Q1 2023 Royal Bank of Canada Earnings Call

March 1, 2023

Speaker 1: All participants please stand by, your meeting is ready to begin. Good morning ladies and gentlemen. Welcome to RBC's Conference Call for the first quarter 2023 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran.

Speaker 2: of investor relations. Please go ahead Mr. M. Rang. Thank you and good morning everyone. Speaking today will be Dave Mackay, President and Chief Executive Officer, Nadine Ahn, Chief Financial Officer and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions, Neil McLaughlin, Group Head, Personal and Commercial Banking, Doug Guzman, Group Head, Wealth Management and Insurance and Derek Neldner, Group Head, Capital Markets.

Speaker 2: 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 this performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then re-queue. With that, I'll turn it over to Dave. Thank you, Awesome, and good morning, everyone. Thank you for joining us. Today we reported first quarter earnings of 3.2.

Speaker 2: billion dollars or 4.3 billion dollars adjusting for the Canada recovery dividend and other items. Our results are a testament to our diversified business model underpinned by momentum from client driven growth across our largest segments as well as the benefit from higher interest rates. Our performance this quarter also reflected record capital markets revenue driven by strong global markets results as well as market share gains and investment banking and investment banking. This is what has been a difficult industry-wide environment for advisory and origination activities. Reported expense growth was elevated at the beginning of the year.

Speaker 2: Wherever Nadine will speak to shortly, expense growth included a number of notable drivers this quarter. Expense growth over the last 12 months has reflected strategic investments in client-facing roles in technology to enhance their value proposition in infrastructure, including artificial intelligence capabilities. A credit to these investments, RBC was recently ranked number two amongst global banks and a recent benchmark of AI maturity in business.

Speaker 2: While we're seeing the benefits of our strategic investments in talent and technology, the entire leadership team is committed to moderating expense growth from these elevated levels and driving efficiencies across the bank. Our results were also impacted by higher PCL this quarter. Although PCL and impaired loans remain well below historical averages given strong employment and consumer balance sheets, we expect them to continue increasing from cyclical lows. Correspondingly, we have added to our stage one and two reserves this quarter, an important pillar and holistic strength of RBC's balance sheet, which includes strong capital and liquidity metrics, including our low cost Canadian deposit base.

Speaker 2: We ended the quarter with a CT1 ratio of 12.7% and expect to maintain a CT1 ratio of at least 12% up to and following the close of our proposed acquisition of HSBC Canada. Our outlook includes a regular cadence of twice a year dividend increases while also deploying capital to support further organic growth. We continue to be well positioned to deliver premium return on equity and compounding strong book value growth. This is underpinned by prudent growth in our many high ROE businesses including Canadian personal banking, global wealth and asset management and investment banking. Before I provide context on performance and growth strategies, I will speak to what remains a complex and fluctuating macro and market environment.

Speaker 2: While central banks have successfully reigned in peak core inflation, strong services demand labour shortages and the reopening of China's economy still present a challenge to getting firm control within stated target ranges. While interest rates may be peaking, they may remain higher for longer as tight labour markets and other supply imbalances keep inflation high and constrain economic and market activity. The difficulty for central banks is forecasting the lagging impact that higher rates have on the economy while also trying to assess the impact of further rate increases to control inflation. Furthermore, the global economy remains susceptible to geopolitical shocks and regional political deadlocks.

Speaker 2: Evaluating all the moving parts, we do forecast the softer landing characterized by a modest recession, largely underpinned by the impact of rising debt service costs on the consumer. This phenomenon has already been felt in the Canadian housing market, where home resells and prices have corrected since their peak last year. Regardless of where we are in the cycle, RBC remains well positioned to support our clients while executing on our diversified growth trajectory. Starting on slide 5, I will speak to these growth trends across our largest segments. I will then spend time focusing on our Canadian retail and global full-service wealth advisory businesses, which provide higher OE through the cycle diversified revenue streams. Turning to our Canadian banking business, where we earned record revenue of $5.3 billion this quarter, with strong volume growth highlighted in the last two decades.

Speaker 2: all the moving parts, we do forecast the softer landing characterized by a modest recession, largely underpinned by the impact of rising debt service costs on the consumer. This phenomenon has already been felt in the Canadian housing market, where home resells and prices have corrected since their peak last year. Regardless of where we are in the cycle, RBC remains well positioned to support our clients while executing on our diversified growth trajectory. Starting on slide 5, I will speak to these growth trends across our largest segments. I will then spend time focusing on our Canadian retail and global full-service wealth advisory businesses which provide higher OE through the cycle diversified revenue streams. Turning to our Canadian banking business, where we earned record revenue of $5.3 billion this quarter, with strong volume growth highlighted the strength of our client franchise.

Speaker 2: We added $28 billion of mortgages over the last 12 months, up 8% from last year. And while mortgage origination activity has slowed from recent highs, it remained in line with pre-pandemic levels, offsetting a slowdown in activity, our retention rates of approximately 90%, and mid-term attrition rates at five-year lows. Looking forward, we continue to expect annual mortgage growth to slow to the mid-single digits given deteriorating affordability. In contrast, credit card balances were up 13% year over year, largely due to higher client spending, particularly in restaurants and travel. While balances have now surpassed pre-pandemic levels, partly due to lower payment rates, revolving balances remain below Q4 2019 levels. Business loans were up over 15% from last year. While utilization rates on revolving facilities remain below pre-pandemic levels, term lending for capital expenditures has been strong. We are seeing broad-based growth across sectors including consumer services, manufacturing, and auto finance. Our global wealth management franchise generated record revenue of $4.6 billion this quarter, partly due to the success of our full-service advisory businesses.

Speaker 2: added $28 billion of mortgages over the last 12 months, up 8% from last year. And while mortgage origination activity has slowed from recent highs, it remained in line with pre-pandemic levels, offsetting a slowdown in activity, our retention rates are approximately 90%, and midterm attrition rates at five-year lows. Looking forward, we continue to expect annual mortgage growth to slow to the mid-single digits, given deteriorating affordability. In contrast, credit card balances were up 13% year over year, largely due to higher client spending, particularly in restaurants and travel. While balances have now surpassed pre-pandemic levels, partly due to lower payment rates, revolving balances remain below Q4 2019 levels. Business loans were up over 15% from last year. While utilization rates on revolving facilities remain below pre-pandemic levels, term lending for capital expenditures has been strong. We are seeing broad-based growth across sectors, including consumer services, manufacturing, and auto finance. Our global wealth management franchise generated record revenue of $4.6 billion this quarter, partly due to the success of our full-service advisory businesses, which I will speak to.

Speaker 2: RBC Global Asset Management, AUM, increased over $25 billion from last quarter as equity markets picked up from the beginning of the fiscal year. Despite increased market volatility, RBC GAM remains an important high ROE profit generator for the bank. Loan growth at City National remained both diversified and robust, up 20%, excluding the impact from PPP loans. Going forward, we expect loan growth to moderate from these heightened levels, particularly in the jumbo mortgage space where refinancing activity has pulled back. Capital markets also generated record revenue, surpassing $3 billion for the first time. Pre-provision, pre-tax earnings of $1.4 billion highlight the increasingly diversified nature of our revenue streams. This strong performance was underpinned by record results in global markets across most regions driven by excellent execution on robust client activity through volatile market conditions. Looking forward, we continue to identify growth opportunities in global markets, including in FX, an area of strength for HSBC Canada as well. Corporate investment banking results were down 11% from last year amidst challenging growth.

Speaker 2: And while investment banking revenues were down 39% from very strong results last year, they outperformed global fee pools, which were down 55%. Consequently, RBC Capital Markets ranked seventh in global league tables this quarter, moving up one spot to ninth, looking at the last 12 months. Looking to the future, we continue to focus on diversifying revenue streams across higher ROE advisory and origination activities. We've been actively hiring managing directors across industry verticals and geographies, while also expanding our client coverage. These have been factors in our move up in global league tables. With that said, and in certain macro and geopolitical backdrop, volatility across asset classes and higher financing costs remain the biggest challenges to M&A activity. I will now double click on our differentiated and award-winning Canadian retail franchise, where we welcome the further 130,000 clients this quarter, on top of the 400,000 clients added throughout fiscal 2022. We continue to benefit from a number of strategic partnerships with...

Speaker 2: partners such as ICIC Bank Canada, while also leveraging investments made in our distribution network, including digital channels. Nearly 60% of credit cards and almost 40% of court checking accounts are now open digitally. Our success is underpinned by a clear focus on doing what is right for the client. It is why we do not have a minimum balance requirement on our court checking account. Our continuum of offerings combined with our insights and advice allows us to help our personal banking clients make the best decisions based on the prevailing macro backdrop. In 2021, the continued low interest rate environment made it attractive for clients to shift liquidity into investment products such as mutual funds. In contrast, the significant increase in interest rates over the last 12 months has resulted in a shift of our court checking and savings into GICs and other high-yielding products. Personal GIC balances are up over $40 billion from last year, with nearly $15 billion this quarter alone.

Speaker 2: While we recognize the trade-off to near-term margins, we attach greater long-term value to retention, deepening relationships and keeping our clients within the RBC value proposition. For example, clients enrolled in our highly successful Vantage product are twice as likely to cross sell into credit cards and three times more likely to stay at RBC. Furthermore, the profitability of our mortgage clients is two times higher when retained for the second term. The execution of our client-focused strategy is reflected in strong revenue growth. Despite clients moving to lower spread GICs, revenues in a personal bank and investments business were higher than last quarter. Turning to slide seven, I will now speak to the strength of our global full-service wealth advisory platform where we now have in-market scale in three of the world's largest asset pools. We are seeing the benefits of our diversified revenue strategy with recent rate hikes driving strong growth and net interest to income in both Canadian wealth management and in U.S. wealth management. This offsets the impact of unfavorable markets on fee-based advisory revenues and transactional revenues this quarter. We are looking to expand our relationships with RBC Brew and Dolphin clients by offering core private banking, lending and payments products and services. This would leverage learnings from our successful U.S. wealth strategy which has seen growth in securities lending. We expect this to accelerate revenue growth in our businesses.

Speaker 2: adding to our fee-based revenue streams which I will now discuss. RBC Dominion Securities continues to strengthen its number one position in Canada, adding net new assets this quarter with Canadian AUA up over $20 billion quarter over quarter. Our position of strength is driven by a set of self-reinforcing competitive advantages underpinned by winning advice, digital capabilities and holistic suite of solutions for our growing base of Canadian wealth planning professionals. Canadian wealth management remains a highly profitable business, leveraging its scale to generate pre-tax margins in the mid to high 20s. It is also important to have scale in the US, one of the largest fee pools globally. Our US business added over $20 billion of AUA this quarter, adding to its position as the sixth largest full-service wealth advisory firm in the United States. Since early 2022, we have recruited 110 advisors who are expected to drive nearly $20 billion of assets under administration.

Speaker 2: This recruiting will remain a key source of growth. We will also look to continue to leverage increasing RBC brand recognition in the US to drive organic client growth. RBC Bruin Dolphin is one of the largest discretionary wealth managers in the UK and Ireland, offering in a market with significant structural changes, including moving from defined benefits to defined contribution plans. This market is expected to increase from approximately 3 trillion pounds today to 4 trillion pounds by 2026. In conclusion, we look to continue executing on our through the cycle organic growth story while maintaining a strong balance sheet across capital, credit and liquidity ratios. Furthermore, we look to deepen existing client relationships and attract new clients as we anticipate welcoming HSBC Canada's colleagues into RBC. Nadine, I'll now hand it over to you. Thank you Dave and good morning everyone. Starting on slide 9, we reported earnings per share of $2.29 this quarter. Excluding the $1.1 billion impact of the Canada recovery dividend and other smaller items of note, adjusted diluted earnings per share was $3.10, up 8% from last year.

Speaker 3: forms to drive a 70 to 80 basis point benefit, largely reflecting the removal of the sector-wide credit risk RWA scaling factor under the new IRB framework. Furthermore, we expect to see RWA reductions reflective of our well-diversified portfolios and the conservatism of our wholesale risk parameters.

Speaker 3: relative to the prescribed parameters under the new framework. Moving to slide 11, all-bank net interest income was up 18% year-over-year or up 29% excluding trading revenue. These results reflect our earning sensitivity to higher interest rates as well as the benefit from higher volume. As a reminder, the cost of funding of certain transactions, particularly in capital markets, is recorded in interest expense while related revenue is recorded in non-interest income. All-bank net interest margin, excluding trading net interest income, was up one basis point from last quarter, largely reflecting trends in our personal and commercial banking franchises. Moving on to slide 12.

Speaker 3: where we walk through this quarter's key drivers of Canadian banking net interest margin, which was up three basis points from last quarter and followed a significant 25 basis points expansion in the second half of last year. This quarter reaffirmed the benefits of our structural low beta core deposit franchise, which drove a 10 basis point benefit to net interest margin in the quarter. We also saw benefits from higher credit card revolve rates, which were offset by continued competitive mortgage pricing. Deposit growth outpaced loan growth this quarter, further improving our industry loan to deposit ratio of 103%, which points to a fully funded segment balance sheet. However, this was partially offset by rising deposit betas and a larger than anticipated shift in deposit mix out of checking and savings accounts as clients sought higher yielding GICs. Notably, we gained market share in GICs this quarter, which we view as an advantageous source of low-cost funding relative to wholesale sources. Turning to City National, net interest margin was down five basis points from last quarter, mainly reflecting higher FHLB borrowings to support additional liquidity requirements at the end of the calendar year.

Speaker 3: This more than offset the significant benefits of Fed rate hikes on our asset-sensitive balance sheet. Going forward, we expect to continue to fund much of our loan growth through our core and sweep deposits while supplementing these by accessing both broker deposits and FHLB funding. Looking out to next quarter, uncertainty around implied rates and client activity impacting deposit mix are expected to put pressure on margins. Nonetheless, we expect margin expansion through 2023 for both Canadian Banking and City National. Our focus remains on growing net interest income. We anticipate mid-team growth in Canadian Banking net interest income for fiscal 2023 and would expect even stronger growth for City National.

Speaker 3: more than offset the significant benefits of Fed rate hikes on our asset-sensitive balance sheet. Going forward, we expect to continue to fund much of our loan growth through our core and sweep deposits while supplementing these by accessing both broker deposits and FHLB funding. Looking out to next quarter, uncertainty around implied rates and client activity impacting deposit mix are expected to put pressure on margins. Nonetheless, we expect margin expansion through 2023 for both Canadian Banking and City National. Our focus remains on growing net interest income. We anticipate mid-team growth in Canadian Banking net interest income for fiscal 2023 and would expect even stronger growth for City National. Moving to slide 13.

Speaker 3: Net interest income was up a record 23% from last year due to higher spreads and strong growth in loans and deposits, which Dave spoke to earlier. Non-interest income was down 2% from last year as challenging market conditions weighed on average mutual fund balances driving lower distribution fees. This was partially offset by higher service charges and foreign exchange revenue.

Speaker 3: interest income growth of 44%, reflecting the benefit of higher rates in both Canadian wealth management and US wealth management. Global asset management revenue decreased primarily due to lower fee-based client assets on the back of a challenging market condition and ongoing industry-wide pressures on net redemption. Turning to slide 16, capital markets earnings were up 9% year-over-year, reflecting record revenue and the benefits of a lower tax rate.

Speaker 3: Record global markets revenue was up 17% from last year, reflecting a record quarter for macro products with strong results across all product lines underpinned by robust client activity across rates and effects. We also saw strength in muni products and investment grade credit sales and trading.

Speaker 3: Investment banking revenue was down 39% from record levels achieved last year. Importantly, results outperformed a more significant decline in global fee pools. Lending and other revenue was up 23% from last year, reflecting strong results in transaction banking underpinned by margin expansion and higher lending revenue driven by volume growth. Turn to insurance on slide 17.

Speaker 3: by approximately $50 million. This was partially offset by improved claims experience. To conclude, our leading money-in franchise positions as well to continue seeing the benefits of higher rates while also funding strong client-driven growth. We also 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 Graham. Thank you, Eden. Good morning, everyone.

Speaker 2: Starting on slide 19, I'll discuss our allowances in the context of the macroeconomic environment that Dave referenced earlier. While markets have already started to recover, the real economic impact of inflation and higher interest rates is just starting to influence credit outcomes. On the whole, we believe the probability of a more severe inflation and interest rate environment has started to reduce. However, as Dave noted, we continue to expect a moderate recession in 2023. With this backdrop, we built reserves on performing loans for the third consecutive quarter. Provisions on performing loans this quarter were driven by three factors. First, from a macroeconomic perspective, we moved closer to our forecast of recession, bringing more of the associated expected credit losses into the IFRS 9 provisioning window. This is partially offset by a modest shift in our scenario weights, reflecting the lower probability of more adverse inflation and rate scenarios that I just noted. Second, the credit quality of our portfolio continued to trend back to more normal levels, with sustained increases in delinquencies and credit downgrades. And finally, we added reserves for ongoing portfolio growth.

Speaker 2: In total, our allowance for credit losses on loans increased by $268 million this quarter to $4.4 billion. Moving to slide 20, gross impaired loans were up $400 million or five basis points this quarter, with higher impaired loan balances across each of our major lending businesses. This was driven by an increase in new formations, which are returning to pre-pandemic levels. In our wholesale portfolio, new formations were up $220 million compared to the last quarter, with the largest increases in the real estate related and consumer staples sectors. We did not expect to incur losses on a large majority of the new formations in the real estate related sector, as these formations were related to loans that are well collateralized and current on their payment, but have a financial sponsor in distress. In our retail portfolio, new formations were up $61 million or 18% quarter over quarter, with increases across all of our lending products. Of note, new formations on residential mortgages more than doubled this quarter to $64 million, primarily due to variable rate borrowers who have seen payments increase after hitting their trigger rate. As you would expect, delinquency rates on triggered variable rate mortgages increased during the quarter. However, delinquency rates for the entire Canadian banking mortgage portfolio were stable at 16 basis points. We remain very comfortable with our residential mortgage exposure.

Speaker 2: Clients continue to have excess savings and liquidity with deposit levels remaining elevated compared to pre-pandemic levels. High risk loans, which we consider as uninsured loans with a FICO score below 680 and a current loan with a value over 80%, account for less than 1% of uninsured balances. We have prudently provisioned for an expected increase in losses, noting that we have increased reserves on performing mortgages by over 30% since Q2 of last year. Moving to slide 21, provisions on impaired loans were up $103 million, or 5 basis points, compared to last quarter. Our PCL ratio of 17 basis points remains below pre-pandemic and historic averages. In our wholesale portfolios, higher provisions in capital markets and wealth management were more a function of reducing credit events and systemic issues, while provisions of our Canadian banking commercial portfolio were lower this quarter. In Canadian banking retail portfolio, higher provisions were primarily driven by personal lending and credit cards, which is consistent with our expectations as higher interest rates start to impact clients. In light of the higher interest rate environment, in turning to slide 22, I'll now provide some details on our exposure to commercial real estate. Our standing loan exposure to this sector represents 9% of our total loans and acceptances. The portfolio is well diversified and has been originated to our sound underwriting standards that stress test loans for more adverse capitalization rates and operating income. Additionally, exposure is well rated and benefits from strong collateral, noting the on-balance sheet RWA density of our commercial real estate exposure is approximately 20% lower than the rest of our wholesale portfolio. That said, we do expect commercial real estate to be negatively impacted by higher interest rates.

Speaker 2: Higher rates will negatively impact property values and dead service coverage. Additionally, certain asset classes like office properties are being impacted by changing fundamentals as companies have adopted hybrid working models post-pandemic. As a result, we expect to incur some losses in the commercial real estate sector as moving forward. We have been proactive in provisioning for these expected losses. For example, our IFRS 9 downside scenarios reflect a decline in commercial property values ranging from 15 to 40 percent. As such, our ACL ratio on performing commercial real estate loans has increased 40 percent since Q2 of last year and has more than doubled relative to pre-pandemic levels. To conclude, we continue to be pleased with the ongoing performance of our portfolios. Our PCL ratio on impaired loans remains below pre-pandemic levels, but we have seen the normalization of delinquencies and impairments as higher interest rates start to impact credit outcomes. We expect PCL and impaired loans to increase through 2023 as we head into a forecasted recession. And ultimately, the timing and magnitude of increased credit costs continues to depend on central bank success in curbing inflation while creating a soft landing for the economy. We continue to proactively manage risk through the cycle and we remain well capitalized with stand plausible yet more severe macroeconomic outcomes. With that operator, let's open the lines for Q&A. Thank you. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. And we will take the first question from Manik Romain. Kolsabank, please go ahead. Hi, good morning. Dave, for a number of quarters now from the outside looking in, it sounds like you're focused on getting expenses more under control. And then we have a quarter like this one where it still looks like that's not mission accomplished yet.

Speaker 2: see that growth and we're going to have to kind of reposition some of our capacity but we are still forecasting a relatively mild recession and a softer landing and an opportunity to continue to access good growth. So I think we're on it. I think it's a volatile market. There's a lot of things going on. We're repositioning the bank for a very different world going forward as far as technology capabilities across the board.

Speaker 2: given the persistence of this issue, does it change your view on that tool? No, we think we have the tools with doubling down in different areas to manage this in the normal course right now, as we normally do.

Speaker 1: and you'll see our expenses get under control. Thank you. Thank you. Next question is from Ibrahim Poonawalla, Bank of America. Please go ahead. Good morning. I guess maybe a question for Graham. You mentioned higher interest rates impacting credit or credit normalization. At what point, and I hear you in terms of expectation for the mine depression.

Speaker 1: But at what point do we start worrying about credit normalization actually leading into a more pronounced deterioration that looks a lot recession like? What are the indicators? Is it all about jobs and what the job market does? And give us a sense of across the customer segment commercial consumer where are you seeing the most pronounced pain due to the higher interest rates? Thanks.

Speaker 2: Thanks, everyone. Maybe just to provide a little bit more color on how we're thinking about the environment. I think as we've guided earlier, we certainly continue to expect that credit outcomes, negative credit outcomes will rise through the year as we progress through the year heading back towards more historic norms. I'm expecting that to start to peak out towards the end of this year and through the first half of next year. As you said, there's different aspects we look at that, and these are the things that really factor into our...

Speaker 2: our models in IFRS 9. And so as you said, it's debt servicing costs. Certainly that directly impacts things like our mortgage portfolio. But we do worry about and think about the overall kind of wealth effect and how that's gonna squeeze out discretionary income, discretionary expenses as well. And so that's kind of the thing that factor into why we forecast GDP the way we do and why we're forecasting unemployment to increase over the course of this year. Right now we're at exceedingly low levels there, but we do expect unemployment to graduate up to kind of more than that 6.5 to 7% range at the tail end of this year before kind of coming back to more historic norms. And so those are the factors that we think really go into our models and how we assess kind of the overall loan losses.

Speaker 2: Having said that, we continue to see in the near term, very significant old performance, particularly on the job space. We've continued to expect unemployment to rise. We've continually been surprised by the strength of the job market in Canada and the US. And so that's kind of always what continues to push back the timing of this normalization a little further than we've anticipated. But yes, jobs is a big one here. And what you see, when you think about the retail side, maybe to break into that a little bit further, certainly we're seeing that delinquency trends kind of move up. But the insolvency side of it, which is kind of the other half of the equation, is very much tied to the labor market.

Speaker 2: And we have seen insolvency start to take a little bit, but they're still well below pre-pandemic norms. And so until we really start to see that kind of job situation, labor side move, it's gonna continue to be a near-term benefit to the overall credit outcomes. And just on that, Graham, so the higher rate structurally, when we look at the commercial real estate market, CNI borrowers were seeing their cost of capital go up, no material paying there. Commercial real estate is certainly, as I noted, I mean, that is one of the portfolios that we are most focused on for sure. I would say it's a sector that I think the underwriting standards have been very strong, had have been very disciplined on for some time. You know, if you look at portfolios, we were doing a deep dive review on our Canadian commercial portfolio, for example, looking at the mortgage side of that. I mean, A, we've had a strategy very focused on kind of your top tier clients.

Speaker 2: And so these are clients that I think are very season, very capable to weather kind of a through the cycle set of challenges. And two, again, the under and extended have been very, very strong there. You look at our mortgage portfolio on that side. You know, we've got guarantees or partial guarantees on 95% of those commercial mortgages. It's just an indicator of, again, the strength of the underwriting standards. And so things will trend up, but they're going to trend up from what's been near zero numbers in that portfolio for a long time.

Speaker 2: But right now, these are still, I would say, forward expectations. We're not seeing a lot of real negative outcomes in that portfolio at this point in time. Next question is from Dargian. Déjà d'un capital market, please go ahead.

Speaker 4: Hi, good morning. Just on the set one, specifically on RWA movements, it looked like market risk RWA was down 8%, quarter over quarter. Counterparty RWA down 11%. Just hoping to get a little bit of color of what drove this and should there be a reversion down the road. Alright, and Edin.

Speaker 4: The basil is going to be 70 ADB points, positive, come Q2. I think there is further changes coming from a regulatory perspective specifically around the trading book and maybe next year. Can you talk a data about what the offset would be or is there any other negative items that are coming down the pipe on the set one ratio side? Thanks for the question, Doug. It's Derek Nell. They all may be starting addressing your RWA question from business perspective and Graham can chime in and...

Speaker 4: tougher environment in 2022. Our inventory levels went up a little bit. We were able to bring those down against a very strong trading environment in Q1. That really was the largest contributor to a decline in our market risk RWA. As you noted, we also did see a decline in our counterparty credit risk RWA.

Speaker 4: That was really again a function of improving credit environment but as well some FX movement that helped bring RWA down and then finally we did see a moderation in commodity prices and so that did bring down our counterparty RWA against some of our commodity trading positions. March is May 2012, has recorded one of RWA's

Speaker 4: credit environment but as well some FX movement that helped bring RWA down and then finally we did see a moderation in commodity prices and so that did bring down our counterparty RWA against some of our commodity trading positions.

Speaker 2: On that part, Derek has absolutely captured it right. This is a quarter with good liquidity that allowed us to be much more in the moving business and not in the storage business by the trading side of it. So I think those are absolutely the right factors. But I guess there are pieces we're on overall, some of the basis points. Just as it relates to on the horizon, we will be implementing the remaining components of Basel IV that are coming into effect next year, so that's related to FRTB and CBA. We don't expect those to have material impacts overall, Doug, in terms of our...

Speaker 4: that had on the all bank margin in the quarter. I would be helpful to understand what that margin might have looked like, was it at five basis points sequentially, if that dynamic hadn't played out? Is that something you can quantify, Navy?

Speaker 3: So if I just start from the total bank name of down nine basis points, as you commented a lot of that relates to the capital markets business where we have the cost of funding, which obviously has gone up with interest rates going up, showing up in the NII line, and then their offsets are another income. So when I break out the two main drivers of that primarily attributed to the repo business.

Speaker 3: costs. When I look at it at the all bank level then, so if you take out a substantial portion attributed to that......

Speaker 3: You're looking at the increase of one basis point. Within that number, we are down a few basis points as it relates to our increased liquidity position. That relates to, we comment in terms of our LCR increase, but also we've increased our funding. That will get absorbed as we go through the year and the loan growth.

Speaker 4: contributes to the margin. Okay, so maybe I may have misunderstood it then. The one basis point listed in the margin all-vent already appropriately excludes that effect that you referred to, that effect of the extent to one area revenue to another. Is that true?

Speaker 3: That is correct. What I would say, why it's represented a bit under where we would expect it to be, is because of the higher liquidity position. In addition, there was one movement of anomaly between quarters of other couple of these points.

Speaker 4: Okay, so that really gets helpful. So now I think I understand why the margin, I think I understand these margin dynamics a little bit better. So it really does lead to my second question, which is...

Speaker 4: The overall margin sensitivity and improvement for an asset-sensitive bank like Royal

Speaker 4: It appears to be diminishing over time. And it's for all the reasons I think you offered, deposit, it is migration, maybe even deposit attrition. And that disclosure you provide in your presentation where you break out costs, funding costs, and like the income where that breakout you do in your presentation, that's awfully helpful. But the message I'm getting here is that that asset sensitivity

Speaker 3: that Royal has benefited from, like we're in the final innings of that. Would you agree with that that we're in the final innings of the benefit for these asset sensitive banks? No, we do expect to, I think we go back to our structural deposit benefit that we have, which continues, which drives our asset sensitivity to higher rates, and we continue to expect to benefit from that going forward. I think what you're seeing in terms of what you commented on the near term movements as a related to the deposit migration. We expect that that will have flow given that the interest rates have gone up and they expect to be.

Speaker 3: that margin expansion coming from that structural deposit base.

Speaker 4: And then I'll stop here. The guidance you offered for mid.

Speaker 4: I think you said mid teens growth in NII in Canadian banking in 2023. The math is pretty simple. It would, it would imply that the domestic or that Canadian banking margin will be essentially flat or maybe marginal, maybe up slightly going forward. That's what the math tells me just by

Speaker 3: plugging in your mid teens. Is that right? Is that essentially what you're telling us? That margins could be kind of flat from here in Canadian banking? I think what you could expect in the next quarter is continue to see a bit of that pressure as it relates to the deposit mix movement. But we do expect to see the margin expansion still continuing through the latter half of 2023, Mario.

Speaker 3: your mid teens. Is that right? Is that essentially what you're telling us that margins could be kind of flat from here in Canadian banking? I think what you could expect in the next quarter is continue to see a bit of that pressure as it relates to the deposit mix movement, but we do expect to see the margin expansion still continuing through the letter half of 2023, Mario. All right, thanks.

Speaker 4: Thank you. Next question from the discussion. Can I call Gen. T? Please go ahead. Yeah, thanks a lot. So, we need to just follow up to that line of questioning. We talked about the KTM P and C, but I think you offered comment on the US side as well on City National Bank being better in 2023. And just wondering the factors in context of that role to kind of the deposit based declining and likely decline to a few as well.

Speaker 3: Sure, so at City National we had commented, I believe in Q4, towards the end of the corridor we had increased our liquidity position related to some changes around parameters. That was funded through FHLB. So the impact of that fully in the Q1 is what you're seeing in terms of a lot of the decrease from the five basis points.

Speaker 3: As we look forward for City National, we do comment that we are expecting to continue to see benefit from our long growth through the funding of both our deposits weeps and our low cost deposits. However, we will potentially need to supplement that for our VHLD, which would put some further pressure on margins. I would think into next quarter, similarly to what you saw this quarter.

Speaker 3: However, we do expect to see the expansion of that as we start to stabilize that deposit level through the latter half of 2023. We have a lot of sensitivity on the asset side so that can still benefit significantly.

Speaker 4: Okay, so the comment was that you expect that I in 2023 on the US side to slightly outpaste candles here from what you see right now. Correct. Okay, thank you. Next question is from Sara Mover-Headie, the Mocapital Market. Please do so. You think so. I just want to really ask a question of me. I appreciate the additional...

Speaker 4: detail you've provided around customer behavior when it comes to savings accounts deposits its GICs and the like.

Speaker 4: Can you also talk a little bit about what's happening on the loan side when it comes to mortgages, variable mortgages, what sort of behaviors you are seeing, and maybe comment a little bit about how

Speaker 4: those mortgage holders, variable mortgage holders, I guess, how many of them would have credit cards with you? And what sort of insights, I guess?

Speaker 2: Are you seeing from a credit quality perspective that might be for talent here? Sure, thanks for the question. So on the variable rate mortgages, I guess there's a couple of themes. Not surprising, we're seeing...

Speaker 2: percentage of originations really drop, really getting down to kind of 15% of originations. Keep in mind that the entire portfolio, about a third of the portfolio is variable rate, so we're seeing a very dramatic shift there.

Speaker 2: We're also seeing a shift overall to basically fewer first time home buyers. You can imagine not a product that first time home buyers are going to take on. And then we've already commented on this, but just in terms of trigger rates, we have seen a good portion of that.

Speaker 2: variable rate portfolio go through that process around trigger rates. The earlier cohorts that went through it saw bigger increases, the ones that have been more recent have had smaller increases. Graham commented, you know, those are embedded in the credit performance. One of the things just to add to Graham's comments is that overall those variable rate mortgages did start from a lower delinquency level.

Speaker 2: customers have had, what are the FICO scores. And then Graham touched on.

Speaker 2: You touched on some key points. I think the one point I think you did draw out there, which I think is important, is that we are seeing the link with these rise in that segment, as I noted, but as you noted, Neil, that they're starting from a position of strength again, and that's true of our client base as a whole. Again, the strong employment situation, strong liquidity situation.

Speaker 2: And that portfolio, that segment of that portfolio in particular kind of was starting from a better than average situation and then that's trending up but that's why the overall delinquencies in the mortgage book are relatively stable quarter over quarter. And then in terms of your second question just about the percentage of mortgage holders with credit cards, it's over 50% so we have obviously a very strong credit card lineup. We do have a relationship based model so the majority of our mortgage holders, you know, you hold other products and...

Speaker 4: over half of that portfolio also hold a credit card with us. Okay, and just a quick, I guess, housekeeping item. Nadine, you didn't mention any impact of the drip discount on the CET1 ratio. Was the uptake not what you expected, or any sense as to how that drip discount is done? Yeah, no, we do, our uptake in the drip has been what we expected, Saurabh, and we do expect to get about 10 basis points a quarter as it relates to that.

Speaker 4: Okay, so included, would there have been about a 10 basis point benefit this quarter? In terms of this quarter impact, the drip was just started, so it's going to be smaller than the 10 that we had in the week's 24th 10th for next quarter.

Speaker 4: Thank you. Once again, please press the one on your device keypad if you have a question. The next question is from DuoCam Credit Suisse. Hi, good morning. And thanks for taking my question. Just one on capital markets. There was a commentary that the bank outperformed the global fee pool.

Speaker 5: from corporate investment banking side. I'm curious if that performance was the same on the global markets side as well if you have some commentary there. And more importantly, would you have a sense of what the PTPP earnings capacity might look like from capital markets this year? I mean, obviously we'll have it flow with the market. I'm curious if you have a baseline sort of.

Speaker 5: expectation similar to the guidance that you provided back in early 2022. Thanks.

Speaker 5: Sure, thank you for both those questions. From a market share perspective, as you noted in our advisory and origination businesses in investment banking, we can get very real-time market share data. And so as you pointed out and as Dave highlighted in his comments, we did have a very strong quarter.

Speaker 5: in what was a tough environment, we did gain share and moved up in our rankings. To your question on global markets, the data that we can get is not quite as real time. There's a little bit of a lag and so we'll be waiting to get some of that data. But when I look at a variety of different information we can access and just anecdotal data points, I do think that our performance has quarter reflected both.

Speaker 5: I do think we picked up share in a number of businesses in global markets, which I think is a reflection of a number of the new strategic initiatives we've been implementing in that business over the last couple of years, but in 2022 in particular.

Speaker 5: To your question on pre-provision pre-tax, obviously we've discussed in the past that we think in a normalized environment, we could contribute a billion dollar plus a quarter when we look at the resegmentation and the addition of Treasury services and transaction banking plus combined with our ongoing growth initiatives.

Speaker 5: We do think that we can lift that bar to 1.1 billion. And so again, would caveat that we are in a cyclical business and that depends on a normalized corridor, but in a relatively normal environment, that's the goal that we'll continue to be shooting for, is 1.1 billion plus.

Speaker 1: Thank you, that's all for. Thank you. The next question is from Mike Rizbanovich, KBW Research. Please do hand.

Speaker 5: Hi, good morning. Derek, if I could just follow up, I wanted to ask a question about the trading line. Obviously a great quarter for you guys. I'm wondering in an environment like this, did you just get paid better for your transactions on the trading side? Just given the some of the numbers that we track, just to try to get a look ahead in terms of the volume that comes into the market overall?

Speaker 5: it seems like this is still an outsized quarter. We didn't really see the volatility spike. We didn't see trading volume spike. And yet here you are sitting at $1.4 billion trading, which was a great number. Anything to suggest that maybe it was outsized a little bit because you're just getting paid more or maybe not as much volume? Sure, thank you for that. A few different comments. Overall, I would say

Speaker 5: it was a very strong quarter for our trading businesses and I would describe it as a very clean quarter. So there weren't any notable one-time items or anything, it was just really good client volume, a constructive market backdrop and I think our teams managed risk and executed very well against that backdrop. A few observations though, I think one

Speaker 5: Fiscal Q1 for us always tends to be a seasonally strong quarter for the trading businesses. We do get some benefit from the calendar year-end and how some of our clients are managing their balances and how other banks are managing their balances. So Q1 always tends to be seasonally a stronger quarter for us. This year there was a constructive backdrop as I think a lot of our clients were repositioning their portfolios around year-end and for the year ahead. For more information, visit www.fema.gov

Speaker 5: with what continues to be a wide array of views for how 2023 may play out. So that drove heightened client volume. And then as I mentioned, I think our mix did play to our favor a little bit. In 2022, our mix created some natural headwinds for us because of challenges in the credit business. Repo spreads were still quite depressed. None of those have been dramatic changes, but obviously it was a more constructive quarter for credit. We have continued to see some moderate improvement in our repo spreads.

Speaker 5: and so I think our mix has helped and then you know importantly I think our team has just executed really well on a number of strategic initiatives that we've been investing in and focused on over a number of quarters. So all to say it was a very robust quarter I certainly wouldn't expect that kind of run rate to continue through the balance of the year but at the same time there were no one-off items or anomalies it was just a really good solid backdrop and our team executed well against it. Thanks for that color and then maybe just quickly for Neil.

Speaker 5: on your residential mortgage lending in Canada. I'm not sure if you want to provide any guidance on where you think your growth level could profit. It looks like you're up about 50 beeps quarter over quarter. What I'm wondering is, just given the dynamic of potentially higher rates for longer, is there a possibility that the mortgage book starts to shrink here?

Speaker 6: Not materially, but maybe by a few percentage points. Is that something that you think is a possible outcome if you do get this dynamic of higher rates for longer and obviously the origination of all you seems to be very you know weak right now home sales are very weak. Is that is that something that's a possibility in your view?

Speaker 2: Yeah, thanks for the question. To your point, the originations are down materially, probably about in the range of 40% in terms of transactions. And then you overlay the just the HPI decrease, and that further takes it down in terms of the actual dollars hitting the balance sheet. So right now, Q1 is not really the heavy origination period of the year. We are getting reports in the market that some inventories are coming online. So...

Speaker 7: Okay, appreciate the color.

Speaker 4: Thank you. Next question is from the member of HRSA,

Speaker 2: enhancing collection processes related to the tougher credit environment perhaps in Canadian banking or is the growth in tech and comp all kind of strictly related to growth initiatives? Yeah, I'll take the question. No, there isn't technology that we would need to put in in terms of the collection activities. I mean it is, if you look at our largest increase in expenses year over year is compensation. That's partly due to...

Speaker 5: wage inflation days spoke to, but also bringing on additional complement of FTE, mostly in front of the client where we're looking to really build volumes. We have started to build up that collections group in terms of just capacity, but it's not a technology driver at all. Gotcha. Then maybe coming back to an earlier comment, from Dave on Expenses on the ability, I think to pull back expense growth at the top line. So if I look at your your your marketing and waterfall on your slide 13, what is some of the areas you can pull back on expenses if the revenue growth environment kind of slows? Yes, you're all taking that question. Thank you. So in terms of when you look at the bucketing, I would say on the.

Speaker 3: investment in people. We've obviously ramped that up quite significantly over the latter half of 2022 as we were investing for growth and you see that with our strong volume. So that was one of the buckets I commented will start to taper off as we absorb some of that hiring that we've seen early part of the year. I would say also when you look at the discretionary and other, David commented that that is also a bucket that's being impacted in inflation. And that's one area that if we start to see any headwinds coming from the economic downturn that we can pull back on that. That's primarily driven off of not only increase in terms of marketing, but also travel, business development that has started to pick up, particularly given where we were on the lows from Q1 in 22. And from a technology standpoint, what you're seeing there is a lot of the investments that we've done not only from our client perspective and driving a lot of our growth in terms of our applications for Canadian banking, for wealth management and for investment in the capital. That's the capital markets business. And part of that also would drive further efficiency saving that we look out.

Speaker 5: until later years as we've talked about how we've been focused on our zero-based budgeting. Thanks, that's it for me. Thank you. Good morning. I apologize. I missed a portion of the call, so if you've already addressed these, I do apologize. But two questions. I guess the first one is on regulatory deal risk. You've done transactions both south of the border and Canada, so we're not sure if you can provide any insights on what you think the primary differences are between the regulatory process in the US versus Canada. And then also just remind us sort of your current confidence in the timing of the HSBC transaction. Thank you. Maybe I'll take that, Dave. I know certainly there's a time period difference between when we went to Canada and from London soon, I think it's kind of a video.

Speaker 5: With respect to the outlook for commercial loans, are you seeing any indications of slowing demand, what are that? I guess in the Canadian business specifically. Yeah, thanks for the question. I am.

Speaker 2: We actually have seen our commercial lending pick up over the last couple quarters and I'd say you know overall sentiment from commercial clients is probably a little bit mixed. We see some of them who feel they've waited long enough. They need to start to pull a lever to invest in the business and they're deploying capital.

Speaker 2: starting to lean into revolvers or taking out term debt. And you have others who I think are a little more cautious. But overall, that growth that we're talking about, we do see that growth continuing to be fairly, quite strong throughout the year. And it's underpinned by a change in strategy and labor as we pulled last year. We resegmented the business and we put more experienced and additional FTE against our larger commercial clients. In the one segment, we didn't feel we were really capturing our fair share. And that's playing out exactly how we wanted. So we're quite confident in the strategy. And then the second comment I would make is, we're just really pleased with the diversification. So we see, you know, essentially very even growth across all sectors. We see very consistent growth across all regions. So we're not seeing, you know, anything any one sector really overweighted.

And I think that's the strategy and provides good diversification in terms of our risk profile. Great. That's it for me. Thank you for your answers. Thank you. The next question is from Mario Mandanca, PD Securities. Please go ahead. I'll try to defend. Can we go to two comments you made during your opening that caught my attention? One you said that the hybrid working model, hybrid working force model, you questioned sort of productivity. And then you, in a separate comment that seemed unrelated, but is related in my mind, you talked about how losses could emerge in commercial real estate. So what I'm getting at here is if the world really is going to, if we're going to function in this hybrid working model where a bunch of us working at home is the message here that big occupiers of commercial real estate, like Royal, like the rest of our banks.

need to revisit their commercial real estate needs and address the productivity and address the inflation by actually unloading this commercial real estate. Is that why you're sensitive to commercial real estate losses going forward? No, I think it would be almost the opposite. I think that the absence of working together in many ways has led to productivity and innovation challenges and society isn't back together enough and working enough. So it actually merits the opposite. Now, there's been a lot of dialogue among CEOs globally now about what is the productivity and creativity of your workforce in this hybrid world and what is the future hybrid world? And we're in this discovery area and trying to find balance with employees. You hear a lot of commentary about it. I think most CEOs would tell you that there is a productivity loss. I think we can identify both in our organization, productivity gains and productivity losses, depending on the group you're looking at, from operations to head office to sales. So we're working through that as an organization and we're working through that as an economy and a society. And I think there's opportunity for improvement. So it's actually the opposite, I'm trying to say that.

we we likely need more people back at work not permanently like it's not five days a week more than we're seeing today what i think that's what the demand for commercial real estate and hence are balanced approach to the i don't think i said there's a heightened commercial risk what what graham sorry what graham did offer is that commercial real estate was in the area of risk going forward uh... maybe graham is that true did you say that art was like yes no that's right i mean so commercial real estate got two headwinds right you've got the overall headwind of a higher-interest rate environment which is affecting the asset class as a whole and then certainly sub-portfolios within that like office have the additional headwind that companies are implementing hybrid models and and but as they've saying how that place out over time is uncertain

And so certainly if it goes down a more negative path as you're articulating where companies choose to be in a more permanent state in a hybrid model, that will impact the kind of the demands and needs around that footprint. But as Dave's pointing out, you've also got companies seeing that we see negative impacts on productivity on that front. And so this is going to play out over time, but certainly support FOIL because of that that we're more focused on and we're cautious about. I'll talk about this now, but the point I'm thinking through here is if Royal sends out an email tomorrow to its 80,000 employees saying everybody come back to the office, it certainly seems to me that commercial real estate risk is diminished because you're using it again. Is that not the right way to look at it?

Yes, that's part of the reason, but it's not going to be returned to pre-pandemic levels either. There is going to be some dislocation, but I think we're probably edging back to a better balance than we saw in 21 and in 22. We're finding our way, I think, as a society. I think all CEOs in every sector I talk to are struggling with the balance of attracting, retaining, developing, promoting talent, building culture, creating productivity. It's tough. It's really tough, but we don't have the final model yet. So I'm trying to highlight this opportunity to be better at this. There's opportunity to be more productive at it. I think that provides a support level under some commercial real estate, but there will be companies that like us that release some real estate. I don't think we'll have 100% of the portfolio we had before. So we're finding our way towards that, and I think it's a balance that creates an overall environment that I think is constructive. So I think we're just trying to highlight that perspective that we're confident of our portfolio. We're evolving as a society and we'll manage it.

That's all. I think the answer is we just don't know yet, but I appreciate you trying to put some texture around it, so I'm a little further along in my understanding. Thanks for that. Thanks for the question. So maybe I know we've run over there. Maybe I'll operate or I'll cut it off there. I think we only had one question in the queue given that we've gone a fair bit over. So maybe I'll summarize some of the semantics that came out in the questions and maybe some of the deltas that happened over the quarter. And I think that the first takeaway I'd like everyone to have is our franchise is built over putting the customer first. That helps us create high ROE's sustainable growth over time. And very much as you saw on the deposit, it filtered into the margin questions, but it's really building a solid client franchise, building a solid funding franchise with a strategic advantage, or RBC leveraging the money in a money out and keeping it within the RBC ecosystem. It's all part of the strength that we're applying for franchise. And that really was put on, I think, strong exhibit today in the money flow, money in and out. It came at lower margins, but that's the right thing to do for a client. It may have surprised you a little bit, but that's how the clients reacting to a higher interest rate environment. It's the right thing to do.

Therefore, that helps create higher RREs, higher retention, higher cross sell, creates a funding strategy for us as we've termed out some of that money with term GICs, creates a good liquidity profile. That levered into a very strong balance sheet with CT1 of 12.7, higher liquidity than you've seen, funding strength. So again, from that perspective, I think this is overall enhancing the higher RRE franchises in wealth and Canadian banking, US wealth that we have. The second thematic is certainly on cost. And as I mentioned, we hired and Neil mentioned, we hired aggressively into the year end. We're kind of walking the talk that we're expecting a softer landing. We're looking for future growth. And we had a lot of client-facing employees. We've also invested heavily in technology to adapt to a rapidly changing world, whether it's AI, whether it's back office, front office, cross the board. When you have number one franchises, we've been investing. Having said that, there is an opportunity to focus and you have my commitment and my management teams commitment that we can do better on cost sign and we can do better on driving.

operating leverage. Having said that, you see Niels business at a 39% efficiency ratio with a significant gap to the competition. So we're already at kind of market and industry leading numbers, but having said that, we can do better and we will do better. So I think from that perspective, we feel good about the trajectory going forward. Do you heard in the Dean comment on, you know, margin expansion still going forward and in leveraging our very strong core banking capability in the United States and Canada. So I think those are the thematics on top of strong growth, very strong performance in Kaplan, America. It's good performance in our US and Canadian wealth franchise, albeit in a volatile market. And I think we produced a no strong quarter. So thank you for your questions. They're all on the right themes. We appreciate your insights and look forward to seeing you next quarter.

Thanks, Alfred. Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

F I public.

I I.

Good morning ladies and gentlemen. Welcome to RBC's Confidence Call for the First Quarter 2023 Financial Results. Please be advised that this call is being recorded. Thank you.

Are we now like to turn a meeting over to us, Jim Imram, and of investor relations? Please go ahead, Mr. Imram. Thank you, and good morning, everyone. Speaking today, we'll be Dave McCuy, President and Chief Executive Officer, Nadine On, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions.

Neil McLaughlin, Grouphead Personal and Commercial Banking, Doug Guzman, Grouphead Wealth Management and Insurance, and Derek Nelner, Grouphead 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 this performance on a reported and adjusted basis and consider both to be useful in assessing underlying business performance. To give everyone a chance to ask questions...

We ask that you limit your questions and then re-q. With that, I'll turn it over to Dave. Thank you, awesome and good morning everyone. Thank you for joining us. Today we reported first quarter earnings of $3.2 billion or $4.3 billion, adjusting for the Canada recovery dividend and other items.

limit your questions and then a RECU. With that, I'll turn it over to Dave. Thank you, awesome and good morning everyone. Thank you for joining us. Today we reported first quarter earnings of $3.2 billion or $4.3 billion to just for the Canada Recovery Dividend and other items. Our results.

Our testament to our diversified business model underpinned by momentum from client-driven growth across our largest segments, as well as the benefit from higher interest rates. Our performance this quarter also reflected record capital markets revenue driven by strong, global markets results, as well as market share gains and investment banking. There's what has been a difficult industry-wide environment for advisory and origination activities. Reported expense growth was elevated at 17 percent year-over-year. However, as Nadine will speak to shortly, expense growth included a number of notable drivers this quarter. Expense growth over the last 12 months has reflected strategic investments in client-facing roles and technology to enhance or value proposition and infrastructure, including artificial intelligence capabilities. A credit to these investments, RBC was recently ranked number two amongst global banks and a recent benchmark of AI maturity in business.

While we've seen the benefits of our strategic investments in talent and technology, the entire leadership team is committed to moderating expense growth from these elevated levels and driving efficiencies across the bank. Our results were also impacted by higher PCL this quarter, although PCL unimpaired loans remain well below historical averages given strong employment and consumer balance sheets, we expect them to continue increasing from cyclical lows.

Of course, bonningly, we have added to our Stage 1 and 2 reserves this quarter an important pillar and the holistic strength of our BC's balance sheet, which includes strong capital and liquidity metrics, including our low cost Canadian deposit base. We ended the quarter with a CT1 ratio of 12.7% and expected to remain a CT1 ratio of at least 12% up to and following the close of our proposed acquisition of HSBC Canada. Our outlook includes a regular cadence of twice a year dividend increases.

will also deploy capital to support further organic growth. We continue to be well positioned to deliver premium return on equity and compounding strong book value growth. This is underpinned by prudent growth in our many high ROE businesses including Canadian personal banking, global wealth and asset management and investment banking.

Before I provide context and performance and growth strategies, I will speak to what remains a complex and fluctuating macro and market environment. While central banks have successfully reigned in peak core inflation, strong services demand labor shortages and the reopening of China's economy still present a challenge to getting firm control within stated target ranges. While interest rates may be peaking,

They may remain higher for longer as tight labor markets and other supply and balances keep inflation high and can strengthen economic and market activity. The difficulty for central banks is forecasting the lagging impact that higher rates have on the economy, while also trying to assess the impact of further rate increases to control inflation. Furthermore, the global economy remains susceptible to geopolitical shocks and regional political deadlocks. Overall, evaluating all the moving parts, we do forecast the softer landing characterised by a modest recession, largely underpinned by the impact of rising debt service costs on the consumer.

This phenomenon has already been felt in the Canadian housing market, where home resales and prices have corrected since their peak last year. Regardless of where we are in the cycle, RBC remains well positioned to support our clients while executing on our diversified growth trajectory. Starting on flight 5, I will speak to these growth trends across our largest segments. I will then spend time focusing on our Canadian retail and global whole-service well-advised business which provides higher OE through the cycle diversified revenue streams.

Turning to our Canadian banking business, where we earned record revenue of $5.3 billion as quarter, with strong volume growth highlighted the strength of our client franchise. We added $28 billion of mortgages over the last 12 months of 8% from last year.

And while mortgage origination activity has slowed from reason highs, it remained in line with pre-pandemic levels, offsetting a slowdown in activity, a retention rate for approximately 90% and mid-termetrician rates at 5-year lows.

Looking forward, we continue to expect annual mortgage growth to slow to the mid-single digits given deteriorating affordability. In contrast, credit card balances are up 13% year-over-year, largely due to higher client spending, particularly in restaurants and travel. While balances have now surpassed pre-pandemic levels,

Partly due to lower payment rates, revolving balances remain below Q4 2019 levels. Business loans are up over 15 percent from last year, while utilization rates on revolving facilities remain below pre-pandemic levels, term lending for capital expenditures has been strong. We are seeing broad-based growth across sectors including consumer services, manufacturing, and auto finance. Our global wealth management franchise generated record revenue, a $4.6 billion this quarter, partly due to the success of our full-service advisory businesses.

which I will speak to. RBC Global Asset Management AUM increased over $25 billion from last quarter as equity markets picked up from the beginning of the fiscal year. Despite increased market volatility, RBC Gamma remains an important high ROE profit generator for the bank.

Low and growth at City National remain both diversified and robust up 20% including the impact from PPP loans. Going forward we expect low and growth to moderate from these heightened levels, particularly in the jumbo mortgage space, where refinancing activity has pulled back. Let's drive.

Capital markets also generated record revenue surpassing $3 billion for the first time. Pre-provisioned pre-tax earnings of $1.4 billion highlighted the increasingly diversified nature of our revenue streams. The strong performance was underpinned by record results in global markets across most regions driven by excellent execution on robust client activity through volatile market conditions. Looking forward, we continue to identify growth opportunities in global markets.

including an FX and Area of Strength for HSBC Canada as well. Corporate investment banking results were down 11% from last year amidst challenging markets. While investment banking revenues were down 39% from very strong results last year, they out-performed global fee pools which were down 55%.

Consequently, RBC Capital Markets ranked seventh in global league tables this quarter, moving up one spot to ninth, looking at the last 12 months. Looking to the future, we continue to focus on diversifying revenue streams across higher RRE advisory and origination activities. We've been actively hiring managing directors across industry verticals and geographies, while also expanding our client coverage.

These have been factors in their move up in global league tables. With that set, an uncertain macro and geopolitical backdrop, volatility across asset classes and higher financing costs remain the biggest challenges to M&A activity. I will now double click on our differentiated and award-winning Canadian retail franchise, where we welcome the further 130,000 clients this quarter on top of the 400,000 clients added throughout fiscal 2022. We continue to benefit from a number of strategic partnerships.

with partners such as ICIC Bank Canada, but also leveraging investments made in our distribution network, including digital channels. Nearly 60% of credit cards, and almost 40% of court-checking accounts, are now open digitally. Our success is underpinned by a clear focus on doing what is right for the client. It's why we do not have a minimum balance requirement on our court-checking account.

Our continuum of offerings combined with our insights and advice allows us to help our personal banking clients make the best decisions based on the prevailing macro backdrop. In 2021, the continued low interest rate environment made it attractive for clients to shift liquidity into investment products such as mutual funds.

In contrast, the significant increase in interest rates over the last 12 months has resulted in a shift of our core checking and savings into GICs and other high yielding products. Personal GIC balances are up over $40 billion from last year, with nearly $15 billion this quarter alone.

While we recognize the trade-off to near-term margins, we attach greater long-term value to retention, deepening relationships, and keeping our clients within the RBC value proposition. For example, clients enrolled in our highly successful vantage product are twice as likely to cross-selling to credit cards and three times more likely to stay at RBC. Furthermore, the profitability of our mortgage clients is two times higher when retained for the second term.

The execution of our client-focused strategy has reflected in strong revenue growth. Despite clients moving to lower-spread GICs, revenues and personal banking investments business were higher than last quarter. Turning to slide 7, I will now speak to the strength of our global full-service, well-served advisory platform, where we now have in-market scale in three of the world's largest asset pools. We have seen the benefits of our diversified revenue strategy with recent rate hikes driving strong growth and net interest.

and securities lending. We expect this to accelerate revenue growth in our businesses, adding to our fee-based revenue streams, which I will now discuss.

RBC Dominion Securities continued to strengthen its number one position in Canada, adding net new assets this quarter, with Canadian AUA up over $20 billion quarter over quarter. Our position of strength is driven by a set of self-reinforcing competitive advantages underpinned by winning advice, digital capabilities, and holistic suite of solutions for a growing base of Canadian wealth planning professionals.

Canadian wealth management remains a highly profitable business leveraging its scale to generate pre-tax margins in the mid to high 20s. It is also important to have scale in the US, one of the largest fee pools globally. Our US business added over $20 billion of AUA this quarter, adding to its position as the sixth largest full-service wealth advisory firm in the United States.

In early 2022, we've recruited 110 advisors who are expected to drive nearly $20 billion of assets under administration. This recruiting will remain a key source of growth. We will also look to continue to leverage increasing RBC brand recognition in the U.S. to drive organic client growth. RBC Brewendolphin is one of the largest discretionary wealth managers in the UK and Ireland, offering in a market with significant structural changes, including moving from defined benefits to defined contribution plans.

This market is expected to increase from approximately 3 trillion pounds today to 4 trillion pounds by 2026. In conclusion, we look to continue executing on or through the cycle organic growth story while maintaining a strong balance sheet across capital, credit, and liquidity ratios. Furthermore, we look to deepen existing client relationships and attract new clients as we anticipate welcoming HSBC Canada's colleagues into RBC. Nadine, I'll now hand it over to you. Thank you, Dave, and good morning, everyone.

Starting on slide 9, we reported earnings through share of $2.29 this quarter, excluding the $1.1 billion impact of the Canada Recovery Divident and other smaller items of note, adjusted diluted earnings per share with $3.10 up 8% from last year. Total revenue was up 16% year over year or up 7% net of PBCAE. Pre-provisioned pre-tax earnings were up 7% from last year as strong client-driven revenue growth more than offset elevated expense growth, which I will discuss shortly. The impact of higher provisions for credit losses was partially offset by a lower adjusted effective tax rate, resulting in adjusted net income growth of 5% year over year.

Before I discuss our segment results, I will spend some time on three key topics. Capital, the outlook for net interest income and our related funding advantage, and finally our expense outlook. Starting with our strong capital ratios on slide 10, our CET1 ratio rose 10 basis points from last quarter, reflecting strong net internal capital generation of 39 basis points, net of $1.8 billion of dividends to our common shareholders. This was partially offset by the 20 basis point impact of the Canada Recovery Dividend and other tax-related adjustments. Next quarter,

We expect Basel III regulatory reforms to drive a 70 to 80 basis point benefit, largely reflecting the removal of the sector-wide credit risk RWA scaling factor under the new IRB framework. Furthermore, we expect to see RWA reductions reflective of our well-diversified portfolios and the conservatism of our wholesale risk parameters relative to the prescribed parameters under the new framework. According to slide 11, all bank net interest income was up 18% year-over-year or up 29% excluding trading revenue.

These results reflect our earning sensitivity to higher interest rates as well as the benefit from higher volumes. As a reminder, the cost of funding of certain transactions, particularly in capital markets, is recorded in interest expense while related revenue is recorded in non-interest income. All bank net interest margin, excluding trading net interest income, was up one basis point from last quarter.

largely reflecting trends in our personal and commercial banking franchises. On the slide 12, where we walk through this quarter's key drivers of Canadian banking net interest margin, which was up three basis points from last quarter, and follows a significant 25 basis points expansion in the second half of last year. This quarter reaffirmed the benefits of our structural low beta core deposit franchise, which drove a 10 basis point benefit to net interest margin in the quarter. We also saw benefits from higher credit card revolve rage, which were offset by continued competitive mortgage pricing. Deposit gross outpaced loan growth by the drawndown of increasingly extra incomeimi until the mild ??

further improving our industry loan-to-deposit ratio of 103%, which points to a fully funded segment balance sheet. However, this was partially offset by rising deposit betas and a larger than anticipated shift in deposit mix out of checking and savings accounts as clients sought higher yielding GICs. Notably, we gained market share in GICs this quarter, which we view as an advantageous source of low-cost funding relative to wholesale sources.

Turning to City National, net interest margin was down 5 basis points from last quarter, mainly reflecting higher FHLB borrowings to support additional liquidity requirements at the end of the calendar year. This more than offset the significant benefits of Fed rate hikes on our asset-sensitive balance sheet. Going forward, we expect to continue to fund much of our loan growth through our core and sweep deposits while supplementing these by accessing both broker deposits and FHLB funding. Looking out to next quarter, uncertainty around implied rates and client activity impacting deposit mix are expected to put pressure on margins.

Nonetheless, we expect margin expansion through 2023 for both Canadian Banking and City National. Our focus remains on growing net interest income. We anticipate mid-team growth in Canadian Banking net interest income for fiscal 2023 and would expect even stronger growth for City National.

Moving to slide 13, non-interest expenses were up 17% from last year with a few notable factors adding to expense growth this quarter. This includes the contribution from RBC Bruin Dolphins which added 3% to the growth rate as well as a prior year legal provision release which added another 1%. Similar to that, there was a 2% contribution from FX Translation.

Beyond these factors, the biggest driver of expense growth was staff-related costs, which were inflated in part due to the U.S. wealth management, wealth accumulation, plan expense. As a reminder, this line is largely offset in other non-interest income using economic hedges, thus making the impact net neutral to pre-provision pre-tax earnings. The remaining contributors to expense growth were related to continued investment in our franchises through technology and business development costs, as well as those driven off higher revenue, including trading execution costs.

For the remainder of the year, we expect non-interest expense growth, excluding variable and stock-based compensation to decelerate, reflecting the distancing from lower COVID-era comparatives. We also expect a slowdown in FTE growth following a period of heightened investment in sales capacity. Strong client-driven revenue growth and a focus on cost control underpin our commitment to deliver positive all-bank operating leverage in fiscal 2023. In Canadian banking, we continue to expect operating leverage for fiscal 2023 to be in the mid-single digits.

driving the full-year efficiency ratio below 40%. Before adding color on segment trends, a reminder that this quarter we announced a realignment of our business segment. Beginning on slide 14, Personal and Commercial Banking reported earnings of 2.1 billion this quarter, with Canadian banking, pre-provision pre-tax earnings up 18% year over year. Net interest income was up a record 23% from last year due to the higher spreads and strong growth in loans and deposits which Dave spoke to earlier. Non-interest income was down 2% from last year as challenging market conditions weighed on average mutual fund balances, driving lower distribution fees. This was partially offset by higher service charges and foreign exchange

In 2016, capital markets earnings were up 9% year-over-year reflecting record revenue and the benefits of a lower tax rate. Record global markets revenue was up 17% from last year, reflecting a record quarter for macro products with strong results across all product lines underpinned.

by robust client activity across rates and effects. We also saw strength in muniproducts and investment grade credit sales and trading. Invested banking revenue was down 39% from record levels achieved last year. Importantly, results outperformed a more significant decline in global fee pools. Lending another revenue was up 23% from last year, reflecting strong results in transaction banking underpinned by margin expansion and higher lending revenue driven by volume growth.

client activity across rates and effects. We also saw strength in muni products and investment grade credit sales and trading. Investment banking revenue was down 39% from record levels achieved last year. Importantly, results outperformed a more significant decline in global fee pools. Lending another revenue was up 23% from last year, reflecting strong results in transaction banking underpinned by margin expansion and higher lending revenue driven by volume growth. Trained to insurance on slide 17.

Net income decrease $49 million or 25% from a year ago, primarily due to higher capital funding cause which impacted NIAAT by approximately $50 million. This was part of the set by improved claims experience. To conclude, our leading money in franchise positions as well to continue seeing the benefits of higher rates while also funding strong, client-driven growth. We also remain disciplined in balancing our investments and capital deployment to continue delivering value for our shareholders and clients. But that I'll turn it over to Graham.

Thank you, Nene. Good morning, everyone. Starting on slide 19, I'll discuss our allowances in the context of the macroeconomic environment that Dave referenced earlier. While markets have already started to recover, the real economic impact of inflation and higher interest rates is just starting to influence credit outcomes. On the whole, we believe the probability of a more severe inflation and interest rate environment has started to reduce. However, as Dave noted, we continue to expect a moderate recession in 2023.

With this backdrop, we built reserves on performing loans for the third consecutive quarter. Provisioned on performing loans this quarter were driven by three factors. First, from a macroeconomic perspective, we moved closer to our forecast recession, bringing more of the associated expected credit losses into the IFRS 9 provisioning window. This is partially offset by a modest shift in our scenario weights, affecting the lower probability of more adverse inflation and rate scenarios that I just noted. Second, the credit quality of report flow continued to trend back to more normal levels, with sustained increases in delinquencies and credit downgrades.

And finally, we added reserves for ongoing portfolio growth. In total, our allowance for credit losses on loans increased by 268 million this quarter to 4.4 billion. We would be to slide 20, gross impaired loans were up 400 million or five basis points this quarter, with higher impaired loan balances across each of our major lending businesses. This was driven by an increase in new formations, which are returning to pre-pandemic levels. In our wholesale portfolio, new formations were up 220 million compared to the last quarter.

with the largest increases in the real estate and related in consumer stapled sectors. We do not expect to incur losses in a large majority of the new formations in the real estate and related sector, as the formations related to loans that are well collateralized and current on their payment, but have a financial sponsor or interest. In our retail portfolio, new formations were up 61 million or 18% quarter of a quarter, with increases across all of our lending products. Of note, new formations on residential mortgages were then doubled this quarter to 64 million, primarily due to variable rate borrowers who have seen payments increase after getting their trigger rate. As you'd expect, Duel Inquancy Rates on Triggered Variable Rate Mortgages increased during the quarter. However, during Duel Inquancy Rates, the entire Canadian banking mortgage portfolio were stable at 16 basis points. Remain very comfortable with our residential mortgage exposure. Clients continue to have excess savings in liquidity, with the pause at levels remaining elevated.

driven by personal lending and credit cards, which is consistent with our expectations as higher-ages rates start to impact clients. In late of the higher-ages rate environment, interne the slide 22, I'll now provide some details on our exposure to commercial real estate. Our standing loan exposure this sector represents 9% of our total loans and acceptances.

The portfolio is well diversified and has been originally to our sound underwriting standards that stress test loans for more adverse capitalization rates and operating income. Additionally, the exposure is well rated and benefits from strong collateral. Noting beyond balance, you are the identity of our commercial real estate exposure is approximately 20% lower than the rest of our wholesale portfolio. That said, we do expect commercial real estate to be negatively impacted by higher interest rates. Higher rates will negatively impact property values and debt service-cutter coverage.

The additionally certain asset classes like Office Properties are being impacted by changing fundamentals as companies have adopted hybrid working models post-pandemic. As a result, we expect to incur some losses in the commercial real estate sector as moving forward. We have been proactive in provisioning for these expected losses. For example, our IFRS 9 down site scenarios reflected decline in commercial property values ranging from 15 to 40 percent. As such, our ACL ratio on performing commercial real estate loans has increased 40 percent to the last year, and it's more than doubled relative to pre-pandemic levels.

To conclude, we continue to be pleased with the ongoing performance of our portfolios. Our PCL ratio on impaired loans remains below pre-pandemic levels, but we haven't seen the normalization of doing-quencies and impairments as higher interest rates start to impact credit outcomes. Expect PCL on impaired loans to increase through 2023 as we head into a forecasted recession. And ultimately, the timing and magnitude of increased credit costs continues to depend on central bank success and curbing inflation while creating a soft landing for the economy.

We continue to proactively manage risk through the cycle and we remain well-capitalized with Stan plausible yet more severe macroeconomic outcomes. With that operator, let's open the lines for Q&A. Thank you. Please press star one at this time if you have a question. There will be a brief pause while the participant will just start for questions. Thank you for your patience. We will take the first question from many grommets. Koshabain, please go in. Good morning. I gave you a number of quarters now from the outside looking in. It sounds like you're focused on getting expenses more under control. And then we have a quarter like this one where it still looks like that's not a mission accomplished yet. I'm wondering, are you frustrated by that? And how do we interpret that in terms of, are we just seeing more of a persistency of inflation coming through? What's really...

the challenge in terms of what seems to be like a key focus for you for quite a while. Thank you, many. I guess you could hear that in my comments, my prepared comments. There's a couple of factors that play. One, there is persistent inflation. There just doesn't come through only on this salary and benefit line as we, you know, as all companies across the world increase, you know, base pay and compensation to match the inflationary environment, but also comes through our, you know, third-party strategic sourcing line over all our partners, all the companies that we work with from technology to advisory to consultants, all those.

of our cost opportunity. We do see opportunity. We did invest significantly in growth. As I talked about, I think the last time if we aren't going to see that growth, then we're going to have to kind of reposition some of our capacity. But we are still forecasting a relatively mild recession and a softer landing and an opportunity to continue to access good growth. So I think

We're on it. I think it's a volatile market. There's a lot of things going on. We're repositioning the bank for a very different world going forward as far as technology capabilities across the board. It's a very complex operating environment. Having said that, we got to do better. And we're going to do better. And just as a follow-up, I know you've been very vocal oil. So, I've been very cautious about taking restructuring charges historically. But is the environment different now? And again, given the persistence of this issue, to the change of view on that tool? No, we think we have the tools.

with doubling down in different areas to manage this in the normal course right now as we normally do. And you'll see our expenses get under control. Thank you. Next question is from Ibrahim Punehwala. Bank of America, please go ahead.

with doubling down in different areas to manage this in the normal course right now as we normally do. And you'll see our expenses get under control. Thank you. Thank you. Next question is from Ibrahim Punehwala. Bank of America, please go ahead. Good morning.

I guess maybe a question for Graham. You mentioned higher interest rates impacting credit or credit normalization. At what point, and I hear you in terms of expectation for a mild recession, but at what point do we start worrying about credit normalization actually leading into a more pronounced deterioration that looks a lot recession-like? What are the indicators? Is it all about jobs and what the job market does? And give us a sense of across the customer's segment, commercial consumer, where are you seeing the most pronounced pain due to the higher interest rates? Thanks.

Yeah, thanks, Abram, maybe just to provide a little bit more color on how we're thinking about the environment. I think as we've guided earlier, we certainly continue to expect that credit outcomes, negative credit outcomes will rise through the year as we progress the year heading back towards more historic norms. I'm kind of expecting that to start to peak out towards the end of this year and to the first half of next year. As you said, there's different aspects we look at that, and that those are the things that really factor into our models and IFRS-9, and so as you said, that servicing costs, certainly that directly impacts things like our mortgage portfolio.

But we do worry about and think about the overall kind of wealth effect and how that's going to squeeze out discretionary income, discretionary expenses as well. And so that's kind of the thing that factor into why we forecast GDP the way we do and why we're forecasting unemployment to increase over the course of this year. Right now we're at exceedingly low level there, but we do expect unemployment to graduate up to kind of more than that six and a half to seven percent range at the tail end of this year before kind of coming back to more historic norms. And so those are the factors that we think really go into our models and how we assess kind of the overall loan losses. Having said that, you know, we continue to see in the near term kind of very significant performance, particularly on the job space. You know, we've continued to expect unemployment to rise.

We've continually been surprised by the strength of the job market in Canada and the US. And so that's kind of always what continues to push back the timing of this normalization a little further than we've anticipated. But yes, jobs is a big one here. And what you see, when we think about the retail side, maybe to break into that a little bit further, certainly we're seeing the delinquency trends kind of move up. But the insolvency side of it, which is kind of the other half of the equation, is very much tied to the labor market. And we have seen insolvency start to take a little bit. There's still well below pre-pandemic norms. Until we really start to see that kind of job situation labor move, it's going to continue to be a near term benefit to the overall credit outcomes.

commercial real estate market, C&I borrowers were seeing their cost of capital go up, no material pain there. Commercial real estate is certainly as I noted, I mean that is one of the portfolios that we are most focused on for sure. I would say it's a sector that I think the underwriting standards have been very strong, had it been very disciplined on for some time. If you look at portfolios, we were doing a deep dive review on our Canadian commercial portfolio example, looking at the mortgage side of that. A, we have had a strategy very focused on your top-tier clients. These are clients that are very season capable to weather through the cycle challenges. Two, the underwriting standards have been very strong there. You look at our mortgage portfolio on that side. We have got partial guarantees on 95% of those commercial mortgages. It's an indicator of the strength of the underwriting standards. Things will trend up, but they are going to trend up. They are going to trend up from what's been near zero numbers in that portfolio for a long time. But right now, these are still, I would say, forward expectations. We're not seeing a lot of real negative outcomes in that portfolio.

trading businesses, we obviously saw very, very strong levels of client activity in the quarter. It was a very robust environment. And against that, we were able to drive good velocity and turnover in our trading book inventories and also bring down some of those inventories in particular in our credit trading businesses, whereas you know it was a tougher environment in 2022.

Our inventory levels went up a little bit and we were able to bring those down against a very strong trading environment in Q1 and so that really was the largest contributor to a decline in our market risk RWA As you noted, we also did see a decline in our counterparty credit risk RWA That was really again a function of improving credit environment, but as well some effects movement that helped bring RWA down and then finally we did see a moderation in commodity prices and so that did bring down our counterparty RWA against some of our commodity trading positions.

to bring those down against a very strong trading environment in Q1. And so that really was the largest contributor to a decline in our market risk RWA. As you noted, we also did see a decline in our counterparty credit risk RWA. That was really again a function of improving credit environment, but as well some FX movement that helped bring RWA down. And then finally we did see a moderation in commodity prices and so that did bring down our counterparty RWA

So I think I mean on that part I think there's absolutely captured it right it's a this is a quarter with good liquidity it allowed us to be much more in the moving business and not in the storage business trading trading side of it so I think those are absolutely right factors but I guess there are pieces where on the overall 70 to 80 basis points. Yeah just as it relates to on the horizon we will be implementing the remaining components of battle four that are coming into effect next year so that's related to FRTV and DBA. We don't expect those to have material impacts overall dug in terms of our in terms of our CET-1 ratio.

Great. Thank you. Thank you. Next question is from Mario Mandanca. Did you see the security? Please go ahead. Good morning. Can we first go to the margin? I was a little surprised at the margin, but it clearly relates to that dynamic you described where the expense was reported in the NII by the income in non-interest income. Is there any way you can help us understand what effect that had on the all bank margin in the quarter? I would be helpful to understand what that margin might have looked like.

was about five basis points sequentially if that dynamic hadn't played out. Is that something you can quantify, maybe? Sure, Mario. So if I just start from the total bank name of down nine basis points, as you commented a lot of that relates to the capital markets business where we have the cost of funding, which obviously has gone up with interest rates going up, showing up in the NII line, and then their offsets are another income. So when I break out the two main drivers of that primarily attributed to the repo business as well as some of our...

equities, derivatives, businesses. That takes our number down and what you're getting from a capital markets perspective then on a total bank level. That would take that number down, which is roughly about 12 basis points down to one or two, which is mainly on the loan book as margin impacted by higher funding costs. When I look at it at the all bank level then, so if you take out a substantial portion attributed to that, you're looking at the increase of one basis point. Within that number, we are down a few basis points as it relates to our increased liquidity position. That relates to, we comment in terms of our LCR increase, both we've increased our funding. That will get absorbed as we go through the year and the loan book growth contributes to the margin.

Okay, so maybe let me, I may have misunderstood it then. The one basis point list in the margin all-bank already appropriately excludes that effect that you referred to, that effect of experiencing in one area, revenue in another. Is that true? That is correct. What I would say, why it's represented a bit under where we would expect it to be, is because of the higher liquidity position. In addition, there was one movement of anomaly between quarters of another couple of basis points. Okay, so that really gets, that's helpful. So now I think I understand why the margin.

I think I understand these margins dynamics a little bit better. So it really does lead to my second question, which is the overall margin sensitivity and improvement for an asset sensitive bank like Royal, it appears to be diminishing over time. And it's for all the reasons I think you offered, the positives, migration, maybe even deposit attrition. And that's the schools you provide in your presentation where you break out costs, funding costs, and like the income where that breakout you do in your presentation, that's awfully helpful. But the message I'm getting here is that that asset sensitivity that Royal has benefited from.

Like we're in the final innings of that. Would you agree with that that we're in the final innings of the benefit for these asset sensitive banks? No, we do expect to, I think we go back to our structural deposit benefit that we have, which can continue, which drives our asset sensitivity to higher rates, and we continue to expect to benefit from that going forward. I think what you're seeing in terms of what you commented on the near term movements as a related to the deposit migration, we expect that that will have flow given that the interest rates have gone up and they expect to level up. So a lot of that movement will have...

We will continue to see the margin expansion benefit for our structural deposit base. And that is going to be a bit sensitive Mario, depending upon what happens to the longer end of the yield curve. And we've seen it move quite significantly, just gives more perspectives on where we're at with rating increases. So it's obviously we're dealing with a bit of an inverted yield curve right now. That has been moving around to the tune of 30 to 50 basis points over the last quarter. And so that's where the devalued driver is. We start to think about that margin expansion coming from that structural deposit base. And then I'll stop here. The guidance you offered for mid.

I think you said mid teens growth in NII in Canadian banking in 2023. The math is pretty simple. It would imply that the domestic or that Canadian banking margin will be essentially flat or maybe marginal, maybe up slightly going for it. That's what the math tells me just by plugging in your mid teens. Is that right? Essentially what you're telling us that margins could be kind of flat from here in Canadian banking? I think what you could expect in the next quarter is continue to see a bit of that pressure as it relates to the deposit mix.

movement, but we do expect to see the margin expansion still continuing through the letter half of 2023, Mario. All right, thanks. Thank you. Can I call Gen. T? Please go ahead. Yeah, thanks a lot. So, I need to just follow up to that line of questioning. We talked about the Canadian PNC, but I think you offered comments on the US side as well on City National Bank being better in 2023 and just wondering the factors in context of that role to kind of the deposit-based declining and likely decline to a few years while. Sure. So, as City National, we had commented, I believe in Q4 towards the end of the quarter, we had increased our liquidity position related to some changes around current.

sensitivity on the asset side so that can still benefit significantly. Okay, so the comment was that you expect that I and 2023 on the US side just like the outpaced candidates here from what you see right now. Correct. Next question is from Sara Moverhedi, the Mocapital Market. I just want to ask a question of me. I appreciate the additional.

I guess how many of them would have credit cards with you and what sort of insights I guess are you seeing from a credit quality perspective?

That might be for telling here. Sure. Thanks for the question. So on the variable rate mortgages, I guess there's a couple themes. Not surprising. We're seeing a sense of originations really drop. Um.

really getting down to 15% of originations. Keep in mind that the entire portfolio, about a third of the portfolio is variable rates. So we're seeing a very dramatic shift there. We're also seeing a shift overall, basically.

Fewer first time home buyers, you can imagine not a product that first time home buyers are going to take on. And then we've already commented on this, but just in terms of trigger rates, we have seen good portion of that variable rate portfolio go through that process around trigger rates. The earlier cohorts that went through it saw bigger increases, the ones that have been more recent have had smaller increases.

Graham commented, you know, those are embedded in the credit performance. One of the things just to add to Graham's comments is that overall those variable rate mortgages did start from a lower the linkancy level than average. So we're starting to see the move up to be average and we're seeing the more recent cohort it's actually have lower incremental payments. So a real focus around the category reaching out, talking to those clients, and we do break it down and look at a couple factors including, you know, what's the collateral those customers have, what are the psychoscores, and then Graham touched on just seeing the excess deposit. So whether it's excess deposits or we have seen wage inflation over time, from when many of those mortgages were taken out and that is helping those clients deal with the increased payments.

So that's maybe a little bit of collar on variable rate mortgages. And, oh, Graham, did you want to end thing you wanted to add? No, I think you touched on some key points. I think the one point I think you did draw out there, which I think is important, is that we are seeing doing with these rise in that segment as I noted. As you noted, they're starting from a position of strength again. And that's true of our client base as a whole. Again, the strong employment situation, the strong liquidity situation, and that portfolio, that segment of that portfolio in particular was starting from a better than average situation. And then that's trending up. But that's why the overall all doing with season in the mortgage book are all totally stable, clover, clover.

And then in terms of your second question, just about the percentage of mortgage holders with credit cards, it's over 50%. So we have obviously very strong credit card line up. We do have a relationship based model. So the majority of our mortgage holders, you know, do hold other products and over half of that portfolio also hold a credit card with us. Okay. And just a quick hack. I guess housekeeping item. I mean, you didn't mention any impact of the drift discount on the CET1 ratio was the offtake, not what you expected or any sense as to how drift discount system. You know, we do we are taken the drip has been what we expected. Sorry, but we do expect to get a.

One on capital markets, there was a commentary that the bank asked for the global fee pool from corporate investment banking side. I'm curious if that performance was the same on the global markets side as well. If you have some commentary there and more importantly, would you have a sense of what the PTPP earnings capacity might look like from capital markets this year?

Obviously, we'll have it flow with the market, but curious if you have a baseline sort of expectation similar to the guidance that you provided back in early 2022. Sure. Thank you for both those questions. From a market share perspective, as you noted in our advisory and origination businesses and in investment banking, we can get very real time market share data. And so as you pointed out and as Dave highlighted in his comments, we did have a very strong quarter in what was a tough environment. We did gain share and moved up in our rankings.

environment. But away from the mix, I do think we picked up share in a number of businesses in global markets, which I think is a reflection of a number of the new strategic initiatives we've been implementing in that business over the last couple of years, but in 2022 in particular. To your question on pre-provision pre-tax.

We do think that we can lift that bar to 1.1 billion. And so again, we'd caveat it that we are in a cyclical business, and that depends on a normalized quarter. But in a relatively normal environment, that's the goal that we'll continue to be shooting for is 1.1 billion plus. Thank you. That's helpful. The next question is from Mike. It is Danobik, KBW.

If I could just follow up, I wanted to ask a question about the trading line, obviously a great quarter for you guys. I'm wondering in an environment like this, did you just get paid better for your transactions on the trading side? Just given the, some of the numbers that we track, just to try to get a look ahead in terms of the volume that comes into the market overall, it seems like this is still an outsized quarter. We didn't really see the volatility spike. We didn't see trading volume spike. And yet here you are sitting at 1.4 billion trading, which was a great number. Anything to suggest that maybe it was outside a little bit because you're just getting paid more or maybe not as much volume.

Sure, thank you for that. A few different comments. I mean, overall, I would say it was a very strong quarter for our trading businesses, and I would describe it as a very clean quarter. So there weren't any notable one-time items or anything. It was just really good client volume, constructive market backdrop. And I think our teams managed risk and executed very well against that backdrop. A few observations, though. I think one.

Fiscal Q1 for us always tends to be a seasonally strong quarter for the trading businesses. We do get some benefit from the calendar year end and how some of our clients are managing their balances and how other banks are managing their balances. So Q1 always tends to be seasonally a stronger quarter for us. This year there was a constructive backdrop as I think a lot of our clients were repositioning their portfolios around year end and for the year ahead with what continues to be a wide array of views for how 2023 may play out. So that drove heightened client volume. And then as I mentioned, I think our mix did play to our favor a little bit. In 2022 our mix created some natural headwinds for us because of challenges in the credit business. repo spreads were still quite depressed.

None of those have been dramatic changes, but obviously it was a more constructive quarter for credit. We have continued to see some moderate improvement in our repo spreads. So I think our mix has helped. And then, you know, importantly, I think our team has just executed really well on a number of strategic initiatives that we've been investing in and focused on over a number of quarters. So, all to say, it was a very robust quarter. I certainly wouldn't expect that kind of run rate to continue through the balance of the year, but at the same time, there were no one-off items or anomalies. It was just really good solid backdrop on our team executed well against it. Thanks for that color. And then maybe just quickly for Neil on your residential mortgage lending in Canada.

I'm not sure if you want to provide any guidance on where you think your growth level could profit. It looks like you're up about 50 beeps, quarter over quarter. What I'm wondering is just given the dynamic of potentially higher rates for longer, is there a possibility the mortgage book starts to shrink here? Not materially, but maybe by a few percentage points. Is that something that you think is a possible outcome if you do get this dynamic of higher rates for longer and obviously the origination value seems to be very weak right now, home sales are very weak. Is that something that's a possibility in your view? Yeah thanks for the question. To your point, originations are down materially, probably about in the range of 40% in terms of transactions. And then you overlay just the HPI decrease and that further takes it down in terms of the actual dollars hitting the balance sheet. So etc.

either in terms of technology or FTE related to enhancing collection processes related to the tougher credit environment perhaps in Canadian banking or is the growth in tech and Commvault kind of strictly related to growth initiatives? Yeah, I'll take the question. No, there isn't technology that we would need to put in in terms of the growth in the

in front of the client where we're looking to really build volumes, but we have started to build up that collections group in terms of just capacity, but it's not a technology driver at all.

Gotcha. Then maybe coming back to an earlier comment, comment from Dave on expenses on the ability, I think to pull back expense growth at the top line. So if I look at your, your, your, your marketing and waterfall on your slide 13, what is some of the areas you can pull back on expenses if the revenue growth environment kind of slows? Yes, you're all safe. That question. Thank you. So in terms of when you look at the bucketing, I would say on the investment in people, we've obviously ramped that up quite significantly.

over the latter half of 2022 as we were investing for growth and you see that with our strong volume. So that was one of the buckets I commented will start to taper off as we sort of some of that hiring that we've seen early part of the year. I would say also when you look at the discretionary and other David commented that that is also a bucket that's being impacted in inflation. And that's one area that if we start to see any headwinds coming from the economic downturn that we can pull back on that, that's primarily driven off of not only increase in terms of marketing but also travel business development that has started to pick up.

particularly given where we were on the lows from Q1 in 22. And from a technology standpoint, what you're seeing there is a lot of the investment that we've done not only from our client perspective and driving a lot of our growth in terms of our applications for Canadian banking, for wealth management, and for investment in the capital markets business. And part of that also would drive further efficiency savings as we look out into later years as we've talked about how we've been focused on our zero-based budgeting.

Thanks, that's it from me. Thank you. CYBC, please go ahead. I missed a portion of the call, so if you've already addressed these, I do apologize. But two questions. I guess the first one is on regulatory deal risk. You've done transactions both south of the border and Canada. So I wonder if you can provide any insights on what you think the primary differences are between the regulatory process in the US versus Canada, and then also just remind us sort of your current confidence in the timing of the HSPC transaction. Thank you. Maybe I'll take that, Dave. I know certainly there's a time period difference between when we went through city national eight years ago in current environments.

outlook for commercial loans. Are you seeing any indications of slowing demand whether that's in the Canadian business specifically? Thanks for the question. We actually have seen our commercial lending pick up over the last couple quarters.

taking out term debt and you have others who I think are a little more cautious. But overall, you know, that growth that we're talking about, we do see that growth continuing to be fairly, you know, quite strong throughout the year. And it's underpinned by a change in strategy and labor as we pulled last year. We resegmented the business and we put more experienced and additional FTE against our larger commercial clients. In the one segment we didn't feel we were really capturing our fair share. And that's playing out.

exactly how we wanted, so we're quite confident in the strategy. And then the second comment I would make is, we're just really pleased with the diversification. So we see essentially very even growth across all sectors. We see very consistent growth across all regions. So we're not seeing anything, any one sector really overweighted. And we, I think that's the strategy and provides good diversification in terms of our risk profile. Great, that's it for me. Thank you for your answers. Thank you. The next question is from Mario Mandanca.

Please, please go ahead. I'll try to be quick. Dave, can we go to two comments you made during your opening that caught my attention? One, you said that the hybrid working model, hybrid working force model, you questioned sort of productivity, and then you, in a separate comment, that seemed unrelated but is related in my mind, you talked about how losses could emerge in commercial real estate. So what I'm getting at here is if the world really is gonna, if we're gonna function in this hybrid working model where a bunch of us working at home, is the message here that big occupiers of commercial real estate, like Royal, like the rest of our banks, need to revisit their commercial real estate needs and address the productivity and address the inflation by actually unloading this commercial real estate. Is that why you're sensitive to commercial real estate losses going forward? No, I think it would be almost the opposite. I think that the absence of working together in many ways has led to productivity and innovation.

week.

but more than we're seeing today. Okay, so I think that's of course some of the demand for commercial real estate and hence our balanced approach. I don't think I said there's heightened commercial risk.

What Graham did offer is that commercial real estate was an area of risk going forward. Maybe Graham, is that true? Did you say that or was I just hearing? No, that's right, Mark. I mean, so commercial real estate has got two headwinds, right? You've got the overall headwind of a higher interest rate environment, which is affecting the asset class as a whole. And then certainly sub portfolios within that, like office, have the additional headwind that companies are implementing hybrid models. But as Dave's saying, how that plays out over time is uncertain, right?

And so certainly if it goes down a more negative path as you're articulating where companies choose to be in a more permanent state in a hybrid model, that will impact the kind of the demands and needs around that footprint. But as Dave's pointing out, you've also got companies seeing that we see negative impacts on productivity on that front. And so this is gonna play out over time, but certainly it's a portfolio because of that, that we're more focused on and we're cautious about. Now I'll talk about this now, but the point I'm thinking through here is if Royal sends out an email tomorrow to its 80,000 employees saying everybody come back to the office, it certainly seems to me that commercial real estate risk is diminished because...

You're using it again. Is that not the right way to look at it? Yes, that's part of the reason, but it's not going to be returned to pre-pandemic levels either. So there is going to be some dislocation, but I think we're probably edging back to a better balance than we saw in 21 and in 22. So we're finding our way, I think, as a society. I think all CEOs in every sector I talk to are struggling with the balance of attracting, retaining, developing, challenging, promoting, building culture, creating productivity. It's tough. It's really tough. We don't have the final model yet. So I'm trying to highlight this opportunity to be better at this. There's opportunity to be more productive at it. I think that provides a support level under some commercial real estate, but there will be companies like us that release some real estate.

some real estate, I don't think we'll have 100% of the portfolio we had before. So we're finding our way towards that and I think it's a balance that creates an overall environment that I think is constructive. So I think we're just trying to highlight that perspective that we're confident of our portfolio. We're evolving as a society and we'll manage it. That's helpful. I think the answer is we just don't know yet. But I appreciate you trying to put some texture around it so I'm a little further along in my understanding. Thanks for that. Thanks for the question.

So maybe I'll, I know we've run over there, maybe operator I'll cut it off there. I think we only had one question in the queue given that we've gone a fair bit over. So maybe I'll summarize some of the thematics that came out in the questions and maybe some of the deltas that happened over the quarter. I think that the first takeaway I'd like everyone to have is our franchise is built over putting the customer first. That helps us create higher ROE, sustainable growth over time. And very much as you saw on the deposit, it filtered into the margin questions. But it's really building a solid client franchise, building a solid funding franchise with a strategic advantage for RBC, leveraging the money in and money out and keeping it within the RBC ecosystem is all part of the strength of our client franchise. And that really was put on I think strong exhibit today in the money flow, money in and out. It came at lower margins, but that's the right thing to do for a client.

It may have surprised you a little bit, but that's how the clients react into a higher interest rate environment. It's the right thing to do. And therefore that helps create higher RRE's higher attention, higher cross sell, creates a funding strategy for us as we've termed out some of that money with term GICs, creates a good liquidity profile. That levers into a very strong balance sheet with CT1 of 12, 7, higher liquidity than you see in funding strength. So again from that perspective, I think this is overall enhancing...

The higher we franchise is in wealth and Canadian banking, US wealth that we have. The second thematic is certainly on cost. And as I mentioned, we hired and Neil mentioned, we hired aggressively into the year end. We're kind of walking the talk that we're expecting a softer landing. We're looking for future growth. And we had a lot of client-facing employees. We've also invested heavily in technology to adapt to a rapidly changing world, whether it's AI, whether it's back office, front office, cross the board. When you have number one franchises, we've been investing. Having said that, there is an opportunity to pull back. There is an opportunity to focus. And you have my commitment and my management team's commitment that we can do better on cost sign and we can do better on driving.

operating leverage. Having said that, you see Niels business at a 39% efficiency ratio with a significant gap to the competition. So we're already at kind of market and industry leading numbers, but you haven't said that, we can do better and we will do better. So I think from that perspective, we feel good about the trajectory going forward. You heard in the Dean comment on you know, margin expansion still going forward and in leveraging our very strong or banking capability in the United States and Canada. So I think those are the thematics on top of strong growth, very strong performance in Kaffir Mark. It's good performance in our US and Canadian wealth franchise, albeit in a volatile market. And I think we produced a no strong quarter. So thank you for your questions. They're all on the right themes. We appreciate your insights and look forward to seeing you next quarter. Thanks, Alfred. Thank you. The conference has no end at all. Please disconnect your lines at this time and we thank you for your participation.

Q1 2023 Royal Bank of Canada Earnings Call

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