Q2 2024 Royal Bank of Canada Earnings Call
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This conference is being recorded.
Let's close the homes that don't go as you see.
All participants please standby your only thing is ready to begin.
Good morning, ladies and gentleman and welcome to RBC 2024 second quarter financial results Conference call.
Excuse me advise that this call is being recorded.
I would like to turn the meeting over to S. M. Enron Edo of Investor Relations. Please go ahead, Mr. Jim Ryan.
And good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer, Catherine Gibson interim Chief Financial Officer, and Graeme Hepworth Chief risk Officer.
Also joining us today for your question, Neil Mclaughlin group head personal and commercial banking.
Guzman group head wealth management, and insurance and Derek Elder group head capital markets.
Speaker Change: As noted on slide one our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties actual results could differ materially.
I would also remind listeners that the bank assesses its performance on a reported and adjusted basis.
It was both to be useful in assessing underlying business performance.
Everyone have a chance to ask questions. We ask that you limit your questions and then re queue.
Speaker Change: With that I'll turn it over to Dave.
Thank you Austin and good morning, everyone and thank you for joining us today.
Today, we reported second quarter earnings of $4 billion or adjusted earnings of $4 $2 billion.
Return on equity, which is a key pillar of our shareholder value creation framework increased to 14, 5% this quarter.
Adjusted ROE increased to 15, 5% as we successfully executed our strategic priorities, including client driven organic growth expense discipline, maintaining a strong balance sheet and accretive capital allocation, including the acquisition of HSBC Bank of Canada.
This quarter, we saw strong growth across diversified revenue streams capital markets reported record revenue of $3 $2 billion as we gained market share in key areas of focus such as advisory and at origination.
In banking revenue growth was driven by strong volume growth and higher interest rate.
The benefits of our structurally advantaged balance sheet.
Asset management, and North American wealth management advisory revenue benefited from double digit fee based asset growth.
Our increasing scale advantages and disciplined cost management helped drive all bank operating leverage of one 4%.
<unk>, 4.5% adjusting for specified items.
Canadian banking reported a 39% efficiency ratio.
While we focused on creating efficiencies we continued to invest in improving the client experience. Obviously it was the first Canadian bank to be awarded the digital CX Award for excellence in Omni channel customer experiences by the digital banker.
Along with being awarded the selling model Bank Award for digital Onboarding.
We're also actively investing in artificial intelligence beyond retail banking and risk management.
In U S wealth management, we're using the power of AI to help financial advisors to identify and act on new opportunities to provide even more value to clients and capital markets. We are seeing continued success with eight and our well established AI powered trading platform.
Our balance sheet remains strong even after successfully closing the largest acquisition or 155 year history.
We reported common equity tier one ratio of 12, 8%.
Canadian banking loan to deposit ratio improved to 98% as we continued to attract new clients to our client value propositions.
Furthermore, we diversified our funding profile with a launch of our U S cash management business, which I will speak to shortly.
Speaker Change: We continue to prudently add to our reserves with PCL on performing loans of $244 million.
Our results continue to demonstrate our ability to generate long term value.
Our premium return on equity drove gross internal capital generation of over 70 basis points and book value growth of 8%.
This morning, we announced a four cent or 3% increase in our quarterly dividend.
We also announced our intention to repurchase repurchase up to 30 million common shares under our normal course issuer bid as we look to offset the dilution from the shares issued under the dividend reinvestment plan.
I will now speak to the acquisition of HSBC, Canada, which we completed on March 28. This was a pivotal milestone as we continue to focus on driving premium long term Roe and growth.
We are excited to welcome 780000 clients from HSBC, Canada, which added approximately $75 billion of both loans and relation based deposits to our balance sheet.
I would like to thank our employees, who made an extremely complex closing converge integration possible all within a single weekend.
The smooth integration also demonstrates the power of the technology investments we've made in recent years.
The level of employee engagement is high and we're excited about the journey ahead.
As a combined organization, we are well positioned as the bank of choice for commercial clients with international needs newcomers to Canada and retail clients.
Who need global capabilities.
A significant percentage of the acquired retail accounts are affluent clients through.
Through HSBC, Canada, we also acquired a well established premier commercial bank with a leading trade finance value proposition and one which skews to a larger client segment than we were than we have historically competed.
We are pleased that the client base and acquired loan portfolio, which can be seen on slide 28 is largely within levels forecasted when we announced the transaction 18 months ago.
These loans continued to be supported by a high quality low cost deposit franchise, which is largely within forecasted levels.
Including the expected repayment of noninterest bearing deposits.
Similar to my own experience net interest margins were impacted by a shift in deposit mix towards term products and more intense competition for mortgages and deposits.
Initially assumed.
Since the acquisition date, HSBC, Canada reported a loss of $51 million or a loss of $33 million adjusting for amortization of intangibles.
As you see on the bottom of slide six underlying HSBC, Canada net income of $63 million represented approximately one month of earnings.
This quarter's results further benefited from the accretion of purchase price accounting marks, which Katherine will speak to shortly.
In addition, we realized $30 million of before tax expense synergies this quarter equating to an annualized run rate savings of $360 million or approximately 50% of our stated target.
In contrast results were negatively impacted this quarter by the recognition of day, one PCL, which Graeme will speak to you shortly as well as the cost of a short term special welcome offered for qualifying HSBC, Canada high interest savings account clients.
We continue to expect approximately $740 million of expense synergies within the two year timeline, we provided last quarter.
Paul and the uncertainty of a long approval, which led to a slowdown in net new sales a reenergized sales force is rebuilding pipelines with clients with whom they have long standing relationships.
There are also leveraging the added benefits that come with Rbcs technology ecosystem, and a double a balance sheet.
Furthermore, we believe our combined product and service offerings should drive compelling cross sell revenue synergies across retail and business banking and while it's early we are seeing positive signs.
We continue to estimate the transaction will generate $1.4 billion of fully synergize adjusted earnings excluding the accretion of purchase price accounting marks.
However, the initial lower than expected margins may push out the realization of our previously stated two year target by a couple of quarters should.
Should we see mortgage and deposit spreads recover we expect that realization timeline will accelerate.
Speaker Change: Before discussing expanding client value proposition and our businesses I will provide my perspective on the macro environment.
The relative strength of the U S economy, including a tighter labor market and healthy consumer spending has kept U S inflation persistently above the targeted range.
Contrast, Canada continues to lag its peers in GDP growth per capita so higher impact of the.
The impact of higher interest rates and rising unemployment begins to weigh on households, which Graeme will speak to in his remarks Canadian inflation metrics are now within the 1% to 3% target range.
A bifurcation in trends suggest the bank of Canada should move earlier than the fed and start lowering interest rates over the coming months.
Speaker Change: The expectation of Central Bank rate cuts has led to strong equity market returns. This year and should also have positive implications for loan growth and M&A deal flow, while also providing relief for Canadians.
Speaker Change: With this context, we are executing on our growth strategy across our largest franchises starting with Canadian banking.
<unk> were up double digits from last year, our strong 9%, excluding the benefit of the H S. P. C. Canada acquisition, we welcomed a record number of new comer clients this quarter, reflecting a 30% increase year over year.
More broadly new to RBC account acquisition was approximately 40% higher than last year due to our innovative client value proposition, which now include expansion of our partnership with Metro and it's more of a rewards program in Ontario. This partnership will continue to build on the successful launch of our co brand credit card in Quebec. Additionally.
Speaker Change: RBC announced the launch of a new loyalty partnership with past in food group and its more rewards loyalty program, which was more than $3 5 million household members in Western Canada.
Furthermore, since launching our abbvie on select here for non clients, we've registered nearly a half a million new members.
We remain focused on attracting new primary client deposits, which provide a foundation for profitable loan growth credit insights deepening relationships and earning stability through the cycle.
Commercial loans were up 25% or up 14%, excluding HSBC Candida alone our growth strategy remains focused amongst a diversified set of existing clients you know well.
Turning to our record results in capital markets.
Investment banking revenue grew 45% from last year, our market share is up 40 basis points over the last 12 months, reflecting gains across all major products. We continue to focus on multi product mandates and improved sector diversification.
While geopolitical risks and an evolving regulatory environment creates uncertainty the market backdrop is creating opportunities for increased dialogue with clients and a healthy M&A pipeline that continues to build.
Speaker Change: Global markets reported $1 $5 billion in revenue largely due to higher debt and equity origination and higher fixed income trading revenue.
We also recently launched RBC clear our cloud Native next generation U S cash management business with a digital end to end onboarding platform and ability to offer an enriched insights to corporate treasurers.
Our initial focus is to increasingly diversify our U S funding sources to reduce reliance on costly wholesale funding and in turn improve our OE.
Now moving to our wealth management segment.
Global asset management, AUM increased 11% from last year, particularly in Canadian strategies benefited benefiting both from higher markets and inflows from institutional mandates.
And easing of monetary policy, but you also start to shift away from term deposits and cash ETF towards fixed income opportunities, which is one of the core strengths of RBC global asset management.
Speaker Change: And Europe RMC Bluebay has been recognized by Morningstar as Excellence awards in the Lipper awards for its fixed income strategies.
RBC Gam was also named the top gun investment team of the year in Canada for the ninth time in 11 years.
Speaker Change: Assets under administration, and our leading Canadian wealth management business were up 15% or nearly 80 billion from last year, increasing to a record level of nearly $620 billion benefiting from higher equity markets and net sales of $16 billion over the last 12 months.
Assets under administration, or a U S wealth management platform, including the sixth largest wealth adviser in the U S. Also increased 12% year over year to 610 billion U S dollars another record.
One of our ongoing key strategic objectives for our wealth management businesses to attract and retain top performing financial advisors.
Speaker Change: To close our premium ROE reflects sufficient capital deployment diversified funding prudent risk management disciplined expense control and the execution of our client focused strategies, including the acquisition of HSBC, Canada.
Speaker Change: In turn our strong internal capital generation through economic cycles allows us to invest in organic growth, while also returning capital to shareholders.
Now I'd like to turn it over to Katherine Gibson, our interim CFO and welcome her to her first quarterly call Catherine brings deep financial sector experience and knowledge of RBC Catherine over to you.
Thanks, Dave and good morning, everyone.
Catherine Gibson: For all our results benefited from strong revenue momentum across all our statement underscoring the bank's diversified business model.
Catherine Gibson: This disciplined cost management also drove robust operating leverage star.
Starting on slide eight we reported earnings per share of $2.74 this quarter.
Adjusted diluted earnings per share was $2.90.
9% from last year.
These adjusted results included a net loss from HSBC, Canada, 33 million, reflecting a day, one PCL impact of 145 million after tax.
We are excited by the earnings power from this transaction as it will provide yet another source of internal capital generation.
Turning to capital on slide nine we reported a CET one ratio of 12, 8% down 210 basis points from last quarter, reflecting the impact of the HSBC, Canada transaction and strong client driven volume growth.
It was partly offset by the ongoing strength in internal capital generation.
We do not expect the Basel III, Florida city binding in fiscal 'twenty, 'twenty, four and anticipate a minimal impact in the second half of 2020 five absence optimization actions.
Moving to slide 10, I'll think net interest income was up 9% year over year or up 10% excluding trading revenue.
These results were largely driven by higher spreads and average volume growth in Canadian banking as well as the addition of HSBC Canada.
We also recognized purchase accounting fair value adjustments on HSBC, Candida alone, which will accrete to net interest income overtime.
This quarter the benefit of 45 million.
All bank NIM, excluding trading revenue was up three basis points from last quarter, driven by tailwind in Canadian banking.
This was partly offset by the dilutive impact of HSBC candidates lower yielding 21 billion securities portfolio that has been consolidated into our existing portfolios incorporate support.
Catherine Gibson: Canadian banking NIM was up four basis points from last quarter.
S. P C. Canada added two basis points in NIM this quarter as the benefit from the accretion of purchase accounting fair value adjustment was partly offset by modest dilution from HSBC candidate portfolio.
Core banking NIM was up <unk>.
Two basis points sequentially.
The structural advantage of very attractive core personal banking deposit portfolio continue to come through this quarter, reflecting the latent benefit of interest rate hike.
Additionally, we saw benefits from changes in asset mix associated with seasonally higher credit card revolve rate, which we anticipate will come off next quarter.
These benefits were partly offset by ongoing intense competition for deposit.
Catherine Gibson: Going forward with five year swap rates up approximately 200 basis claims from five years ago. Our core deposit portfolio is well positioned for continued benefits from tractor maturities rolling on at higher yields.
We expect this benefit to be partly offset by ongoing market competition, and a moderating client driven shifts into higher yielding deposit well the migration of bankers' acceptances to core Baseload, maybe marginally dilutive to NIM, we expect the impact will be net neutral to total revenue.
In addition, the benefit of HSBC candidate purchase price marks will continue to accrete into net interest income.
Catherine Gibson: Adding approximately $135 million per quarter in 2024, followed by a 110 million benefit per quarter in 2025.
Partially offset modest dilution from our relatively lower spread HSBC, Canada portfolio.
Taken all together, we anticipate Canadian banking net interest margin to be slightly higher in the back half of the year.
Moving to slide 11, non interest expenses were up 12% from last year adjusted expense growth was 8%, excluding HSBC, Canada transaction and integration costs as well as the impact of amortization of intangible.
Further excluding the macro driven factors such as FX and share based compensation and the addition of HSBC candidate run rate expenses.
Our expense growth was 6% year over year.
Higher variable compensation driven by strong results in capital markets and wealth management made up 4% of the court and scrubbed.
Looking forward all bank core expense growth inclusive of HSBC, Canada business car is expected to come in at the top of the mid single digit range for fiscal 2024.
Turning now to our Q2 segment results.
On slide 12, personal and commercial banking reported earnings of $2 1 billion.
Gideon banking net income was up 7% year over year, including a day one P C out of 181 million mice.
Catherine Gibson: In my following comments will now exclude any impact to Canadian banking from HSBC, Canada.
Canadian Banking's earnings were up a strong 11% year over year net interest income was up 11% last year.
Noninterest income was up 5% year over year as increased client activity underpinned higher service revenue and FX revenue well my kit market appreciation drove higher mutual fund distribution fees.
Catherine Gibson: Expenses were up 3% from last year, helping to drive 6% operating leverage for the full year, including the benefit from the HSBC candidate transaction, we now expect Canadian banking operating leverage to come in above our historical one to two per cent target range.
Turning to slide 13 wealth management earnings were up 7% from last year, the underlying performance of our wealth management advisory and asset management business benefited from the higher fee based client assets across each of our businesses.
Catherine Gibson: Largely reflecting market appreciation and net sales.
These factors were partly offset by higher variable compensation and lower net interest income in our Canadian and international wealth management businesses.
Catherine Gibson: City National generated 73 million U S and adjusted earnings this quarter or 86 million U S. Excluding the impact of the FDIC Special assessment.
Looking forward, our efforts to enhance expense and capital efficiency and deepen client relationships should allow city national to achieve more normalized profitability as we exit 2025.
However, the path to normalized profitability may not be linear from quarter to quarter.
Turning to capital markets results on slide 14, pre provision pre tax earnings of $1 4 billion increased 24% from last year corporate.
Corporate and investment banking revenue was up 23% from last year, reflecting record investment banking fees underpinned by market share gains across all major products and a recovery in Q4.
Global markets revenue was up 8% from last year, including higher fixed income trading revenue led by mortgages and secured financing. This was partially offset by normalization in rates trading from a very robust quarter last year.
Strong results year to date benefited from very robust investment banking activity.
Catherine Gibson: Higher volumes in global market.
Well, we continue to see good client activity levels and momentum in our business performance. We expect results in the second half to be seasonally lower.
Turning to insurance on Slide 15, net income of 177 million was up 4% from last year, driven by a higher insurance investment results from favorable investment related experience.
It is important to note that the results in the prior year period are not fully comparable as we were not managing our asset and liability portfolios under Ifr 17.
Catherine Gibson: Turning to slide 33. This quarter. We included additional details on our corporate support segment.
Catherine Gibson: Results for corporate support mainly reflect enterprise level activities, which are not allocated to business segments, and therefore represent a modest 3% of all bank average asset.
Results in the first half of the year included slightly elevated earnings on excess capital. We were holding ahead of the H S. P. C candidate transaction close as.
As we look to the rest of the year, we expect corporate support to generate a net loss of approximately 102 hundred $50 million per quarter.
To conclude our focus on thoughtful capital allocation and ongoing discipline around cost containment contributed to this quarter's strong results and remains a key priority going forward with that I'll now turn it over to grant.
Thank you Catherine and good morning, everyone.
On slide 17, I will discuss our allowances in the context of both the macroeconomic environment and the HSBC Canada acquisition.
As Dave noted earlier, the economies of Canada, and the U S continue to diverge in Canada relatively weaker consumer demand higher unemployment rates and the impact of almost two years ago that had interest rates, we're continuing to wait when consumers and businesses.
Catherine Gibson: In the U S. More persistent inflation. These words they'd have to cope with a more prolonged period of higher interest rates.
The stock truck, we saw critical quality continue to weaken this quarter with no credit downgrades additions to our watch list and it would be to do it.
Catherine Gibson: Equity rates.
Catherine Gibson: These outcomes are in line with our expectations for where we are in the credit cycle.
Consistent with last quarter, we added reserves on performing loans, reflecting weaker credit quality, partially offset by a release of reserves, reflecting an improving macroeconomic outlook.
During the quarter. We also added reserves for performing loans, we acquired from HSBC, Canada.
As a reminder, we acquired impaired loan came onto our balance sheet at their fair value net of any credit impairments.
Additionally, under I personally and accounting rules, we are required to take provisions on the acquired performing portfolio.
Catherine Gibson: Provisions are over and above would put it more of a competitive and a fair value adjustment established for the purchase.
Catherine Gibson: This resulted in an initial provision on performing loans of 193 million this quarter.
As this portfolio was all deemed to be stage wanted acquisition provisions in the coming quarters will reflect credit migration moving more of the portfolio into stage II.
This transaction close our analysis has confirmed a critical area of the acquired portfolio is strong and in line with our expectations from due diligence.
Catherine Gibson: Relative to our Canadian banking commercial portfolio acquired commercial loans with similar ratings profile are skewed towards larger exposures are more diversified by sector.
Catherine Gibson: Compared to our Canadian banking retail portfolio acquired retail loans are more concentrated in residential mortgages wherever the acquired mortgages have a lower average loan to value ratio, they're supported by clients with relatively higher incomes and better FICO scores.
Across the acquired loans in our existing portfolio. We took a total of 244 million of provisions on performing loans this quarter.
Total ECL in loans and acceptances increased by 444 million to $6 1 billion and represents over 2.8 times, our PCL on impaired loans over the last 12 months.
Moving to slide 18, gross impaired loans were up $1 1 billion or seven basis points. This quarter, primarily due to increases in capital markets and Canadian banking.
Catherine Gibson: So a couple of markets new formations of 809 million were largely a function of two loans.
Catherine Gibson: Let alone was in the commercial real estate sector, which I'll speak to shortly.
Other loan with the securitization transaction related to our corporate board of defaulted last quarter in the automotive sector.
Relatively large impaired loans securitization facilities are structured to minimize loss in the event of default.
You could even breaking new formations were lower compared to last quarter, we remain elevated reflecting both the macroeconomic environment that I noted earlier and he appeared loans, we acquired from HSBC, Canada.
Despite higher formations and gross impaired loans. This quarter you can see on slide 19, the provisions on impaired loans were down 13 million or one basis point relative to last quarter.
One of the higher provisions in Canadian banking and wealth management were more than offset by lower provisions in capital markets.
And our Canadian banking retail portfolio provisions were up $24 million driven by higher provisions on credit cards.
And anybody can commercial portfolio provisions were down 9 million compared to last quarter were made up of pre pandemic levels.
Catherine Gibson: But it comes in the commercial portfolio are in line with our expectations with stressing the portfolio skewed to smaller borrowers borrowers in sectors that are closely tied to consumer spending and where we're still recovering from the impact of the pandemic.
Capital markets provisions were down 46 million compared to last quarter, primarily due to a reversal of a previously impaired loan can be oil and gas sector.
Catherine Gibson: This quarter nearly three quarters of our capital markets provisions were taken in the multifamily commercial real estate loan.
Backed by a portfolio of rent control properties in San Francisco.
We've now had two large impairments and provisions in our U S multifamily commercial real estate portfolio. So we have provided some additional details on our exposure on slide 20.
The sector has generally been performing well supported by strong demand for housing.
However, pockets of geographic weakness have service on rent control properties in places like New York and San Francisco.
For exposure to U S multifamily commercial real estate loans of $8 3 billion represents less than 1% of total loans and acceptances.
Two thirds of our exposures in wealth management.
<unk> from amortization and additional recourse outside of that property is held as collateral.
Today's impairments and losses have been another capital markets portfolio on rent control properties in San Francisco.
For a deep dive into the remaining 1.9 billion performing couple Martha market's exposure to this sector, we remain comfortable with the risk we are not expecting any additional impairments at this time.
Stepping back from the multifamily sector and looking at commercial real estate more broadly because I noted last quarter impairments of losses have been consistent with our expectations that are well within our risk appetite.
We remain prudently provisioned with for exposure to this sector with our downside provisioning cereals accounting for a reduction in commercial real estate prices are 25 to <unk> 40 per cent.
To conclude crew credit performance. This quarter remained in line with our expectations and we continue to expect provisions on impaired loans between 30, and 35 basis points for the year.
We are pleased with the quality of the loans, we acquired from HSBC, Canada and as Steve noted earlier, we were thrilled with how well the integration has gone.
Alongside provisions we took on the acquired loans, we continue to prudently build reserves on performing loans, reflecting the credit though it comes with the softer macroeconomic environment. We are currently experiencing.
Moving forward credit outcomes will continue to be dependent on the magnitude of change in the unemployment rates directional magnitude of changes in interest rates in residential and commercial real estate prices.
As always we continue to proactively manage risk through the cycle, we remain well capitalized with stern plausible worst 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 one on your devices keep them you may can solve your question at any time by pressing star to peers.
Speaker Change: Please press star one at this time if you other question there would be a brisk balls windup they spend with this stuff all questions.
Catherine Gibson: You for your patience.
The first question is from John Kim from Jefferies. Please go ahead.
John Aiken: Good morning, I'd like to kick this off with a question not related to HSBC, Canada there.
Eric a very strong performance in capital markets. This quarter I know Kathleen mentioned in her prepared remarks that we should expect some level of moderation, but in terms of having us try to triangulate what that what that means can you give us a sense in terms of what the pipeline is for your advisory work and how comfortable you are with the current.
Speaker Change: Quarters run rate so far in trading.
Sure. Thanks, John I appreciate the question.
Obviously, we're very pleased we had a very strong second quarter results in capital markets and that really reflected as Dave touched on both of the improvement in the overall client activity, but also continued a fairly significant market share gains that we saw across all of our products as we look forward we can.
To think the environment will remain quite constructive if we look at the fundamentals for investment banking for example, as we're starting to see a little further clarity on the economic environment and outlook over the next two years.
Stabilization in the rate environment is obviously, improving capital markets and availability of financing that is all coming together to drive for further both strategic M&A activity that also associated financing with that we think those fundamentals will continue and create a healthy environment.
That being said and to Catherine's comments, obviously, we've had a very strong first half we do tend to see some slower seasonality as we go into the second half.
And as well when you just look at some of the ongoing.
Speaker Change:
Uncertainty around the exact trajectory of rates are.
If we're at a higher for longer scenario and financing costs remain a little elevated combined with probably some uncertainty as we look at a range of global elections underway, we think that will likely moderate activity a little bit as we go into H two.
As we look at our previously stated guidance of $1 1 billion a quarter pre provision pretax we remain very comfortable that the strategic steps. We're taking will continue to allow us to outperform that kind of a benchmark.
Speaker Change: Great. Thanks for the color Derik I'll requeue.
Thank you.
Next question is from you Brian Pamela Bank of America. Please go ahead.
Speaker Change: Hey, good morning I.
I guess maybe question Dave for you.
Speaker Change: With HSBC now done like I was just thinking about strategically for oil.
Speaker Change: 15, 5% auto E capital levels, where they are today, just give us a sense of how you're thinking about capital allocation from here.
Just in terms of the main theme, where you think you can play offense to drive growth in Canada is it in the U S. And also just maybe if you can double click on the opportunity created by RBC here in kind of cross selling to your sort of capital market plans. Thank you.
Speaker Change: Great. Thanks, Ebrahim and I'll answer the first part and ask Derek to start off with with RBC clear, which we're really excited about it.
Speaker Change: To a great start now as far as our OEM and capital generation. We are in a very good places you saw it on adjusted basis 15, 5% Roe.
We have a strong path to our target range of 16% when you start looking at extra executing on the remaining HSBC synergies fee based income opportunities. We are margin expansion roll on roll off our books cross sell all of that.
Give us a strong path two to 16 plus percent. So as you think about the capital generation, that's coming off that strong our OE gives.
It gives us enormous strategic flexibility as you pointed out to return capital to our shareholders, but also to continue to build out our core wealth franchises and.
In commercial franchises in U S and in Europe. So as we think about those opportunities and we prepare we'll have that capital generation that will allow us to in a.
Timely way to do that having said that our current focus is on the enormous organic opportunities in front of us whether it's the work that we're doing in simplifying and working on the U S through through Derek and the team there the opportunities with city national as we talked about the opportunities and executing the synergies with Brewin dolphin internationally.
Bringing HSBC into the fold in and going on the offense after being on defense for 18 months now I'd like to thank the HSBC, Canada team for for really holding this bank together through a very prolonged uncertain approval period and execution period and they've been on the defense for 18 months and now we're on the offense and you can see the excitement in their eyes to get.
Back.
And it's hard to replace people, who retire or leave when you're going through an acquisition conversion, it's even harder to bring a new client and when they're going to change banks and go through conversion. So the team's done a great job and now we're back onto the offense. There. So all of that drives opportunity and capital generation to grow organically, but also the.
Speaker Change: You know this is enormous.
Capital that we are generating gives us significant strategic flexibility inorganically.
Abraham it's Derik I'll address the question just on RBC clear.
It really four key reasons. We are we were really excited about the business and we saw it as an attractive opportunity first it's a very large addressable market amongst our corporate clients in particular second it's another opportunity for us to further support our clients and deepen our relationships with them.
Third as Dave touched on it provides a very important source of incremental funding and diversification of funding for our businesses in the U S.
And then finally at its core it's it's it's a a very attractive ROE business attractive efficiency ratio and one that we think we can drive good earnings growth with over time at a compelling Roe.
We've obviously had a multi year initiative to.
To to launch the business, we're very excited to formally launch it in April we very much partnered with a number of our clients along the journey to get their feedback on what was working in the market today, but as well where they were seeing pain points and opportunities for a new entrant to provide a differentiated offering.
In this case, we had the benefit in the U S. I'm coming at this with a bit of a a blank sheet of paper and so we're able to build.
Build a very digitally enabled system based on the feedback from our clients and it's early days given we just launched in April but a very positive very favorable result to date it will be a multi year journey to continue to build this out but I think a very attractive standalone opportunity obviously the U S dollar funding it provide.
Speaker Change: <unk> will be an important enabler for how we can continue to support clients through the loan book and other products. We offer and then you get a number of areas, where it will connect into things like our foreign exchange offering and otherwise where it ties into existing products to offer to clients that allows us to serve them in an even more integrated and holistic way so.
I'm very excited about it.
And does this business need to be global in scale to really get the full benefit from what our clients might need or can you be a U S only business and cash management and still pick up a decent amount of market share.
I think there's a very very strong opportunity in the U S. We obviously do have they are very very strong and leading Canadian cash management platform today that overtime, we can connect between the geographies.
Speaker Change: We think there's a huge opportunity in the U S. As we execute on that we can obviously look at you know further places we can expand the offering.
Ebrahim: I think ebrahim if the plan is more to move it down market into the mid corporate and mid commercial as well as there's a significant opportunity in the United States to look at different target segments. So this platform is extendable horizontally and vertically which is great.
Speaker Change: That's helpful. Thank you.
Thank you next question is from many girl man from Scotiabank. Please go ahead.
Hi, Good morning, Graham you're guiding to 30 to 35 basis points on the impaired PCL loan ratio.
Speaker Change: You've been trending at the low end of that so I'm wondering.
The expectations for the second half of the year, you see reasonable chance that we could get to the higher end of that given your rate outlook.
And in terms of where you see that peaking whether its this year next year on a quarterly basis in terms of that impaired PCL ratio.
Yeah.
For the question Andrew.
Speaker Change: So overall I wouldn't say our outlook on the path of credit here has changed tremendously from from Q1, I think we're pretty much kind of progressing on that path at AR that we kind of had seen previously you know I think when you break that down by businesses and just reiterate some of those it was kind of similar themes.
Speaker Change: I think certainly when we think about retail credit in retail credit in Canada, I think we're still in kind of the upswing there, particularly led by the unsecured retail products. Your cards in your own scale unsecured household products and that's where we kind of see the most impact kind of rolling forward here. So you know they love if you could kind of go together and kind of large corporate wholesale.
Speaker Change: Side of it and that's been running at kind of I would say at the higher end and were elevated levels for the last kind of you know you're in change and I don't really expect that necessarily to accelerate our in fact, we'd be opportunity. The other way there and so I think when you put all that together, we still see in aggregate that are that the stage three PCL probably continues to increase to some degree through.
'twenty 'twenty, four and kind of peaks out at the end of this year and maybe in the first half of next year, and then stage one and two obviously, it's on top of that and you know we've been building that out for quite some time, we've been in you know in conjunction with this kind of.
Hiking cycle and kind of be economic consequences that that's creating that had been building reserves for two years on that you know that how that moves forward really depend on kind of every quarter, we reassessed the forward outlook and reassessed for kind of credit quality sits.
But at some point, we would expect that to start to toggle is that kind of peak period really comes into play and we moved from a building stage into a releasing stage. So you know I think that 30 to 35, we still feel good about this year and I think 2025, we'll kind of reassess as we get closer to the end of the year.
Speaker Change: Just a follow up to that if we see rate cuts how long do you expect it to take for that to have a meaningful impact in terms of the behavior.
Peach TV.
Yeah, I mean, Rick.
Rates the rate environment, where there are higher for longer or whether we're facing cuts is always a hard one to south because it really.
And so that by itself. It really is what's going on in the rest of the economy that right and so it's gonna be much more driven by what's happening with unemployment and what's happening with home prices in conjunction with that.
Certainly you know in our base case forecast in Canada, we do expect rate cuts to start to begin to hear shortly and that we do expect to kind of 100 basis points of rate cuts.
Speaker Change: By the end of this year and then another hundred into next year on the U S side, we're obviously much more cautious about the rate environment. There I think we only have about 25 basis point cut at our forecast this year and that's at the tail end of the year and only another 50 next year and on the long end, we're not really anticipating much change there some more impact on the U S side.
Those are in our baseline.
P C O forecasts for her first nine modeling, we do have a pessimistic sooner that kind of looks at more severe outcomes, but it really kind of takes the interest rate environment. It looks at.
Things going wrong in that in an unemployment really picking up and GDP really pulling back on that so that's already kind of reflected in our ECL in that in that sense, but you know again, it's hard to comment on the rigs by itself. It really is dependent on what's happening with other key macroeconomic variables out there.
Okay. Thank.
Thank you very much.
Speaker Change: Thank you.
Next question is from Matthew Lee Canaccord. Please go ahead.
Hey, good morning, guys and welcome to the call Catherine I will ask one on HSBC can you maybe just talk about the early results from our customer retention strategy.
Relative to your initial expectations and then provide some specifics as to why you're seeing the early cross sell opportunities post acquisition.
Speaker Change: Yeah, Matt, it's Neil I'll I'll pick that one thanks for the question maybe I'll just start with retention I think the headline really across all the businesses is that early retention is above our expectations. So we're quite pleased across all the businesses and that's despite what Dave touched on which was the <unk>.
<unk> approval timeline. So so that did give us some concern I'd say, leading up to it but really pleased where we are.
On the consumer business you know overall client count is very strong the team actually grew the consumer client count in the quarter before migration, which we thought was a great outcome.
Yeah, we're seeing some minor requests for consolidation amongst some of the larger borrowers just.
Just to balance the sort of the sum of those syndications beyond that I think where we're really pleased.
And that's entirely reasonable I think on the clients part Dave spoke to business deposits and there was a couple of things there that we saw which were really non revenue generating.
Speaker Change: Lots of business deposits as HSBC, how the E. D C deposits for the Ciba account, which we're really not providing any revenue, but there was about $5 billion deposits that rolled off to pay off those civil loans.
Speaker Change: We did see it.
As well in the deposit business some clients actually choose to come to RBC a bit early and again net net a positive and just had both relationships and came to us.
Speaker Change: And just wanted to sidestep the migration so.
Topline and thank each of the businesses feel good about retention.
Speaker Change: Pivot to your question about cross sell I think very similar story they are each of the businesses identified.
Opportunities, where we think we've got a lot of revenue and relationship.
You know that we can provide and the consumer business. We've identified things like just the credit card portfolio, we have a very strong lineup.
We see an opportunity to really deepen it there.
Speaker Change: HSBC has not had a strong penetration of the HELOC product, which we really view as a much stickier lender.
Lending products. So we would we would put that in the mix as well Dave touched on the commercial business just access to capital and growing the loan book.
Speaker Change: We would see that as an opportunity on a go forward and working with derek's team.
FX is something that this obviously brings us I think a real new vector of growth.
Around FX and maybe just the last one into doug's business, we're already seeing some great referrals as we look at what Graham touched on which is a high income affluent customer base that hasn't had the leading wealth management platform that doug's team leads so those would you be just a few of them.
Okay.
Speaker Change: Alright, that's very helpful I'll pass the line.
Thank you.
The next question is from Gabriel define National Bank financial Please go ahead.
Gabriel: Hi, Good morning, Oh, we're talking about client retention on the HSBC portfolio I wanted to talk about the mortgage book, there, where they were a known as a price leader.
Retention really an objective there or kind of like a more of a recycling phenomenon and using our funding to Oh, you're a you know the the overall mortgage book and could see some margin expansion on the back of that maybe you could talk about that and then on the commercial side.
You know the buzz around the you know how did that deal with during the you know before the closing anyway was that a lot of the HSBC customers, where you now need to cross border cash man at Mt.
Speaker Change: Capabilities I know you've invested in and that over the past year. If you could talk a bit about those investments.
And what the experience has been from the client.
Syed.
Thanksgiving meal and so maybe just on the on the mortgage book, we've actually touched on this before HSBC just didn't have the strong proprietary sales force. We did so they did have a tactic that was to lead with an aggressive price.
They really did not discount once they started the conversation with the client. So we're happy with the spreads in the mortgage book and we've been I can I can say going at it quite aggressively.
That business and in the first month, we actually see our renewal rates actually a little bit above our own and we feel quite good about that so I'd say definitely put that in the opportunity category.
Speaker Change: Hum.
And you talked about on the on the commercial business and cross border cash management.
Yeah. This is what we would say is an opportunity. We've we've added a couple of products to our shelf to make sure. We have all those value propositions, they're used to I'd say the headlines have been a more sophisticated trade finance capabilities.
Speaker Change: And then.
At the upper end liquidity management. So for corporates that you know just work and a lot of different jurisdictions and wanted to be able to move that liquidity around so not only will it be there for those HSBC clients, but obviously, we can cross sell that into our commercial clients here.
Here in Canada.
Just where we are on that is there is a very small TSA that we've got about 2600 clients and that'll that'll roll off in the first year and so far I'm just been exceptionally smooth.
Alright, great and then if I can throw another one in there if I may.
There's a lot of attention paid on AML. These days can you talk about the you know you're clearly investing in and see them you see them visa.
Speaker Change: Our capabilities there.
Any you know additional investment required across the rest of the bank and HSBC itself, but is there kind of a part anyway.
Maybe I'll start and then Dave.
Dave: Dave Here, then and Graham.
We continue to invest in in our AML systems and in the overall ecosystem. Obviously, it's it takes up all banks to protect the overall payment system and we do.
Collaborate around that we do invest in technology.
Dave: It helps us protect the system. So we're constantly on guard and investing in new systems, and using technology and training to make sure that we we.
You know play our role in the overall financial system and we protect the system.
Against this type of crime complex world and it's a difficult world, but we constantly invest to do that and we work with our regulators and we work with our our governments and all our agencies to to protect the financial system. So it's it's a journey and the world changes and we adjust to that and I would say.
We are.
It would make it the highest priority in our organization and we're all focused on it and every jurisdiction Graham do you want to add yeah, I mean, I think Dave hit the key headlines there it's cool area, we treated like no other.
Speaker Change: Different vetoed or as scary as it's a key part of our risk management program and we've made huge investments in that area to make sure not only that we're leading.
Obligations and expectations.
Our partners in the public sector have on us.
Speaker Change: You've got to make sure that we were.
This institution is safe and sound way.
You asked about HSBC within that certainly they have a they have a international client base. It presents other unique risk there and that was a key part of our diligence and so we spent a lot of time looking at their email program with HSBC had invested a lot of time and so we know what the benefits of the close and convert as we bring that into our email kind of infrastructure and an earn out.
And that process of reviewing all of those clients and making sure. It's gonna daughters standard inspects and the other thing I would just say that you talked about the H.
HSBC client bases and Dave referenced earlier, we're also bringing in a lot of really seasoned professionals from HSBC on the email so I didn't really really lean into their knowledge and experience as well in this and and so that's a real benefit for us on that side as well.
Okay, well, thanks for the year, HSBC disclosures and commentary very transparent and much appreciate it.
Thanks Gabriel.
Thank you next question is from Mario Mendonca TD Securities. Please go ahead.
Dave: Dave Let me start a quick question for you hopefully this is straightforward.
Hugh Hugh you've announced the M CIBC and in your comments. Your opening comments you said it was the NCB is there to offset the shares issued under the drip.
So the obvious question for me is why do the drip if you're just now going to offset it unless something has improved and your outlook. So maybe that's the question what's improved in your outlook that would cause you to want to offset what you just completed doing on the drip.
Speaker Change: Yeah. So thanks for that question. So obviously when we undertook.
Speaker Change: This transaction.
Announced at 18 months ago.
That was a long approval journey and we had to plan a buffer for our capital and make sure that we could close this transaction as we articulated on a cash basis without having to do an equity raise into.
All conservatism, we had to put on a drip to make sure that we could grow the organization.
Speaker Change: Executing on all the work that we had in front of us and deliver this transaction. So there was a lot of moving pieces Mario as we took this on in 'twenty.
It was a year and a half ago. So as we came through that our earnings have been so strong and our roe's have been really strong and we did produce a more capital than we actually planned through the process and therefore exited its very strongly as you. Just saw is 12, 8%. So it does give us the opportunity is.
We look at the organic momentum that we have we look at strong early as we're able to generate capital and therefore, we are going to use buybacks as a strategic tool, including this year to buyback a 30 million shares to start so I think it's a start it's our plan and we're going to see what our game.
Speaker Change: That growth, we're going to see what the inorganic opportunities are I went to see what the state of the economy is and where we should run our actual capital levels. So I think all of those things are in play and it gave us an opportunity to return capital to you to offset the dilution and therefore, it's part of our normal planning process. So when you have uncertainty we ended up in a better place and.
Speaker Change: We're going to drive very strong T. S archway go through it.
I think I understand that no. One quick question before I leave this topic I've come to think of 13% is the bogie for our banks in Canada.
Tier one ratio.
Speaker Change: Do you have a different impression as is the.
Speaker Change: The appropriate level more like 12 and a half.
Yes.
Speaker Change: Okay. That's definitely okay. One quick thing then maybe not so great, but I want to focus on.
Catherine the comments you made around the spread between the five year today than where it was but you know years ago, that's something that's near and Dear to me is something I've been focusing a lot on is it conceivable that if let's say that deposit pricing environment slows like this shift to the high cost deposit slows a little bit, but the high end of the curve remains realm.
Tivoli high it is as we see today, even in the context of a of a shorter lower short end of the carpet. So a steeper curve does that environment could that environment drive Royals all bank margin up.
Speaker Change: Somewhat like one to two basis points a quarter, let's say over the next year or so is that is that reasonable a reasonable expectation that the tractors drive that kind of improvement assuming the deposit environment plays ball.
Katherine: Thank you for that [noise] excuse me. Thank you for the question it's Katherine.
Yes, I would agree with your assessment as you laid that out as mentioned in my notes, we are definitely seeing that positive benefit come through I'm, sorry deposit portfolio and as you've laid it out I would expect to see continued margin expansion and flow through.
Katherine: Canadian banking NIM.
And the all bank them.
Katherine: And it was the expectation is that it would flow through to you all thank him as well right.
Thank you.
Thank you next question is from Paul Holden CIBC. Please go ahead.
Paul David Holden: Hi, Thanks. Good morning, maybe just a quick question for me just to better understand the additional PCL was performing PCL was you would have for HSBC.
Is that a matter of just putting on some additional conservatism as you close the transaction.
Is that a matter of royal applying its own credit models to the HSBC portfolio really what I got them.
Just trying to better understand what is the probability that those T cells. Ultimately you get released back into earnings.
Yeah. Thanks, Paul.
Speaker Change: This isn't a conservatism. This is the first nine rules, we're playing and so they're used to pick them up.
Speaker Change: The way the purchase accounting works, it's like we originated these as new loans. It affects so they're kind of mark to market as they come across that mark to market. It goes through the you know all sits in a goodwill if you will until its newly originated loans, we treat them a little different than the other when we originate in stage, one and we have to.
The allowance for that and so that's really what that is and again the benefits of the close them convert we brought them over we put our RBC ratings on all of those we've run those rollover IRA personally models in all of our governance and review on the item done our own analysis on that and so we've established those day, one PCL very much in line and consistent with how we would do all of the other.
Our products and portfolios at RBC.
Only note I'd made on that as I noted in my speech is that.
It's all stage one it might be one because they were newly originated and we would expect in coming quarters to see the kind of natural migrations in delinquencies in the portfolio and so some additional you know stage, one and two there just as it kind of migrate so more natural state in that regard got it. Okay. There's just applied your own <unk> nine models to HSBC Buck, Okay that makes sense.
One quick follow up one grandmother have you, but you can kind of talk through some of the cash flow experience and I know, what you're seeing for your Canadian consumers and how they are grappling with a higher cost of living and higher cost of borrow. Thanks.
Yes, it's a good good question there Paul I mean so.
So we have a number of tools, we kind of look at it to kind of better understand the health of our client base and their consumers certainly.
We put our own readings on the on each of our clients in those readings are inherently tied to what we see happening and they're kind of cash flow and their savings in their deposits.
Kind of have some some we obviously havent really rich information understand kind of clients overall phasings of deposit profile that I don't know.
It is an overall health there.
Speaker Change: One of the reason that the Canadian consumer has been quite resilient as they built up a lot of savings and a lot of people buffer of starting the pandemic, we haven't seen that in aggregate draw down over the last few years, you know, but I would still say its kind of you know.
Forget elevated somewhat elevated beyond kind of what would be more of a normal growth in that.
But what that does also tell us it does point to those clients that are facing more stress reading those if it goes back to the mortgage clients to the face those payment triggers and don't have quite the same resilience you really do see those cash buffers and reserve start to draw down on that.
So that's you know again overall I would say, we still see a pretty healthy Canadian consumer I'm out there, but but those pockets of stress or exactly was once we've identified and that really is tied to kind of where we're increasing our allowances and reserves accordingly.
Got it okay. That's it for me thank you.
Speaker Change: Thank you. The next question is from Suraj Alrighty.
Well kept them Watkins. Please go ahead.
Okay. Thank you I know, we're tight on time, hopefully three quick questions.
Are you price sensitive on D N CIB or is it just intended to offset the dilution period.
No. It's a good question Yeah, you always think about the overall value and you know you look at where your you know your intrinsic value per share is and you you make that call. So we'd obviously like to accelerate on any deaths, we don't want dips officially but you'd accelerate on a dip.
And you know price does come into it but we do have an overall in our strategy of how to return capital to shareholders to create the overall premium total shareholder return that.
We are we're going to deliver so I can't give you more guidance. It's obviously a variable you think.
Okay. I appreciate that that's helpful. Katherine you had mentioned that you hope by the end of 2025 city national will be back to more normalized.
Earnings levels, what would that what would that be compared to where you are today. You know obviously you've had to make some extra spendings and what have you to to rectify some some stuff down there I'm just curious as to what does that normalize look like.
Yeah.
Maybe I'll take that Steve Shaw.
Speaker Change: So they spent a lot of time on it.
So as I talked about you can see that the our expense trajectory as you know has the full run rate of our remediation efforts center overall building a heightened standards and are re platforming of C. N. B. So you've seen as we talked about a significant amount of work we're doing is embedded.
Speaker Change: And the current run rates, which you know it gives you a kind of a line of sight on on the cost line or our revenue line is stable and higher interest rates will help us we are putting on some tractors you know of any of that.
Protect that revenue line in the event of a declining rate environment. So I think that's a positive as well the lineup. The line items that will have a little bit of volatility going forward that could accelerate or decelerate.
Speaker Change: We'll be there are a number of opportunities for us to simplify this business, whether it's selling noncore parts of C M b or.
Taking out real estate that all have positive run rate benefits and positive shareholder value creation. So you may see the catherines point, the odd one time not material, but the odd one time that that will impact a quarter, where we're able to create long term shareholder value by simplifying selling something or taking out leases.
What happens to be so I think catherines kind of point was on there'll be a little bit of bumping us towards that getting to kind of where are we going to come out of this I think you can look at to where it kind of peer.
Peer are always are and look at our balance sheet. There's no reason why we can't achieve that and therefore for us to get to that peer our away we have to complete our remediation and start to bring a very significant cost structure down, which we planned to do.
And that will happen, we hope over the next roughly 18 months. So I think that is all the things that have to kind of go well, but you should take comfort that our run rates reflect you know full cost run rate of of Remediated and building a stronger platform.
Thank you for squeezing my question to you.
Thank you.
We will take one more question scrapping them off or sold Comex Securities. Please limit yourself to one question. Please go ahead.
Yeah. Thanks, just use my one question here on.
It seems like you guys are highlighting these cross selling opportunities at HSBC. So it really does beg. The question can you guys put some numbers around that and what that would be potential upside to the $1 4 billion and earnings I think the answer is yes. So any numbers you could put around that and and timeline to achieve it just sounds like you guys are very excited.
Thanks.
Thanks, Omar it's Neil Yeah, I mean, you can probably sense that we do think there's a real opportunity here.
When you stepped into it we felt that the cross sell opportunities would be as much or more than any of the attrition risk I think we feel quite confident that that is going to be the case, but it's not something we're going to put numbers around at this point.
Yeah, It's Steve I think as we you got to give us a quarter or so to get.
Get a deeper knowledge of the client base, we brought in and we know what's in affluent client base, Neil I think outlined really well the opportunities across all the businesses and services from an investments to credit cards to core operating accounts to Treasury management to cross border all that exists. So we're just going to go through a process over the next quarter or.
So of testing that and then we're going to size that for you and we will talk about that in the coming quarters, but just give us a quarter to make sure. We're solid on our expectations of the monitor the valuation of that cross sell we want to get it right for you, but we're very excited about it.
Speaker Change: Appreciate the time.
Thank you I would now like to turn the meeting over to Mr. Dave Mackay. Please go ahead.
David I. McKay: Yeah, So just to wrap up thanks for all your questions now that the theme I wanted that.
The team to get across to say, which I think we did is.
It's really along the lines that not only did we close one of the most complex transactions and we did it close and convert.
Seamlessly.
We didn't lose any momentum in the business in fact, we accelerated the momentum in the core business across capital markets across wealth, and a crime and particularly across commercial and consumer banking you see it in the volume growth you see it in our profitability growth you see it in a very strong operating leverage of the business the core business accelerated over the past year, we did not lose.
Momentum and we've got now HSBC opportunities, we've got RBC clear, where we're building on very strong.
Core momentum with these additional.
David I. McKay: Inorganic investments and therefore, when you think about the ROE potential of the bank. When you think about the capital generation of bank. When you think about the EPS trajectory.
We feel very strongly that we've got momentum we've got great investments and we're going to continue to build from one strength. The next so I think that was the message that we really wanted to deliver it today. Thank you for your questions and we look forward to seeing you at the end of the summer and August.
David I. McKay: Thank you.
Speaker Change: Thanks Melinda.
Speaker Change: Disconnect your lines at this time and we thank you for your participation.
In France is now please disconnect your lines at this time and we thank you for your participation.
Speaker Change: Okay.