Q3 2024 Royal Bank of Canada Earnings Call
Speaker Change: This conference has been recorded, this conference has been recorded.
Speaker Change: All participants, please stand by your conferences ready to begin. Good morning ladies and gentlemen and welcome to the RBC 2020-4134 Results Conference Call.
Speaker Change: Please be advised that this call is being recorded. I would not like to turn a meeting over to Asim Imran. Please go ahead.
Asim Imran: Thank you, and good morning everyone.
Speaker Change: Speaking today, we'll be Dave McKay, President and Chief Executive Officer, Catherine Gibson, interim Chief Financial Officer and Graham Hepworth, Chief Risk Officer.
Speaker Change: Also joining us today for your questions, Neil McGlockland, Group Head Personal and Commercial Banking, Judge Guzmann, Group Head Welp Management and Insurance, and Derek Nellner, Group Head Capital Markets.
Speaker Change: As Northern Slide 1, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties.
Speaker Change: Actual results could differ materially.
Speaker Change: I would also remind listeners that the bank assessors' performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.
Speaker Change: To give everyone a chance to ask questions, we ask that you limit your questions and that reach you. With that, I'll turn it over to Dave.
Dave: Thanks, Awesome. Good morning everyone and thank you for joining us. Today we reported 3rd quarter earnings of $4.5 billion.
Dave: for adjusted earnings of 4.7 billion, underpins by strength across our largest businesses.
Speaker Change: Canadian Banking, Net Interesting, come with up 26% year over year, or 11% excluding the impact of HSBC Bank Canada.
Speaker Change: which I will speak to shortly. These results were driven by higher interest rates in strong volume growth.
Speaker Change: Asim Management and Welth Management Revenue Growth was underpinned by over 15% growth in fee-based assets over the prior year.
Speaker Change: as well as higher transactional revenue.
Speaker Change: Apple markets reported revenue of $3 billion while generating pre-tax pre-provision earnings of $1.2 billion.
Speaker Change: As we continue to win market share and key products amidst rising fee pools.
Speaker Change: Our continued focus on improving productivity, drove all bank operating leverage of 2%.
Speaker Change: Pre-provision pre-tax earnings growth was 16% u over a year, or 8% excluding HSBC and adjusting for specified items.
Speaker Change: Credit Quality Remains Strong.
Speaker Change: reported a return inequity of 15.5% or adjusted RRE of 16.4% on the foundation of [inaudible] foundation of the foundation of the foundation
Speaker Change: So 13%
Speaker Change: Strong earnings generated significant 70 basis points of capital this quarter or 26 basis points net of dividends in our WA growth. This is more than what we earned in the first half of the year, underscoring the capital generating power of a diversified business model.
Speaker Change: Our pre-marrer week positions us to continue deploying our growing capital based towards client driven RWA growth and returning capital to shareholders while maintaining appropriate capital buffers.
Speaker Change: As always, we look at the intrinsic value of our business when determining the level of buybacks. As we remain well positioned to compound growth and book value for share, which was up to 11% year over a year, we expect an increasing level of buybacks over the coming quarters to continue providing long-term values to our shareholders.
Speaker Change: I will now provide an update on the recent acquisition of HSBC Canada, which contributed earnings up to $239 million, or adjusted earnings up to $292 million, excluding specified items.
Speaker Change: Results this quarter benefit from the accretion of purchase accounting marks, $90 million of cost energy is achieved and $156 million of underlying earnings, including higher than expected stage 3 PCL.
Speaker Change: Having realized the annualized run rate savings to date of approximately 50% of our state of target. We are confident we will achieve our expense synergy goal of $740 million per year.
Speaker Change: We also remain impressed by HSBC Canada's fundamentals, including the strength of the franchise and the balance sheet we acquired. Employee and client engagement is high, and are combined sales force continues to rebuild lending origination pipelines, which had narrowed ahead of our extended clothes.
Speaker Change: While so early we see encouraging climate activity and opportunities for revenue synergies across the enterprise.
Speaker Change: AHSBC Canada retail clients are being referred to our Canadian wealth management business. They're now benefiting from our deep investment management and planning capabilities.
Speaker Change: This thing, our retail clients, are also benefiting from new products and service capabilities, including foreign currency accounts.
Speaker Change: Our combined commercial banking clients are poised to benefit from the upcoming expansion of our trade finance and global cash management offerings.
Speaker Change: Before discussing our business results in greater detail, I will provide my perspective on the macro environment where the U.S. is outperforming a softening Canadian macro backdrop.
Speaker Change: In Canada, higher interest rates and rising unemployment are impacting consumer spending and business investment. This in turn has led to a moderating non-shelter inflation and lower GDP per capita.
Speaker Change: Contrast, US inflation remains above the targeted range, however there are signs that the restrictive interest rate policy is stabilizing super core inflation measures.
Speaker Change: While the U.S. Labor Market remains resilient, declining job openings are rates of attrition point to some weakening.
Speaker Change: The short-term divergence of monetary policy between the Bank of Canada and the U.S. Federal Reserve is expected to narrow ahead of expected and accelerating U.S. interest rate cuts with positive implications for yield curves.
Speaker Change: Well, there's a higher degree of geopolitical uncertainty and volatility. Our diversified businesses are well-positioned for the macro-driven shifts in the operating environment.
Speaker Change: We expect to see the benefits of lower short-term interest rates and capital market activity, constructive equity markets, the availability of credit, improved that serviceability, and the flow of money from deposits into investments, as we continue to provide our clients with value device and solutions amidst a complex backdrop.
Speaker Change: We're also delivering under strategic priorities across our largest businesses and geographies, including expanding our funding and transaction banking capabilities.
Speaker Change: Starting with Canadian Banking, Record-A-Positive Growth Remains Central to our client acquisition strategy.
Speaker Change: Well, one quarter doesn't make a trend, total banking account deposits grew faster than GSEs on a sequential basis.
Speaker Change: Furthermore, we're beginning to see retail clients augment their portfolios with diversified investments such as mutual funds.
Speaker Change: We remain well positioned to retain and capture this money in motion, following the ongoing shift in the interest rate outlook in client sentiment.
Speaker Change: With impersonal banking, total deposits were up 21% from last year or up 8% excluding HSBC Canada.
Speaker Change: We're having our strongest year-to-date acquisition volume with new to bank checking acquisition up over 20% year-over-year, driven by value proposition such as RBC Vantage, strong client acquisition and a newcomer segment and partnership referrals.
Speaker Change: Our leading digital channels continue to deliver award-winning experiences to our clients, a key indicator of client satisfaction, which in turn is important to the health of our franchise.
Speaker Change: We're proud that our BC ranked number one in customer satisfaction in both a JD power 2024 Canada banking app mobile satisfaction study and the Canada online banking satisfaction study as well.
Speaker Change: A proprietary loyalty program, also in multiple awards this quarter, at the Lawlti360 awards, including the Platinum Award for Branch of Brand Partnerships, a foundational element of Avian rewards.
Speaker Change: Credit card balances are up 13% your over year, or 11% excluding HSBC Canada.
Speaker Change: While Canadians are spending less, our total client spend was up 7% from last year, including higher airline spend.
Speaker Change: Margaret Groot was up to 12% or a modest 3% excluding HSBC Canada. We remain disciplined in our approach as we look to strike a balance between consistent through the cycle growth and spread the myths and tense competition.
Speaker Change: Houseful on RBCX Venture provides a differentiated growth channel as we look to move up the client acquisition funnel, their clients home buying journey.
Speaker Change: In our leading commercial banking franchise, the pauses were up 25% year over year, or 12% excluding HSBC Canada.
Speaker Change: Business loans are up 43% from last year, or 14% excluding HSBC Canada largely from increased activity from our existing clients.
Speaker Change: We are seeing games in a market share across all segments and priority industries that are client benefit from the recent investments in our front-line capabilities and coverage teams.
Speaker Change: Turning to capital markets, where we reported pre-provision pre-tax earnings of $1.2 billion this quarter, or $4 billion here to date, above our annualized guidance of $1.1 billion per quarter.
Speaker Change: We generated $3 billion in revenue this quarter, with half of this coming from the U.S. Our second home market and an important element of our growth strategy.
Speaker Change: Investment Banking Revenue was up 36% from last year, benefiting from a recovery in global people's and a more than 40 basis point gain in market share, notably in MNA.
Speaker Change: You're seeing also early signs of success and client wins an recently launched US cash management platform where we will look to add further capabilities.
Speaker Change: RBC Clear was awarded the best overall bank for cash management, the United States from the Global Finance Magazine 2024 awards.
Speaker Change: to
Speaker Change: Global markets reported a $1.4 billion in revenue this quarter, down 1% for last year, as our equities business was impacted by legislative changes to the dividends received a reduction under Canadian federal measures.
Speaker Change: Looking forward, we have a robust M&A pipeline, as are continued investments in people, product capabilities and coverage, combined with an increasingly constructive environment, is driving more active client dollars and missed secular trends.
Speaker Change: However, market volatility could slow the velocity for moving deals from announcement to close.
Speaker Change: In contrast, this market volatility can continue to act as a constructive tailwind for a sales and trading businesses.
Speaker Change: Administration of the strength of a diverse supply platform.
Speaker Change: Moving to our wealth management segment.
Speaker Change: Assists under administration and Canadian wealth management, or up 20% or nearly $100 billion from last year, increasing to a record level of over $650 billion.
Speaker Change: RBC Dominion Securities, Part of our Canadian Wealth Management franchise, was named a highest ranked bank owned investment brokerage in Canada in 2024, Investment Executive brokerage report card. This is the 18th year in a row that RBC has won this prestigious honor.
Speaker Change: Assess under administration and our US wealth management platform also restore record, up nearly $74 billion or 13% year over year, to record a UA of nearly $650 billion US dollars.
Speaker Change: Furthermore, Loans in the Positis, or US-Welfth Management Franchises, reported strong year over your growth as quarter.
Speaker Change: Our U.S. wealth management advisory business was second largest contributor to U.S. all the results.
Speaker Change: Our BC global asset management's assets under management increased $100 billion or 18% from last year to an all-time high as well. Benefitting from robust equity markets, increasing inflows to higher yielding fixed income funds as interest rates begin to decline.
Speaker Change: RBC Gam, also gain market share and retail mutual funds as a generated positive net sales in a quarter where it appears the industry is tracking to net redemption.
Speaker Change: In conclusion, we continue to execute against our state strategies to generate pre-remorrowing growth.
Speaker Change: As part of the journey, we recently announced a few key executive appointments.
Speaker Change: First of all, I would like to thank Doug Goosman for his leadership and for the pivotal role his played leading RBC Welp Management from Strength to Strength and Insurance over the years.
Speaker Change: In addition, we look forward to welcoming Eric Nielsen, Jennifer Publicover, and Shana Motogelchi, to the next quarterly call as group heads of personal banking, RBC insurance and commercial banking respectively.
Speaker Change: We will also continue to invest to drive diversified growth across clients' segments and sources of funding while maintaining our focus on efficient capital allocation, prudent risk management and improved productivity.
Speaker Change: Furthermore, as it relates to our broader US footprint, we are focused on improving the connectivity across our three platforms.
Katherine: Katherine, over to you.
Katherine: Thank you, Dave, and good morning, everyone. Starting on slide 8, we reported diluted earnings per share of $3.9. This quarter.
Unknown Executive: Don't Registry. All participants, please stand by your conferences ready to begin.
Katherine: adjusted diluted earnings per share with a record $3.26 up 15% from last year. These adjusted results included net earnings from HSBC Canada up 292 million.
Asim Imran: Good morning, ladies and gentlemen, and welcome to the RBC 2024 Third Quarter Results Conference call. Please be advised that this call is being recorded.
Asim Imran: I would now like to turn your meeting over to Asim Imran. Please go ahead.
Speaker Change: Turning to capital on slide 9, our CT1 ratio was strong at 13% up 20 basis points from last quarter, mainly reflecting an internal capital generation, Nadine Ahn, David McKay, Asim Imran, Graeme Hepworth,
David McKay: Thank you and good morning everyone. Speaking today, we'll be Dave McKay, President and Chief Executive Officer, Katherine Gibson, Interim, Chief Financial Officer, and Graham 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 Neldner, Group Head Capital Markis. As noted on slide one, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties.
Speaker Change: This was partly offset by net credit migration in wholesale portfolios and strong growth across our Canadian banking and capital markets portfolio.
Speaker Change: We also initiated Share Repurchases this quarter by an approximately 480,000 shares for $73 million.
Speaker Change: Moving to slide 10, all bank net interest income was up 17% year-rear, or up 19% excluding trading revenue.
David McKay: Actual results could differ materially. I would also remind listeners that the bank assesses this 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 read you. With that, I'll turn it over to Dave. Thanks. Awesome. Good morning everyone and thank you for joining us. Today, we reported Third Quarter earnings of $4.5 billion.
Speaker Change: These results were largely driven by the addition of HSBC Canada, as well as higher spreads in average volume growth in Canadian banking.
Speaker Change: All Bank NIM, excluding trading revenue, was up one basis point from last quarter, mainly driven by tailwinds and Canadian banking.
Speaker Change: This was partly offset by changes in asset mix in capital markets, non-trading portfolios, as well as lower earnings on residual capital reflecting the close of the HSBC Canada acquisition.
David McKay: For adjusted earnings of $4.7 billion, underpin by strength across our largest businesses. Canadian banking net interest income was up 26% year over year, or 11% excluding the impact of HSBC Bank Canada, which I will speak to shortly. These results were driven by higher interest rates and strong volume growth. Acid management and wealth management revenue growth was underpin by over 15% growth and fee-based assets over the prior year, as well as higher transactional revenue.
Speaker Change: Committee of Banking NIM was up eight basis points from last quarter. HFET Canada drove four basis points in NIM expansion this quarter. Mainly reflecting the full quarter benefit from the accretion of purchase accounting for our value adjustment.
Speaker Change: Poor Canadian banking nim was up 4 basis points to increase sequentially. Nim benefited from improvements in product mix, including strong growth in cord deposit. This quarter also included a favorable benefit from treasury-related activities.
David McKay: Capital Markis reported revenue of $3 billion while generating pre-tax, pre-provision earnings of $1.2 billion as we continue to win market share and key products amidst rising fee pools. Our continued focus on improving productivity drove all bank operating leverage of 2%. Pre-provision pre-tax earnings growth was 16% year over year, or 8% excluding HSBC and adjusting for specified items. Credit quality remains strong. It reported a return on equity of 15.5% or adjusted ROE of 16.4% on the foundation of Common Equity 2.1 ratio of 13%.
Speaker Change: In addition, the benefits from our tractor core personal banking deposit portfolio continue to flow through. However, these benefits were partly offset by competition for deposits and mortgages, as well as the deluded impact of the BA Corea Migration.
Speaker Change: Looking forward, we expect fourth-quarter Canadian banking nim to be down a couple of basis points sequentially, reflecting the continuation of headwinds noted this quarter. This is in line with our prior guidance for higher nim in the second half of the year.
David McKay: Strong earnings generated a significant 70 basis points of capital this quarter, or 26 basis points net of dividends in RWA growth. This is more than what we earned in the first half of the year, underscoring the capital-generating power of a diversified business model. Our premium ROE positions us to continue deploying our growing capital-based towards client-driven RWA growth and returning capital to shareholders while maintaining appropriate capital buffers. As always, we look at the intrinsic value of our business when determining the level of buybacks.
Speaker Change: Moving to slide 11, non-interest expenses were up 11% from last year, excluding HSBC Canada integration costs and the impact of amortization of intangible adjusted expense growth was 9%.
Speaker Change: Further, excluding HSBC Canada run rate expenses and other macro-driven factors, such as FX and Sharebase Compensation, Core expense growth decelerated to 5% year over year.
David McKay: As we remain well positioned to compound growth and book value for share, which was up 11% year over year, we expect an increasing level of buybacks over the coming quarters to continue providing long-term value to our shareholders. I will now provide an update on the recent acquisition of HSBC Canada, which contributed earnings of $239 million, or adjusted earnings of $292 million, excluding specified items. Results is quarter benefited from the accretion of purchase accounting marks, $90 million of cost energies achieved, and 156 million of underlying earnings, including higher than expected stage 3 PCL.
Speaker Change: The bulk of core expense growth was driven by higher variable compensation, reflecting strong results in capital markets and wealth management.
Speaker Change: Looking forward, we continue to expand, expect all bank core expense growth in addition to HSBC Canada run rate expenses to be at the top of the mid-single digit range for the fiscal year.
Speaker Change: with volatility within the range largely driven by movements in variable compensation.
Speaker Change: Given the uncertain macro environment, we remain vigilant in controlling costs and running the bank efficiently.
David McKay: Having realized to annualize run rate savings to date of approximately 50% of our state of target, we are confident we will achieve our expense energy goal of $740 million per year. We also remain impressed by HSBC Canada's fundamentals, including the strengths of the franchise and the balance sheet we acquired. Employee and client engagement is high, and our combined sales force continues to rebuild lending origination pipelines, which had narrowed ahead of our extended close.
Speaker Change: Her need to taxes, the non-tab effective tax rate was 16.5% this quarter, or an adjusted tax rate of 20% on a taxable equivalent basis.
Speaker Change: Going forward, we expect next quarter's adjusted tax rate to be towards the higher end of our full year guidance of 19-21% on a taxable equivalent basis.
David McKay: While still early, we see encouraging client activity and opportunities for revenue synergies across the enterprise. HSBC Canada retail clients are being referred to our Canadian wealth management business, and are now benefiting from our deep investment management and planning capabilities. Existing our B.C, retail clients are also benefiting from new product and service capabilities, including foreign currency accounts. Our combined commercial banking clients are poised to benefit from the upcoming expansion of our trade finance and global cash management offerings.
Speaker Change: Broadly, our guidance for fiscal 2025 effective tax rate is similar to that of the fourth quarter. As pillars to income taxes may arise in relation to jurisdictions where our operations have an effective tax rate below 15%.
Speaker Change: Turning now to our Q3 segment results beginning on slide 12.
Speaker Change: Personal and Commercial Banking reported earnings of 2.5 billion. Canadian banking net income was up 17% year over year. My following comments will now exclude any impact to Canadian banking from HSBC Canada.
David McKay: Before discussing our business results in greater detail, I will provide my perspective on the macro environment where the U.S, has outperformed a softening Canadian macro backdrop. In Canada, higher interest rates and rising unemployment are impacting consumer spending and business investment. This in turn has led to a moderating non-shelter inflation and lower GDP per capita. Contrast, U.S, inflation remains above the targeted range. However, there are signs that the restrictive interest rate policy is stabilizing super-core inflation measures.
Speaker Change: Canadian Banking's earnings were up at strong 8% year-over-year, net interest income was up 11% from last year, reflecting higher spreads and robust volume growth.
Speaker Change: Non-interesting come with up 5% year-rear reflecting the benefits of market appreciation and increase client activity, which together drove higher mutual fund distribution fee as well as higher service revenue and FX revenue.
David McKay: While the U.S, labor market remains resilient, declining job openings and rates of attrition point to some weakening. The short-term divergence of monetary policy between the Bank of Canada and the U.S. Federal Reserve is expected to narrow ahead of expected and accelerating U.S, interest rate cuts with positive implications for yield curves. While there's a higher degree of geopolitical uncertainty and volatility, our diversified businesses are well positioned for the macro-driven shifts in the operating environment.
Speaker Change: Year-veer growth was also impacted by the prior years 66 million retrospectives HST on payment card clearing services.
Speaker Change: Expenses were up 5% from last year, helping to drive a 4.9% operating leverage, an underpinning and a leading 39% efficiency ratio.
David McKay: We expect to see the benefits of lower short-term interest rates and capital market activity, constructive equity markets, availability of credit, improved debt service ability and the flow of money from deposits into investments as we continue to provide our clients with valued advice and solutions amidst a complex backdrop. We're also delivering under strategic priorities across our largest businesses and geographies, including expanding our funding and transaction banking capabilities. Starting with Canadian banking, where core deposit growth remains central to our deposits grew faster than GICs on a sequential basis.
Speaker Change: Turning to slide 13, Welch Management's earnings were up 30% from last year, as market appreciation and net failed continue to drive strong performance in our Welch Management Advisory and Asim Management businesses.
Speaker Change: These factors were partly offset by higher variable compensation.
Speaker Change: In light of emerging industry development, around pricing dynamics for advisory suite deposits, we note our total U.S. wealth management cash suite is approximately 30 billion U.S., a which the majority is in non-advisory accounts.
David McKay: Furthermore, we're beginning to see retail clients augment their portfolios with diversified investments such as mutual funds. We remain well positioned to retain and capture this money in motion, following the ongoing shift in the interest rate outlook and client center. With in-personal banking, total deposits were up 21% from last year or up 8% excluding HSBC Canada. We're having our strongest year-to-date acquisition volume with new to bank-checking acquisition up over 20% year-over-year, driven by value propositions such as RBC Vantage, strong client acquisition in the newcomer segment, and partnership referrals.
Speaker Change: Since the beginning of the rate hiking cycle, our pricing has been well above industry averages, particularly as it pertains to our largest wealth management relationship.
Speaker Change: As such, we do not anticipate making any material changes to our pricing of advisory sweep deposit.
Speaker Change: The National Generated 77 million U.S. in adjusted earnings this quarter, or 115 million U.S. excluding the impact of losses on non-core investment.
Speaker Change: The non-core losses taken this quarter are consistent with our efforts to re-align the international path forward.
David McKay: Our leading digital channels continue to deliver award-winning experiences to our clients, a key indicator of client satisfaction, which in turn is important to the health of our franchise. We're proud that RBC ranked number one in customer satisfaction in both the JD Power 2024 Canada Banking app mobile satisfaction study, and the Canada Online Banking Satisfaction Study as well. Our proprietary loyalty program also won multiple awards this quarter at the loyalty 360 awards, including the Platinum Award for Brand to Brand Partnerships, a foundational element of avion rewards.
Speaker Change: Turning to our capital markets results on slide 14, pre-provision pre-tax earnings of 1.2 billion increase 18% from last year.
Speaker Change: Corporate and Investment Banking revenue was up 23% from last year, reflecting strong and municipal banking activity, as well as continued market share gains across most major products, amidst a recovering fee pool in the impact of FX translation.
Speaker Change: Global markets revenue was down 1% from last year as headwinds in credit trading and equity derivatives trading were partially offset by higher debt underwriting.
David McKay: Credit card balances were up 13% year-over-year, or 11% excluding HSBC Canada. While Canadians are spending less, our total client spend was up 7% from last year, including higher airline spend. Mortgage growth was up 12%, or a modest 3% excluding HSBC Canada. We remain disciplined in our approach as we look to strike a balance between consistent through the cycle growth and spread the midst intense competition. Houseful, an RBC X Venture provides a differentiated growth channel as we look to move up the client acquisition funnel in our client's home buying journey.
Speaker Change: and stronger results for rapes, foreign exchange, and commodities trading, as well as the impact of FX translation.
Speaker Change: While business momentum remains strong, we note that the second half of the year, and in particular the fourth quarter, tends to be a seasonally slower period for capital markets.
Speaker Change: Turning to slide 15, insurance net income of 170 million was down 21% from last year, driven by lower insurance investment results.
Speaker Change: 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 IFRS 17.
David McKay: In our leading commercial banking franchise, the pauses were up 25% year-over-year, or 12% excluding HSBC Canada. Business loans were up 43% from last year, or 14% excluding HSBC Canada, largely from increased activity from our existing clients. We are seeing gains in the market share across all segments, and priority industries that are client benefit from their recent investments in our frontline capabilities and coverage teams. Turning to capital markets, where we reported pre-provisioned pre-tax earnings of $1.2 billion this quarter, or $4 billion year-to-date, above our analyzed guidance of $1.1 billion per quarter.
Speaker Change: Importantly, our core business performance was strong, reflecting improved claim experience and business growth across the majority of our products.
Speaker Change: You conclude our strong business performance drove a 16.4% adjusted ROI this quarter.
Speaker Change: Looking forward, we expect to maintain our medium-term objectives, including an ROI of 16% plus, and diluted EPS growth of 7% plus while maintaining strong capital ratios.
David McKay: We generated $3 billion in revenue this quarter, with half of this coming from the US, our second home market, and an important element of our growth strategy. Investment banking revenue was up 36% from last year, benefiting from a recovering global fee pools, and a more than 40 basis-point gain in market share, notably in M&A. We are seeing also early signs of success in client wins and are recently launched US cash management platform, where we will look to add further capabilities.
Speaker Change: With that, I'll now turn it over to Graham.
Graham: Thank you, Katherine, and good morning, everyone.
Graham: Starting on slide 17, I will discuss our allowances in the context of the macroeconomic environment.
Graham: During the quarter, the economies of Canada and the US both offered.
Graham: and Canada, Rolf Lee, weaker consumer demand, higher unemployment rates, and the impact of elevated interest rates are a continue to weigh on consumers and businesses.
Graham: Response to the stopping economic backdrop and with the expectation of inflation rates will continue to edge lower. The Bank of Canada cut the overnight rate for two consecutive months, this quarter.
David McKay: RBC Clear was awarded the best overall bank for cash management, United States from the Global Finance Magazine 2024 awards. Global markets reported $1.4 billion in revenue this quarter, down 1% from last year, as our equities business was impacted by legislative changes to the dividends received deductions under Canadian federal measure. Reuters. Looking forward, we have a robust M&A pipeline as our continued investments in people, product capabilities and client coverage combined with an increasingly constructive environment is driving more active client dialogue amidst secular trends.
Graham: This marks the first set of reductions in rates since the current rate hiking cycle began in early 2022.
Graham: In the U.S. swimming inflation and uptake in the unemployment rate means the risk of interest rates remaining at current levels is also beginning to ease.
Graham: Across these two economies, macroeconomic uncertainty has overall reduced.
Speaker Change: With this backdrop, we saw a quality continue to weaken this quarter with net credit downgrades and elevated watchlists and those utility-inclet's hear raised.
Speaker Change: These outcomes are in line with our expectations for where we are in the credit cycle. In consistent with last quarter, we added reserves on performing loans, reflecting weaker credit quality and portfolio growth, partially offset by more favorable scenario weeks as we gain more confidence in our base case scenario.
David McKay: However, market volatility could slow the velocity for moving deals from announcement to close. In contrast, this market volatility can continue to act as a constructive tailwind for our sales and trading businesses. A demonstration of the strength of our diversified platform. Moving to our wealth management segment, assets under administration and Canadian wealth management were up 20% or nearly 100 billion dollars from last year, increasing to a record level of over 650 billion dollars.
Speaker Change: Across our portfolio, we took a total of 42 million of provisions on performing loans this quarter.
Speaker Change: This marks the ninth consecutive quarter where we added reserves in performing loans, resulting in a total ACL of 6.1 billion.
Speaker Change: We'll be to slide 18, grow some pair of loans, we're up 353 million, or three basis points this quarter. Probably due to increases in Canadian banking.
Speaker Change: Commercial New Formations were driven by relatively large impairments in each of the real estate and related and forest product sectors.
Speaker Change: In the top of the market, the decrease of $354 million in this quarter is mainly due to the lower and fair bones in the real estate related sector.
David McKay: RBC Dominion Securities, part of our Canadian wealth management franchise, was named the Wyatt Ranked Bank Owned Investment Brokerage in Canada in 2024, Investment Executive Brokerage Report Card. This is the 18th year in a row that RBC has won this prestigious honor, assets under administration and our U.S, wealth management platform also reached a record up nearly 74 billion dollars or 13% euro per year to record a U.A, of nearly 650 billion U.S, dollars.
Speaker Change: Production reflects 442 million in foreclosed properties related to real estate loans that are now accounted for as investments.
Speaker Change: Despite higher formations of gross and pered loans this quarter, starting this late 19, you can see provisions on pered loans were down 49 million relative to last quarter.
Speaker Change: Higher provisions in Canadian banking were more than offset by lower provisions in capital markets in wealth management. But capital markets provisions down 65 million compared to last quarter.
David McKay: Furthermore, loans in deposits in our U.S, wealth management franchises reported strong euro per year growth is quarter. Our U.S, wealth management advisory business was the second largest contributor to U.S, dollar results. RBC global asset management's assets under management increased 100 billion dollars or 18% from last year to an all-time high as well, benefiting from robust equity markets and increasing inflows to higher yielding fixed income funds as interest rates begin to decline. RBC Gam also gained market share and retail mutual funds as a generated positive net sales in a quarter where it appears the industry is tracking to net exemptions.
Speaker Change: Hello and welcome to our next video, we are going to talk about the number of people who have been
Speaker Change: The all quoted figures as far have included the HSBC Canada portfolio.
Speaker Change: On its own, the portfolio contributed 81 million provisions on impaired loans. Mostly due to the two larger commercial formations noted earlier.
Speaker Change: Despite the elevated impairments in PCL this quarter, we remain confident in the overall criticality of the low-end gear acquired from HSBC Canada.
Speaker Change: The HSBC Canada portfolio reflects credit characteristics that are in line with or better than the associated RBC portfolios and drive scale and diversification benefits.
Speaker Change: A slide 20, we provided some additional details on our overall commercial real estate exposure.
David McKay: In conclusion, we continue to execute against our status strategies to generate premium ROI and growth. As part of a journey, we recently announced a few key executive appointments. First of all, I would like to thank Doug Goosman for his leadership and for the pivotal role he has played leading RBC wealth management from strength to strength and insurance over the years. In addition, we look forward to welcoming Erica Nielsen, Jennifer Public Over, and Sean O'Modogouchi to the next quarterly call as group heads of personal banking, RBC insurance, and commercial banking respectively.
Speaker Change: The sector has generally been performing well, but pockets of weakness have surface based on property type, with office properties being more sensitive to post pandemic impacts.
Speaker Change: With respect to the larger commercial real estate impairment reference earlier, about more old interesting and operated a number of properties in the office property sector.
Speaker Change: This is the first meaningful office we did to fall to our creative portfolio.
Speaker Change: and we're elevated exposure that arose from the combination of HSBC's RBC's portfolio's last quarter.
Speaker Change: Overall, our exposure to Canadian office commercial real estate loans represents less than 1% of our total loans and acceptancees. And both of our loans are typically, typically benefits from advertising and additional recourse, outside of the properties held as collateral.
David McKay: We will also continue to invest to drive diversified growth across client segments and sources of funding while maintaining our focus on efficient capital allocation, prudent risk management and improved productivity. Furthermore, as it relates to our broader U.S.
Speaker Change: As I noted in previous quarter, impairments and losses have been considered with our expectations, are well within our risk appetite.
Katherine Gibson: footprint, we are focused on improving the connectivity across our three platforms. Katherine, over to you. Thank you, Dave, and good morning, everyone. Starting on slide eight, we reported diluted earnings per share of $3.99 in quarter. Adjusted diluted earnings per share was a record $3.26, up 15% from last year. These adjusted results included net earnings from HSBC Canada of $292 million. Turning to capital on slide nine, our C-T-1 ratio was strong at 13%, up 20 basis points from last quarter, mainly reflecting internal capital generation net of dividends.
Speaker Change: We continue to be prudently provision for our exposures for exposure to the sector with our downside provisioning scenarios, reflecting a reduction in commercial real estate prices of 25-40%.
Speaker Change: To conclude, while we are pleased with the provisions on impaired loans this quarter, we still expect provisions for me to elevate it and to use the increase going into in throughout 2025. We continued to prudently build reserves on performing loans, reflecting the credit outcomes of the software-mechanical economic environment we are currently experiencing.
Speaker Change: Moving forward, Credital comes welcome to you to be dependent on the magnitude of change in unemployment rates, direction of magnitude of changes in interest rates and residential and commercial real estate prices.
Speaker Change: and as always we continue to pull out some of the managed risks through the cycle and we remain well capitalized, we stand plausible, we have more severe macroeconomic embeds.
Speaker Change: With that operator, let's open the lines for Q&A.
Katherine Gibson: This was partly offset by net credit migration and wholesale portfolios and strong growth across our Canadian banking and capital markets portfolios. We also initiated share repurchases this quarter by an approximately $480,000 shares for $73 million Moving to slide 10, all bank net interest income was up 17% year-rear or up 19% excluding trading revenue. These results were largely driven by the addition of HSBC Canada as well as higher spreads and average volume growth in Canadian banking.
Speaker Change: Thank you. We will not take questions from the telephone lines. If you have a question, please press star 1 on your device's keypad. You may get some of your questions at any time by pressing star 2.
Speaker Change: Please press down one at the time if you have a question that will be a brief pause while participants for just a full questions. We thank you for your patience.
Speaker Change: Our first question is from Hibrahim Puna Walla, from Bank of America. Please go ahead.
Speaker Change: Good morning.
Speaker Change: I guess very question for you, Dave, I think I heard you say if we should expect a pick-up and buy-up axe, given how you use the intrinsic value of this stock. So, I get the question is on capital allocation, one correctly, if I am wrong, but
Katherine Gibson: All bank name excluding trading revenue was up one basis point from last quarter mainly driven by tailwinds in Canadian banking. This was partly offset by changes in asset mix in capital markets non-trading portfolios as well as lower earnings on residual capital reflecting the close of the HSBC Canada acquisition. Canadian banking name was up 8 basis points from last quarter. HSBC Canada drove 4 basis points and NIM expansion this quarter mainly reflecting the full quarter benefit from the accretion of purchase accounting fair value adjustment.
Dave: I'm not sure unless something's macro wise, goes all, white oil should be earning a lower ROE then it took us 16% to report it this quarter.
Speaker Change: and if the stock continues to perform well, maybe training not a few times by its work.
Speaker Change: We've seen this with the likes of Gibson Morgan in the US where would you rather accumulate die powder?
Speaker Change: to find organic growth next year, leave some room for M&A. This is how we're thinking about capital allocation given the capital that the bank is creating and the possible uses and your patients to allow capital to build and build in the end of the bank.
Katherine Gibson: Core Canadian banking name was up 4 basis points decreased sequentially. NIM benefited from improvements in product mix including strong growth in core deposit. This quarter also included a favorable benefit from treasury related activities. In addition the benefits from our tractor core personal banking deposit portfolio continue to flow through. However these benefits were partly offset by competition for deposits and mortgages as well as the dilutive impact of the DA core migration. Looking forward we expect fourth quarter Canadian banking NIM to be down a couple basis points sequentially reflecting the continuation of headwinds noted this quarter. This is in line with our prior guidance for higher NIM in the second half of the year.
Speaker Change: Thank you very, very important question. I think the answer to you.
Speaker Change: So your question is yes to the points you made that we are such significant.
Speaker Change: Capital Generation, Organic Capital Generation Cape Abilies as I referenced the 70-based points this quarter in building that, we'll have the luxury of doing both. So I do believe in the strategy that there is no half-life to capital, you can only mispend it.
Speaker Change: So, a creating capital in our balance sheet for future strategic optionality is part of the plan and you should expect that it could run up as we prepare for the next leg of growth at the same time it offers us the luxury of buying back shares. So we will return capital through buyback because...
Katherine Gibson: Moving to slide 11 non interest expenses were up 11% from last year excluding HSBC Canada integration costs and the impact of amortization of intangibles adjusted expense growth was 9%. Further excluding HSBC Canada run rate expenses and other macro driven factors such as FX and share based compensation core expense growth decelerated to 5% year-rear. The bulk of core expense growth was driven by higher variable compensation reflecting strong results in capital markets and wealth management.
Speaker Change: Now we look at our intrinsic value, we'll look at the opportunities these franchise.
Speaker Change: have to continue to build on the momentum that you see now and we're very excited about that and you saw that in the results of this quarter. So the plan is to do both. The plan is to continue to buy back shares to return capital to drive a premium TFR, which is very important.
Speaker Change: in the short term and medium term as well as provide...
Speaker Change: You know an opportunity to build on the balance sheet to deploy Katherine into the right target. But we're going to be patient like we were with HSBC. We're going to look for the right thing.
Speaker Change: and we won't make a mistake and I hope we've earned your trust that that's how we deploy capital and we'll do it smartly, all with the goals of outperforming on total shareholder return.
Katherine Gibson: Looking forward we continue to expense expect all bank core expense growth in addition to HSBC Canada run rate expenses to be at the top of the mid single digit range for the fiscal year with volatility within the range largely driven by movements and variable compensation. Given the uncertain macro environment we remain vigilant in controlling costs and running the bank efficiently. Turning to taxes the non-teb effective tax rate was 16.5% this quarter or an adjusted tax rate of 20% on a taxable equivalent basis.
Speaker Change: very clear thank you
Speaker Change: Thank you. A following question is from a many grownman from Scotchabank. Please go ahead.
Mandy Grownman: Hi, good morning. Question, for Graham just on the impaired piece, y'all, they showed 26 basis points of this quarter, below the average historical loss rate. So I'm just wondering.
Katherine Gibson: Going forward, we expect next-quarters adjusted tax rate to be towards the higher end of our full-year guidance of 19 to 21 percent on a taxable equivalent basis. Broadly, our guidance for fiscal 2025 effective tax rate is similar to that of the fourth quarter. As pillar two income taxes may arise in relation to jurisdictions where our operations have an effective tax rate below 15 percent.
Manny Grownman: Can you, in your view, have this ratio peaked and where I was still likely to head back above the historical loss rates, the average historical loss rate, as you look forward.
Graham: Yeah, many thanks. It's a good question. A poor one. Certainly, you know, I think we're very pleased with the credit outcome this quarter.
Graham: I think when we go back to kind of where I got at the beginning of last year that we were looking at kind of 30 to 35 basis points for the year.
Graham: I would say, you know, through the first half of this year we were certainly training a line with that and I would still say I think that is still a fair range to be kind of thinking about
Graham: We vote performed at this range, I would say that'll performance this quarter is certainly attributable to wholesale.
Graham: with Capal Marketson to the National Cayman, kind of lower than previous quarters in our expectations.
Katherine Gibson: Turning now to our Q3 segment results beginning on slide 12. Personal and commercial banking reported earnings of 2.5 billion. Canadian banking net income was up 17 percent year re-year. My following comments will now exclude any impact to Canadian banking from HSBC Canada. Canadian banking earnings were up a strong 8 percent year re-year. Net interest income was up 11 percent from last year, reflecting higher spreads and robust volume growth. Non-interesting income was up 5 percent year re-year reflecting the benefits of market appreciation and increased client activity, which together drove higher mutual fund distribution fees as well as higher service revenue and FX revenue.
Graham: Again, that's positive, but I'm wholesale, it is more volatile corner to quarter, so I wouldn't read that into a different indication that we've now turned the corner.
Speaker Change: You know, when aggregate when we look going forward, you know, the trends on retail are still negative, you know, we're still seeing that increase across almost all products.
Speaker Change: Overall, I would say though that the timing of that has kind of been more prolonged than we had originally anticipated.
Speaker Change: So we do see kind of growing through, you know, 2025.
Speaker Change: and I think the peak is probably less acute than maybe we were thinking about the beginning of this year. But there are still significant headwinds there, you know, unemployment is still on the rise. We think we get closer to peak unemployment now, but it is still on the rise.
Speaker Change: and we still see a consumer who faces a lot of headwinds with the current rate environment, yes, rates have come down.
Katherine Gibson: Year-veer growth was also impacted by the prior years 66 million retrospective HST on payment card clearing services. Expenses were up 5 percent from last year helping to drive a 4.9 percent operating leverage and underpinning a leading 39 percent efficiency ratio. Turning to slide 13 wealth management earnings were up 30 percent from last year. As market appreciation and net failed continue to drive strong performance in our wealth management advisory and asset management businesses.
Nadine Ahn: But many of these consumers still have in face to full impact of kind of the repricing of their mortgages and the associated payment impact that comes with that. And so, you know, those are all factors that leave us still quite cautious through the end of this year and going into next year. But, Nadine, I'll ask kind of very pleased with the performance we saw this quarter.
Nadine Ahn: Thank you. And just to follow up you talk about the peak on the retail side being lower than what you originally expected. Is that just a commentary on rate cuts or is there something else?
Speaker Change: Again, on the retail side of unemployment is the number one factor always, right? And the unemployment has just played out slower manner than we had really anticipated. It's allowed clients, I think, I think also clients there have been more resilience with their...
Katherine Gibson: These factors were partly offset by higher variable compensation. In light of emerging industry development around pricing dynamics for advisory sweep deposits, we note our total US wealth management cash sweep is approximately 30 billion US of which the majority is in non-advisory accounts. Since the beginning of the rate hiking cycle, our pricing has been well above industry averages, particularly as it pertains to our largest wealth management relationship. As such, we do not anticipate making any material changes to our pricing of advisory sweep deposits.
Speaker Change: and their cash and their liquidity they had coming into this provided a more of a buffer than we had maybe appreciated. But I think the trends are still significant there are on the on the unsecured products that we see will really drive that in 2025.
Speaker Change: Thank you.
John Akin: Thank you. I'll follow in question if some John Akin, some Jeffries, please go ahead.
John Akin: We're talking to you give us a little bit of insight in terms of the integration going on with the HSBC and obviously we're seeing the financial benefits. But are you into the talk about...
Speaker Change: Some of the metrics like cross-selling to HSBC clients or customer tuition, I mean, I'd love to hear it on an absolute level, but basically I'm assuming, I guess, what you had planned for would probably be a little more reasonable.
Katherine Gibson: City National generated 77 million US in adjusted earnings this quarter or 115 million US excluding the impact of losses on non-core investment. The non-core losses taken this quarter are consistent with our efforts to realign city nationals past forward. Turning to our capital markets results on slide 14 pre-provisioned pre-tax earnings of 1.2 billion increased 18 percent from last year. Corporate Investment Banking Revenue was up 23% from last year, reflecting strong municipal banking activity as well as continued market sharegames across most major products amidst a recovering fee pool and the impact of FX translation.
Neil: Yeah, John, thanks for the question, it's Neil, listen, you heard in days' comments, I mean, we've been really pleased with the fundamentals of the business
Speaker Change: We're seeing these clients come in, get really engaged with our branch network, we're seeing good mobile adoption, we're seeing appointments really pick up and renewals that say come in the way we'd really hope.
Speaker Change: What I can say about client nutrition is as well within the estimates when we put the transaction together, a lot of work to make sure we're reaching out to these clients.
Speaker Change: Obviously not to say that there's no attrition, but it's something we're feeling quite comfortable with from what we're seeing right now.
Speaker Change: They got a positive sign, we're seeing a lot of these clients come into existing RBC branches to renew these products So these two portfolios are starting to really co-mingle quite quickly and we view that as a real positive for the client
Katherine Gibson: Global markets revenue was down 1% from last year as headwinds in credit trading and equity derivatives trading were partially offset by higher debt underwriting and stronger results for rates foreign exchange and commodity trading as well as the impact of FX translation. While business momentum remains strong, we note that the second half of the year and in particular the fourth quarter tends to be a seasonally slower period for capital markets.
Speaker Change: It's just increased convenience.
Speaker Change: Overall.
Speaker Change: For the question on cost energies, I'd say there's three buckets we would really look at in terms of the revenue synergies, there'd be three buckets.
Speaker Change: One would be to what you spoke of, which is cross-selling RBC products to HSBC clients. I think we're feeling we're off to a good start. But right now we are really spending time getting to know these clients anchor in the relationships. But I'd say early green shoots.
Katherine Gibson: Turning to slide 15, insurance net income of 170 million was down 21% from last year driven by lower insurance investment results. 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 IFRS 17. Importantly, our core business performance was strong reflecting improved claims experience and business growth across the majority of our products.
Speaker Change: We're seeing very strong flows early on into dominion securities and to wealth management.
Speaker Change: We've already seen over a hundred million dollars of AUM come in from these clients.
Speaker Change: So I think it's a good example there, but we would see opportunities to cross out things like credit cards where we have a real strength, small business with something they weren't.
Speaker Change: I'd say really focused on where we're a market leader.
Speaker Change: Second category would be, we're seeing our ability to sell some of the new products we built for HSBC into our legacy portfolio. And I think a couple would jump out and trade finance will be an example.
Katherine Gibson: To conclude, our strong business performance drove us 16.4% adjusted ROE this quarter. Looking forward, we expect to maintain our medium term objectives including an ROE of 16% plus and diluted EPS growth of 7% plus while maintaining strong capital ratios.
Speaker Change: Some of the sophisticated cash management products, the upper end of our corporates.
Speaker Change: and the foreign currency accounts, Dave mentioned and there's a good example there. We've already sold 7,000 of those.
Speaker Change: to our RBC customers. So you start to see those new products come into the Legacy Portfolio. And then maybe the last bucket we would look at in terms of revenue synergies would just be new clients acquired from the previous HSBC sales forces.
Graham Hepworth: With that, I'll now turn it over to Graham. Thank you, Katherine, and good morning everyone. Starting on slide 17, I will discuss our allowances in the context of the macroeconomic environment.
Speaker Change: You know, we would say there wasn't as much growth pre-trans pre-closed as we would have hoped. But they were holding back some of these transactions where it's starting to see these pipelines build quite well.
Graham Hepworth: During the quarter, the economies of Canada and the US both suffered. In Canada, relatively weaker consumer demand, higher unemployment rates and the impact of elevated interest rates were continued to weigh on consumers and businesses. In response to the softening economic backdrop and with expectation that inflation rates will continue to edge lower, the Bank of Canada cut the overnight rate for two consecutive months. This marks the first set of reductions in rates since the current rate hiking cycle began in early 2022. In the US, slowing inflation and uptake in the unemployment rate means the risk of interest rates remaining at current levels is also beginning to ease. Across these two economies, macroeconomic uncertainty has overall reduced.
Speaker Change: I'll leave it there.
Speaker Change: Great thanks for the call, I'll read you.
Speaker Change: Thank you.
Speaker Change: Following question is some Paul Holden from CIBC. Please go ahead.
Paul Holden: Thank you for joining us today, I'm going to introduce you to the great cutting cycle, certainly in Canada, I'm probably soon in the US. Just wondering if there's anything you can point to or how you're thinking about sort of the NII and earning sensitivity to rate cutting sort of beyond the simple disclosed NII sensitivity, like if there are any nuances why this cycle maybe could be different than past cycles because of some of the funding, make sure to switch changes, etc. And some additional thoughts would be helpful. Thank you.
Graham Hepworth: With this backdrop, we saw a critical quality continue to weaken this quarter, with net credit downgrades and elevated watchlist improvements to equity rates. These outcomes are in line with our expectations for where we are in the credit cycle, consistent with last quarter, the added reserves on performing loans, reflecting weaker credit quality and portfolio growth, partially offset by more favorable scenario weights as we gain more confidence in our base case scenario. Across our portfolios, we took a total of 42 million provisions on performing loans this quarter.
Paul Holden: Good morning Paul. It's Katherine. It's a great question and a lot of moving parts.
Paul Holden: in connection with that. So I'll actually step back and give a bit of a holistic view of the items that we're thinking about that could have potential impact in men covering off both Canada and the U.S. So let's start with the interest rates on the Canadian side we're expecting to see.
Graham Hepworth: This marks the ninth consecutive quarter where we added reserves and performing loans, resulting in a total ACL of 6.1 billion. Moving to slide 18, gross and paired loans were up 353 million or three basis points this quarter, primarily due to increases in Canadian bank.
Speaker Change: Strong Tractor Benefits continued to flow through and this is really showing the advantages of our structural low cost beta core personal banking deposits. We're seeing a swap rates where we'll learn a lot about 200 basis points if you look at, you know, where swap rates were, 3 to 5 years ago.
Graham Hepworth: Dean. Commercial new formations were driven by relatively large impairments in each of the real estate related and forest product sectors. In capel markets, a decrease of $354 million this quarter is mainly due to lower impaired loans in the real estate related sector. Reduction reflects $442 million and foreclosed properties related to real estate loans that are now accounted for as investments. Despite higher formations of growth in impaired loans this quarter, turning to slide 19, you can see provisions on impaired loans were down 49 million relative to last quarter.
Speaker Change: Raid Impact to a cut would mostly impact the non-tractor portion of our low-bated deposits. And this is roughly about a third of the CBNI sensitivity tied to the movement in that short end of the curve.
Speaker Change: The other item that you would have seen in our commentary for the last few quarters now, impacting them would be around intense competition.
Graham Hepworth: Higher provisions in Canadian banking were more than offset by lower provisions in capital markets and wealth management, with capital markets provisions down 65 million compared to last quarter. In our Canadian banking portfolio, provisions were up 32 million driven by higher provisions in commercial banking, residential mortgages, and other personal lending. All quoted figures this far have included the HSBC Canada portfolio. On its own, the portfolio contributed 81 million provisions on impaired loans, mostly due to the two larger commercial formations noted earlier.
Speaker Change: Iran's your pricing for deposits as well as more gauges and we expect to see that continue as we go forward.
Speaker Change: and Neil might want to add to that after.
Neil: And then we're also, you know, client-driven mix shift and you know, keeping an eye on that as interest rates move. We've seen with interest rates increasing the shift into GICs, the semiconductor portion moved in and so as that rates come down the expectations that we will see a flow out of GICs.
Graham Hepworth: Despite the elevated impairments in PCL this quarter, we remain confident in the overall credit quality of the loans be acquired from HSBC Canada. The HSBC Canada portfolio reflects credit characteristics that are in line with or better than the associated RBC portfolio and drive scale and diversification benefits.
Neil: Stepping back though on that, we would expect that Canadian banking with the lower GICs, we would see a negative impact in that interest income.
Speaker Change: Time into dates, comments, the diversification of our business really stems, strong here. The expectations with those flows given the strength of our wealth management business, we would be seeing those flows move into a wealth management. So, net nets really looking at that as a flat across the organization in that environment.
Graham Hepworth: On slide 20, we provided some additional details on our overall commercial real estate exposure. The sector has generally been performing well, but pockets of weakness have surfaced based on property type, with office properties being more sensitive to post-pandemic impacts. With respect to the larger commercial real estate impairment referenced earlier, our borrower owned interest in and operated a number of properties in the office property sector. This is the first meaningful office related default in our Canadian portfolio, the more elevated exposure that arose from the combination of HSBCs and RBCs portfolio's last quarter.
Speaker Change: and then you reference the U.S. to just a quick call out on City National. It has been an asset-fensive business.
Speaker Change: and in connection with that we have been putting on forward hedges to protect us in the downrate environment. And so that is expected to take volatility out of the number as we go forward.
Graham Hepworth: Overall, our exposure to Canadian office commercial real estate loans represents less than 1% of our total loans and acceptances, and most of our loans are typically benefit from amortization and additional recourse outside of the properties held as collateral. As I noted in previous quarter, impairments and losses have been consistent with our expectations that are well within our risk appetite. We continue to be prudently provisioned for our exposure to the sector with our downside provisioning scenarios, reflecting a reduction in commercial real estate prices of 25-40%.
Speaker Change: Okay, that's helpful. I mean, there's a number of things you give us to think about in Canada. My read based on the answers you provided, I think maybe less NIO, sensitivity from rate cuts than we might see based on the disclosed.
Speaker Change: A number that fair takeaway that yeah okay perfect thank you
Speaker Change: Thank you. Following question, if some dog young, from the short and cup-dell markets, please go ahead.
Graham Hepworth: To conclude, what we are pleased with lower provisions on impaired loans this quarter, we still expect provisions from being elevated and to use the increase going into in throughout 2025. We continue to prudently build reserves on performing loans, reflecting the credit outcomes of the software macroeconomic environment we are currently experiencing. Moving forward, credit outcomes will continue to be dependent on the magnitude of change in the unemployment rates, the direction of magnitude of changes in interest rates and residential and commercial real estate prices. And as always, we continue to proactively manage risk through the cycle and we remain well capitalized to withstand plausible yet more severe macroeconomic events.
Speaker Change: Good morning, just on Concity National Bank, just hoping to get a little bit of color.
Speaker Change: You talk about the back of the adjustments, you know, earnings is 150 million. Can you quantify the performing load allowance for these?
Speaker Change: The non-core losses, maybe a little more detail, and I guess what I'm trying to get at is this kind of a reasonable jump-up spot, and I can't be turned the corner simply, you know, the progress from the last two quarters is moving in the right direction just to get some color on that.
Unknown Executive: 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 device's keypad. You may answer your question at any time by pressing star two. Please press star one at this time. If you have a question, that will be a brief pause while participants register for questions. We thank you for your patience. Questions?
Speaker Change: Good morning!
Speaker Change: The captain will start and I'll make a comment. Yes, thank you. I'll start by answering your question on the Pacific's on the non-core impairment charges that I talked to. These are related to steps at City National It's been taking to simplify the business and it's really to focus on the areas that have that higher returns. It's really tight into our comments that we've made previously around City National focusing on that normalized path to higher profitability.
Ebrahim Poonawala: Our first question is from Hebrahim Poonawala, from Bank of America. Please go ahead.
Speaker Change: with that of turning it over. Yeah, maybe I'll just step up a bit, so we are working on a number of initiatives, including
Speaker Change: No, simple find the business and that meant exiting some of the ventures we had exiting some of the...
Speaker Change: You know, I'm still your business as we don't view it to be core to the long-term franchise and it'd be really important to simplify this franchise and focus on customer segments. So we took it, you know, two charges, this quarter to do that, that will have a positive accretion to earnings.
David McKay: And if the stock continues to perform well, maybe trading not a few times twice to book, we've seen this with the life of JPMorgan in the US, where would you rather accumulate die powder to fund organic growth next year, lead some room for M&A, just how are you thinking about capital allocation? Given the capital that the bank is recruiting and the possible and your patients to allow capital to build in the NATO.
Speaker Change: Over the coming quarters and years, in addition, we're down almost like 500 FTE, so it's been a significant cost take note.
Speaker Change: We're not, you know, we have an opportunity to continue to reduce costs and their franchise were focused on that, but a big part of this is the cost that we've allocated significant costs you've allocated to.
Speaker Change: and Building Outer Operational Infrastructure, Arisen, Infrastructure, Remediating.
David McKay: Thanks. Thank you from a very important question. I think the answer to your question is yes to the points you made that we are such significant capital generation, organic capital generation capabilities as I reference the 70 basis points is quarter building. We all have the luxury of doing both. So I do believe in the strategy that there is no half-life to capital. We can only misspend it. So a creating capital in our balance sheet for future strategic optionality is part of the plan and you should expect that it could run up as we prepare for the next leg of growth at the same time it offers us the luxury of buying back shares.
Speaker Change: The Public Concerto Order, all of that is embedded into our current run rate in that world.
Speaker Change: Start to come off as we achieve our milestones in 25 and to 26. So it's a very significant.
Speaker Change: and heavy-cost absorption to move this bank to heighten standards and were well on that path.
Speaker Change: You know, that's embedded in the current run rate. We've also seen a bit of runoff in the balance sheet. We've done that intentionally. We're continuing to raise deposits. We're looking at moving off low yielding assets. There's significant number of still low yielding assets on the balance sheet. We're trying to replace them with higher yielding assets and more importantly with deeper relationship clients. We have a lot of single service clients.
David McKay: So we will return capital through buy back because we look at our intrinsic value, we look at the opportunities these franchise have to continue to build on the momentum that you see now. We're very excited about that and you saw that in the results is quarter. So the plan is to do both. The plan is to continue to buy back shares to return capital to drive premium TSR which is very important in a short term and medium term as well as provide.
Speaker Change: on the balance sheet with low yields and the teams on a very good job of moving some of those.
Speaker Change: Non-Guroth assets in off and then going after clients so the pipeline is building to do that. So all that points to an ability to build on where we are going forward.
Speaker Change: Well, maybe just...
Speaker Change: Sorry to go ahead.
Speaker Change: You know, guys, it's great, I thought I'd jump in too, because I think I'm better than your question there was just a bit of understanding on their PC all and on the dynamic stare.
David McKay: You know an opportunity to build on the balance sheet to deploy capital into the right target but we're going to be patient like we were with HSBC. We're going to look for the right thing and we won't make a mistake and I hope we've earned your trust that that's how we deploy capital and we'll do it smartly all with the goal of outperforming on total shareholder return. Very good.
Speaker Change: made it to be composed out into two parts, so there was release on their kind of performing PCL.
Unknown Executive: Thank you.
Speaker Change: That was a quite practical couple of things there. One certainly in our overall forecast, we have accelerated some of the rate cut to expectations in the U.S. and so that's had a positive impact.
Speaker Change: and kind of how we kind of think about the projection of future losses, that did offset some softer assumptions we had in the U.S. around unemployment in GDP. Additionally, the way to the scenario change, the waiting that we talked about earlier, also benefited kind of how we're thinking about the nation's loan loss is going forward.
Graham Hepworth: A following question is from many Roman from Scotia Bank. Please go ahead. Hi, good morning. A question for Graham just on the impaired PCL ratio 26 basis points of this quarter below the average historical loss rate. I'm just wondering can you in your view have has this ratio peaked and where I was still likely to head back above the historical loss rate the average historical loss rate as you look forward. Yeah, many thanks.
Speaker Change: I think the portfolio there is performing well, but as I said in other portfolios, the whole
Speaker Change: I think coming out of last year with the regional bank issues, it was concerned there and the client portfolio there has been more resilient than expected, but we're still in a cautious situation there.
Graham Hepworth: It's a good question. A important one. Certainly, you know, I think we're very pleased with the credit outcome this quarter. I think when we go back to kind of where I got at the beginning of last year that we were looking at kind of 30 to 35 basis points for the year. I would say, you know, through the first out this year we were certainly training in line with that and I would still say I think that is still a fair range to be kind of thinking about.
Speaker Change: Okay, and then just second, there's been a study decline in market risk are to be way over the last call it three quarters, is that intentional or are you taking down risk and capital markets, you know, just open, you can elaborate me a bit on that.
Speaker Change: There are two on this.
Graham Hepworth: We would perform that this range. I would say that no performance this quarter is certainly attributable to wholesale with capital markets and city national came in kind of lower than previous quarters and our expectations. Again, that's positive, but I on wholesale it is more volatile quarter to quarter. And so I wouldn't read that into, you know, a definitive indication that we've now turned the corner. You know, an aggregate when we look going forward, you know, the trends and retail are still negative.
Speaker Change: Sure, the short answer is, no, there hasn't been any material shift in our risk appetite or purposely taking risk off. I just see there's, you know, various points in time or in the trading business, we're mindful of volatility or different.
Speaker Change: Eccan Ommercord G, political events, but broadly our risk appetite is a remained parody.
Speaker Change: Ferry similar, as always, we're looking at our business and finding different ways to optimize around capital as we focus on continuing to support and improve our ROI. So there's a number of different initiatives that have helped address that tactically, but overall no...
Graham Hepworth: You know, we're still seeing that increase across almost almost all products. Overall, I would say though that the timing of that has kind of been more prolonged than we had originally anticipated. So we do see kind of growing through, you know, 2025. And I think the peak is probably less acute than maybe we were thinking about kind of at the beginning of this year, but there are still significant headwinds there. Unemployment is still on the rise.
Speaker Change: Eating full shift in our risk appetite or approach.
Speaker Change: Thank you. Appreciate the color. Thanks.
Speaker Change: Thank you. Following question is some sort of more of a heavy, from being more capital markets. Please go ahead.
Graham Hepworth: We think we're getting closer to become employment now, but it is still on the rise. And we still see a consumer who faces a lot of headwinds with the current rate environment. Yes, rates have come down. But many of these consumers still haven't faced the full impact of kind of the repricing of their mortgages and the associated payment impact that comes with that. And so, you know, those are all factors that leave us still quite cautious through the end of this year and going into next year.
Speaker Change: Okay, thank you. I think the question will probably be directed at Dave Graham and maybe Derek.
Speaker Change: I think the cautious tone I heard Dave around the macroeconomic environment and I think Graham basically suggested that we will have some sort of an elevated, perhaps PCL outlook. But...
Graham Hepworth: But nonetheless, kind of very pleased with the performance we saw this quarter. Thanks. And just to follow up, you talk about the peak on the retail side being lower than what you originally expected. Is that just a commentary on rate cuts or is there something else? Again, on the retail side of unemployment is the number one factor always, right? And the unemployment has just played out in a slower manner than we had really anticipated.
Speaker Change: But I'm just trying to kind of better understand if that's just being a Uber conservative given.
Speaker Change: The comments that you still plan to also do some bi-backs.
Speaker Change: and whether or not if a declining rate environment, even if it's coming at us.
Graham Hepworth: It's allowed clients, I think, you know, I think also clients there have been more resilience with their cash and their liquidity they had coming into this provided a more of a buffer than we had maybe appreciated. But, you know, I think the trends are still there's still significant there on particularly on the unsecured products that we see will really drive that in 2025. Thank you.
Speaker Change: You know, at the pace that it is, is actually going to be, you know, a steepening, yield curve, like I think that's going to be really additive to Derek's business as well here, so can I just better understand the degree of conservatism I think that Graham is
Speaker Change: Placing in the PCL commentary, and Derek's outlook for PTAX pre-provision, especially in the capital markets and other dovetails with buybacks and pace of buybacks and your view of intrinsic value, please.
John Aiken: A following question is some John Aiken, some Jeffries, please go ahead. We're hoping to give us a little bit of insight in terms of the integration going on with the HSBC and you know obviously we're seeing the financial benefits, but are you able to talk about some of the metrics like cross selling to HSBC clients or customer attrition. I mean, I'd love to hear it on an absolute level, but basically I'm assuming against what you had planned for would probably be a little more reasonable.
Speaker Change: Yes, a great question. So, yes, we have done a very good job of putting caution into our statements today, across the board, I think not just risk. But to your point, the momentum in our franchise is very strong, the opportunities.
Neil Mclaughlin: Yeah, John, thanks for the question. It's, it's Neil. You heard in Dave's comments. I mean, we've been really pleased with the fundamentals of the business. We're seeing these clients come in get really engaged with our branch network. We're seeing good mobile adoption. We're seeing appointments really pick up and renewals. I'd say come in the way we'd really hope. What I can say about client attrition is as well within the estimates when we had put the transaction together a lot of work to make sure we're reaching out to these clients.
Speaker Change: to continue to deliver strong growth.
Speaker Change #100: Are there? So, one to your point, if you look at our ways and you look at the opportunity, we've seen secular low margins.
Speaker Change #100: Historic low margins and some of our largest businesses like mortgages.
Speaker Change #100: and that business is earning a third of what it used to. Part of that's the rising rate environment and the difficulty of managing a mortgage business and a rising rate environment. Historically, margins have been much stronger and a declining to stable rate environment as we...
Neil Mclaughlin: Obviously not to say that there's no attrition, but it's something we're feeling quite comfortable with from what we're seeing right now. They got a positive sign. We're seeing a lot of these clients come into existing RBC branches to renew these products. So these two portfolios are starting to really come angle quite quickly. And we leave you that as a real positive for the client. It's just increased convenience. Overall, for the question on cost synergies, I'd say there's three buckets.
Speaker Change #100: We can fund and hedge that business in that customer pipeline much more effectively. And you know, given some of the dynamics around funding in the industry, maybe...
Speaker Change #100: Better discipline comes back into the overall competitive environment. All that would be quite a creed of, as you can imagine to, are overall, profitable in our way. So there are some secular opportunities as we live there in a lower rate environment.
Speaker Change #100: [inaudible]
Neil Mclaughlin: We would really look at in terms, sorry, in terms of the revenue synergies. There'd be three buckets. One would be to what you spoke of, which is cross selling RBC products to HSBC clients. I think we're, we're feeling we're off to a good start. But right now we are really spending time getting to know these clients anchor in the relationships. But I'd say early green shoots. We're seeing very strong flows early on into dominion securities and to wealth management.
Speaker Change #101: and that could have been a benefit, a number of errors from savings to your credit card business, to your point capital market sector as I called out in my prepared comments with a lower short-term rate environment you can see more, and many activities you can see more capital investment both.
Speaker Change #101: and the corporate lending book in the commercial lending book. So all that, you can stimulate a nice rebound in the economy and a soft landing. We're still calling for a soft landing in the economy. And I think that is the backstop, both in Canada.
Neil Mclaughlin: We've already seen over a hundred million dollars of AUM come in from these clients. I think it's a good example there, but we would see opportunities to cross sell things like credit cards where we have a real strength. Small business was something they weren't say really focused on where we're a market leader. Second category would be where we're seeing our ability to sell some of the new products we built for HSBC into our legacy portfolio.
Speaker Change #101: and the U.S. Recalling for positive growth or not calling for a recession. Recalling for lower inches rates and a flatter yield curve.
Speaker Change #101: and therefore they all, with the hedging that Katherine talked about which is very important to reduce the downside impact of rates on our overall balance sheet. Now we are in a position to absorb this volatility and continue to perform strongly going forward.
Neil Mclaughlin: And I think a couple would jump out to think trade finance will be an example. Some of the sophisticated cash management product to the upper end of our corporates. And the foreign currency accounts Dave mentioned and there's a good example there. We've already sold 7,000 of those to our RBC customers. So you're starting to see those new products come into the legacy portfolio. And then maybe the last pocket we would look at in terms of revenue synergies would just be new clients acquired from the previous HSBC sales forces. We would say there wasn't as much growth pre-close as we would have hoped, but they are holding back some of these transactions where starting to see these pipelines build quite well.
Neil Mclaughlin: I'll leave it there.
Speaker Change #102: So, I think we are just trying to express and I was going to leave this to my closing comments, but your question is so important. We are trying to express this uncertain.
Speaker Change #103: and Volta, and the consumer has not reprised her merbing as to Graeme's point. So there are some unknowns out there that we're trying to manage, but we feel we can manage some quite well, but we want to make sure you're cognizant of.
Speaker Change #103: We haven't landed this plane on the economy yet and we still have to do that but we want to express that in our caution. Hopefully that helps.
Speaker Change #103: It's super helpful, it's Graham.
Unknown Executive: Great, thanks for the call, I'll read to you. Thank you.
Speaker Change #104: If you had to probability weight, if you're going to be increasing the weighting to the base case higher or lower in your IFR's non-modeling in 2025, knowing what you know today, what would it be doing?
Paul Holden: The following question is from Paul Holden, from CIBC, please go ahead. Thank you, good morning.
Katherine Gibson: Since we've entered the rate cutting cycle certainly in Canada, I'm probably soon in the U.S., just wondering if there's anything you can point to or how you're thinking about sort of the NII and earning sensitivity to rate cuttings sort of beyond the simple disclosed NII sensitivity, like if there are any nuances why the cycle maybe could be different than past cycles because of some of the, you know, funding makes shifts, we've changed, et cetera. And some additional thoughts would be, I would be hopeful.
Speaker Change #105: If you're not going to assess what we do, each and every quarter, based on all the facts we know at that time. I really struggle always getting into this, you know, what do I expect my future expectations to be? Like, you know, in each quarter we try to do the full assessment of the risks and uncertainty out there.
Speaker Change #105: and we take the profit access and embed those into our assumptions and allow us as accordingly. So I think this quarter of the shift in the allowance weights is really reflective of the fact that, as we see with the Bank of Canada cutting rates, there's more certainty that
Katherine Gibson: Thank you. Good morning, Paul. It's Katherine. So great question and a lot of moving parts in connection with that. So I'll actually step back and give a bit of a holistic view of the items that we're thinking about that could have potential impact in them covering off both Canada and the U.S. So let's start with the interest rates. On the Canadian side, we're expecting to see strong tractor benefits continue to flow through.
Speaker Change #105: Inflation has been brought within control, and you know, the uncertainty associated with that higher rate higher inflation environment is, is now kind of less likely out there. So that was kind of really driving our, our way shift this quarter, but has to have that kind of flex and future quarters. We'll, we'll set that at the time.
Speaker Change #106: Thank you for taking my questions. All right, good question.
Mario Mondenka: Thank you. A following question is some Mario Mondenka, Mendenka? Sorry, from TD Security. Please go ahead.
Katherine Gibson: And this is really showing the advantages of our structural low cost beta-core personal banking deposits. We're seeing a swap rates roll on, roll off about 200 basis points if you look at, you know, where swap rates were three to five years ago. Rate impacts to a cut would mostly impact the non-tractored portion of our low beta deposits. And this is roughly about a third of the CB NII sensitivity types of movements in that short end of the curve.
Mario Mondenka: Sure, um...
Speaker Change #108: We just wanted to be really clear to the street that our pricing on these links, which is about 31 billion in 30 billion in the U.S. that from a competitive perspective we feel that we're very well placed and in relation to any questions about pricing changes given that competitive positioning. We're not expecting to see anything that you're really going forward.
Katherine Gibson: The other item that you would have seen in our commentary for the last few quarters now impacting them would be around intense competition, around pricing for deposits as well as mortgages. And we expect to see that continue as we go forward. Neil might want to add to that actor. And then we're also client driven mixed shift and keeping an eye on that as interest rates move. We've seen with interest rates increasing the shift into GICs, the significant portion moved in.
Speaker Change #108: and Graeme, one other thing that I want to clarify, I'm page 18, you referred to $450 million reduction has some certain loans of work converted to investments.
Speaker Change #108: [inaudible]
Graeme Hepworth: Yeah, that's correct. I mean, there's a series of commercial real estate loans that we had impaired number of quarters ago.
Graeme Hepworth: is part of our workout there. We've proposed on those and it's likely taking ownership of that and so we just wanted to highlight that that moves out of the impaired loan category into an investment category range. We want to be very transparent about that, but all consistent with our workout thesis and recovery thesis there. So those get marked to mark your drive for it then.
Katherine Gibson: And so as that rates come down, the expectations that we will see a flow out of GICs. Stepping back though on that, we would expect that Canadian banking with the lower GICs, we would see a negative impact in that interest income. But tying into Dave's comments, the diversification of our business really stems strong here. The expectations with those flows, given the strength of our wealth management business, we would be seeing those flows move into a wealth management.
Graeme Hepworth: Not Mark II Mark and per se they get held in as investments in the accountants for a consistent with the pad.
Graeme Hepworth: Okay, I'm going to talk to you about how more I have on that, I'm going to tell you a little bit of a story. I can just add on quickly, Graham's nailed it and think about it as those who just come on to our books now and they're sitting there as assets versus loan. So think about it as commercial property that's sitting on our books.
Katherine Gibson: So net, net, really looking at that as flat across the organization in that environment. And then you reference the US with just a quick call out on City National. It has been an asset-sensitive business. And in connection with that, we have been putting on forward hedges to protect us in the down rate environment. And so that is expected to take volatility out of the number as we go forward. Okay. That's helpful.
Katherine: is a very old, just on this week, this is a good statement. Just that back on this week's pro business perspective, I think it's important to understand what's behind our position today, which is Katherine Point out is.
Speaker Change #110: is a very different one than those are feeling, feeling some pressure, is that we made a judgment some number of quarters ago that with rising rates, the right balance was to allocate some of that rising rates to our customers. So we have come into this period of discussion on this topic with rates that are...
Katherine Gibson: I mean, there's a number of things you give us to think about in Canada. My read based on the answers you provided, I think maybe less NII sensitivity from rate cuts than we might see based on the disclosed numbers. Is that fair takeaway of that? Yeah, fair takeaway. Okay, perfect. Thank you.
Katherine: that our clients are experiencing that are higher than our competition. And so that leads to us obviously paying attention to this because it's getting a lot of attention. But to Katherine's point, we don't feel like we need to make a big adjustment because we had already made that adjustment in our customer's favor. Some number of quarters ago.
Doug Young: I'm following questions from Doug Young, from Deschard and Captain Markets. Please go ahead. Good morning, just on City National Bank, just hoping to get a little bit of color. You know, you talk about the back of the adjustment, you know, earnings $150 million. Can you quantify, you know, the performing loan allowance release, you know, the non-core losses, maybe a little more detail? Yeah, and I guess, you know, I guess where I'm trying to get at, is this kind of a reasonable jump off spot?
Speaker Change #111: and then a more broad question for Dave.
Speaker Change #112: and any investors are probably too polite to say it but they've kind of lost patients with large US deals that do nothing but destroy value and I'm not suggesting that City Nationals was one of those wasn't large enough, I think, in the context of royal to do much damage but clearly the US deals in the last little while have not been good for Canadian trodms
Speaker Change #113: So, in your response to Abraham, when you were talking about capital allocation, what I'm getting at here is with the bank.
Doug Young: Like have you turned the corner, seemed like, you know, the progress from the last two corners is moving in the right direction, just to get some color on that. Good morning. Yes, the captain will start and then I'll make a comment. Yeah, yeah. Thank you. I'll start by answering your question on the specifics on the non-core impairment charges that I talked to. These are related to steps that City National has been taking to simplify the business and it's really to focus on, you know, the areas that have that higher returns, which really tied into our comments that we've made previously around City National focusing on that normalized path to higher profitability.
Speaker Change #114: Consider a large transformative transaction in the U.S., or when you think about allocating capital to the U.S. is it all about fixing city and national, maybe buying something small that might enhance value there? What's your thinking about allocating capital to the U.S. going forward?
Speaker Change #115: It's a great question. It's a very large marketplace. It's a highly...
Speaker Change #115: and intensely competitive marketplace for the pork profit pool shift and it's to your point.
Speaker Change #116: Generally, banks and all industries have been quite unsuccessful and...
Speaker Change #117: and making them work. So we are highly cautious the end of the day. So there could be...
David McKay: So with that, I'll turn it over to you. Yeah, maybe I'll just step up a bit. So we are working on a number of initiatives, including, you know, simplifying the business and that meant exiting some of the ventures we had exiting some of the, you know, and solar businesses that we don't view to be core to the long term franchise and really important to simplify this franchise and focus on on customer segments.
Speaker Change #118: Talkin' Opportunities, as far as a large transformational, I think we've learned a lot through the city national adventures to how to run a bank in the new changing environment.
Speaker Change #118: I would say it's a very high bark, it's clear, at the end of the day to get everything right and a very complex bar, you have to be incredibly sure of footage about your synergies. When we first moved on city national, we didn't have anything in the United States, right? It was our first.
David McKay: So we took it, you know, two charges this quarter to do that that will have a positive accretion to earnings over the coming quarters and years. In addition, we're down almost like 500 FTE. So it's been a significant cost take out. We're not, you know, we have an opportunity to continue to reduce costs and the franchise we're focused on that. But a big part of this is the cost that we've allocated significant costs we've allocated to kind of building out our operational infrastructure.
Speaker Change #118: Step into the market and therefore our synergies were growth and you know the market changed on us as far as the regulatory environment and the whole construct and we've been doing just to that so...
Speaker Change #118: You need a stable market, the stable set of rules to invest, and then we don't have that. Yet in the US, we're very conscious of the dilute of impact, and therefore the bar for us to do anything inorganic in the US is very high.
David McKay: Our risk infrastructure, remediating the public consent order, all of that is embedded into our current run rate and that will start to come off as we achieve our milestones in 25 into 26. So it's a very significant and heavy cost absorption to move this bank to height and standards and we're well on that path. So, you know, that's embedded in the current run rate. We've also seen a bit of runoff in the balance sheet.
Speaker Change #118: You just saw us allocate 13 and half billion dollars a capital to Canada, that's really just BC. Pretty strong signal that we were incredibly sure of what it had acquisition, and it drove very significant shareholder value. We have opportunities in a highly fragmented...
Speaker Change #118: and a UK wealth space to build on Rundolphin as well, against small tuck in.
David McKay: We've done that intentionally. We're continuing to raise deposits. We're looking at moving off low yielding assets. There's significant number of still low yielding assets on the balance sheet. We're trying to replace them with higher yielding assets and more importantly with deeper relationship clients. We have a lot of single service clients on the balance sheet with low yields. And the team's done a very good job of moving some of those non-growth assets off and then going after clients.
Speaker Change #119: To your point, I guess I'm trying to guide you, we don't feel we need to bet the organization on the US acquisition. We didn't do that with City National, that was a very conscious part of the strategy. We decided to go with low financial risk, higher operational risk strategy to re-enter the US commercial and banking space.
Speaker Change #119: Obviously, to your point, it's the low financial risk but the operational risk has been challenging, but we're getting a handle on it. We're going to drive as we've talked about a strong return for our shareholders over time. We don't need to do a transformational acquisition.
David McKay: So the pipeline's building to do that. So all of that points to an ability to build on kind of where we are going forward. Maybe just sorry, go ahead. It's great. I thought I'd jump in too because I think embedded in your question there was just a bit of understanding on their PCL and the dynamics there. Maybe just to decompose that into two parts. So there was a release on their kind of performing PCL.
Speaker Change #120: But if one line up...
Speaker Change #120: To a very, very high bar, I can't say never, but the bar is incredibly high and we don't see anything on the horizon.
David McKay: That was probably a couple of things there. One certainly in our overall forecast we have accelerated some of the rate cut expectations in the US. And so that's had a positive impact in kind of how we kind of think about the projection of future losses. That did offset some softer assumptions we had in the US around unemployment and GDP. Additionally, the scenario change waiting that we talked about earlier also benefited kind of how we're thinking about the nationals low losses going forward.
Speaker Change #121: Thank you.
Speaker Change #122: A following question is some Gabriel the shine from National Bank Financial. Please go ahead.
Gabriel: Good morning, a couple of questions here. First, for Derek, can you talk about the credit performance in your US leverage finance portfolio, I think it's around 20 billion, the stuff you keep on balance sheet.
David McKay: Just like this quarter, City National kind of, again, came in lower than some of their previous quarters and their actual impaired laws. So overall, I think the portfolio there is performing well, but as I said, another portfolio's wholesale is a bit more volatile quarter to quarter and we continue to remain cautious there. I think overall the performance this year has been a bit better than we expected. I think coming out of last year with the regional bank issues, it was concerned there and the client portfolio there has been more resilient than expected, but we're still in a cautious situation there.
Speaker Change #124: and you know how those...
Speaker Change #125: Credits are behaving in this higher rate environment, and on HFC Canada for Neil.
Speaker Change #126: Last quarter you showed the balances at closed versus where they were when the deal was announced.
Speaker Change #127: Showed some deterioration and we don't have that disclosure anymore and just wondering if that decline is stabilized and we have a bit of growth.
Speaker Change #128: on LegacyHSBCFU, and then City National. What's the outlook for loan growth there? The balance has been pretty flat for a few quarters. I know there's a macro challenge as well. What's your timing and expectation of when that loan book can start growing again? Thanks.
David McKay: Okay, and then just second, there's been a steady decline in market risk RWA of the last three quarters. Is that intentional? Are you taking down risk in capital markets? You know, I'm just hoping you can elaborate maybe a bit on that. Derek, do you want to? Sure, yeah, thanks Doug. The short answer is, no, there hasn't been any material shift in our risk appetite or purposely taking risk off. Obviously, there's, you know, various points in time are in the trading business.
Speaker Change #128: Sure, David Stairack, I'll start with your question just on the leverage lending portfolio, your correct, that's around 20 billion in the majority of it.
Speaker Change #129: is in the U.S. Overall, we're very comfortable with it. A few things behind that. First, we've been very focused historically on managing the size of that, so it's modest in the overall size of our balance sheet. But importantly, our holds.
David McKay: We're mindful of volatility or different economic or geopolitical events, but broadly our risk appetite has remained fairly, fairly similar. As always, we're looking at our business and finding different ways to optimize around capital as we focus on continuing to support and improve our ROE. So there's a number of different initiatives that have helped address that tactically, but overall no meaningful shift in our risk appetite or approach. Appreciate the color. Thanks.
Unknown Executive: Thank you.
Speaker Change #129: By single name, we've generally kept quite modest that are approximately 35 million each at the more risky rating categories. And so over a cycle like we've just gone through where you've had economic weakness impacting different industries and you've had higher rates.
Speaker Change #129: that have obviously impacted the interest burden of some of these companies face.
Speaker Change #129: where we've run into any kind of PCL, it's very modest given the small hold size we have.
Sohrab Movahedi: The following question is from Sorab Movaheri from BMO Capital Markets. Please go ahead. Okay, thank you. I think the question will probably be directed at Dave Graham and maybe maybe Derek. I think the cautious tone I heard Dave around the macro economic environment and I think Graham basically suggested that we will have some some sort of elevated perhaps PCL outlook. But but I'm just trying to kind of better understand if that's just being over conservative given the comments that but you still plan to also do some buybacks and whether or not if a declining rate environment, even if it's coming at us, you know, at the pace that it is is actually going to be, you know, it's deepening yield curve.
Speaker Change #129: As well, it's a very diversified group, a borer group, about half of it is corporate half of it is sponsored back and within that very diversified across sectors and so I think as you've seen over the last 18 to 24 months as we've gone through a more challenging cycle.
Sohrab Movahedi: I think that's going to be really additive to Derek's business as well here. So can I just better understand the degree of conservatism? I think that Graham is placing in the PCL commentary and and Derek's outlook for pre tax pre provision, especially in the capital markets and other dovetails with with buybacks and pace of buybacks and your view of intrinsic value.
Speaker Change #129: We've taken some PCL related to that, but I think it's all been with an expectations in quite manageable and so we're overall very comfortable with how it's performed as well as the outlook as we look out to 2025.
Speaker Change #130: As far as a city national growth, overall the industry growth has been.
Speaker Change #130: Very, very low for the last number of quarters in the year. And that's just the higher rate environment that's suppressed overall investment in demand among.
Speaker Change #130: The sector, as you would expect, and as Ray start to come down, you would expect that growth to restart again.
Speaker Change #130: For us it was again more focused on moving and not renewing lower yielding assets to reinvest those deposits in that capital into higher growth.
Speaker Change #131: Higher Return assets, we're building out teams to do that and we're pretty excited about the opportunity under Howard and Greg to really build out a stronger commercial franchise, mid-corporate in the United States and our deposits.
David McKay: Yes, a great question. So yes, we have done a very good job of putting caution into our campus today across the board, not just risk. But to your point, the momentum in our franchise is very strong, the opportunities to continue to deliver strong growth are there. So one to your point, if you look at our ways and you look at the opportunity, you know, we've seen secular low margins, historical margins and some of our largest businesses like mortgages and that businesses earning, you know, a third of what it used to.
Speaker Change #131: Raising strategies, whether it's from RBC clear to our cash management ability as a city national, are a really important part of that. So I would say we've remained focused on growth and manage growth, and I think we can add profitability while doing that.
Speaker Change #131: David Neal, I'll just maybe add a couple comments about the HSBC.
David Neal: Volume's probably the biggest movement we saw and we commented on this last quarter was some non-revenue generating business deposits.
David McKay: Part of that's the rising rate environment and the difficulty of managing a mortgage business and a rising rate environment. Historically, margins have been much stronger and a declining to stable rate environment as we... We can fund and hedge that business and that customer pipeline much more effectively. And given some of the dynamics around funding in the industry, maybe better discipline comes back into the overall competitive environment. All that would be quite accretive, as you can imagine, to our overall property in our way.
David Neal: Part of that related to some inter-company deposits they were holding to settle up with MasterCard and other bucket was a non-revenue generating deposits for the C-book count. They were holding for the government.
David Neal: which I made a comment both on the mortgage book and the GIC book we are seeing this combingling of the portfolio so that keeping these clients from going to other channels going to branches and other transits.
David McKay: So there are some secular opportunities, as we look at our business in a lower rate environment, as spend could increase its capital and consumer spending could increase as we release more disposable cash flow from debt service into consumption in the economy that can benefit a number of errors from savings to your credit card business. To your point, capital markets activities I called out in my prepared comments with a lower short term rate environment.
David Neal: It is getting more complicated already, so we have seen some of that move in but I think the important thing to take away is
Speaker Change #133: Both in terms of the client numbers, whether it's the consumer or the commercial or the volumes, these are, we're both tracking these well within the estimates when we put the original $1.4 billion fully synergized number to the market.
David McKay: You can see more, I mean, activity, you can see more capital investment, both in the corporate lending book and the commercial lending book. So all that, you know, you can't stay and emulate a nice rebound in the economy and a soft landing. We're still calling for a soft landing in the economy. And I think that that is the backstop both in Canada and the US. We're calling for positive growth. We're not calling for a recession.
Speaker Change #134: Thank you very much for using me.
Speaker Change #135: Thank you. Following question is some Jill Shae from UBS. Please go ahead.
Jill Shae: Good morning, thank you so much for taking the question. I just found this as an architectural market with pre-tax pre-provision.
Jill Shae: Coming in at the 1.2 billion and above that guy in 3 inch of the 1.1 billion, realizing you know the steven outie into 4K, but just wondering if you could touch on the overall backdrop and feel flow, as well as any color on the momentum in your market shareings and how that might play into the earnings power of the business over the medium term.
David McKay: We're calling for lower interest rates and a flatter yield curve. And therefore, they all, with the hedging that Katherine talked about, which is very important to reduce the downside impact of rates on our overall balance sheet. Now we are in a position to absorb this volatility and continue to perform strongly going forward. So I think we are, we are just trying to express and I was going to leave this to my closing comments, but your question so important.
Jill Shae: Sure, thanks Jill.
Jill Shae: So, in terms of the environment, I would echo some of Dave's comments that if I set aside very short term, which I'll come back to, but I look forward to 2025. I think the environmental overall feels very constructive, obviously, with interest rate becoming down, access to capital being strong.
David McKay: We are trying to express it's uncertain as volatile and the consumer has not reprised or mortgages to Graham's point. So there are some unknowns out there that we're trying to manage, but we feel we can manage them quite well. But we want to make sure you're cognizant of we haven't landed this plane on the economy yet. And we still have to do that. But we want to, we want to express that in our, in our caution. Hopefully that helps. It's, it's super helpful.
Speaker Change #137: CEO Executive Confidence in the Economic Outlook Improving.
Speaker Change #138: A number of fundamentals are in place that we have been seeing driving increased activity and we expect that to continue into 2025. Part of that as well, that has been commonly spoken to is just the amount of...
Graham Hepworth: It Graham, if you had to probability weight, if you're going to be increasing the weighting to the base case higher or lower in your IFRS 9 modeling in 2025 knowing what you know today, what would it be? Do you think? I won't handicap that. That's the assess that we do each and every quarter based on all the facts we know at that time. And so I really struggle always getting into this, you know, what do I expect my future expectations to be?
Speaker Change #138: Dry Powder Available Among Private Equity Firms as well as...
Speaker Change #139: After a slower period of the last couple years, The Hubside.
Speaker Change #139: Desire to monetize some existing portfolio companies, so all of which speak to
Speaker Change #139: Increased Activity and then from a trading.
Speaker Change #139: Business Perspective, there's a healthy amount of change in volatility, both economically and in geopolitically, that we think is going to continue to drive very good activity among asset management clients. So as we look up to 2025, we think the strength we've seen this year continues and we have a fairly constructive backdrop.
Graham Hepworth: Like we, you know, at each quarter, we, we try and do the full assessment of the risks and uncertainty out there. And, and we take the appropriate actions and embed those into our assumptions and allow us as accordingly. And so, you know, I think this quarter, the shift in the allowance weights is really reflective of the fact that, you know, as we've seen with the Bank of Canada cutting the rates, it's just, you know, there's more certainty that inflation has been brought within control.
Speaker Change #139: My only caveat, as you mentioned, is there is seasonality to this business Q4 tends to be
Graham Hepworth: And, you know, the uncertainty associated with that higher rate higher inflation environment is, is now kind of less likely out there. And so that was kind of really driving our, our weight shift this quarter. But as to how that kind of reflects the future quarters, we'll assess that at the time.
Speaker Change #139: seasonally a software quarter in particular given the month of August which tends to be one of the slower months of the year just with clients away and activity a little bit more muted.
Speaker Change #139: This year we'll see we've obviously got the US election and some other events that we'll see what impact that has on activity So, you know, we would just temper temper the enthusiasm a little bit as we go through the fall period but overall for 2025 We think the fundamentals remain very strong
Unknown Executive: Thank you for taking my question. All right. Good question. Thank you.
Mario Mendonca: Our following question is from Mario Mondenka, Mendonka, sorry, from TD Securities. Please go ahead. Good morning, two quick things I wanted to clarify. They didn't quite follow on the call. First cast, and you talked about, I think it was you talked about the sweep accounts in the US and the bank feeling, not feeling a need to adjust rates there. Could you just maybe speak of that? First. Sure. We just wanted to be really clear to the street that our pricing on these weeks, which is about 31 billion in 30 billion in the US, that from a competitive perspective, we feel that we're very well placed.
Speaker Change #140: Your other comment, I think we're just a market share.
Speaker Change #140: Again, we've been very pleased that the investments in strategy we've been driving.
Speaker Change #140: Over the last number of years, this doesn't happen overnight, have been translating in a market for gains across both our investor banking and global markets business.
Speaker Change #140: We feel good about that momentum and fully anticipate we can continue that as we look in the next year.
Mario Mendonca: And in relation to any questions about pricing changes, given that competitive positioning, we're not expecting to see anything we're really going forward. One other thing that I want to clarify, on page 18, you refer to $450 million reduction as some certain loans were converted to investments. Did I read that? Did I listen to that correctly? There's a series of commercial real estate loans that we had impaired number of quarters ago. As part of our work out there, we've proposed on those and it's likely taken ownership of that.
Speaker Change #141: Thanks for that.
Speaker Change #142: Thank you. Following question is somewhat you Lee from Canna College and UIT. Please go ahead.
Lee: Hey morning guys, thanks for tuning my question in, so Cosmageddon this quarter is really good across pretty much every business and maybe when we can third the HSBC synergies.
Speaker Change #144: and the pretty good trends in the market related businesses that you bought lined.
Speaker Change #145: Is there any reason why all bank, positive operating leverage should be sustainable over the medium term, and then...
Speaker Change #146: Maybe as a follow-on, are there any particular areas of investment that could maybe weigh on operating costs when we think about 20-25 against 24.
Mario Mendonca: And so we just wanted to highlight that that moves out of the loan category into an investment category. It's wanted to be very transparent about that, but all consistent with our work out pieces and recovery pieces there. So those get marked to market going forward. Not marked to market percentage to get held as investments and accounted for a consistent with that. Katherine, I have more ad on that accounting treatment. I can just add on quickly, Graham's nailed it and think about it as those have just come on to our books now and they're sitting there as assets versus loans.
Speaker Change #146: Maybe I'll start at David and I'll hand it to Katherine for some more detail comments.
David: But we are very much focused on overall all bank operating leverage. I think we have a real opportunity to continue to reduce costs.
Katherine: I think we've come off a period where our costs were elevated, we've put a lot of effort into HSBC and now we're very focused on the overall cost structures and run this business.
Mario Mendonca: So think about it as commercial property that's sitting on our books. Just on the suite, does Doug Goosman, just that back on the sweeps from business perspective, I think it's important to understand what's behind our position today, which is Katherine points out is a very different one than those are feeling some pressure, is that we made a judgment some number of quarters ago that with rising rates, the right balance was to allocate some of that rising rate to our customers.
Katherine: I would say they're secular technology opportunities to reduce costs, particularly when you look at generative AI and how we're going to start deploying that more scale in the organization. So I think as you look at...
Katherine: The hedges we've done from a macro perspective and a declining rate environment are focused on cause, the momentum we have It is an important part of not only business level, leverage, offering leverage but trying to maintain that for those reasons at the top of the house, you know, Katherine, do you want to add any comments?
Mario Mendonca: So we have come into this period of discussion on this topic with rates that are that are clients are experiencing that are higher than our competition. And so that leads to us obviously paying attention to this because it's getting a lot of attention. But to Katherine's point, we don't feel like we need to make a big adjustment because we had already made that adjustment in our customers' favor some number of quarters ago.
Katherine: Just a couple of things that I would add on just more re-emphasizing that we are constantly looking to optimize our structural efficiency to support that strategy of creating long-term value.
Katherine: and many of those actions are already reflected in our run rate from a cost efficiency as well as the investment necessary to drive those efficiencies.
David McKay: Okay, and then a more broad question for Dave. Canadian investors are probably too polite to say it, but they've kind of lost patience with large US deals that do nothing but destroy value. And I'm not suggesting that City National was one of those wasn't large enough, I think in the context of royal to do much damage, but clearly the US deals in the last little while have not been good for Canadian shareholders.
Katherine: So I've really just going back to reinforce the guidance that was included in my speech for our expected N.I.E. across, as he finished out fiscal 2024.
Speaker Change #148: And then to your question of a kind of looking broader, I would just hold off at this point in time. Obviously, we've got the drivers that suggest the moment when we have a world continue going forward and look, you know, in Q4, to give it a more prescriptive guidance on the expected NIE growth as we move into 2025.
David McKay: So in your response to Abraham, you were talking about capital allocation. What I'm getting at here is with the bank consider a large transformative transaction in the US, or when you think about allocating capital to the US, is it all about fixing City National, maybe buying something small that might enhance value there? What's your thinking about allocating capital to the US going forward? It's a great question. It's a very large marketplace.
Speaker Change #149: Alright, thanks a lot and I'll leave it there.
Speaker Change #150: Thank you. We have time for one more question. On last question is some of the more personal, from Comrade Securities. Please go ahead.
Speaker Change #151: Yes, thanks for the questions for Graeme, I'm wondering if you could talk through the commenting made on the timing of peak retail credit losses.
David McKay: It's a highly intensely competitive marketplace for the profit pool shift. And to your point, generally banks and all industries have been quite unsuccessful in making them work. So we are highly cautious at the end of the day. So there could be a tuck-in opportunities as far as a large transformational. I think we've learned a lot through the City National Ventures to how to run a bank in the new changing environment. I would say it's a very high bar, it's clear.
Speaker Change #152: I think you mentioned you see it growing through through 2025. I would have thought that maybe it suggests that we could see the peak in the next kind of quarter or two as we see the benefits of rate that's playing out, but it sounds like you're thinking the peak is sometimes beyond 2025.
Speaker Change #153: Can you clarify that and also, is it because of your view on unemployment, continue to move higher, despite the benefit of ray cuts and just want any idea if you could provide some color on that?
Speaker Change #154: I think some are just taking a bit of a couple pieces to tie together there.
Speaker Change #155: Yeah, I think you kind of got to answer there a little bit yourself, which is...
David McKay: At the end of the day to get everything right and a very complex bar, you have to be incredibly sure footed about your synergies. When we first moved on City National, we didn't have anything in the United States, right? It was our first step into the market and therefore our synergies were growth. And the market changed on us as far as the regulatory environment and the whole construct that we've had to adjust to that.
Speaker Change #156: Certainly unemployment is a big driver of that, and we're seeing unemployment kind of peak out in the latter half of this year and in kind of early next year, and then there's kind of a lag effect as we see that trend linked through adult mobility too.
Speaker Change #156: and Parallons and PCL. So that's certainly a factor that kind of is driving the direction of retell as we see it.
Speaker Change #156: and then certainly the read to piece. I think everyone that again focuses on the us we've had some recaps and those have been beneficial.
David McKay: So, you know, you need a stable market and a stable set of rules to invest in and we don't have that yet in the US. We're very conscious of the dilute of impact and therefore the bar for us to do anything in organic in the US is very high. You just saw us allocate 13 and a half billion dollars of capital to Canada, that's really just B.C. Pretty strong signal that we were incredibly sure footed on that acquisition and it drove very significant shareholder value and we have opportunities in a highly fragmented kind of UK wealth space to build on ruined as well against small tuck-in.
Speaker Change #156: that doesn't mitigate rates of the headwind for many of these consumers that when they go to reprisor mortgages
Speaker Change #157: Yes, it's maybe not as acute in terms of the payment shock as they were facing when we saw rates where they were last quarter or two quarters ago.
Speaker Change #158: It's still the payment shock that maybe consumers will face and the big repricing schedule there it really goes from 2526 in the total 27. So there's going to be that we'll contribute to the overall kind of profile as well.
Speaker Change #159: Thank you for the time.
Speaker Change #160: Thank you!
Speaker Change #160: That concludes the Q&A session. I would not like to turn a meeting back over to Mr. McKay.
Mr. Mckay: Thank you for all those great questions. I'd like to sum it up by circling back on.
David McKay: So, to your point, I guess I'm trying to guide you, we don't feel we need to bet the organization on the US acquisition. We didn't do that with City National, that was a very conscious part of the strategy. We decided to go with low financial risk higher operational risk strategy to reenter the US commercial and banking space. Obviously, to your point, it's low financial risk but the operational risk has been challenging but we're getting a handle on it.
Mr. Mckay: 3 points that came up in your conversation. First, just to reiterate, you know, for us, momentum across all of our core franchise, customer franchises is very strong from retail to commercial.
Mr. Mckay: to Capital Markets to U.S. Well, to Canadian Well, we're seeing CNV.
David McKay: We're going to drive as we've talked about a strong return for our shareholders over time. We don't need to do a transformational acquisition but if one lined up to a very, very high bar, I can't say never but the bar is incredibly high and we don't see anything on the horizon. Thank you.
Mr. Mckay: On its path to creating more shareholder value and getting back.
Mr. Mckay: to a positive growth contributor to the organization. So the core of the business performed very well as you saw, add to that strong execution against HSBC. We're on our cost trajectory. We're confident of that. We've got revenue synergies to add to that that will be able to articulate more clearly over the coming months.
Mr. Mckay: To you and therefore, you know, we feel very good about how we're executing through 2023 and to Neil's point, we inherited a fantastic franchise, but one that was hampered by a very long dated regulatory clothes.
Derek Neldner: I'll following question is from Gibri Eldershane from National Bank Financial. Please go ahead. Good morning. A couple of questions here. First for Derek. Can you talk about the credit performance in your US leverage finance portfolio? I think it's around 20 billion. The stuff you keep on balance sheet and, you know, how those credits are behaving in this higher rate environment. And then on HSBC Canada for Neil last quarter, you showed the balances at close versus where they were when the deal was announced showed some deterioration and we don't have that disclosure anymore.
Mr. Mckay: and therefore...
Neil: The momentum had really slowed in the overall HSBC business. We've got over 2,000 frontline facing employees that we're turning on now.
Neil: to whether it's private banking employees, commercial, strong commercial business retail are getting back into building pipelines, building client flow that they normally do.
Neil: will start to benefit from that. So, it will very good about how the customer franchises are performing and the reason I highly do all these awards is that we're investing in creating value, continuing to deliver premium value to our clients and executing and that's why I spend so much time talking about awards.
Derek Neldner: I'm just wondering what if that the kind of stabilize and maybe we have a bit of growth on legacy HSBC, if you will. And then city national. What's the outlook for loan growth there? The balance has been pretty flat for a few quarters. I know there's some macro challenges and all that that, you know, what's your timing expectation of when that loan book and start growing again. Thanks. Mr. Gabe, it's Derek.
Speaker Change #162: Second thing is, you've heard some very cautious comments from us. I think, I saw a vast, a great question and tried to bring that, it's just a little uncertain note there and we're trying to express that that we are operating with confidence in an uncertain environment and we're moving forward.
Speaker Change #162: It's hard to see exactly how fast rates come down at impacts, consumers, but we wanted to be a little bit cautious there, we move through some...
Derek Neldner: I'll start with your question just on the leverage lending portfolio, your correct or that's around 20 billion and the majority of it is in the US. Overall, we're very comfortable with it. A few things behind that. First, we've been very focused historically on managing the size of that. So it's modest in the overall size of our balance sheet. But importantly, our holds by single name. We've generally kept quite modest. They're approximately 35 million each at the more risky rating categories.
Speaker Change #162: Over the last year, we've moved some capital markets, PCL, but it's mitigated. You always see capital markets, you see all an early part of an economic cycle and they're reach out on the back half and I think the story lines are playing out largely.
Speaker Change #162: there as well. You've seen us take some proactive hedging to help perform well through a down rate cycle. You've heard us talk about the benefits of a lower rate cycle to our, to the flows in our business.
Speaker Change #163: So, overall, well, cautious in our overall macro perspective and the impact on the business, we may contain confidence in our overall operating position within that. The third thing to marry is question on.
Derek Neldner: And so over a cycle like we've just gone through where you've had economic weakness impacting different industries and you've had higher rates that have obviously impacted the interest burden that some of these companies face where we've run into any kind of PCL. It's very modest given the small hold size we have as well. Well, it's a very diversified group or group about half of it is corporate half of it is sponsor backed and within that very diversified across sectors.
Speaker Change #164: Investing Capital.
Speaker Change #164: We are highly aware of the challenge in the marketplace of investing in the U.S. marketplace. It's for that reason that we've really chosen to focus on...
Speaker Change #164: The core customer segments that we're focusing on is by design, whether it's corporate institutional, where we've served for...
Derek Neldner: And so I think as you've seen over the last 18 to 24 months as we've gone through a more challenging cycle. We've taken some PCL related to that, but I think it's all been with an expectations and quite manageable.
Speaker Change #164: Many, many decades and we're growing calphum, Marcus franchise, whether it's the high net worth and ultra high net worth franchises we're serving.
Speaker Change #164: and the wealth franchise that we can build on there, which is kind of lower PCL and lower volatility. And the city national franchise, which is...
Neil Mclaughlin: And so we're overall very comfortable with how it's performed as well as the outlook as we look out to 2025. As far as city national growth, overall the industry growth has been very, very low over the last number of quarter and year and that's just the higher rate environment has suppressed overall investment and demand among the sector as you would expect and as rates start to come down you would expect that growth to restart again.
Speaker Change #164: You know, high net worth kind of private banking clients and then very strong entrepreneurial commercial clients that have performed very well over multiple cycles from a PCL all that strategy is designed to produce higher R we relative higher R we
Speaker Change #164: and Nadine High is Canada, obviously, but lower volatility.
Speaker Change #164: on the credit side through a cycle, and we don't see any change to that, so when it comes to the important question of deploying capital, I think I probably should have said first, we have no change to our customer strategy, we are not going to pursue mass.
Neil Mclaughlin: So for us it was again more focused on moving and not renewing lower yielding assets to reinvest those deposits in that capital into higher growth, higher return assets, we're building out teams to do that and we're pretty excited about the opportunity under Howard and Greg to really build out a stronger commercial franchise, mid-corporate franchise in the United States. And our deposit raising strategies, whether it's from RBC clear to our cash management ability at city national, are a really important part of that.
Speaker Change #164: Consumer United States, for all the reasons I've talked about for the last decade, and we continue to view that. So do not fear that we would allocate capital to something that's not core to what we do today. That's for that limits.
Speaker Change #164: The Council of Opportunities very significantly going forward to focus on the core customer segments we do today. We're very aware of the challenges of driving.
Speaker Change #164: Long-term shareholder value from MMA, we are highly opportunistic in Canada as we're working on fantastic. We had to see them.
Neil Mclaughlin: So I would say we've remained focused on growth and manage growth and I think we can add profitability while doing that. David Neal, I'll just maybe add a couple comments, your questions about the HSBC volumes, probably the biggest movement we saw and we commented on this last quarter was some non-revenue generating business deposits, part of that related to some inter-company deposits, they were holding to settle up with MasterCard, another bucket was non-revenue generating deposits for the Seba account they were holding for the government.
Speaker Change #164: City National for Long-Term Growth and we'll continue to.
Speaker Change #165: Execute on our mission there in Deploy Capital, and we will look to talk things in, but I don't want to leave any impression that we think we need to deploy significant amounts of capital to transform the organization. We really feel we can execute organically.
Speaker Change #165: Going forward across all our businesses to drive, you know, the strongest total shareholder return with the lowest volatility, which is quarter-word investment thesis. So there are really, really great questions, and thank you for your time today, and we'll see you next quarter.
Neil Mclaughlin: Which I made a comment both on the mortgage book and the GIC book, we are seeing this calm mingling of the portfolio so that keeping these clients from going to other channels, going to branches and to other transit. It is getting more complicated already, so we have seen some of that moving but I think the important thing to take away is both in terms of the client numbers, whether it's the consumer or the commercial or the volumes. These are, we're both tracking these well within the estimates when we put the original $1.4 billion fully synergized number to the market. Thank you.
Speaker Change #166: Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
Speaker Change #167: Thank you for watching.
Speaker Change #167: Again, the conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
Speaker Change #167: Thank you for watching.
Speaker Change #167: [inaudible]
Jill She: Following question is from Jill She from UBS, please go ahead. Good morning. Thanks so much for taking the question.
Jill She: I just wanted to touch on capital markets with the pre-tax pre-provision coming in at the $1.2 billion and above that guy in three inch of the $1.1 billion realizing you noted the seasonality into 4K, but just wondering if you touch on the overall backdrop and deal flow as well as any color on the momentum in your market share gains and how that might play into the earnings power of the business over the medium term. Sure.
Jill She: Thanks Jill. So in terms of the environment, I would echo some of Dave's comments that if I set aside very short term, which I'll come back to, but I look forward to 2025. I think the environment overall feels very constructive. Obviously with interest rate coming down, access to capital being strong CEO executive confidence in the economic outlook improving. A number of fundamentals are in place that we have been seeing driving increased activity and we expect that to continue into 2025.
Jill She: Part of that as well that has been commonly spoken to is just the amount of dry powder available among private equity firms as well as. After a slower period, the last couple years, desired to monetize some existing portfolio companies. So all of which speak to increased activity. And then from a trading business perspective, there's a healthy amount of change in volatility, both economically and in geopolitically that we think is going to continue to drive very good activity among asset manager clients.
Jill She: So as we look out to 2025, we think the strength we've seen this year continues. And we have a fairly constructive backdrop. My only caveat, as you mentioned, is there is seasonality to this business. Q4 tends to be seasonally a softer quarter in particular given the month of August, which tends to be one of the slower months of the year, just with clients away and activity a little bit more muted. This year, we'll see, we've obviously got the US election and some other events that we'll see what impact that has on activity.
Jill She: So, you know, we would just temper the enthusiasm a little bit as we go through the fall period, but overall for 2025, we think the fundamentals remain very strong. Your other comment, I think was just on market share. Again, we've been very pleased that the investments in strategy, we've been driving over the last number of years, this doesn't happen overnight, have been translating into market share gains across both our investment banking and global markets business. We feel good about that momentum and fully anticipate we can continue that as we look into next year. Thanks for that. Thank you.
Katherine Gibson: Following question is on materially from can accord genuity, please go ahead. A morning guys that thanks for putting my question in so cost management, this quarter was really good across pretty much every business and maybe when we considered the HSB synergies and some pretty good trends in the market related businesses that you've outlined. Is there any reason why all bank positive operating leverage shouldn't be sustainable over the medium term, and then maybe as a follow on other any particular areas of investment that can maybe weigh on operating costs when we think about 2025 against 24.
Katherine Gibson: Thanks. Maybe I'll start it today and then I'll hand it to Catherine for some more detailed comments. But we are very much focused on overall all bank operating leverage. I think we have a real opportunity to continue to reduce costs. I think we've come off a period where our costs were elevated. We put a lot of effort into HSBC and now we're very focused on the overall cost structures and run this business.
Katherine Gibson: I would say there are secular technology opportunities to reduce costs particularly when you look at generative AI and how we're going to start deploying that more at scale in the organization. So I think as you look at the hedges we've done from a macro perspective and a declining rate environment, our focus on costs, the momentum we have is an important part of not only business level operating leverage but trying to maintain that for those reasons.
Katherine Gibson: Is that the top of the house? Catherine, do you want to add any comments? Just a couple of things that I would add on. Just more re-emphasizing that we are constantly looking to optimize our structural efficiencies to support that strategy of creating long-term value. And many of those actions are already reflected in our run rate from a cost efficiency as well as the investment necessary to drive those efficiencies. So I'm really just going back to reinforce the guidance that was included in my speech for our expected NIE growth as we finish out fiscal 2024.
Katherine Gibson: And then to your question about kind of working broader, I would just hold off at this point in time. Obviously we've got the drivers that suggest the momentum we have will continue going forward and look in Q4 to give a bit more prescriptive guidance on the expected NIE growth as we move into 2024. All right, thanks a lot. I'll leave it there. Thank you.
Unknown Executive: We have time for one more question.
Emlem Ahn: Our last question is Emlem Ahn, from Comrock Securities. Please go ahead. Yes, thanks. My questions for Graham. I'm wondering if you could talk through the comment you made on the timing of peak retail credit losses. I think you mentioned you see it growing throughout through 2025. I would have thought that maybe it suggests that we could see the peak in the next kind of quarter or two as we see the benefits of rate cuts playing out, but it sounds like you're thinking the peak is sometime beyond 2025.
Emlem Ahn: Can you clarify that? And then also is it because of is it because of your view on unemployment continue to move higher despite the benefit of rate cuts? And yeah, we're just wondering if you could provide some color on that. I think some are just a couple pieces to tie together there. Yeah, I think you kind of got to your answer there a little bit yourself, which is certainly unemployment is a big driver of that.
Emlem Ahn: And you know, we're seeing unemployment kind of peak out in the latter half of this year and kind of early next year. And then there's kind of a lag effect is that translate through it ultimately to to compare loans and PC all. So that's certainly a factor that kind of is driving the direction of retail as we see it. And then certainly the rates piece I think everyone again focuses on yes, we've had some rate cuts and those have been beneficial.
Emlem Ahn: That doesn't mitigate kind of rates as a headwind for many of these consumers that when they go to reprice or mortgages. Yes, it's maybe not as acute in terms of the payment shock as they were facing when we saw rates where they were allowed. That's quarter or two quarters ago. It's nearly the payment shock that many of these consumers will face and the big repricing schedule there really goes from 25, 26 and into 27. So there's going to be that will contribute to to the overall kind of profile as well.
Graham Hepworth: Thank you.
David McKay: That concludes the Q&A session.
Unknown Executive: I would not like to turn the meeting back over to Mr. McKay. Thank you for all those those great questions. I like to sum it up by circling back on three points and points that came up in your conversation. First just to reiterate for us momentum across across all of our core franchise customer franchise is very strong from retail to commercial to capital markets to US well to Canadian wealth. We're seeing CNB on its path to to create more shareholder value and getting back to a positive growth contributor to the organization.
Unknown Executive: So the core of the business performed very well as you saw add to that strong execution against HSBC. We're on our cost trajectory. We're confident of that. We've got revenue synergies to add to that that we'll be able to articulate more clearly over the coming months to you. And therefore, you know, we feel very good about how we're executing through 2023 and to Neil's point, we inherited a fantastic franchise. But one that was hampered by a very long dated regulatory close and therefore the momentum had really slowed in the overall HSBC business.
Unknown Executive: We've got over 2000 frontline facing employees that were turning on now to whether private banking employees commercial strong commercial business retail are getting back into building pipe lines of building client flow that they normally do and will start to benefit from that. So feel very good about how the customer franchises are performing the reason I highlight all these awards is that we're investing and creating value continuing to deliver premium value to our clients and executing.
Unknown Executive: And that's why I spend so much time on talking about awards to you. Second thing is you've heard some very cautious comments from us. I think sorry. I've asked a great question and try to bring it. It's just a little uncertain out there and we're trying to express that that we are operating with confidence in an uncertain environment and we're moving forward. It's hard to see exactly how fast rates come down at impact consumers, but we wanted to be just a little bit cautious there.
Unknown Executive: We've moved through some over the last year. We've moved some capital markets, PCL, but it's, you know, it's mitigated. You always see capital market PCL an early part of an economic cycle and then retail in the back half. And I think the story lines are playing out largely there as well. You've seen us take some proactive hedging to to help perform well through a down rate cycle. You've heard us talk about the benefits of a lower rate cycle tour to the flows in our business, on this.
Unknown Executive: So, overall, while cautious in our overall macro perspective and the impact on the business, we may obtain confidence in our overall operating position within that. The third thing to Mario's question on investing capital. We are highly aware of the challenges in the marketplace of investing in the US marketplace. It's for that reason that we've really chosen to focus on the core customer segments that we're focusing on. It's by design, whether it's corporate institutional, where we've served for many, many decades, and we're growing capital markets franchise, whether it's the high net worth and ultra high net worth franchises we're serving in the wealth franchise that we can build on there, which is kind of lower PCL and lower volatility in the city national franchise, which is high net worth kind of private banking clients and then very strong entrepreneurial commercial clients that have performed very well over multiple cycles from a PCL.
Unknown Executive: All that strategy is designed to produce higher R.O.E, relative higher R.O.E., not as high as Canada, obviously, but lower volatility on the credit side through a cycle. And we don't see any change to that. So when it comes to the important question of deploying capital, I think I probably footers should have said first, we have no change to our customer strategy. We are not going to pursue mass consumer United States for all the reasons I've talked about for the last decade, and we continue to view that.
Unknown Executive: So do not fear that we would allocate capital to something that's not core to what we do today, that for that limits the number of opportunities very significantly going forward to focus on the core customer segments we do today. We're very aware of the challenges of driving long term shareholder value from MNA. We are highly opportunistic in Canada is working out fantastic. We had to see the city national for long term growth and will continue to execute on our mission there and deploy capital.
Unknown Executive: And we will look to talk things in, but I don't want to leave any impression that we think we need to deploy significant amounts of capital to transform the organization. We really feel we can execute organically going forward across all our businesses to drive this strongest total shareholder return with the lowest volatility, which is core to where investment pieces.
David McKay: So they're really, really great questions, and thank you for your time today and we'll see you next quarter. Thank you.
Unknown Executive: The conference has now ended.
Unknown Executive: Please disconnect your lines at this time, and we thank you for the participation. Again, the conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.