Q3 2023 Royal Bank of Canada Earnings Call
With 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 have 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 <unk> 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.
Starting 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 <unk> ratio will remain above 12%. Following the close of the planned HSBC, Canada <unk>.
<unk> in the first calendar quarter of 2024 pending regulatory approvals.
Moving to slide 10.
All 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 results was down one basis point from last quarter as margin expansion in Canadian banking was more than offset by NIM compression and other lines of business.
Onto slide 11, we walk through this quarters 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 laden 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.
Importantly, NIM headwinds associated with the flows from non maturity deposits into Gic's 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.
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 fed rate hikes on city National's 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% to the overall growth in expenses the core drivers of organic expense growth where investments in people and technology.
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 FTE 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 commiserate with the rebound in revenues as well as ongoing technology investments and build out of products.
At city National we continue to make investments in the operational infrastructure and supported the bank's 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 these 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 invest 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 1% to 2% 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 volume 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.
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 conditions.
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 pre tax 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.
Excluding this 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 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.
Over to Graham.
Thank you Dean and good morning, everyone.
Starting on slide 19, I will discuss our loans is in the context of the macroeconomic environment.
As Dave noted earlier during the quarter, we sold labor market start to soften.
However, unemployment rates remain exceptionally low which was contributed to persistent consumer demand economic growth and inflation.
Accordingly, with central banks continue to tighten monetary policy the markets were local in completing any higher for longer interest rate environment.
With a backdrop related provisions on performing loans for the fifth consecutive quarter.
This quarter's provisions reflect increasing levels of delinquencies include the AUM groups.
Leading this growth were more pessimistic scenarios with ongoing portfolio growth.
Provisions on performing loans were predominantly 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 was a negative drivers were offset by an improvement <unk> forecasts for housing prices.
In total our allowances for credit loss 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.
While provisions continue to normalize from pandemic lows, 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 nobu levels of consumer deposits.
We do expect credit trends and refill to weaken because labor market soften the more clients were impacted by higher mortgage agreements.
As credit trends will be led by credit cards and unsecured lines of credit are consistent with the traditional critics cycle.
A couple of <unk> 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 on the commercial real estate sector and alerts provision on a loan in the transportation sector.
In wealth management provisions were also higher this quarter and included a larger provision at city national on a commercial real estate loan secured by an office property.
We also 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 crude oil environment.
For example, the larger provision in couple of markets this quarter with a loan secured by multifamily properties.
Commercial real estate continues to perform very well in the aggregate.
In this instance, the properties would only impacted by the higher rate environment, but also by elevated unemployment rates are negative socioeconomic teams in the region.
We are now seeing the impairments or losses, we have been expecting in the sector.
We remain comfortable with our commercial real estate exposure.
As I noted last quarter the portfolio was well diversified as it has 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 we benefit from the value of the properties hold tangible collateral and.
And finally losses are expected to be manageable relative to the size of the portfolio and the portfolio is well provisioned.
Over the last several quarters, we have significantly increased reserves on performing loans and our first million 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.
This 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 over a <unk> 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 OLED consumer deposits.
Some larger impairments during the quarter, our <unk> and PCL ratios remain below long term averages are like the size and diversification of our loan portfolios.
We're still expected expecting PCL on impaired loans between 20 to 25 basis points for the year consistent with the guidance we provided last fall.
Looking forward the impact 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, we're creating a soft landing for the economy.
We continue to proactively manage risk through the cycle and we remain well capitalized with the implausible that more severe macroeconomic outcomes and with that operator, let's open the lines for Q&A.
Thank you we will now.
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That will be followed for all participants with just a couple 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 pleasantly surprised by the movement from non interest rates.
To term deposits.
This quarter, I guess, I'm, 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.
We 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 are yes.
Last quarter, we had commented that the GIC book on for personal deposits have grown $15 billion quarter over quarter. So you heard may be 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 and gathering deposits.
Where the rates are there is still an incentive for that retail investor the place that in a term investment so.
I think that's the trend.
We are seeing across into those term deposits really every category as we monitor the flow of funds 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 deposits. So again that strength of the platform to be able to gather those deposits.
Okay second tasks on the asset side I think you've made.
Maybe even noticed the intense competition on the.
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.
This is a stat that you could share with us a meal, but you know if you had to think about the stock.
Of your mortgage book between kind of existing mortgages and.
Kind of net new mortgages, if you're actually seeing.
An improvement in the LTV of one versus the other or.
Maybe put differently are we seeing faster pay downs from savings on existing.
Stock of mortgages.
Sure. So I'll start with the profitability question or the margin question on mortgages.
Obviously mortgages with key relationship product for us, but we.
We do price our mortgages to make sure. We're meeting hurdle I think you've heard that in the prepared comments off the path.
Despite the competition there was just the rapid.
Volatility in swaps has impacted mortgages I think across the street.
We said that the market is competitive.
But we do look at it and expect 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 levered over the medium term, if we need to pull them.
To manage the profitability there in terms of your second question around.
LTV in pay Downs, we are seeing I'd say some <unk>.
Trends, there where clients are saying I'm going to 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.
Good morning maintenance regime, but.
Big Picture question, you talked a bit about interest rates and the impact at the beginning of your comments.
Can you talk about the key impacts on royal's results say nims or credit or whatever metric you want to talk about from a higher for longer rate environment.
Generally the impact more positive impact neutral negative just love to hear your thoughts I get this question a lot of love to hear your thoughts on this.
Yes. Thank you for that question an important part of the overall economic construct of trying to forecast what type of lending you might have.
No were Canada differs from the United States and the construct of higher for longer and if you look at the U S style mortgage when you have so many U S mortgage holders who are in 30 year fixed open 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 Youre 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 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.
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 slowed.
Even faster so 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.
It isn't for the U S for those factors. So we watch closely 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.
<unk>.
It does I'm, where I'm more interested in how you think that kind of flows through your results in I'm sure you get these questions internally in <unk>.
The board and whatnot, but I'm just curious as to if we don't have that easing.
Types of pressures.
Obviously, there's benefits in certain aspects of your business there is pressures in other like what's.
What's the ultimate impact on your business, if we stayed higher for longer isn't more positive neutral or negative.
That's kind of where I was hoping to go yes, maybe I'll ask nadine to jump in as well, but certainly the focus is on medium to longer term rates. 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.
<unk> five year curves and four year curves and therefore market's expecting inflation to stay a bit higher and therefore, we've seen rates go up recently in both markets and therefore, how that expectation comes off.
We will certainly help clients deal with the mortgage REIT Deane.
Dean's point as the rates have gone up its helped our plausible obviously and the carry in our deposit book and the truckers are deposit book and it's part of a big part of the story of the NIM increase so and where.
Trying to say, how do you balance short term gain from the strength of your deposit book versus difficulties your clients could experience on the credit side with higher rates.
As a banker constantly balancing.
Those two areas the other area that I'll comment on editor Dean that's important to understand our asset betas. So I referenced asset betas in the U S regional banking in the U S. Regional banks have done a better job, Canada and passing on the cost increases to customers through higher asset betas, the intense competition that Neil Rep.
<unk> in the Canadian market that we know.
Unable and in many cases to pass on some of these higher asset.
Deposit betas through asset betas, including.
And the mortgage market.
Starting to see some improvement along there as we're able to pass on some of these heightened costs from the movement into Gic's, but the U S is ahead of us 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.
Typically speak to interest rate sensitivity as 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 around that structural deposit base as rates continue to stay high or persist high or continue to go higher you will continue to get that benefit late in <unk>.
<unk> coming through on your on your structural deposit base as it relates to the margin expansion, there and as Neil pointed out to the extent that from the asset side of things that 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 is.
It factors into he's talked about Dave mentioned on the with 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 able to benefit from that asset sensitivity and in city National we are close on an asset sensitivity basis now the deposit base.
As had been rising, but as we become more.
Sensitive from an interest rate standpoint on the liability side will continue to be able to capture it on on the asset side as 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 impacts you've already seen inflation baked into our cost base. So.
So I think it's really going to be a net net benefit minus the impact of our society.
Thanks, John .
I appreciate the color. Thanks.
Thank you. Our following question is from John Aiken from Barclays. Please go ahead.
Good morning, Graeme wanted to leave the nitpicking on commercial real estate to others.
On Slide 33, you go through the.
The past due delinquencies in Canadian banking.
And not surprising we're seeing personal start to uptick, but a little bit.
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 is happening occurs versus mortgages helocs and other personal lending.
Yes, Thanks, John for the question.
I wouldn't say, there's anything specifically happening in cards have been cards does have a seasonal effect to it and so youre going to see it 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 something like the personal lending and particularly with the <unk> product trending more negatively now as its more rate sensitive.
Directly rate sensitive right. So through the direct impact that flows through to the consumer on that of news.
As interest rates rise.
Youll see that kind of continue to trend up we do expect expect cards to trend negatively as we kind of work our way through this year and into next year because this was unsecured.
Client base that we think will be most impacted as we work our way through the cycle.
Thanks, Ron and I know that the 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 on the retail side. Please.
We don't really have much of a retail book 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 any negative trends there at all.
Perfect. Thank you.
Thank you.
Following question is from Gabriel <unk> from National Bank Financial Please go ahead.
Hi, good morning.
Daughter wanted me to ask incurred really helps you get the feeling is with pulse.
Thanks to a couple of questions on the Canadian Bank.
The deposit flows and we've all seen the improvement there and a stabilization of pricing and mix.
Just wondering one of your major competitors seems to be playing catch up on GIC pricing.
And the last couple of months and I'm wondering if that could be at all disruptive to.
Has it 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.
You know your floating rate fixed payment mortgages negatively amortize them.
I'm wondering 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.
But 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 on that 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, yes, there has been I'd say <unk>.
<unk> intensity has picked up there I think to your point there has been one competitor, who whose jump back in but I think you'd see strong competitive pressures across the board.
But I think prices one is only one side of it and just having the access and the sales force capability in the platform to reach.
It reached those depositors as.
As a real differentiator and we feel quite bullish about our ability to continue to win there.
Overall market share increases.
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.
Our variable rate mortgages do not negatively amortize.
So that that is a contract we have.
So in term of hopefully that clarifies that there are different contracts across the street, but we don't do that the other thing probably to keep in mind I had mentioned in.
In the previous question our GIC.
Flow the important part there is also this new flow of clients that are GIC product is pulling in that platform. So we do also get a new client.
From that GIC origination.
A follow up on the negative volume or so.
If it did.
See.
The loan balances would grow.
The excess.
Payment.
There is.
No accounting or capital impact for your particular product right.
And then just to be clear.
The reason it doesn't go negative amortizing as the client actually has their payment read that okay, alright that makes sense.
Yes.
Yeah.
Ill take that question. Thank you.
<unk> question is from many Goldman from Scotiabank. Please.
Please go ahead.
Once we mined participants to limit you.
Yourself to one question.
Please go ahead.
So the question I have is just for Neil going back to the GIC trend that's that's improving.
That growth is slowing just trying to better understand what.
What was driving that from a high level perspective is it just that.
Clients that have moved money, who have moved it already and.
So that's the fundamental question, whether there's a risk that changes if the rate environment continues to move higher is there still.
Risk here that you could see a reacceleration.
Yes, thanks for the question.
Yes, 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 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 that I think is probably dissipated I think the other trend is just around confidence in terms of the retail investor.
And we had been seeing negative net sales in our mutual fund platform and that is I think really gotten to the point, where we're about flat so as that confidence build in the retail investor get 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.
To build on that we're still as we look at how customers in the U S and Canada.
Keeping core balances and there still is the average balance across most of our customer segments are still higher than pre pandemic. So while growth is stopped we still see customers for a number of reasons, one safety and security just to yes.
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.
As 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 was 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.
It gives you a cushion in a downturn and ability to service debt.
Even when they're shocks to your personal situation, but also has the question how does that money move back into mutual funds and the GIC has to stay on the court.
The account all of those.
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 you could just spend some time on expenses. The slide 12 is extremely helpful.
In terms of the walk to the 7.861 billion this quarter as.
As we think about the actions that you laid out into <unk>.
And then do you have HSBC, Canada coming up in the first calendar quarter next year just talk to us.
How you are thinking about expense growth moving forward and the likelihood of driving positive operating leverage I think what im struggling with is should we see that seven eight actually dipped lower all else equal as we think about 'twenty four and then because we see Canada closures or is there still some more.
Upward push could that number.
Thanks for the question Ebrahim, Yeah, very important conversation. So we've been very vigilant and you see on slide 13, where we started to break down some of the actions we've been taking since we had our conversation.
Our call last quarter.
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, there is 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 2024, we are looking to continue to moderate on our.
Generic expensing 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 2024 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 2024. So the expectation is that we are going to look to slowdown.
Inefficiently or 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 then Tony sorry, HSBC, 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.
Understood and just as a follow up when you think about operating leverage.
In response to the earlier question that we should see the Canadian NIM drift higher in this backdrop, if the bank of Canada holds lips.
Correct, Yes, we start to see the benefits of that structural deposit base and the rates continuing to persist up marring any other shifts in mix we've been discussing.
Thank you.
Thank you.
<unk> question is from Paul Holden from CIBC. Please go ahead.
Thank you and good morning, everyone I want to continue with the interest rate conversation a little bit of a different angle versus doug's question. So there is an important one.
Just as we are heading into 2024, I think the market expectation.
As for Central banks, both in Canada, and the U S to reduce rates, which traditionally 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 or lack of.
The negative than you've historically seen.
I think you 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 we referenced the sensitivity there that's in an immediate parallel shock 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.
Central Bank rate reductions in 2024, if the long end of the curve stays where it is is not necessarily that much of a NII or earnings negative.
Correct to you you can tell us on our sensitivity that particularly for Canadian banking I'm more of an interest rate sensitivity is on the longer end of the career paths two years, yes got it okay I'll leave it there. Thank you.
Thank you.
Following question is from Mario Mendonca from TD Securities. Please go ahead good morning.
David maybe and as I go through your presentation. It appears that the steps the bank is taking to address expenses.
They seem incremental.
In my view, taking FTE down another one or 2% talking 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 but 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 are much bigger than can be addressed by <unk>.
An 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 National for example, or just the bank as a whole I mean do you agree with me that the steps are incremental.
Yeah, I'll start and then Dan can fill in so the overall FTE reduction.
When Youre a regulated institution of your 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 FTE reductions a component of an overall expense reduction exercise thats much more significant so as we target.
Slower growth in Q4 and into next year.
Because of all the actions we're taking on all the other discretionary items that we haven't kind of outlined in the slides. 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 FTE.
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.
I know you to do that so that's kind of the macro story that yes. It's part of a larger cost reduction program is designed to materially impact our cost trajectory. So don't just look at DFT component of that on 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 <unk>.
Deposit betas on the business in <unk> borrowings to rising costs to meet all kinds of expectations. So.
That business will benefit from from asset repricing.
Fairly significantly over the coming quarter year, So that will turn at this business is well below our expectations for this year.
It's been a drastic turn since.
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'll see us.
Paul.
Positively the performance of city National.
One quick thing on the Basel III end game.
You 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.
B almost advantaged by that whats your take that Basel, III and gave a negative to our to the Canadian banks in the U S.
Thank you Mary I'll I'll respond to that.
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 you fund and in the U S. As it relates to our legal entity there in order to make sure that our capital ratio.
It was et cetera.
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 are there and don't feel that they are any way unduly penalized versus the rest of the globe. So I think it's going to be a bit of a long implementation.
For Canada for RBC in particular would not impact us from where we are regulated from that perspective.
Thank you.
Our following question is from Nomura shocks from Cormack Securities. Please go ahead.
Yes. Thanks I appreciate the additional five <unk>.
Just thinking about that 1% to 2% FTE reduction for next quarter, how should we think about that impacting human resource cost because.
This quarter FTE dropped 1% sequential but these human resource costs, which includes your salaries and variable comp some group for.
And 4% sequentially. So is there I think the messaging was that 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 we will start to play.
Play out one quarter's impact, it's not going to be a significantly and 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 2024.
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 just following on that or.
More broadly I think you guys have a clearance, suggesting Q3 would be a translational corner and your actions to reduce expense growth but.
Should we think about Q4, because there is there anything you guys are doing to limit.
Seasonal bump, we typically think of them in Q4.
Yes, I mean, there are things that obviously, you're going to come in play from a timing standpoint in Q4 that we will not.
<unk> not been able to avoid however, we are very focused on our spend and particularly our discretionary spend which 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 we have.
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 Thats moved up substantially over the last few years clauses are pretty much back to where they were in 2021 by you alone.
Increased trying to get a sense of the runway here for that mix to shift could you give us a sense of how much non interest 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 to maintain the liquidity.
City National.
The loan to deposit ratio.
Sure.
Thank you for the question. So in terms of the deposit levels. Overall, we have seen a stability to a slight increase in our deposits, which is pleasant to see that we're still managing to hold youre 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 45.
5% to 37%. So that's basically giving you where that all of that increase in beta is causing and the compression in our NIM overall, we have been taking actions to rebalance some of the the mix was the rates there are deposits to bring in more of our sweep deposit balance which comes at a lower cost than what you've seen some of the increase.
As it relates to the C D S and as you've seen that some of the 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 <unk> funding going forward.
Okay.
You can ask to give up some margin there to maintain its Paul here.
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 <unk>.
<unk> costs relative lower cost deposits in the sweep balances, although they are high beta, but they're lower cost relative to some of the increases we've seen.
2023.
That's it for me thank you.
Thank you.
The following question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Hey, Thanks for squeezing one last one for.
Hey, Deane.
I just looked at the last 40 quarters anyway.
The effective tax rate on a tab adjustments at the total bank level I don't think that's ever been below 20%.
Sure.
How would you like us to model this over the next few.
A few quarters.
I didn't really think so.
Have you got your last question there Sara 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.
Into into Q4, I would say as it relates going forward you can probably keep it in that.
19% to 20% range overall for RBC is an effective tax rate.
I appreciate you squeezing me thank you.
Okay.
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 revenue growth as you saw.
The diversification, whether it was in Canada and in our ability to grow our commercial and consumer businesses our wealth businesses.
And combined with our 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 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.
<unk> very strong capital markets operations.
Really strong U S wealth advisory and broker.
In the U S as well so those global franchises were very strong and the importance from all the questions on our deposit franchise as well as U S. Dollar deposits in particular Canadian dollars pause, it's 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 us.
A tailwind over the coming quarters and years, so very very important too to talk.
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 a 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 the Huron approvals, but also plan for 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.
Yes.
Okay well.
Yeah.