Q2 2022 Royal Bank of Canada Earnings Call
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[music] This conference is being recorded.
So to close the homes that don't have as you see it to begin.
Good morning, ladies and gentlemen.
Welcome to Rbc's conference call for the second quarter 2022 financial results.
Please be advised this call is being recorded.
I would now like turn the meeting over to Ashish.
Head of Investor Relations.
Please go ahead, Mr. But.
Thank you and good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer median 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 N T S 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 perform.
To give everyone a chance to ask questions. We do ask that you limit your questions and then re queue with that I'll turn it over to Dave.
Thank you awesome and good morning, everyone. Thank you for joining us today.
We reported earnings of $4 $3 billion with earnings per share.
Excuse me up 7% from last year.
Revenues were modestly lower year over year, largely due to moderating capital markets revenues.
You have an unfavorable market conditions. This was partly offset by strong client driven volume growth in Canadian banking and city national.
The wealth management client activity.
Expense growth was only 1%.
Before I share context on our earnings this quarter I want to acknowledge the increasingly complex macro and geopolitical environment.
As Russia's invasion of Ukraine drives on with devastating effects, we continue to stand with the people of Ukraine.
And consistent with our purpose are supporting the humanitarian effort relief efforts in the region as well as the Ukrainian diaspora in Canada.
From a macro perspective, while I noted last quarter that we were closer to the mid cycle economic growth the ongoing impact of Russia's invasion has added further complexity to existing challenges from elevated.
Inflation, a rapid tightening of monetary policy supply chain disruptions.
In short it is an energy labor and housing supply.
Central Bank actions are having a profound impact on both bond and equity markets and in turn impacting capital markets activity.
Central banks are facing increasingly difficult decisions and how to manage monetary policy to constrained inflation without impacting economic growth.
Given low unemployment rising wages and elevated liquidity, we believe the key ingredients are in place to help mitigate any sustained slowdown.
In this context I will now speak to our proven business model, which generated a strong 18% ROE this quarter underpinned by the strength of Rbcs financial position are.
<unk> revenue streams, and a balanced growth and capital deployment strategies.
He's helped drive significant book value per share growth of 15% from last year.
Our balance sheet remains strong, giving us a solid foundation to grow at all points in the cycle.
Our internal capital generation combined with a strong CET one ratio of 13, 2% enabled us to deploy capital in a balanced manner.
Kate it's relatively equally between 20 billion of client driven art W. A growth $1 7 billion of dividends and nearly 2 billion of share repurchases.
And this morning, we announced an eight or 7% increase in our quarterly dividend.
We also expect to take advantage of changing market conditions to complete our accretive normal course issuer bid in the second half of the year.
With a strong foundation, we are well positioned to continue executing on our key strategic priorities, including working to close the acquisition of Brewin Dolphin, which.
Which its shareholders approved earlier this week.
This proposed transaction meets our criteria our criteria of acquiring high quality franchises, which provide value added complex advice.
<unk> client base and a structurally attractive market.
We look forward to combining our complementary businesses and offering a breadth of wealth and banking products advice and services to clients, while adding yet another sustainable growth vector to both our wealth management and U K franchises.
We also deployed our capital to drive balanced growth in our diversified loan portfolio, where year over year growth was split equally between the retail and wholesale sectors.
Our commercial real estate portfolio is a good example of how we drive balanced growth.
12 billion dollar year over year growth in the portfolio was not limited to Canadian banking, but well diversified across geographies and segments, including capital markets and city National.
We expect our CET one ratio will remain strong above 12, 5% even after accounting for continued share buybacks in the proposed acquisition of Brewin Dolphin, our capital strength continues to provide us the flexibility to deploy our capital in a balanced manner.
While we did release the sizeable portion of our Covid related reserve builds Graeme will speak to the prudent increase in AR reserves related to the increasingly challenging macroeconomic environment, even as we operate with low unemployment and client liquidity at elevated levels with delinquencies N. P. C. L unimpaired loans at low levels.
Yeah.
Our results illustrate the importance of having diversified revenue streams.
We expect the benefit of higher interest rates were more than offset some of them near term headwinds in our market sensitive businesses.
The roughly $75 million benefit to Canadian banking from their recent bank of Canada rate hikes is reflective of the strategic investments. We have made in our core deposit franchise over many years, including last year's launch of RBC vantage in the last two years alone. We have gained over 70 basis points of market share in core checking account.
Yeah.
There's no dean will speak to shortly rising short term rates should provide a significant revenue list across revenue lift across our businesses.
Fitting from both increasing deposit margins in Canadian banking, and our wealth management and custody franchises as well as higher asset yields at city national and our wholesale businesses.
Our results this quarter also highlight the balance within our various market sensitive businesses. The strength of our investment management mutual fund and corporate lending platforms, partly offset pressures in origination activities and trading revenues.
Expense growth was well contained at 1% year over year in part due to natural built in hedge or a variable compensation.
As market sensitive revenues decrease so does this large part of our cost base.
I will now expand on trends, we're seeing across our core businesses.
And Canadian banking residential mortgage growth remained strong up 11% year over year for the second straight quarter, and we continue to invest in further improving the home buying experience for our clients.
But housing activity slowing as interest rates rise, we expect mortgage growth to slow in the second half of the year and come in at the high single digit range for the year.
We anticipate the slowdown in mortgage growth to be offset by higher growth in commercial lending and credit cards.
Especially as utilization of revolve rates continue to increase off their recent lows.
Credit and debit card transactions were 30% above pre COVID-19 levels in April with strong momentum carrying into my global Airlines and credit card networks are noting higher travel bookings and we are seeing increasing visits to restaurants and hotels.
And our market leading business banking franchise loan growth was up 10% from last year as we saw increased confidence from business leaders.
We also saw the benefit of our past investments in our business, including adding bankers and growing our RBC X platform.
Recovery to pre pandemic commercial utilization and card payment rates from current levels will not only add to Canadian banking loan balances, but also drive further margin expansion potentially adding nearly 200 million of additional revenue overtime.
However, the best way to drive growth is to continue growing our 14 million client base as we have been doing through a differentiated products and services <unk>.
Including going beyond banking through innovative solutions, including RBC ventures, and our strategic partnerships with West jet Petro, Canada and Rexall.
Turning to wealth management, we believe the diversity of our portfolio and the quality of her advice our strengths in these volatile markets.
And Canada RBC Dominion Securities has a number one market share for high and Ultra high network clients.
In wealth management.
Was up nearly $35 billion or 7% year over year.
Despite the volatile environment, we continue to attract experienced investment advisors also seeing very limited limited attrition rates.
RBC Global asset management includes the largest retail mutual fund company in Canada. Despite.
Despite volatile market movements in both equity and bond markets long term net sales were $9 billion this quarter.
In the U S. We have multi pronged growth vectors, including the sixth largest U S wealth advisory firm ranked by a way.
Where we continue to add toward adviser base were attracted to our technology and brand.
City National wholesale loan growth was flat relative to last year or up 14%, excluding triple P loans benefiting from a growing teams and the build out of our mid market lending platform.
Retail loans were up 25% year over year, largely due to strong growth in our jumbo mortgage strategy.
And as I noted earlier the proposed acquisition of Brewin Dolphin will further diversify our revenue stream by expanding our footprint in the U K.
Although capital markets revenue was lower than in recent quarters pre provision pre tax earnings of $1 billion highlights the resilience of our diversified business in light of challenging market environment.
Our lending business had a second consecutive quarter underpinned.
Second consecutive record quarter underpinned by increased demand, including acquisition financing mandates as well as more favorable yields.
And we gained market share in global investment banking year to date, reflecting our continued investment in the business.
As I have noted recently, we are strengthening our talent in key verticals, having hard approximately 20, managing directors year to date, and we'll look to continue to hire throughout the rest of the year. This is in addition to the 25 M. D has hired last year.
It's also important to highlight are balanced between growth and prudent risk management.
Slight volatile market conditions, we have had zero days of trading losses over the last two years.
While market conditions are proving to be cyclical headwind, we still expect capital markets to continue to grow in 2023 as markets stabilize.
In conclusion, our continued investments in our people technology products and services are creating more value for our clients and driving strong volume growth in client activity across our businesses.
We remain well positioned to perform through the cycle, given our strong balance sheet diversified business model and balanced capital deployment strategy, including returning capital to our shareholders.
And the Dean over to you.
Thanks, Dave and good morning, everyone I'll start on slide nine.
As Dave noted earlier, we reported earnings per share of $2.96. This quarter up 7% from last year revenues were down 3% year over year as strong volume growth and higher investment management in mutual fund revenue were more than offset by an expected slowdown very strong capital markets results last year.
Expenses were up 1% from last year with pre provision pretax earnings down 2%. Our results benefited from a net release in provision for credit losses, which Graeme will speak to shortly.
Our effective tax rate was down 270 basis points from last year, mainly due to the impact of net favorable tax adjustments.
The legislation associated with the proposed federal budget tax change it has yet to be drafted and as such it is too early to comment on details associated with those changes, which we expect to increase our tax rate next fiscal year.
Before moving to segment results I will spend some time on three key topics.
Our balanced capital deployment strategy, our broad based sensitivity to higher interest rates and our focus on expenses.
Starting with capital on Slide 10.
Our CET one ratio was a strong 13, 2% down 30 basis points from last quarter.
Our earnings this quarter drove a premium ROE of 18% generating 75 basis points of capital.
We continue to maintain a balanced capital deployment strategy allocating capital fairly evenly between growth dividend and buyback.
Inclusive of both dividends and buyback our total payout ratio was over 80% this quarter.
At the midyear point, we have completed our previously announced normal course issuer bid and have returned to our traditional policy of twice a year dividend increases.
Our organic business growth was largely driven by strong financing across capital market City National and Canadian banking.
As we actively engaged with both new and existing clients.
Looking ahead, we expect the benefit from the implementation of the Basel reforms in early 2023 and more than offset the approximate 40 basis point D. G. One impact of the proposed acquisition of Brewin Dolphin, which is anticipated to close by the end of third calendar quarter of this year.
Moving on to slide 11.
Net interest income was up 9% year over year or up 10%, excluding the impact of trading result, the highest growth rate since Q3 2019.
Strong client driven volume growth in Canadian banking and city national along with record lending revenue in capital markets more than offset the impact of lower spreads year over year.
Canadian banking NIM was up four basis points from last quarter, the highest such increase since Q2 2018, largely due to higher deposit margins on our leading low beta core checking platform.
This was partly offset by the impact of a continued decline in mortgage spreads.
City National NIM was up 14 basis points relative to last quarter as expected rising interest rates had a relatively higher impact on city national's asset sensitive balance sheet with roughly half of its loans being floating rate commercial loans.
Now to slide 12.
We remain well positioned to benefit from higher rate of 100 basis point parallel shift is expected to provide a 1.1 billion benefit to net interest income in the first year.
Rising to approximately one 8 billion in your Q.
To provide better visibility on our sensitivity to rising interest rates. We also highlight the expected benefit of a 25 basis point rate hike.
Over the next 12 months, we estimate a flattening curve scenario. It resulted in an aggregate $200 million of additional revenue in our Canadian banking and U S wealth management businesses.
We could also see 60 million benefit over 12 months for my deposit rich Canadian wealth management and asset servicing businesses.
We anticipate an increase in client demand for repo should we see a normalization of surplus liquidity in wholesale market.
This coupled with rising rates should serve as a catalyst for a recovery in repo spread.
And a recovery in commercial utilization and credit card revolve rates would not only be positive for growth, but to margins as well. We expect these benefits to revenue to more than offset the impact of competitive pricing pressures and rising funding costs.
Turning to expenses on slide 13.
Non interest expenses were up 1% year over year.
More control of our costs, our expenses, excluding variable and share based compensation were up 7%.
Salaries were up 7% year over year, representing nearly 40% of the increase in our more controllable cost.
As Dave noted, we continue to invest in sales capacity to meet the needs of our clients and drive growth.
Part of the increase was also driven by higher salaries offered to our employees at the end of last year.
Higher professional fees and packet Jason costs represented nearly 30% of the increase in controllable costs as we continued to invest for the future, while improving our operational and regulatory infrastructure.
The normalization in marketing and travel costs compared to low levels last year drove another 20% of the increase as we continue to meet the needs of our clients as economies open up.
Going forward, we are aware of the evolving operating environment, including inflationary risks and the need to strategically invest to ensure we remain well positioned to provide even more value to our clients.
Nonetheless, we remain committed to prudently managing our cost structure. We continue to expect annual controllable expenses, excluding variable and share based compensation should grow at the higher end of the low single digit range for the full 2022 fiscal year.
We expect the year over year growth in all bank controllable costs to moderate in the second half of the year, even with rising salaries and higher discretionary cost off of Covid load.
Offsetting this would be our continued focus on productivity.
Also recall, we have made significant investments across the bank for a number of years and going forward, we expect growth and amortization costs related to the capitalization of this historic tech spend to begin to slow.
And we expect our full year Canadian banking efficiency ratio to fall under 40% in 2023, as we look to generate full year segment operating leverage above the higher end of our historical 1% to 2% guidance.
Moving to our business segment performance beginning on slide 14.
Personal and commercial banking reported earnings of $2 2 billion this quarter.
Median banking pre provision pretax earnings were up 4% year over year in line with revenue growth.
Canadian banking net interest income was up 5% year over year, driven by strong volume growth.
Non interest income was up 3% from last year higher mutual fund distribution fees were offset by lower securities brokerage commissions from a normalization indirect invest in client activity.
Increased client activity drove higher revenue from service charges.
Higher consumer spending drove higher credit card balances as well as higher credit card purchase volumes and foreign exchange revenue as travel bookings increase.
Partially offsetting this were higher rewards costs commensurate with an increase in travel redemption.
Operating leverage was negative this quarter with expense growth up 6% on higher technology and staff related costs and higher marketing costs.
Year to date operating leverage with 1% and we expect it to improve in the second half of the year.
Turning to slide 15 wells.
Wealth management reported earnings of $750 million.
Pre provision pretax earnings were up 8% from last year.
Revenues were up 11% year over year, including $84 million in pre tax gain from the sale of certain noncore affiliates at city National.
Canadian wealth management, RBC global asset management, and U S wealth management, all reported higher fee based client asset primarily reflecting net sales.
This was partially offset by lower transactional revenue, mainly driven by reduced client activity as investor sentiment turns cautious.
RBC Gam generated long term net asset sales of 9 billion this quarter.
Especially imbalanced and equity mandate.
Outflows were largely driven by clients rethinking their fixed income strategies.
Net interest income at city National was up a strong 10% year over year in U S dollars driven by double digit volume growth.
Turning to insurance on slide 16.
Net income of $206 million increased 10% from a year ago, primarily due to higher favorable investment related experience.
Canadian insurance reported higher group annuity sales and business growth across most products and international insurance recognized business growth and longevity reinsurance.
Turning to I N T S on slide 17.
Net income of 121 million remained relatively flat year over year as higher client deposit revenue from higher interest rates was offset by higher technology related costs, a favorable sales tax adjustment in the prior year and higher legal costs.
Turning to slide 18.
Capital markets reported earnings of nearly 800 million pre provision pretax earnings of 1 billion were down 20% from last year, a strong result.
Corporate and investment banking revenue declined 6% from last year due to weaker origination activity.
Elevated volatility and macro uncertainty kept issuers on the sidelines.
This more than offset higher fees from M&A advisory and loan syndication as well as record lending revenue as we continued to deepen engagement with clients.
Global markets revenue was down 14% year over year with lower results in both FIC and equities trading.
And fake widening credit spreads negatively impacted our larger credit trading business, which more than offset strong trading performance in commodities and FX due to volatile volatility driven client activity.
Equities revenues were solid.
Although down from a record results last year, which was characterized by robust primary activity and flow and derivatives.
To conclude our diversified businesses are well positioned to grow their franchise, while building on the benefits from higher interest and we remain disciplined in balancing our investments and capital deployment to continue delivering value for our shareholders and clients.
With that I'll turn it over to Graeme.
Great. Thank you Dean and good morning, everyone.
Starting on slide 20, our gross impaired loans of $2 1 billion were stable. This quarter are at their lowest level in seven years.
New formations of 398 million increase quarter over quarter as we normalize from the 10 year lows experienced last quarter. It remained below pre pandemic levels.
The increase was mainly in couple of markets, where we had a new impaired loan in each of our other services and consumer staples sectors.
Turning to PCL on impaired loans on slide 21.
During the quarter, we saw a pandemic containment measures continue to use during an economic recovery that has resulted in better than expected unemployment rates and GDP growth.
These factors drove very strong credit outcomes in Q2 with PCL on impaired loans of 174 million or nine basis points.
Which is stable compared to last quarter and remained well below pre pandemic levels and our historic norms.
The Canadian banking portfolio PCL on impaired loans was down $40 million from last quarter, primarily driven by our commercial portfolio.
Even though the benefits associated with government support programs for our commercial clients have largely concluded performances remained strong proving.
Provisions on impaired loans. This portfolio came in at just 1 billion.
This quarter with mid stage delinquencies also declining from last quarter.
This strong performance was also observed were broadly with delinquency rates being lower across all of our Canadian banking portfolios.
Clients continue to benefit from a combination of elevated savings strong labor markets and the overall economic recovery.
And a couple of markets after four consecutive quarters with net PCL reversals, we've seen recoveries normalizing as expected given the low level of impaired balances remaining.
PCL on impaired loans was $27 million in the quarter due primarily to provisions on the newly impaired loans in the consumer staples sector.
Finally in wealth management PCL on impaired loans was less than 1 million this quarter with relatively small provisions on loans in the consumer discretionary sector, which were offset by reversals of provisions picking last quarter in the same sector.
Moving to slide 22, I'll provide some context on allowances.
As noted earlier uncertainty associated with the end of government support is materially subsided and the impact of woman crime, it's proven to be limited.
This has resulted in the release of the majority of our remaining COVID-19 related reserves on performing wounds.
New headwinds and concerns are emerging.
The exceptionally strong economic recovery has created inflationary pressures that are proving to be greater and more sustained than previously anticipated.
These pressures have been exacerbated by computed COVID-19 containment measures in China as well as by the Russian invasion of your creative which is having a substantive impact on commodity and energy prices.
The pace of inflation central banks have increased interest rates and we expect more increases increases are on the horizon.
To account for a deteriorating macroeconomic outlook, we have prudently adjusted our provisions on performing loans.
Our base case still calls for positive economic growth, we have increased both the severity and likelihood of our downside scenarios, which has partially offset the COVID-19 related reserve release.
The net result was a $504 million release of provisions on performing loans, this quarter, which drove a $502 million reduction in our allowance for credit losses on loans from $4 4 billion to $3 9 billion.
Or is your ACL ratio of 49 basis points reflects our reserve releases over the last six quarters.
The shift in portfolio mix driven by growth in our residential mortgage portfolio through the pandemic.
Going forward, we will continue to monitor the evolving macroeconomic environment.
Sure we were adequately provisioned.
Let me now comment on the Canadian housing market and our residential mortgage portfolio.
Following two years of exceptionally strong housing markets, we started to see markets cool and prices stabilized during the quarter on the heels of interest rate increases by the bank of Canada.
Aligned with the rapid home price appreciation. We are also seeing the income underpinning our mortgage originations grow at an accelerated rate.
And the proportion of our mortgage originations with clients in the top quintile income bracket grow from about a third to just under a half.
This highlights the relative quality of our mortgage claim fees and the strong and consistent underwriting standards we employ.
It highlights the ongoing housing affordability challenge, we have in Canada.
There's also been some notable origination trends in the market in relation to investor and variable rate mortgages. So we've provided some more color on these segments on slide 23.
Investor mortgages account for 13% of our Canadian banking residential mortgage portfolio if.
So this client segment, we apply more stringent underwriting standards.
As such the book has outperformed or broader mortgage portfolio with a significantly lower impaired grade and higher proportion of borrowers with a FICO score greater than 800.
Variable rate mortgages account for 29% of our Canadian banking residential mortgage portfolio.
These mortgages are clients monthly payments remains unchanged as interest rates increase until the mortgage matures, providing the board greater time and flexibility before their premium increases.
The majority of these mortgages were originated or renewed in the past here under a high credit quality with an average FICO of 793 and average current LTV of 52%.
Finally in addition to the stress testing built into origination process. We continuously review the resilience of our mortgage portfolio to higher interest rates. This provides us confidence that the large majority of our clients have the capacity to absorb the impact of further interest rate increases.
To conclude we continue to be pleased with the ongoing performance of our portfolio employment rates housing prices oil prices and other macroeconomic variables have come in stronger than projected this quarter as I noted earlier the impact of COVID-19 on our portfolio have largely subsided.
These factors contributed to the lower than expected PCL on impaired loans. This quarter. We believe the return to more normal levels of PCL on impaired loans has likely been believes later in 2023.
However, during the quarter, we continued to see heightened market volatility driven by the increasing macroeconomic risks noted earlier.
We are actively managing this increasing economic uncertainty our.
Our exposure to Russia is nearly nonexistent consistent with our strategy and risk appetite we.
We continue to meet a defensive positioning of our trading businesses did not experience any days with trading losses. During the quarter. We continue to stress test our portfolio for inflation and interest rate risks. We believe we are prudently provisioned and calculates to withstand plausible worst severe macroeconomic outcomes.
We expect that any elevated credit costs associate with these emerging macroeconomic headwinds are not likely to materialize until 2024.
As always we believe the quality of our client base and our prudent risk management approach position us well to manage through this increasingly complex backdrop, 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.
Yeah.
Thank you.
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Yeah.
The first question is from Ebrahim, Pune Wala from Bank of America. Please go ahead. Your line is open.
Hey, good morning, I guess just.
Wanted to get your thought process on capital allocation I think the macro environment is extremely uncertain and I think you used the word such as central.
Central banks, having a profound impact do you clean, we're adding increased complexity, but on the other hand off all your peers.
Most excess capital I think Nadeem mentioned that the Basel four changes will probably more than offset the impact.
Impact to capital So would love to use as you think about on a go forward basis extra organic growth like how do you think about capital allocation.
Do you lean in and become opportunistic in terms of maybe looking at more M&A deals or do you hold back and leave some dry powder because things could get worse six to 12 months.
Thanks, Ebrahim, it's a great question I think we've benefited significantly already by being patient.
As valuations change and I think to your point, we're trying to present, a balanced view of the economy right now and that were mid cycle, but many late cycle signals to your point and as central banks struggled to contain inflation. They have to hit demand really hard and therefore, it's difficult to predict on from them.
CRO perspective, the impact of rates on demand combined with the impact of inflation on demand and lack of lack of goods and services to meet that demand. So I think from that perspective markets are struggling to predict how we land the economy do we landed with us.
Recession, and I think our message today is it is it could go either way, it's 50 50.
Having said that there are strong underlying tenants to the economies.
Lots of liquidity, where I was kind of a full pass full employment and therefore, there are they're good shock absorbers to absorb that uncertainty however.
The central banks will hit them pretty hard and were forecasting demand next R. GDP next year to be roughly 2%.
So as you think about that trajectory in line with being opportunistic I think to your point.
Patients has been rewarded and therefore do you really want to pick up someone else's credit book at this point in time or do you want to see how this plays out a little bit further so from that perspective, where we remained in a balanced posture, which you heard us comment in all our speeches around our W. A growth around share buybacks and.
Around dividends, so I think from that perspective.
<unk> to see us focus on creating we think premium shareholder value shareholder shareholder GSR through those three balanced mechanisms.
I think you also do you expect that as our first strategy right now and then always with.
Because we have such significant organic capital build because of your because your reference to upcoming regulatory changes, we still have significant excess capital to be opportunistic and therefore, we think patients will be rewarded.
And just as a follow up to that Dave I think you were very clear last quarter. When you talked about wealth management interest in U S. Europe , and then obviously you announced a boon acquisition. If you had to sort of pin down to one or two things that would be of interest is it still more stuff to do in Europe is it something on payments digital any perspective would be helpful.
Yes.
At the end of the day, we're very excited about the Brewin dolphin opportunity, we're excited to shareholders fully approve that.
I think a high ninety's approval rate on Monday.
It presents puts us as number three is an integrated.
Full service wealth player in U K and attractive structural market and therefore over time as we are first and foremost objective there was to execute on our synergies and are significant synergies, but I mean, when we get into that then the opportunity in a highly fragmented market to make further consolidations is obviously, there and we are aiming with kantar.
<unk> to pursue a strategy of creating value for clients complex clients with complex needs are high you know high net worth ultra high net worth. So therefore, we continue to look for those opportunities in North America, and obviously in Europe to diversify our revenue stream diversify our balance sheet at the same time my car.
And that's around.
The diversified commercial real estate sector, we have a uniquely diversified portfolio because we have high net worth clients that have real estate needs, we have capital markets clients in our real estate needs globally, we have Canadian clients and therefore.
Suffocation of our balance sheet through a cycle is a great asset to us and that's why we had we continued to build and see these businesses not just from a revenue diversification, but also balance sheet.
And risk so I think all your questions are important we find it a very attractive sector that doesn't need a lot of capital to grow. It once you make an acquisition and therefore, we continue to have dollars at the same time, we are looking at and have made small acquisitions in the technology Fintech, where we continue to look at medium sized acquisitions there.
To continue to accelerate client acquisition and value creation in our commercial.
Consumer and wealth franchise, so yes to both great questions.
Thank you Dave.
Oh.
Thank you.
The next question is from many Grumman from Scotiabank. Please go ahead. Your line is open.
Hi, Good morning, just following up on that in terms of how low you'd be prepared to take your CET one ratio again, Dave given your comments on the complex macro environment has anything changed for you. There in terms of sort of operationally how low you would be prepared to go I'm curious your thoughts on on on that.
Okay.
Obviously, we have regulatory minimums, and buffers above that and given our strong capital generation ability and depending on the type of acquisition you you could take it down to kind of.
The regulatory threshold plus a buffer conservatism buffer therefore, we have significant capital to work with on any type of potential acquisition.
And then what did you want to see.
Yeah, No I think you I think you've covered it Dave I mean, I think we said that 13 billion write it at the levels there.
Recommended so realistically I think managing around the comments that I referenced in his speech that we are looking at some positive impacts associated with Basel three I think that you know to your point around prudency around what's happening in the macroeconomic environment, we still have sufficient capital to make decisions around strategic opportunities as well.
And just to put a finer point on it with 11% like a 50 basis point buffer be acceptably, even in this kind of environment.
Maybe a little higher but.
But not all.
[laughter], but not significant or you're in the right zone, yes.
Got it and then just in terms of those new impaired loans in the cap markets.
Yeah is there anything.
Interesting about those again.
Are those impairments in any way related to supply chain inflation any of the complex issues. We're talking about are more idiosyncratic, if youre able to even sort of disentangle that.
Yeah sure. It's a very it's Graham just a couple of comments there I mean, we don't really comment on client specific accounts I would just say I mean, we've kind of gone through a year here in a couple of markets, where we've had basically no new impaired loan formations. So is the fact that we have one or two it is I wouldn't draw anything extraordinary out of that at this point in time and and I wouldn't say there was any thematic.
Somatic across the two accounts either just marry that up with you. If you look at the scoreboard of all of them are kind of early into it early credit indicators. Those all continue to be very positive signals and so I wouldn't treat this as something that you know against that if you will.
Thanks, so much.
Thank you.
The next question is from Gabriel the Cheyenne from National Bank Financial. Please go ahead. Your line is open.
Uh huh.
Ask about the you know the net.
Some of them you know the big performing.
So.
I see.
You know from your notes.
Graphics, there showing your base case assumptions for GDP unemployment, all that looks like it's become a bit more conservative than what you had at the last quarter of the startup.
End of last year.
Your loans classified as stage two the higher risk performing category.
18% quarter over quarter.
And then I see this whatever $504 million for <unk>.
Forming ACL relief with the SEC.
Again biggest number since the release cycle started in two.
2021.
Can you help me understand.
The moving pieces here on one hand looks like deterioration, but then.
From a provisioning standpoint clearly not.
Yeah, sure Gabriel, it's grandma or I'll speak to that.
Certainly the other competing factors as it is I would say.
The comments in my notes certainly we're seeing a lot of positive economic signals right now right.
That's translating into very strong credit performance in terms of stage three results and I'm looking forward from that we've got strong cash balances still little utilization rates were still seeing upgrades outnumbering downgrades delinquencies that little kind of performing levels and so we have a very strong kind of near term credit environment.
But if we back up.
What's driving that.
Driving the release here I would really kind of break it into two parts. One is we put in significant reserves back in 2020, and lightest kind of extraordinary environment. We were in with a complete economic shutdown and we gradually released those through 2021 and into 2022 but nonetheless, we've not got to kind of the pre pandemic levels that we were at.
Back in 2019, if you will to early 2020, I mean, we'd hold onto significant reserves there based on the uncertainty that we've still been facing and I would say that uncertainty was still tied to two proof point for for US one was around kind of what was going to happen. Following the end of the government support is with government support largely concluding in the fall and we really wanted to see the signals in the outcome.
Yeah.
Going back to the.
The data points I referenced earlier, we're not seeing the kind of negative consequences. We were worried about as governments. When it came to an end and top of that we saw earlier. This year, we were obviously kind of facing army crime.
And that created another uncertainty here, whether society was going to learn to live with it or what are they gonna be on this roller coaster of kind of shutdowns and reopening as again I think we've seen that the economy has remained open and resilient through army crime.
You take those two proof points together and that really kind of put us in a spot that we we just really felt we cannot justify the kind of ongoing overlays we've had in place in relation to the pandemic.
Having said that we're very mindful of kind of the new and emerging headwinds that we're seeing out there the supply chain issues the inflationary pressures.
The constrained labor markets out there and so we did factor those into our reserves and as you said, we did that by way of monitoring or base case scenario, we've put more severity into our downside scenarios and we attach greater weight to those so we still do have a positive economic growth as our as our baseline scenario, but we certainly weighted.
Those downside scenarios and made them more severe reflecting because of those headwinds and so those were two of the two offsetting factors that ultimately led to the $500 million release that we undertook on stage one and two.
Alright, Thank you that's very clear.
Technical question, though.
I've heard Dave talk about it on numerous occasions or labor shortages and inflation I mean obvious challenges to the economy, where does that all hang yourself for that matter.
Does that factor in when I look at these forward looking indicators that probably primarily a toggle on your GDP forecast.
It's something that Oh. These are the major risks to the you know on the economic outlook I guess.
Where we're at.
Where would you see that.
Reflected.
Yeah.
You know inflation. So that's one of a number of macroeconomic variables that we factor into our kind of a loan loss considerations.
It really we're translating that through to kind of a direct impacts that we would see you say on interest rates in a rising rate environment and that's it's kind of a direct very well that was.
The uncertainty that creates around widening credit spreads, which is another factor higher yields which is another factor GDP itself as a factor. So it indirectly if you will translates into all of those variables, which do drive kind of our models and in our other analytics that we bring to bear as we decided on our loan loss allowances.
Alright. Thanks.
Thank you.
The next question from Paul Holden CIBC.
Please go ahead.
Line is open.
Thank you good morning, I wanted to go back to the discussion.
Around capital.
Capital allocation, but a little bit of a different.
Angle to it just with respect to organic capital allocation in light of your more <unk>.
Balanced view on economic risks like does it risk appetite changed at all with respect to <unk>.
Underwriting new loans, whether that's on a broad basis or.
Are there specific areas, you're pulling back risk.
Maybe I'll start with the Dave her with a high level view of how we approach it strategically.
You don't want to jump in after that.
Certainly we take a through the cycle approach when you look at long term client relationships you can't tie markets you can't pull it out of client deals once the clients on the books are there for a while so therefore, our risk strategy is consistent through a cycle.
Based on kind of our overall client and business strategy. So we don't tweak.
Nor do we materially change how you approach that and obviously when you're looking at market deterioration and other things you may Miss more deals because of that and you're certainly seeing that now in a number of kind of lending sectors, where competition and I call end of cycle practices not everywhere across the credit spectrum, but.
And some significant pockets of the credit spectrum, you're seeing end of cycle pricing behavior as the cycle turns and condition behavior in that that could cause you to miss deals with a consistent lending structure, which is which is obviously happening today, but Graham did you want to elaborate on that yeah. No. I think these kind of hit that key freeze, which is that through the cycle approach we've done.
And our risk appetite, so that we can be that very consistent and persistent.
Work for our client base and know that we can operate effectively through the cycle.
So when times are good we're not out there stepping hurt on the gas pedal and we're constantly reviewing and stress testing our portfolio to make sure that we are resilient for when we get into more difficult periods and can continue to lend into that in support of our clients on that and I think that's critically important.
And then as Dave mentioned earlier was I think the other piece of critically feeds into that is the diversification, we have and not just the value of that is from kind of the top line, but the importance. It plays into kind of you know our ability to be the consistent support provider. If you will through the cycle.
Got it Okay and then.
Second question is with respect to <unk>.
Management of liquidity and potential shifts and deposit trends. So you obviously saw good deposit growth.
Quarter over quarter, a little bit of a pullback in the in the U S. I guess because of higher deposit betas, maybe you can address that a bit but how are you thinking about it.
The risk of it in Q T.
Given inflationary pressures on on retail customers.
Customers et cetera, and management of deposits and liquidity.
Yeah. That's an excellent question Simon I think it's something that everyone looks I mean, it wasn't down the bank of Canada, They would start allowing some of their bonds to mature at the pace.
20% per year, when we look at it from our our deposit base I mean, I would expect that with quantitative tightened to withdraw some of the liquidity from the system and have modest dampening effect on the positive I think given our franchise overall, we're not really expecting that to have a material impact because we can.
Expect that it will occur over time.
<unk> seen a slight slowdown in our deposit growth, if you will but still growth in it and other events. So I think as it relates to overall liquidity I mean, we do keep that in mind when we saw the big ramp up in our deposit base Uh Huh.
Through the period and evaluating how that will transition into either a you know from a pain.
Paying down our debt that surplus liquidity has definitely been an asset in the economy, a little while but we take that into consideration when evaluating how we deploy those deposits, but we don't think that it will have a material impact as I mentioned it is expected to incur over extended period of time.
I would also say that that deposit base has been a strategic complement to our to our advantage overall and a funding advantage given the fact that not only has the low beta on it all of my friends in the U S. In a moment, but in Canada and in particular, how that's accelerating our NII growth.
But also a funding advantage over all to support our strong asset growth both in Canada, and the U S and the U S. It's a bit of a different dynamic I would think that we saw that part of our deposit a slowdown and a careful while we did anticipate that.
Given the fact that there is a higher deposit beta in the U S. But we still do expect that only to wrap up very slowly over time with the fed rate hike setting up to.
Who are you know 200 200 basis points roughly before we start to see that deposit beta around the 39% Turkey.
Yeah.
Okay. Those details are helpful. Thank you that's all I had.
Thank you.
The next question is from Doug Young from additional debt capital markets. Please go ahead. Your line is open.
Hi, Good morning, I think know Dan in your prepared remarks, you talked about Canadian banking op leverage being negative this quarter and 1% or just under 1% year to date, but I think you also mentioned driving operating leverage to above 1% to 2%, which is your historical range or target.
Area for fiscal 'twenty, three and and the Nix ratio below 40% in fiscal 'twenty three although I don't think that's new news, but I'm just more curious about what gets you to where we from where we are today.
Two to where you think youre going to get to next year.
Maybe Matt I'll start and then I'll turn it over to Neil I think what you're starting to see.
This quarter.
Around our margin expansion up 40 basis points on a quarter over quarter basis, and we would expect that continued run rate is as we start to see the interest rates increases that I mentioned, a lot of the benefit of that coming from our a low beta strong deposit.
So that that is really driving a lot of the growth we're going to see not only off of increase in interest rates by continued strong volume growth.
In addition, just around the management of our expenses in and I'll turn it over to Neil as well, but we're very yeah. We obviously had a very low period in Q2 last year very difficult comparative as we've been increasing some of our spend not only on the increase in sales force, but also.
Some of our marketing as well that we just come off very low levels from last year, but we're managing that expense base. I mean, we can talk to a number of areas, where we are not only improved our productivity from a frontline perspective, but also some of the initiatives that we've undertaken and our investments in digital and technology, which are also.
<unk> on the back office side. So that's why we're looking for the expansion in operating leverage and I'll turn it over to Neil.
Yeah, I mean, just a little more color on what <unk> already provided I mean, our outlook on NIM is four to five basis points per quarter for the next couple of quarters. So it just to kind of dimensionalize the trajectory there the deposits will play.
Big part and we spoke about the market share gains on the core deposit with relatively low betas.
Other things I think we are we've talked about fanatically, but getting rid of the revolve rates back in the credit card book They've mentioned in his prepared comments. That's one of the drivers of NIM I haven't talked as much about just the other income and there's a couple of things as we look quarter over quarter year over year for Q2.
No.
That line mutual funds, obviously with equity markets down were a headwind we talked about a normalization of direct investing our credit card card service revenue last year, we benefited.
Dramatically from a lower redemption experience with travel not being available as an option. That's obviously opened up and we had higher redemption experiences and we also had to take upfront the cost of new card acquisition.
Bonus points, so that was about $45 million for the quarter.
Relatively flat card services revenue for Q2, we'd start to see that normalize.
As we move forward getting into sort of more parallel.
So the purchase volume growth rates, which were over 20% for the quarter.
So I think those are those are some of the things and then just new client acquisition and strong volumes. So about almost 10% volume growth on the collective business and just really pleased with how we're onboarding new clients into the platform.
Perfect and then just secondly green.
I think you mentioned in your remarks, you correct me if I'm wrong.
That challenge is not likely to surface in fiscal 'twenty, four and I'm, just trying to get a sense of.
What you're kind of meaning here is that when you think that youre going to get a peek out N P CLS or I'm, just trying to get a sense of what's the thinking behind that.
Hey, Doug.
Good question a good follow up there just to make sure I clarify so I think there's two things there's the.
Kind of a normalization of credit costs. If you will like I was talking about we've always had very strong credit outcomes and.
It was kind of the actuals that have come in over the last few quarters have proven to be stronger than we'd anticipated. Obviously, that's reflective of the things like.
40 year lows on unemployment and so we expect that it'll kind of extended longer than we thought and that's kind of the return to more normal levels of of of stage three losses, probably is no deeper into 2023.
Separately when I kind of referenced before is really more getting into some of these emerging headwinds that we're seeing right. So the impacts of rising rates and the potential for higher and higher inflationary environment.
Kind of those little certainly will have an impact in terms of.
Forward credit costs, I, just was saying that I think the.
Timing of those the impact of those or even if you will more deferred.
When you look at some certainly some portfolios like maybe your unsecured credits or small business could see that kind of impacted sooner, but so many of our businesses, where we're are kind of the loan profile of the debt profile has been termed out it's not until that kind of profile starts to turnover that you've started to kind of see the impact on kind of delinquencies impairments come through.
And so whether that's.
Mortgage portfolio or a commercial real estate portfolio or even many parts of our a couple of markets kind of wholesale portfolio impacts there are probably more leading to that.
Those kind of emerging headwinds.
That's great. Thank you very much.
Yes.
Yeah.
Thank you the.
The next question is from Lamar Purcell from <unk> Securities. Please go ahead. Your line is open.
Yeah. Thanks, maybe flipping back to ground here I think you covered some of this in our earlier responses on credit, but following this quarter's release, you're actually now in an ACL coverage ratio below what the band count at the end of Q4 19 with pre pandemic.
It looks like to me, there's a lot more economic uncertainty today and at the end of 2019. So can you maybe help me understand why you're comfortable enough kind of 49 basis points coverage on I think it's.
Slide 22 versus I think it was 53 basis points you had at the end of 2019 like perhaps at a high level. There's some tuning of the portfolio changes in business mix or just maybe your your just overall a more comfortable operating under <unk> nine now just given that you've gone through a period of stress. So any thoughts there would be helpful.
Yeah. That's a good question. Thank you. So I think you hit on one of the key points, there, which is mix right and so if you adjust for mix, we would still be about 8% to 10% higher than where we were back in 2019. So I think that's a key variable most of the growth.
Over the last two years, our balance sheet has come from the residential mortgage portfolio, which is kind of a kind of a lower coverage ratio for it on the other end of the spectrum, obviously, Neil alluded to this earlier on the cards business, which has a high coverage ratio of business. Obviously, we we have lower balances there and even the balances. We do have are much worse towards the trans actor and not the revolver, which has a lower risk profile. So.
So mix is a is a significant contributor to that I would say also if you'd go back to 2019, we were building our ore reserves in because we were feeling we were getting towards end of cycles. So you know we were already I think putting ourselves into a more prudent posture with our ore reserves back in kind of late 2019, obviously 2020 presented.
A whole different level of magnitude of concern, but as we get back to now we obviously are facing an uncertain environment and we do factor that into our framework as I talked about earlier and certainly you know.
200, plus million increase in our loan loss reserves related to those factors will certainly it's certainly considerable by any kind of non COVID-19 kind of norm and so we are taking the right actions to make sure. We are prudently reserved I'm kind of for these as these new headwinds.
Okay. That's helpful. And then I just wanted to come back to slide five where you can talk about the.
Kind of utilization.
Canadian commercial banking, how much of that sequential increase at 84 nine from Q1 'twenty two to 87 nine was driven by <unk>.
Because I think there's other factors in there pay down new customers to the bank et cetera. So just wondering if we can just isolate for the utilization.
Yeah. So maybe I'll just it's Neil I'll just speak to the utilization question. So utilization, we would say is as it has trough that has begun to tick up.
But it's only it's not even I would say back to that sort of halfway from trough to where we were pre pandemic. So couple of the drivers in there just demand loans and operators.
In the diversified book.
But I think differentiated versus other lenders is we were a leader in the in the automotive Floorplan finance business and that has only just started last month to come back. So we were we were negative growth actually in the book for basically the entire the pandemic. So still room to go we would count that as one of the one.
The opportunity areas.
With we believe having a higher <unk>.
Risk rated customer or we feel comfortable putting operators out to them and then just business confidence leading into using those those operating lines.
Okay, that's helpful, but specifically what I'm getting at is it.
The 84 1987 nine sequential it looks like utilization went up one three points sequentially like how much of that $3 billion with you that 1.3 points utilized.
In utilization from Q1.
I'm sorry.
Yeah, well have to circle back to break down the number.
I've given you are giving you that the utilization tick up but we can break out how much of that is new exposure and then how much of that is utilization.
Okay. Thank you next question. Thank you, we're going to try to get through I think three or four questions quickly here.
Since everyone's been waiting patiently next question. Please.
Perfect. Thank you. So the next question will be from Sohrab <unk> from BMO capital markets. Please go ahead. Your line is open.
Thanks, Graham I wanted to just come back to you I mean, I think you've done an excellent job of explaining the challenges.
Providing provisions under <unk> nine.
I guess, what I would like to better understand is.
It is the natural result that provisioning now just becomes a lot more reactionary than.
And forward looking I guess number one and number two what would have to be there.
And one or two key drivers that would have.
Contributing to the bank's decision to put so much reserves aside during COVID-19 that have now I guess rumors and I am hoping for more than just the economies are opening again.
And I guess I'd, just like to understand what did you anticipate what's going to happen and to what order of magnitude.
And how has that not transpired.
So your comment number one reactionary versus forward looking I mean inherently I first night. It is intended to be forward looking and you know it is.
It is fundamentally based off on our forward projections of a whole series of macroeconomic variables and that as you know pre pandemic that was largely what drove it when we kind of.
Found ourselves in the pandemic.
Very extraordinary situation, where the broad economy has shut down that is where we kind of had to produce introduce them. If you will other lenses other kinds of analytics, we brought to bear to kind of consider the real consequences of that.
I think as you saw through 2021 is the broad economy did recover and again. These are the forward looking indicators, we didn't bring it down through that period, certainly we brought it down at a rate slower than you would've seen in other jurisdictions, despite kind of the strong and kind of a forecast on that recovery at the time on that because theres really two factors that go.
Two I have first night and there was kind of what is your baseline expectations, but what does the uncertainty around that and you know and that is the piece that we've continued to hold back on with I have first time and in relation to the pandemic was that kind of level of uncertainty.
And the government support was a huge factor in that and really trying to get our heads wrapped around to what degree that was just <unk>.
Pushing back negative credit outcomes versus truly mitigating them and so that was what I mentioned earlier, we really wanted to see kind of the proof points come off the back end of governments, we're concluding.
And so that is a big factor of kind of why we are kind of taking the further steps now to say, we don't have that same uncertainty with the pandemic that we hadn't placed three and six to nine months ago. The other one was again. These subsequent weighs in on and sitting here in Q1, we're obviously kind of facing let me crown is a huge new wave.
Coming at Us and we needed to see that the tools. We don't have been pleased with with vaccinations and treatments. We're gonna allow the economy to remain open.
Are we going to be back on this roller coaster and so we had to they might be big proof point.
To kind of get to a spot that we were more comfortable pulling back on this uncertainty reserve. If you will that we've had in place and I'll kind of trimmed back towards more focusing on those.
With all this macroeconomic variables that kind of give us the insights we need going forward and that's kind of the two big competing factors.
I mean, not to belabor the point, but I could argue back.
Or what would you say if I argue back in say, yet, but Canadian consumer leverage and it's an all time high.
Interest rates going up higher funding costs for our corporate borrowers.
Energy costs corporate borrowers.
Sure.
Labor costs for her.
Corporate borrowers compliance with yes, I'm going to eat away like you I.
I mean, we're not going to see corporate profit margins fewer borrowers due to rate and maybe you're saying, yeah, but not until 2024, so I'll worry about it later, but.
Like how do you factor all of that or do you disagree with that assessment.
But I don't disagree with your assessment I think those are exactly the kind of ingredients that go into the reason we increased our reserves over $200 million. So it's like I said, we've got this you know.
If you will a latency coming off of the pandemic that we've said that uncertainty just isn't there in the same way, but we have a whole new set of uncertainties coming into play there different magnitudes in our view and that's why you know 100 at least 700 in the other hand, we're taking in over 200 on that and so yeah. You were outlining a set of risks and outcomes that we are worried that we were touching kind of gray.
Or wait to if you will but our baseline if you will to have kind of a recessionary environment, but certainly that's a higher risk I would say all of those things youre talking about though do factor into our fundamental credit processes. These are these are the kind of matter that getting pounded into our ratings processes. If you will and those are the core drivers that go into our estimates of forward credit losses.
I'm, sorry, I'm thinking about a couple of more questions before we wrap up.
Thank you.
Next question from Mario Mendonca from TD Securities. Please go ahead. Your line is open.
Good morning meeting we can go through these relatively quickly any impacts of <unk> 17 on the insurance yourself if the if the answer is it's not material. That's that's good enough.
Yeah, not material, but we have no today now okay.
Another thing.
In your other revenue the other line the.
The 85 million, obviously down a lot from last quarter last time. We saw this was back in Q2 'twenty when they were mark to market losses on certain investments in some hedging activity.
But it bounced back pretty sharply the very next quarter can you just take me through what caused that decline this quarter end and is it appropriate to assume that bounces back next quarter.
Right I just want to confirm.
Were you referring to the other other than yeah, yeah, yeah, yeah, okay. So.
So that one relates there's a couple of things in there primarily though I think you may have seen this before also relates to what's in there from R. R.
Car wealth accumulation plan, which is related to our stock.
Plan.
So that that's the volatility associated with our share price.
And were there and mark to market losses in there as well.
Yeah, so that yeah, exactly that's exactly what you're saying and then we have the other offset to that on N E and that was partially offset by the wealth management gains that I referenced in our sale and see national for some of the noncore affiliates, but primarily it relates to the wealth accumulation plan that we.
We provided for you the breakdown of that Mario in the pack.
So very much like what happened in Q2 'twenty. These things tend to bounce back relatively quickly is that right. It's based on how the market value of our share price though.
Okay and then the final thing is on credit fees.
Not unique to royal but syndication activity down declined sharply in Q2.
Maybe just an outlook on the syndication market in the U S that continuing to trend down from Q2 levels or has it sort of a snapback.
Hi, Mario its Derek maybe ill take that one I think obviously in the last couple of months, we've gone through quite an adjustment in credit markets.
Fairly pronounced through March and April that did continue through the early part of May we are starting to see a little bit of stabilization just in the last few days and so that did impact volumes of new loan syndications activity in the second quarter. I think you know we're seeing still.
Robust M&A pipeline and so that is leading to very reasonable activity, but obviously with the ongoing market uncertainty.
With clients, who are a little bit more cautious and we're obviously trying to take a prudent approach to risk on you know new loan syndication activity against that backdrop until we get greater clarity so.
Still active but you're certainly seeing you know a little bit of a slowdown there was in Q2 persist relative to what we saw against a very robust 2021 and in the first quarter of this year.
Okay got it. Thank you thanks Mario.
Thank you.
The next question is from Mike.
From Stifel GMP. Please go ahead your line is open.
Just a quick one for Graham just just wondering if you can provide any insights on the excess deposits that are currently on your book.
For retail.
Did mention the mortgage portfolio are trending toward the higher income borrow or are you seeing something similar in that excess deposit base and the reason I ask is I'm trying to get a sense of how meaningful excess deposits is on Pcl's I mean, if it's held by people that normally you would not go through it in solvency anyway, maybe it's not as much of an impact so any thoughts you can.
Provide there would be helpful.
Yes, it's Neil Mike I'll I'll start it off and then see if Greg wants to add anything I mean in terms of the the consumer deposit book I mean, we're still seeing you know double digit double digit growth year over year, 15% growth in terms of the checking accounts. So it's still very strong and we're still seeing growth, albeit slowing growth on the savings side. So I think.
That kind of speaks to you know just.
Just where the consumer is in terms of deposits, maybe just to put a little more color on some of the comments that Graeme made we are seeing in the mortgage book that are you know just given home prices and in our underwriting standards. We're seeing just the overall income and the net worth of a mortgage buyer increase over time.
You know and I think a bit of a systemic issue is that first time homebuyer is becoming less and less a part of our portfolio are there maybe you know non D. SIB lenders that are picking up some of that business that you know is enabled to be done under the B 20.
Guidelines, but I think it is a bit of a sad commentary in terms of young people being able to get into some of these markets, but it does underpin that.
For all net worth than just the income Graham's points about the confidence in the mortgage portfolio.
Yeah. The only thing I was going to add just more specifically to your question there Mike was just that.
When we look at deposits and savings balances stratified by risk class, we see those elevated and persistently elevated across all risk classes. So it's not it's not just narrow if you will to the highest rated.
And highest income our clients if you will and so those kind of elevated levels relative to pre pandemic, maybe it started to flatten, but we certainly haven't seen them draw down is it just kind of getting back to that.
A lot of liquidity available to the consumer out there still.
Okay. Appreciate the color and then just quickly on <unk> can we should we still expect the corporate segment to continue to sort of be at that roughly breakeven level on a go forward basis. I know you had the big tax gain that I think showed up in corporate this quarter.
I think that's one time or should we sort of get back to that previous run rate.
Yeah, I mean corporate support of everybody knows and there the comment that Mario need has the volatility associated with the AR accumulation planning there, but that is in both in other revenue and other expenses.
We tend to distribute out of our corporate support we don't keep a elements in there. So the one thing that you didn't see in there you referenced was our our income.
Our provision change, but I think to your point, we do keep it what were normally have from a run rate. So you can expect that going forward.
Thank you one more question, we'll wrap up.
Thank you. So the last question will be from Scott Chan from Canaccord Genuity. Please go ahead. Your line is bank. Thanks, I'll just keep it to one Dave just going back to the dividend 7% dividend increase.
It's RBC trying to signal something without above average dividend increase maybe near term confidence etf's growth, especially since I heard Dean say that the board would look at dividends that we have a quarter going forward. Thanks.
Yeah. So our cycle has to it has been historically to look at a dividend rate sets twice a year and that will continue to do that so that process internally.
It does absolutely signal of our confidence for all the reasons you heard me I think you just led into a great wrap up.
We feel about things, but you see the strong volumes you see the significant outperformance on the deposit I.
Keep thinking and it keeps saying that deposits and funding as a strategic imperative or particularly in the future.
Really focused on core deposits and deposit gathering in north and south of the border.
Very important part and you're starting to see the margin lift you're starting to see finally after a decade those deposits are really going to start to pay and I think you've heard that.
I'm left you heard the revenue lift you heard the operating Leverages is going to come from that and continued asset growth along with that so far.
From that perspective, yes, you heard all the elements of that confidence and why we felt so.
We would move eight cents and we looked at it twice a year.
Okay.
Okay. Thanks, Dave.
So thanks for your comments.
And questions are.
Great questions just to sum up we had as Nadeem mentioned, a tough year over year comp on our particular capital markets business and some of our expenses, we saw a great quarter over quarter volume growth you saw the margin return in the NIM start to return the way we predicted.
Heard from both Nadine and and.
And Neil that we expect good secular quarter over quarter margin improvement as we continue through to benefit from the rate increases very strong margin improvement coming from city national is well in revenue growth probably closer to 30 basis points over the next quarter and again following quarter.
So that's having an impact all the investment we've made in growing those deposits, but also growing our diversified lending capability and managing through a cycle, we're very confident of.
Our ability to drive operating leverage improved operating leverage and create shareholder value. So thank you very much for all your questions and we look forward to talking again next quarter. Thank you operator.
Youre welcome.
Thank you. The conference has now ended please disconnect your lines at this time.
And we thank you for your participation.
Okay.