Royal Bank of Canada Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 25, 2023

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to RBC's Conference Call for the Second Quarter 2023 Financial Results. Please be advised that this call is being recorded. I would like to turn the meeting over to Arsim Imran, Head of Investor Relations. Please go ahead, Mr.

Operator

Imran.

Speaker 1

Thank you, and good morning, everyone. Speaking today will be Dave MacKay, President and Chief Executive Officer Nadine Ahn, Chief Financial Officer and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions are Neil McLaughlin, Group Head, Personal and Commercial Banking Doug Guzman, Group Head, Wealth Management and Insurance and Derek Nelner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially.

Speaker 1

I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and consider both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, We ask that you limit your questions and then re queue. With that, I'll turn it over to Dave.

Speaker 2

Thanks, Austin. Good morning, everyone, and thank you for joining us. Today, we reported 2nd quarter earnings of $3,600,000,000 or adjusted earnings of $3,800,000,000 Pre provision pretax earnings of $5,000,000,000 were up 1% from last year. We also announced a $0.03 or 2% increase Our quarterly dividend is part of our cadence of twice a year increases and commitment to returning capital to our shareholders. Net interest income was up 16% from last year, benefiting from solid client driven growth in Canadian Banking and wealth management as well as higher interest rates.

Speaker 2

Capital Markets That's yet another strong quarter, reporting over $1,100,000,000 in pre provision, pre tax earnings despite a challenging environment for Global Investment Banking fee pools. The revenue contribution was equally split between Global Markets and Corporate Investment Banking, reflecting the segment's well diversified business model. Our all bank performance This quarter reflected the strength and diversity of our leading client franchises and strong balance sheet. However, shifting client deposit preferences, expenses and provisions for credit losses point to an increased cost of doing business. Before I provide context on our key growth strategies and the expense trajectory, I will speak to what remains a complex environment.

Speaker 2

Markets are facing structurally different circumstances following the end of an era of low inflation, low interest rates and increased globalization. This is in addition to absorbing game changing challenges from technology and decarbonization, as well as more near term risks, including implications from U. S. Debt ceiling negotiations. While recent stresses in U.

Speaker 2

S. Regional banking sector appear to have eased, the fallout will likely include more liquidity and capital regulations a subsequent tightening of lending capacity. The Canadian Financial System is already subject many of these liquidity and capital requirements and performed exceptionally well through the recent U. S. Regional banking liquidity crisis.

Speaker 2

It appears that the magnitude and steepness of Central Bank rate hikes has started to reign in headline inflation. Given signs of softening consumer demand for discretionary goods and rising debt service costs, we continue to forecast a mild recession, partly due to lagging impact of higher interest rates on economic activity. However, with labor markets remaining Despite declining levels of attrition and job postings combined with higher jobless claims, we do not expect central banks to cut interest rates through 2023. It's important that inflation doesn't become anchored into the psyche of the economy. The importance of balance sheet strength comes to light these challenging moments.

Speaker 2

And it's in this environment that we strengthened key ratios, including ending the quarter with a CET1 ratio of 13.7%. Looking ahead, we continue to expect that our CET1 ratio We'll remain above 12% following the close of the planned HSBC Canada transaction pending regulatory approval. We expect the transaction to close in the 1st calendar quarter of 2024. This mutually agreed upon timeframe will help us ensure a smooth transition for clients. In addition, the purchase price is structured using a lockbox mechanism.

Speaker 2

And accordingly, all of HSBC Canada's earnings from June 30, 2022 to close will accrue to RBC. We remain comfortable with the synergy and accretion assumptions we made at the time of the acquisition. Another important pillar of RBC's balance sheet strength is the addition of a further $173,000,000 of PCL on performing loans this quarter. We've now increased our ACL and performing loans by over 20% since last year. We also have a diversified funding and liquidity profile, which includes our leading Canadian deposit franchise built on deep client relationships.

Speaker 2

Canadians appreciate the client value proposition that we offer, including RBC Vantage, our partnerships and leading digital banking capabilities. NOMI Forecast was recently recognized for best use of AI for customer experience in 2020 at the 2023 Digital Banker Awards. Furthermore, we entered into a strategic partnership with Conquest Planning to leverage its artificial intelligence platform to identify financial strategies for clients. Our clients also value our continuum of alternative offerings. In the current environment of higher interest rates and increased uncertainty, our clients are looking for both safety and yield.

Speaker 2

We continue to see a shift in personal deposit mix towards term GIC products. In the quarter, personal term deposits saw $10,000,000,000 of inflows, of which a third were from external sources. GICs have seen nearly $50,000,000,000 of deposit flow over the last 12 months alone. We're also seeing a shift in mix for business deposits at the same time as we're seeing continued competition for assets. While there's been a significant trade off to near term margins, we have gained new clients who provided valuable advice to deepen relationships, which will become increasingly profitable over time.

Speaker 2

Furthermore, we expect to retain most of these balances and look to support our clients in reallocating their assets into our leading investment franchises at the right moment. These deposits Also an added source of lower cost retail term funding as we continue to support our clients' financing needs. Our Canadian banking loan to deposit ratio relatively flat and near 100% over last year. While Nadine will get into the details, I want to provide my thoughts on the expense trajectory. Reported expense growth was 16% year over year.

Speaker 2

However, after excluding for acquisition and Macro related factors, expenses were up 8% from last year. The largest driver of expense growth this year has been higher headcount to support client needs as well as base salary increases. We are committed to actively reducing expenses We're using a number of different levers to do so. This includes deliberate actions that we've already initiated such as managing headcount growth through attrition and slower hiring, while also preparing for a complex transition with respect to the planned acquisition of HSBC Canada. The remainder of the core drivers of expense growth reflect inflationary pressure and importantly strategic investments to enhance our value proposition and infrastructure to drive future operating leverage and client driven growth, which I

Speaker 3

will speak to shortly.

Speaker 2

In addition to driving Strategic growth and accretive capital allocation, one of my top priorities is an increased discipline around costs. The entire leadership team is committed To actively executing our efficiency playbook, we are focusing on curtailing expense growth and prioritizing investments without impacting our ability to serve our clients, our opportunities or opportunities to attract new clients. I will now speak to key growth drivers across our largest segments. Starting with Canadian Banking, mortgages grew Activity is expected to continue moderating towards 2019 levels as limited supply and increased demand from immigration is muted by concerns around affordability. We expect annual mortgage growth to slow to the mid single digits.

Speaker 2

Earlier this quarter, we announced the acquisition of Ojo Canada, a fintech that supports Canadians at every stage in their home buying journey, including providing connections to real estate agents. We're also investing to enhance the efficiency of our mortgage lending platform. While credit card balances reached a record high of $20,000,000,000 with record new card openings, revolver levels remained below pre pandemic levels. We expect revolver balance levels to surpass pre pandemic levels by early 2024, which would have positive implications for net interest margins. Business loans were up over 15% from last year as we continue to see improving utilization levels in operating facilities and CapEx investments.

Speaker 2

The growth was balanced with the majority non CRE related. We expect business growth business lending growth will continue over the next few quarters. Moving to Canadian Wealth Management. Assets under administration were up 4% from last year, hitting a record level of $540,000,000,000 We also recently announced we will bring over all advisor teams from Gluskin Sheff. Part of the agreement also includes distribution of Onex alternative investment strategies and funds.

Speaker 2

And going forward, we will look to continue expanding our set of alternative asset strategies, which currently includes a partnership with QuadReal and our Blue Blade family of funds. Despite challenging market conditions, RBC Global Asset Management AUM increased from last quarter and last year, while also generating positive net flows in the quarter. U. S. Wealth Management AUA were also up from comparative periods.

Speaker 2

Advisor recruiting will remain a key source of growth for Wealth Management USA, We added over 20 new advisors this quarter. Since the beginning of fiscal 2022, we have recruited 135 advisors who are expected drive over $20,000,000,000 of assets under administration. We also look forward to future contributions from RBC, Bruin, Dolphin. And amidst the volatile backdrop in U. S.

Speaker 2

Regional banking, City National deposits were down from last year as clients put their money to work. But most importantly, deposits remained stable sequentially, evidence of the new client relationships and the strength of the RBC balance sheet. City National loan growth was up 14% year over year with our mid market strategy based on a diverse foundation of over 200 relationships. Going forward, we expect loan growth to slow as the focus increasingly shifts to improving business profitability, while we continue to invest in enhancing City National's technology and governance infrastructure. Capital markets generated $1,100,000,000 of pre provision pre tax earnings Despite declining global fee pools, which are down over 40% from last year due to the challenging economic environment.

Speaker 2

Investment Banking, we continue to invest in talent in key verticals such as technology and healthcare as well as across important coverage areas, including M and A and Equity Capital Markets. These investments are increasingly reflected in new mandates as well as in our market share, which has improved the 7th place so far in 2023, up from 10th through 2022. We're looking to strategically add further hires in key positions. And we're also building out our U. S.

Speaker 2

Cash management business, which we expect to provide a steady source of revenue and additional deposit funding capacity over time. We are excited about this opportunity and look forward to sharing more over the coming quarters as we look to launch it to market. We believe we can meaningfully compete in this space given our existing corporate banking client relationships and leading credit ratings. In Global Markets, we aspire to continue gaining market share over time. We are currently investing in technology to further modernize our client tools and infrastructure to drive scalable growth in the future.

Speaker 2

In closing, while we continue to operate in the challenging macro and operating We have momentum and are seeking meaningful gains across our core client franchises. We are focused on enabling future growth, including through our intended acquisition of HSBC Canada and to moderating our expense growth to sustain our premium valuation. Before I turn the call over to Nadine, I do want to express our support for Western Canada in light of the ongoing wildfires across the region. We have contributed to the Canadian Red Cross relief efforts and are supporting our communities, clients and employees in the impacted areas. Nadine, over to you.

Speaker 4

Thanks, Dave, and good morning, everyone. Starting on Slide 8, we reported earnings per share of $2.58 this quarter. Adjusted diluted earnings per share of $2.65 was down 11% from last year, largely driven by impact of prior year releases of PCL on performing loans. Strong client driven revenue growth of 20% year over year are up 10% net of PBCAE was largely offset by higher expenses resulting in pre provision pretax earnings growth of 1%. Before focusing on more detailed drivers of our earnings, I will highlight the strength of our balance sheet.

Speaker 4

Starting Our strong capital ratios on Slide 9. Our CET1 ratio improved to 13.7%, up 100 basis points from last quarter. Consistent with the guidance we provided in Q1, this quarter's increase reflected a 79 basis point benefit from Basel III regulatory reform. Next, turning to Slide 10. It's important to emphasize the diversity, strength and stability of our funding and liquidity profile.

Speaker 4

This quarter, we prudently managed to a higher LCR of 135%, up 5 points from last quarter, which translates into a surplus of $102,000,000,000 Our liquidity levels remain robust and provide us with flexibility to execute our strategy. Turning to our $900,000,000,000 client deposit franchise. Canadian Banking accounts for approximately 70% of total client deposits. Our Canadian Retail Banking franchise is well diversified, serving approximately 13,000,000 personal banking clients with a median checking account balance of $2,000 Furthermore, Over 85% of our mortgage clients have a personal banking account, increasing the depth of the relationship. In the U.

Speaker 4

S, as Dave noted, City National deposits remained stable quarter over quarter, And our U. S. Wealth management franchise has over $30,000,000,000 of sweep deposits. Across our North American corporate and commercial deposit franchises, we have long tenured relationship based clients that we support with strong advice and a deep shelf of products and solutions. The combination of our strong deposit base and robust capital position as well to continue funding future loan growth and meeting the needs of clients.

Speaker 4

Moving to Slide 11. Allbank net interest income was up sensitivity to higher interest rates as well as the benefit from higher volumes across many of our Canadian Banking and Wealth Management businesses. All bank net interest margin, excluding trading net interest income and assets, was down 7 basis points from last quarter, largely reflecting deposit trends in our North American Personal and Commercial Banking franchises as well as higher enterprise liquidity levels. On to Slide 12. We walk through this quarter's key drivers of Canadian Banking NIM, which was down 8 basis points from last quarter.

Speaker 4

The embedded advantages of our structural low beta core deposit franchise continued to come through this quarter, reflecting the latent benefit of recent interest rate hikes. NIM also benefited from changes in asset mix, including higher credit card revolving balances and strong commercial growth. While we have seen a slight widening of mortgage spreads from historically low levels, mortgage lending remains highly competitive. However, these benefits were more than offset by both the continued shift in deposit mix into term products, along with lower GIC spread, reflecting increased competition for non wholesale term funding. Going forward, we now expect low double digit net interest income growth for 2023.

Speaker 4

However, there are a number of variables that drive this outlook. Embedded in our guidance are modeled expectations for client behavior, including solid volume growth, A slowing in the continued deposit mix shift towards GICs and a favorable asset mix shift towards higher spread commercial and credit card loans. With respect to spreads, we assume continued intense competition for deposits and mortgages and flat interest rates. Any changes in the timing and extent of these spread and volume assumptions could have an impact on the trajectory of net interest income. Turning to City National.

Speaker 4

NIM was down 22 basis points from last quarter, mainly reflecting an adverse funding mix shift into interest bearing deposits as well as the full quarter's impact of last quarter's higher FHLB borrowing. This more than offset the significant benefit of Fed rate hikes on City National's Asset sensitive balance sheet. Moving to Slide 13. Non interest expenses were up 16% from last year. Approximately half of this growth was driven by acquisition related costs as well as by macro driven factors such as FX and share based compensation.

Speaker 4

Beyond these factors, the core drivers of organic expense growth were investments in people and technology. Salaries were up 20% from last year as investments in our people reflected FTE growth of 10% year over year as well as inflationary impacts of the higher base salaries announced last year. This trend was most evident in Canadian Banking as elevated hiring to service increased client needs and to offset higher than average employee attrition rates has led to FTE being and building our product capabilities that Dave highlighted earlier as well as higher costs in support of increased activity, including trade execution. At City National, we continue to make investments in people, processes and technology to enhance the operational infrastructure in support of the bank's next leg of growth. More broadly, business development costs such as marketing and travel expenses We are increasingly focused on controlling expenses through various levers, including actions to manage headcount, while also curtailing discretionary spend.

Speaker 4

We are also taking action to centralize certain operations, rationalize vendor relationships and prioritize certain application development spend. Looking ahead to the second half of the year, We expect adjusted all bank expense growth, excluding acquisition related costs and share based compensation to decelerate to the mid single digits. In Canadian Banking, we remain committed to leveraging our scale in achieving a sub-forty percent efficiency ratio. Moving to our segment performance beginning on Slide 14. Personal and Commercial Banking reported earnings of $1,900,000,000 this quarter with Canadian Banking pre provision pretax earnings up 11% year over year.

Speaker 4

Canadian Banking net interest income was up 16% from last year due to higher spreads and solid average volume growth of 8% perfecting balanced growth in loans and deposits. Non interest income was flat year over year as higher service charges and foreign exchange revenue driven by higher client activity, was offset by lower mutual fund distribution fees, reflecting the challenging market conditions, which weighed on average mutual fund balances. Turning to Slide 15. Wealth Management earnings were down 8% from last year due to higher PCL on performing loans and elevated expense growth in U. S.

Speaker 4

Wealth Management. In contrast, Non U. S. Wealth management expenses were largely flat year over year, excluding the impact of RBC, Bruin Dolphin. Revenues were up 11% year over year, aided by robust net interest income growth of 25%, reflecting the benefit of higher rates in both Canadian Wealth Management and U.

Speaker 4

S. Wealth Management. Global Asset Management revenue decreased, primarily due to lower average fee based client assets on the back of softness in global markets. Despite challenging market conditions, Net sales encouragingly turned positive, driven by flows into institutional long term and money market funds. Turning to Slide 16.

Speaker 4

Capital Markets earnings were up 10% year over year, reflecting strong performance amidst volatile markets and the benefits of a lower tax rate. Investment Banking revenue was up 4% from last year as a reversal of underwriting marks and increased client activities in municipal banking were partly offset by industry wide declines in global fee pools amidst macro uncertainty. Global Markets revenue was down 3% from last year as lower equity trading revenues across regions was largely offset by broad based strength in fixed income trading. Lending and other revenue was up 17% from last year, reflecting strong results in Transaction Banking, underpinned by margin expansion and higher lending revenue driven by mid teen loan growth. Turning to insurance on Slide 17.

Speaker 4

Net income decreased $67,000,000 or 33% from a year ago, primarily due to higher capital funding costs. To conclude, we are confident that the strength of our capital, credit and funding and we are committed to driving towards our objective of positive operating leverage. Our full management team is focused on expense optimization and moderating our expense growth in light of the rapidly changing macro environment. With that, I'll turn it over to Graham.

Speaker 3

Thank you, Nadine, and good morning, everyone. Starting on Slide 19, I'll discuss our allowances in the context of the macroeconomic environment. During the quarter, we saw elevated volatility stemming from issues in the U. S. Regional banking sector.

Speaker 3

However, the trajectory of the overall macroeconomic environment was consistent with our expectations. Inflation continues to moderate and central banks appear to be nearing the end of their rate hiking cycle. Relative to this time last year, the probability of more severe in interest rate outcomes has reduced. That said, borrowers have been dealing with a higher rate environment for several months now. We are seeing insolvencies, impairments and losses increasing toward longer term averages.

Speaker 3

The full impact of higher rates in the economy will take time to translate into credit losses. We are still in the early stages of the credit cycle we've been expecting for some time. As a result, we built reserves on performing loans for the 4th consecutive quarter. This quarter's provisions reflect the impacts of increasing levels of delinquencies and credit downgrades, lower forecasted housing and commercial real estate prices and portfolio growth. In the retail portfolio, most of this quarter's provisions on performing loans were taken on credit cards and unsecured revolving loans.

Speaker 3

Our credit losses have been the fastest to normalize consistent with the traditional credit cycle. In the wholesale portfolio, a majority of Provisions of performing loans were taken in commercial real estate. As I discussed last quarter, risk in this sector continues to increase driven by higher interest rates, weakening macroeconomic factors and behavioral trends. Having said that, our commercial real estate portfolio is well diversified and has been originated to sound underwriting standards support of a strong client base. With additional reserves added this quarter, our ACL on performing commercial real estate loans has increased 77% from a year ago.

Speaker 3

Remain sufficiently provisioned noting our IFRS 9 downside scenarios reflect the decline in commercial property values ranging from 15% to 40%. In total, our allowance for credit losses on loans increased by $328,000,000 this quarter to $4,800,000,000 Moving to Slide 20, provisions on impaired loans were up $84,000,000 or 4 basis points relative to last quarter. I would note that our PCL ratio of 21 basis points remains below and historical averages. In our wholesale portfolios, provisions were up $74,000,000 compared to last quarter, with increases in capital markets and the Canadian Banking Commercial Portfolios. So far this year, the majority of our losses in the wholesale portfolios have been from clients that had issues prior to or due to the pandemic.

Speaker 3

Rate increases have subsequently acted as a catalyst for these borrowers to become impaired. As we move further into the credit cycle, we expect to see losses driven by more systemic In our Canadian Banking Retail portfolio, provisions increased by just $10,000,000 quarter over quarter. This portfolio continues to benefit from persistently low unemployment rates and elevated client deposits. Notably, provisions on impaired residential mortgages were lower this quarter the rate environment stabilized and clients continue to prioritize payments on their mortgages. As expected, a large majority of the PCL impaired loans was driven by credit cards unsecured lines of credit, which as I noted earlier, is consistent with expectations from a traditional credit cycle.

Speaker 3

Moving to Slide 21. Gross impaired loans were up $294,000,000 or 3 basis points this quarter, with the increase primarily driven by Capital Markets and Canadian Banking. This marks the 3rd consecutive quarterly increase in gross impaired loans. Our GIL ratio of 34 basis points remains below pre pandemic levels. Initially, new formations decreased compared to last quarter across all our major lending businesses.

Speaker 3

To conclude, we continue to be pleased with the ongoing performance of our portfolios. As expected, our PCL ratio on impaired loans continue to increase, remains below pre pandemic levels and historical averages. Impact of inflation and higher rates is expected to play out over a number of years and we are still in the early stages of the current credit cycle. We expect PCL and impaired loans to continue to increase through the remainder of this year. Last fall, I guided toward a range of 20 basis points to 25 basis points for PCL and impaired loans.

Speaker 3

We are expecting to come in at the higher end of that range for the year. Ultimately, the timing and magnitude of increased credit costs continues to depend on Central Bank success in curbing inflation creating a soft landing for the economy. We continue to proactively manage risk through the cycle and we remain well capitalized to withstand plausible yet more severe macroeconomic outcomes. And with that operator, let's open the lines for Q and A.

Operator

Thank you. We will now take questions from the telephone lines. Thank you for your patience. And the first question is from Meny Grauman from Scotiabank. Please go ahead.

Speaker 5

Hi, good morning. I just wanted to touch on expenses. Dave, you talked about some of the levers that you have in that you have at your disposal in order to slow expense growth. One thing you touched on was attrition. My understanding is that companies are seeing attrition Rates come down very, very significantly, which makes sense in the current environment.

Speaker 5

I'm wondering what you're seeing and how significant Attrition can really be in your goal of getting expenses down?

Speaker 2

Yes, fair question. And maybe I'll go back. It's such an Important part of our overall construct of improving our premium performance. First, I think we have to acknowledge that we have a number of complex Strategic programs underway. HSBC, which is front loaded, but not all of HSBC's costs can be quantified within a separate For example, Neil would be carrying more call center employees and maybe some more branch employees just to Get ready for the conversion process.

Speaker 2

So there are some embedded costs in the business. There are the majority of the systems costs obviously we can isolate to So there are some carry on effects to getting ready and spending all that money upfront to get ready for an HSBC, We see a smooth HSBC conversion. We are still seeing attrition to your point. It is slowing. Having said that, we've seen our numbers turn negative month over month.

Speaker 2

So I think there is a way to manage this down while This down while balancing the significant strategic programs we have in front of us. Don't forget, we're also in the process of selling and Attaching our Investor Services business and IS Bank, which is a complex technology play. We've got Bruin Dolphin. So we have a number of strategic Initiatives that blend in a little bit. But having said that, we took Nadine's points on moving this down to mid single digits or better.

Speaker 2

We feel confident in managing all aspects of our cost base, including hiring. And like some other banks in the U. S, you've heard over the last This was a very difficult transition from the volatility and supply demand shortages in the market that were very prevalent last year. We had to react strongly in the latter half of twenty twenty two to staffing shortages given the technology Firms, the tech firms are hiring so aggressively in the latter part of 2022. We had to respond to that with aggressive hiring And anticipating high turnover rates persisting into the first half of twenty twenty three.

Speaker 2

Well, that was not the case. Almost overnight, the tech firm started laying off instead of hiring and therefore, attrition came off very rapidly. And Honestly, we overshot. We overshot by thousands of people. And some of those people are, as I said, are being are there to help us make the transition with HSBC and some will come off through attrition.

Speaker 2

So I think We were caught a little bit by how quickly the labor markets changed in Canada and in the U. S, but largely Canada. We're adjusting to that overhang right now. And we feel we can manage this through all the levers that we have, but we have a we're going to come at it Aggressively and if one method doesn't work, we will we have other plans and strategies to back that up to make sure that we address this. So Thank you for that question.

Speaker 2

It's an important construct to some of the challenges we faced this quarter.

Speaker 5

Thanks, David. And just to follow-up, just to understand the And the timing in terms of what's realistic given all the moving parts that you're talking about, what's the timeline for saying mission accomplished here from your perspective?

Speaker 2

We're definitely expecting to see more significant improvement in Q4, but Q3 will be a transition quarter. We still expect to have strong op level overall in the latter half of this year, but we're going to execute a lot of this in Q3 and we expect a much Better Q4, but Nadine, do you want to add to that?

Speaker 4

Yes. Obviously, given the headcount and Off of Q1, we've been implementing into Q2 some of the cost reductions we already spoke about, but that's going to take a couple of quarters To really start to impact, so that's why many were commenting that the mid single digits NIE growth will be for the second half, but staggered more towards Q4.

Speaker 5

Thank you.

Operator

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please

Speaker 6

I'll use the word chase, you might not, but it seems to me like Royal going out of its way to bring in more deposits to the bank. And Maybe you're not, but what is the motivation there? Is it market share? Do you want Do you expect to convert some of these customers to core banking customers? Or is it A mix of factors like the structure of your business.

Speaker 6

You've got a bigger wealth franchise. You've got a bigger independent broker business, the biggest in Canada. So some of the flows from wealth type and broker money that might have a disproportionate effect on your deposit growth and It's good, but it's also bad.

Speaker 7

Yes. Thanks Gabe. It's Neil. I'll speak to it. I mean, the first thing we'd say is you touched on it, which was new client Acquisition.

Speaker 7

So that aligns to the Investor Day goal we put out to grow that core checking account franchise. We do count that as Low beta, stable funding and that has been going exceptionally well. And as part of our the increased costs we've seen in the 1st couple Because last year, we had pulled back in some of that marketing and biz dev just didn't see the returns on it, whereas right now, we'd say we've had The best Q2 we've ever had in terms of new client acquisition. So that would be the first pillar. The second pillar would be just to your point On the franchise overall, we are we do have a very large financial planning business.

Speaker 7

We do benefit from GAM and the strong investment product manufacturing there. And so we are seeing this rotation that Nadine spoke of In terms

Speaker 8

of the

Speaker 7

GIC growth, now when you look at the GIC growth, I think it's important to call out about half of that growth has come from outside the company. So we're seeing a good portion of that being attracted through those advisory sales forces into the company. We're capturing that In the GIC product, which our full intention would be once we start to have an equity market that we will then put those clients into long term funds. And then about half of it is coming from internally From mostly savings and then some core checking. So that would be, as you sort of asked about the flow and the mix, but it would be a combination of new clients, External consolidation and then rotation internally.

Speaker 6

Okay. And then a quick one on expenses, just the way you display It's 16% growth, about half of that. I get calling out the HSBC acquisitions, but why should I Look at Brew and Dolphin in a distinct manner because it's in a revenue line as well.

Speaker 4

Agreed, From an operating leverage standpoint, you're absolutely correct. We're just trying to explain the NIE growth trajectory since The comparative on a year over year basis sometimes there are highlights.

Operator

That's all.

Speaker 6

All right. Thanks. Have a good day.

Operator

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.

Speaker 9

Good morning. If we go to Slide 15, where you show the decline in your wealth deposits. That 15% sequential decline in deposits is noticeable. It's a big number. Can you help me understand how you fund that kind of deposit attrition?

Speaker 9

Is that through Selling securities and maybe about where these deposits are going, presumably they're not leaving the bank entirely. Help me think that through.

Speaker 4

Thanks. It's Nadine. I'll take that one, Mario. So in terms of the deposit a lot of it is related to the deposit mix in City National. And so we have Attrition overall, moving the shift from non interest bearing into interest bearing.

Speaker 4

So we've managed that through some of our broker CDs. The loan book trajectory has come off of it. As you'll notice though, when you look at it from our balance sheet, when it comes City National, we do have, but we've increased from about 73% to about 88% our loan to deposit ratio. So what's happening there as it relates to the deposits coming off, you're seeing more of a shift into other forms of higher cost funding. So whether it be there's been an Increase in our FHLB that we noted primarily to increase our liquidity position overall.

Speaker 4

So it's not a case that we're actually having To reduce our asset base, it's more that we're actually increasing it from a higher cost of funding and that's where you would notice that You've seen the NIM drop on a quarter over quarter basis.

Speaker 9

That's the 22% or whatever, maybe not 22%, that's the meaningful drop in CMB's Margin is reflective of this deterioration in deposits that I referred to. Those you'd connect those 2

Speaker 8

presumably. Correct.

Speaker 4

And on a year over year, we also would have removed investor services from that as well, given moving that as a Full balance sheet base to available for sale. That would have been on a year over year basis.

Speaker 9

Okay. Then my follow-up my last question then relates to the LCR, that's again a meaningful increase of 5 points sequentially. Is there any way to size What that does to the all bank margin in a given quarter? When you take your LCR up 5 points, are you able to provide some kind of Estimate on what that means for the margin? Yes.

Speaker 4

So overall, you're looking at moving from about $88,000,000,000 surplus to about 102,000,000,000 And that's roughly at about a cost of you could think of it, Mario, around 55 basis points roughly. So from an Old Bank margin perspective, it wouldn't be as material, maybe 1 basis point in the quarter.

Speaker 7

Got it. Thank you.

Speaker 2

Just back on the deposits, Mario, if you look in the footnote on that page, over half of that move is that IS change that Nadine mentioned.

Speaker 10

Investor Services?

Speaker 9

Yes. On

Speaker 4

a quarter over quarter basis, the City National deposits We're flat, but if you think about it from the mix shift from an FHLB funding increase.

Speaker 9

Thank you.

Operator

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Speaker 8

Hi, good morning. Maybe for Derek, Capital Markets seems to buck the trend here. Hoping you can maybe talk a bit about the drivers. I think there was some impact from mark reversals, if you can quantify that. And I know it's tough to kind of pull up the crystal ball, but I'll throw it out You have a $1,000,000,000 pretax pre provision earnings target quarterly that you've kind of set.

Speaker 8

How do you feel relative to that Given the business pipeline, and then maybe you can mention just you're building out a cash management strategy here. How does that impact outlook as well. Thanks.

Speaker 9

Sure. Thanks, Doug. I mean, I'll start just with The macro drivers, I mean, I think overall where we feel we had a benefit this quarter was really, 1, the diversified nature of our platform that while we've seen Ebbing and flowing in activity across different products, the diversified nature of our business has helped us overall, with strength in some of the areas that have been a little bit more active. And then second, I think we continue to see benefits Some of the strategic changes and investments we've made over the last 3 years that are driving market share growth that's helping to offset at least Some of the weaker fee activity. So if I touch on specific areas, obviously, a very solid quarter in our sales and trading business that was really driven by Our macro business with the volatility we saw in interest rate and FX markets and then our credit business.

Speaker 9

And you may recall last year, We've got a sizable and very successful credit trading franchise that was a headwind in 2022 as we saw credit spreads widening, As we've seen a little more stabilization this year, that's a business that has obviously benefited us and done well. I think within our corporate banking business, we've been very disciplined with a moderate growth strategy. So we have seen A moderate growth in that business. It's a little more pronounced year over year, given the growth that we saw through 2022. And then with the addition of the transaction banking business into the Capital Markets segment this year, that's a business that has performed well against a higher Interest rate environment and the spreads we're earning.

Speaker 9

And then finally, on Investment Banking, as Dave touched on, we have We've been successful in continuing to gain market share year over year. We've moved up to 7th place. We've gained share across really all The core products and so that has helped offset a slower fee pool overall. And then one franchise we don't speak a lot about, but we have a very strong U. S.

Speaker 9

Municipal finance franchise and activity was quite good in the muni Over the quarter. So that was a position of strength. So it wasn't really one item. I think across the board, we had a number of businesses that gained share and performed well and the diversified nature of the business helped. To your question on the underwriting mark to market, obviously, again, Last year, that was a headwind for us as we took some fairly significant marks.

Speaker 9

As the market has improved and we've been disciplined around Our portfolio, we have captured some of that back, which has been useful. If you look at I I don't think want to disclose the absolute mark to market change, but if you look at any quarter, there's always some sort of one off items that mark to market Benefited us. We had some other things that were one offs that hurt us. Directionally, I would say maybe that's $50,000,000 of revenue In aggregate, that to the positive. So it certainly helped, but I don't think it was overly consequential in terms of the results.

Speaker 9

We're obviously pleased to hit the $1,100,000,000 target. In terms of your final question, I think, on just the outlook, overall, we feel quite good The business, the trading businesses are normalizing a little bit, but continue to operate at quite a healthy run rate. We continue to expect good demand for our corporate clients for credit. So the loan book revenue should continue to be quite steady. And then we are seeing some early signs of investment banking fee pools coming back.

Speaker 9

I don't think that that's going to be a hockey stick recovery by But we're certainly seeing DCM, ECM leverage finance activity start to improve post March. We've got a very healthy M and A backlog. Deals are always a little harder to get done in a more uncertain environment, but we've got certainly a healthy backlog that as things stabilize Should translate into greater transaction activity. And then importantly, we have a number of strategic initiatives. You referenced cash management that we're obviously excited about, But a number of things underpinning the strategy that we're optimistic will continue to gain market share and drive growth away from just what happens with broader fee pools.

Speaker 8

Appreciate the color. Thank you.

Operator

Thank you. The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Speaker 11

Good morning. I guess maybe a big picture question, Dave, Tying it back to the ROE outlook, you mentioned how quickly the environment changed over the last 6 months. As you are managing the bank today, you talked about attrition, capital, liquidity, just across all of these measures. What are you managing for? Are you managing for A mild recession, deep recession when you look out over the next year and is the outlook different for the U.

Speaker 11

S. Versus Canada? Just talk through all of that. And Within that framework, how do you think in terms of the resiliency of the ROE relative to where we are today?

Speaker 2

Yes, really important question. Thank you, Ibrahim. So we are still forecasting and managing to a mild recession, hence the series of tools that we're using to manage our cost structure around attrition. We still see strong demand coming from businesses and investments and we see a strong employment in the economy and therefore the purchasing power of an active Purchasing of our consumer clients is still strong. So we are managing to, as I mentioned in my comments, a milder, Shallower recession, given the high interest rates, the drag on debt servicing And the need for us to get strong control over inflation and get it out of an anchoring into Leadership and business psyche.

Speaker 2

So it's very important that we do that and that is the priority of our central banks and we support that. So in doing that And we are very much you saw our strong capital ratios. Our strong capital ratios allow us to grow organically and To acquire HSBC Canada remain above 12%. So I think that's a real strength of our balance sheet. There was a previous question around deposits, why you're getting deposits for the lifeblood of a bank and they allow us to continue to lend.

Speaker 2

We're the only bank that are match funded in Canadian dollars in Canada and the retail side, and that's very important. It leads to Better margins over time as you've seen. The movement of clients into higher cost deposits is a global trend, One that obviously you've seen in both sides of the border with ourselves, but we're retaining the vast majority of those deposits. And I think The point that we have to stress around C and B, which is really important is they were flat to slightly up Throughout that crisis in the United States with highly affluent and commercial client base, They maintained their belief in the organization and in CNB and we saw a number of new clients coming in. Notwithstanding That client segment tends to put their money to work and seek yield in the marketplace and you've seen that as a global trend.

Speaker 2

So we're managing That function as well as we think about margins and revenue profiles and adjusting our cost base to that. So Expect growth. We are expecting that margin impact that's come from shifting depositor Strategies, we have to adjust to that. It's come at us quickly along with the changes in volatility around hiring and cost structure there. Therefore, our strategy then is to continue to grow organically.

Speaker 2

We saw Good growth, we saw from very strong growth in capital markets and relatively very strong performance in our U. S. Wealth and Canadian wealth franchises. So very good organic growth in our Canadian retail franchise that will all be funded by the strong capital performance that we have. You saw our business commercial bounce back.

Speaker 2

So from that perspective, strong organic growth, we have to execute on a number of complex Strategic acquisitions, HSBC is a complex acquisition and all the work Happens upfront and as we've talked about publicly, the conversion and the close are on the same day and that will We expect to occur in early 2024, but all that work is happening now. And therefore, we're bearing the cost of that. We're bearing the effort of doing that, The complexity of doing that, while divesting of IS Bank, which is also a complex divestment, but good for our shareholders, good for Cassis shareholders And obviously, a moving Bruin Dolphin. And so those are all the moving parts, Ebrahim. Organic growth, we're very excited about the benefits that we've talked to the market about on the HSBC acquisition.

Speaker 2

We see the benefits there. We've affirmed those benefits as we've gone through A deeper level of integration work along that side and we think that creates significant shareholder value from an M and A perspective. I think you're seeing a unique opportunity for organic growth with the capital and liquidity that we've had and you're seeing a unique opportunity with ROI and bringing in A significant acquisition that will be very accretive to shareholders. So I think from that perspective supports kind of a premium ROE opportunity for us.

Speaker 11

And just on U. S. In terms of the market share opportunity, our role did a great job of Post GFC in the capital market side in the U. S, when you look at it right now, given what's happened with First Republic, SVB, Are there better opportunities in private bank, the regional bank turmoil, does that create some commercial opportunities? Like do you see those and like is RBC ready to act on those?

Speaker 2

Are you talking from an organic perspective? Yes, absolutely. We've run-in a number of new relationships from Both all those challenged banks and failed banks as you've mentioned and we'll continue to do so whether it's through teams coming in or clients approaching us And taking them on those accounts are starting to fund now. So absolutely there's a significant opportunity given the That we have to continue to grow organic. And that's our primary focus is to serve clients and integrate the HSBC acquisition.

Speaker 2

All that while remaining above 12%, I think it's a unique opportunity to create premium shareholder value and ROE.

Speaker 8

Thank you.

Operator

Thank you. The next question is from Paul Holden from CIBC. Please go ahead.

Speaker 12

Thank you. Good morning. First question for Graham. With your revised PCL guidance or pushing to the upper end of The range, how are you thinking about commercialcorporate versus consumer? And I guess the reason I ask is consumer Looks like it's still really strong for many reasons you've already cited, whereas we're seeing some pockets of weakness, I think, on the business side.

Speaker 12

So is there any clear

Speaker 3

Yes. Hi, Paul. Thanks for the question. I'm going to break those down. I would say On the retail side, I would certainly say retail has been trending consistent with our expectations overall.

Speaker 3

I would say this quarter that the some of the trends we were seeing there started to And we saw some improvements obviously in the delinquencies I quoted. Having said that, we do expect retail to continue to increase as we go throughout the year because we're going to see a second leg of an In terms of the employment environment, right? And so in our kind of baseline forecast, we do expect unemployment to tick up from the exceedingly low levels we're at right now. We're That kind of 5.1 range, we expect that to kind of get into the kind of mid-six range as we trend through the end of the year and into 2024. And so while we've had very strong performance there and so the recent trends have been good, we do expect that it will continue to increase as we progress through 2023.

Speaker 3

The wholesale side, certainly we saw a tick up this quarter. Wholesale is never quite as linear and quite as predictable. It will kind of move up and Down from quarter to quarter as we see certain files come in and are impaired. We had a period through 2021 2022, where wholesale was exceedingly low, right? We were at kind of near zero levels for a very extended period.

Speaker 3

And so last quarter to this quarter, are starting to see the implications flow through corporate a little more. I would say that's not unexpected, although it just won't be quite as consistent and linear as we're seeing on the retail side. So Again, on wholesale, similarly, we will continue to expect it to kind of trend back to more kind of longer term averages as we progress through the year. So the same economic factors will continue to play out in that space as we're seeing in retail, but it just won't be quite as kind of consistent as path to get there.

Speaker 12

And then anything worrisome on the commercial side at all?

Speaker 3

Commercial in Canada, you're saying specifically?

Speaker 2

Commercial either sort of either side of

Speaker 12

the border or really I guess both right like obviously there's been a lot of discussion on CRE and you provided some additional details there. Are there other pockets of concern on the commercial side?

Speaker 3

Right. I mean, I think you called out the biggest pocket of concern is certainly around commercial real estate. That's been an area of intense focus. We've been doing a lot of analysis and work there to make sure we're taking all the right actions in our portfolio. As I think I indicated in my comments, that has been that was one of the reasons we did increase our loan loss allowances, our performing allowances This quarter is in anticipation of kind of more challenges and more headwinds in that sector.

Speaker 3

It will take time to play out and you will see kind of Different markets and different spaces play out in different ways. But to give you maybe just a little context on kind of how we've kind of changed our perspective on Cree as a whole and maybe Put some magnitude around that. If you look at the ACL ratios we have around commercial real estate now versus the pandemic, they're about 2 times where we were pre pandemic. And so pre pandemic gives you some sense for what we were thinking about loss rates in a more normal environment. The aggregate portfolio now we kind of would expect more of a 2x run rate there.

Speaker 3

And certainly the U. S. Probably more acute within that. I think as we look at our ratios, U. S.

Speaker 3

Is about 2.5 times higher than what we would see play out in Canada. That's the mix of the nature of our client base. We have more of an institutional mix in the U. S. Than in Canada.

Speaker 3

But again, We've got, I think, very good client base. We've got good underwriting standards, certainly in the commercial space as a whole as well as in CRE. We tend to get a lot of guarantees from our clients. In That's about 95% plus for our portfolio is guaranteed. So our clients are very invested in kind of working these situations out and working with us.

Speaker 3

So we do expect to see headwinds in commercial real estate for sure. But overall, we do expect the overall commercial portfolio We'll trend back to more normal levels as we progress through the year.

Speaker 12

Great. In the interest of time, I'll leave it there. Thank you.

Operator

Thank you. The next question is from Lamar Prasad from Cormark Securities. Please go ahead.

Speaker 8

Thanks. This one is maybe for Dave, but the other group heads might want to chime in as well. I think you referred to increased regulation in the U. S. From the fallout of the sale of the U.

Speaker 8

S. Regional banks. I'm wondering if you can maybe offer your thoughts on how much of a magnitude these increased potential capital regulations, liquidity changes and Tightening of landing capacity will impact to oil's U. S. Operations.

Speaker 8

Are you guys actively making changes with respect to how you operate in the U. S? And then It sounds like it's a net positive for City National, but then what about the Capital Markets business?

Speaker 2

Yes, maybe I'll start and I don't know if Graham, you want to jump in on that side. So yes, as we look at some of the root causes to the challenges The banks under question based in the narrative back and forth between the industry and leaders in the regulatory side. We do expect to see some type of whether liquidity or capital rules or combined rules around Deposit concentration, overall liquidity levels, the nature of duration in Your asset portfolio, all the things that we account for, how you account for that in your balance sheet and charges to your equity base and AOCL, All those things that we do in Canada, we do expect to see and we should all expect to see and there's been a strong public narrative on it, Some of those changes and therefore that will have some industry impact on margins and on profitability and a requirement for, we would think at a minimum increased liquidity. That to some degree may also impact CNB. In addition, there's a recovery charge from the FDIC to the industry on the recovery costs of Signature Bank and Obviously, SVB to start and we haven't heard what that is for First Republic and it's a fairly material recovery cost that You'll see we expect CMB would be part of that over recovery charge even though a very small part.

Speaker 2

So from that perspective longer term, How does that impact the way we think? Certainly want to make sure you watch your concentrations in your depositor side. Doesn't really mean as much insured to uninsured, but overall, where do you have significant commercial or ultrahigh net worth concentrations? We saw those to be quite stable to very stable, while they were unstable at many other banks and we attributed that as do Other observers to the strength of RBC combined with CNB, but we do have to anticipate that there could be some regulation around that notwithstanding The enormous stability that we have that we'll have to absorb. So does that change your strategy?

Speaker 2

Maybe at the margin you're looking for everyone's looking for more operating deposits, more Treasury management deposits, lower beta deposits, the whole world is competing for that. So how strong is your customer value proposition, your customer profile? One of the reasons we're launching a U. S. Corporate cash management capability is to compete in a space that we We have a strong right to play given our relationships with large corporates.

Speaker 2

We're in their senior in their syndicates or AA ratings. So from that perspective, that don't think we can assume that we're going to be immune from it at the C and B level, but we have very strong ability We think to adjust for it and we will continue to plan for a balanced depositor profile over time. I hope that helps. It's an important concept that's evolving that we'll watch carefully.

Speaker 3

I would just jump With one extra comment there, Dave, you had asked about impacts potentially to capital markets. I mean, I would just remind you that kind of the standards that are being considered, the policy changes that Dave referenced are All standards and policies that RBC as a group is subject to inherently has to adhere to. And so in the U. S. Likewise, our U.

Speaker 3

S. Operations in aggregate It's been treated as a large bank and subject to things like CCAR, etcetera. And so capital markets has been kind of living in part of that for a long time. And so we would certainly expect Policy changes are uncertain at this point in time. Dave said, as Dave indicated, there are impacts at the margin, it would be more on City National Bank than Capital Markets.

Speaker 2

And we aggregate City National into RBC and therefore all of those positions are already aggregated into our balance sheet and our income So it just be how they're distributed with it internally wouldn't be a top of the house impact.

Speaker 8

Thanks. I'll limit myself to that just in the interest of time.

Speaker 2

Important question. Thank you.

Operator

Thank you. The next question is from Joo Ho Kim from Credit Suisse. Please go ahead.

Speaker 8

Hi, thanks. Just a quick number ones for me. That NII growth target of low double digit, Was that for all of 2023 or just the second half of the year?

Speaker 4

That would be a full year 2023.

Speaker 8

Okay, thanks. And just last one for me on your expense outlook for the remainder of the year. I'm just trying to get a sense of what the levers you have to dial this done and I think you've done a good job of Talking about on the FTE side, but just wondering if capital markets expenses could play a big role here. I do see over the last Few years seasonal decline in capital markets expenses from first half to the second half. So I'm wondering if we could see a similar dynamic play out this year and then whether that's a big driver of your expense growth outlook?

Speaker 8

Thanks.

Speaker 9

Yes, thank you. Good question. I mean, I'll tackle that a few ways. I think I would be careful a little bit looking at the last few years, because as we've discussed on a few of the prior calls, Given the volatility we saw coming through the pandemic and post, we saw more intra year movement in our Compensation accrual where in 2021, we had a sort of larger accrual through the first And we were able to scale that back in the second half. And then last year, with a number of the The environmental surprises and challenges we saw in the second half, it was the opposite.

Speaker 9

So we ended up having to increase our accruals through the second half. So the last 2 years, I would say the compensation was less linear throughout the year as we would normally like. And we are very focused on being More consistent or linear, if you will, on how we're accruing throughout the year. So I would just maybe caution away from looking at that too much over the last few years. I think in terms of our expense profile overall, I think first, we're actually there's more to do, We're reasonably pleased with our expenses in the Q2 where you saw revenue is up 5%.

Speaker 9

Our expenses were up 6%. So we did Negative operating leverage in Q2, but a number of initiatives that we've been implementing have kept NIE to a reasonable level, taking into account some of the strategic technology investments, cash management investments, other things we're doing. When you look at the second half of the year, given revenue environment was quite Weak for capital markets in H2 last year. We do expect very strong positive operating leverage in the second half. So I think we will continue to execute on some of our cost programs, but in a stronger revenue environment than last year, we expect that should contribute to very positive operating leverage in the second half.

Speaker 8

Thank you.

Speaker 2

I think we have time for one more question.

Operator

Thank you. And the last question will be from Mike Usmanovitch from RBCW Research. Please go ahead.

Speaker 10

Good morning. This one's probably best for Neil. I just wanted to go into the deposit growth since pre pandemic in Canada In a bit more detail. So one thing that I think is a bit surprising is Royal's underperformed the peer group a little bit on the demand and notice And then on the fixed term side, you've had a lot better growth than anyone else. So what's driven that underperformance In the demand and notice category in your view?

Speaker 7

We've actually been growing our checking market share. So Our core checking business in the Canadian Retail Bank is actually up over the last year. And I would say in the last while, if we look on a combined demand and Term basis, the market share is also up. So I think we do have a lot of confidence just about the momentum we see in consumer deposits. That would be the take there.

Speaker 7

And I think part of that is also related to the New Klein acquisition we spoke of. I had mentioned earlier, we've had very aggressive targets in terms of new clients. And after the pause We put in place during the pandemic. We're back out, playing offense, investing with that biz dev Expense to drive that new client acquisition and it's pulling well. So we feel quite bullish on consumer deposits.

Speaker 7

Just

Speaker 10

in terms of the mix shift, so if I look at your demand and notice as a percentage of your total Canadian deposits, 63% as of March, this is just the Aussie data. You're about 5% lower than you were pre pandemic and this is the lowest level that I can see since I'm wondering how this mix sort of what's the trajectory going forward assuming rates drop later this year, early next year? I'm just trying to understand, do you now have maybe for the foreseeable future less of a benefit of having that bigger Concentration in the demand and notice category then you maybe would typically see a benefit from. It looks like it's diminished a little bit. I'm wondering how that sort of moves from here.

Speaker 3

Yes. I mean, I've

Speaker 7

spoken to the consumer side, and I would say, just everything we would look at, we're seeing increased market share on both sides of that Quarter over quarter, year over year, we have seen, I'd say where we feel we don't feel satisfied is where we see the higher end commercial deposits and particularly where we service cash management in some of the larger corporates. We have seen about 100% rotation on our commercial and corporate deposit balances into those term categories. That would be one very strong trend there. And then we have seen our energy book. We've seen some large Large deposits move out for capital expenses.

Speaker 7

We've seen a couple of public sector Clients spread those deposits out. But other than that, I would need to sort of Really maybe take the question offline. Those would be the trends we're looking at.

Speaker 10

Okay. That's helpful. Maybe we can take it offline. Thanks for the color.

Speaker 2

Okay. Well, thank you. This is Dave here. Thank you for all the questions today. And I'll summarize kind of where we feel we came out over the 1st last quarter and 1st 6 months of the year.

Speaker 2

And I think On the real strong positive story is our core client franchises, very strong performance across the board from Derek and the Capital Markets team and hitting our targets and good momentum, our client momentum moving up to 7th overall and market share talks to The strategy really working, very strong performance, relative performance in our Canadian wealth asset management and U. S. Wealth franchises continue to execute organically, grow clients, growing AUA, AUM At high ROEs and really executing very well on our plan. Our funding continues to be a real advantage. And as Neel talked to, we continue to aim to match fund our portfolio.

Speaker 2

It's our real strength. We continue to gain overall market share in deposits as to the last question. We see more money in motion. Clearly, it's a global phenomenon, including our own client base, which tends to be an affluent client base in many parts of the organization. So strong volume growth, couple of areas can definitely do better as that were pointed out in the volume side, but our client franchise is healthy.

Speaker 2

We're building it for the medium and long term and we feel Very good. We have very strong capital. Capital, I think exceeded expectations, continue to build capital very well in a number of ways As we've guided you to and it allows us to do both organic and inorganic execution where we thought. Having said that, we were caught out on a couple Things which have hurt our results. 1, I answered at length.

Speaker 2

2, we didn't foresee this environment 9 months ago. We didn't see the volatility of deposits moving out of core demand into higher yield at that rate. It started before the U. S. Banking crisis, it accelerated during the crisis and that caused A real shock to our overall forecast and what the revenue would be off our balance sheet.

Speaker 2

And the second way we were caught and we have to adjust to is on our cost structures. We knew we were going to have these big programs are complex and expensive, but we did not forecast the rapid change in Hiring markets where we were hiring aggressively given attrition levels were 2x, 3x what they would normally be in the latter part of 2020 You only to see that stop almost overnight and we overshot. We overshot by thousands of people. It's a real drag in our cost structure. It's a big part as you can see in our Waterfall of the overall cost moving up 8% and we're committed to getting that down.

Speaker 2

And as Nadine walked us through, We have a line of sight to mid single digits and below. We're on that. We have a number of levers. But that's kind of the tail of the tape from my perspective, Strong client franchise, great opportunity with HSBC, Bruin Dolphin. We feel confident in executing against those benefits, But we got caught out on the magnitude of the revenue drop and the expense increase and we're going to manage that and we're going to manage it like all Good teams do and we're going to get hold of it and we're going to drive shareholder value.

Speaker 2

So thank you very much for your attendance today and your questions and we'll see you in another 3 months.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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Earnings Conference Call
Royal Bank of Canada Q2 2023
00:00 / 00:00