Q4 2021 Royal Bank of Canada Earnings Call

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All participants please standby.

Your concentration.

Good morning, ladies and gentlemen, welcome to Rbc's conference call for the fourth quarter 2021 financial results.

This call is being recorded I would now like to turn the meeting over to assume.

Head of Investor Relations. Please go ahead Mr Imran.

Thank you and good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer, leading on Chief Financial Officer, and Graeme Hepworth Chief Risk Officer also joining us today for your question, Neil Mclaughlin Group head personal and commercial banking, Doug Guzman group head wealth management insurance and I.

Yes, and Derek Elder group head capital markets 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.

Everyone have a chance to ask questions. We ask that you limit your questions and then re queue.

I'll turn it over to Dave.

Thank you Austin and congratulations on your recent appointment to Rbcs head of Investor Relations.

And good morning, everyone and thank you for joining us today.

This morning, we reported fourth quarter earnings of $3 $9 billion.

Our results include further releases of PCL on performing loans, primarily reflecting improvements in our macroeconomic.

And credit quality outlook.

Provision pre tax earnings of $4 $8 billion.

We're driven by robust client activity.

Driving fee based revenue growth in Canadian banking wealth management.

And investment banking.

In addition, Canadian banking and city National continue to generate strong volume growth.

These factors were partly offset by a moderation in our global markets businesses.

Continued impact of low interest rates.

And higher expenses, largely due to variable compensation.

As we continue to invest in our core businesses and strategies, we're committed to running a bank efficiently and driving improved productivity.

Looking back.

2021 was a year that saw RPC stepping up for our clients and communities, while supporting our employees.

Across our core businesses, we saw robust client activity and as a result, we delivered record revenue up nearly $50 billion.

We earned <unk> 16 billion in net income and generated a 19% Roe.

All paying $6 1 billion in taxes over 6 billion in dividends and meeting all of our medium term objectives.

Also noteworthy was our strong double digit growth in book value per share highlighting our ability to compound the value of our business, while maintaining the quality and our risk appetite.

RBC franchise.

We ended a strong year with a record CET one ratio of 13, 7% up 120 basis points with see tier one capital up $7 $5 billion from last year.

As we turned our focus to 2020 two.

Macro perspective, we continue to see a strong recovery with consumer spending almost 20% above 2019 levels increased mobility in society and corporate management teams actively pursuing growth opportunities.

At the same time, we recognize there are significant challenges.

Including supply demand imbalances, disrupting supply chains, and various parts of the economy, including labor housing and energy markets.

These factors are driving uncertainty and adding to inflation risk, which we're closely monitoring.

While higher interest rates could add some drag to economic growth, we do not see material credit concerns given excess client liquidity strong underwriting including testing for higher rates.

That's the Dean will speak to later, we are well positioned to benefit from rising interest rates, given our leading Canadian deposit franchise and the asset sensitive nature of U S wealth management balance sheet.

The highlight the potential benefit over time, the impact of lower interest rates reduced our revenue by approximately $1 billion in each of the last two years.

Majority in Canadian banking, and U S wealth management, including city National.

Additionally, we are poised to benefit from the deployment of unprecedented buildup of liquidity that we expect Canadians will use for a better tomorrow, whether that is to buy a home increased discretionary spending or invest in financial markets.

Within this context, let me expand how our momentum and ability to create value for clients.

Long with our premium franchises position RBC to succeed heading into 2022 and beyond.

Our strong balance sheet gives us flexibility to continue supporting our growth momentum and strategic initiatives. In addition to driving increasing shareholder returns.

And this morning, we announced a 12% or 11% increase in our quarterly dividend, while also announcing our intention to repurchase repurchase up to 45 million common shares under our normal course issuer bid.

We remain focused on driving premium organic growth, including expanding our market leading position in Canada.

We see growth opportunities in each of our Canadian businesses and our results. This year were what the value we create for our clients.

The Canadian banking, we added over $35 billion in mortgages and over 22 billion in personal deposits over the last year, leading to market share gains in both these anchor products.

We have added and continue to add to our 750 plus mortgage specialist sales force.

We also continue to invest in digital tools and capabilities to enhance the client experience and the productivity of our sales team.

Looking forward, we expect mortgage growth to be strong and a high single digit range supported by low interest rates.

Supply demand imbalances affecting prices and increasing immigration activity.

We are seeing a strong recovery in transactional purchase activity, which helped drive a sequential increase in credit card balances, including revolvers.

And Bo commercialize a commercial utilization rates remained well below pre pandemic levels. We are seeing an uptick which is helping drive the emergence of stronger commercial lending activity.

We're also hiring commercial account managers and priority industries, including an RBC X, where we provide capital and advice to the growing innovation ecosystem.

Now as we move up the value chain and continue to re imagine banking and innovation, we are well positioned for a world of payment modernization and open banking.

RBC ventures remains core to accelerating our growth by creating value beyond banking, including in our health care and youth ecosystems.

We are excited about Doctor Bill adventure, which helps reduce the complexity of medical billing for physicians.

We're currently serving nearly 3000 Canadian positions up 28% from last year.

Also within the health care vertical we continue to support Kansas Medical community, whether exclusive multi year strategic partnership with the Royal College of physicians and surgeons of Canada.

And the youth segment, my Dow as a new pillar that helps kids learn and practice money management, we recently hit a milestone having onboard at 10000 Canadian households.

Over the last two years, we've added 350000, net new Canadian banking clients, including over 200000 this year alone.

In a period when clients weren't making as many decisions to switch banks and immigration activity was muted.

Given the value added initiatives, we've put in place we are well positioned to continue attracting even more clients.

An important area of focus.

Almost 70% of our Canadian banking clients, who have a core checking account and or a mortgage with US also of a card and investment relationship.

And clients with mortgage and checking accounts that were on boarded three years ago in 2018 have deepen their relationship to all four products at a rate that is three times greater than any other acquisition relationship.

This leads to another core part of our Canadian strategy, which is to deepen our client relationships, including providing access to best in Class Award winning service and advice.

Which has defined our leadership in wealth and asset management.

As I noted earlier, we expect much of the buildup of liquidity in the system will be used to increase discretionary spending or be invested.

And our whole set of an integrated end to end industry, leading wealth and asset management solutions have well over one trillion dollars in client assets.

These covers the full spectrum of client segments and needs ranging from digital only solutions up to full service discretionary wealth management.

Following a record year last year RBC direct investing finish 2021 with another year of exceptional growth.

<unk> record trading volumes and record new client acquisition with nearly half of new client side of this year being under the age of 35.

And Investees.

I've seen account openings doubled from the last year.

The wealth advisory space are leading scale is complemented.

Is complemented by our differentiated technology and investment expertise, including private banking insurance state philanthropic and business planning solutions.

These factors drive strong advisor productivity with RBC Dominion Securities ranked number one amongst bank owned advisory firms in 2021 investment executive brokerage report card.

And my adviser our digital platform to review financial plans.

Now has nearly 3 million clients.

Overall, our wealth management businesses continued to see strong growth in client assets.

On a year over year basis, Canadian banking and wealth management, Canada increased 26% each with RBC global asset management.

We are a leading north American asset manager at scale with 85% of AUM outperforming the benchmark over the last three years at below average fees.

As a testament to the strength of the platform.

RBC Global asset management was recognized for its outstanding investment performance at the 2020, One Canada Lipper Fund awards.

RBC Gam AUM was up 15% year over year well.

While higher markets were a large contributor we also saw record Canadian long term retail net sales of over $20 billion or 17% of all industry wide flows adding to its leading market share in industry AUM.

And though we can't control where equity markets will go we are well positioned to add to our market share and industry net flows as clients can choose from a broad range of products and advisory services, which increasingly include in ESG and alternatives product suite.

Our scale innovation and an ability to deepen client relationships with leading value propositions underpin, our 30% Roe across our banking wealth and asset management platforms in Canada.

Turning to the U S I want to focus on our diversified growth strategy.

Our client franchises across wealth management, private and commercial banking and capital markets generated $10 billion 10, U S $1 billion or 25% of total revenue over the last 12 months.

Our U S capital markets franchise, our largest U S business.

Yet another great quarter, as we reported strong investment banking revenue on higher M&A advisory and loan syndication activity.

We are increasingly deepening relationships and winning significant M&A advisory mandates with important partners such as Blackstone.

Earlier this year RBC capital markets acted as exclusive financial advisor so Blackstone on the acquisition of evolution, a leading education technology solutions provider.

This followed the adviser on their acquisition of signature aviation.

Looking forward our investment banking pipeline remains strong benefiting from the strength of our franchise. Our goal is to be a top 10 global investment bank, while maintaining our position as the clear leader in Canada.

And with this in mind, we have added a number of managing directors in U S investment banking.

Especially in technology and healthcare sectors, while also focusing on sustainable finance a growth opportunity for us and our clients.

City National continues to be a growth company with wholesale loans up a further 3% over last year or up 11%, excluding triple P trends.

Our mid market strategy, along with expansion of market coverage is expected to add to our growth trajectory.

Mortgage that city national were up 23% year over year as we continue to grow our high net worth private banking capabilities with a mortgage led growth strategy.

Deposit growth was up a strong 25%.

This year.

Going forward, we continue to expect strong loan growth in our city national businesses.

And in U S wealth management, we grew client assets, 30% year over year to nearly 570 billion U S dollars, including the addition of high quality advisers to our private client group platform.

We are increasingly adding lending products to provide holistic advice to our U S wealth clients. Our securities based lending portfolio has increased by over $2 billion or nearly 60% year over year.

Beyond our underlying business performance in 2021, we recognize we have an important role to play in accelerating clean economic growth.

A key pillar of our enterprise strategy is to play a leadership role in the transition of our economy to net zero emissions, including helping clients work through an orderly energy transition.

As part of that we are committed to providing $500 billion in sustainable finance by 2025.

And in addition to our own net zero commitments. We are pleased to have joined the net zero banking Alliance.

Some up we're entering 2022 with strong momentum.

And are well positioned to take advantage of secular and macro trends and deliver client and shareholder value over the near and long term.

Our focus will be to drive growth, while maintaining prudent risk management and expense discipline.

We will continue to leverage the size and strength of our balance sheet to consolidate our broad based leadership position in Canada, including deepening client relationships and investing for the innovation economy.

And in the U S. We will continue to execute on our multi pronged growth strategy across capital markets City National in wealth management.

Before I conclude I want to thank our more than 87000 colleagues for their relentless dedication.

Living our purpose through these extraordinary times.

And now I'll pass it to Nadeem on our new CFO was well known to the investment community from her time as head of Investor Relations and CFO of RBC capital markets previously and he brings a wealth of experience gained over 20 years at RBC, including a number of positions of increasing responsibility in our corporate Treasury group.

And then dean over to you.

Dave and good morning, everyone I will start on slide 11, we.

We reported quarterly earnings of $3 9 billion up 20% from last year, including the benefit of a 355 million release of PCL on performing loans.

Earnings per share of $2.68 was also up 20% paper.

Pre provision pretax earnings of $4 8 billion were up 4% year over year, including the impact of a legal provision at city national.

Before I expand on earnings drivers I will speak to capital on slide 12.

Our CET one ratio it was up 10 basis points sequentially to a strong 13, 7%.

Our strong earnings net of dividend added 42 basis points to our CET, one ratio highlighting the capital generation power of our diversified business model and premium Roe.

Robust client driven business growth across our largest segment.

Partly offset by $2 billion of net credit migration.

Looking forward, we will continue to take a disciplined approach to deploying capital to create long term value for our shareholders. We will lead with client driven organic <unk> growth and lets you revert back to our traditional policy of twice a year dividend increases returning to the midpoint of our 40 to 50 per.

<unk> dividend payout ratio objective.

This morning, we also announced a normal course issuer bid.

Will allow us to repurchase up to 3% of our common shares outstanding.

As yet another lever to manage our capital levels.

Moving on to slide 13.

Net interest income was up 1% year over year or up 4%, excluding the impact of lower fixed income trading revenue.

Was impacted by lower spreads on repo balances.

Wrong volume growth more than offset continued margin headwinds driving solid net interest income growth in both Canadian banking and city national.

Turning to slide 14.

At the segment level, we had outsized NIM compression in our largest banking franchises.

Gideon banking NIM decreased nine basis points sequentially, partly due to an accounting adjustment of two basis points or 22 million, which we do not expect to repeat going forward.

Another two basis points was due to lower mortgage prepayment revenue.

Reversal of the favorable trends, we noted on our Q2 earnings call.

The three basis point impact from lower asset spread is largely related to strong mortgage origination as the benefit from the sequential credit card growth was offset by growth in lower spread mortgage loan.

City National NIM was down 20 basis points sequentially with 11 basis points related to lower loan team largely from the forgiveness of the first round of Triple T loan.

Another seven basis points.

Lower loan to deposit ratio trend as deposit growth continued to outpace strong loan growth.

Going forward, we expect both Canadian banking and city national margins to stabilize around current levels, but the bias to the upside as central bank raised interest rates.

While the city National's interest rate sensitivity is largely driven by an increase in short term rate Canadian banking would benefit more from a broader across the curve increase.

We estimate that a 25 basis point increase in interest rate across the curve could result in over $250 million of additional revenue over 12 months across Canadian banking and U S wealth management inclusive of sweep deposits.

We expect to benefit from a rate hike in the second and third year would be higher than seen in the first year.

Turning to slide 15, noninterest income was up 20% year over year, we continued to see strong growth in higher ROE investment management and mutual fund revenue in wealth management and Canadian banking.

Strong M&A deal flow and loan syndication activity were reflected in higher advisory and credit team as we execute on our capital markets client centric growth strategy.

Higher card service revenue in Canadian banking, reflecting Canadians increased spending on travel and entertainment heading into the holiday season.

As we continue to enhance our rewards programs and drive higher client engagement through increased option to earn and redeem points.

Yeah, our rewards liability by 29 million this quarter.

Offsetting this was an expected moderation in global markets revenue, which I'll provide more details on shortly.

Turning to expenses on slide 16 non.

Noninterest expenses were up 9% year over year.

A legal provision of $116 million in city national impacted expense growth by approximately two percentage points.

Adjusting for this provision and excluding higher variable and share based compensation across our businesses.

Expense growth was 2% year over year.

As quarterly capital markets compensation ratios typically experienced this volatility in the fourth quarter, it's important to look at full year trend.

And the 2021 annual ratio of 35% is consistent with 2020 levels.

Salaries and benefit costs were up 4% from last year as we continue to add employees in Canadian banking and city national is support increasing client activity.

Marketing costs were also higher as the economy opens up and we increasingly engaged with new and existing clients across our businesses.

However, there is also an element of seasonality in the quarter over quarter increase of certain line items.

Looking forward to 2022, we expect marketing cost to trend higher than pre pandemic levels as we execute on our strategic growth initiatives.

However, corporate travel costs are expected to remain below pre pandemic levels in the near term.

Overall, we expect annual expenses, excluding variable and share based compensation to grow at the higher end of low single digits range as inflationary pressures and higher investments to support growth initiatives are expected to be offset by our continued focus on driving efficiencies and productivity.

City game.

Moving to our business segment performance beginning on slide 17.

Personal and commercial banking reported earnings of $2 billion this quarter, including the benefit of lower P. C. L. K.

Canadian banking pre provision pre tax earnings were up a strong 8% from last year as solid revenue growth was supported by strong operating leverage.

Looking forward, we expect annual operating leverage to be closer to the high end of our historical 1% to 2% guidance with the potential to be above that range as central banks raise interest rates.

Canadian banking revenue was up 6% year over year with net interest income up 2% from last year.

On a sequential basis, an uptick in commercial loan growth added to continued strength in mortgages.

Growth in credit card balances is largely related to higher purchase volumes with payment rates remaining elevated relevant relevant relative to pre pandemic levels.

Noninterest income was up 15%.

Due to higher mutual fund distribution revenue underpinned by higher AUR, a including record net sales as client liquidity continued to move into investment products.

Our service revenue was up on higher purchase volume.

Turning to slide 18 wealth management reported fourth quarter earnings of $558 million driven by strong investment management in mutual fund revenue growth and robust volume growth at city National.

These were only partly offset by a commensurate increase in variable compensation higher non compensation costs, and a legal provision and lower spreads at city national.

Double digit client asset growth across our north American wealth businesses benefited from both higher market with strong North American equity markets more than offsetting weakness in bond indices as well as strong net sales.

RBC Gam attracted total net sales of over 12 billion in the quarter with strong institutional flows adding to continued momentum and Canadian long term retail net sales, which added 4 billion to AUM.

The majority of Canadian retail flows went into balance mandate.

Turning to insurance on slide 19.

Net income of $267 million increased 5% from a year ago, primarily due to favorable annual actuarial assumption update.

Partially offset by lower favorable investment related experience, including the impact of realized investment gains in the prior year.

Insurance revenue benefited from higher group annuity sales and growth and longevity reinsurance and Canadian insurance sales.

Looking at I N T S on slide 20.

Net income of $109 million increased 20% from a year ago, primarily driven by higher revenues from our asset services business.

Funding and liquidity revenue was also higher year over year as the prior year reflected heightened impact from elevated enterprise liquidity.

Turning to slide 21.

Capital markets reported earnings of 920 million up 10% from last year.

Provision pre tax earnings surpassed 1 billion for the eighth quarter in a row.

Corporate and investment banking reported strong investment banking revenue as our platform platform performed very well in an environment of robust deal flow and elevated sponsor activity.

In contrast, global markets moderated from elevated levels last year.

Revenues were down 14% year over year, reflecting similar trends across the industry.

Lower spreads continue to impact repo and secured financing revenue, which was down 18% year over year.

Equities revenues were down 17% as volatility levels normalize closer to pre pandemic levels.

To conclude we continue to drive strong growth in volumes and client assets and are well positioned to benefit from higher interest rates.

And while we look to accelerate our growth momentum, we remain focused on expense management and effectively deploying capital to continue delivering value for our shareholders.

With that I'll turn it over to Graeme.

Great and thank you Dean and good morning to everyone.

So starting on slide 23, the allowance for credit losses on loans of $4 4 billion was down one $7 billion from its peak in Q4 of last year.

Reflecting the ongoing improvements in our macroeconomic outlook and the critical area of our portfolio Dave noted earlier.

In 2021, we released over 50% of the pandemic related reserves on performing loans built in 2020.

Releases this quarter were primarily in our commercial personal lending and cards portfolios in Canadian banking, reflecting further improvements in our macroeconomic outlook and the political do you have those specific portfolios.

Allowances for these portfolios do remain above pre pandemic levels, given the ongoing headwinds that I will touch on later in my remarks.

Turning to slide 24, our gross impaired loans of $2 3 billion were down $253 million were four basis points during the quarter.

Compared loan balances decreased across all our major businesses and new formations of 298 million remained close to the nine year low set last quarter.

The Canadian banking, we had modest increases in new formations during the quarter with increases in the unsecured personal lending and small business portfolios.

And capital markets, New formations were limited to just $7 million.

Clients continue to benefit from favorable market conditions.

Turning to slide 25, PCL on impaired loans of $137 million or seven basis points was down by one basis points and the claim for a sixth consecutive quarter.

The level of provision through 2021 reflect the quality of our client base, our prudent underwriting practices, the economic recovery underway and the impact of government support programs on delinquencies and impairments.

And our Canadian banking retail portfolio PCL on impaired loans was down 12 billion quarter over quarter due primarily to lower write offs on credit cards.

During the year the retail portfolio has benefited from higher client deposit levels decreasing unemployment rates and ongoing government support programs.

For context, this quarter, approximately 6% of our retail lending clients were still receiving government support down over 60% from the peak observed in 2020.

And with Canadian banking commercial portfolio PCL on impaired loans was down 3 million quarter over quarter.

Provision was taken this quarter continues to be primarily in sectors impacted by COVID-19. However, the portfolio overall continues to see low and stable delinquency rates that credit upgrades and reductions in credit watch list exposure.

In capital markets, we had a net recovery unimpaired loans for the third consecutive quarter.

This portfolio is not materially impacted by government support programs as it benefited from a constructive operating environment and strong market liquidity.

Finally in wealth management PCL on impaired loans increased 14 million quarter over quarter.

During the quarter, we took additional provisions on alone written off in the information technology sector at city National.

Overall, we continue to be pleased with the positive trends in our loan portfolio supported by favorable market conditions.

Well, many individuals and businesses have weathered the worst it depend on a number of headwinds remain as Dave noted.

Rising and persistent COVID-19 cases, and the prospect of new variants creates the potential for continuation or resumption of COVID-19 related containment measures.

Inflationary pressures pressures may also impact our clients were increasing costs driven by supply chain disruptions and labor shortages and through increased increases in interest rates.

We have incorporated many of these risks into our provisioning scenarios, which leaves us comfortable with our current levels of allowances.

Looking forward, we do expect our PCL ratio on impaired loans to trend back toward long term averages over time.

In addition to the headwinds I've already noted the wind down of government support and owner, we will also impact with our commercial and retail clients.

Full impact will take time to materialize due to the strong levels of liquidity savings and job demand currently in place.

Additionally, we have seen strong recoveries unimpaired loans over the past few quarters, which we do not expect to persist given the low levels of impaired loans now remaining.

That said as I noted for a number of quarters, we expect to be able to draw down on the existing allowance on performing loans.

Our total PCL across all stages will remain below long term averages.

Importantly, we remain steadfast in our commitment to supporting our clients and delivering advice products of insights to help them navigate the evolving macroeconomic and operating environment.

With that operator, let's open the lines for Q&A.

Thank you we will now.

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All participants with just a few questions.

Thank you for your patience.

Our first question is from John Aiken from Barclays. Please go ahead.

Good morning, I wanted to start off on capital markets. Derek we saw an exceptionally strong year, but as the second half evolved we saw revenues trailing off a little bit.

The revenues in the quarter were one of the lowest store for the last eight quarters was there anything in the quarter you'd highlight as unusual either positive or negative.

Is this a run rate you're looking for in terms of 2022 or can we get the revenues a little bit higher.

From here.

Sure. Thank you for the question I think I'll.

I'll address it in two parts first looking at Q4 I think overall it was it was a we feel is quite a solid quarter.

As Nadine reviewed we had very strong activity on the investment banking side.

In M&A and in loan syndications, and we see that level of activity continuing in our pipeline heading into next year continues to feel very healthy obviously, the one area where we saw.

A slowdown in revenue was in the marketing business and I would say that you know there were a couple of things driving that.

One is just the ongoing normalization, we've seen in client activity and volatility that we saw in markets. In Q4 now that has obviously picked up as we've come.

Come into the fall again, but it was a little more tepid as we went through the summer second when you're comparing over the last eight quarters.

Recall, obviously Q4 tends to be seasonally slower just given August in the summertime lull in activity that we tend to see so we certainly would not look at Q4 is indicative of where we see normalized quarters going.

I think the third item I would say is you know.

We were quite careful managing risk coming into the fall was uncertain on what Covid and dynamics would bring as our kids return to school in communities continued to reopen.

So I think we came in with a cautious risk mindset and you saw that in some of our var metrics and no trading losses in the quarter.

Obviously.

The return.

In the fall turned out to be pretty smooth and market stayed very very robust and so in hindsight, where we are a little cautious on risk possible, but I think it was probably a prudent way to approach it given what we're facing at the time.

If I, then turn to the outlook going forward.

We do as we've communicated see normalization in markets, but we think that our run rate will settle above pre pandemic levels and you know if I look at pretax pre provision earnings pre pandemic, we were generally running in the $800 million to $850 million a quarter range.

We saw the elevated client activity throughout the pandemic that was more in the $1 one to $1 2 billion range and as <unk> highlighted we've now had eight consecutive quarters over 1 billion. Importantly that does include the first quarter of 2020, which was before the impact of the pandemic, which was our first quarter, it's true that $1 billion Mark and so.

That is certainly an area, we're focused on and while we see things normalizing our objective would be to try to keep that run rate above the $1 billion level in terms of pretax pre provision.

Great. Thanks for the color Derik I'll re queue.

Thank you. Our following question is from Brian <unk> from Nomura from Bank of America. Please go ahead.

Good morning.

I guess just a question Dave as we think about capital allocation I think thats going to be a big deal.

In terms of just some of the decision jewelry, making talk to us in terms of when you think about the CET, one north of <unk> and a half.

Beyond funding for organic growth of the announcements you made this morning, how do you think about inorganic growth last quarter, you talked about strategic partnership for the asset generation.

Would love to hear your thoughts around asset management wealth management distribution.

There might be opportunities there that you could deploy some of this excess capital.

Yes, do you think you'd coverage as you know part of my answer on your question. So you're on all the right themes, but I think one of the things we're trying to highlight in our comments. This morning is that more capital intensive higher return growth opportunities are starting to present themselves in credit cards and commercial lending in Canada, certainly our mid market corporate strategy in the U S capital markets.

Corporate banking, we're looking to put more balance sheet out there and again as you said, we have very strong organic capital generation ability that will fund the majority of that but we do expect to see really good <unk>.

Growth as our clients start using their balance sheet and our balance sheet to a greater degree. That's obviously the primary use is organic growth.

As far as inorganic to your question Youre, starting to see a number of our ventures take.

Take flight, we highlighted two more ventures to you today Dr. Bill.

Partly through inorganic acquisition are looking to build out the healthcare vertical it's been with a partnership with the college of physicians, it's been a fantastic partnership up 28% as you heard so we're going to look to continue to build out that vertical.

We introduced <unk> today, which is in the family finance vertical incredibly exciting opportunity if you see some of the similar.

<unk> capabilities in the U S would there be an opportunity there to kind of build out that early stage client pipeline and to bring clients into the organization in very different ways than we have historically, so again as part of future proofing. The organization, we are looking to make acquisitions in.

Those verticals in addition to the small business vertical that we've talked about the mortgage vertical as we look at <unk> and building out our ability to help clients find homes and and close homes. So all of those capabilities will present opportunities north and south of the border for us.

Two to grow.

Acquisitions, I don't generally be fairly small I would think it's better to get these acquisitions early stage and then pay significant goodwill and in later stage I think others. The few other firms that are pursuing this strategy not that many.

We are distinct in this strategy.

Have found similar things that paying a huge premium for oh in mid stage.

It's very expensive and therefore trying to find knees in earlier stages in that $20 million to $150 million range. So again, it's not going to consume a lot of capital, but very important to our growth strategy.

The other place we can deploy capital is we've got four major ventures that we need to scale and we have an aggressive plan to scale nationally ventures like owner that we've talked to you over the last couple.

Orders were very excited about and our Doctor Bill we talked about today Oh, Joe on the home side. So again, we can deploy capital now into scaling those ventures, so that as a whole gross segment that will.

We will need and we will see more capital as we tried to really build significant momentum into into capabilities that are proven a very strong client reaction to so.

Manage these ventures, we built them, we've tweaked them, we pivoted to where we've found a customer market fit and those four or five that have a strong customer market fit that we keep talking about are going to get capital.

To scale and then it leads to your third question around.

Our more traditional wealth management distribution, absolutely we're interested in acquiring wealth management distribution, either particularly in United States, obviously, but in Europe as well to build out that franchise. There are we're looking for quality platforms, and therefore, we're being prudent and we're thinking about the value and the dilution to the shares.

Holder at the same time, because we have the ability to grow these organically at the same time. So again it comes back to real.

Lynn around we have to create shareholder value and we're very conscious of the dilution and the the last alternative is to return capital to you, which we are starting to do and have that ability through share buybacks and continued share buybacks. So again, nothing strategically changing because the capital doesn't have a half life to it it will sit there and.

It gives us enormous strategic optionality.

Okay, Thanks, Dave and congrats on that even the kimono noodles.

Thank you. Our following question is from many Goldman from Scotiabank. Please go ahead.

Hi, Good morning, Greg you talked about a normalization in PCL ratios.

Back to where they were pre pandemic and I'm just.

Warrants some clarification there in terms of the timing is is this in your mind that 2023 story, where we basically get back to where we were pre pandemic is that the right year to think about.

No I think.

I think there's some hesitancy on timing just because I think there's a high degree of uncertainty out there and.

Certainly you can just reflect on the last week and we see kind of the emergence of new Newberry.

New variants in the kind of uncertainty associated with monetary policy to remind us of that.

Let's say you were obviously you'd exceptionally benign credit environment.

No it's manifested itself with incredibly low levels of loan losses, I think last quarter, we were eight basis points this quarter at seven basis points.

So having said that we do see that kind of trending back to more normal levels that will happen over time.

<unk>.

It's a there's a number of factors that we look at it in kind of the thinking about the timing of those will hit different portfolios.

I mean bearing pieces some.

Some of those factors are certainly around kind of a strong asset prices and the implications of that title and recoveries on the wholesale side. We've seen I think I said three quarters in a row now where we've had net recoveries in capital markets certainly we don't see that persisting in the coming quarters, and so that will influence.

Our provisions there and kind of return us back to more normal levels over time there.

On the retail side, though we benefited from strong asset prices more in the housing and auto space, but those will persist for a longer period, and so that will take time for that to kind of revert to normal or is it related to kind of the portfolio turning over.

Secondly, I think I mentioned government support certainly we've assumed the government support is the.

The degree of suppressing loan losses in the near term our debate has really been around the degree to which that is mitigated or simply deferred.

It was government support has been extended a few times, that's really had two applications. The first it's mitigated more losses than we originally anticipated.

Due to more consumers being bridged the reemployment.

Business is being bridged to reopening.

Secondly, it's also delayed the timing and when do we think that's going to.

Kind of sort, resulting increasing loan losses, I think we had a more definitive personnel and the government support winding down certainly we're seeing that on the consumer side and I think the small business is going to happen over the coming months.

So we'll be looking for signals in our portfolio on that kind of site in the coming quarters, and whether that be through kind of the readings changes or delinquencies, particularly on the unsecured consumer products there.

And then lastly around the macroeconomic environment that we talked about.

The current economic environment is very robust and supportive of the credit outcomes and if we don't see that changing in shipping things and in the near term but.

We are looking at inflation and supply chain and those will have impacts over time and the prospect of rising rates also will factor in overtime.

So you put all this together like things like supply chain will have more of a near term impact on our small business and commercial portfolios.

Whereas higher interest rates will take more time, it'll it'll affect real estate portfolios in pockets of our portfolio, but that's not likely to be a factor in this coming year and so I think in 2022, we will see it rising levels of loan loss allowances, but as I said in my comments I think the total PCL, there will still be well below kind of historic norms.

It's more into 2023 and beyond that you start to get into kind of more normalized levels.

Thanks for the detail.

Thank you. Our following question is from Paul Holden from C.

<unk>. Please go ahead.

Thank you good morning.

I ask you a broad question around.

Equation and related risks now you've already addressed.

What are your expectation for operating expense growth and you've talked about expectations for central bank rate tightening in response to higher inflation, but wondering if there's any kind of.

Other impacts weather negative or positive.

We should be thinking about in terms of bank earnings.

In a higher inflationary environment.

Well, maybe I'll start and then I'll see if anyone wants to jump in the Grand put his hand up here.

Certainly an inflationary environment helps our asset growth helps the economy grow right. So as you think of boats.

I said inflation.

If it's if it's healthy and under.

Our normalized.

I don't not excessive and you don't build a bubble and that can be supportive of overall balance sheet growth and profitability growth.

From that perspective.

You start to worry us when do you start to see excess asset growth in a certain area in that inflationary impact has to be watched in a number of asset classes.

And then you worry about it from obviously your customers cost management and their margins and their ability to to maintain healthy kind of debt coverage ratios. So we do worry about it from a risk perspective, maybe grandma will touch on that so there's a positive and negative and that's why as a bank you have to watch these things carefully on the asset and.

CPI side, and what impact they are having and will get to look into that increasingly with the quarterly numbers that we see from our clients and their income statements and balance sheets so off.

The top of my head those are two areas that we certainly talk about as a team and Graham did you want to jump in on that.

I think could be inflationary kind of ranges, where we're entertaining right now I think that's a net positive for the bank overall I mean, so low rising it we'll see kind of.

Enhancements and improvements to our to our revenue those will be attended with higher credit costs that come with us.

What I referred to earlier and again this can affect different portfolios in different ways, you look at say, our small business and commercial clients.

They're more price takers in place makers are going to have less supplier flexibility.

They're going to they're going to see a higher implications towards our credit costs and that was kind of referring back to the comments I made earlier around our forecast going forward.

This will ultimately translate into higher interest rates as well, but as I said, that's that will take a much longer time to really translate into our credit costs. When you look at our fixed rate portfolios. It is going to lose weight rates are locked in and it will be when we get to those points of refinancing and those are kind of more measured in years and they are in months and quarters in terms of implications there so different portfolios will.

You will see that and absorbed that in different ways.

The corporate portfolio was probably more resilience again, because again, they have a better ability to pass on their inflationary costs.

More resiliency in their operations. So we look at those implications in different portfolios across the board, but overall it will over time contribute to the rising kind of win loss costs.

And then just quickly can you tell us what your inflation range expectations are.

Well I think we have a number of scenarios that we analyze and each of those scenarios is going to have a slightly different assumptions or better that as we look at the different ranges for kind of extreme purposes and capital resiliency. So I'm not sure. There's a single answer we can give you on that but really look through look at a wide range as we think about both capital and earnings on that front.

Okay. Thanks, I'll leave it there thank you.

Thank you. Following question is from Doug Young from Desjardins Capital markets. Please go ahead.

Hi, Good morning, just looking at the wealth management Division I mean pre tax pre provision earnings I've got it up 3% if I exclude the legal provision and it doesn't really match with what we're seeing in the asset growth and I guess my question is is there any other unusual items.

And that's where I'm going is I know there are several segments in here.

Canadian asset management wealth management <unk> I'm, just hoping you can provide maybe some perspective on what youre seeing pre tax pre provision wise, because I think theres, probably some good news stories in the asset management side maybe.

May be overshadowed by some near term pressure in <unk>.

City National Bank.

This isn't maybe a question, but a statement it would be helpful to us.

City National Bank removed from the wealth division because I do think sometimes that clubs are that so I'm, just hoping to get some color on that.

Thanks, Nadine I'll I'll start and thanks for your advice on the segmentation I appreciate that I just as it relates to the U S. I'll start with U S wealth management and you're right. There are there are a couple of elements in there and so we spoke about the strength on the wealth management side, particularly in Canada, and the U S, but the the high growth in the <unk>.

Obviously with that business you do have the variable compensation that scales with it so very strong margin there and we have been adding a lot of advisers in order to generate that growth on the <unk> side. So I would say that the strong momentum in that business going forward from a P. P. P. T perspective, when you look at city National is when we spoke a bit around the <unk>.

<unk> compression that we saw but if you look at what some of the drivers were related to that the PPP loans in particular in which we expect that to taper off going into next year. So that will no longer be a headwind and then as we look at the the mix we've seen a lot of strong asset generation, but that deposit level has still been quite high.

And so that that loan to deposit mix ratio has put some pressure on margins, but then as we start to see rates increase hopefully next year, you'll start to see that margin expansion as it relates to city national on the cost base. There we have grown that bank a lot and so we do have to invest in our infrastructure in order to support that that's why you're seeing a bit more of the uptick.

And cost as it relates to the city national platform outside of the provision.

I would say going forward, though given the expectation around some of those changes as it relates to the stabilization of the NIM that we do expect a strong operating leverage overall in that business segment, and maybe I'll turn it over to Doug.

Yeah sure I think I think the hypothesis and the question is a very good one so if you looked at the core Canadian larger franchises of global asset management and wealth management, Canada. A couple of things that are probably not obvious. So there are some compensation true ups in the quarter.

That's a good news factor in that that while we didn't get the accruals rate throughout the year. Those are performance based or profitability based compensation programs. So that's not a normalized run rate there is seed capital the quarter over quarter was a little bit lower than the prior cup prior quarter, but but there again not fundamental to the.

To the.

The success of the business. So you are right.

The big franchises that drive the bulk of the earnings in the non U S. Part of the segment are are very healthy and fundamentally very strong.

Great. Thank you.

Thank you.

Following question is from Gabrielle Hussain from National Bank Financial Please go ahead.

Good morning.

A follow up for Derek on the capital markets outlook.

I guess some of the indications there, but do you think earnings growth and <unk> growth in your segment can be positive and.

The coming year.

And then a separate question Dave Nadeem.

Dave in your opening remarks, you talked about $6 billion of taxes.

This past fiscal year.

It makes me think about the.

Liberal.

Proposal to introduce a third tax on them.

Thanks.

On the Canadian earnings, presumably have you done any work to quantify the impact of the proposal.

As always I'll, let Derek go personnel.

Along with the tax question.

Sure.

Good good good question not an easy one to answer in terms of.

The outlook on client activity I guess the way I would approach. It is obviously 2020 was a very strong year for us given elevated client activity and coming into 2021.

We had expected there'll be some normalization of that activity.

It probably didn't normalize as much as we feared and so we had a constructive backdrop for this year and you saw that result in.

3% growth in revenue and 5% growth in pre tax pre provision for 2021 off of what was our prior high watermark in 2020, so notwithstanding.

Some expectation of normalization, we did manage to drive strong.

Revenue pre tax pre provision growth and then obviously very strong NIAD on the back of the PCL recovery. So I think as we now look forward to 2022, it's a little bit of a similar situation client activity on both the investment banking corporate banking side as well as end markets still continues to be very healthy, we see that continuing right now and against that back.

Drop I think we feel quite good about our pipeline and level of activity, but what's obviously difficult to predict as you know, particularly rolling off so some of Graham's points as we see dynamics around variance and changes in monetary policy and inflationary pressures and how policymakers may react to that.

Difficult to predict what the capital markets environment will look like for the full year. So certainly our our objective is to continue to drive growth, but it will be somewhat dependent on the market backdrop and level of client volumes.

All of our expenses are levered at all.

Cancel because you would have.

A lot of investment banks expanded.

Staffing levels.

Or are too.

Yeah, no certainly.

Certainly cost is something we'll continue to keep a close eye on and you know a large component of our costs are compensation, which are linked to performance of the business. So that does give us a natural lever that if for some reason activity slows and revenue slows there will be.

And offset in compensation expenses more broadly we are still very focused on broader productivity and efficiency initiatives.

Two items that we do feel very good about exiting this year, we did manage to bring are even though we had great results in 2020, we managed to bring our efficiency ratio down by almost another 100 basis points. This year and continued to drive positive operating leverage in 2021, and so you know.

Obviously, our clear objective is to drive the client volumes, but we will manage our NIH closely to try to ensure we continue to drive strong productivity and positive operating leverage.

And maybe a quick high level comment on the overall.

A bank tax environment I think.

From a macro perspective, the most important.

Saying that we have to think about as a country as we need to attract capital we need to track capital domestically and we need to attract capital from foreign direct investment, we're going through an enormous transition of our economy supply chain transition.

Climate transition journey, where we're going to need up to two trillion dollars and therefore, creating an environment that attracts capital and where the rules around the economics are certain for a longer period of time. It was really important and I think when you start proposing taxes right now.

And this narrow way.

A real detriment to the overall investment thesis for Canada. So for the first reason there were obviously.

Articulating that perspective, that's really important for Canada to think about long term investment.

And our country in the second half.

On banks, a unique tax rate that means less capital for small business less capital for investment in our clients.

As you know we retained roughly 45% we pay out 45% of our income and we reinvest the other 55% mostly in this country and in North America, and North American supply chain, therefore that just means less capital to reinvest.

So I think from those respective now is not the time to look at these types of policies, we need to rein in our spending.

You need to think about inflation and we need to make sure we attract future generation of supply chain and manufacturing and investment in climate to this country.

I hear you but.

I tend to agree with everything you're saying.

There may actually be a pac system grows nonetheless.

I don't have any details on it but I would just say that there were still working out some of the details and that's been announced as yet so.

Well, it's difficult for us to comment on a on an impact until we get more information on it understood. Thanks.

Thank you.

Following questions.

<unk> from TD Securities. Please go ahead good morning.

Graham can we go back to a comment I believe you made in Q3 21.

Suggested that <unk>.

PCL impaired loan PCL ratio in 2020 to lighten vastly higher than the long term averages and I think a few of us observe that that seemed a little bit.

Hi.

And I guess I'm getting the sense from this call that we're now suggesting that it might be below long term averages.

How do I characterize that correctly and secondly can you talk about that change.

But I'll characterize it properly.

Thanks, Bruce and I think we go back I think when we were making those comments we were referencing to.

Peak points, how you're in a certain quarter or not certainly on an annual aggregate rated and so.

So there is a part of the context is that I.

And I think then it kind of leads into this quarter in my earlier comments, right, which I said I think as we've gotten further into the recovery.

<unk> seen that government support continued to extend it.

We've seen more clients bridge to kind of reemployment and bridge the reopening of the economy again, those all factor into our comfort and confidence that more of those loan losses that we think had been suppressed actually you know what we have been mitigated and not just simply deferred to a later date.

Again, theres a lot of uncertainty out there and so in my comments earlier the timing on when we can get back to those.

Normalized levels is still uncertain.

And it's going to vary by portfolio and I kind of went through the factors is to own the.

Our retail portfolios will be impacted by different factors in some of our wholesale portfolios, but some of these effects will take longer to kick in such as rising interest rates.

But that's just to give you a little bit more color I think on kind of how we're thinking about it in her commentary now this quarter versus some of the comments we provided last quarter.

To make sure I understand the comments are providing this quarter then you are suggesting that.

In 2022, the impaired loan ratio will probably be a little lower than what we've seen in prior years, our long term averages and that perhaps by 2023. It starts to normalize is that.

If I characterize it correctly there.

I think that's roughly fair.

The timing of when we get the peak as part of the question Mark there.

Okay.

Can we go to <unk>.

Expense type question.

Im looking at that measure that royal likes to use and it makes sense for one where you look at your year over year expense growth, excluding variable comp and stock compensation.

And that.

That number had been declining fairly consistently year over year for some time now.

I imagine some of that was COVID-19 related and then this quarter of course, it sort of moves.

Higher and materially so can you talk about what was it about this quarter that caused that measure to really reverse course, it had been trending down and then it really reverses course, specifically in Q4 can you speak to that.

Sure. Thank you Mario in terms of a couple of things I would comment on we mentioned in my in my remarks around the marketing costs and part of that would be seasonal but part of that also is just from a Canadian banking perspective really starting to ramp up on our marketing as you would've seen probably through the summer and into the fall.

In addition to that we have seen and we haven't been increasing our head count overall and as that starts to pull through in terms of a run rate. So that is something that as we talk about the growth we've been generating around our strong volume that was a bit of an inflation pressure, but going forward. We look to see that we will have.

<unk> growth and the top line in order to support that increase in staff costs.

In terms of technology as well. This is one area that we continue to invest we have been investing through the pandemic I would say that what we're focusing on going forward really around those optimization and productivity and efficiency gains that I spoke to is how can we continue to make sure that we're finding opportunities to invest.

In our in our big franchises going forward and create that capacity with them.

With reductions in other areas that we can find some efficiency and productivity gains so a bit of it Mario just in terms of some of it with season seasonality.

But it but also we are we are seeing that just some of the increase as it relates to some of our growth initiatives.

As I mentioned with our low single digit guidance still and we're looking to advance that into next year.

For next year, maybe you may have answered that I may have missed it yes.

Yes, sorry, our guidance is still in low single digits.

Potentially the inflation pressures moving it up a bit on the low singles.

But positive operating leverage is that fair.

Correct Yep. Thank you.

Yeah.

Thank you.

Question is from Sohrab <unk> from BMO.

Please go ahead.

Thank you I appreciate we've gone over the hour. So I appreciate you taking the call and maybe just can I start there nadeem for a second so call it around.

4%, let's just say expense growth, including inflation.

You've talked about the positive operating leverage on a number of times I think you made reference to higher rates can you can you tell us what.

Is assumed in your budgeting process as far as rates increases next year.

So sorry, I believe looked at it.

Would have done it earlier in the fall, which would include tied to rates in Canada, which would then probably mid year and then towards the end of the year.

And then the U S. We didn't anticipate any any rate hikes.

So just so that would be the basis of the assumption. When you were talking about positive operating leverage for example, as far as the impact on your margins and spreads.

Correct Okay.

Okay, and then if I can just clarify one thing with the with Neil Neil mortgage growth can you talk to us a little bit about what mortgage spreads were like during the quarter and maybe throughout the quarter compared to prior periods.

Yeah. Thanks for the question.

You probably have a sense I mean exceptionally strong volume across the industry.

The record amount of originations in our business.

And with that really strong market and all of that demand increased price pressure from competition. So it's been a very tight market.

We've talked in the past.

Haven't let on price.

We just basically have a strategy, we know we have to be competitive and make sure. We're providing good value for our clients, but without a doubt it theres been price pressure in the mortgage business.

And can you can you quantify some of that for US like you know, how where spreads this quarter versus prior quarters or.

Or any any point of reference.

Yeah, I mean, I would say in terms of overall in the portfolio, we've seen them come off a little bit, but they do bleed in overtime. So as originations in Q4. They were I'd say the tightest, we saw all year, but in terms of the total portfolio Thats, one quarter's worth of originations and it will bleed into the portfolio and impact the entire of the book over time.

Okay I appreciate that and can I, if I could just ask one last question if I look historically at the total bank level.

Your <unk> growth has been call it mid single digit, sometimes 6%, sometimes 3%, but let's call it in that.

45% this year was obviously.

On a full year basis, lower although you had some growth.

In the fourth quarter.

I think about next year are you can you give us any guidance as to how you expect you know given the business plans that you have how that arguably is going to trend is it going to.

Revert back to that mid single digit or could there be a year of catch up where it could be more like 10%.

Even that if you hardly had any growth this year.

I think it would it would revert back to a higher than average so are either I mean, I think we also had the benefit this year of some of the parameter changes, particularly around the capital markets business, which would have muted some of the the growth trajectory, but I think as Dave mentioned the growth potential in our commercial loan book as well as in <unk>.

The National Uh Huh.

Is the opportunity for that to be maybe higher than the regular previous run rate you saw this year. Thank you very much I appreciate you taking the calls.

We're going to stay on a bit longer because I think we have a couple more people in the queue.

Remarks, so we're going to keep going.

Let's stay with us.

Thank you. Our following question is from Scott Chan from Canaccord Genuity. Please go ahead.

All right yeah. Thanks for taking my question, maybe a bigger picture outlook.

We kind of think about the Canada, Canada, and the U S and European CE franchises U S being international where do you think the better region is in terms of the outlook over the next few years and potentially related to PDP growth would be helpful. Thanks.

Better still candidates, 70% of our earnings so it's important our cana delivers for us strong growth. So it's hard to say better, but I would say no.

When I look at the city National U S. Wealth franchise, we had the first kind of four or five years of city National We had a great run.

Higher rates helped us we've tripled the size of that bank, we've seen more muted growth in the last as you've noticed in the last four to six quarters. Because we are re platforming city national or the next phase of growth and Triple that bank to an $80 billion balance sheet right now and for us to continue to.

Grow at rates well above the industry, we need to re platform from a customer perspective from an operational efficiency perspective.

I am very excited about the U S growth opportunity from a P. P. P T because of the higher rates that the Dean reference thing to have a significant impact on US you just can't.

Underestimate how asset sensitive.

Bank is but also from a greater efficiency perspective, as we re platform city national were looking for greater efficiency and we've grown this bank on the top of a $20 billion bank platform and now as we re platform. This thing into an 82 plus $150 billion bank is going to have to grow.

Grow more efficiently and more effectively.

I'm very excited about the dual opportunity of revenue growth.

And better bottom line growth there at the same time when you look at venture starting to kick in and you look at the momentum we have in our Canadian banking franchise.

The good you look at our quarter over quarter growth is still very strong we're exiting the year with really good volume growth and momentum across capital markets. As you heard Derek say in neil's business across mortgages credit cards commercial lending starting to pick up so you look at our quarter over quarter momentum into 2022 and then the.

The flows that we're seeing in M&A UA in the Canadian wealth franchise, I'm very excited about Canada, the numbers kind of speak to that as we accelerate the exit the year with very good.

Momentum so I don't have a favorite child, if that's what you're asking.

I like them, both equally and they both have great opportunities, which you can see in our in our exit numbers and I would say, yes, we are.

Somewhat disappointed.

So it may be and how much we're able to drive to the bottom line. This quarter. We had a number of puts and takes you saw our margins came off.

But that doesn't take away from the momentum that we're going into the cost control that we'll be able to demonstrate to stabilize margins and therefore, the op Lev into the next year.

In both markets I think we're feeling we're feeling well, we're not as happy with the bottom line. This quarter, we're happy with the momentum and the overall franchise court.

And Dave you talked about stabilized margins.

When do you think that will happen and it seems that that theme of quarter over quarter stabilization really really hasn't come in your quarter over quarter decline was probably a bit more than expectations, yes.

Yes, and in our forecast too. So yes, we do feel good about nadeem is going to jump in on that.

Why we're we're more confident of the stabilization timeframe, yes, maybe I'll just speak first to Canada. They give you some perspective so in terms of you're right. We saw the decrease this quarter. There were a few one offs I would say that we highlighted but if we look at what's been happening with some of the rate increase that we've seen in particular for.

Canadian banking is prominent in along and we look at the two and five year rates, we see that that will start to price through that takes a bit of time in terms of how it averages in for against our deposit book and then as we also start to see some of the expansion into some of the commercial mortgage or as we start to see the revolve rates pick up in.

In the credit card book that will be positive when I say stabilized and thinking about some of the some of the headwinds that we've seen that relates to.

The next around the mortgage book and then at a lower spread as well as some of the tailwind. We saw this year on the mortgage prepayments. So as those rates start to rise you will see less of that revenue coming through from prepayments, that's where the stabilization really comes in so that the benefits will have some of those one time items or are going to come back and then in addition as rates start.

To price through that's when you're going to see the lift.

Alright, thanks for your time.

Yeah.

Thank you.

Alright.

Okay.

Following question is from Nomura versa from Cormack Securities. Please go ahead.

Thanks for taking my questions. So.

Graham this one's probably for you I'm wondering if we could go to slide 23 and talk about the <unk>.

Outlook for the ACL rate.

At the end of Q1.

53 basis points and now you're sitting at 60 basis points. So would it be fair to suggest that releases moving forward will normalize at big way heading into 2022 or as the bank comfortable letting that ratio trend below 53 basis points or any comments there would be helpful.

Yes, sure I mean so.

I mean, there is no such thing as a steady state and your performing ACL. The ACL was meant to be a reflection of kind of the macroeconomic forecast that you have at any given point in time and the uncertainty around that right and so those are the two factors that always go into it that we have to reassess each and every quarter.

So you're going to put a forecast out there on our forecast is a bit of a difficult exercise right now I think as we look out over 2022 that.

Assuming that we continue to progress through the macroeconomic kind of strength, we see right now assuming we see some of this uncertainty come down at Yahoo, We wouldn't see that potentially drawing down further.

The reason, it's still at the level that is where the macroeconomic environment. It's really strong right now that would indicate that we should be at lower levels of ACL, but theres a high degree of uncertainty still in this environment.

Some of the factors I referenced earlier.

As we progressed here, we've got more confidence in bringing some of the reserves down from prior years.

But I wouldn't say there is a steady state there, but certainly as we look forward into 2022, and we continue to progress as we expect and some of the uncertainty kind of reduces.

It reduces around us that yes, we would expect that that can come down further.

So as is the 53 basis points.

Not appropriate to use as the low end of what that could go down to like it could go down lower than 2015.

Okay.

Those steady state there and it's going to really be dependent on the environment. We're in at any given quarter.

Okay. Thank you have a fixed number that we kind of we ended up at any given time.

Okay.

Our last question.

Thank you. Our last question is from Nigel D'souza from sandwiches investment research. Please go ahead.

Thank you good morning, I wanted to circle back on the earlier comments you mentioned that you have conducted testing for the impact of higher rates on.

Potential credit risk and I was wondering if you could flesh that out and give us some color on the type of.

Erez you were testing for the timing and pace of interest rate increases.

Have you thought about that impact development relationship kind of experience.

So we do a lot of different scenario analysis and stress testing for different purposes right. So.

At the most granular level, we do that as part of our origination practices. When we're originating a new residential mortgage where we're originally in commercial mortgage.

That's quite prescriptive in the residential mortgage space, where B 20.

Looking at the claims capacity to service debt.

Plus 200 basis point increase in interest rates somewhere in the commercial real estate side.

Certainly we also obviously do with much more at the portfolio level and so whether it's our determining our loan loss provisions in our ACO again, we don't have a single scenario. There we have certainly a baseline exercise and the dean referenced some of the assumptions that go into our baseline, but then we look at a range of I think we vulnerable five different scenarios that we look at the kind of describe different interest rate environments.

Some more moderate increases are more severe.

And then we also contemplate much more implausible environments that really go into our stress testing program, we're really kind of making sure. We continue to have the right level of capital adequacy in place and we do those exercises across the bank, we do those in conjunction with our regulators as well. So again similar to the earlier comments on inflation, there isn't a kind of a fixed single scenario.

That we kind of lock in on but.

We look at our range, we wait those are different ranges appropriately and then that all factors into how we determine CLO as an example that we do.

Okay. That's helpful and if I could just wrap up on a comment earlier on inflation I think you mentioned when you look at asset growth you want to look at healthy asset price depreciation versus excess asset price depreciation. So could you provide some context on how you look at the recent price depreciation for Canadian real estate is that.

If you would is excessive and theres concern from broader economic or credit risk completions, how do you how do you think about it.

Yes, thanks for the questions Neil I'll start just in terms of what we see in terms of housing as we went into the market.

In relation to the mortgage book and I think you've seen it over time, obviously the biggest driver of what we're seeing in terms of HP I in some of the biggest markets Toronto Vancouver.

More lately markets like Ottawa really moving up into strong double digits rates is the biggest factor so affordability.

And.

Consumers being able to just go through the metrics that Graham laid out.

And Carrie and carry those payments that's the biggest driver.

I think in terms of on the go forward view.

We would say immigration has been.

Almost completely turned off that's a demand that we haven't seen in the housing market. We would expect that to provide some offsetting demand as we expect to see the rates come up on the timing of that may deem laid out. So I think those are the factors.

If we look at over time, where we've seen different leavers polled.

For example on the regulatory front, whether it's in British Columbia, or Toronto, we have seen I'd say sort of moderate corrections in those markets and then subsequently over let's say the next 18 months those home prices have come back so.

I think those are the factors, we would look at I think Graham laid out fairly well in terms of.

Competence, we have in the underwriting and the stress testing, we do to make sure that whether it's on an LTV or are there just in terms of.

Our repricing of that debt that the consumer and our commercial customer can manage it. So that's the I think the primary lenses, we would look through in.

In terms of our loan book and agree with you on that.

I think our risk approach to the mortgage book is to make sure. We are very consistent in our approach through the cycles, we're not using risk as a lever to drive growth here I would just remind everyone that we are focused in terms of our client base is a very high quality prime client base, we're not engaged in the subprime space. Our product set is again very focused on first lien products.

And it's very resilient I mean, we talked about the stress testing around around interest rates to make sure our clients can be resilient for a higher rate environment. We have a risk based approach to our loan to value ratio. So again, it's a very prudent approach allows us to be consistent and are engaged with clients and managed through a cycle very effectively.

Okay. Thanks Brent.

Thank you.

We have no further questions registered at this time I would now like to turn the meeting back over to Mr. Mackay.

So thanks, everyone for questions. We cover a lot of ground today I think in my my takeaways in summary, I cover a lot of it in one of the questions I took but overall I think the takeaways are really strong client activity and growth market share gains across Canadian banking Canadian wealth.

Capital markets City National U S well U S capital markets.

Very strong momentum you saw the momentum in the quarter over quarter numbers, which positions us well.

Our disappointment also was we didn't drive as much to the bottom line as we would normally with that type of volume, we walked through kind of the margin impacts in <unk>.

Trying to price mortgages in a rising rate environment.

What's called that was it was a little trickier at a number of one offs this quarter and the margin side expenses a bit elevated some one times in there and therefore as we look forward.

Our degree of control, we plan for a rate environment.

Great question.

The plan for a rate environment that was.

Less tightening.

And therefore, there's upside opportunity to our own forecast. So we're confident in our operating leverage.

Going forward and the momentum we have in the business. So thanks for your questions all great questions and wish.

I wish everyone a good holiday season, and look forward to seeing you in the new year, thanks very much.

Thank you.

The conference has now ended.

Please disconnect your lines at this time and we.

Thank you for your participation.

Yeah.

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[music].

Good morning, ladies and gentlemen, welcome to Rbc's conference call for the fourth quarter 2021 financial results. Please be advised that this call is being recorded I would now like to turn the meeting over to assume emera.

Head of Investor Relations. Please go ahead Mr Imran.

Thank you and good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer, leading on Chief Financial Officer, and Graeme Hepworth Chief Risk Officer also joining us today for your question, Neil Mclaughlin Group head personal and commercial banking, Doug Guzman group head wealth management insurance and <unk>.

Yes, and Derek Elder group head capital markets 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.

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 Austin and congratulations on your recent appointment to Rbc's head of Investor Relations.

Hey, good morning, everyone and thank you for joining us today.

This morning, we reported fourth quarter earnings of $3 $9 billion.

Our results include further releases of PCL on performing loans.

Primarily reflecting improvements in our macroeconomic.

And credit quality outlook pre provision pretax earnings of $4 8 billion.

We're driven by robust client activity.

Driving fee based revenue growth in Canadian banking wealth management and.

In investment banking.

In addition, Canadian banking and city National continue to generate strong volume growth.

These factors were partly offset by a moderation in our global markets businesses.

Continued impact of low interest rates.

And higher expenses, largely due to variable compensation.

As we continue to invest in our core businesses and strategies, we're committed to running a bank efficiently and driving improved productivity.

Looking back.

2021 was a year that saw RBC stepping up for our clients and communities, while supporting our employees.

Across our core businesses, we saw robust client activity and as a result, we delivered record revenue up nearly $50 billion.

We earned <unk> 16 billion in net income and generated a 19% Roe.

While paying $6 1 billion in taxes over 6 billion in dividends and meeting all of our medium term objectives.

Also noteworthy was our strong double digit growth in book value per share highlighting our ability to compound the value of our business, while maintaining the quality and our risk appetite of the RBC franchise.

We ended a strong year with a record CET one ratio of 13, 7% up 120 basis points with CET, one capital up $7 $5 billion from last year.

As we turned our focus to 2022 from a macro perspective, we continue to see a strong recovery with consumer spending almost 20% above 2019 levels increased mobility in society and corporate management teams actively pursuing growth opportunities.

At the same time, we recognize there are significant challenges.

Leading supply demand imbalances disrupting supply chains and various parts of the economy, including labor housing and energy markets.

These factors are driving uncertainty and adding to inflation risks, which we are closely monitoring.

While higher interest rates could add some drag to economic growth, we do not see material credit concerns given excess client liquidity strong underwriting including testing for higher rates.

As a dean will speak to later, we are well positioned to benefit from rising interest rates, given our leading Canadian deposit franchise and the asset sensitive nature of U S wealth management balance sheet.

The highlight the potential benefit over time, the impact of lower interest rates reduced our revenue by approximately $1 billion in each of the last two years. The majority in Canadian banking and U S wealth management, including city National.

Additionally, we are poised to benefit from the deployment of unprecedented buildup of liquidity that we expect Canadians.

We used for a better tomorrow, whether that is to buy a home increased discretionary spending or invest in financial markets.

Within this context, let me expand how our momentum and ability to create value for clients along with our premium franchises positioned RBC to succeed heading into 2022 and beyond.

Our strong balance sheet gives us flexibility to continue supporting our growth momentum and strategic initiatives. In addition to driving increasing shareholder returns.

And this morning, we announced a 12 or 11% increase in our quarterly dividend, while also announcing our intention to repurchase repurchase up to 45 million common shares under our normal course issuer bid.

We remain focused on driving premium organic growth, including expanding our market leading position in Canada.

We see growth opportunities in each of our Canadian businesses and our results. This year were what the value we create for our clients.

In Canadian banking, we added over $35 billion in mortgages and over 22 billion in personal deposits over the last year, leading to market share gains in both these anchor products.

We have added and continue to add 750, plus mortgage specialist sales force.

We also continued to invest in digital tools and capabilities to enhance the client experience and the productivity of our sales team.

Looking forward, we expect mortgage growth to be strong and a high single digit range supported by low interest rates.

Supply demand imbalances affecting prices and increasing immigration activity.

We are seeing a strong recovery in transactional purchase activity, which helped drive a sequential increase in credit card balances, including revolvers.

And bolt commercialize a commercial utilization rates remained well below pre pandemic levels. We are seeing an uptick which is helping drive the emergence of stronger commercial lending activity.

We're also hiring commercial account managers and priority industries, including an RBC X, where we provide capital and advice to the growing innovation ecosystem.

And as we move up the value chain and continue to re imagine banking and innovation, we are well positioned for a world of payment modernization and open banking.

RBC ventures remains core to accelerating our growth by creating value beyond banking, including in our healthcare and youth ecosystems.

We're excited about Doctor Bill adventure, which helps reduce the complexity of medical billing for physicians.

We are currently serving nearly 3000 Canadian positions up 28% from last year.

Also within the health care vertical we continue to support Canada's medical community, whether exclusive multi year strategic partnership with the Royal College of physicians and surgeons of Canada.

And the youth segment, my Dow as a new pillar that helps kids learn and practice money management, we recently hit a milestone having onboard at 10000 Canadian households.

Over the last two years, we've added 350000, net new Canadian banking clients, including over 200000 this year alone.

In a period when clients werent, making as many decisions to switch banks and immigration activity was muted.

Given the value added initiatives, we've put in place we are well positioned to continue attracting even more clients.

An important area of focus.

Almost 70% of our Canadian banking clients, who have a core checking account and or a mortgage with US also of a card and investment relationship.

And clients with mortgage and checking accounts that were on boarded three years ago in 2018 have deepen their relationship to all four products at a rate that is three times greater than any other acquisition relationship.

This leads to another core part of our Canadian strategy, which is to deepen our client relationships, including providing access to best in Class Award winning service and advice.

Which has defined our leadership in wealth and asset management.

As I noted earlier, we expect much of the buildup of liquidity in the system will be used to increase discretionary spending or be invested.

And our whole set of an integrated end to end industry, leading wealth and asset management solutions have well over one trillion dollars in client assets.

These cover the full spectrum of client segments and needs ranging from digital only solutions up to full service discretionary wealth management.

Following a record year last year RBC direct investing finished 2021 with another year of exceptional growth.

<unk> record trading volumes and record new client acquisition with nearly half of new client side of this year being under the age of 35.

And Investees.

Athene account openings doubled from the last year.

And the wealth advisory space are leading scale is complemented.

It's complemented by our differentiated technology and investment expertise, including private banking insurance state philanthropic and business planning solutions.

These factors drive strong advisor productivity with RBC Dominion Securities ranked number one amongst bank owned advisory firms in 2021 investment executive brokerage report card.

And my adviser our digital platform to review financial plans.

Now with nearly 3 million clients.

Overall, our wealth management businesses continued to see strong growth in client assets.

On a year over year basis, Canadian banking and wealth management, Canada increased 26% each with RBC global asset management.

We are a leading north American asset manager at scale with 85% of AUM outperforming the benchmark over the last three years at below average fees.

As a testament to the strength of the platform.

Global asset management was recognized for its outstanding investment performance at the 2021, Canada Lipper Fund Awards.

RBC Gam AUM was up 15% year over year, while higher markets were a large contributor. We also saw record Canadian long term retail net sales of over $20 billion or 17% of all industry wide flows adding to its leading market share.

In industry AUM.

And though we can't control where equity markets will go we are well positioned to add to our market share and industry net flows as clients can choose from a broad range of products and advisory services, which increasingly include in ESG and alternatives product suite.

Our scale innovation and an ability to deepen client relationships with leading value proposition.

Underpinning, our 30% ROE across our banking wealth and asset management platforms in Canada.

Turning to the U S I want to focus on our diversified growth strategy.

Our client franchises across wealth management, private and commercial banking and capital markets generated $10 billion 10, U S $1 billion or 25% of total revenue over the last 12 months.

Our U S capital markets franchise, our largest U S business had yet another great quarter as we reported strong investment banking revenue on higher M&A advisory and loan syndication activity.

We are increasingly deepening relationships and winning significant M&A advisory mandates with important partners such as Blackstone.

Earlier this year of RBC capital markets acted as exclusive financial adviser to Blackstone on the acquisition of evolution, a leading education technology solutions provider.

This followed the adviser on their acquisition of signature aviation.

Looking forward our investment banking pipeline remains strong benefiting from the strength of our franchise. Our goal is to be a top 10 global investment bank, while maintaining our position as the clear leader in Canada.

And with this in mind, we have added a number of managing directors in U S investment banking.

Especially in technology and healthcare sectors, while also focusing on sustainable finance a growth opportunity for us and our clients.

City National continues to be a growth company with wholesale loans of a further 3% over last year or up 11%, excluding triple P trends.

Our mid market strategy, along with expansion of market coverage is expected to add to our growth trajectory.

Mortgage that city national were up 23% year over year as we continue to grow our high net worth private banking capabilities with a mortgage led growth strategy.

Deposit growth was up a strong 25%.

This year.

Going forward, we continue to expect strong loan growth in our city national businesses.

And in U S wealth management, we grew client assets, 30% year over year to nearly 570 billion U S dollars, including the addition of high quality advisers to our private client group platform.

We are increasingly adding lending products to provide holistic advice to our U S wealth clients. Our securities based lending portfolio has increased by over $2 billion or nearly 60% year over year.

Beyond our underlying business performance in 2021, we recognize we have an important role to play in accelerating clean economic growth.

A key pillar of our enterprise strategy is to play a leadership role in the transition of our economy to net zero emissions, including helping clients work through an orderly energy transition.

As part of that we are committed to providing $500 billion in sustainable finance by 2025.

And in addition to our own net zero commitments. We are pleased to have joined the net zero banking Alliance.

To sum up we are entering 2022 with strong momentum.

We are well positioned to take advantage of secular and macro trends and deliver client and shareholder value over the near and long term.

Our focus will be to drive growth, while maintaining prudent risk management and expense discipline.

We will continue to leverage the size and strength of our balance sheet to consolidate our broad based leadership position in Canada, including deepening client relationships and investing for the innovation economy.

And in the U S. We will continue to execute on our multi pronged growth strategy across capital markets City National in wealth management.

Before I conclude I want to thank our more than 87000 colleagues for their relentless dedication.

Living our purpose through these extraordinary times.

And now I'll pass it to Nadeem on our new CFO is well known to the investment community from her time as head of Investor Relations and CFO of RBC capital markets previously and he brings a wealth of experience gained over 20 years at RBC, including a number of positions of increasing responsibility in our corporate Treasury group.

And then dean over to you.

Dave and good morning, everyone I will start on slide 11.

We reported quarterly earnings of $3 9 billion up 20% from last year, including the benefit of a 355 million release of PCL on performing loans.

Earnings per share of $2 68 was also up 20% paper.

Pre provision pretax earnings of $4 8 billion were up 4% year over year, including the impact of a legal provision at city national.

Before I expand on earnings drivers I will speak to capital on slide 12.

Our CET one ratio it was up 10 basis points sequentially to a strong 13, 7%.

Our strong earnings net of dividend added 42 basis points to our CET, one ratio highlighting the capital generation power of our diversified business model and premium Roe.

Robust client driven business growth across our largest segment, but it's partly offset by 2 billion of net credit migration.

Looking forward, we will continue to take a disciplined approach to deploying capital to create long term value for our shareholders. We will lead with client driven organic <unk> growth and led to revert back to our traditional policy of twice a year of dividend increases.

Turning to the midpoint of our 40% to 50% dividend payout ratio objective.

This morning, we also announced a normal course issuer bid, which will allow us to repurchase up to 3% of our common shares outstanding giving us yet another lever to manage our capital levels.

Moving on to slide 13.

Net interest income was up 1% year over year or up 4%, excluding the impact of lower fixed income trading revenue, which was impacted by lower spreads on repo balances.

Strong volume growth more than offset continued margin headwinds driving solid net interest income growth in both Canadian banking and city national.

Turning to slide 14 at the segment level, we had outsized NIM compression in our largest banking franchise is.

Canadian banking NIM decreased nine basis points sequentially, partly due to an accounting adjustment of two basis points or 22 million, which we do not expect to repeat going forward.

The other two basis points was due to lower mortgage prepayment revenue a reversal of the favorable trends. We noted on our Q2 earnings call.

The three basis point impact from lower asset spread is largely related to strong mortgage origination.

The benefit from the sequential credit card growth was offset by growth in lower spread mortgage loan.

City National NIM was down 20 basis points sequentially with 11 basis points related to lower loan team largely from the forgiveness of the first round of Triple T loan.

The other seven basis points was due to lower loan to deposit ratio trend as deposit growth continued to outpace strong loan growth.

Going forward, we expect both Canadian banking and city national margins to stabilize around current levels, but the bias to the upside as central bank raised interest rates.

While the city National's interest rate sensitivity is largely driven by an increase in short term rate Canadian banking would benefit more from a broader across the curve increase.

We estimate that a 25 basis point increase in interest rates across the curve could result in over $250 million of additional revenue over 12 months across Canadian banking and U S wealth management inclusive asleep deposit.

We expect the benefit from a rate hike in the second and third year, it would be higher than seen in the first year.

Turning to slide 15, noninterest income was up 20% year over year, we continue to see strong growth in higher ROE investment management, and mutual fund revenue and wealth management and Canadian banking.

Wrong M&A deal flow and loan syndication activity were reflected in higher advisory and credit team as we execute on our capital market client centric growth strategy.

Higher card service revenue in Canadian banking, reflecting Canadians increased spending on travel and entertainment heading into the holiday season as.

As we continue to enhance our rewards program and drive higher client engagement through increased option to earn and redeem points.

We adjusted our rewards liability by 29 million this quarter.

Offsetting this was an expected moderation in global markets revenue, which I'll provide more details on shortly.

Turning to expenses on slide 16.

Non interest expenses were up 9% year over year.

Provision of $116 million in city national impacted expense growth by approximately two percentage points.

Adjusting for this provision and excluding higher variable and share based compensation across our businesses.

<unk> growth was 2% year over year.

As quarterly capital markets compensation ratios typically experienced this volatility in the fourth quarter, it's important to look at full year trend.

And the 2021 annual ratio of 35% is consistent with 2020 levels.

Salaries and benefit costs were up 4% from last year as we continue to add employees in Canadian banking and city national is support increasing client activity.

Marketing costs were also higher as the economy opens up and we increasingly engaged with new and existing clients across our businesses.

However, there is also an element of seasonality in the quarter over quarter increase of certain line items.

Looking forward to 2022, we expect marketing cost to trend higher than pre pandemic levels as we execute on our strategic growth initiatives.

However, corporate travel costs are expected to remain below pre pandemic levels in the near term.

Overall, we expect annual expenses, excluding variable and share based compensation to grow at the higher end of low single digits range as inflationary pressures and higher investments to support growth initiatives are expected to be offset by our continued focus on driving efficiencies and productivity.

Game.

Moving to our business segment performance beginning on slide 17.

Personal and commercial banking reported earnings of $2 billion this quarter, including the benefit of lower PCL Canadian.

Canadian banking pre provision pre tax earnings were up a strong 8% from last year as solid revenue growth was supported by strong operating leverage.

Looking forward, we expect annual operating leverage to be closer to the high end of our historical 1% to 2% guidance with the potential to be above that range as central bank raised interest rates.

Canadian banking revenue was up 6% year over year with net interest income up 2% from last year.

On a sequential basis, an uptick in commercial loan growth added to continued strength in mortgages.

Growth in credit card balances is largely related to higher purchase volume with payment rates remaining elevated relevant relevant relative to pre pandemic levels.

Noninterest income was up 15%.

Due to higher mutual fund distribution revenue underpinned by higher.

Including record net sales as client liquidity continued to move into investment products.

Our service revenue was up on higher purchase volume.

Turning to slide 18 wealth.

Wealth management reported fourth quarter earnings of $558 million, driven by strong investment management in mutual fund revenue growth and robust volume growth at city National.

These were only partly offset by a commensurate increase in variable compensation higher non compensation costs, and a legal provision and lower spreads at city national.

Double digit client asset growth across our north American wealth businesses benefited from both higher market with strong North American equity markets more than offsetting weakness in bond indices as well as strong net sales.

RBC Gam attracted total net sales of over 12 billion in the quarter with strong institutional flows adding to continued momentum and Canadian long term retail net sales, which added 4 billion to AUM.

The majority of Canadian retail flows went into balance mandate.

Turning to insurance on slide 19.

Net income of $267 million increased 5% from a year ago, primarily due to favorable annual actuarial assumption update.

Partially offset by lower favorable investment related experience, including the impact of realized investment gains in the prior year.

Insurance revenue benefited from higher group annuity sales and growth and longevity reinsurance and Canadian insurance sales.

Looking at <unk> on slide 20.

Net income of $109 million increased 20% from a year ago, primarily driven by higher revenues from our asset services business.

Funding and liquidity revenue was also higher year over year as the prior year reflected heightened impact from elevated enterprise liquidity.

Turning to slide 21.

Capital markets reported earnings of 920 million up 10% from last year pre provision pretax earnings surpassed 1 billion for the eighth quarter in a row.

Corporate and investment banking reported strong investment banking revenue as our platform platform performed very well in an environment of robust deal flow and elevated sponsor activity.

In contrast, global markets moderated from elevated levels last year.

Revenues were down 14% year over year, reflecting similar trends across the industry.

Lower spreads continue to impact repo and secured financing revenue, which was down 18% year over year.

Equities revenues were down 17% as volatility levels normalize closer to pre pandemic levels.

To conclude we continue to drive strong growth in volumes and client assets and are well positioned to benefit from higher interest rates.

And while we look to accelerate our growth momentum, we remain focused on expense management and effectively deploying capital to continue delivering value for our shareholders.

With that I'll turn it over to Graeme.

Great. Thank you Dana and good morning to everyone.

So starting on slide 23 allowance for credit losses on loans of $4 4 billion is down $1 7 billion from its peak in Q4 of last year.

Reflecting the ongoing improvements in our macroeconomic outlook and the criticality of our portfolio the Dave noted earlier.

In 2021, we released over 50% of the pandemic related reserves on performing loans built in 2020.

Releases this quarter were primarily in our commercial personal lending and cards portfolios in Canadian banking, reflecting further improvements in our macroeconomic outlook and the criticality of those specific portfolios.

Allowances for these portfolios do remain above pre pandemic levels, given the ongoing headwinds that I will touch on later in my remarks.

Turning to slide 24, our gross impaired loans of $2 3 billion were down $253 million were four basis points during the quarter.

Impaired loan balances decreased across all our major businesses, the new formations of $298 million remained close to the nine year low set last quarter.

The Canadian banking, we had modest increases in new formations during the quarter with increases in the unsecured personal lending and small business portfolios.

And capital markets, New formations were limited to just $7 million as clients continued to benefit from favorable market conditions.

Turning to slide 25, PCL on impaired loans of $137 million or seven basis points was down by one basis points in decline for a sixth consecutive quarter.

The level of provision through 2021 reflect the quality of our client base, our prudent underwriting practices.

I'll make recovery underway and the impact of government support programs on delinquencies and impairments.

And our Canadian banking retail portfolio PCL on impaired loans was down 12 billion quarter over quarter due primarily to lower write offs on credit cards.

The year the retail portfolio has benefited from higher client deposit levels decreasing unemployment rates and ongoing government support programs.

For context, this quarter, approximately 6% of our retail lending clients, we're still receiving government support down over 60% from the peak observed in 2020.

And with Canadian banking commercial portfolio PCL on impaired loans was down $3 million quarter over quarter.

Provisions taken this quarter continued to be primarily in sectors impacted by COVID-19. However, the portfolio overall continues to see low and stable delinquency rates net credit upgrades and reductions in credit watch list exposure.

So a couple of markets, we had a net recovery unimpaired loans for the third consecutive quarter.

This portfolio is not materially impacted by government support programs that had benefited from a constructive operating environment and strong market liquidity.

Finally in wealth management, PCL on impaired loans increased $14 million quarter over quarter.

During the quarter, we took additional provisions on alone written off in the information technology sector at city National.

Overall, we continue to be pleased with the positive trends in our loan portfolio supported by favorable market conditions.

Well, many individuals and businesses have weathered the worst it depend on a number of headwinds remain as Dave noted.

Rising and persistent COVID-19 cases, and the prospect of new variants creates the potential for continuation or resumption of COVID-19 related containment measures.

Inflationary pressure pressures may also impact required through increasing costs, driven by supply chain disruptions and labor shortages and through increased increases in interest rates.

We have incorporated many of these risks into our provisioning scenarios, which leaves us comfortable with our current level of allowances.

Looking forward, we do expect our PCL ratio on impaired loans to trend back toward long term averages over time.

In addition to the headwinds I've already noted the wind down of government support and underway will also impact with our commercial and retail clients.

The impact will take time to materialize due to the strong levels of liquidity savings and job demand currently in place.

Additionally, we have seen strong recoveries unimpaired loans over the past few quarters, which we do not expect to persist with the low levels of impaired loans now remaining.

That said as I noted for a number of quarters, we expect to be able to draw down on the existing allowance on performing loans.

Our total PCL across all stages will remain below long term averages.

Importantly, we remain steadfast in our commitment to supporting our clients and delivering advice products and insights to help them navigate the evolving macroeconomic and operating environment.

With that operator, let's open the lines for Q&A.

Thank you we will now take questions from the telephone lines you have a question and you are using a speaker phone. Please lift your handset before making a connection.

Have a question. Please press star one on your devices Keypad you may cancel your question at any time by pressing star two.

Please press star one at this time, if you have a question that will be a brief pause from all participants with just a quick question. We thank you for your patience.

Our first question is from John Aiken from Barclays. Please go ahead.

Good morning, I wanted to start off on capital markets. Derek we saw an exceptionally strong year, but as the second half evolved we saw revenues trailing off a little bit and the revenues in the quarter were one of the lowest store for the last eight.

The quarters was there anything in the quarter you would highlight as unusual either positive or negative and is this a run rate you're looking for in terms of 2022 or can we get the revenues a little bit higher from here.

Sure. Thank you for the question I think.

I'll address it in two parts first looking at Q4 I think overall it was a it was a we feel is quite a solid quarter.

As Nadine reviewed we had very strong activity on the investment banking side.

Both in M&A and in loan syndications, and we see that level of activity continuing in our pipeline heading into next year continues to feel very healthy.

The one area, where we saw.

A slowdown in revenue was in the markets business and I would say that you know there were a couple of things driving that.

One is just the ongoing normalization, we've seen in client activity and volatility that we saw in markets. In Q4 now that has obviously picked up as we've.

Come into the fall again, but it was a little more tepid as we went through the summer second when you are comparing over the last eight quarters.

Recall, obviously Q4 tends to be seasonally slower just given August in the summertime lull in activity that we tend to see so we certainly would not look at Q4 is indicative of where we see normalized quarters going.

I think the third item I would say is.

We were quite careful managing risk coming into the fall. It was uncertain on what Covid and dynamics would bring as our kids return to school in communities continued to reopen.

So I think we came in with a cautious risk mindset and you saw that in some of our var metrics and no trading losses in the quarter.

Obviously.

The return.

In the fall turned out to be pretty smooth and market stayed very very robust and so in hindsight, where we are.

A little cautious on risk possible, but I think it was probably a prudent way to approach it given what we're facing at the time.

If I, then turn to the outlook going forward.

We do as we've communicated see normalization in markets, but we think that our run rate will settle above pre pandemic levels and you know if I look at pre tax pre provision earnings pre pandemic. We are generally running in the $800 million to $850 million a quarter range.

As we saw the elevated client activity throughout the pandemic that was more in the one one to $1 2 billion range and as Nadine highlighted we've now had eight consecutive quarters over a 1 billion importantly that does include the first quarter of 2020, which was before the impact of the pandemic, which was our first quarter, it's true that $1 billion Mark and so.

That is certainly an area, we're focused on and while we see things normalizing our objective would be to try to keep that run rate above the $1 billion level in terms of pretax pre provision.

Great. Thanks for the color Derik I'll requeue.

Thank you. Our following question is from Ebrahim <unk> from Nomura from Bank of America. Please go ahead.

Good morning.

I guess just a question Dave as we think about capital allocation I think thats going to be a big deal.

In terms of just some of the decision jewelry, making talk to us in terms of when you think about the CET one note of cooking in the half.

Beyond funding for organic growth of the announcements you made this morning, how do you think about inorganic growth last quarter, you talked about strategic partnerships what asset generation.

Would love to hear your thoughts around asset management wealth management distribution.

There might be opportunities there that you could deploy some of this excess capital.

Yes, I think you've covered part of my answer on your question. So you're out you're on all the right themes, but.

One of the things we're trying to highlight in our comments. This morning is that more capital intensive higher return growth opportunities are starting to present themselves in credit cards and commercial lending in Canada.

Lee or mid market corporate strategy in the U S capital markets corporate banking, we're looking to put more balance sheet out there and again as you said, we have very strong organic capital generation ability that will fund the majority of that but we do expect to see really good <unk>.

As our clients start using their balance sheet and our balance sheet to a greater degree. That's obviously the primary use is organic.

Growth as.

As far as inorganic to your question Youre, starting to see a number of our ventures take.

Take flight, we highlighted two more ventures to you today Dr. Bill.

Partly through inorganic acquisition are looking to build out the healthcare vertical it's been with a partnership with the college of physicians, it's been a fantastic partnership up 28% as you heard so we're going to look to continue to build out that vertical.

We introduced <unk> today, which is in the family finance vertical incredibly exciting opportunity if you see some of the similar.

Our capabilities in the U S would there be an opportunity there to kind of build out that early stage client pipeline and to bring clients into the organization in very different ways than we have historically, so again as part of future proofing. The organization, we are looking to make acquisitions.

Those verticals in addition to the small business vertical that we've talked about the mortgage vertical as we look at <unk> and building out our ability to help clients find homes and and close homes. So all of those capabilities will present opportunities north and south of the border for us.

Two to grow.

Acquisitions, I don't generally be fairly small I would think it's better to get these acquisitions early stage then pay significant goodwill in later stage I think other a few other firms that are pursuing this strategy not that many.

We are distinct in this strategy.

I have found similar things that paying a huge premium for <unk> and.

In mid stage.

Very expensive and therefore trying to find needs in earlier stages in that $20 million to $150 million range. So again, it's not going to consume a lot of capital, but very important to our growth strategy. The.

The other place we can deploy capital is we've got four major ventures that we need to scale and we have an aggressive plan to scale nationally ventures like owner that we've talked to you over the last couple of quarters. We're very excited about our Doctor Bill we talked about today Oh, Joe on the home side. So again, we can deploy capital now into ski.

Ailing those ventures, so that as a whole gross segment that will.

We will need and we will see more capital as we tried to really build significant momentum into into capabilities that are proven a very strong client reaction to so.

Manage these ventures, we built them, we tweak them, we pivoted to where we've found a customer market fit and those four or five that have a strong customer market fit that we keep talking about are going to get capital.

To scale and then it leads to your third question around.

Our more traditional wealth management distribution, absolutely we're interested in acquiring wealth management distribution, either particularly in United States, obviously, but in Europe as well to build out that franchise. There are we're looking for quality platforms, and therefore, we're being prudent and we're thinking about the value and the dilution to the shares.

Holder at the same time, because we have the ability to grow these organically at the same time. So again it comes back to real discipline around we have to create shareholder value and we're very conscious of the dilution and the the last alternative is to return capital to you, which we are starting to do and have that ability through share buybacks and continued share buybacks. So.

<unk>.

Nothing strategically changing because the capital doesn't have a half life to it it will sit there and it gives us enormous strategic optionality.

Okay, Thanks, Dave and congrats Nadeem and the kimono noodles.

Thank you our.

Following question is from many Goldman from Scotiabank. Please go ahead.

Hi, Good morning, Glenn you talked about a normalization in PCL ratios.

Back to where they were pre pandemic and I'm just.

Warrants some clarification there in terms of the timing is is this in your mind in 2023 story, where we basically get back to where we were pre pandemic is that the right year to think about.

Yes, I think I think there's some hesitancy on timing just because I think there's a high degree of uncertainty out there and.

Certainly you can just reflect on the last week and we see kind of the emergence of new <unk>.

Variance in the kind of the uncertainty associated with monetary policy to remind us of that.

We obviously had exceptionally benign credit environment.

That's manifested itself with incredibly low levels of loan losses, I think last quarter, we were eight basis points. This quarter at seven basis points. So having said that we do see that kind of trending back to more normal levels that will happen over time.

It's there's a number of factors that we look at it in kind of the thinking about the timing of those will hit different portfolios and bearing pieces. Some of those factors are certainly around kind of a strong asset prices and the implications of that title and recoveries on the.

Wholesale side, we've seen I think I said three quarters in a row now where we've had net recoveries in capital markets certainly we don't see that persisting in the coming quarters until that will influence.

Our provisions there and kind of return us back to more normal levels over time there on.

On the retail side, though we benefited from strong asset prices more in the housing and auto space, but those will persist for a longer period, and so that will take time for that to kind of revert to normal and that will be related to kind of the portfolio turning over.

Secondly, I think Ive mentioned government support certainly we've assumed the government support is.

The degree of suppressing loan losses in the near term our debate has really been around the degree.

The degree to which that is mitigated or simply deferred.

It was government support has been extended a few times, that's really had two implications.

The first is it's mitigated more losses than we originally anticipated.

Where consumers being bridged the reemployment.

Business is being bridged to reopening.

Secondly is also delayed the timing and when do we think that's going to kind of start resulting increasing loan losses I think one of the more definitive personnel on the government support winding down certainly we're seeing that on the consumer side and I think the small business is going to help you over the coming months and so we'll be looking for signals in our portfolio on that site in the coming quarters.

Whether that be through kind of the readings changes or delinquencies and particularly on the unsecured consumer products there.

And then lastly around the macroeconomic environment that we've talked about.

The.

Current economic environment is very robust and supportive of the credit outcomes as we don't see that changing in shipping things and in the near term, but we.

We are looking at inflation and supply chain and those will have impacts over time and the prospect of rising rates also will factor in overtime.

So you put all this together things like supply chain will have more of a near term impact on our small business and commercial portfolios.

Whereas higher interest rates will take more time, it'll it'll affect.

Allstate portfolios in pockets of our portfolio, but thats not likely to be a factor in this coming year and so I think in 2022, we will see it rising levels of loan loss allowances, but as I said in my comments I think the total PCL there will still be well below kind of historic norms and I think it's more into 2023 and beyond that you start to get into kind of more normalized levels.

Thanks for that detail.

Thank you. Our following question is from Paul Holden from CIBC. Please go ahead.

Thank you good morning.

I ask you a broad question around <unk>.

Relation and related risks now you've already addressed.

Your expectation for operating expense growth, you've talked about expectations for central bank rate tightening in response to higher inflation, but wondering if there's any kind of.

Other impacts weather negative or positive that we.

We should be thinking about in terms of bank earnings.

In a higher inflationary environment.

Although I'll start and then I'll see if anyone wants to jump in the Grand put us at.

Certainly an inflationary environment health or asset wrote helps the economy grow right. So as you you think of boats asset inflation you know if it's if it's healthy you know under you know Ah Ah normalized.

Channel not excessive then you don't build a bubble and that can be supportive.

Total balance sheet growth and profitability growth.

From that perspective, where you start to worry is when you start to see excess asset growth in a certain area in that inflationary impact has to be watched in a number of asset classes.

And then you worry about it from obviously your customers cost management and their margins and their ability to to maintain healthy kind of debt coverage ratios. So we do worry about it from a risk perspective, maybe grandma will touch on that so there's a positive and negative and that's why as a bank you have to watch these things carefully on the asset and.

CPI side, and what impact they are having and we'll get a look into that increasingly with the quarterly numbers that we see from our clients and their income statements and balance sheets. So off the top of my head. Those are two areas that we certainly talk about as a team Graham did you want to jump in on that.

Could be inflationary kind of ranges, we're entertaining right now I think that's a net positive for the bank overall, I mean still rising at we'll see kind of <unk>.

Enhancements and improvements to our to our revenue those will be attended with higher credit costs that come with that kind of integrations, what I referred to earlier and again, it's going to affect different portfolios in different ways. You look at say, our small business and commercial clients.

They're more price takers in place makers are going to have less supplier flexibility and so they're going to they're going to see a higher application towards our credit costs and thats kind of referring back to the comments I made earlier around our forecast going forward.

This will ultimately translate into higher interest rates as well, but as I said, that's that will take a much longer time to really translate into our credit costs. When you look at our fixed rate portfolios. It is going to hit rates are locked in and it will be when we get to those points of refinancing and those are kind of more measured in years and they are in months and quarters in terms of implications there so different portfolios will.

See that as an absorbed that in different ways.

The corporate portfolio was probably more resilient again, because again they have that ability to pass on their inflationary costs.

More resiliency in their operations. So we look at those implications in different portfolios across the board, but overall it will over time contribute to the rising loss.

One loss costs.

And then just quickly can you tell us what your inflation range expectations are.

Well I think we have a number of scenarios that we analyze and each of those scenarios is going to have a slightly different assumptions embedded in it as we look at the different ranges for kind of extreme purposes and capital resiliency. So I'm not sure. There's a single answer we'd give you on that but really look through look at a wide range as we think about both capital and earnings on that front.

Thanks, I'll leave it there thank you.

Thank you.

Question is from Doug Young from Desjardins Capital markets. Please go ahead.

Hi, Good morning, just looking at the wealth management Division and pre tax pre provision earnings I've got up 3%, excluding legal provision and it doesn't really match with what we're seeing in the asset growth and I guess my question is is there any other unusual items and.

And that's where I'm going is I know there are several segments in here.

Canadian asset management wealth management <unk> I'm, just hoping you can provide maybe some perspective on what youre seeing pre tax pre provision wise, because I think theres, probably some good news stories in the asset management side that.

May be overshadowed by some near term pressure in <unk> City National Bank and.

And I guess this is maybe a question, but a statement it would be helpful. Thanks.

City National Bank removed from the wealth division because I do think sometimes that closet and so I was just hoping to get some color on that.

Thanks, Nadine I'll I'll start and thanks for your advice on the segmentation appreciate that just as it relates to the U S. I'll start with U S wealth management and you're right. There are there are a couple of elements in there until we spoke about the strength on the wealth management side, particularly in Canada, and the U S, but the the high growth in the <unk>.

There, obviously with that business you do have the variable compensation that scales with it so very strong margin there and we have been adding a lot of advisers in order to generate that growth on the <unk> side. So I would say that's the strong momentum in that business going forward from a PTT perspective, when you look at city National is when we spoke a bit around.

The margin compression that we saw then.

But if you look at what some of the drivers were related to that the PPP loans in particular in which we expect that to taper off going into next year. So that will no longer be a headwind and then as we look at the the mix we've seen a lot of strong asset generation, but that deposit level has still been quite high and so that that loan to deposit mix race.

Leo has put some pressure on margins, but then as we start to see rates increase hopefully next year, you'll start to see that margin expansion as it relates to city national on the cost base. There we have grown that bank a lot and so we do have to invest in our infrastructure in order to support that that's why you're seeing a bit more of the uptick in costs as it relates to that.

City National platform outside of the provision.

I would say going forward, though given the expectation around some of those changes as it relates to the stabilization of the NIM that we didn't expect.

Strong operating leverage overall in that business thing and maybe I'll turn it over to Doug.

Sure I think I think the hypothesis and the question is a very good one so if you looked at the core Canadian larger franchises of global asset management and wealth management, Canada. A couple of things that are probably not obvious. So there are some compensation true ups in the quarter.

That's a good news factor in that that.

While we didn't get the accruals rate throughout the year those are performance based or profitability based compensation programs. So that's not a normalized run rate there is seed capital the quarter over quarter was a little bit lower than the prior prior quarter, but there again not fundamental to the to the.

The success of the business. So you are right.

The big franchises that drive the bulk of the earnings in the non U S. Part of the segments are very healthy and fundamentally very strong.

Great. Thank you.

Thank you.

<unk> question is from Gabriel Shang.

National Bank financial please go ahead.

Good morning.

Just a follow up for Derek on the capital markets outlook.

I guess some of the indications there, but do you think earnings growth and <unk> growth in your segment can be positive.

In the coming year, and then a separate question Dave Nadeem.

Well, Dave in your opening remarks, you talked about $6 billion of taxes.

In this past fiscal year.

When you think about.

Liberal.

Proposal to introduce a third tax on.

Thanks.

On the Canadian earnings, presumably have you done any work to call.

Quantify the impact of that.

Proposal.

As always I'll, let Derek go personnel.

Along with the time.

Sure.

Good good good question not an easy one to answer in terms of.

The outlook on client activity I guess the way I would approach. It is obviously 2020 was a very strong year for us given elevated client activity and coming into 2021.

We had expected there'll be some normalization of that activity it probably didn't normalize as much as we feared and so we had a constructive backdrop for this year and you saw that result in <unk>.

3% growth in revenue and 5% growth in pre tax pre provision for 2021 off of what was our prior high watermark in 2020, so notwithstanding.

Some expectation of normalization, we did manage to drive strong.

Revenue pretax pre provision growth and then obviously very strong <unk> on the back of the PCL recovery. So I think as we now look forward to 2022, it's a little bit of a similar situation client activity on both the investment banking corporate banking side as well as in market still continues to be very healthy.

See that continuing right now and against that backdrop, I think we feel quite good about our pipeline and level of activity, but what's obviously difficult to predict as particularly building offices some of Brian's points as we see dynamics around variance and changes in monetary policy and inflationary pressures on how policymakers may react to that.

It's difficult to predict what the capital markets environment will look like for the full year. So certainly our our objective is to continue to drive growth, but it will be somewhat dependent on the market backdrop and level of client volumes.

Our expenses the lever.

Thank you.

You can call because.

I mean, a lot of investment banks.

<unk>.

Staffing levels in the past year or two.

Yes, certainly.

Certainly cost is something we'll continue to keep a close eye on and a large component of our costs are compensation, which are linked to performance of the business. So that does give us a natural lever that if for some reason activity slows and revenue slows there will be.

And offset in compensation expenses more broadly we are still very focused on broader productivity and efficiency initiatives in two items that we do feel very good about exiting this year. We did manage to bring are even though we had great results in 2020, we managed to bring our efficiency ratio down by almost another 100 basis points this year and continue.

To drive positive operating leverage in 2021 and so.

Obviously, our clear objective is to drive the client volumes, but we will manage our nia closely to try to ensure we continue to drive strong productivity and positive operating leverage. Thank you.

And maybe a quick high level comment on the overall.

A bank tax environment, I think from a macro perspective, the most important.

Saying that we have to think about as a country as we need to attract capital we need to track capital domestically and we need to attract capital from foreign direct investment, we're going through an enormous transition of our economy supply chain transition.

Climate transition journey, where we're going to need up to two trillion dollars and therefore, creating an environment that attracts capital and where the rules around the economics are certain for a longer period of time. It was really important and I think when you start proposing taxes right now.

This narrow way.

A real detriment to the overall investment thesis for Canada. So for the first reason there. We are obviously articulating that perspective, that's really important for Canada to think about long term investment.

And our country in the second half.

Tax on banks unique tax rate that means less capital for small business less capital for investment in our clients as you know we retain roughly 45% we pay out 45% of our income and we reinvest the other 55% mostly in this country and in North America, and North American supply chain, therefore that just means less capital to reinvest.

Best.

So I think from those respective now is not the time to look at these types of policies, we need to rein in our spending.

You need to think about inflation and we need to make sure we attract future generation of supply chain and manufacturing and investment in climate to this country.

I hear you.

I tend to agree with everything you said.

Actually be impacts of compose nonetheless.

Have you.

I don't have any details on it.

Just saying that there were still working on some of the details and that's been announced as yet.

Well, it's difficult for us to comment on an impact until we get more information on it understood. Thanks.

Thank you.

The following question.

From TD Securities. Please go ahead.

Morning.

Can we go back to a comment I believe you made in Q3 'twenty one I think.

You suggested that.

PCL impaired loan PCL ratio in 2022 might in fact be higher than the long term averages and I think a few of us observe that that seemed a little bit.

Hi.

And I guess im getting the sense from this call that we're now suggesting that it might be below long term averages.

Well, how I characterize that correctly and secondly can you talk about that change.

I'll characterize it properly.

Thanks, Bruce and I think we go back I think when we were making those comments, we were referencing to peak points, how you're in a certain quarter or not certainly on an annual aggregate rated and so.

So there is a part of the context is that.

<unk> done that kind of leads into this quarter in my earlier comments, right, which I said I think as we've gotten further into the recovery.

As we've seen that government support continued to extend.

As we've seen more clients bridge to kind of reemployment enbridge the reopening of the economy again, those all factor into our comfort and confidence that more of those loan losses that we think had been suppressed actually hopefully have been mitigated.

Simply deferred to a later date.

Again, theres a lot of uncertainty out there and so my comments earlier the timing on when we can get back to those.

More normalized levels is still uncertain.

And it's going to vary by portfolio and I kind of went through the factors is to own.

The retail portfolio portfolios will be impacted by different factors in some of our wholesale portfolios with some of these effects will take longer to kick in such as rising interest rates.

But that's just to give you a little bit more color I think on kind of how we're thinking about it in her commentary now this quarter versus some of the comments we provided last quarter.

So to make sure I understand the comments are providing this quarter then you are suggesting that.

In 2022, the impaired loan ratio will probably be a little lower than what we've seen in prior years, our long term averages and that perhaps by 2023. It starts to normalize is that.

And I characterize it correctly there.

That's roughly the.

Timing of when we get that peak is part of the question Mark there.

Nadine can we go to an.

Hence type question.

Looking at the measure that royal likes to use and it makes sense, but one where you look at your year over year expense growth, excluding variable comp and stock compensation and.

That number had been declining fairly consistently year over year for some time now.

I'll just cover that was COVID-19 related and then this quarter of course, it sort of moves higher.

Higher and materially so can you talk about what was.

Is it about this quarter that caused that measure so really reverse course, it had been trending down and then it really reverses course, specifically in Q4 can you speak to that.

Sure. Thank you Mario in terms of a couple of things I would comment on we mentioned in my in my remarks around the marketing costs and part of that would be seasonal but part of that also is just from a Canadian banking perspective really starting to ramp up on our marketing as you would've seen probably through the summer and into the fall.

In addition to that we have seen and we haven't been increasing our head count overall and as that starts to pull through in terms of a run rate. So that is something that as we talk about the growth we've been generating around our strong volume that was a bit of an inflation pressure, but going forward. We look to see that we will have.

<unk> growth and the top line in order to support that increase in staff costs.

In terms of technology as well. This is one area that we continue to invest we have been investing through the pandemic I would say that where were focusing ongoing forward really around those optimization and productivity and efficiency gains that I spoke to is how can we continue to make sure that we're finding opportunities to invest.

In our in our big franchises going forward and create that capacity with reductions in other areas that we can find some efficiency and productivity gains so a bit of it Mario just in terms of some of it with season seasonality.

But it but also we are seeing that just some of the increase as it relates to some of our growth initiatives.

But as I mentioned with our low single digit guidance still and we're looking to advance that into next year.

For next year, maybe you may have answered that and I may have missed it.

So our guidance is still in low single digits.

With the inflation pressures moving it up a bit on the low singles right.

Positive operating leverage is that fair.

Correct, yes.

Yes.

Okay.

Thank you.

Question is from Sohrab <unk> from BMO. Please go ahead.

Thank you I appreciate we've gone over the hour. So I appreciate you taking the call maybe just can I start there nadeem for a second so call it around.

4%, let's just say expense growth, including inflation.

You've talked about the positive operating leverage in a number of times I think you made reference to higher rates can you can you tell us what.

Assumed in your budgeting process as far as rates increases next year.

So we've looked at it.

Would have done it earlier in the fall, which would include two rates in Canada, which would then probably mid year and then towards the end of the year.

And in the U S. We didn't anticipate any any rate hikes.

So just so that would be the basis of the assumption. When you are talking about positive operating leverage for example.

As far as the impact on your margins and spreads.

Correct Okay.

Okay, and then if I can just clarify one thing with the with Neil Neil mortgage growth can you talk to us a little bit about what mortgage spreads were like during the quarter and maybe throughout the quarter compared to prior periods.

Yes, thanks for the question.

You probably have a sense I mean exceptionally.

Strong volume across the industry.

The record amount of originations in our business.

And with that really strong market and all of that demand increased price pressure from competition. So it's been a very tight market.

We've talked in the past, we haven't let on price.

Basically you have a strategy, we know we have to be competitive and make sure we're providing good value for our clients, but without a doubt it theres been price pressure in the mortgage business.

And can you can you quantify some of that for us like how were spreads this quarter versus prior quarters or.

Or any any point of reference.

Yes, I mean, I would say in terms of overall in the portfolio, we've seen them come off a little bit, but they do bleed in over time, so as originations in Q4. They were I'd say the tightness, we saw all year, but in terms of the total portfolio Thats, one quarter's worth of originations and it will bleed into the portfolio and impact the entire of the book over time.

Okay I appreciate that and can I, if I could just ask one last question if I look historically at the total bank level.

Your <unk> growth has been call it mid single digit, sometimes 6%, sometimes 3%, but let's call it in that.

4% to 5% this year it was obviously.

On a full year basis, lower although you had some growth.

In the fourth quarter.

I think about next year are you can you give us any guidance as to how you expect given the business plans that you have how is that <unk> is going to trend is it going to.

Revert back to that mid single digit or could there be a year of catch up where it could be more like 10%.

Even that if you hardly had any growth this year.

I think it would it would revert back to a higher than average so are either I mean, I think we also had the benefit this year of some of the parameter changes, particularly around the capital markets business, which would have muted some of the the growth trajectory, but I think as Dave mentioned the growth potential in our commercial loan book as well as in <unk>.

The national.

Is the opportunity for that to be maybe higher than the regular previous run rate you saw this year. Thank you very much appreciate you taking the calls.

We're going to stay on a bit longer because I think we have a couple more people in the queue.

Remarks, so we're going to keep going.

Let's stay with us.

Thank you. Our following question is from Scott Chan from Canaccord Genuity. Please go ahead.

Alright, Thanks for taking my question, maybe a bigger picture outlook.

When we kind of think about the Canada, Canada, and the U S and European key franchises.

<unk> being the National where do you think the better region is in terms of the outlook over the next few years and potentially related to PDP growth would be helpful. Thanks.

Better still candidates, 70% of our earnings. So it is important to Canada delivers for us strong growth. So it's hard to say better, but I would say when I look at the city National U S. Wealth franchise, we had the first kind of four or five years of city National had a great run.

Higher rates helped us we've tripled the size of that bank.

Seen more muted growth in the last as you've noticed in the last four to six quarters. Because we are re platforming city national for the next phase of growth tripled that bank to an $80 billion balance sheet right now and for us to continue to.

Grow at rates well above the industry, we need to re platform from a customer perspective from an operational efficiency perspective.

I am very excited about the the U S growth opportunity from <unk> because of the higher rates that the dean referenced so but.

A significant impact on US you just can't.

Underestimate how asset sensitive.

<unk> Bank is but also from a greater efficiency perspective, as we re platform city national were looking for greater efficiency and we've grown this bank on the top of a $20 billion bank platform and now as we re platform. This thing into an 82 plus $150 billion bank, it's going to have to grow.

Grow more efficiently and more effectively.

I'm very excited about the dual opportunity of revenue growth.

And better bottom line growth there at the same time when you look at venture starting to kick in and you look at the momentum we have in our Canadian banking franchise.

The good you look at our quarter over quarter growth is still very strong we're exiting the year with really good volume growth and momentum across capital markets. As you heard Derek say in neil's business across mortgages credit cards commercial lending starting to pick up. So you can look at a quarter over quarter momentum into 2022 and then the.

The flows that we're seeing in M&A UA in the Canadian wealth franchise.

Very excited about Canada, the numbers kind of speak to that as we accelerate the exit the year with very good momentum. So I don't have a favorite child, if that's what you're asking.

I like them, both equally and they both have great opportunities, which you can see in our in our exit numbers and I would say, yes, we are.

Somewhat disappointed like some may be and how much we're able to drive to the bottom line. This quarter. We had a number of puts and takes you saw margins came off.

But that doesn't take away from the momentum that we're going into the cost control that we'll be able to demonstrate to stabilize margins and therefore, the op Lev into the next year.

In both markets I think we're feeling.

Well, we're not as happy with the bottom line this quarter, we're happy with the momentum and the overall franchise.

And Dave you talked about stabilized margins.

When do you think that will happen it seems that that theme of quarter over quarter stabilization really really hasn't come in your quarter over quarter decline was probably a bit more than expectations.

Yes, and in our forecast too. So yes, we do feel good about nadeem is going to jump in on kind of the.

Why we are more confident of the stabilization timeframe, yes, maybe I'll just speak for us to Canada. They give you some perspective. So in terms of you're right. We saw the decrease this quarter. There were a few one offs I would say that we highlighted but if we look at what's been happening with some of the rate increase that we've seen in particular for.

Our Canadian banking and its prominent and along and we look at the two and five year rates, we see that that will start to price through that takes a bit of time in terms of how it averages in for against our deposit book and then as we also start to see some of the expansion into some of the commercial mortgage or as we start to see in the revolve rates pick up in.

In the credit card book that will be positive when I say stabilized and thinking about some of the some of the headwinds that we've seen that relates to.

The mix around the mortgage book and then at a lower spread as well as some of the tailwind. We saw this year on the mortgage prepayment so as those rates start to rise you will see less of that revenue coming through from prepayments, that's where the stabilization really comes in so that the benefits will have some of those onetime items or are going to come back and then in addition as rates start.

Price through that's when you're going to see the lift.

Alright, thanks for your time.

Thanks.

Right.

Okay helpful.

Following question is from Omar Saad from Cormack Securities. Please go ahead.

Thanks for taking my questions. So.

Graham this one's probably for you I'm wondering if we could go to slide 23 and talk about the <unk>.

Outlook for the ACL ratio so again.

53 basis points and now you're sitting at 60 basis points. So would it be fair to suggest that releases moving forward will normalize the big way heading into 2022 or as the bank comfortable letting that.

Our ratio of trend below 53 basis points or any comments there would be helpful. Yeah sure I mean so.

I don't think there is such thing as a steady state and your performing ACL. The ACL was meant to be a reflection of kind of the macroeconomic forecast that you have at any given point in time and the uncertainty around that right and so those are the two factors that always go into it that we have to reassess each and every quarter. So you're going to put a forecast out there on our forecast is a bit of a difficult extra.

Right now I think as we look out over 2022 that.

Assuming that we continue to progress through the macroeconomic kind of strength, we see right now assuming we see some of this uncertainty come down at Yahoo, We wouldn't see that potentially drawing down further but the reason it's still at the level that is where the macroeconomic vibrant that's really strong right now that would indicate that we should be at lower levels of ACL, but theres a high degree of uncertainty still in this environment.

Some of the factors I referenced earlier, so as we progressed here, we've got more confidence in bringing some of the reserves down from prior years.

But I wouldn't say there is a steady state there, but certainly as we look forward into 2022, and we continue to progress as we expect and some of the uncertainty kind of <unk>.

Reduces around us that yes, we would expect that that can come down further.

So as is the 53 basis points.

Not appropriate to use us as the low end of what that could go down to like it could go down lower than 2015.

Okay.

So steady state there and it's going to really be dependent on the environment. We're in at any given quarter.

Okay. Thank you have a fixed number that we kind of we ended up at any given time.

Okay move onto our last question.

Thank you our last question is from Nigel D'souza from there.

With US investment research. Please go ahead.

Thank you good morning, I wanted to circle back on the earlier comment you mentioned that you have conducted testing for the impact of higher rates on.

Potential credit risk and I was wondering if you could flesh that out and give us some color on the types of scenarios you were testing for the timing and pace of interest rate increases.

How you thought about that impact to development relationship kind of experience.

So.

So we do a lot of different scenario analysis and stress testing for different purposes, right I mean so.

At the most granular level, we do that as part of our origination practices. When we're originating a new residential mortgage where we're originally in commercial mortgage.

That's quite prescriptive in the residential mortgage space, where B 20.

Looking at claims capacity to service debt.

Plus 200 basis point increase in interest rates somewhere in the commercial real estate side.

Certainly we also obviously do with much more at the portfolio level and so whether it's our determining our loan loss provisions in our ACO again, we don't have a single scenario. There we have certainly a baseline exercise and the dean referenced some of the assumptions that go into our our baseline, but then we look at a range of I think the vulnerable five different scenarios that we look at the kind of describe different interest rate environments.

So more moderate increases and where severe likewise and then we also contemplate much more implausible environments that really go into our stress testing program, we're really kind of making sure. We continue to have the right level of capital adequacy in place and we do those exercises.

The bank, we do those in conjunction with our regulators as well so again similar to your earlier comments on inflation, there isn't a kind of a fixed single scenario that we kind of lock in on but we look at our range. We wait those different ranges appropriately and that all factors into how we determine CLO as an example that we do.

Okay. That's helpful and if I could just wrap up on a comment earlier on inflation I think you mentioned when you look at asset growth you want to look at healthy asset price depreciation versus excess asset price appreciation. So could you provide some context on how you look at the recent price depreciation for Canadian real estate is that.

There is excessive and theres concern for broader economic or credit risk and Felicia how do you how do you think about it.

Yes, thanks for the questions Neil I'll start just in terms of what we see in terms of housing as we went into the market.

In relation to the mortgage book and I think you've seen it over time, obviously the biggest driver of what we're seeing in terms of HP I in the biggest markets Toronto Vancouver.

More lately markets like Ottawa really moving up into strong double digits rates is the biggest factor so affordability.

<unk>.

Consumers being able to just go through the metrics that Graham laid out.

And Carrie and carry those payments that's the biggest driver.

I think in terms of on the go forward view.

We would say immigration has been.

Almost completely turned off that's the demand that we haven't seen in the housing market. We would expect that to provide some offsetting demand as we expect to see the rates come up on the timing of that may deem laid out. So I think those are the factors.

If we look at over time, where we've seen different leavers polled.

For example on the regulatory front, whether it's in British Columbia, or Toronto, we have seen I'd say sort of moderate corrections in those markets and then subsequently over let's say the next 18 months those home prices have come back so.

I think those are the factors, we would look at I think Graham laid out fairly well in terms of the.

Competence, we have in the underwriting and the stress testing, we do to make sure that whether it's on an LTV or there's just in terms of.

Our repricing of that debt that the consumer and our commercial customer can manage it. So that's the I think the primary lenses, we would look through in <unk>.

<unk>.

Loan book and agree with you on that.

I think our risk approach to the mortgage book is to make sure. We are very consistent in our approach through the cycles, we're not using risk as a lever to drive growth here I would just remind everyone that we have.

Our focus in terms of our client base is a very high quality Prime client base, we're not engaged in the subprime space.

Our product set is again very focused on first lien products and it's very resilient I mean, we talked about the <unk>.

Stress testing around around interest rates to make sure our clients can be resilient for a higher rate environment.

Risk based approach to our loan to value ratios. So again, it's a very prudent approach allows us to be consistent and are engaged with clients and managed through a cycle very effectively.

Okay. Thanks Brent.

Thank you.

We have no further questions registered at this time I would now like to turn the meeting back over to Mr. Mackay.

So thanks, everyone for questions. We cover a lot of ground today I think in my my takeaways in summary, I covered a lot of it in one of the questions I took it.

Overall, I think the takeaways are really strong client activity and growth.

Share gains across Canadian banking Canadian wealth.

Capital markets City National U S well U S capital markets.

Very strong momentum you saw the momentum in the quarter over quarter numbers, which positions us well.

Our disappointment also is we didn't drive as much to the bottom line as we would normally would that type of volume we walked through kind of the margin impacts.

Trying to price mortgages in a rising rate environment as was called out was a little trickier at a number of one offs this quarter and the margin side expenses a bit elevated some one times in there and therefore as we look forward.

Our degree of control, we plan for a rate environment that.

Great question.

Plan for a rate environment that was.

Less tightening.

And therefore, there's upside opportunity to our own forecast. So we're confident in our operating leverage going forward and the momentum we have in the business. So thanks for your questions all great questions and.

I wish everyone a good holiday season, and look forward to seeing you in the new year, thanks very much.

Thank you.

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