Q3 2021 Royal Bank of Canada Earnings Call
[music].
Please standby your meeting is about to begin.
Good morning, ladies and gentleman.
Welcome to Rbc's conference call for the third quarter 2021 financial results. Please be advised that this call is being recorded I would like to turn the meeting over to Nadine on head of Investor Relations. Please go ahead Miss on.
Thank you and good morning, everyone speaking today will be Dave Mackay, 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 <unk> group head capital markets.
Tillman 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 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.
Thanks, Nadine and good morning, everyone.
Today, we reported earnings of $4.3 billion.
Driven in part by strong client activity as we continue to attract new clients.
And deepen existing relationships across our market leading franchises.
Our performance reflects disciplined execution of our strategy.
Strong expense control.
<unk> growth higher fee based client assets.
And record investment banking revenue.
This was partly offset.
Expected normalization.
In global markets revenue and continued pressures from low interest rates.
We also saw improvements in our macroeconomic outlook and credit quality, resulting in significant release of reserves, which Graeme will speak to later.
PCL on impaired loans and new Gis.
Formations remained at cyclical lows as.
As our well diversified portfolios continue to perform in these uncertain times underpinned by strong underwriting and well defined risk appetite.
Our CET one ratio increased 80 basis points to 13, 6% net of $15 billion of R. W. A growth.
This was to support client demand and business growth across our platform.
We leveraged our franchise and balance sheet strength to generate strong organic growth and an ROE of 19, 6% this quarter or 19, 2% year to date.
Well above our global peers, we continue.
Create long term sustainable value for our shareholders in support of our 17 million clients.
Underscored by a 12% year over year growth in book value per share.
And even though regulatory restrictions remain we paid $1.5 billion in common dividends to our shareholders.
Majority.
<unk> based in Canada.
I will now offer some perspective on the macro environment, which we view with cautious optimism in the near term, let's see growing in strength into 2022.
We remain cognizant of the near term challenges to global growth posed by new variants and inconsistent global vaccine rollout supply.
Hi chain disruption rising geopolitical risks.
And continued global travel restrictions.
However, we are encouraged by the.
<unk> progressing as it reopens based on trends, we're seeing in credit card spend on both goods and services and business investment.
The term assets and in working capital.
Little while the momentum that's building could moderate in the near term by rising virus cases.
Even with 75% of the eligible Canadian population being vaccinated.
We believe the foundation of the economy remains solid and we'll manage through the threat of the Delta variant.
As I noted last quarter, we are well positioned.
To leverage the scale and embedded profitability in our core franchises.
To significantly grow earnings in a more favorable economic scenario, which would include rising interest rates higher credit card about revolve rates and growth in business lending.
With or without a rate hike, our diversified business model and scale.
Biography channel product or service is poised to generate strong growth, particularly asset growth through cycles and with a consistent.
Risk appetite.
Our success comes from our investments in significant client data and geographic scale.
This combined with our cross sell ability Brandon.
And people have produced premium growth in average, earning assets and market share gains in our core products.
In Canadian banking, we added a market, leading 37 billion in mortgages year over year, including over $9 billion this quarter.
And we expect strong mortgage growth to continue, albeit at a lower rate than we've seen over.
I'll buy junctional last 12 months.
We are seeing green shoots of growth in our higher higher yielding Canadian credit card and commercial loan portfolios, both up quarter over quarter.
In the U S. We are seeing particular strength at city National where we've added 15 billion U S dollars in loans.
Over the last two years, including over 5 billion U S dollars and mortgages.
The recent launch of our new strategy supporting mid corporate sized companies across the United States is also proving to be successful already booking over $1 billion of new commitments over the last few months.
And the other side of the balance.
Next our long term strategy to grow our core deposit business and provide exceptional service and advice continues to succeed over the last year, we added 43 billion.
Our personal and business deposits in Canadian banking and a further 14 billion U S dollars and deposits at city National.
Our North American wealth management.
Our businesses have also been generating strong growth in fee based client assets, both sequentially and year over year basis.
Canadian banking assets under administration were up over 63 billion or 22% year over year, partly benefiting from strong equity markets and an increased client pressure preference for investments.
Sheet, which I will speak to shortly.
Furthermore, Canadian wealth management, AUM increased 23% or 95 billion from last year crossing $500 billion in client assets for the first time.
RBC Global asset management had 35 billion.
Total net sales over the last 12.
<unk>.
Increasing assets under management, 13% or over $67 billion year over year to record levels.
And in U S wealth management, we added over $115 billion of EUA growing client assets, 27% year over year, and surpassing 550 billion.
<unk> months for the first time.
We are continuing to invest in our people to capture a greater share of growth, adding managing directors and core investment banking verticals, such as technology healthcare and aerospace. We're also adding ultra high net worth private banking teams in city national on the East coast along with.
You ended presence in our core California markets.
In Canadian banking, our team has added 700 employees year over year to capture strong client activity in mortgages commercial banking and investments.
Another differentiated element of our strategy is building ecosystems that go beyond banking.
To enable RBC to participate in a broader part of the client journey and value chain.
One example is an increasingly competitive Canadian commercial and small business segment.
Several of these capabilities are made in RBC proprietary solutions.
Owner and RBC venture that's up 45000.
Entrepreneurs launched their businesses online, including 20000 year to date.
With RBC insight edge, our business clients can leverage aggregated data to gain relevant insights into their markets to enable them to attract more customers.
We continue to make investments in building a digital platform with enriched payments in cash.
<unk> management capabilities for our business clients.
RBC pay edge helps our clients save time and money with secure solution for their accounts payable processes.
We also launched <unk> a platform to help entrepreneurs scale up their ideas through access to partnerships capital and advice the tech.
Clean Tech and life science verticals.
And to further support the Canadian Tech ecosystem, RBC recently announced the Calgary innovation hub, while also signing on to become the anchor financial sponsor or hub $3.50, a new technology Park near Ottawa.
And both RBC pay plan and ample.
<unk> allow us to increasingly partner with merchants across Canada to provide even more value for our retail and business clients.
We've expanded our slate of partners, who continue to be a differentiator for RBC and with the recent addition of door dash and finance it it will help attract new clients and.
And create more value for existing clients.
I've spoken a lot this morning about our asset generating opportunities.
Also core to our client strategies as a fundamental belief in reciprocity.
Which rewards clients for the depth and breadth of their relationship with us.
Last quarter, we provided a number of metrics highlighting our.
Multi product relationships.
The recent launch of RBC vantage further incentivize the consolidation of our strong client relationships.
And vantage as a further retail banking value proposition to our existing investments capabilities, such as my advisor direct investing and Investees.
This expansion.
Continuum of offerings allows us to support our clients with advice and solutions to help them make the best decision based on the prevailing macro backdrop.
The continued low interest rate environment is making it increasingly attractive for our Canadian banking clients to shift out of lower yielding gic's and savings accounts and putting their money to work into.
And the key products such as mutual funds.
The related fee based revenue along with higher client savings and card payments rates have been positive for credit quality and risk adjusted revenue metrics, helping offset margin pressure.
And even as we invest in our core client franchises to achieve.
The investment premium asset growth, we remain committed to managing our costs as we've done in the past.
This includes implementing a zero based budgeting methodology, where we judiciously and consistently reevaluate every cost and activity across the bank.
To sum up our diversified business model scale financial.
<unk> risk management culture, and robust capital position continues to provide the foundation for delivering differentiated client and shareholder value over the long term.
And we will continue to grow in an inclusive and sustainable way.
It enables our clients to thrive and our communities to prosper.
I will now turn it over to Rod.
Thanks, Dave.
<unk> good morning, everyone. Starting on slide eight we reported quarterly earnings per share of $2.97.
Up 35% from $2.20 per share a year ago.
Pre provision pretax earnings of $5 billion were up a solid 6% year over year with strong client driven performance in Canadian banking and.
Dave and management non U S along with record investment banking revenue more than offsetting a moderation in capital markets trading revenue as client activity decreased across the industry.
<unk> the impact of foreign exchange and lower interest rates pre provision pre tax earnings were up a strong 10% from a year ago. These.
These results yet again higher.
Wealth <unk> of Rbc's diversified business model.
Moving to slide nine our CET one ratio of 13, 6% was up 80 basis points sequentially, including the benefit from model parameter updates net of the increase in SCR multipliers guided to last quarter.
This quarter saw a further 2 billion.
<unk> net credit upgrades lowering the cumulative net credit downgrades since startup pandemic to $8.5 billion.
And strong internal capital generation net of dividends added nearly 50 basis points of capital. This was partially offset by strong client driven business growth across our largest segments.
Moving.
And we expect <unk> to continue to grow given the client driven organic opportunities Dave highlighted earlier.
Also wanted to give an update on our initial analysis of the impact of the upcoming Basel changes, we expect the net impact of the reforms to be moderately favorable as the benefit from the implementation of the guidelines in 2023.
Forward are partly offset by adverse market risk impacts under the fundamental review of the trading book coming to effect in 2024.
Moving on to Slide 10, net interest income was down year over year, excluding trading revenue net interest income was up 6% from last year as strong client driven volume growth in Canadian banking.
<unk> national more than offset continued margin pressures.
Indian banking NIM decreased four basis points from last quarter, largely due to competitive pricing pressures in mortgages and changes in asset mix City National NIM was down 10 basis points relative to last quarter, largely due to the dilutive impact of a lower loan.
And so deposit ratio with excess deposits being deployed into low yielding short term securities.
Although NIM was lower in each business largely due to mix more importantly, net interest income was up at least 5% year over year in each business.
Going forward, we expect all bank net interest income.
Loan diluting trading results to continue to increase year over year as strong volume growth more than offsets moderating modern.
Margin pressures.
Turning to slide 11, while we don't anticipate short term rates to increase in the near term both Canadian banking and city national are well positioned to benefit when they do rise partly because nearly half.
So the deposit base as near zero rates.
Looking forward, we expect a 25 basis point increase in short term interest rates. The long end of the curve unchanged would increase Canadian banking net interest income by $90 million in U S. Wealth management revenue would increase by another 80 million U S dollars and.
This scenario, including the benefits from our sweep deposits.
Turning to slide 12, higher noninterest income net of insurance fair value change was largely driven by strong growth in our higher ROE investment management and new mutual fund revenue streams. This quarter also saw a shift in the revenue mix in capital markets strong loans.
Have a patient in M&A fees boosted underwriting advisory and credit fees. This was offset by a decline in global markets revenue.
Our service charges and card service revenue reflected the benefits of higher client activity in Canadian banking.
On slide 13, noninterest expenses were well controlled up only one.
<unk> percent year over year, largely due to higher variable compensation on stronger wealth management revenue, partly offset by lower compensation and reduced capital markets revenue and market related movements in our U S wealth accumulation plan.
Excluding growth in variable share based compensation and the impact of FX expenses were.
One 5% year over year, partly due to higher salary and benefit costs non compensation costs declined largely due to lower facility and cleaning costs. This was partly offset by higher technology and equipment costs as well as higher marketing and travel expenses from prior year lows. We are cognizant of some of these.
Cessionary costs could start to increase as economies begin to open back up.
And as we implement new client acquisition strategies and as Dave noted, we will continue to execute on the zero based budgeting program, while continuing to invest in our people and technology to drive revenue growth.
Moving to our busy.
The segment performance beginning on slide 14, personal and commercial banking reported earnings of over $2.1 billion.
Up 55%, mainly on lower PCL Canadian banking pre provision pre tax earnings were up a strong 13% from last year.
Canadian banking revenue was up 8% year over year, partly due to volume.
Business and growth in net interest income.
Noninterest revenue was up largely due to higher mutual fund distribution fees underpinned by very strong <unk> growth.
Well controlled Canadian banking expenses up 2% from last year combined with strong revenue growth drove operating leverage of 6%.
Drip order and 3% year to date.
On average, we expect operating leverage to remain at or above the higher end of our annual 1% to 2% historical guidance over the next four to five quarters based on current economic projections.
Turning to slide 15 wealth management reported record quarterly earnings.
<unk> of $738 million up 31% from last year pre provision pre tax earnings were up a strong 16%.
Robust client asset growth across our wealth management franchises was underpinned by both constructive markets and higher net sales.
This in turn drove strong double.
Earnings growth in mutual funds and investment management revenue. In addition, strong volumes drove 9% year over year growth in city National net interest income in U S dollars or up 5%, excluding the benefit from Triple P loans, which is expected to moderate in the fourth quarter RBC.
RBC Gam.
<unk> net sales of over $10 billion in the quarter with institutional flows into money market mutual funds, adding to continued strength in Canadian long term retail net sales, which added nearly $6 billion.
AUM.
As with recent quarters. The majority of retail flows went into balance and equity mandates.
Turning to insurance Slide 16, net income of $234 million increased 8% from a year ago, primarily due to the impact of new longevity reinsurance contracts lower claims cost and the favorable impact of actuarial adjustments. These factors were partially offset by the impact of realized investment gains.
Attract a year ago.
Turning to slide 17, Investor and Treasury services reported net income of $88 million up 16% from an even more challenged quarter last year funding and liquidity revenue increased from low levels last year and lower interest rates continue to drive deposit margin compression negatively.
Our client deposit revenue trend.
Turning to slide 18 capital markets reported earnings of over $1 billion for a third straight quarter and pre provision pretax earnings of over $1 billion for the seventh quarter in a row.
Corporate investment banking reported record investment banking revenue strong loan syndication and M&A advisory fees were driven.
Packaging by robust deal flow and higher industry fee pools recall last year also included recoveries and loan underwriting marks following the spine of leveraged loan markets global markets revenue normalized from recent elevated levels down 31% year over year due to lower client activity FIC trading results were down 30.
35% year over year as tightening credit spreads last year drove mark to market gains as well as robust activity in our spread business macro products were also down from last year, which benefited from elevated market volatility lower spreads.
Elevated market liquidity and lower balances continue to impact our repo.
Repo and secured financing business.
Equities results were down 20% from last year underpinned by lower levels of market volatility going forward, we see a solid pipeline of M&A advisory mandates.
Issuance activity is also expected remained solid but lower than peaks experienced in the first half of the <unk>.
Full year, we anticipate debt origination and trading activity will continue to normalize from recent peaks, but remain above pre pandemic levels in.
In summary, we continue to have striven exhibit strong momentum across our core franchises, we are well positioned to accelerate our growth trajectory while remaining.
<unk> focus on expense management.
And with that I'll turn it over to Graeme.
Thank you Rod and good morning, everyone starting.
Starting on slide 20 allowance for credit losses on loans of $4.9 billion was down $658 million compared to last quarter.
This includes a $638 million release of reserves on performing loans primarily.
<unk> capital markets and the Canadian break in cards and personal lending portfolios.
Early release reflects improvements in both our macroeconomic outlook as well as the credit quality of our portfolio during the quarter.
We've now released about 40% of our pandemic related reserve build with ACL of six 7% of loans and acceptances down from its peak of eight.
In Q4 of last year.
Our level of allowances remains well above pre pandemic levels, given the ongoing uncertainties associated with the COVID-19 Delta variant and the conclusion of the significant government support that has benefited both consumers and businesses.
Turning to slide 21, our gross impaired loans of $2.6 billion were down 216 million.
Nine five basis points during the quarter.
Compared loan balances decreased across all our major businesses and new formations of $293 million were at nine year lows this quarter.
<unk> new formations in Canadian banking are due in part to ongoing government support programs as noted earlier one.
When capital markets clients continued to benefit from active.
We're <unk> markets, providing strong access to capital and the improving macroeconomic environment.
Turning to slide 22, PCL on impaired loans of $146 million or eight basis points was down three basis points from last quarter and has trended lower in each of the last five quarters.
And our Canadian banking retail portfolio.
And equity AUM of $136 million was down 25 million from last quarter with decreases across all products with exception of our residential mortgage portfolio, where PCL was flat quarter over quarter and remains at its lowest level in more than five years.
In our community banking commercial portfolio PCL of 25 million was down 9 million from last quarter the critical.
Quality of the commercial portfolio was strong with sustained low delinquency rates positive credit migration and reductions in our watch list exposures.
In capital markets, we had a net recovery for the second consecutive quarter.
The net recovery of $16 million was due to PCL reversals in the real estate and related and oil and gas sectors.
Partially offset by a provision of a.
<unk> sector.
Our strong performance on credit continues to be a reflection of the quality of our client base the diversification of our portfolios and our prudent underwriting practices.
With government restrictions easing and companies starting to return employees to premises I'd like to provide an update on our commercial real estate portfolio on slide 23.
Our portfolio is well diversified by geography business segment and property type.
I noted in prior quarters. The retail segment of this portfolio has been most impacted by COVID-19 restrictions.
Rent collection has been most challenged for enclosed malls, which are faced closures and reduced foot traffic. However.
However, our exposure to enclosed malls is limited and the loans are well structured.
Heading into the pandemic.
As for the office segment of this portfolio, we have not seen material changes in rent collection, where occupancy rates. However.
However, the outlook for the office segment remains uncertain as companies will need to balance remote work capabilities with physical distancing requirements and the need for more space per employee when in the office.
The remaining segments of this portfolio, where a majority of.
Interest rates have not been materially impacted by COVID-19.
We continue to monitor the portfolio and are carefully managing exposure to the retail and office segments.
To conclude we are pleased with the positive trends in our credit portfolio that we are seeing as the economy recovers.
We have seen pandemic related government restrictions easing and significant progress on vaccine distribution.
Of our exposure, which is continued contributed to the strong credit performance this quarter.
While pandemic related uncertainty has declined translating into a larger lease of reserves on performing loans this quarter.
Certainly does remain elevated due to a rise in cases of the COVID-19 Delta variant this could impact the timing and pace of the economic recovery.
We do.
Abuse remain adequate provision for expected increase in delinquencies and impairments in 2022 that we believe will result in 2022 PCL on impaired loans trending above our long term average however.
However, as I noted last quarter, we expect to be able to draw down on the remaining balance of our on performing loans.
We built in 2020, such that our total PCL across all stages will remain below.
With long term averages.
And with that operator, let's open the lines for Q&A.
Thank you we will now take questions from the telephone line. If you have a question and you're using a speaker phone. Please check your handset before making your selection. If you have a question. Please press star one on your devices keypad. If you wish to cast the question. Please.
Do however star team. Please press star one at this time, if you have a question there will be a brief pause all participants register thank you for your patience.
And the first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Good morning.
Oh sure.
Wondering if we could.
Maybe Dave again, just your view around the housing market.
Think about obviously, it's become a big election issue with the ban on foreign buyers.
Being promised.
Talk to us in terms of how given just your mortgage business has been very strong how you see the housing market today and do you see there.
The appropriate policy responses coming through to kind of.
Make housing affordable, especially in the Metro markets.
Yeah. Thanks for that question I'll say, a few comments on Neal who is also very close to the issue.
I'll ask <unk> to make a few comments. So we look at the structural elements of the housing industry in Canada on a monthly basis.
A lot of stats, we track on supply demand and supply demand imbalances. Those obviously continue to persist where you as a shortage of supply and highly stimulated demand marketplaces from all the things we talked about low rates.
Consumer preference changes.
And lack of.
General supply as I talked about an inability to fill that gap quickly. So obviously price increases are part of this and as an employer in the major metropolitan areas. We certainly worry about the cost of housing and the effects on our employees and our ability to attract talent to the country into the cities, where we operate one of the reasons why we.
We have created the Calgary hub for technology is to diversify her employee base across the country and access talent in different marketplaces.
So to your question.
The rising cost of housing have an impact on all employers are cost of operating in our own ability to operate the way we want to and therefore, we're starting to make the moves.
Like you saw in Calgary to diversify our areas, we don't worry about the quality of our credit book it.
It's well adjudicated, there's there's good equity positions still a third of its insured.
And therefore, we're confident in the cash flows and the stress test and the policies that have gone in to changing those stress tests to make sure.
Dedications.
Solid. So this is more a long term macroeconomic issue, where I do worry Abraham to your point.
Is the more the more cash flow that consumers are putting into the housing stock the lessons available to drive the economy. So I think all policymakers are worried partly as well about long term economic drag from that much cash flow going.
Into servicing.
Housing. So those are all elements that lead us to think about policy for the country and policy that keep tries to keep everything in balance from.
From an economic growth perspective from a cost of living perspective from an attractiveness and quality of life perspective, we're all trying to keep those things in balance. So I think it's important that we look at policy initiatives.
Try to balance the needs of Canadians and the prosperity of Canadians and the happiness of clean so and with that I'll pass it to Neal Thanks, Dave Ebrahim. The only other things I would add is I think and just to if we focus on our mortgage business.
And the underwriting in that business I mean, I think be 'twenty has been a positive for the industry a lot more granularity on.
The different segments and transactions in the book the stress test I think is built in.
Confidence that there is resiliency there I think the in terms of the supply demand imbalance, maybe just a couple of other appointments points to build on daves.
I think more recently you've started to see this the supply side start to get more.
I would say that's something that doesn't need a lot more focus.
We have a very I think a very strong <unk>.
Immigration policy, but a big portion of those that new household formation comes from newcomers. So we see what's driving it.
Beyond some of the things I would say that are there.
Maybe more macro in nature of some of the things that can be shorter term, we get a lot of feedback from some of Canada's largest developers that are more cooperative.
Municipal set of policies could help them actually increase bringing more supply to market.
So that may be a tactical I think that can be done, but I think the supply side is something we need to be talking more about.
<unk> got it helpful. Thank you.
Thank you. The next question is from many grauman from Scotiabank. Please go ahead.
Hi, Good morning, Dave you touched on the macro outlook in your opening remarks, but to put a finer point on it.
I think back to the call last quarter you made.
Bullish case for the recovery and for Royals ability too.
Really take advantage of that recovery and I'm wondering given the delta variant.
Things have evolved is there any change in your outlook anything you would highlight that's different now than it was when we were speaking I guess it was early June.
It very well I think net net when you think over the medium term as I said through 2022, where we're still equally as positive about the opportunity for the economy to grow to accelerate beyond where it was in 2019, we're seeing that economic activity progressed nicely right. We look at our credit card spend.
Look at the activity levels that are now above 2019, we starting to see draws on our operating working capital lines. So that was a green shoots I referred to all symbols.
Of confidence returning we're seeing term asset lending start to grow we've seen our.
Authorized credit book increase.
So I think almost 10%. So you are seeing all the signs of economic confidence.
What's going to happen with the Delta Varian It may pause things for a month or two as we have to work through and make sure. We don't overwhelm the health system. Its a little concerning to see the numbers, but where are we starting to see in other parts of the world a little bit of a turn on the Delta brand.
We will manage through this with 75% of vaccination rates.
We don't expect we're going to have to shut down the economy. The way it was last year.
Early in 2021, so we should have every ability to manage through this given what we've achieved so far and therefore, I think youre talking months of maybe slowing return.
Turned to work slowing their full reopening of some of our service sector until we deal with this governments will make that decision, but that will not I think up and the majority of the momentum we have so still very positive about the continued progress on reopening the economy through the next 12 to.
24 months.
Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning.
The new Canadian banking slide that you provided on slide six.
On the revenue yield showing stable.
All the lunar offsetting the NIM pressure.
So just on the nurse side on the yield what kind of factors are kind of driving that and is the message that that dinner is more stable or that could potentially increase over time as well.
Yeah. Thanks, Thanks for.
Sure Scott.
The NIM is obviously a factor of the what you are paying on deposits as you well know one what you're receiving on the loan. So the mix has been a significant driver of our overall NIM and the nurse as you referenced and so as we continue to grow mortgage is at an elevated rate.
Thats quite that where that will naturally come down because those products because they are secured and well underwritten.
And to have a lower rate with the client, but as the green shoots happened to Dave talk to and we start to see credit card balances come up and we start to see commercial balances come up we would expect that to start to bottom out and then.
Start to increase again and that will help NIM overall bottom out and increase again, but importantly, because of the volume growth is so strong and because the deposit growth is so strong and it's very low costing the net interest income has bottomed out and it has been growing and will continue to grow.
But on the nurse side is that is that also forecasted or expected to to increase like it has over the past year.
Scott, It's Neil Mclaughlin I'll jump in.
I think what we're trying to get across there is.
On the other income side.
Really good growth year over year.
Year, I think a reflection of the diversification just what we have in terms of the retail bank.
<unk> growth in mutual fund trailer fees.
Our new client acquisition over the last couple of years paying off in higher service charges.
We're starting to see a little bit of bounce back enough in FX.
Our direct investing business.
And what obviously benefiting from the macro trends there. So I think the message here is there is a.
A strong contributor in other income and that's I think really it's.
While NII is up 5% NIM.
Nims are down obviously, but between the two I think we're just trying to decompose the overall revenue contribution.
Got it thank you very much.
Thank you. The next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Okay. Thanks, that's actually a great segue to my question I guess.
Neil.
There is also a slide in here that talks about.
This beyond banking for the Canadian business.
So you are not attributing.
Any of the.
Fee income or other income.
Our results in your segment to these initiatives over here.
Let's start on page five.
Yes, I mean, I think what we're really trying to get to there in terms of.
Our strategy is.
Two things, we would say really.
Our continual focus as the value for money, we're providing clients and our distribution to be able to get in front of more clients year over year. What we're really trying to lay out here is we are starting to play upstream and downstream in terms of the clients value chain and an example here with owner that.
Dave talked about we are seeing an increase in new small business accounts related to our investment in owner and really pleased with the trajectory really pleased with our ability to turn those new business business registrations into RBC customers. So there would be one example.
Another example around the value play is RBC insight.
As you see there. This is an example, where we're taking our data and we're turning that into new value in terms of being able to tell a merchant a b to C business client more about who their consumers are M. I ask that they wouldn't usually have that we can then provide them on a on a confidential sorry on anonymised basis, where those.
Inside a couple of examples as you get into sort of further down the value chain there.
RBC pay edge that with something else Dave touched on this was a product we developed.
And really built out after our 2019 acquisition of a small company called <unk> and what this does is it automates and.
Automates the okay.
Our payable and reconciliation process. So again, taking another part of that of that entrepreneurs business and really simplifying it. So they can save cost and drive more convenience. So those are the types of things that youll start to see represented on this slide and our confidence in terms of the strategy just continues to grow.
Neil if I can just have a follow.
Follow up.
Is it fair to say then that.
The benefits of these initiatives listed under they'd be on banking slide.
Primarily first of all accrue to your business number one number two they accrue probably both in terms of.
Top line.
Growth, but maybe even efficiency.
Movements, I, suppose and operating leverage, but most importantly through.
Increased customers, which.
Ultimate team and our kind of concentrated mature space I guess, what I'm trying to figure out is how much of it is growing the pie how much if it is increasing your share of the pie and is this primarily.
Primarily a market share grab.
Or benefit or gain or win in Canadian banking.
And how much bigger can you get I suppose.
Yeah, great Great question so.
Like owner would be what we think about is top of the funnel so that would be driving new clients.
An example, like inside edge.
As a fee revenue stream that comes off of that.
As we charge those merchants as you move down into the RBC pay adds there. Other example, I used or and pay plan, which is another.
Value proposition, we're putting into merchants hands.
As fee income and so there is I would say a share of wallet and.
Other income contribution from both of those so it is really both.
This is Dave I think thats the key at both attracting more clients and new clients as I mentioned 20000, new clients on the small business side. This year alone. We could also show you an ecosystem like this in home equity and everyday payments and shopping so.
So we gave you an example of a well constructed ecosystem in our business and commercial side, but this is obviously a big part of the strategy, we articulated on Investor day, four years ago, that's really coming to life to drive.
Both client acquisition, but also an expansion of fee opportunity and new revenue streams to the bank.
Thank you all.
Thank you. The next question is from Gabriel <unk> from National Bank Financial. Please go ahead. Good morning, a couple of quick ones here one on the expense the outlook there for rod.
1% down 1% in the non comp variable comp categories.
And the focus.
On that number like one where you are.
Renewing to grind it down over the next.
Year, and a half or whatever.
Or do we start to see a ramp up.
Then on the discount brokerage side by side.
Could you quantify.
The revenue exposure, there, where we're seeing some.
But this one on the competitive commission rates.
Yeah, I'll start and thanks, Gabe I'll start on the expenses and then hand off to Neil for the discount for the I'm sorry for direct investing.
So on the expenses I mean, this is a continuation of our of our cost management program of our.
Efficiency initiatives.
We look to spend dollars, where it makes sense to continue to grow market share to continue to invest in distribution and we think.
That's one of the key reasons why we're growing market share in our core businesses and that's not only people, but also technology.
And we will continue to do that but we're also going to continue.
We referred to grind down other costs in an effective way as we digitize.
And leverage that technology, we expect the other cost growth to moderate now is it going to be negative or zero for five straight quarters. After it's been negative or zero for the last five straight quarters unlikely, it's probably going to.
I have a little bit of uptick on that but it's not going to grow wildly, it's not going to get up to mid single digits its going to be lower single digits and then the rest of the expenses will flow.
In accordance with variable compensation.
For our financial advisers for managing directors and whatnot and for our employees at large.
I think.
Is the outlook for expenses and I'll hand, it off to Neil for direct investment sure. Thanks, Gabriel Yes in terms of the competition. We're seeing there I mean, we've seen one more player go to zero on commissions, we have another player in the market who is already there announcement. This week was with some was from a player has a very very small market share.
As we.
We look at again the focus on value for money for our customers. We feel there is good value in the RBC direct investing platform in terms of the tool sets we have there the top tier research.
One of the few to provide free streaming quotes so I think the value is there I think one of the differences is also we look at the investment market on a holistic basis.
So between.
<unk> business.
Hours between the branch retail customer a DIY customer to a <unk> customer or the robo offering we have value propositions and every portion of that market.
A large portion of our direct investing customers are also banking customers. So again the value comes from what they're paying per trade.
But a good portion of those also participated in the RBC vantage program and they're actually receiving discounted banking fees for that so another way that we're delivering value. So I think those are the things where we're focused on we'll obviously watch the market, but we're committed to having a strong value proposition in every space of that market.
And in terms of.
What that would mean for us I mean, I wouldn't say.
As we look forward.
This is not a material part of the retail banks revenue line.
It sounded like Youre interested.
All of that pricing is revenue.
I can move on then.
Next question. Thanks.
Thank you. The next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Hi, Good morning, just on the credit card business as balances are up quarter over quarter still down year over year, but I'm curious the percent of clients that are paying down balances monthly today versus pre pandemic and so how much of the growth.
<unk> is coming from the revolver side, and maybe given the higher liquidity might the rebound on the net interest income from higher card balances lag is that a fair assumption and then maybe if I can tag on something else in terms of what youre doing or what you're seeing from a buy now pay later trend perspective, and how you feel.
Neil that's a threat I believe your you've done some stuff in that marketplace, maybe you could talk a little bit about your thoughts on that as well. Thank you.
Sure. So in terms of the card book I mean, I think that's the appropriate split as you you want to look at it in terms of the two large segments that trans actors who are paying their credit card building full every year, where the focus is really on.
On the fee side as well as interchange those transactions are driving disproportionately this increase in spending and Theyre also driving disproportionate increase in what youre seeing in terms of balances on the revolver side, we actually have seen that that mix actually the percentage of revolvers come down versus pre pandemic and a direct correlation.
And so the the stimulus in the economy and the conversations we've had about the average Canadian just having more in their deposit accounts. So there has been a.
A segment that used to pay us interest that no longer pays us interest.
I would say the timing of when that come back I think is is obviously really hard to predict but I would say you.
Your point on it will.
<unk> to lag is absolutely absolutely right I mean.
When we look at it the encouraging signs Dave touched on his spending is up even versus 2019, and we talked about categories. I think last quarter that everything was up except for travel and dining we're seeing dining get fairly close to those 2019 levels while traveling.
Correlations there, it's really spike since since that's sort of mid may so a lot of positive signs.
So the effective yield on the portfolio is down and that's part of our NIM story in terms of buy now pay later.
What I would say is there are options.
That the clients have.
Travel is and it was a good article in the globe about how this may play out differently in Canada than other markets.
We're already seeing a number of credit card issuers launch capability for clients to select almost any transaction over a certain threshold and be able to term that out I think that'll play out differently in Canada, but we do look at buy now pay later as something that merchants have said this is a.
Value and they want to have it particularly in their digital properties and that's really what led us to launch PE plants. So we're participating in on both sides of that equation and really look at it is as more so not a.
A real headwind for our lending business, but more so a value proposition merchants are going to expect.
Thank you.
Thank you. The next question is from Lamar per Sox from Cormack Securities. Please go ahead.
Thanks, So I have a more of a big picture question I don't think I'd be sitting here talking about while delivering a near 20% Roe.
While holding 36% and common equity.
Sure a lot of capital but.
Here we are.
Is there any reason you think around a 20% ROE you wouldn't be sustainable going forward I appreciate there's a number of clinics.
Clemson team normalizing credit environment, but on the plus side potential return of capital. So I guess, where I'm going at is maybe can you talk.
Talk to me about where you see the ROE for ROI of playing out over the longer term. Thank you.
Thanks for that question, it's obviously something that we think about well I can give you maybe some of the bigger drivers of <unk>.
Positive.
Negative two those Roes.
We can.
Talk about the ranges, we obviously see ROE is well above our medium term objectives. So some of the positives as we've talked about on the call already are higher yielding asset growth such as credit card revolve rates coming back credit card spend.
All the revenue drivers in NIM stable.
Inflation of NIM expansion being really positive for row, particularly in Canadian banking, but also city national.
Can't underestimate the impact and we have inserted the interest rate sensitivities on city national balance.
Balance sheet of the impact on our revenues of the year over year rate decreases.
So I think as those come back as rates come back those are all positive drivers for ROE on our existing balance sheet and our existing capital base. So if you don't have to put more capital against.
Return of revenue, that's obviously ROE enhancing our very strong fee based.
Revenue generation.
Stable and the mix that we have which is market leading is again really positive for ROE is the strong investment banking pipelines, we have in our goal to continue to.
To advise clients and generate fees off our existing balance sheet and generate more turns to that balance sheet than we have in the past all our Roe.
Enhancing.
Our capabilities and obviously as we've talked about returning capital to shareholders.
Sure.
Through dividends share buybacks.
Earl ROE enhancing as we manage that base of excess capital and knowing that if we do make any inorganic play it will certainly be four.
<unk> strong growth and very conscious of any dilution. So those are all.
How we're thinking about capital so I would say when you net.
The tailwind headwinds are particular franchise has significant opportunity to an enhanced revenues from the existing deployment of balance sheet and our.
Sure.
And I think that's we've earned through that as I have said almost every call up until Q3 quite nicely and those headwinds and therefore, when those headwinds become tailwind or ROE enhancing rod I'll hand, it to you to add some more color. It's a really important question.
Yeah, Thanks, Dave David Dave covered.
<unk> core business.
MS drivers couple of things I look at and we have it on the slide one of the first slides book value per share growth of 12% year over year tangible book value of 17%.
Part of that is showing that our organic client driven growth is going to be ROE accretive and Dave mentioned, the city national acquisition and how.
How it accelerated organic growth. Since then <unk> has had an annual CAGR of 3%.
Growth since that acquisition and our EPS has grown.
Nearly 12%.
And so as long as we can continue that velocity of growing earnings and client relationships.
Faster than capital, we're going to continue to be accretive to Roe.
Dave pointed out you know as you point out in your question, it's not going to be at this level because we're not gonna have big reversals every quarter on PCL. So you strip that out and you should see ROE in the high teens and with an upward bias.
Great. Thank you.
Thank you. The next question is from Marion Linda <unk> from TD Securities. Please go ahead.
Good morning gradually go back to some of the the outlook you offered.
You suggested that impaired loan PCL in 2042.
I see about the long term average for Royal.
I think that's how you phrased it.
If I look at the long term average for Royal impaired Youre, probably talking something like 25 to 30 basis points over the very long term and this year.
Imperatives, only about might only be about 10 basis points. So.
We're talking about a near tripling.
Of impaired loan PCL in.
In 2022 relative to 2021, so the offer that outlook.
It seemed to me that you are seeing something that's encouraging you to call for a near tripling in the impaired loan PCL. Firstly did I got my numbers right.
And secondly, what might you be seeing.
Yes. Thanks for the question, Yes, I think Youre general numbers are about right.
Clearly at a few things.
One is.
I think we talked about in past quarters, there's really three things we've been looking at here kind of assess our forecasting uncertainty.
Certainty around those one was progress on vaccines to subsequent reopening of the economy and then three was the government support the significant levels of government support.
And certainly what we've seen really good progress on those first two points, it's a third point that still.
Difficult out there and we will inflect.
The trajectory of loan losses, as we head into 2022.
So part of the debate that we have.
<unk> seen over the last year is the degree to which that government support.
Defers or mitigate those losses and I think the further that government support goes and the further it goes into the economic recovery.
It pushes more and more towards mitigated not just deferring those loan losses, and so I think there could be a period in 2022 and certain of our portfolio.
That we will see our loan losses, our stage three loan losses get up to around our long term averages.
But as I said in my comments we.
We have very significant stage, one and two reserves in place right now and that we would expect that really to be offset or funded by releases in stage, one and two so that that kind of total mix. If you will.
Remains.
Well within our long term average is as you articulated.
So if we if we bought back then too.
The notion that the impaired loan losses.
It could be higher in 2022, then the long term average.
And would it be possible for you to highlight what specific.
Product.
You you would point us to or would it be something like credit cards and personal loans would it be more like commercial or is that just a little too granular at this point in time to comment on.
Yes, I would put it towards where we see government support with significant rate and so that's going to be.
A large part we're in.
In our personal and commercial businesses, where we have seen significant government support.
Benefiting consumers as well as businesses, we've seen that factor insignificantly.
Along with all the actions that consumers are taking themselves obviously to effectively suppress loan losses to very low levels that we're experiencing right now as we've noted we're seeing.
The lowest level of new formations that we've seen in a long long time.
And so those are all positive factors in the near term, but ones that we don't necessarily expect to see persist over the long term.
Well recently, we've seen obviously in the wholesale side, our PCL our stage three PCL has benefited from recoveries right. We've seen recoveries in all three businesses.
Mrs that have kind of again suppressed the near term stage III.
Reserves, we put in place. So again I think some of those will normalize, but certainly we're really looking to see how the government support rolls off and how that consumers transition back into the economic recovery.
In fact, our loan losses, and so we do expect.
Over 2022.
We get to that point as I indicated and as I said it'll be funded in part by our releases in stage, one and two.
Let me, let me put it another lens on it Mario which might help also I don't know if you picked up on this and Graham's comments was this is we still have a significant stage one and two build.
Since the pandemic.
And we still have 60% of what we added on our balance sheet and so implicit in that is that we will incur losses on those which means higher stage III than what we've been seeing so we don't see those losses.
We would expect to.
The lease some of the reserves if we do see some losses, we would use the stage one and two against those.
I think though what Graham was talking about is implicit in our allowance for loan losses as well.
Okay. That's helpful. Thank you.
Thank you.
Again, Please press star one if you have a question.
And the next question is from <unk>.
<unk>.
So from Bank of America. Please go ahead.
Okay. Thanks for taking my question.
Just wanted to follow up.
Steve you spent a lot of time talking about RBC ventures, new ways of client acquisition.
Talk to US I think one of the conversation just from this longer term investors are centered on one what.
What does like.
Our structured open banking framework in Canada mean with regards to Europe grip on the war client wallet share and like is there a risk to our oil and then looking externally does fintech create M&A opportunities a partnership opportunity.
In the U S or in Europe for RBC to play.
They are disruptor role as you've seen with some of the big banks trying to do.
That's a great question and thanks for coming back on in asking I'll give a strategic.
Perspective, then you know Neal is obviously very active on the strategy and the policy within within Canada.
Being discussed right now.
I have to say we were anticipating a more open market. We are anticipating disruptive tech platforms that we've talked about for the last five years and therefore, when you think about ventures. When you think about owning you think about these ecosystems. We feel they are all designed to compete in this type of marketplace. So when we think of open banking and the ability.
To see more clients and attract them through our beyond banking ecosystem. We think we're well prepared to compete in an open banking world. We've been preparing for this one of the reasons why create more value for customers is the rallying cry and they're in their core strategy is around wrapping our arms around clients creating.
Two are you, making it very hard through RBC vantage through our partners like door Dash and Petro Canada to pull a client away. So we feel really well prepared with how we've wrapped our clients and value to compete and therefore, we have access to other clients with all the channels. We have we think open banking can create a significant opportunity for RBC and we don't fear.
Ratings with that Neil specifically on you know you worked on policy you worked on the strategy over to you.
Yeah. Thanks for the question.
In Canada, I mean, it's but this has been a file has been opened for.
Quite a few years now and the Advisory Committee. It was just just now submitted the report.
To the government, but the industry has been working.
So it's a very collaboratively to make this come to market faster than somebody think we've already land as an industry on what's called the <unk> standards. So we have a.
A format that we can start to put in place to exchange data in a safe and private way I mean, I think these are some of the Paramount concern so.
At the end of the day I would say.
We are supportive of open banking and look at it is it's something that clients are asking for it is not about being made to do it it's about something that we see clients clients really having a right in terms of the portability of their data I think it's important to sort of call out. If you look at other regions, particularly in the UK, which was one of the early movers.
There wasn't in that market.
A real increase in churn and there hasn't been.
Many markets, where you've really seen a lot more competition.
I think if that does happen if Canada were to play out differently I think we view this as an opportunity a lot more than a risk.
We look at our value proposition.
You spoke to some of the new ones were bringing to market, but our core retail banking value propositions of our product line, our ability to reach out to customers and the way we use data now.
We believe theres, a real consolidation of the wallet opportunity in an open banking environment that net net we come out as a winner. So I think those are probably the things to take away is.
That the industry is working together to try to get this to happen and that Theres, a lot of safety and privacy concerns to get right.
But it will enable some of the things Dave spoke about and if there is more churn than we are ready to we're ready to get into it.
That's helpful. And then just in terms of when you look at the U S.
Is that an opportunity for on the consumer side, given Lake City Nationals have a niche focus is there an opportunity for you to please the disruptor rules in U S retail banking and on the consumer side.
Yes, that's a great question and it's something we've been thinking about for quite some time I think the crease a key strategic.
Pic capability you need is a partner that gives you access to those clients, it's very straightforward to build a direct to consumer deposit bank, but you pay wholesale rates plus for those deposits that make it very difficult. The key is to have an asset generator along with the deposit taker, where you need a core strategic.
<unk> is the best way to go to market, we've talked to many partners.
It's still on the strategic table.
Yes, it's something that I could see RBC doing in a direct to consumer way as I said before we do not see ourselves being a mass consumer branch based banks I'll say that again, just because I know investors want to hear that.
Part, but a direct to consumer with a strategic partner is a very effective way to go to market.
Versus a funding model of direct to consumer which is high high cost savings is always accessible to us we've held off given obviously the long deposit position, we have right now.
It's not worth launching.
<unk> that we have it on the shelf ready to go as we've talked about before so that would be how I would think about direct to consumer strategically in the U S.
That's helpful. We'll stay tuned thanks, David Yeah.
And one more question I think it will take and then we'll wrap up.
Thank you and our final question will be from Nigel D'souza from Veritas investment research. Please.
Go ahead.
Thank you good morning, I, just wanted to touch on the risk weighted assets and fee reversals in the quarter and should we expect those two items to move in tandem so what I'm getting at here is as you reassess and lower your probability of default assumptions.
Do we expect that to drive your PCL reversals as well as have a benefit on the <unk> side to a lower risk weighting is that the right way to think about it.
I know Joe its Greg ill start with <unk>.
Rod wants chicken he can add to it but.
They should be correlated, but they're not they don't correlate one to one.
It would be the default probabilities that go into <unk>.
Are designed to meet a regulatory purposes, there and so they are really meant to be very long term averages and so what we do reassess those annually.
Don't change dramatically from year to year, we saw obviously a significant shift this year, but that was a byproduct of a big investment on our part.
So to kind of reevaluate our methodology there a big investment in data to get more granular and then kind of a onetime methodology change.
<unk> nine is meant to be more of a point in time estimate of default and so thats more of a real time impact that will translate through so directionally they should correlate but they certainly don't correlate one to one.
The only thing I'll add and then turn it back to David I would expect because that was a onetime decrease in our parameters are whole.
Assail parameters I would expect <unk> to have an upward bias from here as we continue to grow clients and in our businesses and I would expect the allowance is to have a downward bias as we continue to work through the pandemic.
And the reserve build that we built since then so what.
With that I'll turn it back to Dave Thanks, Rod maybe I'll, just say a few wrap up questions really appreciate the comments today, which still somatic were centered around how youre going to grow how are you going to adapt to a changing world whether it's a policy changing world deal with variance in and deliver shareholder value and I think.
And they reinforce our comments around growth whether it's in the Indian banking from cards revolving credit growth well positioned on commercials have drawdown in lines and more term lending with our existing facilities. One thing. We didn't mention is one third of all our mortgage volumes are now new clients first.
First time clients to the bank and now we have a unique opportunity to cross.
Cross sell those clients into RBC vantage into a number of other investment products, so very attractive client and that's different than it was five to 10 years ago, where potentially 80 plus percent would've been already existing clients.
On city National we've talked about.
Our core commercial capabilities.
Just you talked about moving into the mid corporate area and growth in our high net worth core banking are all key.
Key abilities for us to continue.
Lower risk higher Roe.
Core growth that we've enjoyed now for the last five years, we didn't get a chance to talk about Canadian wealth today, but outstanding.
<unk> in our asset management business and global asset management and in our Canadian wealth franchise.
During a disproportionate share of investment growth in the country, whether it's our AUM and obviously well poised to continue to grow that we've invested not only in our people, but our technology.
And we're cross selling better off of that.
So when.
<unk> head of capital markets and the investment banking pipeline, obviously, we're really well positioned and we didn't get a chance to talk about that today, but really strong pipeline and obviously looking for year over year in our trading businesses. It was particularly in FIC was a difficult year over year adjustment, but we hope some of that does come back really.
When you look at cost control and I would say on the risk side, we don't see anything in our portfolio and very strong adjudication and our growth has been increasing at a higher ROE lower products, particularly mortgages in the U S mortgages in Canada, which is Huawei in sort of that new slide to give you an idea.
Not just the NIM, but its the NIM after risks.
Adjusted that you have to also.
Strong guidance on what ROE are you driving for your organization, so when I think about risk.
Our strong ability to manage risk or a premium growth.
The investment for growth and we got some great questions on ventures today and around the ecosystem beyond banking, which will drive not only new customers, but are already starting to present new.
Also be new streams for the organization. So thank you for very strong series of questions. Today I will see you in Q4.
Thank you.
The conference has now ended please disconnect your lines at this time and thank you for your participation.
Revenue.
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All participants please continue to standby.
Entrees will begin momentarily.
Once again, please continue to standby we thank you for your patience.
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