Q3 2019 Earnings Call

August 21, 2019

Done by your meeting it's about speaking good morning, ladies and gentlemen, welcome to RBC 2019 third quarter results Conference call. Please be advised that this call is being recorded.

I'd like to turn the meeting over to 19 on its head of Investor Relations. Please go ahead Ms Dawn.

Thank you and good morning.

Speaking today will be Dave Mckay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graham Hepworth Chief Risk Officer.

Then we'll open the call for questions to give everyone a chance to ask a question. We ask that you limit your questions and then re queue. We also have with us in the room, Yeah Mclaughlin group had a personal and commercial banking, Doug Guzman group head wealth management, and insurance and Doug Mcgregor Group head capital markets and Investor and Treasury services.

As noted on slide one our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties actual results could differ materially.

With that I'll turn it over to Dave.

Thanks, Dan and good morning, everyone. Thank you for joining us this morning.

Today, we reported record quarterly earnings of $3.3 billion.

Largely driven by strong results.

In our retail and wealth management businesses.

Our market related businesses also performed well considering challenging.

Market conditions during the quarter.

We continued to maintain a premium or we have 16.7%, but very strong capital ratio.

Oh, 11.9%.

Giving us flexibility to fund that strong organic growth and return capital to shareholders.

We're also pleased to announce a three cents increase to our dividend.

Bringing our quarterly dividend to dollar five for sure.

Before moving to our results I want to touch on the macro environment.

Rising geopolitical risks and trade tensions are having an impact on both business and market sentiment worldwide.

This uncertainty is manifesting itself in downward trends in global interest rate.

Well there are risks to the excuse me for the outlook.

Current economic conditions in our core North American geography.

Remained solid.

Unemployment near multi decade lows and a continued resilience in a Canadian manufacturing sector.

Also a recent report finds that cannot admit the largest number of skilled immigrants in the always CD.

A contributing factor to both economic growth and household formation.

Our Canadian housing, we're seeing a more balanced supply demand conditions as policyholders appear to have engineered a soft landing, we're seeing positive developments in key markets, including a return to growth in Toronto.

And a healthy Montreal market.

As the largest of the big five Canadian banks and come back we are participating in the resilient growth of the economy.

<unk> leverage for the collaboration of our employees across the province, and all our business segments.

Furthermore, Canada has become an attractive technology hub.

Attracting top talent and investment dollars, including demand for office space, We are seeing large corporations opening their global headquarters in Canadian cities.

In a recent study ranked four Canadian cities in the top 20 protect talent in North America.

So against this backdrop I want to update you on a business segment performance.

Canadian banking reported record earnings this quarter underpinned by strong client driven volume and revenue growth.

At our Investor Day last year, we shared a story of how does a market leader growth.

For RBC, that's to create greater value for our clients.

Not only having grown but we accelerated our growth.

We are leveraging our scale to grow market share.

It gives me and thrive in this period of secular change.

Over the last few years, we've made significant investments.

And our digital capabilities.

Including my advisor and no me.

Our active mobile user base increased 17% year over year to 4.3 million this quarter.

And we added over 1 million active mobile users over the past two years.

We also continue to build out our sales capacity, adding over 300.

Client facing experts and our retail bank over the last year.

Including mortgage specialist and investment advisors.

Our consistent volume growth reflects Canadian Bankings franchise strength since the end of 2016, we have added.

Combined loan and deposit account balances of over $100 billion.

With RBC ventures, we continue to move beyond banking.

As part of the strategy, we recently acquired Smart Renault platform to enhance the home renovation experience of Canadian.

We now have 17 ventures and market in areas ranging from home search to supporting newcomers to Canada.

We also recently launched amply, a new loyalty platform.

With over 20 partner brands and while early days, we expect this and other ventures to further differentiate RBC.

Strengthen partner relationships.

And drive further client acquisition for the bank.

We're seeing strong growth in the number of registered RBC ventures users.

And similar to last year, we will provide an update to our investor day targets and our upcoming Q4 disclosures.

Our growth in credit cards remain strong and above.

The industry average.

This is a testament to the value of our clients get from our unique offerings.

We're also seeing increased momentum in our mortgage portfolio benefiting from additional sales capacity and new digital tools.

We remain prudent on our new mortgage underwriting with FICO scores in line with our existing portfolio.

And business banking, our strong performance has been driven by focus.

On high growth.

Hi, return sectors and regions, while operating with a consistent risk framework.

Our success has been underpinned by multiyear investments and top talent cash management solutions and technology.

We are excited by the potential of new capabilities for our commercial clients, including RBC go digital.

This new initiative.

With Microsoft provides a suite of turnkey technology and financing solutions to accelerate our clients' digital transformation.

Another part of our capital deployment strategy has been our journey to expand our portfolio of digitally enabled capabilities to reimagine. The role we play in our clients' lives.

This quarter, we acquired way paid a fintech startup to help our business banking clients save time and money with a secure and simple solution for their accounts payable processes.

Turning to wealth management, where we also reported record earnings this quarter.

We generated over $3 billion of revenue for the first time in this segment, reflecting both market appreciation and net sales.

Our clients continue to choose our broad range of products and advisory services in this challenging market environment.

Our leading distribution network and strong performance versus industry benchmark has resulted in 50 basis points of Canadian retail market share gains over the last 12 months.

This is a significant accomplishment in an industry with 1.6 trillion in AUM.

In fact, RBC global asset management has added over $10 billion long term Canadian retail net sales since the end of 2017.

The rest of the industry experienced aggregate net redemptions over the same time period.

We've also continued to invest in our industry, leading Canadian wealth management platform.

And we expect to continue to outgrow the market having added close to 30, new competitive hires this year alone.

Our us wealth management business also generated record earnings this quarter as we continue to invest in both our us private client group and city national businesses.

We have scaled our core businesses organically with both us wealth, a web and CNB loan growth up double digits from last year.

We expect strong growth to continue as we add client facing talent, including seasoned financial advisors and sales colleagues.

As part of this we expanded our commitment to serving the financial needs of our city national clients by adding to our sales teams across geographies.

We also recently enhanced our services to entertainment clients with the acquisition of film track, a leader and intellectual property rights management.

This builds upon our acquisition of his actuals.

Our insurance business delivered strong results highlighting the importance of our diversified business model.

This segment continues to generate high ROI, we earnings with a strong and diverse client base as develop long term relationships with our other retail franchises.

Investor and Treasury services had a challenging quarter impacted by difficult market conditions. Despite secular industry headwinds, we are increasingly focused on markets and products, where we can provide the most value to our clients. We will continue to find opportunities to drive efficiencies in this segment.

Onto capital markets.

The segment generated solid earnings of $653 million, despite a challenging market backdrop that saw lower client activity in global equities.

Also a reduction in global fee pools impacted in investment banking fees.

In contrast, fixed income trading revenue was solid across all regions.

And we're also driving increased collaboration across our capital markets businesses.

For example, RBC capital markets acted as M&A advisor and provide a committed debt funding to Sinclair broadcast group and supportive its announced $10 billion acquisition of the Fox Regional Sports network.

Overall, we delivered a solid quarter and I'm proud of the scale momentum we have built in our core retail businesses of Canadian banking wealth management and insurance, we are well positioned to continue providing value added advice and service to our existing clients, while attracting new clients with our market leading capabilities across our segments.

We are committed to balancing our investments to continue creating value for our clients and shareholders.

Yes, we will not lose sight of our focus on disciplined cost management and prudent growth.

Before I end my Mer My remarks, I'd like to recognize Doug Mcgregor as we announced this morning that Doug has decided to retire next year. After 37 years at the bank.

There will be more opportunities to recognize Doug, but I wanted to take this moment today to sincerely. Thank him for his many contributions to RBC.

As our investors know very well Doug has played a pivotal role in growing RBC capital markets from being the Canadian market leader to also being a top 10 global investment bank.

And under his leadership, our client relationships a strengthened.

Our competitive positioning has improved we've attracted and retained from the best talent in the industry.

And most importantly, Doug has led with strong judgment and integrity.

Im pleased that Derek Millner will assume the role of group head capital markets on November Onest and he will join our group executive.

Eric is currently global head of investment banking has been with RBC capital markets for over 20 years. It brings a deep experience and a strong commitment to our clients, which positions them well to lead this important business.

In addition, Mike book has been important appointed President of RBC capital markets effective November Onest, Mike will report to Derek Millner and he will continue to lead the global markets business and Trevor Treasury market services operations.

I'm also pleased that Doug Guzman group head wealth management, and insurance will assume leadership for Investor and Treasury services effective November Onest.

Francis Jackson, CFO CEO of Investor Services will report to Doug.

With that I'll now turn the call over to Rob.

Thanks, Dave and good morning, everyone. Starting on slide five we had strong third quarter earnings of $3.3 billion up 5% from last year.

Diluted EPS of 2022 cents was up 6% year over year.

Before I walk you through the segment results I want to update you on our progress relative to cost management guidance, we provided last quarter.

Given lower interest rates and the expectation of interest rate cuts, we are prudently focused on driving efficiencies and managing costs.

This quarter expense growth slowed to 2.3% year over year compared to 6.6% in the first half of the year.

About three quarters of our expense growth was from investments and transformation as well as front office and Salesforce staff. So we remain well positioned to continue to increase market share.

We continue to drive efficiencies, which create opportunities to invest in growth.

We reaffirm our guidance from last quarter and expect lower expense growth in the second half of the year.

Now turning to slide six our Cetone ratio improved 10 basis points to 11.9% as internal capital generation was partly offset by organic our WSE growth the unfavorable impact of pension and other post employment benefit obligations.

And share buybacks.

In addition to our dividend increase we bought back 1.9 million shares this quarter for a total capital return of $1.7 billion or nearly 50% of earnings.

Going forward, we expected combined impact of IRS 16 adoption securitization in counterparty credit risk will impact our cetone ratio by approximately 25 to 30 basis points in Q1, 2020, which we expect to fully absorbed through capital generation.

And we remain well capitalized to absorb the incremental domestic stability buffer increase of 25 basis points, which comes to effect into effect.

October 31 2019.

Now moving to our business segments on slide seven personal and commercial banking reported earnings of $1.7 billion Canadian banking net income of $1.6 billion was up 8% from a year ago.

This quarter, we saw strong volume growth across many of our products.

Residential mortgages grew 6% year over year as we continue to gain market share through increased originations and client retention.

Business loan growth was up 10% year over year growth, it's been across most segments and sectors with notable momentum in small and mid market commercial businesses.

And as Dave spoke to earlier and deposit growth was also strong this quarter up 10% across both business and personal accounts.

In particular, we saw an increase of 16% in personal G fees and deposit business growth of 9% as clients shifted towards deposits in response to macroeconomic uncertainty.

Our net interest margin of 2.80% was flat to last quarter.

Going forward, we expect NIM to potentially drop as much as four to five basis points over the next year, if the current interest rate outlook and market pricing holds.

Expenses were up 5% year over year due to higher staff related costs as we added client facing employees and increase our investment in technology.

Operating leverage in Canadian banking was 1.7% this quarter and 1.1% year to date.

Adjusting for last years gain related to the reorganization of interact year to date operating leverage for Canadian banking was 1.4%.

Turning to slide eight wealth management reported record earnings of 635 $639 million up 11% year over year.

Global asset management revenues were up 12% year over year.

This was due to higher fee based revenue on higher AUM, driven by market appreciation and net sales.

Excluding the prior years loss on an investment in an international asset management joint venture revenues were up 6%.

Canadian wealth management revenue was up 8% year over year as a result of higher fee based revenue driven by higher fee based assets from solid net sales from referrals strategic hiring and market growth.

Our non us wealth management efficiency ratio of 66.3% was down from 68.5% in Q3, 2018, improving 220 basis points or 90 basis points. If you exclude the previously mentioned impact of the prior years loss on an investment in Gam.

In U.S. wealth management revenue was up 6% year over year in us dollars driven by strong 15% loan growth at city National and higher fee based revenue in our U.S private client group.

City National continued to generate strong growth in net interest income up 14% year over year with pre provision pre tax earnings up 15%, excluding last years gain related to the sale of a mutual fund product and its associated team.

Deposits were up 6% year over year, and we're confident in our wide range of deposit initiatives will enable us to support the strong and prudent loan growth at city national.

Last quarter, we stated that we expected NIM to be range bound adjusting for eight basis point gain from recoveries on legacy loans this quarter.

Given the U.S. tenure bond yields declined to material 95 basis points since our last call and the Fed's recent 25 basis point cut.

City National NIM is likely to tick lower.

However, we expect to continue to drive strong net interest income.

Driven by double digit loan growth.

Moving on to insurance on slide nine net income of $204 million was up 29% from last year, reflecting increased favorable investment related experience and new longevity reinsurance contracts. This was partially offset by higher disability and life retrocession claims costs and favorable reinsurance contract renegotiations in the prior year.

Moving on to Investor and Treasury services on Slide 10 earnings of $118 million in this segment were down 24% year over year.

I NCS was impacted by lower client deposit margins driven by spread tightening.

We saw reduced client activity and our asset services business and lower funding and liquidity revenue driven by lower realized gains from the sales of security compared to the prior year as well as declining rates.

We continued to actively manage our cost base as a result of these efforts cost decreased 1% year over year, and we will continue to assess and act on efficiency opportunities.

On slide 11 capital markets earnings of $653 million were down 6% year over year as industry wide headwinds and lower client activity impacted revenues.

Corporate investment banking revenues were down primarily due to lower loan syndication activity and M&A across the industry.

Despite headwinds of a declining fee pools RBC rose to 10 in the global League tables for the fiscal year to date.

Mobile markets revenue was down 4% year over year MRD challenging market draft backdrop for both equities and fixed income trading as you may recall in Q3 last year equities had a strong quarter in particular with one outsized trade.

On the other hand credit trading was higher this quarter I'm positive mark to market on investment grade as well as credit spreads tightened.

Looking ahead, our investment banking pipeline remains strong for the remainder of the year.

In conclusion, we are pleased with our strong results this quarter driven by growth in our retail businesses and our market dependent businesses, despite industry headwinds and with that I will turn the call over to Graham.

Thank you Rod and good morning, everyone.

Starting on slide 13, our total Q selling loans was 429 million this quarter.

Equivalent to 27 basis points, who was comprised of $399 million in provisions on impaired loans and 30 million in provisions on performing loans.

To fill in impaired loans decreased by $36 million or four basis points from last quarter, mainly due to lower provisions in Canadian banking.

PCL and performing loans was 30 million this quarter, driven mainly by portfolio growth in retail.

Offset by seasonal critical improvements in the cards portfolio.

We have not materially changed or macroeconomic forecast this quarter. So there was some modest impact at the segment level. Overall this had a neutral impact on our allowances.

On a quarter over quarter basis, PCL and portfolio on performing loans increased by 24 million from last quarter.

I'd now like to provide a bit more detail on three of our businesses in Canadian banking, PCL and loans of $329 million decreased by eight basis points from last quarter, largely due to the higher provisions we experienced in Q2 and our commercial lending portfolio.

In wealth management PCL on loans decreased by 3 million from last quarter, reflecting relatively stable credit trends of city national and a couple of markets PCL and loans increased by $20 million from last quarter, mostly due to provisions on performing loans of 3 million this quarter compared to the release of provisions of 21 million last quarter, reflecting the change in macroeconomic forecasts noted earlier.

Provisions on impaired loans were largely related to one previously impaired account in the industrial product sector.

Additionally, as impaired loans in the oil and gas sector contributed to provisions this quarter.

Turning to slide 14, gross impaired loans of 3 billion decreased by two basis points from last quarter, largely due to high repayments in Caribbean banking and higher write offs in Canadian banking.

Both of the Q2, new impaired loan formations declined at a retail portfolio and were notably in our wholesale portfolio.

We continue to see new formations in the oil and gas sector as oil and gas prices remained under pressure this quarter.

But as expected the trend is moderating.

Overall, we remain comfortable or exposure to this sector represents only 1% of RBC is loan book is governed by borrowing bases and size of the proven reserves of the borrowers which provides good protection against credit losses.

The remaining new impaired loan formations that are wholesale portfolio were spread broadly across sectors and geographic regions.

Turning to slide 15, our Canadian retail portfolios were generally stable both in terms of provisions and new formations. This quarter notwithstanding the sold growth. Dave noted earlier. This reflects strong economic fundamentals, but also the strength of our underwriting standards, which gives us confidence that our portfolio will be resilient through the credit cycle.

In closing we are pleased with our overall performance this quarter, which remains in line with our previous guidance as we continue to benefit from the diversification of our portfolios will come terms of geography and industry as well as our prudent prudent approach to risk management.

With that operator, let's open the lines for acuity.

Thank you.

We will now take questions from the telephone lines. If you have a question and you are using a speakerphone. Please mr. handsets before making your selection. If you have a question. Please press star one on your telephone keypad to cancel the question. Please press the pound sign. Please press star one at this time if you have a question there will be a brief pause for participants register thank you for your patience.

And you first question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

Good morning, guys.

Hi, I just.

Just first question on on credit try heard Dave Your prepared remarks, and then just in terms of the credit commentary, but when I look at it.

Credit and tell us if this is not the right way to think about it but.

The wholesale loan growth over the last two years has been 26%.

Gross impaired loans or would that two year period have gone up 14%.

But the actual 11 for these losses have gone down to 458 from high Vol. Nine so just talk to us in terms of why you feel good about just wholesale credit in Canada, and within sort of push and banking that come to us and wide. These metrics are okay or should we.

Is it a fair pushback <expletive> Weil.

So it's not a much more higher for this portfolio for that.

So I'll make a couple of macro comments I'll ask Graham to go through the reserving exercise and why we're comfortable from.

From a strategic perspective, as we've talked about our loan book and our wholesale loan book is diversified across geographies globally.

Our hold levels are smaller, particularly in the riskier leverage finance often senior positions in the capital structure. So we've managed this book very prudently.

Overtime with great.

A single and diversification disciplined hold levels disciplined structure and we've seen this book performed well.

You referenced the drawn loan growth versus R.W.A. loan growth and authorization growth, which has been significantly slower in the last couple of years. So yes, while the draws have.

Given some of the bridge facilities, we put on that we've disclosed and Doug or Graham can give you more color if you like on that but certainly.

We've been I think prudently managing our risk weighted asset growth and our authorized exposure growth in the business. So yes, we remain confident in the business model and how we've managed it going into what looks like to be.

Somewhere near the end of a cycle as far as the appropriateness of our reserves all ask Graham to to make a few comments, yes, we on reserves in general I guess again, there's always sort of a couple of points certainly we look at.

So with stage three 2017, we certainly saw a very low levels of new formations and and recoveries in those periods and so we certainly would say that's more of a cyclical low and I think what we've seen in 2019 is a bit of a reemergence of credit card space and so.

The impairments we saw in the first half of the year all the water to know what we think will reflect some more normalization.

Our csthree allowances phase one and two is certainly driven by our macroeconomic forecasts and the wholesale space that can be more volatile factors like equity markets and oil prices interest rates, hopefully opex factors into that but as I said in my speech, we didnt change our macroeconomic forecast this quarter.

So we didnt make a material change in wholesale.

On the capital market side, we saw a fairly neutral growth in the loan portfolio. There. So that was an additive whereas in city national.

Commercial we did see growth there and our baseline reserves would grow with that and so.

I think each quarter I would just continue to reiterate some regards upgraded provided previously is that the baseline here is that our reserves. He is willing to reserves will grow in line with the growth of the loan portfolios and that will be adjusted for both credit quality and are macroeconomic forecasts.

More recently as we've seen interest rates come off that has near term benefits to this stage one into a near term expected allowances, although I wouldn't say, that's a signal of healthy sort of medium term macroeconomic environments.

So we're always balancing all those factors that we're establishing our reserves and overall this quarter as I said, we grew our reserves largely in line with the growth of our portfolio overall.

And just on that very quickly again.

I ask you to re queue, because we've got half an hour and probably lots of questions. So how can you repeat again fall. Thank you.

Thank you. The next question is from many grauman from Cormark Securities. Please go ahead.

Hi, just just a question on that stage, one and two.

Reserving thats.

So new for all of Us just understanding.

The fact that macro factors.

Positively impacted to Canadian banking this quarter and.

Acknowledging the GDP actually came in better than expected in Canada, but.

We have all of these.

Uncertainties that have really bubbled up over the last few months trade uncertainties driving a lot of negative sentiment I'm wondering.

Does that ever come into into play in terms of determining those stage one and two.

Provisions or is that.

Is that not to are these not.

Issues that feed into that calculation.

Oh, no absolutely the macroeconomics workout some move kind of uncertainties absolutely played into our reserves I think as we've outlined we consider five different scenarios in our reserving process on that look at fuel for the victory bunker environments to much more severe negative economic environments, and we weight those accordingly in UK reference to treat uncertainty to treat uncertainty has come not a new story in my mind, here's something that weve been reflecting in our forecasted our reserves for since we initiated our first nine effectively and and.

More recently as we focus more on the kind of China.

Use trade sanctions all the stories of it and factoring into our considerations, our forecasts and how we kind of wait those scenarios and ultimately establish our reserve. So absolutely. It does play a significant role in how we consider our loan loss reserves.

Thank you.

Your next question is from John Aiken from Barclays. Please go ahead.

Good morning, I was hoping you might to dive into the rationale for having an investor and Treasury services now roll up and turn into a Doug Guzman are we are we looking for incremental synergies between now and in his combined operations or is this more just more of an administrative change that you felt was appropriate.

Well I think we look at certainly opportunities to put a different lens and a different set of eyes on the business, which is always helpful. As a different perspective, so yes, we're looking for.

Doug to to build on the work that.

Doug Mcgregor is done and the team's done and and take this business and and look at strategic context of it and try to.

As we've talked about to improve on the performance.

Based on a number of challenging market conditions right. We've got a secular change around if the impact on our asset management clients weve changing rate environment.

We've got a changing client preferences around FX and others. So there are a number of.

Of secular wins coming across this business said I thought given.

So derik coming into a big role is opportunity for us to to us.

Guseman to insist to step up and take on a challenging business right now.

Great. Thanks for the color I'll re queue.

Thank you.

Your next question is from Steve Cherry Hill from capital. Please go ahead.

Hi, Thanks very much.

Broad I'm interested in your comments around margins you said that you could see four to five basis points of NIM downside over the next year.

Can you flush that out a bit more in terms of how many rate cuts that envisions.

If any I assume it does.

Does it does it assume a steeper curve if we do get cuts at the short end and I'd love. It I don't know how doable buses, but I'd love to get some color you talked about city national ticking lower.

Maybe this is ticking lower is that sort of immaterial tick lower and I think most importantly, if.

Given your rate expectations and outlook on the all in margin would be super helpful to the extent that's possible.

Okay, great. Thanks, Steve ill take those in order.

And on the Canadian banking margin I.

Hedged a little bit because listen we could potentially drop as much as four to five basis points and part of that is the the violent swings we're seeing in the interest rate forward markets.

In Canada, I mentioned, what how much the us is down versus our last call, Canada and just on the five years down 50 basis points.

On the five year versus three months ago. When we were on this call and so that's going to change between now and the end of next year and certainly what the foot what the forward curves are saying right. Now is 2.17 rate cuts by the end of our next fiscal year and a Canadian rate of 120.

Whether that's going to come to pass we'll see.

So we we factor all that in Theres pricing, but we do have.

A large portion of our Canadian banking book is five year fixed rate mortgages. So we tend to be slower when rates are going up in terms of NIM expansion and then slower on the way down when rates are cotton that provides a nice hedge for us from a revenue perspective, and you also typically see no as rates come down you see deposit growth, sometimes accelerate as we saw this quarter and we would expect that to continue.

And give us more favorable funding as well. So there is a lot of puts and takes and then competitive pricing can accelerate or decelerate, depending on how volumes are and whatnot and lately volumes have been strong and we've seen very strong volumes on a year to date basis, ending Q3, So thats why the impact is somewhat muted in Canada.

For our Canadian banking business in city National.

The rate changes had been even more violent if you will I mentioned, the 95 basis points on the 10 year.

You look at what the forward markets are saying.

4.2 cuts by the end of next year down to a fed funds effective rate of 1.08%. We certainly don't run our businesses. If that's a given but we do manage that business. If that comes to pass in and again. It's the same dynamics. That's a very strong deposit book, we had good growth. This quarter, we have a lot of opportunities there we've made strategic investments in technology with.

Yes.

With within our entertainment business multiple acquisition, so that we can again get that payments business and keep those core deposit accounts and that helps us fund from a funding mechanism. So if you, but if you look back at one was the last time fed funds was at those levels that was kind of the end of 2017 and NIM increase in sea National was was substantially lower than it was now from a net interest margin per percentage level. Now we also benefit from having double digit loan growth and we expect that to continue so that is going to give us the benefits of having an upward trajectory to our revenue targets and numbers. Despite a falling rate environment. So we think we're well hedged for that on the enterprise issue.

A lot of that is mix and so if you look year over year, Yes, we're down.

But across most businesses were up and so it's a mix issue and so we have seen a repo business grow at a faster rate than our core lending businesses in city national or Canadian banking, and so that puts downward pressure on the NIM at the top of the house, although the individual businesses are up and Thats, how we prefer to look at it individually as the product issues at very different risk return profiles.

Thanks, Michael I'll requeue.

Thank you.

The next question is from Doug Young from Desjardins Capital markets. Please go ahead.

Hi, Good morning, just I guess I was a little surprised by just the level of deposit growth you have shown in Canada, just given your market share and so and I know you gave what the growth was in G fees and hoping you can just unpack what demand to notice deposit was.

And just maybe unpack a little bit about what drove that and I know you've given some targets around ventures, and 5 million active users converted to Royal Bank clients.

Over a period of time, it sounds like you're going to give us an update to that target, but maybe you can kind of weave in how successful you've been in terms of capturing those clients as well. Thank you.

Yes, thanks for the question as Neil.

So I guess, there's a number of factors one weve talked in the past about.

Clients looking for security and and yield and that really driving swap out of some long term fund volumes into the G. I see so that's part of it.

On the on the savings accounts is the mass retail savings customer those are about mid single digit in both registered a non registered.

And then to your point on on new client acquisition that Weve referenced in the past we have seen good year over year gains over the last couple of years in terms of our ability to acquire that core deposit customer and those balances are about the same range sort of that mid single digit so thats really on the on the personal side on the business side.

Similar type of trend, we're seeing strong double digit on the GE IC portfolio basically for the same reason and then fairly fairly equal growth as we look at interest bearing in noninterest bearing.

A lot of good things going going on in the portfolio right now for the small business customer, which is really sort of a profile for the noninterest bearing deposit balances within our business account franchise and then use have rod had mentioned some of our commercial clients are just keeping keeping some of that capital.

At the ready trying to steer through some of this uncertainty so I think that would be.

Kind of just a walk through of the different categories.

Anything on the venture side, but that you can in terms of how you're tracking in terms of converting clients over into deposit accounts.

Yes.

So in terms of ventures I mean, obviously, we're in the early innings on the strategy. We're feeling that we've got some good green shoots in terms of the connectivity with clients across the ventures portfolio.

The ultimate end goal is to is to convert these into Joe.

The best case would be core deposit account holders one of the early success has been in the small business space. However, in our in our venture called owner and we've seen thousands of customers as they register that new business.

Through a quite a streamlined digital process take up our deposit account for business customers. So that's probably our best example, and as we mentioned in my speech will give you a more fulsome update in Q4 of bonds, a waterfall and or new acquisitions. So on that how the vendors are performing but we're pretty excited about the strategy.

Great. Thank you.

Thank you. The next question is from Sumit Malhotra from Scotia Bank. Please go ahead.

Thank you good morning, I wanted to start with Investor and Treasury services. Please so we've certainly seen the earnings contribution the revenue contribution move lower.

For the for the past number of quarters, when I look back at some of the.

Some of the reasons that you folks have highlighted.

Spreads on some of your high quality liquid assets.

Securities dispositions deposit margins declining.

All of this in some form or another it does speak to the impact of lower rates, which as you point out a couple of times on this call has only gotten worse in the last little while.

So when you do you think about this run rate that we're right now that are in this quarter's earnings of a $120 million is there any reason to believe that given some of the.

Factors.

This number is going to face continued pressure in the near term.

Should that be the expectation here or are there a few factors that you think are more transitory.

Oh I think.

When you look at that when you look at the performance of the business this quarter, but two thirds of the underperformance is around the factors that you just that you just mentioned it's around the what we call. The Treasury services side of the business, which is investing deposits and our HQ well, a and as a result of lower rates flat yield curve et cetera, it's become more challenging so.

I expect thats going to continue in the near term while though.

I guess, we've had a little bit of relief from that.

Over the last several days I think.

The other side of the business the Investor services side of the business some of the challenges have been around just customers.

Internalizing FX flow or using less of our securities lending businesses and and actually grinding on core fees.

That part of the business, we're managing that those challenges were managing by repositioning to a different client base.

More private equity.

In in in Europe , and we are going to reposition our cost base as well. So we're working on that real time so.

I would say on the core investor services side of the business.

Im less concerned about that on the tertiary services, we have some headwinds that we're just working through.

And the Treasury piece rods, given some context on this call for what.

The the new rate environment means for Canadian banking and city national but Doug.

Taking your comments into account.

Im hearing that the treasury piece is going to reflect.

This rate environment, perhaps further so based on on where long bonds have moved.

Well, so much long bonds as short rates.

Our industrial portfolio duration of less than two years.

And so things can change a little more quickly.

And then where rates go we're repositioning the book and we'll try to manage through it.

Maybe you could ask one on city national or re queue.

Q3.

Yes.

Thanks.

Thank you. Your next question is from Robert Sedran from see RBC. Please go ahead.

Thanks, excuse me good morning, Dave in your prepared remarks, you made a few comments about acquisitions that are I guess are really to support.

Organic growth some of the smaller things you've been doing that the last time, you talked about M&A at the bank level. It was more about how valuations were frothy and perhaps not very interesting I'm curious what valuations having come off.

And your Cc one ratio now all the way up to 11 nine if if the idea behind bank M&A, maybe something thats more interesting today or if you still think theres plenty of organic runway and you'd rather focus on buybacks and organic growth.

Yes, certainly the latter it's.

As we expected valuations have come off not only valuations have come off but I think with the large merger that we advised on expectation I mean BBCN Suntrust.

Expectations of premiums have also come off so you know relative valuations are better having said that as you know expectations and uncertainty around the future interest rate environment and economic growth have increased in line with that or as you see in the strong organic growth that we have in Canadian banking and city national in the U.S. and U.S. wealth management, that's executing on their credit strategy and.

A secured credit strategy executing on their advisory platforms drives driving anyway in the U M.

We're really happy with the organic growth our market expansion. So it still is first and foremost we have invested for growth in the United States and we're expecting to see that growth and produce that growth with elevated in a base that we have.

So I think Thats first and foremost.

And we're still going to be very cautious I think relative valuations will continue to come off and in the U.S. and therefore.

We are thinking about the right strategic opportunity I've talked.

Oh about some of the challenges that the U.S. mid sized bank space around funding growth and around technology platforms.

You must think those issues through would solve for those issues at the same time, so theres a number of moving parts that are continuing to drive us to focus on organic growth with a return of capital to shareholders and driving premium MRO, we and premium TSR from that strategy first and foremost and so something in that 50% total shareholder return payout ratio is kind of what we should expect.

No I think returning capital via share buybacks, obviously with their seats to one ratio is important and given that were towards the end of the cycle, we're being very conservative at our payout ratio around 45% and I wouldn't expect you in the short term to see that creep up a given the cycle that we're in.

So no I think largely through two share buybacks would be our primary choice at this point.

Okay. Thank you.

Thank you.

The next question is from Sohrab Movahedi from.

<unk> capital markets. Please go ahead.

Hey, Thanks have a bit of a detailed question I am just looking into.

Maybe for Graham I don't know, but when you provide that subsector.

For industry breakdowns up your wholesale book.

At three categories kind of stand out to me.

That have been driving the year over year growth actually quite a bit of to growth going back to.

Probably the last three years.

They are what you referred to as financial services financing products and investments.

Financing products are doubled from last year financial services are now second largest.

Two real estate.

Investments up five or 6 billion can you can you just talk a little bit about.

What sort of business.

Would this be.

Which went up your business segments would it be in support of maybe a little bit around that geography.

The type of fat.

Wu way that attracts and and ultimately the types of returns that these types of businesses.

Hi, generating I mean, I think the three of them collectively are up about $50 billion year over year and now account for about 2020, 1% of the wholesale loan book.

And I think of them as really at least based on the qualitative description. These are.

Leveraged.

Industry. So are you are you lending to the shadow market is that how I should be thinking about it.

Thanks, Yeah. This is Greg I'll, maybe start on that Bill do you turn to somebody like this certainly can provide a bit more on the growth and if you look at something like a.

Financial services.

So this would be a lot of our activity that we do with with funds for example, Uh huh.

So that could be anything from a private equity fund to mutual funds or to to.

Other kind of fund providers like that.

The balance of that a lot of that growth over the last few years has been in the cold capital call loans.

And that that a in terms of business attribution, we see that a across actually three of our businesses Oh CNBC National has a quarter ago fund client base that they support.

A couple of markets has likewise and I M. P. S. Through obviously there their fund servicing platform has strong relationships with funds and couple of coal into the product at all those businesses have been actively using a over the last few years and growing it's a you know.

Going to be the quality of that asset bases. I claimed pieces is very high quality. It is an investment grade credit quality, but as a well structured the product for us. So it's a product that we're quite comfortable with the the credit quality there and the growth is a is it's been a nice.

From a risk perspective.

The the financing products would typically be related to our securitization business and so that would be more of a couple of markets construct and investments. Likewise would also be a capital markets conscript typically.

So that's kind of where are those this is probably in the city within a couple of calls is probably be the probably the most notably driving growth within those.

But from a risk perspective, it's been a product that are quite comfortable with we turn over to Doug the comments on the business Robert spectacular.

Yeah, I would say in terms of the capital call loans I mean, some of the customers for that we're funding and really funding commitments from private equity investors or sponsors and the.

A recent example, where weve been putting more on would be Blackstone.

In Europe as an example in this brand pointed out.

The funding is is low leverage and a and high quality and so we're fine there in terms of the rest of the loan book growth.

In the investment bank.

You know our real estate continues to grow and similarly.

You know we have.

A very diversified portfolio across Canada, the U.S. and Europe , and it's largely to larger investors like Brookfield and Blackstone and other.

Large financial sponsors in that book.

A book is in in quite good shape.

I don't know what else to add Graham.

They're going to bring up all of that is just not to confuse I think sometimes there's some confusion that the the financial services piece on the couple of coal the ones that we make to the private equity sponsors that Doug was referring to is somehow leverage lending that's not what this is this is this is providing loans to the actual funds themselves not to the levered companies that they might be purchasing.

And as I said these are loans that are secured by maybe the couple of calls that they have on their Lps and these are high quality investors that these funds have and we really look through to that and that security to secure our position here.

I just want to clarify that so I think we've got a few questions coming on or before.

And geographically this would be a broad based or would it be mostly the most of the growth would be coming outside of Canada.

Mostly I would say a U.S. would be far and away the largest source of growth and portfolio. There at a more modest portion would be out of Europe very very limited much.

Thank you.

Your next question is from Mario Mendonca from TD Securities. Please go ahead. Good morning real quickly just on sort of similar type of question, but more on US commercial real estate is there something you're seeing in the horizon that would cause that to decline.

Substantially from quarter to quarter, because I guess down like 8% or was that mostly currency.

Yeah that book hasn't been a declining on the actual secured property mortgages, we have been taking some loans off against some rates that where we made loans into revolvers years ago, and we haven't seen the kind of the.

Performance. So we expected to see so we have been de marketing a bit around some of the read book.

But on the on the real estate mortgage book or large customers, we continue to grow and I mean the whole.

Capital markets loan book growth, though we're managing into a sort of low to mid single digit number and.

Some of that growth is occurring in real estate and U.S.

But you're not spending any there's no message here on credits.

Commercial real estate I'm, not I'm, not particularly fond of a small and clothes shopping centers, but away from that we are.

We're we're we're just fine and the performance of that book is really good. Okay. Just about just real quick question. If I could go to you for a moment and I know, there's a lot of moving parts here.

And the environment's changed in the last three months substantially are you are you able to provide an outlook.

For total bank earnings growth as you normally do in Q4 Im asking in Q3, because there's been so many changes are you prepared to talk talk to that.

There are a lot of moving pieces that Oh.

We've talked about in our prepared speeches on the come up in the queue in a this morning. So we start with significant momentum in the business and I don't think that should be lost on anyone the market share gains across our core retail franchises are significant volume growth is significant the revenue growth is significant and these tend to be momentum businesses.

Our core economy. Despite all the questions around the volatility in trade agreements and Brexit still remains strong employment remains strong. So we have good momentum, but we have headwinds coming into that momentum as all banks space.

We have you know a couple of businesses, particularly in Investor services and Treasury services that are underperforming that we're going to try to.

The turnaround, but we're carrying good momentum.

Into into these headwinds, having said that it's going to mean, we always talk about medium term objectives and meeting medium term objectives, you know for US both talk a little bit more in Q4, how we see that balance coming out but things are slowing as you can see across a couple of dimensions, but combining your organic growth with ability to return capital to shareholders were pushing around or medium term objectives and that's.

I think that is kind of where we sit right now we feel good about performance of our core businesses and with the strong bid pipeline and capital markets as we talked about.

We're we're building solid client franchise with long term clients I think that's our objective and we feel good about our moment that's helpful. Thanks.

Thank you.

The next question is from Gabriel the Shang from National Bank Financial. Please go ahead.

Good morning, just a clarification on the city national.

Excluding the Accretable yield looks like margins were down 13 basis points quarter over quarter and I just want to clarify what you mean by.

The margin will be range bound from from that level.

And then on Ikea, just to circle back to that business.

How you gave a good explanation of what two factors are weighing on that.

You know how how big is the negative carry if you will in the a and the treasury business relative to the just the customer slowdown in the.

Investor services business, and and how big is on liquidity portfolio lost.

All right.

My questions.

So.

Q3, so rod quickly on the dollar.

On NIM and then we'll give the idea sense and I will try to take another couple of months, yes, maybe just quickly on NIM I mean, we ended 2017 and in the high Twos to 96 ended 2018. It at 341 hit as high as 356 as you rightly adjusted for those for the FDIC loans were down about 335, now so I think I said range bound last quarter when rates were 95 basis points higher this quarter I would I tried to highlight that we expected to shift down.

And then I would just suggest that if you believe that the forward curve for the fed is going back down.

To the levels that we saw in 17, we could see it slipped below 3% at the end of next year. If that comes if that comes to happen.

As Dave highlighted the U.S. GDP has been strong and so you know do you believe that the fed is going to cut four or five more times between now and next October .

You know, it's hard to say exactly where that NIM is going but the trajectory is lower and it does move much more aggressively than our Canadian banking NIM.

On T.S. I'll turn to Doug real quick that a HQ only portfolios both $50 billion invested in a in a in the U.S. and Europe and Canada.

What else is there a negative carry no its not as well.

There's not a negative carry but we're not we're not seeing much spread between our cost of funds and the return on the age fuel a.

Which is the challenge.

And we'll take another question that began before nine.

Thank you.

The next question is from Scott Chan from Canaccord Genuity. Please go ahead.

Hi, good morning, just going back to cutting PNC. The the overall overall portfolio growth is pretty solid, but if I look at two personal helocs other personal which I assume is mostly auto.

It's been pretty flattish for a while some perhaps maybe give us an update on.

No kind of what you're thinking on those portfolios and the outlook.

Going forward.

Yeah. Thanks, it's Neil.

Yeah, we've talked about the HELOC there has been.

A trend of customers rolling out to the HELOC looking to fix in lock into the mortgage segment that continues.

In terms of the of the other personnel its a combination of what we originate through our branches in lines of credit.

And unsecured installment loans and then our auto segment about two thirds sort of direct through our branches and about one third in auto we've actually seen a return to positive growth in the branch originated credit.

Through some work we've done in our sales force and underlying credit strategies.

Auto would be we made some some changes to the strategy is they're just making sure. We we liked all the credit segments. We are picking up we had a bit of a.

A push to get some growth and we're seeing that flatten out you are coming off about 2% last quarter.

Down to about 1% so those would be the two segments.

Perfect very helpful. Thank you very much.

One more question.

Thank you.

And the next question is from Mike.

Fantastic from Credit Suisse. Please go ahead.

Hey, good morning, I have a question for Doug Mcgregor on the U.S. cap markets business.

Clearly a challenging quarter, but I'm just looking at the longer term trajectory in revenue in us dollars.

Hasn't really moved much of the past couple of years and I realize you made some changes in the business with respect to where you're allocating capital. So just maybe a two part question first are there more changes on the way in terms of where you're competing and second do you have a timeline in mind for when you might start to see a revenue growing again or is this something.

Should we be maybe thinking about the cost side.

To go to the bottom.

I mean, the revenue pool globally at least according to Dealogic is down 16% leverage lending is down double that.

Which is a decent business for us, but I think in the context of the other global investment banks Weve actually born pretty nicely here and as Dave said.

Actually the backlog.

In the investment bank, which has really been the challenges the investment banking.

Fees for this year, both really globally I mean in Europe , U.S. and in Canada, It's been slow and the backlog actually is really quite good. So in terms of just large deals that are going to transact over the next two quarters were in better much better shape than we were coming into this quarter or coming into the calendar year. So I would say depending on how the trading environment goes I think will be.

Probably doing better going forward.

Thanks for the color.

Hello, thank everyone for attending todays.

All and for your questions and you know the themes are this is a record quarter for RBC at $3.3 billion, driven by really strong client volumes revenue from our retail businesses Canadian banking Caribbean wealth management, Canada wealth management U.S. insurance, we had it.

As a couple of challenging outcomes and investor and Treasury services, but overall, we feel good about the momentum the client driven momentum and feel ready to but the challenge some of the headwinds that are coming out as thank you for your questions and look forward to speaking again in Q4. Thanks.

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