Q4 2023 Royal Bank of Canada Earnings Call
Yeah.
[music].
All participants please standby your conference is now ready to begin.
Good morning, ladies and gentlemen, and welcome to Rbc's conference call for the fourth quarter 2023 financial results.
Please be advised that this call is being recorded.
I would now like to turn the meeting over to assume.
Head of Investor Relations.
Please go ahead Mr <unk>.
Thank you and good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer, Nadine on Chief Financial Officer, and Graeme Hepworth Chief Risk Officer also joining us today for your question, Neil Mclaughlin group head personal and commercial banking Doug Guzman.
Group head wealth management, and insurance and Derek Nelnet 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.
With that I'll turn it over to Dave.
Thank you Austin and good morning, everyone. Thank you for joining US today, we reported fourth quarter earnings.
One 1 billion, we also announced the <unk>.
Our 2% increase in our quarterly dividend and tuning our policy of increasing dividends every other quarter.
Our revenues were up 4% from last year, reflecting the strength of our diversified business model, including market share gains in both investment banking and global markets.
Solid volume growth in Canadian banking and higher fee based revenue from wealth management.
Reported expense growth of 13% year over year was impacted by several factors, which Nadine will speak to later.
Importantly, core expense growth declines of 5% year over year or about 2% sequentially.
This is a trend that underscores our heightened focus on expense control includes higher than normal severance costs.
Our results were also impacted by higher PCL on impaired loans, we added a further $194 million of PCL on performing loans. This quarter, the recognition of the evolving macro environment and more challenging credit conditions.
Our allowance for credit losses now covers three times the stage three PCL that we incurred over the last 12 months.
Looking back at the 2023 fiscal year RBC delivered earnings of nearly $15 billion in a very challenging operating and macro environment.
We met all our medium term objectives, while investing to further strengthen our core businesses.
As part of a regular strategic review, we also simplified our business model by exiting our Investor services franchise in Europe.
We ended the year with a strong CET one ratio of 14, 5% nearly 200 basis points higher than last year.
Furthermore, we generated an ROE of 14% this year or 16% when we consider the capital we're holding had a closing of the proposed acquisition of HSBC, Canada.
We remain confident in our ability to continue meeting our medium term objectives, including delivering a premium Roe.
Of over 16%.
Our balance sheet is diversified by both industry and geography.
Underpinning our all weather franchise, a strong balance sheet combined with our premium ROE enables RBC to create value for our clients and shareholders through the cycle.
This includes growing book value per share by 10% CAGR and the recovery.
Following the global financial crisis from 2012 to 2019 and by similar rate from 2019 to 2020 to join the uncertainty will depends on it.
Before I discuss the strategic initiatives that will drive our next leg of value creation I will provide my perspective on the macro environment, where slowdown in economic activity is already being observed.
The rapid nature size, an accumulation of interest rate hikes is raining and elevated inflation.
Interest rates are having a more immediate impact on our cost of living in Canada relative to the U S. Partly due to the stark difference in the duration of mortgage terms.
Consequently, discretionary consumer spending in Canada as well.
With October marking the largest monthly decline.
Six months.
Higher interest rates are also cooling housing markets across the country with sales to new listings ratio falling to 49% in October.
Furthermore, we are seeing signs of slowing labor markets as evidenced by rising unemployment slowing wage growth and lower job postings.
Also seeing declines in global trade, even before the recent escalation of geopolitical risk.
Following recent peaks in September and October were seeing declines in both yields and oil prices.
Further signs of an economic slowdown.
Given the easing pricing pressures, we believe central banks have reached the end of the tightening cycle and will pivot to rate cuts in 2024, albeit rates are expected to remain higher than pre pandemic levels.
With this context, we expect Canadian mortgage growth will continue to moderate to the low to mid single digits as immigration driven demand more than offset the impact of higher interest rates on the cost of capital.
In our commercial portfolio, 80% of the year over year growth was driven by our strategic focus on doing more with our best existing clients.
We expect relative strength in Canadian commercial lending to continue, particularly in the agriculture auto and supply chain sectors.
Our growing Canadian deposit franchises should continue to provide a foundation to drive premium loan growth, while also providing a latent benefit on their recent trend.
Rising interest rates.
Given market uncertainty, there's a significant amount of cash that can be deployed by our retail and institutional clients and central banks to provide further clarity on the path of lower interest rates.
This in turn should stimulate a broad based recovery in equity and fixed income markets.
Our market sensitive businesses are positioned to benefit from this change in sentiment sentiment.
Increased conviction in equity markets would also be conducive.
To a rebound in M&A deal activity, where we maintain a healthy pipeline and strong client engagement.
We are confident our leading wealth and asset management franchises are well positioned to capture money in motion back towards investment products, resulting from a shift in risk sentiment.
Importantly, we remain committed to prudent cost and underwriting discipline in this uncertain environment, while continuing to invest in our leading client franchises to drive growth.
Our strategic investments in technology, and the client experience over the past several years and we're well positioned to continue creating value.
For the second year in a row RBC ranked in the top three.
Artificial intelligence maturity amongst 50 global financial institutions.
The evident AI index.
While we cannot control the market environment, we have positioned ourselves to succeed.
We remain focused on creating diverse resilient and high RV revenue streams, while adding to our leading deposit base.
I'll start with our leading Canadian banking business.
We had record new to RBC account acquisition this year, including through a newcomer strategy an important client acquisition funnel.
Our partnership with ICR.
Canada has created an attractive banking experience for newcomers attracting 30000, new clients this year, though.
These clients come with new deposits, which provide a stable source of funding for us.
An important factor in clients consolidating their relationship with RBC at a rate that is 50% higher than average.
We will continue to strategically invest in our proprietary sales force.
Innovation distribution channels and privilege assets to deliver a sustainable competitive advantage.
We also remain focused on the proposed acquisition of HSBC, Canada and are well positioned to meet these clients' needs, including multi currency accounts and trade finance will continue to enhance the client experience that rbcs market leading value proposition.
Turning to our wealth management business adviser recruiting remains a key source of growth.
Our leading Canadian wealth management business hard, 40% more competitive recruits last year, resulting in a record year for recruited assets.
Our U S wealth management platform, the six largest wealth adviser in the U S by asset under administration recruited 94 advisors this year driving over $20 billion of expected growth.
Our U S wealth advisory business to become the destination of choice for top talent in the industry because of our strong culture entrepreneurial environment.
Innovation and competitive products.
In the U K the integration of RBC Brewin Dolphin is progressing well with milestone objectives being met this acquisition provides us with deeper scale and what we see is our third hallmark.
Furthermore, we continue to add deposits and lending products to support client needs across our increasingly global wealth management franchise.
We recognized city national operated well below its full potential this year as it absorbed higher commercial PCL continued investments in operational infrastructure and a sector wide increase in funding costs.
Looking forward our focus is on enhancing city national is profitability.
Outsides volume growth over the years building on the relative stability of deposits and retention of clients and advisers through 2020 three.
Accordingly, the quarter this quarter, we enhanced the yield of city National Securities portfolio recognized impairments on certain assets and implemented a cost program, resulting in higher than normal severance.
We've also added.
The strength of the management team, which will increase the focus on several strategic initiatives, including expense management enhanced enhancing the deposit base.
Normalizing for the potential recognition of the FDIC special assessment costs, we anticipate a return to profitability next quarter stepping stone towards a return to more normalized levels of net income in 2025.
Furthermore, as it relates to our broader U S footprint, we are focused on improving the connectivity of our three platforms.
And in this regard we have recently enhanced the mandate of Derek Neltner, Our group head of capital markets to include Accountability for the integrated strategy performance of all our businesses operating in the United States.
Moving to corporate investment banking, where RBC capital markets. Its ninth in the Global League tables, we continue to focus on shifting revenue streams towards higher or are we advisory and origination activity.
We're also building on their best on our investments in people across verticals and geographies to expand our client coverage.
Global markets were looking to build on recent market share gains.
The changes we've made to our organizational structure are increasingly producing results. We're also currently investing in technology to further modernize our infrastructure, including the FX trading arm of our macro business.
We're excited about the opportunity to attract client deposits that are pending launch of our U S cash management business, given our existing corporate banking client relationships and leading credit ratings.
Turning to the insurance segment, which continues to generate high ROE earnings and provides diversification against credit and interest rate risk, we remain focused on sustaining and growing our market leadership in key segments, including increasing harnessing the power of RBC.
In conclusion, we are well positioned entering into fiscal 2024, our balance sheet remains strong.
We're growing our deposit base by attracting new clients and deepening existing client relationships, we have diversified revenue streams across our segments and geographies.
Following a record year of client acquisition, you're focused on welcoming even more clients onto our platforms.
We will continue to deliver on our strategic ambitions, while staying true to our purpose of helping clients thrive and communities prosper.
Our success is built on the strength of our employees and their commitment to serving as a trusted advisors for retail commercial and institutional clients.
I want to personally thank our 94000 colleagues and 17 million plus clients.
Dean over to you.
Thank you, Dave and good morning, everyone.
On Slide 11, we reported earnings per share of $2.90. This quarter adjusted diluted earnings per share of $2 78, and was flat from last year as the benefits of higher rates solid volume growth strong market related revenue and a lower tax rate were largely offset by higher expenses.
And increases in P. C L from low levels a year ago.
I will first highlight the continued strength of our balance sheet before focusing on more detailed drivers of our earnings.
Starting with our strong capital ratios on slide 12.
Our CET one ratio improved to 14, 5% up 40 basis points from last quarter, mainly reflecting internal capital generation net of dividend and benefits of share issuances under the drip.
This was partly offset by unrealized losses on OCI security.
Our W. A growth excluding FX it was largely flat this quarter.
This growth in Canadian banking and capital markets as well as an unfavorable wholesale credit migration was offset by lower loans and the city national and RW way optimization initiatives driven by improvements in data quality and collateral management.
We expect that our CET, one ratios will remain comfortably above 12% following the close of the planned HSBC, Canada transaction pending remaining regulatory approvals.
We do not expect a material impact from the implementation of <unk> 17, or F. R. A T V next quarter.
Furthermore, based on our initial estimates we do not expect our W. A florida to be binding in 'twenty 'twenty four.
We will look to revisit the drip and reintroduction of share buybacks in the second half of the year.
Moving to slide 13.
All bank net interest income was up 4% year over year or up 5%. Excluding trading revenue. These results reflect the benefit from both higher interest rates and higher volumes.
On a sequential basis, all bank NIM, excluding trading was up 12 basis points, reflecting margin expansion in Canadian banking and city national.
Other benefits to all bank NIM were largely offset in non interest income.
On to slide 14.
We will walk through this quarters key drivers of Canadian banking, NIM, which was up another three basis points from last quarter.
Our low beta core deposits generated wider retail deposit spreads as of late and benefit of recent interest rate hikes continues to flow through.
Favorable shift in asset mix, driven by strong growth in credit card balances.
We offset by a shift in deposit mix.
Margins continued to be impacted by the intense competition for mortgages. In addition to increasing competition for term deposit.
Going forward, we continue to expect to see the structural benefits of our ladder deposit portfolio come through as we benefit from continued reinvestment at higher rate.
There are a number of factors, which can alter the magnitude or trajectory of the structural benefit such as the shape of the yield curve or changes in balance sheet mix.
However, we do not believe NIM has peaked in Canadian banking.
Turning to city National.
NIM was up 29 basis points from last quarter, the increase reflected the full quarter benefit of fed rate hikes on city national is asset sensitive balance sheet, an 11 basis point benefit from the intercompany sale of certain city national debt securities as well as lower levels of S. H L B funding.
Looking to next quarter, we expect NIM to continue moving higher as we realize the full quarter benefit of structural balance sheet improvements made last quarter.
Moving to slide 15.
Non interest expenses were up 13% from last year, approximately 6% of this growth was driven by acquisition and integration related costs as well as by macro driven factors, such as FX and share based compensation.
Legal provisions and impairment of other intangible and U S wealth management, including city National also contributed.
Excluding these factors core expense growth decelerated to 5% from 13% last quarter in line with the guidance we provided in Q3.
The largest contributors to core year over year expense growth were higher base salaries and severance costs.
As well as ongoing investments in technology and continued investments in city National's operational infrastructure.
We made progress on our cost reduction strategy incurring bank wide severance of $157 million and delivering on our commitment to reduce all bank FTE by 1% to 2%.
But the majority of the reductions having taken place towards the end of the quarter. We anticipate full run rate savings of 235 million to be realized starting next quarter.
We expect all bank core expense growth to come in the low to mid single digit range in 2024.
Excluded from this guidance is the cost of the FDIC Special assessment, which we estimate at approximately 120 million U S dollars.
Results. This year benefited from a lower effective tax rate, reflecting favorable changes in earnings mix and certain deferred tax adjustments, which were partially offset by the impact of the Canada recovery dividend and at one 5% increase in the Canadian corporate tax rate.
Looking forward, we expect the nine T V effective tax rate to be in the 19% to 21% range in 'twenty 'twenty four.
Moving to our segment performance beginning on slide 16.
Personal and commercial banking reported earnings of $2 1 billion.
Canadian banking pre provision pre tax earnings were up 4% year over year.
Adrian banking net interest income was up 6% from last year due to higher spreads and solid volume growth of 7%.
Non interest income was up 2% year over year as higher client activity contributed to increased service revenue and credit fees.
Operating leverage was flat for the year, including severance taken in the quarter.
Looking forward, we expect Canadian banking operating leverage for 'twenty 'twenty four to come in within our historical 1% to 2% target.
Turning to slide 17 wells.
Wealth management earnings were down 74% from last year, largely reflecting the impact of 380 million of impairments and legal provisions in U S wealth management, including city National.
The segment was also impacted by severance costs and the partial sale of RBC Investor services operation.
We believe the underlying performance of our wealth management advisory and asset management business was solid including strong pre tax margins and return on equity.
And avian in U S wealth management as well as RBC global asset management benefited from higher fee based client assets, reflecting the benefits of market appreciation.
Solid net sales and our wealth management advisory businesses, where in contrast to retail net outflows at RBC Gam in a period, where the Canadian mutual fund industry has experienced approximately $90 billion in net outflows over the last two years.
U S wealth management was impacted by lower sweep deposit revenue and a higher provisions for credit losses at city National.
Turning to slide 18.
Capital markets generated pre provision pretax earnings of 886 million, bringing total P. P. P. T for the year to $4 5 billion. This was in line with our expectations of $1 1 billion a P. P. P T earnings per quarter in a normalized environment.
Results this quarter reflected record fourth quarter revenue underpinned by market share gains across investment banking and global markets.
Corporate and investment banking revenue was up 9% from last year, reflecting higher loan syndication activity and debt originations in the U S.
Global markets revenue was down 5% from last year, reflecting lower equity in FX trading revenue, partly offset by improved fixed income client flow.
Activity slowed near the end of the quarter, reflecting unfavorable market conditions, which largely recovered in November.
Turning to insurance on slide 19.
Net income increased to $289 million up 8% from a year ago, mainly due to improved claims experience and business growth across most products.
Offset by lower investment related experience.
We expect the upcoming implementation of the Ifr 17 accounting regime to result in a change in the timing of earnings recognition.
While earnings will remain neutral over the life of the given insurance contract reported earnings and earnings volatility are expected to be lower in the near term we.
We will provide further updates next quarter.
To conclude despite a number of headwinds we generated an ROE of 15% this quarter underpinned by the strength of our leading Canadian deposit franchise, our strong balance sheet and the diversification benefits of our various revenue streams.
We made good progress on our commitment to rationalize expenses, and we will remain diligent and containing costs through 'twenty 'twenty four but.
With that I'll turn it over to Graeme.
Thank you Nate and good morning, everyone.
Starting on slide 21, we will discuss our allowances in the context of the macroeconomic environment.
As Dave noted earlier high interest higher interest rates are causing growth to slow and unemployment rates to soften.
Americans don't believe the rate hiking cycle has concluded.
Interest rates have been elevated for over a year and clinical it comes with normalized from pandemic close.
So we can see rates and impairments are at or above 2019 levels insolvencies have been steadily climbing.
In our retail portfolio higher interest rates and rising unemployment for now the primary drivers of credit outcomes.
Clients, who have yet to be impacted by a higher rates such as fixed rate mortgage borrowers continued to perform well with stable delinquency rates and elevated levels of savings.
Over clients, who have experienced a material increase in their mortgage payment.
We're likely to be showing signs of stress with increasing delinquency rates and decreasing savings levels.
Today less than a third of mortgage clients have seen their payments impacted by higher rates. The majority of mortgage renewals still over a year away.
As we detailed on slide 34 over half of our Canadian banking residential mortgage balances renew in 2025 or 2026.
The fixed rate borrowers in those cohorts currently paying an average rate of three 1% and three 5% respectively.
There's more people renew at higher rates and more of their income is used to service mortgage debt, we expect delinquencies and losses to increase in the retail portfolio.
I'm wondering if mortgage exposure benefits from the strong credit quality for our clients significant borrower equity Andrew close capacity will make higher payments for such higher rates and rising unemployment are expected to have the largest impact on credit cards and unsecured lines of credit consistent with sort of traditional credit cycle.
In our wholesale portfolio higher interest rates up north and the main driver of credit deterioration.
Higher rates hub exacerbated headwinds stemming from rising cost and change in consumer spending and behavioral patterns.
This quarter in our wholesale portfolio, we continued to see a growing number of credit downgrades increasingly watch list exposure and more accounts being transferred to our special Loons team.
With this backdrop, we added 194 million of provisions on performing loans this quarter.
Provisions were predominantly commercial real estate loan portfolio and credit card and personal loans in the retail portfolio.
We have now added provisions on performing loans for six consecutive quarters, increasing our allowance on performing loans by 33% over that period.
We are prudently provisioned as Dave noted earlier, our total allowance for credit losses on loans of $5 3 billion almost three times, our 2023 PCL on impaired loans.
Moving to slide 22 <unk>.
Provisions on impaired loans were up $40 million or two basis points relative to last quarter consistent with our expectations.
Our retail portfolio provisions on impaired loans were higher across most products led by credit cards and personal loans.
Our retail stage three PCL ratio of 21 basis points remains well below average historical loss rate of 30 basis points, but the portfolio continues to benefit from relatively low unemployment rates and strong client savings.
However, as I noted earlier, we expect Codell comes to deteriorate as more clients become impacted by higher interest rates overtime as unemployment rates continue to increase.
They're also portfolios provisions on impaired loans were up $17 million or two basis points quarter over quarter.
During the quarter, 25% of our wholesale provisions were in commercial real estate taken on previously impaired loans.
This quarter, there was only one newly impaired commercial real estate loan and we expect to be fully repaid on alone with losses absorbed by equity and subordinated debt holders.
We're broadly recoveries of impaired loans are being negatively impacted by depressed valuations to the level of uncertainty of interest rates as well as tighter credit conditions, particularly in the U S.
Outside of commercial real estate, the remaining 75% of wholesale provisions were taken across several sectors.
As a result of idiosyncratic events like the rider and actress break in California.
Other provisions were a function of changing consumer behaviors post pandemic.
Regionally approximately two thirds of wholesale provisions this quarter were in the U S. Wholesale for the stage three PCL ratio in the U S is almost three times higher than in Canada.
This reflects a number of structural challenges in the U S market as long as the speed at which distressed loans in the U S or restructured.
It also reflects the strength of the Canadian banking commercial portfolio, where loans often benefit from recourse guarantees from sponsors.
Our allowance is appropriately reflected these structural differences for example in commercial real estate or ACL ratio on performing loans is approximately four times higher than the U S and in Canada.
Moving to slide 23, gross impaired loans were up $420 million were four basis points this quarter with increases across all of our major lending businesses.
We have now seen five consecutive quarterly increases in gross impaired loans in our G. I L ratio of 42 basis points is approaching 2019 pre pandemic levels.
Last quarter, new formations were higher across most wholesale sectors of retail parks with the exception of commercial real estate, which I noted earlier.
As we head further into the credit cycle, we expected formations and gross impaired loan balances to continue to increase.
To conclude despite the challenging macroeconomic environment, we continue to be pleased with the ongoing performance of our portfolios.
For the year, our PCL on impaired loans of 21 basis points remains well below our historical loss rates. It was at the low end of the guidance I provided last fall of 20 to 25 basis points.
Our strong credit performance reflects our diversified business model, our prudent underwriting practices and the quality of our clients.
We also added 660 million of provisions on performing loans this year, and we feel well prepared for more uncertain and challenging credit conditions going forward.
And 'twenty 'twenty four we are forecasting credit losses more in line with historical loss rates for the year, we expect provisions on impaired loans between 30 to 35 basis points with peak loss rates in late 'twenty 'twenty four and there was a 2025.
We expect to continue building reserves are performing well and for the first two or three quarters of the year, that's what our projected peak losses or insider provisioning window.
This guidance is predicated on our current macroeconomic forecasts or actual losses will be largely dependent on the magnitude of change to unemployment rates the direction and magnitude of changes in interest rates in residential and commercial real estate prices.
As always we continue to proactively manage risk through the cycle.
Well capitalized with stern plausible it more severe macroeconomic outcomes.
With that operator, let's open the lines for Q&A.
Thank you.
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Okay.
Thank you.
First question is from Gabriel <unk> from National Bank Financial. Please go ahead. Your line is open.
Good morning, I have a question about the overdrafts they use.
Covered that off in the U S quite a bit over the past few years, but that's pretty late and Canada clearly.
Have you or are you willing to quantify.
Have you or are you willing to quantify.
What percentage of your Canadian revenues are generated from overdraft fees.
I'm asking you only because your core deposit business is so large.
Yeah. Thanks, Gabe, it's Neil I'll take the question a.
A little bit of context in Canada, the conversations we're having.
Around that direction are really focused on NSF fees as well as a E.
A direction of making sure that low and no cost positive accounts or made available to Canadians. So on those two fronts, which are really the focus of the other conversations we actually provide a.
NSF charge as part of our core Maine.
The deposit account, we mostly taken our go to market strategies.
We also have I'd say quite generous go pay no pay processes, where we will actually do analytics to understand if the client and how does that type of liquidity that we expect to come in and what will what we will cover that to avoid the NSF charges. We also had the lowest NSF fee in the country. So.
We'll work with the government to make sure that that policy direction is taken forward.
In terms of we don't expect to be to be very clear any material reduction in other income on the retail bank as a result of this and the last part and parts of that question around low and no cost accounts, we already do provide this product it is a regulatory requirement.
And the focus from the government is really making sure that some of the larger F. EIS also participate in making sure that low and no cost accounts are made available. So those are that's really the core of it.
So you don't expect anything material from the sounds of it no we don't.
Okay, and then on myeloma.
Second question I forget now.
Fire away.
Hmm I'm just looking at the deposit mix.
Mix trends in Canadian banking again, we've seen the term deposit GIC growth slow.
But if I look at it and this is industry level G. O sees in term deposits or whatever as a percentage of total deposits in Canada are still pretty low relative to historical standard I'm wondering if you know.
How does that inform our view on margins is there still a pretty big natural uplift could these term deposits and should that be viewed as a you know an ongoing NIM headwind here, but that's not going to go away for a while maybe you can talk about that for a bit. Please.
Yes sure sure gave it's Neil again, so we have seen from mid year, a slowing in the rotation into term deposits.
Quite slow it dropped quite a bit in Q3 picked up a little bit in Q4.
Overall, you know that this is the consumer looking for yield where that was coming where that's coming from is multiple sources in our book. So a good portion of that is actually coming external to the bank. So we're welcoming new clients taking on incremental volumes.
The the other flows coming from our mutual fund business, where clients are just looking for that risk free or next to risk free yield, but the GIC product has been benefiting from from inflows from all types of deposit deposit products.
So that's that's really kind of as we look at like the direction of the flow of funds.
Where things have moved checking is down marginally year over year savings is down a little bit more year over year, representing those flows but overall the Canadian consumers still has a material buffer in overall deposit.
So you know some of that has started to started to erode if you've heard Graham's comments, you know what else I need to put that liquidity towards paying a paying increased mortgage payments, we're seeing some of that but overall, we'd say the consumer still has some good healthy buffers.
Alright, thank you.
Yeah.
Thank you.
The next question is from money Grauman from Scotiabank. Please go ahead. Your line is open.
Hi, good morning.
To follow up on commentary you made about revisiting the drip for buyback.
Q1, the second half of the year I'm, just wondering well first of all.
If the G. SIB buffer goes up by 50 basis points does that change your.
Your guidance on this issue and I'm also wondering about the expectations for rates.
So the.
Comment that outlook.
Jeremy. Thank you so in terms of where we had a healthy capital builds are this quarter, which as I mentioned in my remarks, when we look at them the pending closure of our HSBC pending the approval.
That's why I approvals, we expect to be healthy over the 12%, which if you look at where Osophy is currently from a D. S. P standpoint that would put us well over a 50 basis point buffer against the current a regulatory minimum so when we're thinking about where we expect to land with HSBC.
Barring any other changes from a from the economic environment, We think that we still would be comfortably able to revisit the drip post that in terms of the second half of the year.
Got it is there any update in terms of the timing of HSBC deal.
Well, maybe I can answer that it's Dave here now, we certainly feel very good about the overall process that we have to respect the overall processing all steps we have a strong approval from the competition Bureau of recognizes that others remains a very strong competition in the Canadian marketplace and in all the markets where.
H S. B C operated this provides an enormous benefit to two.
Canadians as far as increased taxes increased dividends in the country. It was very significant you know you'd see upwards of three or 400 $500 million of increased dividends in Canada that were pulling out of the country under HSBC global before it's good for clients as far as offering HSBC clients.
Enormous amount of opportunity with our product set and our capabilities across wealth and capital markets and credit cards and other areas, where we're really strong.
Conversely, you know that technology that we're bringing to our to bear on our 17 million clients, particularly those in my speech around trade finance and a multi currency accounts and cross border trading. So I think from that perspective, when you look at the process. We've gone through if you look at the benefits to Canada. If you look at the fact that HSBC is may.
The decision to exit this country and we have to respect that it would be a very bad signal to go Florida investors too.
Two new not move forward with this.
You have to attract capital into this country and therefore for all those reasons. We are you know confidence in the overall outcome of this transaction. So you know we're waiting for approval and we have to respect that process, but we feel good about the transaction, we're well on our way too.
Coding the technology side of this with our HSBC partners.
Where we're allowed to prior to approval and we are very very excited about what this can do for Canada, what it can do for HSBC clients and communities like our British Columbia, where we will invest significantly.
In the BC economy. So for all those reasons. This is good for Canada and therefore, we expect a we are you know we're close.
I'll leave it there thanks.
Yeah.
Thank you.
The next question is from Ebrahim <unk> from Bank of America. Please go ahead. Your line is open.
Hey, good morning.
I guess, maybe first question Jim for you in terms of the credit outlook, you talked about peak losses towards the end of the year and into 'twenty five.
When you look at when you think about the economy today in Canada and the consumer do you do you have enough confidence in the visibility if saddam going higher how much downside. There is how much being that is for the consumer and how that kind of escaped into credit losses beat unsecured are as a business or like how would you read the level of uncertainty.
Be it on the macro and what that means.
And how credit performs over the coming quarters.
Yeah. It takes it remember it's a good question.
You know as you noted I mean, there's still there's a lot of uncertainty on how credit plays out over 'twenty 'twenty four and certainly as we look beyond that there's going to be hugely dependent on how unemployment plays out over that time, how incomes for consumers play out over that time, what happens in the interest rate environment, where house prices go up and these are all very critical factors into how you know the impacts.
It will really flow through our books, we certainly captured a number of different ways. One you know certainly our baseline I think you've commented on some of the big macro factors that are we are assuming in the baseline that interest rates.
Short term interest rates start to pull back in the latter half of next year, we assume housing prices or are you know fairly stable going forward, but to them, but not treating I'm terribly fast, but unemployment, we do see picking up and starting to peak out isn't kind of the mid year next year no. We recognize there's a lot of uncertainty all of that and that's where we're at kind of our downside scenarios.
A big role for us and when we look at the downside scenarios.
Pessimistic scenario, we referred to to give you some consideration of that that assumes that whose prices could come off 15% kind of stay down that levels for an extended period, we assume a rate environment where rates persist higher than they are now for for a longer period I'm gonna be considered a world where you know unemployment could get up into the mid sevens and so that's kind.
It gives you a context for how we think about that downside scenario. So that all kind of comes into play and we weigh that up against our portfolio in terms of how we think about what 'twenty 'twenty four is looking like where do we start to at least get early indications of where we think this will peak out but again, we're in when it peaks out it's going to be highly dependent on the path going forward.
Got it that's good color. Thank you ma'am and maybe just one of Nadine on the low to mid single digit expense growth guidance.
Do you just talked about HSBC.
How does the timing of HSBC and HSBC impact achievement of incremental savings given the close to convert there would that meaningfully impact just if the deal for whatever reason got pushed out by a few months is sort of the closing date is concerned.
No no. It in terms of the number that I gave in terms of guidance even for him just to be clear excluded anything related to HSBC coming on board. It does include costs related to the integration that we do it just for so that that guidance is excluding the specified items. So in terms of.
Our our work that we're doing is integrating HSBC that wouldn't change anything materially as it relates to the guidance that I provided a going into 'twenty 'twenty four in that mid to low low to mid single digits.
They get the Guy who doesn't like HSBC still would hold in terms of our synergies, which we're still very confident in in terms of the the two year out left but most of it coming into the second year.
Understood. Thank you.
Yeah.
Thank you.
The next question is from Paul Holden from CIBC. Please go ahead. Your line is open.
Thank you good morning, I want to go back to you Graham to start.
Some of them or the factors that always see matter for provisioning I guess, what I want to ask is how sensitive are your credit models to.
Interest rates versus unemployment and I guess the reason I ask is with fee.
Now wall of mortgage renewals coming up in 2025, let's say, we go through a situation where unemployment hold up okay, but rates remain high like how bad is scenarios that versus our versus the opposite way, where you may see higher unemployment, but lower interest rates.
Right Yeah. That's a good question Paul Thank you.
You know certainly I would start by saying, it's only rely on one set of models here to give us all the answer is we certainly look at these a number of different ways and we obviously have a high degree with details on our client base that really allows us to kind of examine the impact it'll have on them.
All of this is backstopped by a starting point that you know what origination all these clients went through kind of a consideration on this so called stress test to make sure. There was good resiliency to higher interest rates.
We provided some of the disclosure we did this quarter to give you some sense for kind of what that kind of starting rate looks like and kind of what the impact could be on them.
But when we go through that I would say yes.
Be impactful, but it really is is gonna be looked at in conjunction with what kind of plays out with host prices. There's a lot of equity clients have in their houses and so you know when they have good equity that gives them a lot of options of options to potentially extend amortizations to offset the pay moves to potentially kind of considered life changes.
And up to create or downgrade their houses.
And then on income generation that happens over that period.
So I think there's just a lot of factors that come into it which you know certainly interest rates as part of it but I wouldn't say interest rates by itself will tell us the whole story.
Okay. Okay got it and my second question is related to city National So Dave you provided.
It's pretty clear and useful expectations around returned to profitability, starting next quarter and improving through 25, I guess, what I wanted to understand is to what extent does that impact. Your all bank results I E is the improvement in profit.
Early next quarter is simply a result of that our insurance company a transaction or are there action plans that are actually going to impact the bottom line earnings as well. Thank you.
Paul Thank you for that question. So as we think about the rapid growth we've gone through in city National the return to profitability as a couple of factors one.
The absence of the write down of the noncore assets, obviously as a significant benefit to we executed a reduction of over 5% of employees layoffs.
Layoffs are in Q4, and you'll start to see the cost run rate of about 5% a reduction in those severance costs, which are.
Absorbed within the businesses, we we don't call them out there. So I think from that perspective that provides a tailwind a continued expense management, we still have a very high expense ratio for a business of this size compared to peers. So with the new management team under Greg Carmichael, there have a clear focus on how to drive.
Our competitive.
For 70 to 100 billion dollar bank.
The productivity ratio. So that's very much in our focus to do that as we look at streamlining the organization and the benefits of some of the technology investments.
We've made then I would say.
Over that's in 'twenty four and then so we expect to exit the year with a more normalized run rate and then into 'twenty five kind of run it where we were hoping to be this year and end of the day, we still face in the overall challenges from funding costs as you can imagine, but that will start to alleviate as you see rates start to come down in the U S. Maybe sooner than most people.
I thought they would but you know that provides benefit in funding, but also puts a little bit of pressure on our revenue line and we'll watch that carefully but as you saw in our capital markets franchise. It's.
Seven or eight years ago. After a period of very rapid balance sheet growth. We ended up with a lot of single service lending clients and I would say the capital markets business over the last five years has done a fantastic job of leveraging existing balance sheet and or a W. A until multi product relationships higher roe's have come from that and this is.
As part of our growth process and a franchise, that's growing quickly and you'll see that in city national as well.
As Greg and Howard's and Chris and the team along with Kelly Coffey continue to focus on clients with deposit relationships with FX relationships with cross sell.
On the commercial and private bank side, you'll see us start to enhance our overall profitability and are always from that so it's a journey in the United States, but you can see it will return to profitability and then we will get back to more normalized towards the end of the year and into 'twenty, five and start to realize the benefits.
Of this this very strong franchise at the end of the day, it's been a difficult year. It came at US really quickly in March and I think we've done a good job pivoting and have a number of levers to do that.
Oh, thanks for that.
Okay.
Thank you.
The next question is from Doug Young from there's no capital markets. Please go ahead. Your line is open.
Hi, Good morning, maybe David you staying with city National Bank, I guess I'm more curious.
You know what what's gone wrong since.
All the different things that are kind of kind of played out since you bought the business and I'm more curious I can understand better the macro side of it is there things that you would've done differently or is there other things within your control.
That you can kind of talk a little bit about or was this just all yeah. Most of the macro side just kind of went against you.
I think its the latter I mean essentially bought it we've had seven good years. The end of the day and we had a plan this year to have a record year for city National So I would say, we've been very happy with the franchise and its carry the organization and growth and I think given the tough year. We've had it will provide a bit of a tailwind for us into 'twenty four obviously as we can perform better and then.
Again into 25, so I would first challenge it hasn't been a strong performer for us and we thought coming into the year a pre the financial banking crisis in March that we would have our strongest year in <unk>, but it was the macro environment was the rapid move and deposit costs kind of.
The volatility of our of the customer franchise as far as my money movement, not only within the U S banking sector, but increasingly outside the U S banking sector led to much higher betas than.
Then we had ever seen in this franchise is franchise operated.
This client segment for 60 years, and we have not seen this type of volatility in the in the overall business, though it came at US really quickly we didn't plan for it I think we've pivoted well I think to your question what could we have done better I think we could have focused on growing.
With more multi product clients quicker.
I think you know the focus on deposits came in so quickly and so easily to this franchise over the last five six years, we were along what $35 billion of deposits a.
Midway through the financial crisis, we focused on a lot of single serve as lending and I think if we had really focused on leveraging.
Into multi product relationships, we'd see a different profitability model now and just the pivot from don't forget this was a community bank when we bought it and we've grown it now into us a mid size regional.
And we are re platforming this thing for the next decade so.
Going from a community bank to a regional bank is not an easy journey and we're well into that now and therefore, we will have a platform that is more profitable and able to grow multi currency relationships, including <unk>.
U S cash management into the mid corporate sector in the coming year. So I think from that perspective overall.
And any journey.
It takes it takes a long time to build these franchises and I think any journey, you're going to hit a few bumps I would say, it's mostly macro we think the client franchise and our long term potential is very very strong in this franchise.
I appreciate the color I was just a question I get asked I do appreciate it.
Glad you asked it thank you.
And then the Dean just on the Nims in Canada, they comment that yeah, not not it's not peaking I get and I understand the tractors and how that unfolds. It could you take maybe a little bit more into that or maybe that's just everything that's behind the story and then can you kind of bring that up to the all bank level in terms of what you're what you're what you're thinking in terms of the evolution of the al.
And then excluding trading over the coming year.
Yeah, absolutely. So when you think about it or are they starting to start with Canadian banking and I mentioned that the benefit we continue to get from the deposit tractors and if you look at it that's really in the leg over for quite a period of time, even if rates start to come off and you look at our our interest rate sensitivity that shock is for an immediate 100 basis point, but where we're.
<unk> to leg into those higher rates and that will continue to benefit there are offsets to that as I mentioned in my in one of the things that we saw earlier in the year was really around the deposit mix shift that has as Neil mentioned abated quite significantly and if rates start to come off that and something that probably will start to see that even shift back maybe and from the bank standpoint into mutual.
Fun.
<unk>, which is which is the benefit for us as well that the challenge also of a Zen around kind of the business mix as it relates to on the asset side and in mortgages increased competition there pushes our margins down so that we do expect them based on their deposit franchise. We will continue to see NIM accretion how much that get pulled back a bit related to some of those other factor.
At the all bank level, then when you think about the three primary components opponents that we highlighted there between Canadian banking city National and you have within corporate support what's really sitting the areas you have from an internal asset liability management, we pushed through all of the impacts associated.
With the margins into the business and you're seeing offsets there where you will have an internal flow that gets put in NII and you'll have the hedge that sits in other income and so that's why we tell you to really net the two of those the reason that that's gone. So large it is primarily because of the floating leg that you'll see there that that differential between either the funding side.
Or the derivative side, and that's where you're seeing the increase on the on the corporate support side within the within the E com for all banks.
So of that about that you do expect the all bank NIM to kind of go in a similar direction as the Canadian Bank escalating trading yes both.
I mentioned on city national in Canadian banking, excluding that noise yet.
Thank you.
Yeah.
Thank you.
The next question is from Sohrab <unk> from BMO capital markets. Please go ahead. Your line is open.
Okay. Thank you hopefully two quick questions one for Derek I mean, I think there was mention of some sort of a record breaking quarter for some parts of your business can you just give us some.
And sort of how you see the business developing over the next two to four quarters maybe.
Sure. Thanks, Sarah.
Yeah for Q4, just to touch on I think what it was a record revenue quarter for Q4 and was a record revenue year for 'twenty. Three overall. So obviously, we're very pleased with the results and I think reflects headway, we've been making on a number of strategic initiatives we've undertaken.
As we look forward to 2024, right now I would say.
We're cautiously optimistic on the outlook, obviously, there still is a fair bit of uncertainty on the economy and rates and implications that may have on markets and client activity.
But overall I think we feel.
Quite constructive in terms of the macro and then obviously some of the specific things we're driving to grow the business. So if I just step through that a little bit global markets has obviously had a pretty constructive environment. The last two years given some of the volatility we think as the economy and market.
It's stabilized a little bit Ah that may normalize a bit but overall I think we expect a reasonably constructive environment for the sales and trading business next year.
Investment banking has obviously had a difficult two years with fee pools down you know, 30% plus each of 2022 and 2023 I think again as we see a little greater.
Confidence in the outlook over the next two years, we're starting to see corporate and sponsor activity pick up that's reflected in a obviously a good quarter you saw in Q4 and improving visibility on our backlog. So I think we feel good about the outlook for the investment banking franchise next year and then you know demand for credits among our.
Corporate clients continues to be quite steady and so we envision a.
I think a good solid year next year for our lending franchises. One headwind has obviously been an elevated cost of funding.
You know with with rates potentially peaking spreads, peaking you know we would be hopeful that that pressure has abated through 'twenty four and more into 'twenty, five and maybe start to see that settle down a bit so.
That gives you a bit of an overview reasonably constructive overall in the businesses and importantly, we.
We feel confident in our strategy in a number of the investments we've been making to underpin that you've seen that evidenced in market share gains this year across both our markets business and investment banking and we feel good we can continue that momentum into next year.
Yeah.
Okay. That's very helpful. And then just a quick one for Neil they've got a target of 1% to 2% positive operating leverage for you next year do you think that's going to be more.
On the revenue side or on the expense side or which one do you think will make it more challenging for you the revenues or the expenses to deliver on that.
Thanks for the question.
I mean, I think there's obviously, we can control the expense and we have more volatility in the revenue line.
So you've seen us take take the expenses on a downward trajectory that it will definitely continue.
But that's one of the reasons that we really focus on operating leverage because there was that that type of uncertainty. So we'll manage the operating leverage through the year and we've made some pulled some levers, but particularly around FTE you heard Dave's comments earlier in the year.
And that type of focus will continue.
Thank you.
Thank you.
The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is open good morning.
First of all Greg in your opening comments, you said something about performing loan provisions in the first few first three quarters of 'twenty, four but I didnt quite follow what what were you suggesting there.
Well I'm just suggesting.
The range, we gave the range I guided to is 30 to 35 basis points on stage three.
Stage, one and two is harder to guide on because we're effectively he tried to give you a best estimate of what our future expectations are.
But just given the forward trajectory in our view that a bit.
Stage, three probably doesn't start to really kind of peak out towards the.
The end of next year and into 2025, we do expect it will continue to build stage, one and two of them through the first two or three quarters as well, but is that like are you talking the normal course of five to I don't know maybe four to eight basis points are you planning something more than that.
I don't think we can assert at about at this point Mario but right now I think you know we've been building in our range for the last few quarters and I would say that kind of is a reasonable expectation right now, but subject to all the kind of different considerations around house prices and interest rates and unemployment et cetera, That's fair.
Probably for Dave next Thee.
You've seen some of your peers, taking meaningful restructuring charges. This.
This quarter.
And that's clearly Royals doing.
What it what it does to manage expenses.
But we're not seeing any.
Sort of large restructuring.
[noise] initiatives at least in Canada, that's my impression.
Ask the question this way.
Have there been any meaningful head count reductions in Canada buried in these severance charges or is Canada been left out of the mix for now.
No we I think from the Dean referenced it in her comments that we were.
Just under 2% reduction in Canada, you see Niels Ft is down that's where the focus was that's where the over hiring was as we talked about last year, we had a couple of thousand frontline people.
When attrition slowed down so, yes, that's where the run a big part of the run rates coming out of Canada. The 200 plus million dollars of them I think to 40, you said in the name of a run rate coming out of Canada. In addition to a fair bit of heavy lifting in city national as well as 5% of our of that workforce or rather 300 people there as well.
So I think between the two though but Canada is definitely down and will continue to be fit for the future and as is our practice, we absorbed those into our overall run rate.
And we will continue to manage our platform in conjunction with the macro environment and revenues in and target that operating leverage so we don't call. It out specifically as our peers do that but we it's a cost of doing business and you should hold them to that.
Good day and therefore.
That's how we operate.
Just a quick follow up on HSBC.
Becomes somewhat politicized and I mean, that's the sort of unfortunate but.
Nature of the question I want to ask is there.
I know you can't take us into the boardroom and really your discussions with with with the people that matter here, but.
Is this just a matter of Royal now having to make some kind of concessions.
Around people and processes for 2024 to get this over the finish line.
I can't give you that type of detail. We this transaction has enormous benefits for Canada, and I would say all parties in the approval process understand the benefits to the country of tax revenue increases of dividend increases of investments in Canada.
And then promotional investment in Canada, the benefits to employees and to clients everybody understands that.
Everybody understands that HSBC is leaving us.
Joyce to leave and it would look horrible on Canada. If you didn't allow the free flow of capital.
Everybody understands that and that gives us confidence overall that the benefits of this structure the diligence that the competition Bureau put into this and they've put enormous diligence with extended process with tens of thousands of documents.
We have to respect the process and therefore, Oh I remain confident given that everybody at all levels understand the benefits.
And why this is good for Canada, and why not doing it is very bad for Ken.
Understood. Thank you.
Thank you.
Uh huh.
Next question is from Lamar Purcell from <unk> Securities.
Please go ahead your line is open.
Thanks, I just wanted to continue along that line of questioning, but I want to approach it a little bit differently.
So would it be fair to suggest that based on where you sit today.
And synergies estimates associated with HSBC deal.
It shouldn't be expected, we shouldn't expect that to hold so there.
There arent any additional concessions that could impact the economics of the deal together over the finish line is that a is that a fair statement.
Yes.
Okay, Okay and then.
Love This transaction we loved this bank.
We're confident in our cost takeout, we're working through and we'll talk to you about where we see revenue synergies going forward.
El post close and therefore.
Therefore, yes, we are very excited about this because it's good for Canada is good for RPC and its shareholders.
And we don't expect any material delay in the realization of the benefits with the with the protracted approval process.
I appreciate that that's very clear and then just on the outlook for Canadian banking margins here I understand that you guys are expecting that to move higher this quarter. It was really driven by mix because our competition really offset the benefits of a range is there a similar dynamic and expect it to play out moving forward.
Read that as you know mix is going to be the real driver for higher Canadian banking margin stuff is that fair.
I would say that there is a latent benefit associated really with the strong deposit franchise, that's where our interest rates sensitivity. He comes on and that's what's driving a lot of the margin expansion I would position it a bit differently. So the question really is is the competition around certain products and the mix associated with where our balance sheet is trending going to be offsetting.
Not I think that the baked in structural advantages, what we thinking it's going to create the left.
Okay. Thanks.
Thank you.
The next question is from Nigel D'souza from Veritas investment Research. Please go ahead. Your line is open.
Good morning. Thank you for taking my question I wanted to follow up on city national but more so on.
Our strategic outlook long term.
And of course, just that bank for 5 billion put more capital in.
With the measures taken let's say the profitability, it's been all sort of what you initially expected with that business. So how does that change your appetite.
If there is another opportunity to purchases of U S retail.
Our commercial banking franchise would you still allocate capital or would you prefer a.
Focusing the capital domestically or sports or capital markets and wealth management business.
Well. Thank you for that question, our second home market continues to be the U S. We continue to look to deploy capital into United States organically.
And or Inorganically over time, I think the first thing that's required is a stabilization of all the rules and all the policies and all of the regulatory environment in the United States and understand liquidity rules and capital rules that are under debate right. Now therefore, you'll have to work through that you have to move into a different interest rate environment, because you've got accounts.
Remarks on everybody's balance sheet that makes it very problematic to do M&A right now so all of that has to kind of clear the way.
And then we have to complete our integration of our technology build so that if we were to bring another bank onto our platform. We could do cost take out from that and we're not at that point yet.
So I think from all those perspectives, it's gonna were watching where.
It could be in any one of those lines of businesses, but between wealth and commercial and other spaces that we've talked about but yes over the medium to longer term. We are very much interested in growing our U S franchise and one of the reasons, we asked Eric to take over the overall integration of those three businesses is to simplify our biz.
This model in the United States, simplify our technology infrastructure, and reduce duplication and make us more profitable and amenable to a strategic move forward like that so all of this is lane the found work to a long term multi year investment in United States.
That's it for me thank you.
Thank you.
There are no further questions registered at this time I will turn the call back to run back to yeah, I'll just take the call from Harris, Dave. So thanks very much for all your questions very good questions as always just to summarize kind of my takeaways from the messages through your Q&A today, and what I'd like you to focus on.
Enormous balance sheet strength and liquidity strength with capital at 14, 5% you can see the clear path towards being able to absorb HSBC continue to build capital and allocate capital for growth and to start returning capital to shareholders in the near future so that strength of capital build in organic.
Growth is core to one of our investment teams as you know and the return on that capital.
Heard us you've crossed a lot of questions about cost control, you've seen us move core expenses down to that 5% Mark and then and the commitment to continue to move it down.
Next year in 'twenty 'twenty four we feel very good about that a number of initiatives that we've already executed more that we'll make to continue to manage that I hope you noticed the very strong client volume performance, whether its investment banking global markets.
Canadian retail deposits Canadian retail lending Canadian business lending asset management and into wealth management U S. Wealth management are very strong.
Core client compete and that's going.
Continuing to flow through and good revenue growth for us in cross selling off those clients, particularly new clients to the bank is very very strong and then our P. C O with all of that growth are P. C. All looks to relatively outperform as well. So net net we feel very good about how we've turned the corner. We wrote off some noncore assets that were a little noisy.
We don't do that very often but we did it this quarter.
Really poised to take advantage of whichever way the macro environment goes and 24, where we're poised to do well in that environment. So thank you very much.
Great year end and a good holiday season, and we will see in Q1.
Uh huh.
Yeah.
Thank you.
The conference has now ended please disconnect your lines at this time.
We thank you for your participation.
Yeah.
Yeah.
[noise].
Yes.
[noise] [noise].
Yes.
Alright.
Okay.
Okay.
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