Q1 2025 Royal Bank of Canada Earnings Call
Speaker Change: This conference is being recorded. Cette conférence est enregistrée. All participants please stand by. Your meeting is ready to begin.
Speaker Change: Good morning, ladies and gentlemen. Welcome to the RBC's 2025 First Quarter Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Senior Vice President, Investor Relations. Please go ahead, sir.
Thank you, and good morning everyone.
Speaker Change: Speaking today will be Dave McKay, President and Chief Executive Officer, Catherine Gibson, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer.
Speaker Change: Also joining us today for your questions, Erika Nielsen, Group Head, Personal Banking.
Sean Iwata-Gauchi: Sean Iwata-Gauchi, Group Head, Commercial Banking Neil McLaughlin, Group Head, Wealth Management Derek Nelner, Group Head, Capital Markets and Jennifer Publicover, Group Head, Insurance
Speaker Change: As noted on 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. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis, and considers both to be useful in assessing underlying business performance.
Speaker Change: To give everyone a chance to ask questions, we ask that you limit your questions and then re-queue. With that, I'll turn it over to Dave.
Dave Mckay: Thanks, Asim. Good morning, everyone, and thank you for joining us.
Dave Mckay: Before we begin, I want to mention our thoughts are with the families that have been impacted by the devastating fires in Southern California.
RBC, together with Citi National Bank, has donated $3 million.
to support victims in the impacted areas.
Dave Mckay: Today, we reported first quarter earnings of $5.1 billion, a record result that reflects RBC's financial and strategic strength amidst an evolving operating environment to start the fiscal year.
of HSBC Canada.
Dave Mckay: We reported a return on equity of 16.8%, the foundation of a strong common equity tier one ratio of 13.2%.
Dave Mckay: Our premium ROE continues to create value for shareholders, with gross internal capital generation of 76 basis points underpinning robust book value growth of 13% year over year.
Dave Mckay: Strong revenue growth was driven by a well-diversified base comprised of a balanced mix of net interest income and fee-based revenue.
Dave Mckay: Net interest income was up 26% this quarter. Results benefited from strong deposit growth in personal banking, strong loan growth in commercial banking, and higher spreads.
Dave Mckay: We also saw robust fee-based revenue growth, with strong results across wealth management, global markets, and investment banking, as we benefited from constructive markets and strong client activity.
This quarter, we generated operating leverage of 13%.
Dave Mckay: or 8% on an adjusted basis, as we saw the benefits of our scale and the realization of cost synergies related to the acquisition of HSBC Canada.
Dave Mckay: We remain well positioned to achieve the full cost synergies of $740 million by early 2026.
Dave Mckay: having achieved an annualized run rate savings of over $500 million.
were approximately 70% of our stated target.
Dave Mckay: We expect to drive further efficiencies as our clients benefit from the investments we continue to make in our digital capabilities.
Dave Mckay: Earlier this year we made the mortgage renewal process easier and faster for clients through our streamlined option in the RBC mobile app which has nearly 8 million active users.
Dave Mckay: Clients who choose to renew through this option will be able to secure mortgage terms and virtual signed documents.
in a matter of minutes.
Dave Mckay: And RBC Direct Investing is now the only bank-owned brokerage in Canada to offer self-directed investors online international trading through leading global exchanges.
Dave Mckay: While our PCL and impaired loans increased this quarter, they were largely within expectations given the point of the economic cycle.
Dave Mckay: Going forward, we are maintaining our PCL guidance for the year, which Graeme will speak to shortly.
Thank you.
Dave Mckay: Turning to the macro environment. We started the year operating amidst a backdrop of constructive markets and affirming of Canadian economic data including moderating headline inflation levels and improving employment trends.
Dave Mckay: Furthermore, we expect the Bank of Canada to continue to take a more dovish stance, which should help consumer sentiment and growth.
Dave Mckay: The widening gap between U.S. and Canadian interest rates has resulted in a weaker Canadian dollar, which could partly buffer any tariff shock for American users of Canadian goods and services.
Dave Mckay: As Canada's largest financial institution, we have an important role to play in delivering advice, insights and value to our clients amidst the uncertainty, while also supporting our communities.
Dave Mckay: Many of our clients continue to come to us for deeper advice in navigating the involving environment, which has contributed to strong deposit flows and increased transactional activity in our market-related businesses.
Dave Mckay: Having said that, rising uncertainty around trade policy and geopolitics, combined with immigration restrictions, may already be moderating client activity in certain parts of the Canadian economy.
Dave Mckay: We are seeing signs of lower business confidence with some of our commercial banking clients opting to delay certain investment decisions.
Dave Mckay: Furthermore, Canadian housing activity remains modest despite tailwinds from lower interest rates and changing mortgage rules.
Dave Mckay: Moving forward, while we hope this uncertainty is short-term in nature, we are focused on the preparedness as opposed to the predictions.
Dave Mckay: We have run several scenarios with respect to the depth, breadth, and duration of potential tariffs. We believe we are in a strong position to navigate the uncertainty given the strength of our capital, our diversified funding, our brand, and our diversified business and geographic model.
Dave Mckay: Similarly, Canada also has a strong foundation. We have the natural and human resources that the world is looking for. We have the capability to improve our access to major markets.
Dave Mckay: The existing Kuzma Trade Agreement is a solid foundation. While it can always be improved, we are encouraged by the ongoing dialogue and believe there is a path forward that can drive prosperity for all across these economies.
Dave Mckay: Importantly, this is the chance for Canada to make structural improvements to the country's economic productivity and competitiveness, including removing inter-provincial trade barriers and improving high-impact energy and infrastructure products.
Dave Mckay: This can drive future growth opportunities with significant benefits to Canadians.
Dave Mckay: Amidst this uncertainty, ensuring we continue to operate with sufficient buffers takes on increased importance. Our stress testing suggests that even under a more severe scenario of lower revenue and higher credit losses, our capital levels would remain above regulatory minimums.
Dave Mckay: We are deeply committed to supporting our clients' growing financial needs through award-winning advice and value propositions.
Dave Mckay: We have also been repurchasing our stock this quarter and continue to see buybacks as a tactical lever to generate shareholder value.
Dave Mckay: With this context, I will now speak to our key growth drivers, starting with our acquisition of HSBC Canada.
Dave Mckay: Since the Close and Convert acquisition almost a year ago, we have generated cumulative adjusted pre-provisioned pre-tax earnings of over $950 million on a stand-alone basis, excluding the benefits of the cost synergies highlighting the earnings-generating power of this acquisition.
Dave Mckay: Moving to personal banking, where we continue to leverage our client value proposition and foundational distribution advantage across our physical and digital channels.
Dave Mckay: This quarter, we saw outsized growth in our core banking accounts, which underpinned 18% deposit growth, or 8% excluding the acquisition of HSBC.
Dave Mckay: The acquisition of core deposits remains a focus as they provide us with data insights that allow us to better understand client needs while also improving our risk management capabilities.
Thank you. Thank you.
Dave Mckay: Furthermore, they're an important source of lower cost funding to support our clients financing needs.
Dave Mckay: As client needs shift amidst an uncertain environment, we expect flows to shift between RBC's savings and investment offerings.
Dave Mckay: Mortgage growth remained modest as we maintained our pricing discipline with respect to originations while remaining focused on retaining client relationships as mortgages renew over the coming quarters.
Dave Mckay: In contrast, credit card balances grew due to the increased purchase volumes and seasonally higher revolve rates following the holidays.
Dave Mckay: Turning to our commercial banking franchise where we have leading market positions across small business and commercial clients.
Dave Mckay: loans and acceptances were up 35% year-over-year or up 10% excluding HSBC Canada. The majority of our growth has been with clients.
where we have long relationships.
Dave Mckay: Deposit growth also remains strong, up 19% year-over-year, or 8% excluding HSBC Canada.
Dave Mckay: In the near term, commercial banking loan growth may moderate as clients hold back plans and investments amidst the tariff-driven uncertainty.
Dave Mckay: However, absent more severe and sustained tariffs, we expect long growth in the high single-digit range through this year, including the benefits from our expanded client and specialist coverage related to HSBC Canada's acquisition.
Dave Mckay: Turning to capital markets, which reported very strong results this quarter, generating record pre-provision, pre-tax earnings of $1.7 billion.
Dave Mckay: Global markets reported over $2 billion in revenue this quarter, driven by strong performance in both equities and foreign exchange trading revenue, benefiting from increased client activity amidst an uncertain macroeconomic environment.
Dave Mckay: Corporate investment banking was up 24% from last year with our investment banking business benefiting from constructive market conditions and expanded scale across client and product verticals and supported by solid growth in corporate banking.
Dave Mckay: Going forward, the uncertainty around trade policy could impact deal activity in the near term. However, the resulting levels of volatility could be beneficial to our sales and trading businesses.
Dave Mckay: Furthermore, we have robust client dialogue and a strong client engagement and remain well positioned to support our clients and take advantage of market opportunities as policy uncertainty moderates.
Thank you.
Dave Mckay: Moving to our wealth management segment where we look to leverage our growing advisory base, holistic advisory and banking solutions and technology investments to serve client needs and enhance advisor productivity.
Dave Mckay: Wealth management revenue surpassed $5.5 billion for the first time, while generating nearly $1 billion in net income for the quarter.
Dave Mckay: Assets under administration in U.S. wealth management, including Citi National, increased to nearly 700 billion U.S. dollars.
Dave Mckay: And RBC global asset management assets under management increased 23% from last year, surpassing $700 billion for the first time.
Dave Mckay: RBC Gam generated net sales of $11 billion this quarter, including nearly 4 billion of Canadian retail net sales as our clients continue to choose us as their trusted adviser amidst a volatile environment.
Dave Mckay: Yeah.
Dave Mckay: To close we've had a strong start to fiscal 'twenty twenty-five amidst an evolving operating environment. While change is constant. So it was our commitment to our clients and communities. Our strategies also continued to deliver leading risk adjusted returns and long term value to our shareholders.
Dave Mckay: We look forward to our upcoming Investor day on March 27th where he will discuss key strategic initiatives designed to accelerate our ambitions across our businesses in core geographies.
Catherine Gibson: With that Catherine over to you.
Dave Mckay: Hum.
Dave Mckay: Thanks, Dave and good morning, everyone.
Dave Mckay: On slide eight we reported record results this quarter with diluted earnings per share coming in at $3 54, adjusted diluted earnings per share was $3 62.
Dave Mckay: Up 27% from last year benefiting in part from the acquisition of HSBC, Canada, and FX translation impact.
Dave Mckay: Our record results were underpinned by double digit revenue and earnings growth across each of our segment and reflected robust adjusted all bank operating leverage of seven 7%.
Dave Mckay: Turning to capital on slide nine our CET one ratio remains strong at 13, 2% favorable to last quarter.
Dave Mckay: The solid growth in internal capital generation net of dividends with mostly deployed into organic businesses, particularly in capital markets and personal banking and easily allowed the bank to earn through the net credit migration in the quarter.
Dave Mckay: As part of our capital deployment strategy, we also repurchased approximately one 9 million shares this quarter for $338 million.
Dave Mckay: Despite the macro uncertainty our strategy of prioritizing capital allocation, where its client driven organic growth and increasing dividends in line with earnings remain unchanged. We will also continue to be opportunistic in our use of buybacks well operating with a strong CET one ratio.
Dave Mckay: About 12, 5%.
Dave Mckay: She'd downside scenarios associated with rising trade tensions materialized.
Dave Mckay: Experienced during the pandemic serves as a good reminder of the benefit of our strong recurring and diversified earnings streams, which will continue to act as a primary absorber of any deterioration. Furthermore, our capital buffer, which is well above the regulatory minimum.
Dave Mckay: Our strong second line of defense.
Dave Mckay: Moving to slide 10.
Dave Mckay: Net interest income was up 26% year over year or up 27% excluding trading revenue.
Dave Mckay: These results benefited from the addition of HSBC, Canada solid volume growth in both personal banking and commercial banking as well as higher spreads in personal banking and the impact of foreign exchange translation.
Dave Mckay: I'll think net interest margin excluding trading revenue was down one basis point from last quarter as the impact of higher securities balances in capital markets was mostly offset by favorable product mix in personal banking and commercial banking.
Dave Mckay: Canadian banking NIM was up seven basis points from last quarter.
Dave Mckay: Driven by strong growth in non maturity deposits, which were up approximately 3% quarter over quarter.
Dave Mckay: Underpinning this strong growth has been positive flows from GIC and external sources into non maturity deposit.
Dave Mckay: <unk> also continued to benefit from our tractor deposit strategy.
Dave Mckay: These benefits were partly offset by ongoing competition for term deposits, which we expect to persist throughout the year.
Dave Mckay: Looking forward, we are increasing our 2025, all bank net interest income growth guidance.
Dave Mckay: We expect high single digit to low double digit net interest income ex trading revenue growth in 2025.
Dave Mckay: From the mid to high single digit range guidance provided last quarter.
Dave Mckay: The increase in our guidance reflects stronger than expected growth in non maturity deposits this quarter as well as better than expected spreads in both mortgages and GIC.
Dave Mckay: Well our guidance has increased the wide range reflects.
Dave Mckay: Balding operating environment.
Dave Mckay: Moving to slide 11 reported noninterest expenses were up 11% from last year.
Dave Mckay: Core expense growth as guided to last quarter with elevated I mean at 13% year over year impacted in part by the contribution of run rate expenses associated with the acquisition of HSBC, Canada. The.
Dave Mckay: The main driver of growth, however was higher variable compensation, which was commensurate with strong results in wealth management and capital markets.
Dave Mckay: Other staff related costs associated with increased S. T E. N. Severance also also contributed to the increase.
Dave Mckay: Looking ahead, we will remain diligent in managing our cost base, we expect all bank core expense growth, which is off a base of reported 2020 for expenses to be at the upper end of our mid single digit guidance range for 2025, we continue to expect positive opera.
Dave Mckay: Leverage for the year.
Dave Mckay: Move to the upper end of our core expense growth guidance reflects higher than expected variable compensation in the quarter.
Dave Mckay: As indicated last quarter, we expect a faster piece of core expense growth in the first half of the year, reflecting the inclusion of HSBC, Canada, Brazil and to a lesser extent investments for our next phase of growth.
Dave Mckay: As a reminder, core expense growth includes run rate costs associated with the HSBC candidate acquisition, but excludes the impact of FX and share based compensation.
Dave Mckay: Turning to taxes, the adjusted noncash effective tax rate was 24% this quarter up from 19, 5% last quarter.
Dave Mckay: The increase reflects the impact of pillar two tax legislation, which was embedded in our guidance provided last quarter as well as changes in earnings.
Dave Mckay: Turning to our Q1 segment results begin on slide 12, personal banking reported earnings of $1 7 billion.
Dave Mckay: Focusing on personal banking, Canada net income was up 26% year over year, excluding $91 million a night from HSBC, Canada personal banking, Canada net income rose a strong 19% year over year benefiting from close to 4% operating leverage.
Dave Mckay: Ganic net interest income was up 15% from last year, reflecting higher spreads and a robust 8% growth in deposits.
Organic non interest income was up 7% year over year underpinned by higher mutual fund distribution fees, mainly from capital appreciation and the benefit of branch net sales.
Dave Mckay: Turning to slide 13, commercial banking NAIAD of 777 million rose, 20% from a year ago, including $73 million from HSBC, Canada.
Dave Mckay: Net income growth was impacted in part by higher credit provisions across a huge sectors, which Graeme will touch on shortly.
Dave Mckay: On a pre provision pre tax basis earnings were up 32% or 9% year over year, excluding HSBC, Canada, driven by solid volume growth and higher service charges.
Dave Mckay: Loan and deposit growth was solid at 10% and 8% year over year, respectively.
Dave Mckay: Importantly, the loan book, we acquired through the acquisition of HSBC, Canada, It's starting to show momentum and it's up over recent months in line with the growth of the commercial banking back book.
Dave Mckay: Commercial banking efficiency ratio improved to 33%, reflecting positive operating leverage of 1%.
Dave Mckay: Turning to wealth management on slide 14, nine out of 980 million rose, 48% from a year ago, reflecting strong growth in fee based client assets across our businesses.
Dave Mckay: We added over 20 billion in net new assets across our North American wealth advisory and global asset management businesses as momentum builds and long term retail mutual fund net sales.
Dave Mckay: Revenue was partly offset by higher variable compensation.
Dave Mckay: National generated 60 million U S. In adjusted earnings this quarter impacted in part by 31 million U S. Taking on performing loans related to the California wildfires.
Dave Mckay: We are seeing good momentum enhancing city national's profitability and we remain committed to these efforts.
Dave Mckay: Turning to capital markets results on slide 15.
Dave Mckay: Record net income of $1 4 billion increased 24% from last year benefiting from broad based revenue growth and FX translation impact.
Dave Mckay: Pretax pre provision earnings surpassed $1 7 billion in the quarter up 31% from last year.
Dave Mckay: And investment banking revenue was up 24% from last year.
Dave Mckay: Excluding the impact of loan underwriting markdowns in the prior year revenue was up 18%, reflecting higher loan syndication revenue in North America, the impact of increased lending balances and spreads as well as higher debt origination primarily in the U S.
Dave Mckay: Global markets revenue was up 24% as robust client engagement and a constructive market backdrop drove higher equity trading across most regions and increased FX trading in Canada.
Dave Mckay: Q1 is capital markets seasonally strong this quarter and while we expect business momentum to remain strong we anticipate typical seasonal declines in pretax pre provision earnings through the remainder of the year.
Dave Mckay: Turning to slide 16 insurance net income of $272 million was up 24% from last year, mainly due to higher insurance service result, driven by the 65 million impact of reinsurance contract Recaptures and improved claims experience across the majority of our products.
Dave Mckay: This was partially offset by lower insurance investment results, primarily reflecting higher favorable investment related experience in the prior period on the transition to <unk> 17.
Dave Mckay: To conclude we are very pleased with the strong momentum across our core businesses to start the year, which underpinned our robust adjusted ROE of 17, 2% on a strong C E. One base of 13, 2% looking.
Dave Mckay: Looking ahead, our financial and strategic strength, including our diversified businesses and revenue streams.
Dave Mckay: <unk> says well to navigate uncertainty in the macroeconomic environment with that I will turn it over to grant.
Grant: Thank you Catherine and good morning, everyone.
I'll now discuss our allowances in the context of the current macroeconomic environment and the path ahead as we navigate uncertainty for me as well.
Dave Mckay: Geopolitical risks that Dave noted earlier.
Dave Mckay: Underlying performance of the U S and Canadian economies have been largely positive over the quarter, although the Canadian economy is still underperforming it.
Dave Mckay: It looks like the bank of Canada to continue gradually cutting rates since the middle of 2025, providing further relief for borrowers well the U S. Federal reserve is now expected to hold rates steady throughout 2025.
Dave Mckay: Notwithstanding these factors it remains highly uncertain, how the prospect of tariffs will impact the broader economy.
Dave Mckay: It will vary based on the extent and duration tariffs would tell us where he measures progress in removing barriers to domestic trade and the availability of fiscal support measures.
Dave Mckay: To provide some context on how the tariff uncertainty is reflected in our provisions.
Dave Mckay: All the neuro I personally are performing allowances reflect not only our baseline expectations.
Dave Mckay: The potential for weaker economic conditions reflected through a series of pessimistic scenarios.
Dave Mckay: These scenarios have been highlighted on slide 36.
Dave Mckay: Well, Brian sustained tariffs could create a recessionary conditions the range of outcomes are well within the pessimistic scenarios. We currently consider.
Dave Mckay: Despite the pause of U S and Canadian club economic signs noted earlier, we kept our downside risk weights at an elevated level this quarter to account for this new uncertainty.
Dave Mckay: Going forward does the tariff situation evolves, we will continue to reflect no no. It comes through our baseline scenario, maybe ongoing uncertainty through potentially new were amended downside scenarios.
Dave Mckay: Turning to slide 18, we took a total of 68 million of provisions on performing loans this quarter, mainly reflecting unfavorable changes in portfolio composition, including a $45 million provision related to the California wildfires.
Dave Mckay: This was partially offset by a favorable impact from our macroeconomic forecast and the migration of one large couple markets account and the other services sector from performing to impaired.
Speaker Change: Set up on this in a moment.
Speaker Change: Excluding the impacts of the wildfires and the transfer. This one couple markets account provisions on performing loans of similar with recent history.
Speaker Change: Many of our C. N V clients were directly impacted by the California wildfires Rbcs related credit exposure consists primarily of residential mortgages and loans and the fires or put them out to just under $1 billion.
Speaker Change: The absolute nature of the client base low loan to value ratios, but effective insurance coverage substantially mitigate the credit risk of this tragic event.
Speaker Change: Additionally, we have established a prudent allowance that provides coverage for residual uncertainty, reflecting the potential for lengthy recovery efforts and the possible depreciation the land values.
Speaker Change: This marks the 11th consecutive quarter, where we added reserves are performing loans, resulting in a total ECL up 6.9 billion.
Speaker Change: We remain confident these allowances provides strong coverage relative to current and anticipated pcl's unimpaired loans.
Speaker Change: Moving to slide 19, gross impaired loans of 7.9 billion were up $2 billion or 19 basis points. This quarter, primarily driven by capital markets and commercial banking.
Speaker Change: As a reminder, last quarter, we highlighted that our strong credit performance or a couple of months its portfolio for the last two quarters was unlikely to continue.
Speaker Change: This quarter are reflective of the ongoing challenges in the current credit environment can be uneven timing of losses that can occur within our wholesale portfolio.
Speaker Change: Capital markets, a $1.5 billion new formation relates to the impairment of the previously mentioned accounting the other services sector.
Speaker Change: This former investment grade utility borer was originated with a strong capital structure.
Speaker Change: He's operated in a heavily regulated environment.
Speaker Change: Most recently the borrowers are being impacted by changes to regulatory environmental expectations that requires significant investment to address.
Speaker Change: We've been provisioning for this outcome and relative to the size of this exposure losses are expected to be manageable.
Speaker Change: In commercial banking, new formations remain elevated driven by a few large impairments in the real estate related consumer discretionary and agricultural sectors.
Speaker Change: However, several of the largest new formations in the real estate and related sector have recently returned to performing status.
Speaker Change: Turning to slide 20, PCL on impaired loans of 39 basis points was up 13 basis points quarter over quarter or $345 million was provisions higher across all segments.
Speaker Change: The personal banking provisions were up 66 billion with her unsecured portfolio is continuing to be the main drivers of losses.
Speaker Change: Our mortgage portfolio impairments and provisions are increasing in line with our expectations.
Speaker Change: Clients are showing resilience as they face higher refinancing cost supported by stable home prices lower rates.
Speaker Change: And our commercial banking portfolio provisions came in higher this quarter.
Speaker Change: These outcomes are not unexpected given where we are in the economic cycle.
Speaker Change: Most notably this quarter, we took additional provisions on previously impaired loans in the forest products and automotive sectors, the new provisions in the consumer discretionary and industrial product sectors.
Speaker Change: With respect to the performance of the commercial banking portfolio quite from HSBC, Canada. It is driving a disproportionate share of commercial banking PCL on apparel loans predominantly driven by a few larger accounts economically sensitive sectors and there is an area where HSBC was more concentrated.
Speaker Change: Give me HSBC portfolio also indexes to larger client sizes provisions can be uneven.
Speaker Change: So if we go if they want to HSBC names accounted for 54% of the cumulative HSBC PCL on impaired loans.
Speaker Change: Given the mix of the HSBC portfolio, we do expect PCL for this portfolio to remain elevated for the next few quarters, though not at the levels we experienced in Q1.
Speaker Change: With nearly a full year of experience with the HSBC portfolio. We have conducted our standard credit reviews for the majority of HSBC borrowers and on that basis, we remain confident in the overall critical political loans, we acquired and believe the combined portfolio will continue to benefit from greater diversification that will support strong through the cycle performance.
Speaker Change: Capital markets provisions were up 191 million, mainly due to the large account noted earlier and the other services sector.
Speaker Change: To conclude despite being impacted by several unique factors or areas of weakness. This quarter, we are seeing offsetting strength in other segments of the portfolio.
Speaker Change: All of this reflects the breadth scale and diversification of our combined franchise.
Speaker Change: We still expect full year 2025 provisions on impaired loans to remain within the guidance previously provided.
Speaker Change: We are prudently building reserves on performing loans as we navigate the uncertainties across multiple fronts.
Speaker Change: Moving forward, while we remain confident of our stage three PCL guidance for 'twenty 'twenty five.
Speaker Change: The uncertainty of the policy environment, specifically related to tariffs could impact the likelihood and timing of allowance allowance releases and peak T. C L.
Speaker Change: It'll comes will continue to be dependent on the magnitude of change and unemployment rates the direction and magnitude of changes in interest rates and commercial and residential real estate prices.
Speaker Change: There's always a computer correct, we manage risk through the cycle. So we remain well capitalized with the implausible get worst severe macroeconomic and geopolitical outcomes.
Speaker Change: With that operator, let's open the lines for Q&A.
Speaker Change: Thank you we will now take questions from the telephone lines. If your other question. Please.
Speaker Change: You may cancel your question at any time by pressing star two.
Speaker Change: My Star one at this time if you other question it wouldn't be a very small swipe up their spend with us.
Speaker Change: Questions. Thank you for your patience.
Speaker Change: You have the first question from John Kim from Jefferies. Please go ahead. Your line is open.
John Kim: Good morning was hoping that you could expand upon other forms of city national in the quarter. If we take into account the incremental provisions that you indicated for the California wildfires performance seems to be quite solid can you can you talk to.
John Kim: Where you stand in terms of the ongoing operational improvement of profitability increases it so that you'd be looking for and what we may be able to expect through the rest of the year.
Yeah, Thanks, Johns Dave for.
Speaker Change: That question, we continue to your point to make very good progress in our city National franchise I was actually out there last week with the team and we remain really encouraged about the client franchise the momentum that we're starting to build across a number of fronts.
Speaker Change: It's still a heavy lift on the overall re platforming for them from a number of fronts, but we'll get a lot of that work done.
Speaker Change: This year, so I think from from that perspective, we continue to work through it on the schedule that.
Speaker Change: We've told you are.
Speaker Change: When you look at volume growth, we continue to run off single service clients in the commercial space, bringing on multi product clients.
Speaker Change: A chance to meet with a number of clients last week and the ability to cross sell I think more importantly is critical.
Speaker Change: As we'll show you in the Investor Day continues to build out platforms to sell into the wealth management space and we're launching that as we speak. So we feel good commercial loan growth as you probably know there's a little muted given the run off run on but the pipelines are building really nicely and as the run off starts to slow as we deem mark.
Speaker Change: But you'll start to see better growth there and again, we have to finish the job on the re platforming and our regulatory remediation and where we're doing well on that front is also so net net we feel good about the franchise and you'll hear more about it in a few weeks.
Speaker Change: Great. Thanks for the color Dave I appreciate it.
Speaker Change: Thank you.
Speaker Change: Question is from Mario Mendonca TD Securities. Please go ahead.
Speaker Change: So at first blush that big increase in formations seems I mean, it's disconcerting, but on closer review like page trying to supplement I can see that.
Speaker Change: The majority of it like a meaningful amount of it relates to that one credit and other services. So maybe help me understand what's going on there what what happened in the quarter that would cause you knew something was up with this credit because you built up meaningful performing something happened in the quarter that caused you to impair. It if you could just speak to what that was and.
Speaker Change: Then how do you get confidence that the collateral is good that you don't need to build more provisions against it.
Mario Mendonca: Hi, Mario its great and thanks for the question you really got to see noted right that a this quarter or are a significant pick up in gross impaired loans.
Mario Mendonca: Usually driven by this one account in utilities sector, you know that accounted for about $1 5 billion of the new formations and if you are you set that aside I would say new formations have largely been in line with where we've been traveling through the last few quarters you.
Mario Mendonca: You know this this account we've seen it are facing some headwinds and some struggles for the past year and we've been downgrading that along the way and that's why those downgrades in some of the kind of management overlay as we take on top of that have been the drivers for why we built up the stage tube.
Mario Mendonca: Loan loss reserves against that in prior quarters, but as many of these counts go at it progressed to a more kind of formal situation and its restructuring and that kind of triggered us moving it into a into impaired status this quarter and with the information that we glean through that restructuring processes and how we firm up our reserves to where we are there still is a degree of it.
Mario Mendonca: Certainty around this account, but I think the range of scenarios. We've considered in the workout process. Our teams are very close to the restriction that's going on there I think we feel pretty good about where we're pretty meaningfully in the range of where we think this lands in the coming quarters and granted it is common for royal to have like a billion and a half hold on a on a single credit as that mine.
Speaker Change: That seems high to me.
Mario Mendonca: Perhaps that's normal maybe royal is really that big and can absorb that sort of thing.
Speaker Change: I think that's also a very good question Oh, let me just start with a couple of comments, but they will turn to Derek on that too to give you a bit of context for the client situation here, but you are right like that.
This is an investment grade utility so naturally we will have higher colds. So those type of situations, but this is certainly beyond what I would say is a natural hold size for us on the larger end and when we get into larger hold is typically associated with kind of a transactional situation, where it might be more temporal in nature. Unfortunately things have deteriorated.
Speaker Change: During that period, so maybe Derek can provide a little bit more context on the on the background here.
Derek: Sure. Thanks for the questions Mario.
Speaker Change: Building on what Graham said I think he I think he is bang on that traditionally if you look at an investment grade name. We would have meaningful holds but this would certainly be a larger exposure than what we would have across the rest of the book.
Speaker Change: This specific client has been a very long standing client of the firm are going back multiple decades, we would typically support them through our revolver hold there would be meaningful size, but much smaller than the exposure we out here as Graham said at various points in time over that historical relationship.
Speaker Change: We've had a different.
Speaker Change: Different transactions or just moments in time, where the client needed a shorter term or more temporal increase a that was a situation here, where we had some bilateral exposure.
Speaker Change: For a period of time and unfortunately, given the way the situation deteriorated following our origination of that we ended up with an outsized exposure obviously at a time when it went into a more difficult scenario in restructuring.
Speaker Change: One quick thing on U S margin I was a little surprised to see that come down considering what we've seen from the U S. Regionals in their Q4 and all the chatter about better deposit dynamics rates higher for longer the U S. Regionals were talking about margins in a big way, but didn't see it wrong can you speak to that.
Speaker Change: Yes, Mario it's Katherine I'll take your question to city National I know you've talked about before is asset sensitive and so what you're seeing flow through the book is deemed a crazy state impact of the reduction in that rate and so that's what you would have seen on the deposit side as well as the outbound side, we've got hedging in place to lead.
Speaker Change: <unk> secured two that downside environment and the rates are and so as we go forward, we actually expect to see.
Speaker Change: The ability of that margin slightly increased go for it.
Speaker Change: I would just say we have a slightly higher beta clients obviously it was.
Speaker Change: I thought the high net worth clients interest bearing accounts, so, whereas the regionals would have.
Speaker Change: Like we do in Canada, a greater share in noninterest bearing accounts.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question is from Brian.
Speaker Change: Bank of America.
Speaker Change: Go ahead.
Speaker Change: Good morning.
Speaker Change: I guess, maybe just sticking with the margin got suddenly if I heard you right you talked about.
Speaker Change: When you gave your NII guidance that mortgage MGIC split to look better.
Speaker Change: Talk to us in terms of is that margin expansion in Canada.
Speaker Change: Given by just balance sheet dynamics hedging et cetera, or is that also a reflection that competitive environment is well behaved.
Speaker Change: At the moment.
Speaker Change: I. Thank you for the question eager hand Hill.
Speaker Change: Speaking to the margins that you would have seen I play out this quarter for Canadian banking, you're Bang on basically the dynamics that we saw that's why they are increasing spreads do in mortgages and NTIC friends at least it came in better than what we expected it not flying to driver in increasing our guidance for the.
Speaker Change: Product mix shifts and you would have heard me in my comments, Racine and positive shift with GIC, basically being largely flat quarter over quarter, but the non maturity deposits and up 3% quarter over quarter and with that she yes, it's definitely accretive to our margin on the competitive front.
Speaker Change: I think that is still something that is definitely a plane is again I noted in my comments, where we're seeing the competitive pressure, but not the same degree as what we had forecasted.
Speaker Change: Yeah, maybe just a couple of.
Speaker Change: It's Erica just a <unk>.
Speaker Change: Couple of sentiments on the competitive dynamic I would say that.
Speaker Change: In both of those markets. We it remains a very competitive I would say that we think about how we're going to ensure that we serve the needs of the Canadian or the RBC customer and how we win and so what you're seeing in the dynamics in this last quarter is our ability to really do a good job.
Speaker Change: But managing that price to that to the end state consumer while winning the volume that we that we want and in the marketplace and that we expect you know that intensity in the competitive nature of that I mean in the mortgage business, we're heading into the spring market. We always see the dynamics of the spring market play out differently than than other times in the year end.
Speaker Change: So where we're ready and prepared for the intensity to continue.
Speaker Change: Got it.
Speaker Change: A quick one for you how do you manage the business right now is the marching orders to the coops play offense or defense or are there different order depending on the market just give us a sense given me even during the call the new headlines on tariffs I'm, just wondering how you're going about.
Speaker Change: Putting.
Speaker Change: Let me go back right now in terms of growth for us as a.
Speaker Change: Managing for a photo of a downside scenarios.
Speaker Change: Yeah, It's a great question and I think we come off constructive markets. We have you know these past.
Speaker Change: Possible scenarios going forward, but we remain hopeful that we find the outcomes here that are that don't do damage to both economies. So we are we are still helping our clients grow not every clients pulling back some clients are pulling back but there are many clients, they're still moving forward with confidence as they have business models that orange.
Speaker Change: Aren't affected by the overall scenario you've got to believe that when if there's that much damages done on both sides with across the board tires, but hopefully we find a better solution than that and we can move these issues forward without doing severe damage to both economies, particularly the U S economy. So.
Speaker Change: We're in a S.
Speaker Change: Some of our clients are being more cautious obviously and we will take their cue, but youre going to see you know I think that's.
Speaker Change: Pretty strong opportunities across a number of areas as well so we are.
Speaker Change: We are balanced in our approach and you know what if things deteriorate, we'll will review that.
Speaker Change: But right now where we have a lot of momentum and we're going to continue.
Speaker Change: To serve our clients as they need.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you next question is from monarch Raman pumps Scotia Bank. Please go ahead.
monarch Raman: Hi, good morning.
monarch Raman: David as we think through the worst case scenario if the tariffs I'm just curious your perspective in terms of what's a bigger challenge tariffs or COVID-19 both.
monarch Raman: From the overall economic perspective in RPC specifically.
monarch Raman: I think it depends on you know.
Speaker Change: It's cold, but it was really difficult at the beginning is as this could be in that there was enormous uncertainty and managing uncertainty is where the challenge lies so when we entered COVID-19 and in March and we started shutting the economy down and we didn't understand the nature of support programs and how people would get through that it was it was incredibly uncertain certain and stressful.
Speaker Change: If there are across the board tariffs then we will have a similar kind of trajectory that will have to figure out what's the impact what's nature of support programs coming out how what was the duration all of that was uncertain in the pandemic and hopefully we can clarify that uncertainty so managing uncertainty.
Speaker Change: What we do we plan for scenarios.
Speaker Change: So I can't say one's harder than the other they both have a lot of similarities in that you know the impactful will range mountain.
Speaker Change: Graham set in time, the tariffs around the nature of the terrorists, whether they're broad based or not are more and more specific which is more likely scenario.
Speaker Change:
Speaker Change: You'll go through a period of uncertainty while you'll work through the world is not going to collapse overnight.
Speaker Change: So it's very different so this should be more manageable at the end of the day we're.
Speaker Change: We're not shutting the whole economy down like we had to.
Speaker Change: During COVID-19, so I would expect whatever the scenario is this should be more manageable.
Speaker Change: Got it so you're saying like.
Speaker Change: No longer a longer it will take longer to play out I'm just tariffs now.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Next question is from Gabriel does Shine National Bank financial Please go ahead.
Speaker Change: Hey, good morning, just a couple on the performing provision. So the you know the actual performing piece of that was low but the because you released some.
Speaker Change: Students to book into stage three for that one loan can you give me.
Speaker Change: And the number of stage two releases associated with other count and then the.
Speaker Change: You gave some slide 36, I think it is where you're kind of giving us some a sense of the economic scenario was underperforming your performing ECL and if I look at the pessimistic one with.
Speaker Change: 7% GDP contraction of 10% unemployment that doesn't line up to the worst case scenarios, if we get the more severe tariff situation.
Speaker Change: You know are you able to tell me if you were to if that becomes your base case, what's the up tick in the performing AC all because it's not your base is now.
Speaker Change: Yeah, Gabe thinks it's grandma's good couple of questions. There. So on your first question.
Speaker Change: The utility account, we've been talking about so we had built up about $110 million of Oh allowances on that name over prior quarters, but most of that coming in in Q4.
Speaker Change: So that would have been released out of performing and then we added $165 million into phase III. So net net from a P&L perspective, that's $55 million, but from a okay.
Speaker Change: That reduced performing 100 tests, that's why I indicated you know absent that we would have been building in roughly the same range, where we have for the last few quarters.
Speaker Change: In terms of the scenarios, it's good quite a bit that you know going back to my comments. My speech you know we've looked at a whole range of scenarios here ranging from kind of very severe across the board tariffs global impact through two we looked at the different bank of Canada's scenarios that abid articulating them through the more targeted scenarios and I'm kind of impacts of things like the stool and <unk>.
Speaker Change: I mean, so the range of outcomes there is very very broad.
Speaker Change: We provided this slide just to highlight to you that none of those scenarios. We've looked at are outside what we already include in our first nine provisioning rate.
Speaker Change: For context, I don't think we've ever provided this data point before we already attributable to 35% weighting to those three pessimistic scenarios in our in our Oh I personally can construct right. So we already attribute a fairly significant waiting to these pessimistic outcomes and tariffs. We may just have a what could be the driver of them.
Speaker Change: I guess the other to your other question and just to give you a context right. We take the pessimistic the general pessimistic of those three scenarios.
Speaker Change: But when we can touch the most weight to and it's kind of in the middle of the part of the three scenarios, but it would be in line with kind of the higher end of the tariff considerations worried about if we shifted 100% to that you'd be looking at an ACL performing PCL increase of about 30%. So that gives you a marker on the high end of what possibly could play out I mean, I would just add.
Speaker Change: I'd answer the question earlier about comparing it to cool, but like again I don't see any of this having the same day one impact as Covid did as Steve said that was a complete shutdown of the economy. This is much more targeted but that's assuming that plays out kind of a worst case scenario, let alone kind of government actions et cetera coming into play on it. So hopefully that gives you a bit of context gave us a mercury there that helps a little bit.
Speaker Change: No that's great a very very clear I'm gonna have to reread, the Graeme hepworth sections of the transcript again, but the very helpful. Thanks.
Speaker Change: Thank you.
Next question is from Paul Holden from CIBC. Please go ahead.
Paul Holden: Thank you good morning.
Paul Holden: And just to be very clear sorry, just a follow up on that topic cramp.
Paul Holden: Very clear you Didnt increase performing PCL for potential tariff risk.
Paul Holden: You believe your pessimistic scenarios plus.
Paul Holden: The way you've put towards those pessimistic scenarios already adequate enough.
Paul Holden: Well for where we're at yes, I would say I mean, you've got other factors came into play this quarter.
Paul Holden: You know if we'd said tariffs aside and we looked at kind of everything else is playing as Dave commented, we've seen some better than expected strength in Canada. This past quarter of the two the inflation situation seems to be now contain and so all of that I'd, probably would have led us to a spot that we would've reduced our weights on the pessimistic this quarter because of the tariffs we did not do that and so in that sense, we didn't bill.
Paul Holden: For it but we certainly kind of held back on some releases I think likewise as we looked at it our baseline expectations are certainly on the more conservative end of the spectrum of what you see in the market and so all of those are kind of the factors that we considered this quarter, but I think they could be going forward, but we'll continue to monitor this and as we learn more we will empower our base case will continue to reflect on.
Paul Holden: The uncertainty and whether we think we need to build more for that or again, likewise push off the potential releases them, but we'll continue to evaluate that as we learn more through the quarter. Okay. That's helpful and that kind of leads to my second question. So no change in the impaired PCL guidance for the year. Despite obviously a high starts a year in <unk>.
Paul Holden: It is why you.
Paul Holden: You pray for your previous guidance I think incorporate an expectation that compare piece shows would peak second half here. So maybe that's attributed back to sort of Canadian retail is that is that still your expectation or maybe that has hit.
Paul Holden: It improves or change just because of the point you highlighted clean economy ex tariffs was actually starting to do better than previously expected.
Paul Holden: Right. That's a good good question and maybe just to kind of break down the guidance or a little bit in terms of where we're going to peak for the year will given what has transpired in Q1, primarily driven by that one account, we don't expect for the rest of year to be above that but if we normalize.
Paul Holden: For.
Paul Holden: The utility accounts it added about seven basis points to stage three this quarter.
Paul Holden: We still feel good about the trajectory for the rest of the year and that's why you know we're holding our overall forecast.
Paul Holden: We guided to in Q4 the same.
Paul Holden: The component parts, there I would say retail is still.
Paul Holden: With where we were in Q4, we continue to expect both unsecured and secured products to treat up throughout the year and so we would anticipate will peak out towards the end of the year wholesale.
Paul Holden: Getting harder to trend quarter to quarter, but we continue to expect wholesale to.
Paul Holden: Be at elevated levels, you know different business by business you'd be you'd probably see a more balanced scorecard couple markets. The same commercial being impacted more by the conditions in Canada and so you know that's probably more overall neutral throughout the rest of the year, but we put all that together I think we still feel good about the range. We're in and so it's somewhat supported by the.
Paul Holden: The strength of the economy to date.
Paul Holden: How the tariffs play into all of that I wouldn't expect the tariffs to have a huge impact on stage three in 2025, I think the impact of that really will play its way through into 2020 six.
Paul Holden: 2025, there'll be more of what we do with our stage one and two in terms of tariffs.
Paul Holden: That's great I'll leave it there for interest of time. Thank you.
Thank you. So last question is from Lamar peso Comex Securities. Please go ahead.
Lamar peso: Yeah. Thanks, maybe for Katherine just wondering if you could just double click on what gives you the confidence to take the NII guidance are higher I guess, just given the uncertain outlook of the impact of these terrorists on volume growth increased macroeconomic uncertainty and the potential implications on competition that cutting back.
Speaker Change: Mike mortgage spreads and there's some element of.
Speaker Change: Revenue synergies on HSBC incorporated in there or maybe FX benefits that you didn't mention or is it really or is it just down to you know these the benefits the non maturity deposits and spreads in mortgages and GIC is just that great. Thanks, Hi.
Speaker Change: Hi, Omar. Thank you for the question I, you basically hit all the key for driving or our guidance up for the quarter are the one item that I would add is accepted.
Speaker Change: The positive for us so just going back to the key drivers. It leaves me a positive results. We saw in Q1 from the spreads as well as the product mix effect.
Speaker Change: Your question on HST has always been included in our guidance and so no change on our assumption there going forward.
Speaker Change: But you're not adding in like revenue synergies expectations on an H S. P. C that you haven't quantified yet is that is that part of it is that a piece of it or no. That's not part of why we changed back to the reasons that I calculated it and what we're seeing in our results for Q1, and we felt it was appropriate to take up our guidance.
Speaker Change: Given the strong results.
Speaker Change: Okay, great. Thank you.
Thank you there are no further question would just thought at this time I would now like to turn the meeting over today's Mackay.
Dave Mckay: I just want to thank everybody for their questions are great questions. Obviously, we understand the focus on the credit side, but I do want to bring in you know the messaging back to just.
Speaker Change: Canadian economy performed well through most of the quarter are.
Speaker Change: Better than we thought a client activity was strong across all our businesses and I think you saw the benefit of that whether it was capital markets wealth management consumer Bank had an outstanding quarter commercial banks lots of client activity or compete level was very high and we gain market share that drove really strong revenue performance across the board with.
Speaker Change: The margin expansion margin expansion was really benefited from our strategic focus on deposits you've heard us talk for deposits for a decade, what's consumer deposits commercial deposits continue to build out RBC clear. So here more about at the end of March and therefore that it provides us with a nice tailwind coming out of Q1.
Into the rest of the year there is uncertainty obviously a lot of your questions around the uncertainty we face that uncertainty knowing that we have plans, we have stability or working with our clients. We're hoping for the best preparing for the worst and.
Speaker Change: Well really in a great position to help our clients volatility does help the business a number of the businesses as well and we've capitalized on in the capital market side. So feeling very good about how we started the year that you've heard from Graham.
Speaker Change: No great questions around where we came on the credit side, a few lumpy issues there, but overall, we feel good about our book and how it's going to perform and continue to build the business and drive really strong shareholder returns. So thank you for your questions and look forward to seeing you next quarter.
Speaker Change: The conference has now ended up please disconnect your lines at this time and we thank you for your participation.
Speaker Change: This conference is no longer being recorded so it closely Hosni. Please also as you see.
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