Q3 2023 Royal Bank of Canada Earnings Call
By your conference is ready to begin.
Good morning, ladies and gentlemen, and welcome to Rbc's Conference call for the third quarter of 2020 financial results.
This call is being recorded.
I'd now like to turn the meeting over to Athene Enron head of Investor Relations. Please go ahead, Mr him run.
And good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer.
Adding on Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer also joining us today for your questions Neil Mclaughlin group head personal and commercial banking, Doug Guzman group head wealth management, and insurance and Derek Elder group head capital markets.
As noted on slide one our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties.
Actual results could differ materially.
I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.
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.
Good morning, everyone and thank you for joining us before we begin I want to acknowledge the tragic events in the northwest territories.
And Hawaii.
Ongoing wildfires are care and concern is with all of those in these areas.
And we're supporting community relief efforts.
Year to help affected clients and employees.
Yeah.
Moving now to our results today, we reported third quarter earnings of $3 $9 billion or adjusted earnings of $4 billion up 11.
Sent from last year.
Pre provision pretax earnings were up 7% year over year revenue grew 19% to 14.1.
$5 billion I'm.
That's our performance yet again demonstrated the strength of our diversified business model.
Which produced revenue growth across.
Our businesses.
Personal and commercial banking revenue increased 7% from last year.
Capital markets had another strong quarter with over $1 billion and pre provision pretax earnings gaining share across global markets and investment banking amidst declining fee pools.
Wealth management revenues were up 10% from last year in insurance revenue net of PBC AE was up 22% year over year.
Expenses were up 23% year over year, largely due to the acquisition related costs FX and share based compensation.
Excluding these items and growth in variable compensation expenses were up 9%.
We also added a further $120 million of PCL on performing loans this quarter, and we remain well provisioned for a softer economic outlook.
We ended the quarter with a CET one ratio of over 14%, while maintaining a diversified funding profile.
Our strong balance sheet and premium Roe.
Are important elements of our value creation model.
Before I provide updates on our growth and cost strategies I will speak to what remains a complex and challenging environment from a macro operating and regulatory perspective.
On the macro front consumer spending remains resilient at the same time. It appears the magnitude of interest rate hikes is having its intended effect of reining in persistently elevated inflation.
The increase in the price of goods and services are slow to 2% and 4% respectively.
While immigration levels and labor markets also remained strong.
Seeing evidence of slowing labor markets as evidenced by slowing wage growth lower job postings.
And an increase in Canadian unemployment.
Consequently, our base case forecast softer economic outlook, we expect slowing growth and lower inflation due to the lagging impact of monetary policy.
And with a slowdown in China, and elevated climate and geopolitical risks.
The length of time central banks will have to be in a hold pattern before decreasing interest rates will be a key determinant of the impact on consumers and businesses and the economy.
Yeah.
We are operating in a structurally uncertain macro backdrop. Furthermore, the operating environment is changing at a faster pace than we've seen for over a decade, particularly in the U S banking sector.
Banks are facing increasing regulatory and funding requirements, which are exacerbated by quantitative tightening and other actions taking liquidity out of the U S banking system nearly two trillion dollars sits the federal reserve's overnight reserve.
Reverse repurchase facility, including a significant increase in usage by money market funds.
A higher cost of doing business is reducing profitability for U S. Regional banks led by higher funding costs and pressure to reduce lending capacity to protect capital and liquidity.
City National is not immune to these factors with both loan growth and profitability being impacted by the higher cost of attracting deposits and continued investments in operational infrastructure.
While we expect these cost pressures to continue for city National we expect to drive future benefits for it was asset sensitive balance sheet.
Furthermore, we are well positioned to benefit from our diversified business mix, including our top 10 capital markets and wealth management platforms, which generated over 90% of U S pretax pre provision earnings over the last 12 months.
Okay.
Given the current operating environment and economic backdrop, I will now speak to the actions, we're taking to optimize structural efficiencies to support our strategy of creating long term value.
While we have a strong foundation to do so we have not been satisfied with our recent operating leverage and so we've heightened our focus on expense control. We have acted by slowing discretionary spend and prioritizing investments and moderating hiring to benefit from natural attrition.
To date have resulted in a 1% reduction in FTE, excluding the partial sale of RBC Investor services.
Our summer students program.
We expect to further reduce FTE by approximately 1% to 2% next quarter through attrition and targeted reductions.
We will continue to monitor the changing landscape and are ready to accelerate further tactical actions as deemed appropriate.
In addition, we're also maintaining our discipline around capital allocation.
As highlighted by the partial sale of RBC Investor services.
We remain focused on driving the bank forward, including the planned acquisition of HSBC, Canada.
The transaction once approved and closed as expected to drive attractive financial returns all positioning RBC is the bank of choice for newcomers and commercial clients with international needs.
We're also investing to create even more value, including leveraging our leading borealis AI Institute to expand our capabilities in artificial intelligence.
We're expanding end market use cases, and credit adjudication cyber security client offers and through our aten trading platform.
I will now speak to key growth drivers across our segments, starting with Canadian banking, our largest business, we had our best ever quarter for new to RBC client acquisition with record volumes from newcomers and new partnerships, including IC ICI Bank, Canada.
Personal deposits were up 14% from last year.
Our stable low cost low beta deposit franchise allows us to efficiently fund our loan growth.
Tractive funding structure is also expected to provide a relatively smooth revenue stream, which dean will speak to shortly.
We continue to see a shift in deposit mix towards term products as new and existing clients continue to value our higher yielding offerings.
We also continued to enhance our franchise by expanding our offerings and partnerships and important part of our client centric model. We're excited to be the official financial services partner of the 'twenty 'twenty four Taylor Swift Era's tour in Canada.
Earlier this quarter, we launched our new loyalty partnership with Metro and Quebec will also opening our innovative shot plus platform and having untoward rewards to all Canadians.
Many of our kitting and banking clients or members of our internationally recognized award winning program and we expect to grow its membership base by 50% in the next three to five years.
Onto mortgage growth, which moderated to 5% from last year, and we expect industry or origination activity to continue along this trend we remain focused on the tradeoffs between spreads and new mortgage originations as intense pricing competition is limiting expansion and asset betas.
We will remain disciplined to ensure new originations continue to meet internal hurdles of economic value.
Business loan growth remained strong up 14% from last year as we continue to see balanced growth, including solid growth in agriculture and supply chain sectors.
With inventory levels remaining below pre pandemic levels. There was a continued runway for growth.
Moving to our global diversified wealth and asset management franchises, which are key contributors to our premium return on equity.
Starting with Canadian wealth management assets under administration were up 7% from last year, increasing to a record level of approximately $550 billion.
On slide 30, we provide new disclosures on our leading advisor productivity, which remains significantly higher than peer averages.
U S wealth management.
<unk> was up 7% from last year to a record level of approximately $575 billion U S.
We also added over 20, new advisors this quarter, a key source of growth.
RBC Global asset management, AUM increased 3% from last year, despite unusual conditions, where market outperformance was heavily weighted towards a narrow band of U S technology stocks.
Our clients chose us as a trusted adviser largely due to our performance and investment expertise nearly 85% of our AUM have outperformed the benchmark on a three year basis, a challenging period for markets.
Furthermore, we are confident that our leading money and franchise is well positioned for any client driven reversal of GIC inflows back to investment products.
We added to our alternative products suite this quarter by launching the RBC global infrastructure fund, which exceeded commitment targets.
Capital markets had a strong quarter as we benefited from the growing strength of our diverse business model, while industry wide fee pools remain muted our businesses showed continued momentum and delivered market share gains to drive outperformance.
Our cross platform teams are building undervalued position as trusted advisors to our clients across geographies and products.
In corporate banking and investment banking, we continued to advance the globalization of our business and deepen our sector and product coverage or franchise.
These investments are reflected in our participation in key mandates across diversified industry groups.
And so our move to ninth and global League tables on a year to date basis up from 10th of last year.
Going forward, we are seeing increased client from the conversations the buildup of a healthy pipeline.
In global markets. We also delivered strong market share gains across several core products and focused areas for accelerated growth.
Our strong market share in the spread business worked well for us this quarter. Furthermore, investments we have made in our macro business I've also positions us to support our clients.
We are pleased that the strategic investments in talent and technology and the changes we have made to our organizational structure are producing results.
In conclusion, our investments in our people technology products and services continue to create more value for our clients. They are driving strong volume growth and client activity across our businesses.
We also remain committed to delivering more value for our shareholders by efficiently allocating investments and capital within our stated risk appetite.
Dean over to you.
Thank you, Dave and good morning, everyone. Starting on slide eight we reported earnings per share of $2.73. This quarter adjusted diluted earnings per share of $2.84 was up 11% from last year as broad based revenue growth was partly offset by higher expenses and increases in PCL.
Unimpaired loans off of low levels a year ago.
Before focusing on more detailed drivers ever earnings I will highlight the continued strength of our balance sheet.
With our strong capital ratios on slide nine our CET, one ratio improved to 14, 1% up 40 basis points from last quarter, mainly reflecting net internal capital generation share issuances under our drip and the impact of the partial sale of RBC Investor services.
Looking ahead, we do not expect there to be a material impact from the implementation of the fundamental review of the trading book or <unk> 17 in fiscal Q1 2024, we continue to expect that our CET one ratio will remain above 12%. Following the close of the planned HSBC, Canada Trans.
Action in the first calendar quarter of 2024 pending regulatory approvals.
Moving to slide 10, I'll Bank net interest income was up 7% year over year or up 6%. Excluding trading revenue. These results reflect our sensitivity to higher interest rates as well as the benefit from higher volumes, particularly in Canadian banking.
All bank net interest margin. Excluding trading result was down one basis point from last quarter as margin expansion in Canadian banking was more than offset by NIM compression in other lines of business.
Onto slide 11, we walk through this quarter as key drivers of Canadian banking, NIM, which was up three basis points from last quarter.
The embedded advantages of our structural low beta core deposit franchise continued to come through this quarter. The latent benefit of recent interest rate hikes has resulted in a widening of deposit spreads.
NIM also benefited from changes in asset mix, including strong growth in credit card balances.
Importantly, NIM headwinds associated with the flows from non maturity deposits into GIC abated. This quarter. However, we continue to be impacted by the tightening of mortgage spreads as competition remains highly intense.
Going forward, we continue to expect to see the structural benefits of our ladder deposit portfolio comes through the increase in swap rates seen over the past year should result in reinvestment rates that are higher than those rolling off which in turn should provide tailwind.
However, as we've seen in past quarters. There are other factors that impact quarterly changes in margins, including changes in product mix, both in assets and funding.
With respect to competitive pricing, we assume intense competition for deposits and mortgages will continue.
Any changes in the timing and extent of these assumptions could have an impact on the trajectory of net interest income.
Turning to city National NIM.
NIM was down 11 basis points from last quarter, including the benefits from hedging mainly reflecting an adverse funding mix shift into interest bearing deposits as well as rising deposit betas. These.
These headwinds more than offset the benefit of a fed rate hikes on city national asset sensitive balance sheet.
Moving to slide 12.
Noninterest expenses were up 23% from last year, approximately 10% of this growth was driven by a combination of acquisition related costs and macro driven factors, such as FX and share based compensation.
Beyond these factors growth in variable compensation added a further 4% of the overall growth in expenses.
Core drivers of organic expense growth, where investments in people and technology savvy.
Salaries, excluding the impact of RBC Brewin dolphin were up 17% from last year as investments in our people reflected FTE growth of 6% year over year as well as inflationary impact of salary increases announced last year.
We also incurred a high higher level of severance, which I will speak to shortly.
The growth in F. T was prevalent in Canadian banking were FTE was up over 1500 year over year and up 2500 from the end of fiscal 2021 investments in product innovation also added to the segment's expense growth.
And capital markets expense growth was driven by higher variable compensation commensurate with the rebound in revenues as well as ongoing technology investments and build out our products.
Our city National we continue to make investments in the operational infrastructure in support of the banks next leg of growth, including higher professional fees and staff costs.
On to slide 13.
And Miss the ongoing challenging operating environment I want to reiterate daves comments on our heightened focus on cost containment.
Firstly, we are in the process of reducing our employee base FTE, excluding the impact of summer students is down 3% quarter over quarter.
This was largely driven by the impact of the partial sale of an RBC investor services operations.
Excluding the sale much of the FTE reductions to date have come in Canadian banking, which was down 2% quarter over quarter, excluding the impact of summer student.
As attrition and a slowdown in hiring are running their course.
Additionally over the last two quarters, we have seen aggregate severance costs of nearly 70 million. Moreover, we expect to further reduce FTE by approximately one to two per cent next quarter, resulting in additional severance costs being recognized in Q4.
Another lever at our disposal is the managing of discretionary spend which has already begun to slow.
Looking forward, we see further opportunity to reduce discretionary spend across various work streams, including business development advertising and professional services.
Moving to our segment performance beginning on slide 14.
Personal and commercial banking reported earnings of 2.1 billion this quarter with Canadian banking pre provision pretax earnings up 5% year over year.
Canadian banking net interest income was up 9% from last year due to higher spreads and solid average long growth of 7%.
Noninterest income was down 1% year over year, partly due to a $66 million impact a retrospective HST on payment card clearing services announced and the government of Canada's 2023 budget and enacted in Q3 2023.
Excluding this non interest income was up 4% driven by higher service charges and foreign exchange revenue, reflecting increased client activity.
Year to date operating leverage for the segment was nearly 1%.
Turning to slide 15 wells.
Wealth management earnings were down 18% from last year, including the decline in profitability at city National on the back of the challenging expense environment rising funding costs and higher provisions for credit losses.
The remaining businesses within wealth management saw combined earnings growth of 5% underpinned by higher net interest income in our international wealth management business as well as solid asset growth in our North American wealth and asset management businesses amidst challenging market condition.
Wealth management earnings also benefited from the gain on the partial sale of RBC Investor services operation.
Turning to slide 16.
In capital markets, we earned pre provision pretax earnings of $1 billion, reflecting the benefits of our diversified business model and market share gains across both global markets and investment banking.
Corporate and investment banking revenue was up 74% from last year as the prior year included the impact of loan underwriting markdowns.
<unk> net revenue was up a strong 30% year over year underpinned by higher debt originations across all regions share gains in M&A and improved equity originations.
Lending and other revenue was up 6% from last year, reflecting strong results in transaction banking supported by margin expansion as well as solid securitization financing activity.
Global markets revenue was up 18% from last year, reflecting an increase in fixed income trading revenue on the back of good client flow and improvement in the credit trading environment.
These factors were partly offset by lower equity trading revenues admits lower volatility.
Turning to insurance on slide 17.
Net income increased to $227 million up 22% from a year ago, primarily due to a favorable investment related experience.
Insurance business generated gains related to movements on interest rates on assets backing reserves.
To conclude our results this quarter were largely underpinned by the strength of our leading Canadian deposit franchise as well as broad based client driven revenue growth looking forward. Our full management team remains committed to rationalizing expenses with the goal of driving positive operating leverage with that I'll turn it off.
Richard Grant.
Thank you Dean and good morning, everyone.
Starting on slide 19, I will discuss our allowances in the context of the macroeconomic environment.
As Dave noted earlier during the quarter, we sold labor markets start to soften.
However, unemployment rates remain exceptionally low which has contributed to persistent consumer demand economic growth and inflation.
Accordingly, central banks continued to tighten monetary policy the markets are now contemplating a higher for longer interest rate environment.
With this backdrop, we added provisions on performing loans for the fifth consecutive quarter.
This quarter's provisions, reflecting increasing levels of delinquencies and credit downgrades.
We're awaiting ascribed were more pessimistic scenarios and ongoing portfolio growth.
Provisions on performing loans were predominately in the city national and capital markets, reflecting the more challenging conditions in United States.
Allowances on performing loans for our retail portfolios were largely unchanged. This quarter is a negative drivers were offset by improvements in our baseline forecast for housing prices.
In total our allowances for credit losses losses on loans increased by 182 million this quarter to 5 billion.
Moving to slide 'twenty provisions on impaired loans were up $58 million or two basis points relative to last quarter.
Well provisions continue to normalize from pandemic close our PCL ratio of 23 basis points remain below historical averages.
Canadian banking provisions were stable this quarter with lower provisions in the commercial portfolio offset by modestly higher provisions on personal loans and residential mortgages.
Expected losses in the retail portfolio continued to be delayed due to strong employment and all these levels of consumer deposits.
We do expect credit trends in retail to weaken as labor markets, soften and where clients were impacted by higher mortgage payments.
Credit trends will be led by credit cards, and unsecured lines of credit consistent with a traditional credit cycle.
A couple of markets provisions of 158 million were up 45 billion compared to last quarter.
Given the relatively large size of our clients and loans in couple of markets loans can vary from quarter to quarter.
Sorry losses can vary from quarter to quarter.
This quarter, we took a large provision on three related financings in the commercial real estate sector and a large provision on a loan in the transportation sector.
Wealth management provisions were also higher this quarter and included a larger provisions at city National on a commercial real estate loan secured by an office property.
The office segment remains challenging given the fundamental change in demand for office space Post pandemic.
However challenges within the commercial real estate sector are not exclusive to the office segments any property facing multiple headwinds is a greater risk in the current high rate environment. For example, the larger provision in capital markets. This quarter was on loan secured by multifamily properties segment of commercial real estate that continues to perform very well in the aggregate.
In this instance, the properties were notably impacted by the higher rate environment, but also by elevated unemployment rates negative socio economic change in the region.
Well, we are now seeing the impairments and losses, we had been expecting in the sector, we remain comfortable with our commercial real estate exposure.
As I noted last quarter, the portfolio was well diversified than its been originated to sound underwriting standards in support of a strong client base.
Additionally loss rates on impaired loans are typically lower in commercial real estate as they benefit from the value of the properties hold tangible collateral.
Losses are expected to be manageable relative to the size of the portfolio the portfolio was well provisioned.
Over the last several quarters, we have significantly increased reserves on performing loans.
My first name downside scenarios reflect a decline in commercial commercial property values, ranging from 15% to 40%.
Moving to slide 21, gross impaired loans were up $391 million or four basis points this quarter.
The increase was primarily driven by a couple of markets, where new formations were higher largely due to the impairment of the commercial real estate loans I noted earlier.
We've now seen four consecutive quarterly increases in gross impaired loans. However, a jail ratio of 38 basis points remains below pre pandemic levels.
So to conclude we continue to be pleased with the ongoing performance of our portfolios. Our retail portfolio continues to outperform expectations supported by low unemployment rates and only to consumer deposits.
Despite some larger impairments during the quarter, our jail and PCL ratios remain below long term averages I leave the size and diversification of our loan portfolios.
We are still expected expecting PC unimpaired loans between 20 to 25 basis points for the year consistent with the guidance I provided last fall looks.
Looking forward the impacts of inflation and higher rates is expected to play out over a number of years and we are still in the early stages of the current credit cycle.
As we move further into the credit cycle, we expect to see losses, driven by more systemic factors arising from the anticipated economic slowdown.
Ultimately the timing and magnitude of increased credit costs continues to depend on central bank success in Caribbean inflation, well, creating a soft landing for the economy.
We continue to proactively manage risk through the cycle and we remain well capitalized with sound plausible get more severe macroeconomic outcomes and with that operator, let's open the lines for Q&A.
Thank you.
I will take questions from the telephone lines. If you have a question and you are using a speaker phone. Please lift your handset before making your selection. If you have a question. Please press star one on your devices keypad, you make and so on your question at any time by pressing star two.
Please press star one at this time, if you have any questions.
All participants register for questions. We thank you for your patience.
Our first question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Okay. Thank you.
Neil.
Last quarter.
I think in your segment, you were probably a little bit I'm pleasantly surprised by that.
And then from an interest rate.
To term deposits.
This quarter, I guess, a little bit, but pleasantly surprised maybe maybe not surprised but that's what it looks like to me I mean, when you think about this.
Stabilized or do you expect some.
Variability around these types of net interest margins at least on the funding side.
When you look ahead over the next couple of quarters anyway.
Thanks for the questions. Yeah, I mean last quarter, we had commented that the GIC book on for personal deposits have grown $15 billion quarter over quarter. So you heard maybe you can comment about that trend starting to lessen this quarter. It was about half of that so that's I think.
The trend we're on overall I think we feel very comfortable that we continue to win.
In gathering deposits.
Where the rates are there is still an incentive for that retail investor day, you know the place that in a term investment so.
You know I think that's the trend we.
We are seeing you know across into those term deposits really every category as we monitor the flow of funds. You know really every category of deposits are flowing in there, but I think important to call out about half of that growth is coming from external deposit. So again that strength of the platform to be able to gather those deposits.
Okay I'm going to ask you on the asset side I think you've oh, they didn't know that the intense competition on.
On mortgages and mortgage spreads in particular I Wonder if you could just share how mortgage spreads were in the quarter compared to I don't know recent recent quarters.
And then I don't know if this is a stat that you could share with us a meal, but you know if you had to think about your stock.
Of your mortgage book between kind of existing mortgages and.
Kind of net new mortgages, if you are actually seeing.
An improvement in D. L T V F one versus the other or.
Maybe put differently are we seeing faster pay downs from savings on existing debt.
Soccer mortgages. Thank you.
Sure. So I'll I'll I'll start with the profitability question or the margin question on mortgages.
Obviously mortgage is a key relationship product for us, but you know we do price our mortgages to make sure. We're meeting hurdle I think you've heard that in the prepared comments off the top.
Despite the competition that there was just that the rapid.
Volatility in swaps has impacted mortgages I think across the street.
You said that the market is competitive.
But we do look at it and expect you know some some normalization as we saw that volatility and swaps start to abate when we look at it overall in terms of profitability. We do look at the levers we have in the short term and the long term and I think we feel very confident that we have lever is over the medium term, if we need to pull them.
To manage the profitability there in terms of your second question around <unk>.
LTV in pay Downs, we are seeing I'd say some.
Trends, there where your clients are saying you know I'm gonna make some lump sum payments come renewal to take down the impact of those that payment shock.
And then on Ltvs I'd say at origination we are seeing I'd say, a slight decrease of ltvs at origination, but not something I would say worth calling out the portfolio overall.
Okay. Thank you.
Thank you.
The following question is from Doug Young from Desjardins Capital markets. Please go ahead.
Hi, good morning, maybe misreading, it but a big.
Big Picture question, you talked a bit about interest rates and the impact at the beginning of your comments like can you talk about the key impacts on royal's results say nims or credit or whatever metric you want to talk about it from a higher for longer rate environment and.
Generally it would impact more positive as the impact neutral negative just love to hear your thoughts I get this question a lot of love to hear your thoughts on this.
Yeah. Thank you for that question and it was an important part of the overall economic construct of trying to forecast what type of lending that you might have and.
No well, Canada differs from the United States and the construct of higher for longer and if you look at you know the U S style mortgage when you have so many U S mortgage holders who are in 30 year fixed opening mortgages. It gives them enormous flexibility in times of rising rates and persistently high rates.
Those those interest yields that they're paying their mortgage or kept low and they have disposable income to spend in the U S economy, and you're seeing why the U S economy, such as persistent inflation challenge more so than Canada.
The reverse is true in Canada, because we have five year terms for a five year terms, we reprice that the amount of disposable income that's being pulled into debt servicing of mortgages slows the Canadian economy down more quickly, which is why Canada is a little bit ahead of the curve in most western countries and getting inflation under control.
Paul.
But going forward the period of time that the bank of Canada has to hold at these rates then to make sure. We've brought inflation down to our targets is critical as you know we have the industry has a significant portion of mortgages maturing in 'twenty four 'twenty five the rate resets if rates hold will pull more disposable income out of the economy and slow it.
Even faster so it's it's hard to predict how much spending will slow we're starting to see spend slow right. Now. So it's important to contrast, a bit the two economies and the amount of disposable income that will go to service mortgages, given the structure of the industry and therefore.
For that reason for business investment and community, it's more important for Canada to start easing.
Then it is for the U S for them for those factors. So we watch closely our inflation rates are coming down core inflation rates are coming down nicely.
And if we can start to ease in 2024, that's going to really help the economy get through this to a soft landing.
Yeah.
It does I'm worried I'm more interested in how you think that kind of flows through your results in I'm sure you get these questions internally and from the board and whatnot, but I'm just curious as to you know if.
If we don't have that easy you know what types of pressures like you know obviously, there's benefits in certain aspects of your business. There is pressures in other like.
What's the ultimate impact on your business, if we stay higher for longer isn't more positive neutral or negative and.
That's kind of where I was hoping to go yeah, maybe I'll ask dean to jump in as well, but certainly the focus is on medium to longer term right. So we're not looking so much at the short term rates. We are looking for how market expects rates to evolve. So we set our mortgage rates off the swap curves in our five year curse and four year curves and therefore.
Mark is expecting inflation to stay a bit higher and therefore, we've seen rates go up recently in both markets and therefore, how has that expectation comes off.
It will certainly help clients deal with the mortgage resets to Dean's point as the rates have gone up its helped our plausible obviously and the carry on or deposit book and the truckers aren't deposit book and it's part of a big part of the story of the NIM increase so and.
And we're trying to say how do you balance short term gain from the strengthening deposit book versus no difficulties your clients could experience on the credit side with higher rates and as a banker constantly balancing those two areas. The other area that I'll comment on and it's Nadeem, that's important to understand our asset betas, so I referenced asset.
Adas in a U S regional banking U S regional banks have done a better job.
Canada, and passing on cost increases to customers through higher asset betas, the intense competition that Neil referenced in the Canadian market that we.
Unable and in many cases to pass on some of these higher asset the deposit betas through asset betas, including.
In the mortgage market.
Starting to see some improvement along there as we're able to pass on some of these heightened costs from movement into Gic's, but the U S is ahead of us and in balancing higher deposit betas with higher asset betas, and we're hopeful Canada will follow that trend as well and that will help our results as we pass on the higher cost that we've talked about over the last.
Two or three quarters with that I'll hand, it to Nadine important construct yeah. No. Thank you I think one of the things just to point out in terms of when you look at it when we specifically speak to interest rate sensitivity. We've outlined on slide 26, we do benefit from increases in interest rates. So part of what we've been talking about the expansion in our NIM this quarter.
Order around that structural deposit base as rates continue to stay high or if it's just high or continue to go higher you'll continue to get that benefit a latent benefit coming through on your on your structural deposit base as it relates to them the margin expansion there and as Neil pointed out you know to the extent that are from the asset side of things.
So, we're managing and focusing on our margins there you'll continue to see that overall margin expansion for the retail bank I think some of the other areas that it factors into he's talked about Dave mentioned on the we've got another opposite side as it relates to the U S construct and the question really is based on your mix in the U S are you.
We're able to benefit from that asset sensitivity and in city National we are close on an asset sensitivity basis now the deposit betas have been rising, but as we become more sensitive from an interest rate standpoint on the liability side, we will continue to be able to capture it on on the asset side is.
Well, so we do expect for particularly our core banking and that they will benefit on the interest rates you can talk a bit more about what impact you've already seen inflation baked into our cost base and so I think it's really going to be a net net benefit minus the impact for society.
Thanks, John .
Great color. Thanks.
Thank you.
Following question is from John Aiken from Barclays. Please go ahead.
Good morning, Graeme wanted to losing nitpicking on commercial real estate to others, but I'm on slide 33, you go through the the past due delinquencies in Canadian banking.
Not surprising we're seeing personal start to uptick, but a little bit a little bit unusual was the decline that we saw we've seen in credit cards over the last couple of quarters can you talk to that is this just noise in the in the system or is there something fundamentally different that's happening a curse versus mortgages helocs and other personal lending.
Yeah. Thanks, John for the question.
If there's anything specifically happening in in cards have been cards does have a seasonal effect to it and so you're going to see it a bit ebb and flow through the year, but overall is there kind of what's driving all of US right now is a very strong employment backdrop.
But the unsecured products overall, we do expect those to trend negatively while you see somebody like the personal lending in particular, the RCI product trading where nickleby now is this more rate sensitive directly rate sensitive right. So there is a direct impact that flows through to the consumer why not a news.
Interest rates rise Yo Yo Yo.
That kind of continue to trend that way, we do expect expect cards to trend more negatively as we kind of work our way through this year and into next year because this was unsecured.
White base that we think will be most impacted as we work our way through the cycle.
Thanks, Ron and I and I know that the your U S book is dramatically different than the Canadian book, but are we seeing similar trends in the U S. Delinquencies as we are in Canada.
Are you asking me John on the retail side or just in general yes, no on the retail side. Please we don't really have much of a retail book and in the U S or a retail book in the U S is really tied to kind of a high net worth affluent client base and so it's largely a mortgage book and we really haven't seen any indicators of a.
Negative trends there at all.
Perfect. Thank you.
Thank you.
The following question is from Gabriel Deschaine from National Bank Financial. Please go ahead.
Good morning, and my daughter wanted me to ask if the other non card really helps you get the Taylor Swift.
I'll stick to a couple of questions on the Canadian Bank here.
The deposit flows and we've all seen the improvement there and a stabilization of pricing and mix.
I'm just wondering what are your major competitors is a seems to be playing catch up on G. I see pricing.
And the last couple of months and I'm wondering if that could be at all disruptive to what has been an improving trend.
And then my second question is on the mortgages and correct me, if I'm wrong, but I don't believe you're you know your floating rate fixed payment mortgages negatively amortize I'm wondering you know if that is correct is there an accounting or capital impact because.
I'm trying to simplify things.
Those borrowers aren't actually paying you as much as they should have Uh huh.
You know.
It should otherwise be negatively amortizing.
Yeah, so listen I'll jump in and maybe take the questions in sequence. So the first one is yes. Your daughter is correct yeah.
The program does gets you the ability to get in the queue to get Taylor Swift tickets.
And in terms of in terms of the GIC pricing yeah their husband I'd say.
Competitive intensity has ticked up there I think there to your point there has been one competitor, who whose jump back in but I think you'd see you see strong competitive pressures across the board, but I think prices one there's only one side of it and just having the access and the sales force capability in the platform to.
To reach those depositors as.
It's a real differentiator and we feel quite bullish about our ability to continue to win there yeah I've seen overall market share increases you know for the last 12 months in the GIC space and so I think we're feeling quite quite strong there in terms of.
Your question on on mortgages.
The the.
Our variable rate mortgages are sorry, our variable rate mortgages do not negatively amortize.
So that that is a contract we have so in term I hopefully that clarifies that there are different concepts across the street, but we don't do that the other thing probably to keep in mind I had mentioned.
In the previous question or GIC.
Flow the important part there is also this that the new flow of clients that are GIC product is pulling in that platform. So we do also get a new client.
From that Gee I see our origination.
Just to follow up on the negative so if it did where you would see is the the loan balances would grow.
You know the excess payment, but that you're not receiving a I'm just there's there's no accounting or capital impact for your particular product right.
Just to be clear the reason it doesn't go negative amortizing as the client actually has their payment recess, okay alright.
Yeah.
Yeah.
Ill take that question. Thank you.
Following question is from many Roman <unk> from Scotiabank.
Please go ahead, I, just want to remind participants to limit.
Yourself to one question. Please go ahead.
So the question I have is just for Neil going back to the GIC trend that's.
It's improving or where that growth is slowing just trying to better understand what.
What was driving that from a high level perspective is it just that the.
Clients that have moved money of I've moved it already and so that's that's the fundamental question of whether there's a risk that changes if the rate environment continues to move higher is there still a risk here that you could see a reacceleration.
Yeah. Thanks for the question Yeah, I think there's a couple of factors I think to your point in terms of the if you look at this.
We do monitor flows from the different products. If you look at for example in the core checking account I think that would be one where you know we started to see a softening of balances there and I think that rate environment has now been high for quite a while and if you wanted to make that that swap I think a lot of that has already happened. We also see as you break down that category.
Where do we see the movement and it is coming from individuals with very high balances over $100000. So you know that I think is probably dissipated I think the other trend is just around you know confidence in terms of the retail investor and you know we had been seeing you know negative net sales in our mutual fund platform and that is I think.
Really gotten to the point, where you know we're about flat so as that confidence.
And the retail investor gets that money off the sidelines and decided to put it back into the market I would say that would be the other trend.
And then maybe I'll jump in it's Dave just to build on that we're still as we look at how customers in the U S and Canada are keeping core balances and there still is you know the average balance across most of our customer segments are still higher than pre pandemic. So while growth is stopped we still see.
<unk> for a number of reasons, one safety and security just to yeah to the shocks that we've been through there is a conservatism built in there inflation whatever it happens to be consumers are still carrying in Canada with 19, 20% higher average balances and so predicting that Ah is important in the U S.
When you look at the ratio of noninterest bearing balances to total balances historically, it's been about 15% that ratio is up near 25%. So U S consumers are carrying.
Significant surplus liquidity in their core balances as well, albeit coming down more quickly in the U S and Canada, where it's flat. So there still is that surplus savings concept that gives you a cushion and a downturn in our ability to service debt, even when they're shocks to your personal situation, but also has that.
Question, two how does that money move back into mutual funds and the GIC has to stay on the court a checking.
Checking account all of those which we're all we're trying to predict but it is important to understand that concept.
Thanks for that Dave.
Thank you.
Following question is from Brian <unk> from Bank of America. Please go ahead.
Good morning.
I guess, maybe nadeem if he could just spend some time on expenses. So the slide 12 is extremely helpful.
In terms of the walk to the 7.861 billion this quarter.
We think about the actions that you laid out in Q4 Q1, and then do you have any chance, we see Canada coming up in the first calendar quarter next year just talk to us.
How you are thinking about expenses grew up.
Going forward and the likelihood of driving positive operating leverage I think what I'm struggling with is should we see that seven point it actually dipped lower all else equal as we think about 'twenty four and then he says we see Canada closures or is there still some more.
Oh, what pushed that number.
Thanks for the question Ebrahim, Yeah, very important conversations so we've been very vigilant in UC and on slide 13, where we started to break down some of the actions we've been taking since we had our conversation I on the call last quarter I.
We are not done we are moving forward as we indicated in Q4 to further reduce our head count by the 1% to 2%, obviously theres going to be some severance cost that comes with that in the fourth quarter and so youre going to start to see the benefits of that run rate pushed through into 'twenty 'twenty four.
We are looking to continue to moderate on our discretionary expense and you saw that come down in terms of the increase in Q.
Q3, and then we're going to look to do that more as we go into 'twenty 'twenty four as well and we're going to evaluate where we're at from a from a head count and look at where we can address our structural cost base more explicitly as well into 'twenty 'twenty four so the expectation is that we are going to look to slow down.
Secondly, our growth in Nia into next year, just coupled with the actions we've been taking to date as well as what we're planning on a go forward basis.
And there's probably three agency obviously, we've been we've been aligning our cost base and lead outlined in terms of the the $1 billion as part of the integration there.
Yeah.
Understood and just as a follow up when you think about operating leverage was the response to the earlier question that we should see the Canadian NIM drift higher in this backdrop, if the bank of Canada, whose lips.
Correct, Yeah, as we start to seeing the benefits of that structural deposit base and the rates continuing to persist up marring any other shifts in our mix we've been discussing.
Thank you.
Thank you. Following question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning, So I wanted to I want to continue with the interest rate conversation a little bit of a different angle versus doug's question because it is an important one.
This is where you're heading into 2024 I think the market expectation is for central banks, both in Canada, and the U S to reduce rates, which traditionally it would be a negative I think on NII is there anything different in this scenario just because of the dynamics we've seen over the last.
Six nine months that might mean central bank rate cuts are less of a negative than you've historically seen.
Yeah.
I I think he wanted to focus again on what we've seen from the rising interest rates to date and the latent benefit that we continue to get on our margin expansion. When we talk about interest rate decreases and leads we referenced the sensitivity there that's in an immediate parallel shock are in.
The curve overall, so we continue to benefit from the the rates that we've already seen rising that we managed our interest rate exposure, while we are exposed to a drop in interest rates.
We will that will happen over time, and we mitigate that through through our hedges I would say that the other benefits associated with the drop in interest rates really will be related to refinancing on the mortgage book and then potentially releasing some of the pressure on the refinancing there for our customer base.
So if I understand you correctly you Nadeem then.
Our central bank rate reductions in 2024, if the long end of the curve stays where it is is not necessarily that much of our NII earnings negative.
Correct to you you can tell us on our sensitivity that particularly for Canadian banking I'm more of their own interest rate sensitivity is on the longer end of the past two years, yes got it okay I'll leave it there. Thank you.
Thank you.
The following question is from Mario Mendonca from TD Securities. Please go ahead good morning.
David.
Go through your presentation. It appears that the steps the bank is taking to address expenses.
Incremental.
In my view like taking FTE down another one or two per cent talked about marketing and travel.
That's my impression from the outside looking in it seems very incremental and when.
Part of the reason why I'm offering that is when you look at city national and the business isn't profitable anymore.
She paid over $5 billion for 2015 didn't make any money. This quarter. So it seems like the issues are sort of they're much bigger than can be addressed by <unk>.
And incremental move on expenses, So I guess, what I'm asking here is is there is there something in place for a more drastic move to take expenses down to address city.
City National for example, or just the bank as a whole I mean do you do you agree with me that the step sorry incremental.
Yeah, I'll start and then dean can fill in so the overall FTE reduction.
You know when you're you're a regulated institution, you're a big bank takes a while to get all of the regulatory approvals in place to move forward for one two I agree. It's a F T reduction as a component of an overall expense reduction exercise that is much more significant so as we target a much slower growth in Q4 and into next.
Next year, it's because of all the actions we're taking on all the other discretionary items that we haven't kind of outlined in the slide. So it is part of a bigger program and a more ambitious program that you'll hear more from us over the coming quarter.
So is it fair F T.
First part through normal attrition and just slowing things down we have accelerating that in in Q4 with our approvals in place to do that and we'll continue to look at that don't forget we still have to manage one of the most complex transitions with HSBC next year and we're carrying extra in.
You have to do that so that's kind of the the macro story that yes. It's part of a larger cost reduction program is designed to materially impact are our cost trajectory. So don't just look at the F. T component of that city National everything went against US this quarter.
In city National from credit loss on a real estate item that.
The Grand reference to the significant impact of Oh as deposit betas on the business and S. H L. P borrowings to rising costs to meet you know all kinds of expectations. So.
That business will benefit from from asset repricing.
Fairly significantly over the coming quarters, a year, so that will churn at this business is well below our expectations for this year.
And it's been a drastic kind of turn since Oh, the financial challenges in the U S banking system in March where liquidity ran off and all all regional banks are facing very similar NIM.
Decreases challenges on expenses and others. So we do have a program to that on the expense side. We are moving forward with that and you know you'll see us evolve.
Positive Lee.
Performance of city National.
Just one quick thing on the Basel III end game.
You've kind of described it as almost a negative for the bank that these higher capital requirements could impact the bank, but my impression was that.
It could affect U S banks, but that our Canadian banks as intermediate I guess their I guess their intermediate holding companies might be almost advantaged by that what's what's your take that as Basel III and gave a negative to our to the Canadian banks in the U S.
Thank you mayor I'll I'll respond to that you're you're correct. It is not an AEP and impact for RBC more broadly as a result, the fact that we obviously are managed under asking from a regulatory capital standpoint, I think it may be a question more around how how are you funding and in the U S or is it really.
To our legal entity there in order to make sure that our capital ratios et cetera, but it's quite a long implementation timeline and I think theres a lot of discussions they're still going to be had as it relates to ensuring that from a U S standpoint, either don't feel that they are anyway unduly penalized versus the rest of the globe. So I think it's gonna be a bit of a long.
[noise] implementation.
For for Canada for RBC in particular would not impact us from a regulated perspective.
Yeah.
Thank you. Our following question is from Nomura shocks from Cormack Securities. Please go ahead.
Yeah. Thanks, I appreciate the additional slides on ground.
Growth.
Thinking about that 1% to 2% FTE reduction for next quarter, how should we think about that impacting human resource cost because.
This quarter after you dropped 1% sequential but these human resource costs, which includes your salaries and variable costs. So group.
4% sequentially. So is there I think the messaging isn't there's a lagged impact because of higher severance costs do I have that right.
And when can we see the benefits of that.
So correct, Laura I think in terms of the the head count reduction that you saw in this quarter to Dave's comment. It was primarily manage through attrition so that will start to play.
Play out one quarter's impact, it's not going to be a significant you'll start to see that play out more in Q4 related to the 1% to 2%. We will have severance that would overwhelm any benefit as it relates to an actual reduction in salaries in the fourth quarter. So the run rate benefit will that start to persist in Q1 of 'twenty 'twenty four.
Okay. So we're gonna see more of an impact as we move forward into next year I think that's that's correct.
And then you know just following on that more broadly I think you guys are clear and suggest in Q3 would be a translational corner and your your actions to reduce expense growth, but how should we think about Q4, because there is there anything you guys are doing to limit the seasonal bump we typically think of them in Q4.
Yes, I mean, there are things that obviously, you're gonna come in play from a timing standpoint in Q4 that we will.
Not being able to avoid however, we are very focused on our spend and particularly our discretionary spend like sometimes you do see tick up in the fourth quarter. There are some types of fees example, as well as some marketing that may come through but we are focused on reducing our overall growth trajectory in the fourth quarter based on these actions.
Taken to date and you will expect to see that come down to more of the mid single digits and a growth trajectory.
Thank you.
Thank you.
Once again, we ask that you limit yourself to one question and then come back on the queue.
Our following question is from Nigel D'souza from Veritas investment Research. Please go ahead.
Thank you good morning, I wanted to circle back on city National and maybe get some more insights on the deposit trends when I look at the loan to deposit ratio. That's moved up substantially over the last few years clauses are pretty much back to where they were in 2021 by you alone.
Increased I'm trying to get a sense of the run way here for that mix to shift could you give us a sense of how much noninterest bearing deposits are remaining.
In terms of the mix at city National and is there a need to continue to offer higher interest rates on interest bearing deposits too.
The liquidity.
City National given that you're going to deposit ratio is much higher.
Higher.
Thank you for the question. So in terms of the deposit levels. Overall, we have seen a stability to a slight increase in our deposit which is pleasant to see that we're still managing to hold your right that what we're seeing is the mix shift mix I mean, when we're looking at it from a noninterest bearing that has come down from Q1 at 40.
5% to 37%. So that's basically giving you where that all of that increase in data is causing and the compression in our NIM overall, we have been taking actions to rebalance some of the the mix with the rights of our deposits you bring in more of our sweep deposit balance which comes at a lower cost than what you've seen some of the inquiry.
As it relates to D. A C D S and as you've seen that some of the our loan growth has slowed down. So we expect that to continue and be able to manage our funding levels overall with not having to go into higher S. H L. B funding going forward.
Okay. So fair to say that you don't have to give up some margin there to maintain.
Let me say that.
We've given up margin already and the trajectory that we're looking to improve that going forward as we've been bringing in some of the more lower.
Lower cost relative lower cost deposits and the sweep balances, although they are high beta, but they're lower cost relative to some of the increases we've seen.
2023.
Yeah, that's it for me thank you.
Thank you the.
Following question is from Sohrab <unk>.
<unk> from BMO capital markets. Please go ahead.
Hey, Thanks for squeezing one last one for me.
I just looked at the last 40 quarters anyway.
The effective tax rate on a tab adjusted at the total bank level I don't think that's ever been below 20%.
How would you like us to model this over the next.
A few quarters.
I didn't realize you think they could go so happy you got your last question in there somewhere at a in terms of the the tax rate what I can tell you from a guidance standpoint is that you can see that most of it was driven off of our capital markets. We do expect this to persist Ah in into into Q4, I would say as it relates to going for.
Forward, you can probably keep it in that a 19% to 20% range overall for RBC is an effective tax rate.
I appreciate you squeezing thank you.
Thank you that's all the time, we have for questions I would now like to turn the meeting back over to Mr. Mackay.
Thank you operator, and thanks, everyone for your questions just to kind of sum up the quarter I think.
Very strong performance from our customer franchises on on revenue growth as you saw strength of diversification, whether it was in Canada and in our ability to grow our commercial and consumer businesses our wealth businesses.
Combined with their global businesses.
Didn't talk at all in any of the questions about the real strength in capital markets This quarter, particularly in global markets and trading and credit trading was was very very strong we saw good market share gains and in investment banking as well as our advisory businesses are really kicking in and strong corporate banking performance. So I think from that perspective.
You know very strong capital markets operations are fairly strong U S wealth advisory and broker are in.
In the U S as well so those global franchises were very strong and the importance from all the questions on our deposit franchise well. It's U S. Dollar deposits in particular Canadian dollar pauses, how do they move how do consumers behave has a big impact on all banks, including ourselves is a core strength of ours are generally low beta.
And particularly in comparison to peers and that strength has led to NIM expansion very important this quarter and will continue to benefit as a tailwind over the coming quarters and years. So very very important too to talk about that and then I would say balance sheet strength.
Diversification of our balance sheet, the global diversification of our balance sheet customer diversification of our balance sheet.
You saw the strong credit performance in a volatile world and I think continued strong performance and very very excited about HSBC as we move forward and continue to plan for and wait for to hear on approvals, but also planned for a conversion and close.
In the coming quarters. So we feel very good about our customer momentum and what's in store for the coming quarters. Thanks, very much and we look forward to seeing you next quarter.
Thank you.
The conference has now ended please disconnect your lines at this time and we thank you for your participation.
[noise] [noise] well.