Q1 2024 Royal Bank of Canada Earnings Call
Operator: Stand by. We thank you for your patience. Nous vous remercions de bien vouloir prendre la peine. La conférence commencera bientôt peu.
Your patience.
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Operator: Nous vous prions de bien vouloir attendre quelques instants et nous vous remercions de votre patience. This conference is being recorded.
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Speaker Change: This conference is being recorded so it's closer to home as it always is.
Speaker Change: All participants please standby your conference is ready to begin good morning, ladies and gentlemen, and welcome to Rbc's Conference call for the first quarter of 2024 financial results. Please be advised that this call is being recorded.
Operator: All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen.
Operator: Welcome to RBC's conference call for the first quarter 2024 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.
Sam Enron: I'd now like to turn the meeting over to our same Enron.
Investor Relations: Investor Relations. Please go ahead Mr. Enron.
Asim Imran: Thank you, and good morning, everybody. Speaking today will be Dave McKay, President and Chief Executive Officer, Nadine Ahn, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions are Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; and Derek Neldner, Group Head, Capital Markets. As noted on slide one, our comments may contain forward-looking statements that involve assumptions and have inherent risks and uncertainties. However, actual results could differ materially.
Enron: And good morning, everyone.
Dave Mckay: Speaking today will be Dave Mckay, President and Chief Executive Officer, Nathan on Chief Financial Officer, and Graeme Hepworth Chief Risk Officer also joining us today for your questions Neil Mclaughlin group head personal and commercial banking, Doug Guzman group head wealth management and insurance and Derek elder.
Dave Mckay: <unk> capital markets.
Dave Mckay: 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.
Asim Imran: 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. To give everyone a chance to ask questions, we ask that you limit your questions and then requeue. With that, I'll turn it over to Dave. Thanks.
Dave Mckay: 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.
Dave Mckay: To give everyone a chance to ask questions. We ask that you limit your questions and then re queue with that I'll turn it over to Dave.
Dave: Awesome good morning, and thank you for joining us today today, we reported first quarter earnings.
David McKay: Good morning, and thank you for joining us today. Today we reported our first quarter earnings. $3.6 billion, for adjusted earnings of $4.1 billion. Our results benefited from higher fee-based revenue and wealth management, including strong flows in our advisory businesses and solid performance by Asit Manish. Broad-based, client-driven volume growth in Canadian banking more than offset escalating competitive growth. The Canadian bank more than offset escalating competitive pricing pressure. Capital markets reported strong pre-provision, pre-tax earnings of $1.3 billion as we continued to gain market share.
A $3 $6 billion.
Dave: Adjusted earnings of $4 $1 billion.
Dave: Our results benefited from higher fee based revenue in wealth management, including strong flows in our advisory businesses and solid performance.
Dave: In asset management.
Dave: Broad based client driven volume growth in Canadian banking more than offset escalating competitive growth.
Speaker Change: Hey, Nate.
Speaker Change: Bank more than offset escalate and competitive pricing pressures.
Capital markets reported strong pre provision pretax earnings of $1 $3 billion as we continued to gain market share.
Speaker Change: Importantly, core expense growth continues to decelerate, demonstrating our ongoing discipline, which nadine will speak to shortly.
David McKay: Importantly, core expense growth continued to decelerate, demonstrating our ongoing discipline, which Nadine will speak to shortly. The strength of our diversified earnings stream more than mitigated the increase in provisions from credit losses in our commercial real estate and Canadian unsecured retail portfolio. As Graeme will speak about later, we expect PCLN Impaired Loans to remain within the guidance we provided last quarter, and we remain confident in our risk management framework, including our prudent and consistent underwriting and our rigorous monitoring and stress testing process. Furthermore, our strong capital position and prudent allowances position us well for any further deterioration in credit quality. We added $133 million of PCL on performing loans this quarter, increasing our ratio of allowance for credit losses to 64 basis points, up 11 basis points from pre-pandemic levels.
Speaker Change: The strength of our diversified earnings stream more than mitigated the increase in provisions for credit losses in our commercial real estate and Canadian unsecured.
Speaker Change: Portfolios.
Speaker Change: As Graeme will speak to later, we expect PCL on impaired loans to remain within the guidance. We provided last quarter, we remain confident in our risk management framework, including our prudent and consistent underwriting and a rigorous monitoring and stress testing processes.
Speaker Change: Furthermore, our strong capital position and prudent allowances position us well for any further deterioration in credit quality.
Speaker Change: We added $133 million of PCL on performing loans this quarter, increasing our ratio of allowance for credit losses to 64 basis points up 11 basis points from pre pandemic levels.
David McKay: The strength of our balance sheet is further underscored by our robust CT-1 ratio of 14.9%, up 220 basis points from last year. Additionally, our liquidity coverage ratio was 132% this quarter, translating to a $94 billion surplus above the regulatory minimum. Our balance sheet strength, diversified business model, and franchise scale position us to continue delivering value for our clients and shareholders through a wide range of monetary and economic scenarios. Flowing inflation suggests central banks are close to achieving the soft landing they've been aiming for. However, trends are diverging across geography. Canada is lagging peers in growth in GDP per capita, partly due to a slowdown in spending on discretionary goods and services, including on an inflation-adjusted basis.
Speaker Change: Our balance sheet is further underscored by a robust CET one ratio of 14, 9% up 220 basis points from last year.
Speaker Change: Additionally, our liquidity coverage ratio was 132% this quarter translating to 194 billion surplus above the regulatory minimum.
Speaker Change: Our balance sheet strength diversified business model and franchise scale position us to continue delivering value for our clients and shareholders through a wide range of monetary and economic scenarios.
Speaker Change: Slowing inflation suggest central banks are close to achieving the soft landing that had been aiming for however.
Speaker Change: However trends are differentiating across geographies.
Speaker Change: Canada is lagging peers in growth and GDP per capita partly due to a slowdown in spending on discretionary goods and services, including on an inflation adjusted basis.
David McKay: RBC's card transaction data suggests average growth in our non-auto retail sales has continued to moderate. However, flowing consumer demand and rising unemployment point to a softening in the Canadian economic backdrop. In contrast, the U.S. is showing continued strength in labor markets, above-average wage growth, a resilient U.S. consumer, and higher corporate profits, suggesting the effect of the federal funds rate may remain higher for slightly longer. Nonetheless, we expect a more sustained decline in inflation measures to push both U.S. and Canadian central banks to follow recent global examples and pivot to a more dovish stance this year.
Speaker Change: Rbcs car transaction data suggest average growth in our non auto retail sales has continued to moderate.
Speaker Change: Slowing consumer demand and rising unemployment points, but softening Canadian economic backdrop.
Speaker Change: In contrast, the U S is showing continued strength in labor markets above average wage growth are resilient U S consumer and higher corporate profits, suggesting the effective federal funds rate may remain higher for slightly longer.
Speaker Change: Nonetheless, we expect more sustained decline in inflation measures to push both U S and Canadian Central banks to follow recent global examples and pivot to a more dovish stance this year.
David McKay: Bifurcation and trends suggest the Bank of Canada should move on rate cuts earlier than the U.S. Fed. Uncertainty around monetary policy points to 2024 being somewhat of a transitional year as markets consider the impact of interest rate trajectories and rising geopolitical tensions on equity markets, credit quality, capital market revenues, and client preferences. In this context, I will now speak to Q1 revenue growth drivers and an outlook across our franchises, where we continue to gain share in key areas. Starting in Canadian banking, where we continue to benefit from our long-term scale advantages, we reported strong growth in our high-quality deposit franchise, which is the foundation for building premium loan growth and deepening existing client relationships. 2021-2024 was a record quarter with new-to-bank clients up 29% year-over-year due to our distribution strength, technology investments, and innovative client value proposition, including RBC Vantage and partnerships with Canadian industry leaders.
Speaker Change: Bifurcation and trends suggest the bank of Canada should move on rate cuts earlier in the U S fed.
Speaker Change: The uncertainty around monetary policy points to 'twenty 'twenty four being somewhat of a transitional year as Mark is considered the impact of interest rate trajectories and rising geopolitical tensions on equity markets credit quality capital market revenues and client preferences.
Speaker Change: With this context I'll now speak to Q1 revenue growth drivers and the outlook across our franchises, where we continue to gain share in key areas.
Starting with Canadian banking, where we continue to benefit from a long term scale advantages, we reported strong growth in our high quality deposit franchise, which is the foundation for building premium loan growth and deepening existing client relationships.
Speaker Change: Q1, 2024 was a record quarter with net new to bank clients up 29% year over year due to our distribution strength technology investments and innovative client value propositions, including RBC vantage and partnerships with Canadian industry leaders.
Speaker Change: With interest rates remaining higher than pre pandemic levels, we continue to support our clients' preference for shifting their asset into term deposits.
David McKay: With interest rates remaining higher than pre-pandemic levels, we continue to support our clients' preference for shifting their assets into term deposits, especially within the higher net worth cohort. Commercial loan growth remains strong, up 14% from last year, with balanced growth across sectors, particularly amongst our existing clients. While our clients remain optimistic, we expect lower CapEx investments in anticipation of slower economic growth. Growth in our leading Canadian credit card franchise was up 13% year over year, as higher revolver balances significantly outpaced increases in transactor balances. In contrast, mortgage growth declined to 3% year-over-year as a strong retention rate offset continued pressure on home prices.
Speaker Change: Especially within the higher net worth cohorts.
Speaker Change: Commercial loan growth remained strong up 14% from last year with balanced growth across sectors, particularly amongst our existing clients.
Speaker Change: Our clients remain optimistic we expect lower capex investments in anticipation of slower economic growth.
Speaker Change: Growth in our leading Canadian credit card franchise was up 13% year over year as higher revolver balances significantly outpaced increase increases in <unk> balances.
Speaker Change: In contrast mortgage growth declines of 3% year over year, a strong retention rate offset continued pressure on home prices.
David McKay: While we anticipate some continued recovery in housing resale activity, we expect mortgage growth to remain in the low single digits through 2024 as we remain disciplined on pricing and spreads amidst intense competition. Turning to our wealth management segment, where combined assets under administration across our Canadian, U.S., and international wealth advisory businesses have grown to nearly $1.6 trillion. Assets under administration in our leading Canadian wealth management business were up 12% from last year, increasing to a record level of nearly $600 billion.
While we anticipate some continued recovery of housing and we saw activity, we expect mortgage growth to remain in the low single digits through 'twenty 'twenty four.
Speaker Change: Disciplined on pricing and spreads amidst intense competition.
Speaker Change: Turning to our wealth management segment, where combined assets under administration across our Canadian U S and international wealth advisory businesses have grown to nearly one six trillion dollars.
Speaker Change: Assets under administration, and a leading Canadian wealth management business were up 12% from last year, increasing to a record level of nearly $600 billion.
Speaker Change: Assets under administration in our U S wealth management platform, including our sixth largest wealth adviser in the U S increased 12% year over year to nearly U S. $600 billion are over at Canadian 800 billion, which is a record.
David McKay: Assets under administration in our U.S. wealth management platform, including the sixth-largest wealth advisor in the U.S., increased 12% year-over-year to nearly U.S. $600 billion, or over Canadian $800 billion, which is a record. While higher markets are a key driver of client asset growth, our Canadian and U.S. wealth advisory businesses generated $16 billion and $12 billion of net sales, respectively, over the last We believe there is significant opportunity for continued growth, and we will continue to invest in advisor recruitment across North America. On the other hand, net income in our wealth management businesses was impacted by similar trends seen in Canadian banking, namely a shift from deposits into higher-yielding products. RBC Global Asset Management's AUM increased 6% from last year, benefiting from higher markets.
Speaker Change: While higher markets were a key driver of client asset growth, our Canadian U S wealth advisory businesses generated $16 billion and $12 billion of net sales respectively over the last 12 months.
Speaker Change: We believe there's significant opportunity for continued growth and we will continue to invest in adviser recruitment across North America.
Speaker Change: In contrast, net interest income in our wealth management businesses were impacted by similar trends seen in Canadian banking, namely a shift from deposits into higher yielding products.
Speaker Change: RBC Global asset management, AUM increased 6% from last year benefiting from higher markets.
Speaker Change: Canadian reach it.
David McKay: Canadian retail net outflows this quarter were less than 1% of opening AUM, outperforming the industry, which has faced a challenging backdrop over the last year. We are confident that our leading franchises are well-positioned to capture money in motion back into investment products following a shift in the interest rate outlook and risk sentiment, particularly when it comes to fixed income strategies, which is one of our core strengths. There are early signs of these trends, with RBC's retail long-term net flows turning positive in January for the first time since February last year, led by fixed income mandates. Furthermore, RBC-GAM delivered over $4 billion of long-term institutional flows this quarter, which is a testament to our deep client relationship. Demand for ETF products was also strong as RBCI Shares Alliance led the industry with long-term net sales of $5 billion for calendar Q4. Capital markets reported pre-tax, pre-provision earnings of $1.3 billion, the second highest since 2021 and well above our $1.1 billion run rate guidance. Corporate investment banking revenues were up 3% from last year.
Indian retail net outflows this quarter were less than 1% of opening AUM.
Speaker Change: Outperforming the industry, which has faced a challenging backdrop over the last year.
Speaker Change: We are confident that our leading franchises are well positioned to capture money in motion back into investment products. Following a shift in the interest rate outlook and risk sentiment, particularly when it comes to fixed income strategies, which was one of our core strengths.
Speaker Change: There are early signs of these trends with Rbc's retail long term net flows turning positive in January for the first time since February last year led by fixed income mandates.
Speaker Change: Furthermore, RBC gam delivered over $4 billion of long term institutional flows this quarter, which is a testament to our deep client relationships.
Speaker Change: Demand for ETF products was also strong as RBC Ishares Alliance led the industry with long term net sales of $5 billion for calendar Q4.
Speaker Change: Capital markets reported pretax pre provision earnings of $1 $3 billion, the second highest since 2021 and well above our $1 1 billion dollar run rate guidance.
Speaker Change: Corporate investment banking revenues were up 3% from last year.
David McKay: Our investment banking business ranked 8th globally in the first quarter, with a market share of 2.3%, up 30 basis points from where we ended fiscal 2023, with share gains across all our products. We are benefiting from the successful execution of past strategic investments and talent combined with a focus on increasing banker productivity. Our pipeline remains healthy, and we're engaging in increased dialogue with corporate clients. Furthermore, we expect private equity activity to ramp up as sponsors sit on significant levels of uninvested client funds.
Speaker Change: Our investment banking business ranked eighth globally in the first quarter, but our market share of two 3% up 30 basis points from where we ended fiscal 2023 with share gains across all our products. We're benefiting from the successful execution of past strategic investments and talent combined with a focus on increasing banker productivity.
Speaker Change: Our pipeline remains healthy and we are engaging an increased dialogue with corporate clients.
Speaker Change: Or more we expect private equity activity to ramp up as sponsors sit on significant levels of Uninvested client funds.
Speaker Change: That said due to evolving market conditions, including us uncertain macro and regulatory environment.
David McKay: That said, due to evolving market conditions, including an uncertain macro and regulatory environment, it's hard to predict when deal completions will sustainably rebid. Global markets also had a solid quarter. While overall revenues were down compared to a very strong prior-year quarter, we grew origination and secondary client volumes consistent with our strategic focus for the business. We also did not experience any trading loss days this quarter, a reflection of a strong market risk management culture.
Speaker Change: It's hard to predict when deal completions will sustainably rebuild.
Speaker Change: Global markets also had a solid quarter overall revenues were down compared to a very strong prior year quarter, we grew origination and secondary client volumes consistent with our strategic focus for the business.
Speaker Change: We also did not experience any trading loss days this quarter, a reflection of a strong market risk management culture.
Speaker Change: We also recently launched our U S cash management business and we will look to provide a progress update at the end of this year on the value provided to both clients and to Rbcs funding profile.
David McKay: We have also recently launched our U.S. cash management business, and we will look to provide a progress update at the end of this year on the value provided to both clients and to RBC's funding profile. I will now speak to two areas of interest, namely our planned acquisition of HSBC Canada and the recent developments at Citi National Bank in the U.S. Starting on slide 7, we are excited to have received approval from the Finance Minister, and we have targeted a March 28th close.
Speaker Change: I will now speak to two areas of interest, namely our planned acquisition of HSBC, Canada and the recent developments at city National Bank in the U S.
Speaker Change: Starting on slide seven we are excited to have received approval for the finance Minister we've targeted a march 28th close.
Speaker Change: Following this close we expect our CET one ratio to be approximately one 5% by the end of the quarter.
David McKay: Following this close, we expect our CT1 ratio to be approximately 12.5% by the end of the quarter. With this transaction, RBC will be better positioned to be the bank of choice for commercial clients with international needs, affluent clients needing wealth management capabilities, and newcomers to Canada. Furthermore, we look to deepen existing client relationships and build new client relationships. We continue to expect approximately $740 million in expense synergies. Given the nature of the concurrent financial and operational close and convert transaction, we expect nearly 25% of the expense synergies to be realized in the second half of 2024 and 60% by the end of year one of the transaction, largely related to Shared Service and IT Systems.
Speaker Change: With this transaction RBC will be better positioned to the bank of choice for commercial clients with international needs affluent clients needing wealth management capabilities and newcomers to Canada.
Speaker Change: Furthermore, we look to deepen existing client relationships and build new client relationships.
Speaker Change: We continue to expect approximately $740 million of expense synergies.
Speaker Change: Given the nature of the concurrent financial and operational close and convert transaction, we expect nearly 25% of the expense synergies to be realized in the second half of 'twenty 'twenty, four and 60% by the end of year, one of the transaction largely related.
Speaker Change: Shared service and I T systems.
Speaker Change: Given the timing of the close we now expect nearly 80% of the cumulative expense synergies to be realized in 2025 with the remainder in the first half of 2026.
David McKay: Given the timing of the close, we now expect nearly 80% of the cumulative expense synergies to be realized in 2025, with the remainder in the first half of 2026. We expect to provide further updates on the earnings power of the combined platform on our Q2 earnings call after the expected close. On to slide 8, Citi National has grown considerably since we acquired the bank in early 2016. One of our top priorities over the last couple of years has been to execute against extensive and detailed action plans, including investing in the appropriate risk and control infrastructure, as well as new leadership.
Speaker Change: Yeah.
Speaker Change: We expect to provide further updates on the earnings power of the combined platform on a future earnings call. After the expected close.
Speaker Change: Onto slide eight city National has grown considerably since we acquired the bank in early 2016.
Speaker Change: One of our top priorities of the last couple of years has been to execute against extensive and detailed action plans, including investing in the appropriate risk and control infrastructure as well as new leadership.
David McKay: Looking forward, our focus at CityNational is to deliver a more normalized level of net income in 2025, including costs associated with an enhanced operational infrastructure. This includes optimizing its balance sheet to enhance spreads, enhancing its funding profile, creating efficiencies, and redeploying capital to focus on multi-product clients. To close, we've had a strong start to Fiscal 2024, as we continue to execute on our client-focused strategies, including welcoming new clients and colleagues in a few weeks' time from the planned acquisition of HSBC Canada. Amidst ongoing macroeconomic uncertainty, our balance sheet remains strong. At the same time, our diversified revenue streams across businesses and geographies and prudent cost control position are swelled to continue driving a premium ROE and organic capital generation throughout the economy. Nadine, over to you.
Speaker Change: Looking forward, our focus city national is to deliver a more normalized level of net income in 2025, including costs associated with an enhanced operational infrastructure.
Speaker Change: This includes optimizing its balance sheet to enhance spreads enhancing its funding profile, creating efficiencies and redeploying capital to focus on multi product clients.
Speaker Change: To close we have.
Speaker Change: Had a strong start to fiscal 'twenty 'twenty four as we continue to execute on our client focused strategies, including welcoming new clients and colleagues in a few weeks' time from the planned acquisition of HSBC, Canada.
Speaker Change: Amidst the ongoing macroeconomic uncertainty our balance sheet remains strong at the same time, our diversified revenue streams across businesses and geographies and prudent cost control position as well.
Speaker Change: Continued driving a premium ROE and organic capital generation throughout the economic cycle.
Speaker Change: The dean over to you.
Nadine Ahn: Thanks Dave and good morning everyone. I'm starting on slide 10. We reported earnings per share of $2.50 this quarter, and adjusted diluted earnings per share of $2.85 was down 6% from last year. Results benefited from higher rates, solid volume growth, increased non-interest revenue, and a lower effective tax rate. The PCL wins, however, were more than offset by higher expenses, including the cost of the FDIC special assessment. Increases in impaired PCL were also a headwind, as provisions continued to trend upwards, reflecting the impact of higher interest rates and rising unemployment. I will first highlight the continued strength of our balance sheet because we're focusing on more detailed drivers of our earnings, starting with our strong capital ratios on slide 11. Our CT1 ratio improved to 14.9 percent, up 40 basis points from last quarter, mainly reflecting our strong internal capital generation net of dividends, unrealized gains on OCI securities, and benefits of share issuances under the DRIF. This was partly offset by a modest impact from regulatory changes, including the impact of IFRS 17. RWA growth, excluding FX, was largely flat this quarter.
Dean: Thanks, Dave and good morning, everyone. Starting on Slide 10, we reported earnings per share of $2.50. This quarter adjusted diluted earnings per share of $2.85 was down 6% from last year.
Dean: I'll spend a fitted from higher rates solid volume growth increased non interest revenue and a lower effective tax rate.
Dean: However were more than offset by higher expenses, including the cost of the FDIC special assessment increases in impaired PCL were also a headwind as provisions continued to trend upward, reflecting the impact of higher interest rates and rising unemployment.
Dean: I will first highlight the continued strength of our balance sheet.
A more detailed drivers of our earnings.
Dean: Starting with our strong capital ratios on slide 11, our.
Dean: Our CET one ratio improved to 14, 9% up 40 basis points from last quarter, mainly reflecting our strong internal capital generation net of dividend unrealized gains in OCI securities and benefits of share issuances under the drip.
Dean: This was partly offset by a modest impact from in that regulatory changes, including the impact of I F 17.
Dean: <unk> growth, excluding FX was largely flat this quarter higher R. W. A primarily driven by operational risk from continued revenue growth as well as unfavorable wholesale credit migration was offset by lower market risk <unk> in capital markets and that regulatory changes.
Nadine Ahn: Higher RWA, primarily driven by operational risk from continued revenue growth as well as unfavorable wholesale credit migration, was offset by lower market risk RWA in capital markets and net regulatory changes. Going forward, the close of the planned HSBC Canada transaction is expected to reduce the CET1 ratio by approximately 250 basis points. In light of our projected capital position, we have elected to cease the current 2% discount on our DRIP following the delivery of our February 23rd dividend. Furthermore, we do not expect Basel III floors to be binding in 2024.
Dean: Going forward the close of the planned HSBC, Canada transaction is expected to reduce the CET one ratio by approximately 250 basis point.
Dean: In light of our projected capital position, we have elected to cease the current 2% discount on our drip following the delivery of our February 23rd dividend.
Dean: Furthermore, we do not expect Basel III, Florida to be binding in 2024.
Nadine Ahn: The revenue and expense guidance provided in my remarks hereafter does not incorporate the impact from the planned acquisition of HSBC Canada, which we will provide updates on next quarter. Moving to slide 12, all bank net interest income was up 2% year-over-year or largely flat, excluding trading revenue.
Dean: The revenue and expense guidance provided in my remarks, hereafter do not incorporate impact from the planned acquisition of HSBC, Canada and she will provide updates on next quarter.
Dean: Moving to slide 12.
Dean: All bank net interest income was up 2% year over year are largely flat excluding trading revenue.
Nadine Ahn: These results benefited from solid volume growth in Canadian banking, partly offset by lower Treasury services revenue in capital markets. On a sequential basis, all bank NIM excluding trading revenue is down seven basis points. The prior quarter included a favorable accounting adjustment in corporate support, which increased NII and lowered other income. This adjustment was reversed in the current quarter.
Dean: These results benefited from solid volume growth in Canadian banking, partly offset by lower Treasury services revenue in capital market.
Dean: On a sequential basis, all bank NIM, excluding trading revenue was down seven basis points.
Dean: The prior quarter included a favorable accounting adjustment in corporate support which increased NII and lowered other income.
Dean: This adjustment was reversed in the current quarter exclude.
Nadine Ahn: Excluding this quarterly-over-quarter adjustment, since Q3 2023, NIM excluding trading revenue is up five basis points. Canadian banking NIM was up one basis point from last quarter. As expected, the embedded advantages of our structural, low beta core personal banking deposit franchise continue to come through this quarter, underpinned by the laden benefit of recent interest rate hikes. We also continue to benefit from changes in asset mix, largely reflecting strong growth in credit card balances. These benefits are partly offset by intense competition for term deposits.
Dean: Excluding this quarter over quarter adjustment since Q3, 2023 NIM, excluding trading revenue is up five basis points.
Dean: Canadian banking NIM was up one basis point from last quarter.
Dean: As expected the embedded advantages of our structural low beta core personal banking deposit franchise continued to come through this quarter.
Dean: Underpinned by the latent benefit of recent interest rate hikes.
Dean: We also continued to benefit from changes in asset mix, largely reflecting strong growth in credit card balances.
Dean: These benefits were partly offset by intense competition for term deposits.
Nadine Ahn: Quarterly movements in Canadian banking NIM will be impacted by the continued benefit from our core deposit franchise, as well as ongoing pricing competition for deposits. Furthermore, there is added uncertainty from the impact of other factors such as interest rate movements, the shape of the yield curve, and changes in balance sheet mix. Turning to City National,
Dean: Quarterly movements in Canadian banking NIM will be impacted by the continued benefit from our core deposit franchise as well as ongoing pricing competition for deposit.
Dean: Furthermore, there is added uncertainty from the impact of other factors such as interest rate movements, the shape of the yield curve and changes in balance sheet mix.
Dean: Turning to city National.
Nadine Ahn: Nim was up 20 basis points from last quarter. The increase mainly reflected the full quarter benefit of last quarter's intercompany sale of certain city national debt securities, partly offset by corporate support, as well as lower levels of FHLB funding. Higher deposit pricing continued to be a headwind this quarter. Moving to slide 13, non-interest expenses were up 10% from last year.
Dean: NIM was up 20 basis points from last quarter the.
Dean: The increase mainly reflected the full quarter benefit of last quarter's intercompany sale of certain city national debt securities, partly offset in corporate support as well as lower levels of S. H L. D funding higher deposit pricing continued to be a headwind this quarter.
Dean: Moving to slide 13.
Dean: Non interest expenses were up 10% from last year expenses were up 6% adjusting for acquisition and integration related costs as he HSBC Canada.
Nadine Ahn: Expenses were up 6%, adjusting for acquisition and integration-related costs related to CHSBC Canada. However, excluding the cost of the FDIC Special Assessment, as well as macro-driven factors such as FX and share-based compensation, core expense growth decelerated to 2% year-over-year, reflecting our ongoing focus on cost reduction. Core year-over-year expense growth was driven by higher base salaries, higher pension and benefits expenses, and increased professional fees, including ongoing investments to enhance City Nationals' operational infrastructure. Looking forward, we continue to expect all bank core expense growth to come in the low to mid-single-digit range in 2024, with revenue-related expenses such as variable compensation fluctuating within this range commensurate with market activity levels. Results this quarter benefited from a lower Adjusted Effective Tax Rate of 18.3%, which was down 180 basis points from last year, reflecting favorable changes in earnings mix. Looking forward, we expect the non-TEB effective tax rate to be in the 19-21% range for the remainder of the year. Moving to our segment performance, beginning on slide 14, personal and commercial banking reported earnings of $2.1 billion.
Excluding the cost of the FDIC special assessment as well as macro driven factors such as FX and share based compensation core expense growth decelerated to 2% year over year, reflecting our ongoing focus on cost reduction.
Dean: Core year over year expense growth was driven by higher base salaries higher pension and benefits expenses and increased professional fees, including ongoing investments to enhance city national's operational infrastructure.
Dean: Looking forward, we continue to expect all bank core expense growth to come in the low to mid single digit range in 2024 with revenue related expenses, such as variable compensation fluctuating within this range commensurate with market activity levels.
Dean: Results this quarter benefited from a lower adjusted effective tax rate of 18, 3%, which was down 180 basis points from last year, reflecting favorable changes in earnings mix.
Dean: Looking forward, we expect the non T. He be effective tax rate to be in the 19% to 21% range for the remainder of the year.
Dean: Moving to our segment performance beginning on slide 14.
Dean: Personal and commercial banking reported earnings of $2 1 billion.
Nadine Ahn: Canadian banking pre-provisioned pre-tax earnings were up 4% year-over-year. Canadian banking net interest income was up 5% from last year, mainly reflecting solid volume growth. Non-interest income was up 4% year-over-year as higher client activity contributed to increased service revenue and credit fees. Operating leverage was negative 1% for the quarter, partly reflecting higher marketing costs associated with new client acquisition campaigns. For the full year, we now expect Canadian banking operating leverage to come in at the higher end of our historical 1-2% target. Turning to slide 15.
Dean: Canadian banking pre provision pretax earnings were up 4% year over year Canadian banking net interest income was up 5% from last year, mainly reflecting solid volume growth.
Noninterest income was up 4% year over year as higher client activity contributed to increased service revenue and credit fees.
Dean: Operating leverage was negative 1% for the quarter, partly reflecting higher marketing costs associated with new client acquisition campaign for.
Dean: For the full year, we now expect Canadian banking operating leverage to come in at the higher end of our historical one to two per cent target.
Dean: Turning to slide 15.
Dean: Wealth management earnings were down 27% from last year, including the 150 million after tax cost of the FDIC special assessment incurred in the quarter.
Nadine Ahn: [inaudible] The underlying performance of our wealth management advisory and asset management business benefited from higher fee-based client assets across each of our businesses, largely reflecting the benefit from market appreciation and net sales. Higher transactional revenue and Canadian wealth management, and stronger RBC GAM performance fees also contributed. These factors were partly offset by lower net interest income in our wealth management businesses, reflecting lower deposit volumes and spreads, as well as lower sweep deposit revenue in U.S. wealth management. The segment efficiency ratio increased to 83% largely due to higher expenses at Citi National, including the cost of the FDIC special assessment and the ongoing investments in its operational infrastructure. Turning to slide 16.
Dean: The segment was also impacted by the partial sale of RBC Investor services operation.
Dean: The underlying performance of our wealth management advisory and asset management business benefited from higher fee based client assets across each of our businesses.
Dean: Largely reflecting the benefit from market appreciation and net sales.
Dean: Higher transactional revenue in Canadian wealth management, and stronger RBC Gam performance fees also contributed.
Dean: These factors were partly offset by lower net interest income in our wealth management businesses, reflecting lower deposit volumes and spreads as well as lower sweep deposit revenue in U S wealth management.
Dean: The segment efficiency ratio increased to 83% largely due to higher expenses at city national including the cost of the FDIC special assessment and the ongoing investments and its operational infrastructure.
Dean: Turning to slide 16.
Nadine Ahn: Capital markets results were robust this quarter and generated pre-provision pre-tax earnings of $1.3 billion, which more than offset the impact of higher PCL. Corporate and investment banking revenue was up 3% from last year due to higher securitization financing revenue, improved margins in our transaction banking business, and higher M&A activity across most regions. Global markets revenue was down 8% from a strong prior year, which benefited from more favorable market conditions and stronger client activity in equity trading. Turning to insurance on slide 17. This quarter, we adopted the IFRS 17 accounting standards.
Dean: Capital markets results were robust this quarter and generated pre provision pretax earnings of $1 3 billion, which more than offset the impact of higher P. C. L Court.
Dean: Corporate and investment banking revenue was up 3% from last year due to higher securitization financing revenue improved margins in our transaction banking business and higher M&A activity across most regions.
Dean: Global markets revenue was down 8% from a strong prior year, which benefited from more favorable market conditions and stronger client activity in equity trading.
Turning to insurance on slide 17.
Dean: This quarter, we adopted the <unk> 17 accounting standard.
Nadine Ahn: Net income was $220 million, driven by favorable investment performance, as we repositioned our portfolio for the transition to IFR 17. (Inaudible) It is important to note that the results in the prior period are not fully comparable as we were not managing our asset and liability portfolios under IFR 17. Going forward, we anticipate net insurance service revenue will be more stable under IFR 17.
Dean: Net income was $220 million driven by favorable investment performance as we repositioned our portfolio for the transition to <unk> 17.
Dean: The current period also benefited from favorable market conditions.
Dean: It is important to note that the results in the prior period are not fully comparable as we were not managing our asset and liability portfolios under Ifr 17.
Dean: Going forward, we anticipate net insurance service result will be more stable under Ifr 17. However, we do know that net investment result was outsize this quarter and do not expect that magnitude of performance to persist.
Nadine Ahn: However, we do know that the net investment result was outsized this quarter and do not expect that magnitude of performance to persist. We anticipate net income growth to be mid single digits in 2024 off of the restated 2023 IFRS 17 levels. To conclude, we generated a mid-teen ROE while holding excess capital related to the planned acquisition of HSBC Canada. Our strong results were underpinned by the depth of our leading Canadian deposit franchise and the strong positioning of our wealth management and capital markets franchises. Our ongoing progress on cost containment was another key contributor to our performance this quarter. With that, I'll turn it over to Graeme. Thank you, Dean, and good morning, everyone.
We anticipate net income growth to be mid single digits in 'twenty 'twenty four off of restated 2023 I after a 17 level.
Dean: To conclude we generated a mid teen ROE, while holding excess capital related to the planned acquisition of HSBC, Canada. Our strong results were underpinned by the depth of our leading Canadian deposit franchise, and the strong positioning of our wealth management and capital markets franchises.
Our ongoing progress on cost containment was another key contributor to our performance this quarter with that I'll turn it over to Graeme.
Graeme Hepworth: Great. Thank you Dan and good morning, everyone.
Graeme Hepworth: Starting on slide 19, I'll discuss our allowances in the context of the macroeconomic environment. As Dave outlined earlier, the market continues to gain confidence that interest rates have peaked in the current cycle and the probability of a hard landing for the economy is decreasing. Notwithstanding an improving macroeconomic outlook, we continue to see credit outcomes deteriorating as the lagging impact of interest rate increases takes hold for more clients.
Graeme Hepworth: Starting on slide 19, I will discuss our allowances in the context of the macroeconomic environment.
As Dave outlined earlier the market continues to gain confidence that interest rates have peaked for the current cycle the probability of a hard landing for the economy is decreasing.
Speaker Change: So notwithstanding an improving macroeconomic outlook, we continue to see credit outcomes deteriorating as the lagging impact of interest rate increases takes hold for more clients.
Graeme Hepworth: In the retail portfolio, delinquencies, insolvencies, and impairments continue to increase, with delinquencies and impairments above pre-pandemic levels. In the wholesale portfolio, we continue to see growth in watchlist exposure, net credit downgrades, and more names being transferred to our special loans team. As a result, and as Dave noted earlier, he added $133 million of provisions on performing loans this quarter. This marks the seventh consecutive quarter where we have added reserves on performing loans, translating into a $1.2 billion, or 37% increase, in our ACL on performing loans over this period. Our provision of performing loans has been consistent with the expected outcomes of a traditional credit cycle.
Speaker Change: In our retail portfolio delinquencies insolvencies of impairments continued to increase with delinquencies and impairment above pre pandemic levels.
Speaker Change: In our wholesale portfolio, we continue to see growth in watch list exposure, no credit downgrades and more names being transferred to our special loans team.
Speaker Change: As a result, and as Dave noted earlier, you added 133 million of provisions on performing loans this quarter.
Speaker Change: This marks the seventh consecutive quarter, where we added reserves on performing loans translating into a $1 2 billion or 37% increase in our PCL and performing loans over this period.
Speaker Change: Our provisions on performing loans has been consistent with the expected outcomes of a traditional credit cycle.
Graeme Hepworth: When we started adding reserves in the second half of 2022, provisions were largely driven by a deteriorating macroeconomic outlook, while credit performance remained strong. Through 2023, reserve additions reflected further deterioration in macroeconomic signals and, to a lesser extent, deteriorating credit performance, as clients started to feel the impact of higher rates and slow economic growth. This quarter, an improving macroeconomic outlook drove releases of provisions. However, these were more than offset by reserve additions for deteriorating credit performance. This quarter's provisions on performing loans were primarily in Canadian banking, driven by increasing delinquencies and a lower Canadian housing price forecast.
Speaker Change: When we started adding reserves in the second half of 2022 provisions were largely driven by the deteriorating macroeconomic outlook what credit performance remained strong through 2023 reserve additions reflected further deterioration in macroeconomic signals and to a lesser extent deteriorating credit performance as claims started to feel the impact of higher rates and slow economic growth.
Speaker Change: This quarter, improving macroeconomic outlook drove releases of provisions. However, these were more than offset by reserve additions for deteriorating credit performance.
Speaker Change: This quarter's provisions on performing loans were primarily in Canadian banking, driven by increasing delinquencies and a lower Canadian housing price forecast.
Graeme Hepworth: Partially offset by a release in wealth management, reflecting the strength in the U.S. macroeconomic outlook. As Dave highlighted earlier, we remain prudently provisioned, noting our total ACL loans of $5.6 billion are over two and a half times our PCL and impaired loans over the last 12 months. Moving to slide 20, provisions on impaired loans were up $146 million, or six basis points relative to last quarter.
Speaker Change: We offset by recently released in wealth management, reflecting the strength in the U S macroeconomic outlook.
Speaker Change: So as Dave highlighted earlier, we remain prudently provisioned what are your total your total loans of $5 6 billion, there's over two and a half times, our PCL on impaired loans over the last 12 months.
Speaker Change: Moving to slide 'twenty provisions on impaired loans were up 146 million or six basis points relative to last quarter.
Graeme Hepworth: With higher provisions in Canadian banking and capital markets. In our Canadian banking commercial portfolio, PCL and impaired loans of 45 basis points increased by 20 basis points compared to last quarter. It was above the pre-pandemic level.
Speaker Change: Higher provisions in Canadian banking and capital markets.
Speaker Change: At our Canadian banking commercial portfolio PCL on impaired loans of 45 basis points increased by 20 basis points compared to last quarter. It was about a pre pandemic levels.
Graeme Hepworth: This quarter, we took a large provisional loan in the automotive sector, where more has been impacted by lower demand for trucking post-pandemic. And our Canadian banking retail portfolio, provisions on impaired loans, were higher across all products, led by Credit Company. The increases in unemployment rates we observed through 2023 and the impact of higher interest rates are now translating into losses. For example, the Canadian banking retail stage 3 PCL ratio of 29 basis points has largely returned to our average historical loss rate of 30 basis points. In capital markets and wealth management, over 80% of our PCL and impaired loans this quarter were in the commercial real estate sector, which I'll discuss further in a moment. Moving to slide 21, gross impaired loans were up $494 million or six basis points this quarter, and our GIL ratio of 48 basis points is now slightly above pre-pandemic levels.
Speaker Change: This quarter, we took a large provision alone in the automotive sector for more has been impacted by lower demand for trucking post pandemic.
Speaker Change: And our Canadian banking retail portfolio provisions on impaired loans were higher across all products led by credit cards.
Speaker Change: The increases in unemployment rates, we observed through 2023 and the impact of higher interest rates are now translating into losses the.
Speaker Change: The Canadian banking retail stage, three PCL ratio of 29 basis points as larger trend towards average historical loss rate of 30 basis points.
Speaker Change: In capital markets and wealth management over 80% of our PCL on impaired loans. This quarter was in the commercial real estate sector, which I will discuss further in a moment.
Speaker Change: Moving to slide 21, gross impaired loans were up 494 million or six basis points this quarter, but our G. I L ratio of 48 basis points. So that was slightly above the average levels.
Graeme Hepworth: New formations were also hired this quarter, primarily in Canadian banking. In our retail portfolio, new formations were higher across all products, consistent with the trends we've observed in delinquencies and insolvency. In our wholesale portfolio, higher new formations were driven by the impairment of the loan in the automotive sector that I noted earlier, as well as higher new formations in the commercial real estate sector. Given the ongoing headwinds in commercial real estate, as well as the impairments and provisions we took in the sector this quarter, this provided some context on our exposure on slide 22. Our commercial real estate exposure represents less than 10% of our total loans and acceptances and has originated under sound lending standards.
Speaker Change: New formations were also higher this quarter, primarily in Canadian banking and.
Speaker Change: In our retail portfolio, new formations were higher across all products consist with the trends we've observed in delinquencies and insolvencies.
Speaker Change: In our wholesale portfolio higher new formations were driven by the impairment of the loading in the automotive sector that I noted earlier as well as higher new formations in the commercial real estate sector.
Speaker Change: Given the ongoing headwinds in commercial real estate as well as the impairments and provisions we took through the sector. This quarter you provided some context of our exposure on slide 22.
Speaker Change: Our commercial real estate exposure represents less than 10% of our total loans and acceptances is originated to sound lending standards.
Graeme Hepworth: Following a prolonged period of strength in the sector, we have seen impairments and losses increase since the start of the current rate hiking cycle in Q3 of 2022. However, these higher formations and losses have been consistent with our expectations and well within our risk appetite. Since the start of the rate hiking cycle, our cumulative new formations of impaired loans in the sector represent less than 0.2% of our total loans in acceptance.
The prolonged period of strength of the sector, we have seen impairments and losses increase since the start of the current redistricting cycle in Q3 of 2022.
Speaker Change: However, these higher formations and losses have been consistent with our expectations and well within our risk appetite.
Speaker Change: This is sort of the rate hiking cycle, our cumulative new formations of impaired loans in this sector represents less than 2% of our total loans and acceptances.
Graeme Hepworth: And our cumulative PCL and impaired loans represent just 1% of our pre-provisioned pre-tax earnings, demonstrating the benefit and strength of our diversified business model. Additionally, we have been prudently and consistently increasing our allowances for credit losses in the sector. Our downside provisioning scenarios account for a reduction in commercial real estate prices of 25 to 40 percent.
Speaker Change: Our cumulative PCL on impaired loans represents just 1% of our pre provision pretax earnings demonstrating the benefit and strength of our diversified business model.
Speaker Change: Additionally, we have been prudently and consistently increasing our allowances for credit losses in the sector.
Speaker Change: Our downside provisioning Suez account for reduction in commercial real estate prices of 25% to 40%.
Graeme Hepworth: As a result, our ACL ratio on performing commercial real estate loans is approximately three times higher than pre-pandemic levels, and our reserves are significantly higher in the U.S., where we've seen the large majority of impairments and losses to date. To conclude, while credit performance is weaker this quarter, it has trended in line with the guidance I provided last quarter. We continue to prudently build reserves on performing loans, while provisions on impaired loans of 31 basis points are returned to historical averages. Moving forward, credit outcomes will continue to be dependent on the magnitude of changes in unemployment rates, the direction and magnitude of changes in interest rates, and residential and commercial real estate prices. As always, we continue to proactively manage risk through the cycle, and we remain well-capitalized to withstand plausible yet more severe macroeconomic outcomes. With that operator, let's open the lines for Q&A. Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2.
Speaker Change: As a result, our ACL ratio on performing commercial real estate loans is approximately three times higher than pre pandemic levels that our reserves are significantly higher in the U S, where we've seen the large majority of impairments or losses today.
Speaker Change: To conclude well credit performance was weaker this quarter. It has traded in line with the guidance I provided last quarter.
Speaker Change: We continue to prudently build reserves on performing loans with provisions on impaired loans of 31 basis points to return to historical averages.
Speaker Change: Moving forward critical outcomes, we will continue to be dependent on the magnitude of changes in unemployment rates the direction and magnitude of changes in interest rates in residential and commercial real estate prices.
Speaker Change: As always we continue to proactively manage risk through the cycle and we remain well capitalized who stay implausible, yet where severe macroeconomic outcomes.
Speaker Change: With that operator, let's open the lines for Q&A.
Speaker Change: Thank you well, we're not take questions from the telephone lines. If you have a question. Please press star one on your devices keep at you.
Speaker Change: You make it so to your question at any time by pressing star too. Please.
Operator: Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Meny Grauman from Scotiabank. Please go ahead. Hi, good morning.
Speaker Change: Please press star one at this time, if you have any question.
Speaker Change: That will be a brief pause small participants, but just have four questions. We thank you for your patience.
Manny Roman: Our first question is from many Roman from Scotiabank. Please go ahead.
Manny Roman: Hi, Good morning, just maybe a question for Graham just start off just in terms of impaired PCL ratio came in higher than expected, we're seeing that trend at some peers as well.
Graeme Hepworth: Just maybe a question for Graeme to start off, just in terms of the impaired PCL ratio coming in higher than expected. We're seeing that trend at some peers as well. It looks like definitely that there's more stress in the unsecured BOCA across the sector.
Manny Roman: It looks like definitely there's more stress in the unsecured book.
Graeme Hepworth: From your commentary, it sounded like it was basically in line with your expectations, but I want to clarify that if there was anything that you're seeing that is different than what you would have expected when you spoke to us in Q4. Yeah, thanks, Manny, for the question. In terms of what we saw kind of play out this quarter, you know, I always divide it kind of into wholesale and retail. On the wholesale side this quarter, we probably were on the elevated side of what we were expecting in a quarter. But wholesale, you know, tends to be lumpy quarter to quarter. We had, you know, three specific names, two in the commercial real estate sector and one in the automotive sector, where we took fairly significant reserves.
Manny Roman: Okay across the sector from your commentary it sounded like.
Graham: It's basically in line with your expectations, but I want to clarify that if there was anything that you.
Graham: We're seeing that is different than what you would've expected when you spoke to us in Q4.
Speaker Change: Yeah. Thanks for the question.
Speaker Change: In terms of what we saw it kind of play out this quarter, maybe it was divided cut into wholesale and retail and the wholesale this quarter, we'd probably run the elevated side of what we were expecting in the quarter, but wholesale tends to be lumpy quarter to quarter. We had a you know three specific.
Speaker Change: Pacific names to the commercial real estate sector and one in the automotive where we took fairly significant reserves. So those three names themselves accounted for a quite a significant pick up in the quarter on quarter. Our stage three PCL, we expect wholesale will kind of continue at elevated levels, but because it probably doesn't persist at this level quarter to quarter.
Graeme Hepworth: So those three names themselves accounted for quite a significant pickup in the quarter on quarter stage three PCL. You know, we expect wholesale will kind of continue at more elevated levels, but that probably doesn't persist at this level from quarter to quarter. On the retail side, again, it was, you know, pretty broad. I think we've indicated in previous meetings that we do expect retail sales to pick up through the year. And we saw that kind of coming into play this quarter.
Speaker Change: On the retail side again, it was pretty broad based I think we'd indicated in previous meetings that we do expect our retooled it tick up through.
Speaker Change: Through the year, and we saw that kind of coming into play this quarter.
Graeme Hepworth: You know, much of what we saw pull through was what was happening in 2023, the rising rate environment and some of the increase in unemployment were now flowing through into the retail side, as well as insolvencies were ticking up. And so that is playing out in products like we expected, like cards. And to a lesser extent, but it is starting to flow through into products like mortgages as well. So the aggregate is probably a little bit on the higher side than we would have planned for. But I think, you know, in the aggregate for what we're expecting in 2024, reasonably in line. TransUnion recently published a report highlighting fraud as being a particularly big issue in Canada. I'm wondering how much of a driver fraud is in your impaired performance.
Speaker Change: Where we saw the pull through is what are you always wonder what's happening in 2023 of the rising rate environment and some of the increase in unemployment was now flowing through into the retail side as well as insolvencies were ticking up at sweat who's playing in products like we expected like cards.
Speaker Change: And to a lesser extent, but it is starting to flow through into products like like mortgage as well, so sort of aggregate probably a little bit on the higher side than we would've planned for it but I think as you know in the aggregate for what we're expecting in 'twenty 'twenty four I'm reasonably in line.
Speaker Change: And just.
Trends Union recently published a report.
Speaker Change: Alright, lighting fraud as being particularly.
Speaker Change: Being a particularly big issue in Canada, I'm wondering how much of a driver as fraud in your impaired.
Speaker Change: Performance.
Graeme Hepworth: Do you see that as a big issue, a growing issue, maybe? From a PCL perspective, these would be fairly pure credit numbers, not fraud numbers, if you will. Certainly, fraud is a risk vector that we're very focused on, and we invest a lot to mitigate those risks to the bank, but that wouldn't be what's showing up in the PCL numbers. And then, finally, just in terms of... Andy, maybe we'll go to one question. Can you rescue them?
Speaker Change: Do you see that as a big issue a growing issue maybe.
Speaker Change: From a PCL perspective, these would be fairly pure credit numbers like broad numbers. If you will certainly fraud is a is a risk factor that we're very focused on and we need to invest a lot to mitigate those risks to the bank, but that wouldn't be what's showing up in PCL.
Speaker Change: And then finally just in terms of any maybe it will go down.
Speaker Change: Just one question can you re queue. Thanks sure.
Operator: Thanks. We'll get to you. Thank you. Our next question is from Ebrahim Poonawala from Bank of America. Please go ahead. Good morning.
We'll get to you.
Speaker Change: Thank you. Our following question is from Ebrahim and putting them under some bank of America. Please go ahead.
Ebrahim: Hey, good morning, I guess, maybe just sticking with your own credit you mentioned, two things Oh don't P Seattle being sensitive to the alka for unemployment.
Graeme Hepworth: I guess maybe just Graeme speaking with your own credit. You mentioned two things around PCL being sensitive to the outlook for the unemployment rate. Tell us what you are assuming if even looking out into 25, where you think the unemployment rate goes higher or lower in 25. And then just the importance of the yield curve staying where it is. Does a five-year at three and a half percent plus still create pressure on PCLs and impaired PCLs as we look into next year? Thank you.
Ebrahim: Tell us what you're assuming it's even looking out into 'twenty five day, you'd think unemployment rate goes higher or lower in 'twenty five and then just the importance of the yieldco staying where it is does it if I did it three and a half dozen plus still create pressure on P. C. As in impaired PCL as we look into next year. Thank you.
Speaker Change: Yes, Thanks Ebrahim.
Graeme Hepworth: Yeah, thanks, Ebrahim. So, I think as we look forward, I think you've hit on some of the key variables. I think, you know, some of the key drivers that we're focused on and that will drive kind of our view of how, you know, what credit losses will play out in the coming year and into 2025 really are, as you said, the trajectory of unemployment, and the trajectory of rates. And I would maybe add the kind of the third big one to that is valuations, particularly around HPI and commercial real estate prices. You know, our current forecast on unemployment is that we have that picking up really significantly from where we are now to, you know, about 6.6% mid-year 2024.
Speaker Change: So I think as we look forward I think.
Speaker Change: You hit on some of the key variables I think you know some of the key drivers that we're focused on and that will drive kind of our view of those.
Credit losses will play out in the coming year and into 2025, we really are as you said the trajectory of unemployment to kind of the trajectory of rates and I would maybe add to that kind of a third big one that is valuations, particularly around H P. I.
Speaker Change: Commercial real estate prices you know our current forecast.
Speaker Change: On unemployment, because we have that picking up fairly significantly from where we are now to six 6% midyear 2024.
Graeme Hepworth: You know, we'll see if that plays out like that. Certainly, in kind of recent months here, unemployment in Canada has kind of proven to be a little bit more resilient than we'd anticipated. But then as to how that plays out in PCL, when you think about something like unemployment, you know, there's definitely a lag factor that comes on the back of that.
Speaker Change: You know that's we will see if that plays out like that certainly isn't kind of recent months here unemployment in Canada has kind of proven to be a little bit more resilient than we'd anticipated.
Speaker Change: But then as to how that plays out in PCR. When you think about something like an employment you know theres a lag factor that comes on the back of that and so that's kind of the kind of you would take that you take the pressure of interest rates and the refinancing cycle it'll it'll play out so how do I read it was certainly on the retail side, we do expect that.
Graeme Hepworth: And so that's kind of the kind of, you know, take that, take the pressure of interest rates and the refinancing cycle that'll, that'll play out. That's kind of why we, you know, certainly on the retail side, we do expect that the, that stage three credit losses will kind of continue to build and kind of peak out more as we get into the latter half of 2024 and into the earlier half of 2025. Again, on the wholesale side, you know, we're seeing some of the benefit of rates maybe coming into play earlier, that maybe plays out a bit sooner, particularly on the large corporate side. We've been running at more elevated kind of stage three losses there. So I don't say we would trend that the same way.
Speaker Change: The phase III credit losses will kind of continue to build in and couldn't pick out more as we get into the latter half of 'twenty 'twenty four and to the earlier half of 2025.
You get on the wholesale side, we're seeing some of the benefit of rates may be coming into play earlier that maybe plays out a bit sooner, particularly in the large corporate side, we've been running at more elevated kind of stage III losses. There. So we don't see we were trimmed out the same way, but on the wholesale side on the smaller side stay under the small business under 10 million commercial is where we would accept.
David McKay: But on the wholesale side, on the smaller side, say under that, you know, small business under 10 million commercial is where we would expect to see kind of similar pressures and similar buildings overall. So that's kind of the total picture there. Ibrahim, again, I think you hit some of the key factors in terms of how we see them and kind of the timeline of how we see that playing out a little bit. And as a follow up, maybe Dave for you.
Speaker Change: We expect to see kind of similar pressures in similar building overall, so that's that's kind of the total picture there.
Speaker Change: Ebrahim again, I think you hit some of the key factors in terms of how we see them in and kind of the timeline of how we see that playing out a little bit.
Ebrahim: Got it and as a follow up maybe Dave for you.
David McKay: It looks like CNB is back on track in terms of the actions you've outlined and what you've already done. Just give us a sense of, I think, in January, you talked about appetite for wealth management, commercial M&A in the US, and just where we are in terms of growth strategy. There's a lot of disruption going on in the US across capital markets. Well, are we just playing offense?
Ebrahim: It looks like C. N V is back on track in terms of the actions you outlined and what you've already done just give us a sense of I think in January you talked about appetite for wealth management commercial M&A in the U S. Just maybe add in terms of growth strategy. There's a lot of disruption going in the U S across capital markets well just.
Ebrahim: Are we playing offense what the thought process that is thank you.
David McKay: What is the thought process there? Thank you. Yeah, I think it's certainly our focus is on profitability at Citi National. I think there's a real opportunity for us to continue to operate this business and build this business out and make more money doing it even with the existing balance sheet. We'll continue to talk about that. I think to continue to grow sustainably in the US, you need deposits.
Ebrahim: Yeah.
Speaker Change: Certainly I think our focus is on <unk>.
Speaker Change: Profitability at city National I think there's a real opportunity for us to continue to operate this business and build this business out and make more money doing it even with the existing balance sheet and we'll continue to talk about that I think that continues to grow sustainably in the U S. You need deposit. So our focus is on growing deposits, we have an 85% loans.
David McKay: So our focus is on growing deposits; we have an 85% loan deposit ratio, which is good. But to continue to grow, we want to maintain that and lower that if we can. So, very much from a product perspective, and a push perspective, you'll see good deposit growth, which will add to profitability. We are well positioned with our wealth management franchise to capture the move out of treasury bills into equities and into investments
Speaker Change: <unk> ratio, which is good but to continue to grow we maintain that and lower that if he cancels very much from a product perspective push perspective, you'll see good deposit growth, which will add to profitability.
Speaker Change: We are well positioned with our wealth management franchise to capture the move out of a treasury bills into equities.
Speaker Change: Equities into into investments. So I think our very strong wealth platform will capture about flow business as well as continuing to grow our advisor base. So we're still adding teams were still being very successful in growth and productivity per adviser.
David McKay: So I think our very strong wealth platform will capture that flow business, as well as continue to grow our advisor base. So we're still adding teams, we're still being very successful in growth and productivity per advisor, and expanding the product line within the wealth platform. All those are strong growth drivers for us. And on the capital market side, we continue to enhance our team, grow our team, and compete very well. You saw the market share. We gained on a fee basis up to eight in Q1, so very, very strong organic opportunities to grow, very strong profitability enhancements. That would be a nice tailwind for us that we're happy about. And as it comes to M&A, to the last part of your question, we are continuing to think through how we scale each of our franchises. Notwithstanding, it was very unlikely for us to make an acquisition in the capital market space.
Speaker Change: Spanning the product line within the wealth platform. All of those are are strong growth drivers for us and on the capital market side, we continue to enhance our team grow our team compete very well you saw the market share.
Speaker Change: We gained on the on a fee basis up to eight <unk>.
Speaker Change: Q1, so very very strong organic opportunities to grow very strong profitability enhancements that will be a nice tailwind for us. So we're happy about it as it comes to M&A to the last part of your question. We will we are continuing to think through how do we scale each of our franchises.
Speaker Change: Notwithstanding what very unlikely to make an acquisition in the golf market space, but as Ive said before really focused on the wealth space and the commercial space over time.
Speaker Change: Nothing imminent, obviously, we're focused on profitability and strengthening our platform, but we continue to think through that space rebuild our capital from HSBC.
David McKay: But as I said before, really focused on the wealth space and the commercial space over time. Nothing imminent, obviously, we're focused on profitability and strengthening our platform. But we continue to think through that space, and rebuild our capital from HSBC. Thank you very much.
Speaker Change: Acquisition.
Speaker Change: We gave you some more color on.
Speaker Change: This morning, and therefore, we think we're well positioned to continue to grow our U S franchise from a scale and profitability perspective, So no change in strategy and always kind of focused on what's the right place overtime, but nothing imminent as well.
David McKay: Thank you, Dave. Thank you. Our next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Hi, good morning.
Speaker Change: Thank you Dan.
Speaker Change: Thank you. Our following question is from Doug Young from Desjardins Capital markets. Please go ahead.
Doug Young: Hi, Yeah. Good morning, just on your slide seven each S. D C. Canada, obviously, you like a Q4 results for that business and it did deteriorate a bit.
Neil Mclaughlin: Just on slide seven, HSBC Canada, obviously, you look at Q4 results for that business and did deteriorate a bit. And just trying to see if it doesn't look like your accretion or cost synergy expectations have changed. I know you're going to get more of an update with Q2, but just talk about why you're still confident with that.
Doug Young: Just trying to see if it doesn't look like your accretion or cost synergy expectations has changed I know you're going to get more of an update with Q2, but just talk about why you're still confident with that and then on the integration timeline. Thanks for this figured you know the.
Neil Mclaughlin: And then on the integration timeline, thanks for this. Figured, you know, the expense reductions would be more, I guess, would be faster given it's an in-market, lots of overlap. Just wondering if there's anything I should be thinking about or anything I'm missing on that. Thanks for the question, Doug. It's it's Neil.
Doug Young: The expense reductions would be more I guess would be faster given it's an in market lots of overlap I'm just I'm wondering if there's anything I should be thinking about or anything I'm missing on that front.
Doug Young: Okay. Thanks for the question, Doug It's it's Neal.
Neal: In terms of the cost synergies, we still remain really confident in terms of the $740 million.
Neil Mclaughlin: Yeah, in terms of the cost energies, you know, we still remain really confident in terms of the $740 million of Cost Synergies. The closing convert is part of why, you know, we have so much confidence around it. The first synergies that will come out will really be technology-related, so those will be towards the front end.
Neal: Of cost synergies that closing convert is part of why you know we have so much confidence around it the first synergies that will come out and really be technology related so those will be towards the front end.
Neal: In terms of the timing the timing delays, we really havent really I'd say change the sort of the calendar timing of when the cumulative cost synergies will roll in it's really from the delay we had in terms of regulatory approval and then having to slide back that closing convert date. So that's.
Neil Mclaughlin: In terms of the timing, the timing delay is we really haven't really, I'd say, changed the sort of the calendar timing of when the cumulative cost synergies will roll in. It's really from the delay we had in terms of regulatory approval and then having to slide back that closing convert date. So that's. That's really the driver of the timing.
Neal: That's really the driver of the timing.
David McKay: Okay. And then, if I can just follow up, Dave, on Citi National. You know, it was obviously profitable, excluding FDIC charges. I think it was $88 million.
Neal: Okay.
Speaker Change: And then if I could just follow up Dave on city National.
Dave: Obviously profitable excluding FDIC charges thinking J D. Again, the NIM was up I know you're investing a lot you've got a new management team in place can you talk about the timeline I think you talked in your prepared remarks about a normalized net income in 2025 can you talk about the timeline have been you know some of them I guess.
David McKay: You know, the NIM was up. I know you're investing a lot. You've got a new management team in place. Can you talk about a timeline?
David McKay: I think you talked in your prepared remarks about a normalized net income in 2025. Can you talk about a timeline about something similar, I guess, like, in terms of how you get back to profit, profitability, or appropriate profitability? And what is that appropriate profitability for Citi National? Yeah, we'll go through kind of our targets later in the year as far as each of our businesses and their potential. But you know, for us here, we do believe that City National is kind of a full run rate.
Dave: In terms of how you get back to profit profitability or appropriate profitability and what is that appropriate profitability for forest City national.
Speaker Change: Yeah, well I won't go through kind of our targets are later on the year as far as each of our businesses and their potential but you know for US there. We do believe that city national is that it's kind of full run rate.
David McKay: This year to complete its platform build-out and we'll continue that through the year and then as you come through 2025 we expect that to start to moderate and create some some tailwinds for P&L So as we come through that year, there are other areas where we're taking out costs in the platform to accommodate Profitability growth we have repositioning as I said in my prepared comments Of the balance sheet around more multi-product clients and getting a better ROE out of our existing balance sheet as well Which I think you know, you've seen me create the analogy with capital markets. We had very rapid growth in 2013 to 2016 we've spent a lot of time extracting more return out of that balance sheet We're doing something very similar now in C&B given the two and a half fold increase was so quick We're not getting the return we want in all our client franchise there so we're focused on that so that enhancement you saw the you know securities that Higher yielding securities that we're able to put on the balance sheet has helped as well So all of that as we look at our trajectory gives us the confidence that we're getting going to get back to more normalized ROE, [inaudible] Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Good morning.
Speaker Change: This year to complete its platform build out and we'll continue that through the year and then as you come through 2025, we expect that to start to moderate and creates some tailwind for P&L. So as we come through that year or there are other areas, where we're taking out costs in the platform.
Speaker Change: To accommodate our profitability growth, we have a repositioning as I said in my prepared comments.
Speaker Change: Of the balance sheet around more multi product clients and getting a better ROI out of our existing balance sheet as well, which I think you've seen me crazy analogy with capital markets. We had very rapid growth in 2013 to 2016, and we've spent a lot of time extracting more return out of that balance sheet. We're doing something very similar now in C. N V.
Speaker Change: Given a two and a half folds increase was so quick.
Speaker Change: We're not getting the return we want in all our client franchise. There. So we're focused on that so that enhancement you saw the securities that are of a higher yielding securities that were able to put on the balance sheet has helped as well. So all of that as we look at our trajectory. It gives us the confidence that we're getting going to get back to more normal.
Speaker Change: Our away.
Speaker Change: And 25 and a tailwind from there. So we'll provide kind of a more of a waterfall to that but when we look at our cost trajectory revenue opportunities repositioning of assets, we feel confident of generating strong returns out of this business again in 2020 five.
Speaker Change: I appreciate it thank you.
Thank you. Our following question is from Gabriel to Shang from National Bank Financial. Please go ahead.
Operator: First question on the RWA output floor: My math agrees with yours that it won't hit you until 2025. How do you plan for that eventuality? Do you just eat it?
Gabriel Shang: Good morning first question on the output.
Gabriel Shang: Output floor, Oh, my math agrees with doors that it won't become effective.
Gabriel Shang: Until 2025, how do you plan for that Eventuality do you just eat.
Speaker Change: You did.
Operator: Do you go after more standardized customers? Do you curb balance sheet growth or debanking customers, something along those lines? And then my second question is for Doug, the wealth business. The non-CNB stuff, that is. I'm looking at what's going on in the UK and, you know, one of your peers there is...
And go after more standardized do her balance sheet growth or deep banking customer or something along those lines and then my second questions for Doug.
Speaker Change: Our wealth business.
Speaker Change: Uh huh.
Speaker Change: No one C N V and stuff that is I'm looking at what's going on in the U K and you know what.
Speaker Change: One of your peers there is facing some difficulties.
Operator: Facing some difficulties, cutting the dividend and refunding customers, and, you know, regulator scrutiny is an issue. Wondering what, if any, impact it has had on your business? You've acquired Blue Bay and Bruin Dolphin over the past, you know, years.
Speaker Change: Cutting the refunding.
Speaker Change: The refunding customers and you know.
Speaker Change: Regulators scrutiny is an issue I'm wondering you know what if any impact has been on your business you've acquired blueberry and.
Speaker Change: Rune dolphin over the over the past years.
Operator: And, you know, is there any reason for me to be thinking about that as a potential, you know, top line hit or cost hit, something like that? Well, thanks, Gabe. I'll start off with the first question on the floor.
Speaker Change: Is there any reason for.
Speaker Change: Thinking about that as a potential topline hit or or cost or something like that.
Well, thanks, Gabe I'll I'll start off with the first question around the the floor and it is something that we do closely monitor I think with every two 5% increase you did see a buffer dropped by about $20 billion, but we've done a bad over 30 billion of optimization since 2023 and when we talk about optimization.
Nadine Ahn: And it is something that we do closely monitor. I think with every 2.5% increase, you do see the buffer drop by about $20 billion. But we've done over $30 billion of optimization since 2023. And when we talk about optimization, what we're really focused on is around data cleanup, because a lot of what you see as it relates to some differential between standardized and ARB comes in part as it relates to getting better clarity on data, whether you're on collateral or when you're looking at rated companies, etc.
And what we're really focused on is around the data clean up because a lot of what you see as it relates to some differential between our standard is an air B comes in part as it relates to getting better clarity on data, whether you're on collateral or when youre looking at a rated companies et cetera. So we continue to think that we have.
Nadine Ahn: So we continue to think that we've got more optimization as it relates to that going into 2025 to help benefit from and create some room. But we do recognize the fact that it will become binding at a point as it relates to, and you just have to continue to manage your optimization across your balance sheet, ensuring that you're profiling your capital out to those business segments to generate our focus is really on a strong ROE. Okay, well, probably worth more of a fulsome discussion offline.
Speaker Change: Got more optimization as it relates to that are going into the into 'twenty 'twenty five to help benefiting create some room, but we do recognize the fact that it will become binding a I had a point as it relates to when you just have to continue to manage your optimization across your balance sheet and ensuring that you're you're.
Speaker Change: We're filing your capitalized to those business segments have generated by our focus on is really on a strong Roe.
Speaker Change: Okay, well, probably work more with more of a fulsome discussion offline I know Ralph.
Operator: Anyway, well... Yeah, hopefully you won't need a more fulsome discussion on this. I mean, it's pretty clear that you're talking about the consumer duty focus in the UK, which is similar to many jurisdictions where regulators have over time taken a higher interest in making sure that customers are treated fairly. And the competitor you're pointing to is a very decentralized model. They had fee scales that were very diverse across customer bases. And they're having to adjust because of that. We don't, we don't have that.
Ralph: Yeah, hopefully you won't need a more fulsome discussion on this I mean, it was pretty good it's a so you're talking to the consumer duty focus in the U K, which is similar to many jurisdictions, where regulators over time I've taken a higher interest in making sure that customers are treated fairly.
Ralph: Competitor, you're pointing to.
Ralph: As a very decentralized model they had fee scales that we're very diverse across customer bases.
Ralph: And they're having to adjust because of that we don't we don't have that what we liked about brewin dolphin frankly is the direction of travel for the business model is one that fits with the consumer duty, it's very much advice focused planning focus with the client.
Douglas Guzman: What we liked about Bruin Dolphin, frankly, is the direction of travel for the business model is one that fits with consumer duty. It's very much advice-focused, and planning-focused with the client. You know, we'll make some tweaks around fee scales to make absolutely certain that everyone is getting consistent treatment across the different channels, the different target market segments, where we're quite comfortable. And from an asset management perspective, on the Blue Bay side, there's less acute focus there. ,,,,,,,, All right, thank you.
Ralph: You know, we'll make some tweaks around few skills to make absolutely certain that the everyone is getting consistent treatment across the different channels the different market target market segments, but we're quite comfortable and from our asset management perspective on the root bluebay, sorry, there's less acute focus there mhm.
Ralph: It is now fully integrated with the rest of the World wasn't management. So over the last 12 to 18 months, there's been a fair amount of heavy lifting which we haven't really highlighted externally.
Get the systems integrated to get teams integrated to create a more scalable leverages will infer.
Ralph: Infrastructure around both operations and distribution.
Ralph: And so that's really been the focus of the Blue band and it's a lot the consumer duty piece is much more on the distribution side on the device side.
Ralph: Okay.
Speaker Change: Alright, thank you.
Speaker Change: Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Operator: Thank you. Our next question is from Mario Mendonca from TD Securities. Please go ahead. Good morning.
Graeme Hepworth: This question might be appropriate for Graeme. There's this evolving narrative I'm hearing from our banks that PCLs could move a little higher here in the near term, there would be a transition, and then they would start to decline perhaps by early or mid-decade. What I'm asking about is this: while rates were moving higher, it took some time before it had the effect of causing PCLs to move higher. In fact, we're only seeing a meaningful increase in PCLs, it seems like, this quarter. That's quite a long lag from when rates started to rise to when we see the PCLs. Why would it be the case, then, that declining rates late this year would lead to such an abbreviated cycle, a period of declining PCLs following shortly thereafter? Why wouldn't there be a meaningful lag where we see higher PCLs before the effect of lower rates has the desired outcome? Yeah, thanks, Mario.
Mario Mendonca: Good morning, this question might be appropriate for Graham.
There's this evolving narrative I'm hearing from our banks that.
Mario Mendonca: P C S could move a little higher here in the near term there'd be a transition and then they would start to decline perhaps by early 'twenty five or mid 'twenty five.
Mario Mendonca: What I'm asking about is this while rates were moving higher it took some time before it had the effect of causing pcl's to move higher in fact, we're only seeing the meaningful increase in P. C. All it seems like this quarter that that's quite a long lag from when rates started to rise. So when we saw the P. C L why would it.
Mario Mendonca: Would be the case, then that declining rates late this year.
Mario Mendonca: Would lead to such a what such an abbreviated cycle a period of declining pcl's. Following shortly thereafter, why wouldn't there be a meaning a lag where we see higher P. C. All before the effect of lower rates have the desired outcome.
Speaker Change: Yeah. Thanks, Mario I'm, it's a good question and again I would just start by saying rates are certainly one critical factor to try his PCL, but it's not the sole critical factor that's driving PCL rate and when you look at a portfolio like ours, it's very diversified.
Graeme Hepworth: It's a good question. And, again, I would just maybe start by saying rates are certainly one critical factor that drives PCL, but it's not the sole critical factor that drives PCL, right? And you look at a portfolio like ours that's very diversified, both geographically, sector, consumer, wholesale, rates play out differently in each of those segments. You know, and so in certain rate sensor products, you know, whether it be an RCL in retail, there's going to be a more concurrent effect, if you will, with rates going up and down than in other products.
Speaker Change: Well geographically sector consumer wholesale rates plays out differently in each of those segments.
Speaker Change: And so and so.
Speaker Change: Reed sensor products, whether it be in our C O and in retail.
Speaker Change: Can it be a more concurrent effect, if you will with rates going up and down then there's another products.
Graeme Hepworth: But likewise, you know, factors like unemployment, which we talked about previously, are certainly a big indicator of where our PCL will go. And so that's kind of what drives, we bring all those into the mix, and we're kind of considering our forecast and thinking about it going forward. You know, as you said, we're seeing some of that lag effect happen on rates. That's why we do, and I indicated earlier, between that and unemployment, why we see this kind of grading out and kind of through 2024 and into 2025. Certainly, what happens kind of beyond that, we're starting to get into a forecast period that is highly dependent on how all this plays out. But again, it's the combination of all these factors and not just rates by themselves that I think will ultimately define our trajectory for PCL. Okay, a somewhat related question.
Speaker Change: But likewise factors.
Speaker Change: Doctors like unemployment, we talked about previously are certainly a big indicator of where our PCL will go.
Speaker Change: So that's kind of a driver we bring all of those into the mix. When we are kind of considering our forecasts and people going forward you know.
Speaker Change: As he said, we're seeing some of that lag effect happened on rates.
Speaker Change: That's why we do what I was indicating earlier between that and unemployment why do we see this kind of grading out and kind of through 2020 forward into 2025, certainly what happened.
Speaker Change: And it's kind of beyond that because I mean, we're starting to get into our forecast period that is highly dependent on how all this plays out.
Speaker Change: But again, it's the combination of all these factors are not just rates by itself.
Speaker Change: Well ultimately define our trajectory of P. C L.
Speaker Change: Somewhat related question it would appear that the Canadian consumer is slowing down and I think you've made the point in your opening comments, we're seeing a Canadian consumer slow down.
Neil Mclaughlin: It would appear that the Canadian consumer is slowing down. I think you made the point in your opening comments that we're seeing a Canadian consumer slow down somewhat more abruptly than in the US. The contrast, however, is the 3.7% sequential growth in commercial loans this quarter. That confuses me. It confuses me to see the Canadian consumer slow down somewhat abruptly, but yet Royal and others are showing such robust growth in commercial sales. How do those two things happen simultaneously? Yeah, I'll start Mario. It's Neil.
Speaker Change: Somewhat more abruptly than than in the U S.
Speaker Change: Contrast, however is the three 7% sequential growth in commercial loans this quarter.
Speaker Change: That confuses me confusing to me to see the Canadian consumer slow down somewhat abruptly, but yet royal and others showing such robust growth in commercial how do those two things happen simultaneously.
Speaker Change: Yeah, I'll start Mario it's Neil I mean, if you look at it we've talked about this for a number of quarters and our commercial strategy you know we've.
Neil Mclaughlin: I mean, if you look at it, we've talked about this for a number of quarters in our commercial strategy, you know, we've made quite a pivot to restructure our front office to get our most senior bankers lined up against our larger commercial clients. And that's where we've been adding FTE. So that has been a multi-year strategy.
Neil Mclaughlin: We've made quite a pivot to restructure our front office to get our most senior bankers lined up against our larger commercial clients and that's what we've been adding adding FTE. So that has been a multi year strategy and the re segmentation, we'd say, we feel really good it's paying off in the way we intended we're seeing the growth come from.
Neil Mclaughlin: And the resegmentation, we'd say we feel really good, it's paying off in the way we intended, we're seeing growth come from larger clients. And we also set out in that strategy to make sure we really liked the diversification. And we're seeing that growth across multiple sectors; things like agriculture, things like our auto business have seen very good growth. So that's where we would really look at it. We've not expanded our risk appetite for that business.
Neil Mclaughlin: The larger clients and we also set out and that strategy to make sure we really like the diversification that we're seeing.
Neil Mclaughlin: That growth across multiple sectors things like agriculture things like our auto business has seen very good growth. So that's where we would really look at it.
Neil Mclaughlin: We've not expanded our risk appetite in that business in fact, where we look we've 80, Dave mentioned at 80 plus percent of our growth is coming from existing clients and where we've added new clients. These are actually as good or better rated clients than we would've had in previous years. So.
Neil Mclaughlin: In fact, where we look, we've 80 Dave mentioned it 80 plus percent of our growth is coming from existing clients. And where we've added new clients, these are actually as good or better rated clients than we would have had in previous years. So, in our business, we would say this is around a purposeful strategy, and it's led by a front office, and it's led with advice and capability. Okay, sounds like a royal thing.
Neil Mclaughlin: In our in our business, we would say this is around a purposeful strategy and it's led with a front office and has led with advice and capability.
Neil Mclaughlin: That sounds like a royalty banking it's.
David McKay: All right, Dave, just to add some macro color to it, I did also say in my comments, as you probably picked up, that we do expect CapEx to slow as well, as some businesses anticipate in the manufacturing and logistics sector, slowing goods and potentially service demand in the economy. Now, the one variable, so we are seeing kind of equivalency and macro impact there. One of the dimensions that we all struggle to predict is what's going to happen with the $350 billion of consumer deposits that largely sit in GICs right now. Some will flow, as we expect, back into equities and back into investment products. And some will create stimulative demand. So that's different than the United States, where a large part of the surplus deposits of $3.5 trillion have already been spent.
Steve: Steve just to that.
Steve: Color to it I did also say in my comments as you probably picked up that we do expect capex to slow as well as some businesses anticipate into manufacturing and logistics sector slowing goods and potentially service demand in the economy and the one variable. So we are seeing kind of I'd put let's see in macro impact there.
Steve: One of the dimensions that we all struggle to predict is what's going to happen with the $350 billion of consumer deposits largely sit in gic's right now some will flow as we expect back into equities and back into investment products. Some will create stimulative demand. So that's different than the United States, where the large part of the surplus the pause.
Steve: That's a three and a half trailing haven't been spent already Canada sits on that buffer and it's helped to absorb some cash flow challenges from higher rates.
David McKay: Canada sits on that buffer, and it's helped absorb some cash flow challenges from higher rates, but it largely remains, particularly in the top 40% of Canadians, largely intact from where it was last year. So we're watching that carefully to see how that gets deployed, but it can serve all those purposes, right? A buffer for risk, a stimulant for growth, and a higher yield on investment products. That's helpful.
But largely remains particularly in the top 40% of Canadians largely intact from where it was last year. So we're watching that carefully to see how that gets deployed but it's sort of all those purposes right a buffer for a risk a stimulant for growth and a higher yield into investment products.
Speaker Change: That's helpful. Thank you.
Operator: Thank you. Thank you. The following question is from Paul Holden from CIBC. Please go ahead.
Speaker Change: Thank you. Following question is from Paul Holden from CIBC. Please go ahead.
Operator: Yeah, thank you. Two questions. The first one is with respect to funding cost pressures. You've highlighted funding cost pressures, and I think some of the other banks have as well. It seems to be lasting longer than we would have expected, let's call it last quarter.
Yeah. Thank you two questions first one is with respect to our funding cost pressures, you've you've highlighted funding cost pressures and I think some of the other banks have as well it seems to be lasting longer than we would've expected you know let's call. It last quarter. What's your what's your recent view on when this might abate.
Neil Mclaughlin: What's your recent view on when this might abate, and what would be, I guess, the key catalyst or trigger for those funding cost pressures to abate? Yeah. Hi, Paul. It's Neil.
Speaker Change: And what would be I guess, the key catalysts or triggers for those funding cost pressures to abate.
Speaker Change: Yeah, Yeah, Hey, Paul it's Neil I'll I'll start us off them. So I think the the factors there are within the retail business I would point to two of them. One is the mix of deposits. So we are seeing in our core noninterest bearing consumer deposits. I'm. You know those are are marginally down year over year, our savings accounts are again, while they.
Neil Mclaughlin: I'll start us off. So I think the factors there in the retail business, I would point to two of them. One is the mix of deposits. So we're seeing in our core non-interest-bearing consumer deposits, which are marginally down year over year. Our savings accounts, again, while they pay interest, they're still a very valuable deposit for us. Those are also down modestly year over year.
Neil Mclaughlin: Pay interest, it's there's still a very valuable deposit for us those are also down modestly year over year in Stark contrast to the GIC book. They reference we were up about $10 billion quarter over quarter in <unk> and it's the same trend. We've commented on for a couple of quarters, which as you know.
Neil Mclaughlin: In stark contrast, the GIC book Dave referenced, we were up about $10 billion quarter over quarter in GICs. And it's the same trend we've commented on for a couple of quarters, which is, you know, excess liquidity still not having mass retail investor confidence to step up to, in our case, the fund business or, in Doug's Wealth business, into more equities or securities. And so while some of those client rates are off, they're still quite attractive. So that continues to be a rotation that we've commented on before.
Neil Mclaughlin: Excess liquidity still not having mass retail investor confidence to step it too in our case, the fund business or and doug's well our business into more equities securities.
Neil Mclaughlin: Securities and so they're there well well some of those client rates are off theyre still quite attractive. So that continues to be a rotation that we've commented on before.
Neil Mclaughlin: The second part of that I would say is the spreads within the GIC book, while still very strong, they have come down over the last year as we've seen a lot more competition for those term deposits. So it's both rotation and mix and then competitive pricing on the consumer book. It's basically the same trend as we get into our commercial deposits. However, we're seeing larger growth at the upper end in our larger commercial and corporate deposits. Those are lower margin deposits and really point to a mix. And there has been, again, steep price competition for the term product amongst those commercial and corporate.
Neil Mclaughlin: The second part of that I would say is the spreads or the spreads within the GIC book.
Neil Mclaughlin: While still very strong or they have come down over the last year as we've seen a lot more competition for those term deposits. So.
Neil Mclaughlin: It's both a rotation and mix and then competitive pricing on the consumer book.
Neil Mclaughlin: It's basically the same trends as we get into our commercial deposits, we're seeing a larger growth at the upper end in our larger commercial and corporate there is those are lower margin deposits and really point to a mix and there has been on again steep price competition for the term product amongst those.
Neil Mclaughlin: So in corporate so very much mirrors I'd say the same themes.
Neil Mclaughlin: So, it very much mirrors, I'd say, the same theme, on both sides of the consumer and then corporate and commercial. And I would just add to that, I mean, they obviously are still a very strong, good source of funding, right? So it drives down the overall wholesale funding requirement.
Neil Mclaughlin: On both sides of consumer and then corporate and commercial.
Speaker Change: I'd just add to that I mean, they obviously are still a very strong good source of funding right. So it drives down the overall wholesale funding requirement, but in addition, I think given when we talk about with Dave's comments earlier were that flow of funds, maybe given the dominance when Neil mentioned around the wealth management business, while we may not capture that through.
Nadine Ahn: But in addition, I think given Dave's comments earlier, where that flow of funds may be given the dominance that Neil mentioned around the wealth management business, while we may not capture that as a funding source, it does actually look to come back in from a fee revenue standpoint. Just to provide some context on Nadine's comment, in the quarter, about half of that flow into GICs would be coming outside of the Canadian retail business, with the majority of that coming from outside the institution. I got it.
Speaker Change: As as a funding source it does actually look to come back in from a fee revenues just to provide some context on the Dean's comment in the quarter about half of that flow into gic's would be coming outside of the Canadian retail business with the majority of that coming from outside of the institution.
Speaker Change: Got it and I mean that kind of leads to my my second question is the point that they've raised just just previously because at some point in time when rates go down.
Operator: And I mean, that kind of leads to my second question, the point that Dave raised just before, is at some point in time when rates go down, you'd expect these GIC deposits, these term deposits to flow into other savings vehicles, mutual funds, or what have you. What then becomes the liquidity solution at that point in time? Obviously, those deposits have to be replaced by something. Is that what Nadine referred to?
Speaker Change: You would expect these these GIC deposits these term deposits to flow into other savings vehicles mutual funds or or or what have you. What's kind of then becomes a liquidity solution at that point in time, obviously those deposits has to be replaced by something is it what dean referred to maybe its wholesale funding.
Operator: Maybe it's wholesale funding, or how do you think that plays out? I think that's one of the reasons we're so focused on our deposit franchise and have been in a lot of client acquisition that Neil has spoken about in the past, and particularly our record client acquisition last year and into this year, and our newcomer to Canada. And you think about HSBC, that's just giving us more opportunity to grow our demand deposit book, while there is an expectation that when markets come down, that markets improve, and rates come down, that those deposits could flow into things like mutual funds. I think there's also the growth that we continue to have overall in our client franchise that will help stem that. And then we also do have a leading position, you know, in our wholesale funding; we do price it quite lower than the rest of the peer group on that, but I think that we've got opportunities in cash management that we've discussed in the U.S. to help supplement our asset growth.
Speaker Change: Or how do you think how do you think that plays out.
Dean: I think that's one of the reasons. We're so focused on our deposit franchise and have been in a lot of the client acquisition that Neal spoken to in the past and particularly our record client acquisition last year and into this year and our new come out of Canada, and you think of that HSBC, that's just giving us more opportunity to grow.
Dean: On an armed our demand deposit book, while the there is an expectation that when markets come down that the markets improve and rates come down that those deposits could could flow into things like mutual fund them I think theres also the growth that we continue to have overall in our client franchise that will help stem that and then we also do have.
Dean: I'm, leading you know from our wholesale funding, we do price quite lower than the rest of the peer group on that but I think that we've got opportunities also in cash management that we've discussed in the U S to help supplement our asset growth.
Got it thank you.
Operator: Thank you. Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Our following question is from Sohrab <unk> from BMO capital markets. Please go ahead.
David McKay: Okay, thank you. I also have, hopefully, two questions, not too long. Dave, number one on this international, I'm just curious, what's the lesson learned here? Is it that if it grows like a weed, it's a weed? Or, or how do you what?
Sohrab: Okay. Thank you.
Sohrab: Hopefully to two questions and not too long ago, Dave number one on.
Sohrab: City National.
Sohrab: I'm just curious what's the lesson learned here is that.
Speaker Change: It's like we did this week or.
Speaker Change: Or how do you I mean, that's something we'll do another acquisition in the U S. What are the lessons learned what are the lessons learned from dish.
David McKay: I mean, at some stage, you will do another acquisition in the US. What are the lessons learned? What are the lessons learned from this? I think it's a good question.
Speaker Change: No I think it's a good question I think our growth outstripped our operational capability.
David McKay: I think our growth outstripped our operational capability. We emphasized growth maybe over the profitability of the growth a little too strongly. Certainly, the franchise was tested to see if it could grow geographically. It was an important part of our investment thesis, which it has. We wanted to see how it could scale. So, from all those perspectives, and I equated that back to some of the growth we've seen in other parts of our businesses, which historically have exhibited similar trends. So I think now there's an opportunity to really push the profitability of the existing balance sheet, and I think that's a nice tailwind for investors. And it's really important for us to build a really solid technology and operational foundation so, in the future, we can continue to roll out within our strategy. So I think that is the objective.
Speaker Change: We emphasize maybe grows over the profitability of the growth a little too strongly.
Speaker Change: Certainly the franchise was tested to see if it could grow geographically it was important part of our investment thesis, which it has done it was we wanted to see how it could scale. So I think from all those perspectives.
Speaker Change: I equate it to that back to some of the growth we've seen in other parts of our businesses historically.
Speaker Change: But it's similar trends so I think now there's opportunity to really push the profitability of the existing balance sheet and I think that's a nice tailwind for investors and it's really important for us to build a really solid technology and operational foundation. So in the future. We continued continuing to roll up within our strategy. So I think.
Speaker Change: That is the objective it's an important outlet for capital in the long term for RBC and it's an important part of the franchise and we've got an outstanding leadership team. There that has done this before in a large regional bank led by Greg Carmichael. So we're very fortunate Greg has built a strong team very quickly there and I've done this before and let a bank to sustainable.
David McKay: It's an important outlet for capital in the long term for RBC, and it's an important part of the franchise. And we've got an outstanding leadership team there that has done this before in a large regional bank led by Greg Carmichael. So we're very fortunate.
David McKay: Greg has built a strong team very quickly there that has done this before and led a bank to sustainable growth with a strong infrastructure. So we're feeling really good about things. It was a tough year last year, I admit. And those are kind of a fair question.
Speaker Change: Growth was strong our infrastructure. So we're feeling really good about things. It was a tough year last year I admit and those are kind of it's a fair question those learnings.
David McKay: Those are the learnings. Perfect. And just, I guess it's for you, maybe it's for the broader team, if I maybe even start with Derek, just trying to get a feel for what the revenue environment you anticipate over the next, call it, four to six quarters? And, you know, what sort of growth you expect. Where do you think it's going to come from?
Speaker Change: Perfect.
Speaker Change: I guess, it's for you or maybe for the broader team if I could have you been stuck with Derek.
Speaker Change: Trying to get a feel for what's the revenue environment you envision over the next call it four to six quarters and.
Speaker Change: You know what sort of growth, where do you think it's going to come from.
David McKay: Is it going to be volumes? Is it going to be fees? You know, which business maybe might be, Contributing more or less than the other businesses, you know, given the diversified mix, if I can just get some, some commentary around the rep. You know, I think your last part of the question there was, is part of the investment thesis for ROI, that we have such strong, diversified NII and non-interest income capabilities. And I think where you can see a lot of excitement building in our comments is around the other fee income, non-interest income, particularly around capital markets and the pipelines that we'll start to convert and our ability to leverage our growth there and drive fee-based business. We've talked about it a couple of times already in the call and the flow from fixed income into other higher yielding equity investments and managed investments within our franchise in the United States, Canada and the UK now, which is an emerging strength for ROI that's starting to differentiate itself from some of our peers, which we're getting more and more excited about, while we may see some NII pressure from rates, but we're seeing strong growth.
Speaker Change: Is it going to be volume is it going to be fine.
Speaker Change: Which business maybe like E S.
Speaker Change: Contributing more or less than the other businesses you know given the diversified mix if I can just get them.
The commentary around the revenue outlook.
Speaker Change: I think your last part of the question there was as part of the investment thesis for our why that we have such strong diversified NII and noninterest income capabilities and I think where you can see a lot of excitement building in our comments is around the other fee income non interest income, particularly around capital markets and the pipeline.
Speaker Change: They'll start to convert in our ability to leverage our growth there and drive fee based business, we've talked about it a couple of times already in the call in the flow from.
Speaker Change: Fixed income into other higher yielding equity investments and managed investments within our franchise in the United States, Canada, and the U K now, which is an emerging strength for our wireless starting to differentiate itself from some of our peers, which were were getting more and more excited about a wash.
Speaker Change: While we may see some NII pressure from from rates that we're seeing strong growth, we're seeing strong growth and commercial which is a higher yielding product for US you know we're seeing the leverage that comes from our market, leading deposit franchise, which should help mitigate some of that more than maybe some of our competitors I think is a strong.
David McKay: We're seeing strong growth in commercial, which is a higher yielding product for us. We're seeing the leverage that comes from our market-leading deposit franchise, which should help mitigate some of that more than maybe some of our competitors, I think is a strong support of that. So volume and other income strength is certainly a big part of that.
Speaker Change: Part of that so volume other income strength is certainly a big part of that and Theres an opportunity. You know we were hopeful that there's as I said in my words intense competition and a number of markets, including mortgages, we're probably at historic lows I would think there and there's always hope that we.
David McKay: And there's an opportunity, you know, we're hopeful, as I said in my words, intense competition in a number of markets, including mortgages, we're probably at historic lows, I would think there. And there's always hope that we can come off the floor of historic lows into some more normalized Margin Environment for some of our secured lending products in Canada as well. So I think all that pertains to, we're feeling generally quite positive. Thank you. Our next question is from Lemar Persaud from Comrack Securities. Please go ahead.
We come off the floor of historic lows into some more normalized.
Speaker Change: Margin environment for some of our secured lending products in Canada as well. So I think all that pertains to were feeling generally quite positive.
Speaker Change: Thank you.
Speaker Change: Thank you.
Nomura: Following question is from Nomura pushed out from <unk> Securities. Please go ahead.
Neil Mclaughlin: Yeah, I kind of want to bolt on to Mario's question on the divergence and growth and commercial versus retail, but I wonder if you could talk about how long this cross-sell to existing clients can last. Like, is this a 2024 phenomenon but then largely abating into 2025? Or is this something that could persist into the future?
Nomura: Yeah in Taiwan, a bolt on to <unk> question on the divergence in growth in commercial versus retail, but I wonder if he I'm wondering if you could talk about how long this cross sell to existing clients can laugh.
Nomura: 'twenty 'twenty four phenomenon, but then largely abating into 2025 or is this something that could persist into the future and it just feels like anytime we talk about commercial we typically thinking about we definitely think about this as having some element of persistence, where it can last for a few years, whereas on the retail side you see some banks turn on and off the tops depending on.
Neil Mclaughlin: It just feels like any time we talk about commercial banking, we typically think about this as having some element of persistence where it could last for even a few years. Whereas on the retail side, you see some banks turning on and off the taps, depending on, you know, competitive factors and spreads in the market. Yeah, thanks. It's Neil.
Speaker Change: <unk> you know competitive factors in spreads in the market. Thanks.
Speaker Change: Yeah. Thanks, it's it's Neil.
Neil Mclaughlin: I mean, I think for the most part, in our commercial business, our strategy has been for quite some time to grow with our best clients. So as they continue to invest and grow their franchise, you know, we continue to be there with them. And the majority of our growth has come from our existing clients for an exceptionally long time. I think what you're hearing is, you know, we have pivoted to a more profitable client segment with just broader needs where we can put in more products. And that is something we're feeling quite good about.
Speaker Change: I think for the most part.
Neil Mclaughlin: On our commercial business I mean, our strategy has been.
Neil Mclaughlin: For quite some time to grow with our best clients. So as clients continue to invest and grow their franchise. You know we continue to be there with them and in the majority of our growth has come from our existing clients.
Neil Mclaughlin: We're exceptionally long time, I think what you're hearing as you know we have pivoted to a more profitable client segment was just broader needs, where we can put in more products.
Neil Mclaughlin: And that is something we're feeling quite good about and maybe the last thing I would say is that we touched on the timing of HSBC, but we do see that as a.
Neil Mclaughlin: And maybe the last thing I would say is that we touched on the timing of HSBC, but we do see that as obviously a very profitable and a very attractive client set that we continue to be impressed with the capabilities HSBC has brought. But we do see opportunities to bring products to the table that they don't have. And so I think that is another vector of cross-sell we probably haven't talked that much about.
Neil Mclaughlin: Obviously, a very profitable and a very attractive a client set that we continue to be impressed at the capabilities HSBC is broad, but we do see opportunities to bring products to the table that they don't have and so I think that is another vector of cross sell we probably haven't talked that much about it and maybe the on on the consumer.
Graeme Hepworth: And maybe on the consumer side, you heard Nadine and Dave both comment on our new client origination of consumers. And that's something that has been on a very steep trajectory, and we're starting these new relationships, and we'll continue to grow with our consumers as well. So I do think, you know, on both sides, we feel that it does have staying power. Gotcha. And then maybe for my second question, turning to Graeme, what do you think? I'm wondering if you could flesh out what you mean by the implied loss rates on impaired loans as 28% on your slide 28. Is that intended to suggest that?
Neil Mclaughlin: Syed.
Neil Mclaughlin: Nadine and Dave both comment on our new client origination of consumers and that's something that has been on a very steep trajectory and we're starting these new relationships and we'll continue to grow with our consumers as well. So I do think you know on both sides. We feel it does have staying power.
Speaker Change: Gotcha and then maybe for my second question turning to Graham.
Graham: What do you I'm wondering if you could flush out what do you mean by the implied loss rates on impaired loans was 28% on your slide 28 is that intended to suggest that.
Graeme Hepworth: On the impaired CRE, 72% is covered by tangible collateral and guarantees, so you're reserved to 28%. Is that the way I should be looking at that, or is there some risk that maybe if collateral and these guarantees aren't as good as you're expecting, that maybe that implied loss rate could move higher? Any thoughts there would be helpful.
Graham: On the and parents CRE, 72% is covered by tangible collateral and guarantees in your reserve to 28% does that is that the way I should be looking at that or.
Graham: Isn't there some risk that maybe you know of collateral and these guarantees arent as good as you're expecting that you know maybe that imply loss rate could move higher or any thoughts there would be helpful.
Graeme Hepworth: Yes. Sure. To be clear, what we're providing you there is just an indication of what our actual outcomes have been on those commercial real estate accounts that have defaulted. We're just highlighting that, you know, while this catches a lot of headlines and valuations are hard, on average, we're still realizing an amount there that's still quite strong and consistent with expectations. And so on a given account, we've seen kind of worse outcomes than that, but we've seen lots of accounts where we kind of get fully repaid as well. So overall, in this even more distressed and difficult environment, we're still realizing at a relatively healthy level. I appreciate the time.
Graham: Yes.
Speaker Change: I appreciate that.
Speaker Change: Clear that what we're providing you there or is this a vacation or what are the actual outcomes have been on those commercial real estate accounts of defaulted, we're just highlighting that.
Well if it catches a lot of headlines and valuations are hard on average were still realizing it.
Speaker Change: And I'm out there that's still quite strong and consistent with kind of expectations. I was wondering given me an account we've seen kind of work. So it comes in that but we've seen lots of accounts, where we kind of get fully repaid as well. So overall, even more distressed and difficult environment were still realizing at relatively healthy levels.
Speaker Change: I appreciate the time.
Graeme Hepworth: Thank you. Our last question is from Nigel D'Souza from Veritas Investments Research. Please go ahead. Good morning.
Speaker Change: Thank you.
Our last question is from Nigel D'souza from Veritas investment Research. Please go ahead.
Nigel D'Souza: Good morning. Thank you. Thanks for taking my questions. Just two for you if I can squeeze them in the first on the HSBC Canada.
Operator: Thank you. Thanks for taking my questions. Just two for you, if I could squeeze them in.
Graeme Hepworth: The first on the HSBC Canada... You know, the first line of defense is underwriting the portfolio ahead of a more challenging environment. And our... I didn't underwrite HSBC Canada's portfolio, so I'm wondering if you could share any thoughts on what you're seeing. Credit Performance Metrics for HSBC Canada. Are you thinking about their commercial book as well, which has automotive manufacturing and real estate exposures? And how does that tie into the credit marks on purchase prices? All right, there's a number of pieces here, but it's Graeme, and I'll start and turn it over to Neil.
Nigel D'Souza: You know the first line of defense is underwriting the portfolio.
Nigel D'Souza: More challenging environment in RPC.
Nigel D'Souza: Didn't underwrite HSBC candidates portfolio. So I'm wondering if you could share and thoughts on what youre seeing in terms of the credit performance metrics for that.
Yeah, I would think.
Nigel D'Souza: About their commercial book as well such as automotive manufacturing.
Nigel D'Souza: Exposures and how does that tie into the credit Mark on purchase price accounting.
Nigel D'Souza: Discloses.
Alright. This is the number of pieces there, but it's good.
Speaker Change: It's great to know, Joe maybe I'll start and turn it over to Neil.
Graeme Hepworth: Certainly, you know, you go back to the diligence we did at the inception of the transaction; credit was a huge part of our focus there, and, you know, it's where our cut-aside-in-scale comes into play. We brought a lot of people into the room on that from the risk management side and the business side to go very deep on their portfolios, really understand their mortgage portfolio, their commercial portfolios. We did that from, you know, both an aggregate portfolio view as well as right down to reviewing and understanding the underwriting they did on sample portfolios there.
Certainly you know when you go back to the diligence we did at the inception of the transaction.
Speaker Change: Credit was a huge part of our focus there and.
Neil Mclaughlin: Wherever I go to size and scale comes into play because we brought a lot of people into the room on that from the risk management side on the business side to go very deep on their portfolios really understand their mortgage portfolio their commercial portfolios.
Neil Mclaughlin: Did that from both an aggregate portfolio view as well as rate down to reviewing and understanding the underwriting they did on a unsimple portfolios. There so through that process, we got very comfortable with their portfolio that if anything it skews a little bit better than some of our portfolios. The nature of their retail client base is a fairly high net worth one and so that 10.
Graeme Hepworth: So, through that process, we got very comfortable with their portfolio, which skews a little bit better than some of our portfolios. The nature of their retail client base is a fairly high-network one, and so that tends to skew well. And likewise, in commercial, and particularly in this environment, their commercial portfolio, again, skews to larger commercial accounts, which in this environment are performing better than, as I noted earlier, kind of the smaller commercial and smaller business pieces. So, overall, I think we felt really good about the diligence we did at the time. Obviously, we'll get the full details as this transitions across on March 28th, as Dave indicated, but I don't think at this point in time we've seen anything new there that would cause us concern. But maybe Neil can talk about some of the performance and discussions he's been having.
Neil Mclaughlin: The skew will likewise in commercial and particularly in this environment. There are commercial portfolio I'm against Skus to larger commercial accounts, which in this environment is performing better than as I noted earlier kind of the smaller commercial installer business piece. So overall I think there's a really good about the diligence we did at the time. Obviously, we're you know, we'll we'll get the full details of this transition to crossover.
Neil Mclaughlin: First 28th as Dave indicated, but I don't think at this point in time, we've seen anything.
Speaker Change: New there that would cause us concern, but maybe if you can talk to some of the performance in discussions he's been having yeah. I think are very much aligned with our with grants comments I mean, maybe start with the consumer these are generally more affluent consumers they have.
Graeme Hepworth: Yeah, I think very much aligned with Grant's comments. I mean, maybe start with the consumer. These are generally more affluent consumers.
Neil Mclaughlin: They have FICO scores that actually skew higher than our overall portfolio. And to Graham's point, we can get in as far as due diligence and do extensive file reviews to really understand their processes and their policies. I think all of that really took away and mapped up to the experience we saw in the data room and everything in their performance. Very similar, I'd say, in the commercial. Larger clients do skew very much to the highest segment that we serve. They don't really participate that much in the sort of under $10 million, under $5 million credit segment.
Speaker Change: FICO scores that actually skew higher than our overall portfolio into grams point.
Speaker Change: And as part of due diligence and do extensive file reviews to really understand their processes and their policies I think all the all of that really took away.
Speaker Change: Got.
Speaker Change: Experienced we saw.
Speaker Change: And in the data room, and everything and they're in their performance very similar I'd say on on commercial higher larger clients. They do skew very much too.
Speaker Change: The highest segment that we serve they don't really participate that much in the sort of under $10 million under $5 million credit segment, So our larger clients better rated.
Neil Mclaughlin: So, larger clients, better rated. And the last part of that, we'd say, is we did go through an extensive exercise to really just map by PD and do a deep analytical exercise to get comfort. All to say... extensive due diligence, and we feel quite good about it. Thank you. We have no further questions registered at this time. I would now like to turn the meeting over to Mr. McKay.
Speaker Change: And the last part of that we'd say is we did go through an extensive exercise to really just map a five P D and.
Speaker Change: And do a deep analytical exercise to get comfort all to say.
Speaker Change: You know extensive due diligence and we feel quite good about the book.
Speaker Change: Thank you.
Mr. Mackay: We have no further questions registered at this time I would now like to turn the meeting over to Mr. Mackay.
David McKay: Thank you everyone for attending today and thank you for your questions. Maybe I'll just kind of summarize the themes that we hope came out from our comments and your questions. One, I would say a very strong start to the year characterized by really good client flow across all our businesses. Our competitive level was very high, from global markets and investment banking to wealth management, asset management, and distribution to the majority of our sectors, particularly commercial and retail banking and insurance. So, very, very strong competition levels and quality business that we brought in, I think, drove the story today, matched by very good cost control. So, as you see, our focus on cost in the face of good volume control and good cost control, and we are very focused on that for the rest of the year into 2025, producing a strong Fortress balance sheet of 14.9%.
Mackay: Well. Thank you everyone for attending today and thank you for your questions, maybe I'll just kind of summarize the themes that we hoped came out from our comments and your questions. One I would say a very strong start to the year characterized by really good client flow across all our businesses are compete level was very high from global markets and investment banking to wealth management.
Mackay: Our asset management and distribution to the majority of our sectors, particularly commercial and in the retail bank and insurance are very very strong compete levels and quality of business that we brought in I think drove this the story.
Mackay: Today matched by a very good cost control. So as you see our focus on costs in the face of good volume control good cost control and we are very focused on that for the rest of the year into 2025, producing us a strong fortress balance sheet of 14, 9%.
David McKay: We gave you a glimpse forward into where we think we're going to close the HSBC transaction and very strong capital levels, which gives us a lot of flexibility given the power, capital generation power of this franchise going forward will be even enhanced. Great progress on HSBC, albeit we lost three months in the approval process. We're on track again for that March 28th close, kind of reaffirmed our synergies, and gave you greater clarity around the timing. And then, obviously, as we've signaled a lot of great work at CNB, we have a path forward there. We are at full run rate to strengthen this platform. We have an opportunity to create more profitability from the existing platform and position ourselves for strong integrated growth across all our businesses in the United States.
Mackay: <unk> gave you a glimpse forward into where we think we're going to close the HSBC transaction and very strong capital levels, which gives us a lot of flexibility given the power of capital generation power of this franchise going forward will be even enhanced.
Mackay: Great progress on HSBC, albeit we lost three months in the approval process.
Mackay: We're on track again for that March 20th close and have reaffirmed our synergies gave you greater clarity around the timing and then obviously as we've signaled a lot of great work at C N b.
Mackay: We have a path forward there are at full run rate two to strengthen this platform, we have an opportunity to create more profitability from existing platform and position ourselves for strong integrated growth across all our businesses in the United States. So thank you very much look forward to see you in Q2 and have a great day.
David McKay: So, thank you very much. Look forward to seeing you in Q2 and have a great day. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Speaker Change: Thank you.
Speaker Change: Conference has now ended please disconnect your lines at this time and we thank you for your participation.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.