and the retail space.
We also released reserves on performing loans and capital markets for the third consecutive quarter.
This quarter is $87 million release reflects continuing improvement and macroeconomic forecast, particularly for Canadian and U S GDP global equity prices and oil prices.
And wealth management gross impaired loans of $338 million increased 49 million from last quarter due to higher new formations at city national from borrowers and the consumer discretionary and information technology sectors.
Few smaller borrowers and the commercial real estate sector.
Despite these noted impairments PCL on loans was relatively benign and this quarter and overall credit quality of the portfolio remains strong.
And Canadian banking gross impaired loans of $1.4 billion with stable from last quarter, and a $54 million increase in jail and our retail portfolios was offset by a $55 million decrease and G I L and our commercial portfolios.
PCL on impaired loans of 195 billion was down 22 million from last quarter with decreases across all portfolios with the exception of our cards portfolio.
Higher write offs and cards are attributed to the end of our deferral programs and Q4.2020 with card balances written off after 180 days past due.
I would note that delinquency rates for cards have decreased relative to last quarter.
Impact of the client deferral programs is largely migrated through to conclusion.
Looking at our program our portfolio more broadly delinquency rates for all products and regions across Canadian banking are down compared to last quarter and remain at or below historical levels as government support programs remain in place benefiting many of our clients both directly and indirectly.
This quarter, we also released $155 million of reserves on performing loans and Canadian banking.
The release came primarily from our cards portfolio and our commercial portfolio, reflecting improvements in both macroeconomic forecasts, including GDP and short term unemployment rates and our overall credit outlook.
Turning to the Canadian residential mortgage portfolio and slide 25.
As Dave touched on we have been growing our residential mortgage exposure and market share since the start of the pandemic, while maintaining a prudent and consistent approach to risk management.
Origination metrics on loan to value debt service and FICO scores have remained largely unchanged compared to pre pandemic levels were low.
And so stressed the portfolio for a higher interest rate environment, which demonstrate that the vast majority of our clients have the capacity to absorb a significant increase in interest rates.
That said, we have taken a conservative approach to our reserves and performing residential mortgages, which are stable compared to last quarter as improvements to our host price forecasts were offset by an increase and the leading toward downside through given the rapid growth and house prices since the start of the pandemic.
To conclude low credit trends improved this quarter, we continued to maintain a cautious approach to reserve releases and to a larger percentage of the population and as vaccinated.
And he is prove effective against new COVID-19 variance and the economic recovery takes hold.
At the onset of the pandemic I noted that the prime nature of our retail portfolio and the diversity of our wholesale portfolio.
Serve as strong mitigates against the economic impact of COVID-19, and this remains true today and our <unk>.
Retail portfolio FICO scores and Ltvs remained strong and our clients have increased savings and lower utilization rates on cards and personal lending products throughout the pandemic and are.
Wholesale portfolio diversification across sectors has served us well.
This 4.5% of total loans acceptances to sectors, most vulnerable to COVID-19.
Additionally, we are seeing positive trends and many of our key credit indicators.
Watch list or declining upgrades or downgrades and delinquency trends are stable.
As well, both our retail and wholesale portfolios are well diversified geographically and just.
Help mitigate the risk of and uneven global economic recovery and has allowed us to benefit from the reopening of the economies and certain regions.
With many government programs scheduled to conclude and before you do expect delinquencies and impairments to increase from Q4 and into the first half of 'twenty 'twenty 2 and.
And where we don't expect them to be as acute as we initially expected at the onset of the pandemic.
Italy, we expect to be able to draw down and the allowance and performing loans. We built in 2020 is that our total PCL across all theaters will remain below long term averages.
With that operator, let's open the lines for Q&A.
Thank you, we'll now take questions from the telephone lines. If you have a question and using a speaker phone. Please and what you had said before making your selection. If you have a question. Please press star 1 on your devices keypad to cancel the question. Please press Star 2 please press star 1 at this time, if you have a question there'll be a brief pause.
Discipline to register Thank you for your patience.
And the first question is from Ebrahim <unk> from Bank of America Securities.
Please go ahead.
Well I guess my question was tied to capital to total Dave.
And your prepared remarks, you talked about the P. L can you share being at the low and as far as the dividend is concerned.
Understanding that there's some benefit from a lower PCL was higher capital markets.
Talk to US 1 in terms of in terms of the dividend payout as we look into next year.
Oh, your appetite for the dividend payout being at the higher and maybe 50% or even exceeding that and secondly, I think and 1 question given the significant capital build outlook that you outlined can.
And we see by.
Backs being significantly stronger than what we are used to from the Canadian bank. So from an oil over the last 5 to 10 years.
Yeah. Thank you for that question, we were expecting that question. So thanks.
Certainly as we look at how we best return capital to shareholders given the strong capital we have more than enough organic capital creation overtime to drive our R. W. A growth, we see great opportunities for organic growth and a platform. That's first and foremost our objectives and we always talk about but even with that we do obviously.
With our pro forma <unk>, 1 well over 13% and Q3, we see and opportunity to grow accelerate growth and return capital to shareholders and accelerated rate. So when it comes to your specific question around low dividend payout ratio, our current philosophy and that won't change and a long term is to link our dividend pay.
Oh, 2 core earnings growth as you referenced and we've let that trail to the lower and given you know and ability to raise dividends.
So first and foremost the signal and in our comments was we view our core earnings to be very strong you heard me articulate a number of tail winds that are already and embedded in our business.
Better credit card performance more active customers, we were down almost I think $4 billion and credit card balances, that's driving that 400 million dollar revenue.
And that they come back and we've got strong embedded profitability and our core deposit book as we've talked about both in Canada and the U S.
All of those provide tailwind on our existing book of business that give us confidence and our core earnings and the ability to move that payout ratio back up to the top end of the range.
So I would say from a strategy of returning earnings to and core earnings to shareholders that remains the same and there's ability for us to you know given you feel the tailwind is our ability to do that with our strong capital ratios. Then you turn to the question of longer term capital return to shareholders and we have a number of tools to do that and yes, we do expect to use access.
<unk> buybacks.
1 of the core tools to return capital to shareholders. We will look at other mechanisms around dividend and return and where we're running a number of scenarios trying to optimize the return to our shareholders taking all factors into consideration. So the answer is yes to both I think it's great to have the luxury to feed accelerated organic growth.
To increase our dividend based on current core earnings and to return and increasingly excess capital to our shareholders.
Got it thank you.
Thank you. The next question is from Gabriel Deschaine National Bank Financial Please go ahead.
A similar question actually and you know more and more so on the organic or they'll be weighted.
Growth because you do have.
Pro forma basis close to $12 billion of excess capital above 11% you got the buybacks, you've got the dividend, but far and limitations. There I'm just wondering how you're thinking about.
Capital consumption via organic growth and that.
And what does accelerate growth look like for you how long it could take to kind of chew through that excess capital, which is great to have but it also suppresses your return ironically during a quarter, where you have and 19%.
Maybe I'll start and then maybe a broad wants to jump in after soil and you know and my comments, obviously, you highlighted a couple of new platforms, particularly the mid market commercial and the United States, where we're looking at largely private companies.
And with revenues between anywhere from kind of $2 billion to $5 billion very attractive companies. We've got a whole team that we've stood up there we've got a leader and rich for photo who has built that business and other large banks and therefore, we feel very confident of our ability so theres new growth trajectories.
Such is that we've got we expect drawdowns as I said and our operating lines, which are quite significant and brothers and the market leader and business financing and our operating lines are at currently low utilization. So again, there's going to be draws on that that are going to consume capital. We've got a fantastic global capital markets business, particularly in a very large and active U S marketplace.
And that's going to need capital for for underwriting and increased lending opportunities that we're seeing and we've got a very active pipeline.
So we've got it.
Core businesses that are are we expect accelerated growth that come from from new clients from existing business and our balance sheet that will start to consume we think little more RW way than we've previously.
Out there. So I think we feel very good about our growth opportunities and they're getting 2 to manage that well within our current risk appetite, so, but having said that to your point, that's not going to consume the excess capital on our balance sheet and therefore, our core acquisition strategy remains focused and unchanged we're looking to.
To create shareholder value and growth through and acquisition strategy, we remain highly focused and very picky about how we would deploy any capital into and acquisition.
Therefore, there is you know still remains a significant opportunity for us to do all of that and return capital to shareholders. So it's a it's a great position.
To be and but those are businesses that we think we'll start accelerating that are going to consume more RW ey and position us to outperform on growth across our Canadian banking U S wealth management commercial banking and global capital markets operations. All are seeing heightened client activity and all have very strong networks, we've invested and <unk>.
Spanning capability to capture that growth, we're very excited about the opportunities going forward.
Thank you.
Thank you. The next question is from many grauman from Scotiabank. Please go ahead.
Hi, Good morning, just 1 clarification before my real question, how much of the $40 million sales tax adjustment and Brian called out was in Canadian banking.
I think you know this goes across our Canadian businesses, we didn't disclose that but you know that.
Canadian banking business is a good share of our overall.
Businesses and Canada all of our businesses are obviously.
1 and number 2 market share and Canada. So you can roughly allocate that based on the size of the Canadian banking business, we're not disclosing that but it was a it was a fair amount, but not a substantial amount.
Thanks for that Roger and and then just wondering we've heard from a few peers they've talked about kind of post pandemic step function up in terms of the run rate of their capital markets business I'm wondering if from your perspective.
How you view your capital markets business, we're coming out of the pandemic.
And your commentary you talked about maybe a little bit of a moderation in terms of some of the trading revenue.
<unk> of markets.
Is there a step function and your capital markets business do you feel like you've met had headway through this volatile period.
Sure, It's Derek Neltner I'll I'll take that question. Thank you for it.
Yeah right.
Come at it 2 ways I think if we look at the pipeline overall right now further to Rod and Dave's comments, we continue to see a very strong backlog and pipeline and our investment banking platform really driven by M&A as well as ancillary financing some of the flow financing has moderated a little bit from the peaks, but we continue to see very good.
Levels of activity and our corporate banking business, while as you would've seen from prior quarter results, our loan Utilizations and corporate banking came down significantly following the peak post pandemic last year, we have seen that stabilized and we're seeing a lot of good incremental financing opportunities to support our corporate clients come up on the back.
And of M&A and organic growth initiatives that our clients are pursuing.
In the markets business, we've obviously had a very robust backdrop for the last 12 months we.
We do expect that will normalize from the peaks.
But continuing to see a very good both equity and fixed income market. We do expect that while it will normalize it will normalize above pre pandemic levels.
I think the second item I would highlight and further to some of Dave's comments is notwithstanding some normalization and the market we.
And we feel we've got a very sound strategy to continue our growth and capital markets. We've made some important investments and the talent side. We've done some reorganization of our business that Dave alluded to in his comments and so we are we do think that through a number of our initiatives and investments we are well positioned to continue to grow our client businesses.
Increase our market share and that should move our business to a level above where it was pre pandemic.
Thanks, Derek and want to leave you out.
Yeah.
Thank you Dana.
Next question is from Doug Young from day, Sheldon and capital markets. Please go ahead.
Hi, Good morning, just my questions are focused on are sitting.
City National Bank, and and Brian I think I missed and maybe you didn't give it but maybe I missed what impact would be from a 25 basis point increase in rates just on that business and I was hoping you could kind of break that business out a little bit more I don't think I can get to what pretax pre earnings wise this quarter, but if you could elaborate on what that was and how the growth.
Or if there was growth year over year, and then if we kind of strip out the noise from P. C. I was like what would be the outlook on a pretax pre provision basis for this business over the coming years.
Sure. Thanks for that Doug and you know we.
And we did we disclosed the impact across the 2 businesses and it's.
Which I think I said was what $85 million U S and it's roughly half and half if you will between the.
The private client business and the city national business.
And given the sweep balances there and of course, the city national would be more beneficial if long rates also rise given the loan book and.
And that that half of the book is variable, but half. The book, there's also a longer term fix including some growing mortgage book, whereas the sweet businesses not in terms of the you know the pretax pre.
Pre provision for that business, you're looking at roughly.
You know 200 million U S. Typically around there on a standalone basis. That's if you look at their call reports, obviously, we have some purchase accounting and other stuff, which most of you adjusted out anyway.
So that is poised to grow we have been we have been hampered by lower interest rates our margins have come way down like we've continued to invest and that business. We've taken the rate of expense growth down, but we're still investing and that business and still growing the expense base, but whereas we had it probably the first 3 and a half years after the acquisition.
We had very positive operating leverage, but we would crowd and expenses mid teens now we're growing expenses and the single digits and we and the revenue growth was slowing because of interest rates, but now we're basically ready for growth, we're growing deposits and loans double digits ROE and the mortgage book, we're still grow and commercial loans and that should again expand as the U S economy.
It goes up.
So we should see higher earnings and we kind of hit the high point in Q3 of 19, if you will but we should see growth throughout 2022, and a net 2023.
Great. Thank you.
Thank you and next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning, maybe going back to Derek on capital markets and kind of say the U S is roughly a 5% hit for a 50% of the revenue and and the other half was non U S. And maybe you can talk about some of the themes that you talked about you know with an IV and and and global markets, if theres any differences and.
You know because you are a global markets platform is there any revenue synergies that are that maybe you can kind of speak to perhaps had arisen from the from the pandemic.
Sure a couple of questions.
Questions and then I'll try to address and so from a geographic perspective, as Dave mentioned with over half of our revenue today would be in the U S. We do also have a very strong platform in Europe, and obviously the strength of our domestic part for me and Canada.
We're very happy with our geographic footprint, we see very good growth opportunities and the U S and it continues to be the primary focus, but we will invest and the in the global platform, where we see good opportunities, but clearly the U S is where we see the most attractive opportunity at this point in time.
You know between our corporate and investment banking and global markets in terms of differences, we see in terms of the outlook.
You know as I as I mentioned right now the pipeline is very robust on the investment banking side. We are optimistic that will continue for some time given the confidence that we've seen returned to corporate clients as the economy has reemerged, we do see a little bit more normalization in the markets business, you saw that quarter over quarter, and we expect that that will.
We will continue so a little more strength, maybe on the corporate investment banking side with a little more moderation and the market side of the business.
I think finally in terms of your comment on synergies. This is an area, where we've continued to invest and grow our business. We have really been focused on driving more synergies both across geographies and across our platform all.
All of these businesses are very interrelated.
Our investment banking activities clearly supported by the loan book as we see primary issuance that drive secondary trading activity and and that can then trigger.
Cross sell opportunities across our other businesses. So we feel we're doing a good job capitalizing on those synergies, but we continue to believe there is more we can do there.
Undertaken some reorganization of the business to allow us to better capture that and we feel good about the opportunity ahead to do so.
Alright, Thank you very much.
Thank you. The next question is from Lamar Prasad from <unk> Securities. Please go ahead.
Thanks, I was just going to flip back and domestic mortgages, so domestic mortgage growth seemed to slow a bit sequentially relative to what we've seen and some peers.
And like what I see this and just knowing that that Royal was actively taking market share. It just makes me wonder if you guys are intentionally tapping on the brakes, because maybe the risk reward is in there or maybe theres something else. Just wondering if you could offer any commentary on that.
Yeah. Thanks for the question, it's Neal Yeah, I mean, I think we look at the mortgage business and theirs.
Definitely not a question about risk, we we like the risk.
To your point, we've been growing the mortgage business and double digits for over a year now and I still consider it to have tremendous momentum. If you look at quarter over quarter, we did see some exceptionally aggressive pricing and the market. Both in terms of rates that were offered.
We saw spreads really come in and then also in terms of the offers the acquisition offers that we saw some competitors offering more than double what we were seeing standard and the marketplace. So we did just take that opportunity with all the momentum to make a choice to say, we're going to continue to compete and protect our relationship clients, but we were looking to really.
Compete for the for the better spread deals and and that had to slow down and I'd say marginally and the quarter. We have zero concern and I'll tell you in terms of our ability to continue to grow share and the mortgage business and I'd expect that momentum and Youll see returned in Q2, sorry Q3.
Excellent that's it for me thank you.
Thank you. The next question is from Sohrab and overhead from BMO capital markets. Please go ahead.
Yeah, Thanks, and I just wanted to go back to a gram.
And I could claim I think.
Thank you said.
You've taken a cautious approach to reserve releases or you are taking a cautious approach to zero and he says.
Let's get the total bank total peak sales for them and that group.
Calgary.
And if I look at your last 5 years, maybe the average is being more and the 35 ish percent quake and 5 basis point range, sorry, So I just wanted to try and understand.
Are you, suggesting that Oh.
Call it zero or even recovery positions at the total PCL for the total bank.
Could persist for the foreseeable future.
Thanks, and thanks for the question.
And certainly.
Good day to talk to because a lot of complexity.
And the different stages of allowances here and.
And certainly this quarter and a total PCL perspective, and we were in and a net release position.
Say for the foreseeable future, obviously, we cant be and that kind of split for a extended period.
But if you look at how this could play out and in the coming quarters.
And and certainly this is very conditional on some of those key proof points I referenced in my comments.
Really dependent on how the how the vaccine rollout kind of.
Received and in the coming months that we really get the health outcomes. We're looking for how the economy reopens and subsequent to that and then thirdly really hold kind of the transition off of government programs and kind of <unk>.
Concludes if you will and so on.
And so a lot of dependencies on those but we are seeing very good.
Fundamental credit indicators, and our portfolio and and then you're obviously seeing that translate into very low stage 3 losses, and it's all the data and analytics would indicate and the near term that we will have a continued good stage 3 performance as we get we're confident and those proof points I referenced and that could yield further stage, 1 and 2 releases and we do expect though.
And over the latter half of this year and and it's kind of the earlier half of 2022 that those impairments and delinquencies will rise and stage III will rise with that but again I think we've got a very very prudent.
Low and split up and in stage, 1 and 2 and so that'll be more funded by kind of transition out of stage, 1 and 2 and into stage 3 and so that's why I couldn't acclimate and and so.
The variability between those 3 stages.
And depending on how and how those factors play out over the coming months, but in aggregate, we feel quite confident that the total PCL will kind of remain.
Within the or our long term averages and then.
And the near term could be.
And could see continued benefits.
Okay. Thank you.
Thank you. The next question is from their own Mario Mendonca from TD Securities. Please go ahead.
Good morning, Robert and you got to.
Some comments, you've offered and the cost on the expense side and what you suggested that <unk>.
Operating leverage could be better and the second half of 2021 and it wasn't in the first half and looking at our expense trends and 2020.
It doesn't look like operating leverage should be.
But our new offer any outlook on operating leverage and the second half and.
And the context of some of the expenses that.
Some of them some areas and at the expense lines and you should see some increases or maybe moderation and expenses.
Yeah, Thanks, Mike and you know I'd like to kind of bifurcate between stock based comp variable comp FX and then all the other expenses right that are more controllable, which we've done and the chart that we added you know I would expect that we would have positive operating leverage into the second half of this year Canadian banking as well.
Positioned for positive operating leverage.
And with good expense discipline.
You know I think our FTE might've been up year over year, but down quarter over quarter. So, we're managing that well and we're continuing to grow the client base.
And and now revenue growth is accelerating and then you look at the the wealth businesses a lot of that depends on the markets. If we keep constructive equity markets. We should see continued positive operating leverage and it's the all bank level you know a lot of it gets down to mix. You know you could you can run a scenario where you have positive operating leverage of 2 person.
And across all 5 segments and net negative at the top of the house also some of the accounting and insurance and confuse the top of the house because you can get some some some big trades that have big revenue, but also P. B C. A so it kind of disrupts the AR and I E. So, but all in all we should see positive operating leverage.
At the top of the house in the second half of the year.
Absent some market disruption.
Okay and then just my final question is on.
And the all bank and margin.
I like to separate what I see from.
From the domestic and the U S retail banking sector segments from what I see at the rest of the bank.
And it does seem to me that we should see some progression and the margin because low margin liquidities are coming down.
Rates are moving higher cards might improve but I didn't get the sense from listening to your opening comments from you.
And expect the all bank margin to improve I may have misunderstood, but what is that out and we'll again and if it's not going to improve can you offer some reasons as to why.
Yeah. Thanks for that and you know, it's it's important to look at that there's a lot of complexity to that as you get into right. We're going to see positive net interest income.
And can day at the Canadian banking level and the second half of the year, we're going to see positive net interest income growth in city National and U S. Dollar terms and we will see positive from both of those.
For the full year, which I think is important but what you might see because of the stronger Canadian dollar is you might see that.
Benefit at the top of the house kind of evaporate as you convert it from U S dollars to Canadian dollars, but we will get a benefit on that and expenses. So it's not going to hurt earnings. Similarly loan book margins and Derek business have come down utilization is down versus a year ago and margins have come down and that there's so much liquidity out there. So you got to look at some of those other businesses trading net.
Interest income might see a little bit of headwinds, but it's not a big driver loan book and capital markets again, not a big driver. So when you add all that up because of foreign exchange because of trading book you might see it moderate and be kind of zero ish, but the core business since youre going to see net interest income growth in the core businesses and local currency and.
And that's what's going to drive the overall earnings at the top of the house.
Okay. Thank you.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you and good morning, So wanted to kind of go back to appoint Rod just made and his answer regarding the amount of liquidity out there and I. Appreciate your optimism regarding the outlook for NII and loan growth and I'm totally there with you given economic data, we're seeing out of the U S. But the concern I guess is that.
There's so much liquidity out there that maybe that returned to loan growth at the industry level might take longer than we originally thinking. So wondering if you can put some thoughts around the timing on that not to specific quarter, but you know will it come later in 2021, where we have to wait for 2020, 2 where we have to wait for later in 2022, just sort of.
General and some general thoughts around timing would be would be helpful.
Well, maybe I'll start and then and Rod can jump in and so you know and my comments, we tried to signal that and 1 of the big categories of loan growth for us and a bigger contributor is the return of our credit card balances back 2019, and $20 billion range from from 16 and that is normally and highly correlated to economic.
<unk> activity and the economy and purchase activity on those on those cards and and as we do the analysis and we look at who's got excess deposits and and who's who's using their credit cards. We do expect that that relationship will continue to hold going forward there may be a little bit of a lag that because of.
The excess liquidity out there, it's not and it wont be a perfect correlation that you saw historically through economic cycles. So there may be a lag, but we don't think is a significant lag the client behavior as client behavior and and that will come back along with increase card purchases.
And the economy. So I think there is an example of liquidity being out there like clients keeping liquidity investing liquidity and.
And and us getting the card growth and on the business side business financing side, certainly liquidity and optimizing their cash flow probably won't play a bit of a lag and I think you're already seeing that.
And already seeing the economy, certainly and then the mid market.
Commercial and that.
<unk> and rates continue to be at.
And a cyclical lows and therefore.
Would have expected given some of the economic activity that inventory and receivable build would've led to draw down and you're not seeing that per se. So there's an example of it already and are lagging, but it will come it will come through the cycle and then and the corporate side certainly you're seeing the liquidity lead and pay downs of those draws you saw last year and as Derrek just pointed.
Note that.
And that they've come through that there's a there's a focus on growth among all clients and you're going to start to see drawdowns. There. So there's a examples of walking through our 3 businesses, where there is a certain lag and a couple of them, but you're starting to see the correlations rebuild and why did you want to add anything to that yeah. I mean, you look structurally at some of the points Dave made right you bet.
It's the force working against you is the liquidity arguably 20 years and savings rate in both Canada and the U S over the last year or so that hurts loan growth. But then you have structural like mid single digit GDP growth that everyone is forecasting that's going to drive it up plus I think companies are going to be less likely to play more just in time because it.
Supply chain issues that are out there, they're going to hold more inventory that's going to be a positive and then you look at our mix of businesses, even when we've had negative loan growth and capital markets over the last year, we've had positive and top of the house, because we have such strength and diversified business model City National's strong double digits. That's a good starting point, even with our mortgage business going from double D.
The high single digits, where even if a false and mid single digits by the second half of next year, because you put it all together, we're still going to have good positive loan momentum and.
And then the glass half full side it could feed into our investment business.
Talked about and our speeches so theres as many pauses or more positives than there are negatives to that liquidity.
Okay, Okay and just.
Want to go a little bit deeper here just on the business loan growth you mentioned there could be a lag again you know this is a little bit of guests for everyone. But do you think it's kind of a 1 or 2 quarter lag or could it be something and that's you know a 4 quarter lag a little bit more significant.
Neil do you want to take a stab at that yes, sure I mean, just a little bit of color on the we're really seeing and there isn't the revolvers and particularly a couple of sectors, but.
And the core commercial business, we're seeing.
And your revolver utilization rate down 10%.
From where we were pre pandemic I think you have to then look at the deposits were up about $40 billion of deposits.
I think as you start to see the economy reopened and you start to see entrepreneur's confidence to invest that capital and I think it would be much closer to that kind of 1 to 2 quarters. We don't expect it to be and the 4 quarter range. I mean, theres also sectors like for example, our auto finance business. There just isn't the inventory to finance and so that's related to the supply chain.
And issues that Rob referenced we expect that supply to come back online and into early next year and we get these microchips.
So the manufacturers and Youll see that that really spring up and we'll see strong strong growth there so and it would be very similar comments as we look at our consumer lending business. We think probably a you know a 4 month type of lag between.
When you'd see that direct lending and come back after the economy opens people can start traveling and we see some of the consumer spending Dave talked about really tick up.
That's helpful. Thank you I appreciate it.
We have 1 more question and the cube and go to that.
Thank you. The next question is Nigel D'souza from Veritas investment Research. Please go ahead.
Thank you good morning, I wanted to ask the question and in a different way and I was wondering if you know persistent U S. Dollar weakness does that change how you evaluate your U S franchises. So for example, if we.
And into a world, where they can and dollars closer to parity does your strategy.
And the U S change and do you start prioritizing Canadian businesses, more or just currency and not have a major impact on your outlook here.
So I would say kind of thing.
Alright.
And you're correct.
Well I would say that currency doesn't have a long term impact in fact, it may make capital deployment and to the Shaw.
A little easier at that point.
But certainly as you are looking at.
Growing your franchise you know given the size of our Y and our goal to drive premium growth off of you know as you saw our pretax pre provision earnings of $5 billion, we need a deep U S businesses and and capital markets, we need a deep business and U S wealth management and commercial banking to continue to drive.
Profit outperformance and therefore, the U S market remains absolutely critical to overall growth strategy and our performance strategy, regardless of where the U S. Dollar is and in fact, it may accelerate our ability to grow.
So I think.
Dollar is going to impact earnings obviously impact R. W. A but it's not impacting the overall need and our overall construct of how we want a balanced growth between Canada, the United States and Europe.
That makes sense and it's good color. Thank you.
Got it.
Thank you.
This concludes today's question and answer session and I'd like to turn the meeting back over to Mr. Mackay.
I just wanted to thank everybody for their questions and you know just the core messages that I think came up both in the speeches, but also and a lot of great questions.
We received that were very happy with our pretax pre provision earnings up 11% and $5 billion I think it really highlights the organic growth capability of this franchise you saw strong performance across the board and and we had a chance to highlight where we see low embedded profitability and business. We've already earned from clients.
Whether that's you know the existing credit cards and customers' hands, whether that's a significant number of operating lines that we already have with customers that will get drawn and increased overall economic activity will drive growth without having to earn a new clients. We've got the interest rate tailwind that we think differentiates ourselves both in Canada and the U S already on our balance sheet.
And then you heard a number of strategies to acquire new clients and grow whether that's a unique RBC vantage and leveraging our differentiated loyalty platform to completely change the core client business you are having enormous success with the college of surgeons and attracting a high net worth medical professionals and Canada and we're very excited about.
You heard about.
Our new growth strategy and the mid market corporate on top of a very successful as rod pointed out mortgage strategy and the U S. That's really getting significant traction with already $15 billion of mortgages on our balance sheet and the U S and growing your core double digit growth and our city National Bank, we expect.
To continue so we feel that the investments we've made we did and back off capital markets opportunities are significant and our.
<unk> and M&A.
ECM and DCM business. So we feel very well poised now through historic investments to capitalize on the growth and the investments that are going to get made to transition and and improve our society. So thank you very much for your questions and I will look forward to seeing you in Q3 and have a good summer.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.