Royal Bank of Canada Q2 2025 Earnings Call Transcript

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Provided by Quartr
May 29, 2025
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Operator

Good morning, ladies and gentlemen, and welcome to the RBC's twenty twenty five Second Quarter Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Senior Vice President, Investor Relations. Please go ahead, sir.

Asim Imran
Asim Imran
SVP, Head of Investor Relations & Enterprise Performance Management at Royal Bank of Canada

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer Catherine Gibson, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions, Erica Nielsen, Group Head, Personal Banking, Shana Motogouchi, Group Head, Commercial Banking, Neil McLaughlin, Group Head, Wealth Management Derek Nelner, Group Head, Capital Markets and Jennifer Publicover, Group Head, Insurance. As noted on slide two, our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially.

Asim Imran
Asim Imran
SVP, Head of Investor Relations & Enterprise Performance Management at Royal Bank of Canada

I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. 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.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Thanks, Awesome, and good morning everyone and thank you for joining us. Today, we reported second quarter earnings of $4,400,000,000 Adjusted earnings were $4,500,000,000 and included $260,000,000 of earnings from the acquisition of HSBC Bank Canada. This quarter, we generated strong pre provision pre tax earnings of nearly $7,000,000,000 as we continue to execute the strategies we shared at our Investor Day. Adjusted pre tax pre provision growth was up 16% or $971,000,000 from last year, more than offsetting a prudent reserve build of $568,000,000 this quarter. Revenue growth of 11% year over year was underpinned by strong average volume growth in personal banking and commercial banking, as well as higher spreads in personal banking.

David McKay
David McKay
President & CEO at Royal Bank of Canada

We also reported robust fee based revenue growth in wealth management and strong global markets revenue in capital markets. Our results demonstrate the strength of our diversified business model and earnings power, as well as the value of the insights and advice we deliver for our clients as they navigate the uncertain macro environment. Our revenue growth is noteworthy considering the evolving market conditions. The strong performance was generated from a position of balance sheet strength, which continues to be through the cycle competitive and a strategic advantage for RBC. We continue to grow our core deposit franchises across our segments, including in Canadian Banking, where the loan to deposit ratio improved to 97%, helping fund loan growth in an efficient and stable manner.

David McKay
David McKay
President & CEO at Royal Bank of Canada

We ended the quarter with a common equity Tier one ratio of 13.2%, well above regulatory minimums, translating to excess capital of approximately $5,000,000,000 relative to a mid-twelve percent range. Underpinned by our robust capital and earnings power, this morning, we announced a $06 or 4% increase in our quarterly dividend. We also announced our intention, subject to relevant approvals, to commence a normal course issuer bid to repurchase for cancellation up to 35,000,000 common shares. We also remain disciplined with respect to our risk management framework and risk appetite. The allowance for credit loss ratio increased to 74 basis points following a prudent reserve build, which included increasing weightings toward downside scenarios amidst heightened economic uncertainty.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Our through the cycle approach to managing risk takes into consideration elevated market volatility. We did not have any trading loss days this quarter and furthermore, over the last four years, we've only seen five days where we generated a trading loss. Our strong balance sheet creates a resilient foundation that allows us to navigate uncertainty while creating value for clients and shareholders. Turning to the macro environment, changes to long standing U. S.

David McKay
David McKay
President & CEO at Royal Bank of Canada

And international trade policies have resulted in a volatile and uncertain operating environment, given the potential for structural disruptions to global supply chains and capital flows. These changes are taking place concurrently with other large secular forces of change, including the increased role of artificial intelligence and private capital, magnifying the complexity that businesses are facing. We saw market volatility through much of the quarter, evidenced by movements in credit spreads, the VIX and bond market volatility indices. However, as the US administration implemented a ninety day pause in reciprocal tariffs, the volatility of outcomes, sentiment and markets narrowed significantly. While we can't say for certain where global trade policies will settle, we are cautiously optimistic about the path forward.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Reciprocal tariffs imposed on Canada are currently at the lowest end of the global scale, reflecting strong bilateral trade in the Kuzma agreement. Although we are not projecting a recession in either Canada or The U. S, the prevailing uncertainty is dampening confidence, sentiment and client activity in certain parts of the North American economy, including housing. North American consumers have remained resilient. They are continuing to spend albeit less on discretionary items and savings are growing.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Businesses are in a holding pattern on large CapEx, but have built inventory and shored up supply chains moving consumption forward. It's under these complex circumstances that policymakers are looking to navigate the options to solve for inflation, unemployment and growth. We expect the Bank of Canada will continue to take a more dovish stance to shore up consumer sentiment and growth. Furthermore, we hope to see the increased political uncertainty in Canada drive structural improvements in the country's productivity and competitiveness, including more effectively leveraging our abundant natural resources and skilled workforce. With the Federal Reserve signalling a holding pattern on interest rates given opposing forces, we similarly expect a more dovish stance in U.

David McKay
David McKay
President & CEO at Royal Bank of Canada

S. Monetary policy, albeit on a lagged timeline. To reiterate what I said earlier, we believe we are in a strong position to navigate this period of uncertainty given the strength of our balance sheet, our diversified business model and our strong risk culture. With this context, I will now speak to the trends we're seeing across our businesses as we continue to focus on delivering advice, insights and value to our clients. Starting with our leadership position in Canada.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Personal banking, we have the leading distribution network in Canada with a full suite of award winning products and solutions. Average deposits increased 13% year over year or 8% excluding the acquisition of HSBC Canada, led by outsized growth in our lower cost core banking and savings products. As noted at our Investor Day, growing core deposits remains a priority. This provides us with data to support personalization, underpin risk models and our interest rate hedging strategy while being an important source of funding. Residential mortgage growth was largely supported by stronger client renewals, higher origination volumes driven by strong mortgage switch in activity, partly offset by higher pay downs.

David McKay
David McKay
President & CEO at Royal Bank of Canada

We expect housing resale activity and mortgage growth to remain contained in the near term as the uncertainty around tariffs outweighs lower debt servicing costs from lower interest rates. Amidst ongoing intense competition, we will maintain the disciplined mortgage growth strategy we articulated over the past year. In our credit card business, spending remained relatively resilient despite low consumer sentiment. Going forward, we expect spending to soften and revolver balances to increase year over year should the current environment persist. Turning to commercial banking, where we have leading market share across all segments. Average deposit growth remains strong, up 15% year over year or 10% excluding deposits acquired through the acquisition of HSBC Canada. This growth continues to be supported by investments in our people and capabilities, including digital client onboarding and transaction banking. Average net loans and acceptances were up 22% year over year, or up 9% excluding loans acquired through HSBC Canada. Adjusting for these acquired loans, larger commercial and corporate loans and small businesses loans grew at a similar rate. Utilization rates have remained largely unchanged. While the lending pipeline and client activity remains solid across many parts of our diversified portfolio, we continue to see signs of cautious business sentiment in certain areas as clients assess how global tariffs could impact their strategies and investment plans.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Loan demand was notably softer for companies in the automotive, consumer discretionary and transportation sectors. Going forward, we continue to expect commercial banking loan growth in the high single digit range for next year, but moderate to mid to high single digit growth range in the back half. Turning to HSBC Canada, we are continuing to bring new capabilities to market as we've now completed the migration of the largest and most complex commercial clients acquired through the acquisition of HSBC Canada pursuant to the transition services agreement. As we exit Q2, the execution of cost synergy initiatives is largely complete, and we are increasingly confident of achieving our targeted annualized cost synergies by next quarter. Now to segments in which we are expanding our reach in global fee pools.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Starting with capital markets, which reported strong pre provision pre tax earnings of $1,400,000,000 or a record $3,100,000,000 in the first half of the year, reflecting its diversified business model. Global Markets had a strong quarter driven by increased client activity amidst market volatility, which largely benefited our equities and broader macro trading businesses. This was partly offset by the impact of a challenging market backdrop on credit trading. The strong performance in both cash equities and equity derivatives was particularly notable as they are a key area of focus for market share gains over the medium term. Like commercial banking, utilization in the corporate banking loan book remained relatively steady.

David McKay
David McKay
President & CEO at Royal Bank of Canada

We continue to pursue our strategy to moderately grow lending activity with average loan balances up mid single digits year to date. In contrast, investment banking activity was muted this quarter, given the volatility in markets. Going forward, policy uncertainty could continue to impact activity as clients wait on the sidelines for clarity. While the second half of the year is seasonally slower than the first half, client dialogue is robust and we are well positioned to deliver as deal making momentum improves. Moving to Wealth Management, where we reported assets under administration growth of 11% in Canada and 9% in The US.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Our clients remain engaged and we had solid net sales and transactional activity in our Canadian platforms, including in RBC Direct Investing. RBC Global Asset Management assets under management increased by 11% to $694,000,000,000 Net sales were robust across asset classes, with client flows shifting from fixed income and equity mandates earlier in the quarter to more balanced funds in April, highlighting our clients' confidence in our wide range of investment strategies across geographies. As a leading asset manager, RBC GAM consistently delivers strong performance through our leading distribution network. This point was underscored with RBC GAM yet again being named the Top Gun Investment Team of the Year in Canada for 2025. To close, this quarter builds on the strong start we've had to fiscal twenty twenty five amidst an evolving operating environment. While macro related uncertainty remains, we are confident in our ability to pursue the ambitions of medium term targets outlined at our Investor Day in March.

David McKay
David McKay
President & CEO at Royal Bank of Canada

This includes our One RBC approach to extending our leadership in Canada, growing in global fee pools and leveraging our strong balance sheet, data scale and AI investments to create more value for clients. The key strategic initiatives designed to accelerate our ambitions are expected to continue to deliver leading risk adjusted returns and long term value for our shareholders through a wide range of economic cycles. Kathryn, over to you.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Thanks, Dave, and good morning, everyone. This quarter, we reported diluted earnings per share of $3.2 Adjusted diluted earnings per share of $3.12 was up 7% from last year, driven by strong revenue momentum across our businesses and prudent cost management. The acquisition of HSBC Canada and foreign exchange translation impact also benefited results. Turning to capital on slide 10, we demonstrated our through the cycle capital strength and resilience despite the market disruption. Our CET1 ratio came in at 13.2%, flat sequentially.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Solid internal capital generation, net of dividends, was partly offset by net credit migration, primarily in our wholesale portfolio. We also continued deploying organic capital across our businesses toward trading related activities as well as wholesale and personal lending. A key part of our capital deployment strategy is returning capital to our shareholders. This quarter, we repurchased 3,000,000 shares for $488,000,000 an increase from the 2,300,000.0 shares repurchased over the last two quarters. We will continue to be tactical with the cadence of share repurchases while operating with a strong CET1 ratio.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Next quarter, we expect a modest negative impact to our CET1 ratio as a result of changes to our retail capital parameters. Moving to slide 11, all bank net interest income was up 22% year over year or up 14% excluding trading revenue and HSBC Canada. All bank net interest margin, excluding trading revenue, was down two basis points from last quarter, partly due to the impact of higher investment securities balances in capital markets. Lower rates on our funding and securities portfolio in corporate support also impacted all bank NIM, as a benefit of certain hedging transactions this quarter was recorded in non interest income, with a related offset reported in net interest income. These factors were mostly offset by a favourable product mix in personal banking.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Canadian Banking NIM was up five basis points from last quarter, benefiting from a favourable product mix, higher mortgage spreads and continued benefits related to our tractor strategy, which provides protection in a declining rate environment. Benefits from changes in product mix were driven by strong growth in checking and savings accounts and seasonally higher credit card revolve rates, the latter of which we expect to reverse next quarter. In addition to our client acquisition strategies, declining interest rates and uncertainty in the markets are driving clients to hold cash in non maturity deposits as shorter duration term deposits mature. While we expect to continue benefiting from these tailwinds in the near future, we don't anticipate this level of margin expansion to continue. Looking forward, we are maintaining our 2025 all bank net interest income growth guidance of high single digit to low double digit net interest income excluding trading.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Moving to Slide 12, reported non interest expenses were up five percent from last year. Our core expense growth was up 8% year over year. As a reminder, core expense growth includes run rate costs related to the acquisition of HSBC Canada, which contributed 1% to expense growth, but excludes the impact of foreign exchange translation and share based compensation, which are largely driven by macro variables. The main drivers of growth were higher staff related costs, including higher than average severance, targeted amendments to our defined benefit pension, and higher variable compensation commensurate with strong results in wealth management. Going forward, we continue to expect all bank core expense growth, which is off a base of reported 2024 expenses to be at the upper end of our mid single digit guidance range for 2025.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

We remain prudent in managing our cost base amidst an uncertain macroeconomic backdrop and have proactively identified labours to do so. Higher than expected core expense growth outside our guidance range for this year will likely reflect higher than expected variable compensation commensurate with higher revenues in our market sensitive businesses. Consequently, we continue to expect positive operating leverage for the year. On taxes, the adjusted non TEP effective tax rate was 20.6% this quarter, up from 19.8% last year. The increase reflects the impact of changes in earnings mix and Pillar two tax legislation, partly offset by the net impact of tax adjustments.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Turning to our Q2 segment results beginning on slide 13. Personal Banking reported earnings of $1,600,000,000 Focusing on Personal Banking Canada, net income was up 15% year over year. Excluding HSBC Canada, Personal Banking Canada's net income rose 8% year over year as strong operating leverage of approximately 6% was partly offset by higher provisions for credit loss. Personal banking's efficiency ratio improved to 41% this quarter, underpinned by strong revenue growth. Higher year over year revenues excluding HSBC Canada benefited from a 14% increase in net interest income and an 8% increase in non interest income.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

We are maintaining the sub 40% efficiency ratio target noted at our Investor Day. However, as a reminder, benefits from the purchase accounting accretion of fair value adjustments from the HSBC Canada transaction are expected to largely run off by Q2 twenty twenty six. Turning to slide 14, commercial banking's net income of $597,000,000 rose 3% from a year ago. Results were impacted this quarter by an increase in stage one and two provisions. On a pre provision, pretax basis, earnings were up 25% or 11% excluding HSBC Canada, driven by solid average volume growth, offset by lower credit fees and higher expenses, mainly reflecting higher staff related costs.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Excluding HSBC Canada, average deposits and loan growth were strong at 109% year over year respectively. Turning to wealth management on slide 15, net income of £929,000,000 rose 11% from a year ago, driven by strong growth in fee based client assets across our businesses, benefiting from market appreciation and net new assets. We added $6,500,000,000 in net new assets across our Canadian wealth advisory business, reflecting the benefits of the holistic strategies we highlighted at our Investor Day. Global Asset Management net sales were slightly negative this quarter as a result of net outflows from institutional clients largely due to one client mandate. These outflows, however, were partly offset by a fifth consecutive quarter in positive retail fund inflows as we continue to grow our leading market share in Canada.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Higher segment revenue was partly offset by higher variable compensation, measure it with increased results and higher staff related costs. City National generated US88 million in adjusted earnings, up 21% from last year. We are encouraged by the momentum we are seeing and remain focused on enhancing City National's profitability. Turning to our capital markets results on slide 16. Net income of $1,200,000,000 decreased 5% from last year, reflecting a 1% decline in pre provision pre tax earnings off a strong second quarter last year and a higher effective tax rate this year.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Global markets revenue was up 23% year over year as a volatile market backdrop drove higher client activity, particularly in our equity and FX trading businesses across all regions. Corporate investment banking revenue was down 7% from last year. Investment banking revenue was down 22%, reflecting lower M and A activity across all regions. The second quarter of last year was very strong due to the timing of several large M and A deals that closed in the quarter. Lending and transaction banking revenue was up 8%, underpinned by higher lending revenue primarily in Europe.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Turning to slide 17, insurance net income of $211,000,000 was up 19% from last year, mainly due to higher insurance service results from improved claims experience. Results also benefited from higher insurance investment results on lower capital funding costs and favorable investment related experience. Lastly, results for corporate support in the quarter included higher than normal severance costs, representing approximately half of the total severance incurred this quarter. As we look forward, we continue to expect corporate support to generate a net loss of 100,000,000 to $150,000,000 per quarter. Before closing, I want to note a couple of disclosure updates in our analyst slides.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

We have provided new disclosures related to the performance of our US region, which we highlighted as a key geography at our Investor Day. Secondly, while we commit to providing updates on synergies related to the acquisition of HSBC Canada, this is the last quarter we'll provide detailed financials as the acquired business becomes fully integrated into comparable periods. Lastly, we will look to provide annual updates on our Investor Day targets every fourth quarter. To conclude, despite the market and macroeconomic uncertainty, we delivered strong results this quarter. We are maintaining the annualized guidance provided last quarter on net interest income and core expense growth, while continuing to drive towards the medium term targets we outlined at our Investor Day.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Our performance reflects the resilience of our diversified earnings stream and financial strength, all of which position us to navigate the quarters ahead. With that, I'll now turn it over to Graeme.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Thank you, Catherine, and good morning everyone. I'll now discuss our allowances in the context of the current macroeconomic environment and ongoing trade uncertainty. After a stronger than expected start to the year, Canadian and US economic indicators softened over the second quarter, with momentum stalled by global trade uncertainty. US trade policy and bouts of market volatility are creating uncertain conditions, increasing the odds of recession in North America. Although tariffs imposed on Canada were not as severe and broad based as initially expected, global and sector specific impacts are creating economic risks, including reduced trade, higher input costs and supply chain disruptions.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

The final form of tariffs is still unknown, and it is too soon to know how they will work through the economy. Against this backdrop, we continue to lean on our robust credit provisioning process to inform our allowances. As a reminder, we are not managing to one scenario or forecast. Within our IFRS nine framework, we employ five separate scenarios, a base case, an optimistic scenario, and three downside scenarios of varying severity. This allows us to better handle forecasting uncertainty and incorporate a larger range of potential risks.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Compared to last quarter, our base case reflects a greater slowdown in the North American economy from tariffs already known and imposed, which we expect will be in place for at least six months before easing. We expect Canada and The US will narrowly avoid a recession as higher inflation and unemployment are expected to be offset by interest rate reductions in both countries, providing relief to borrowers and stimulating investment. Given the trade related uncertainty, we implemented a new trade disruption downside scenario this quarter, which replaces our previous oil and gas downside scenario. This new scenario reflects the potential for a severe North American recession, driven by an escalating global trade war and rising geopolitical risks That translate into a rapid rise in unemployment, higher inflation, disruptions in supply chains and a sharp decrease in asset prices. The trade disruption scenario and other downside scenarios help us evaluate risks that we have not yet observed.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Given the high degree of geopolitical and economic uncertainty, we have reduced the weighting in our base case and reallocated it toward trade disruption scenario. We would expect to decrease the weighting on our downside scenarios as and when there is greater clarity of tariff related outcomes and those are captured in our base case scenario. In the retail portfolio, clients continue to demonstrate resilience with credit performance improving as interest rate cuts and wage growth have made it easier to service debt. Mortgage renewal pricing and refinancing risk have played out better than we anticipated. Housing prices have also generally held up well.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

We are seeing more balanced conditions in the Canadian housing market with improving home affordability due to lower interest rates and rising inventory levels. We are monitoring risks, risks of further slowdown in the condo segment in certain regions harder hit by economic weakness. We remain well provisioned on performing loans in the home equity finance portfolio. We have built higher allowances in segments of the housing market where we see higher risk. We also continue to monitor our condo developer portfolio as new condo sales pull off.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

For context, our exposure to high rise condo developers represents only about 1% of total loans and acceptances. This portfolio has a very strong credit profile that reflects our focus on top tier developers supported by prudent underwriting standards such as minimum presales backed by buyer deposits, minimum borrower equity and outside recourse carrying sufficient liquidity to support a project. Turning to slide 19, we took a total of $568,000,000 or 23 basis points of provisions on performing loans this quarter, an increase of $500,000,000 from the prior quarter, mainly reflecting unfavorable changes to our macroeconomic, to our scenario weights, macroeconomic forecasts and credit quality. The significant increase in provisions on performing loans is meant to capture a broad range of potential outcomes due to the heightened uncertainty I spoke to earlier. As a reference point, the ratio of ACL to total loans and acceptances is 74 basis points while we reached the COVID peak of 89 basis points in 2020.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

This marks the twelfth consecutive quarter where we added reserves and performing loans resulting in a total ACL of 7,500,000,000.0. Moving to slide 20, gross impaired loans of 8,900,000,000.0 were up 1,100,000,000.0 or 10 basis points from last quarter, primarily driven by Commercial Banking and Capital Markets. In Capital Markets, we saw new formations in The US commercial real estate office portfolio, reflecting continued softness in The US office market conditions. In Commercial Banking, while new formations increased $512,000,000 quarter over quarter, the majority of this increase was driven by administrative factors that have subsequently been resolved. The largest ongoing impairment this quarter was related to the insolvency of a large retailer in Canada, where we had related commercial real estate exposure.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Turning to slide 21, PCL on impaired loans of 35 basis points was down four basis points or 133,000,000 quarter over quarter, with lower provisions across most segments. In personal banking, provisions were down 17,000,000 driven by lower provisions and other personal lending and residential mortgages. Consumer clients continue to show resilience, but higher employment is expected to lead to higher losses in our unsecured portfolios. In our commercial banking portfolio provisions were down 22,000,000 reflecting a moderation of PCL from the HSBC Canada commercial portfolio as we had anticipated. Overall, the commercial portfolio continues to be impacted by softer economic conditions and consumer spending in Canada.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

We expect PCL in the commercial segments remain elevated in the coming quarters considering the added uncertainty from tariffs. In capital markets provisions were down 100,000,000 as we had a large provision on one account and the other services sector in Q1, just partially offset by a few new impairments in The U. S. Office real estate this quarter. Within our broader commercial real estate portfolio headwinds still exist and will continue to play out over an extended period.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

As we have seen, impairments can be uneven and less predictable on a quarterly basis. However, losses have been well contained on the back of our strong client base and underwriting standards. To conclude, despite the uncertainty in the macroeconomic and policy environment, we are pleased with the overall diversification and performance of our portfolios. While sustained trade uncertainty could create recessionary conditions, the range of outcomes are well within the stress and downside scenarios we currently consider, giving us confidence in our financial resilience through the cycle. We're navigating this uncertainty from a position of strength with PCL expected to be manageable under multiple scenarios.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

For lower PCL on impaired loans this quarter was positive and within our expectations, we are prudently building reserves to account for the uncertainty ahead. Today, are seeing some slight pull forward of losses because of trade related uncertainty, which if sustained, they push full year losses to the higher end of our previous guidance. However, we expect the impact of tariffs to play out mostly in 2026, potentially pushing out peak stage three credit losses into fiscal twenty twenty six. Moving forward, the likelihood timing and directional allowances and peak PCL will continue to be dependent on the extent and duration of tariffs, retaliatory measures, availability of fiscal support measures, magnitude of change in employment rates, the direction of magnitude of changes in interest rates and commercial and real estate prices. As always, we continue to proactively manage risks through the cycle and we remain well capitalized to expand a broad range of macroeconomic and geopolitical outcomes.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

With that operator, let's open the lines for Q and A.

Operator

Thank you. We will now take questions from the telephone lines. If you have a question, please press star one on the device's keypad. You may cancel your question at any time by pressing 2, so please press 1. At this time, if you have a question, there will be a brief pause while the participants register.

Operator

We thank you for your patience. The first question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is open.

Gabriel Dechaine
Gabriel Dechaine
Analyst at National Bank

Hey, good morning. I didn't expect to be first anyways. I'd like to ask about your increase in gross impaired loans. You did mention that a big chunk of that was tied to a large Canadian retailer. Thanks for that.

Gabriel Dechaine
Gabriel Dechaine
Analyst at National Bank

How much discretion are you using to classify loans as impaired? Because one perspective is that maybe this is a royal specific issue. We've seen a couple quarters of higher GILs, but maybe the bank is just being a bit more proactive in how they classify something as impaired. They could still be paying you, but you're assessing the risk and deciding, oh, let's classify those impaired. So you're more conservative in a sense than maybe another bank might be.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Hi Gabriel, it's Graham. I'll take that. Thanks for your question. Some broader context on the GIL build this quarter, we just were over a billion dollars increase quarter on quarter. As I noted in my speech, about 40% of that was related to some administrative concerns.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

And those have all been resolved subsequently. So the overall build isn't quite maybe as large as the headline relates to. To your question on kind of discretion, I mean, I can't speak to what others do in their processes. I would say we have very well defined processes and rules and how we determine when something is impaired. Those rules and when we impair something isn't strictly driven on when a company stops paying or not, would be on our forward views of that company as well.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

And so some of the companies we have put into impaired loan status over the last two quarters are still paying interest to us. We then in turn take that and just build that into our reserves as we receive that interest. So there is some discretion in that regard, but I would say we're very consistent in our processes. We certainly haven't changed our approach in that in recent quarters. And I've just also noted maybe on the impaireds.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Again, the wholesale, it just can be a bit more episodic quarter to quarter, it's not quite as consistent in the way retail is. I think if you go back to the latter half of last year where we had, I would say very low impairments in PCL in our wholesale businesses, we know at the time that that was probably not representative of the cycle either. And so I think again, just kind of look quarter to quarter and maybe how this trends over longer periods. Don't think we saw this quarter was something unique or kind of newly indicative of where we see things trending.

Gabriel Dechaine
Gabriel Dechaine
Analyst at National Bank

Okay. And can you clarify that administrative comment? So 40% of the $1,000,000,000 increase is administrative and technical, so and they've been resolved. So am I that's going to go in the other direction next quarter?

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Is that how Yeah, that's difficult. This relates directly and indirectly to us just kind of finalizing some of the final pieces of integrating HSBC into our processes. As we work through the final kind of credit elements of that, there were some queues particularly related to some term loans that were up for renewal that just didn't get renewed on our normal timelines. And so it tripped into impaired.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

None of those were credit issues. Those have all been subsequently renewed and resolved. And so yes, those will go the other direction next quarter.

Gabriel Dechaine
Gabriel Dechaine
Analyst at National Bank

Got it. Thanks for that clarification.

Operator

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

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

Good morning. I wanted to follow-up actually, Graham, with you on credit. So sorry if I missed this. I'm not sure if you talked about what your expectations were on impaired PCLs for the back half of the year. And just talk to us as you think about peak PCLs being pushed into 2026, are there new areas of stress within the book?

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

So are there areas within sort of the commercial book where you're seeing stress maybe due to tariffs or a prolonged kind of a slow economy that are emerging which are informing that we own? I'm just trying to think about as we think about all these macro reserve builds, is it just conservative management of building reserves or do you have a sense of a line of sight on how this plays out and the stress areas are maybe already beginning to emerge where future losses could come through? Thanks.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Yeah, thanks, Ebrahim. Just to maybe provide a few different pieces on that. In our slide there on the ACL bill, really kind of break down the drivers of what's building that ACL rate. And so the three really big component parts there. One is credit migration.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

That's a direct reflection of what we're seeing with our clients, their risk profiles, if you will, their financial profiles. And that this quarter was about 20% of that build. And that's kind of in line and in fact, quite a little bit lower than what we've been seeing in prior quarters. So I wouldn't say at this point, we're seeing newly emerging kind of credit pockets of concern, at least directly to our client base. 80% of the build is really more on kind of our go forward view and just the uncertainty around that go forward view, right?

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

So, you know, our base case was weaker this quarter, you know, not hugely weaker, but certainly we've increased our views on unemployment going forward, we pulled back a little bit of our views on HPI and GDP. And so that's contributing to it. That's just reflecting the current uncertainty in the market right now. There is some real direct economic impacts of that. But more, the third part was just really increasing the weights.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

We introduced this new scenario to really try and target kind of uncertainty we're seeing. That by itself didn't really increase our reserves because we already had some fairly pessimistic scenarios in there, but it was really attributing more weight to that. And the more weight is just, again, just us trying to, I think, this uncertain environment and get ahead of that to some degree.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

Understood. And maybe I guess just one for you, Catherine, around rate sensitivity as we think about on a go forward basis. I appreciate you are sort of guiding to NII growth. Perhaps if you can tell us what would drive NII into that low double digits versus high single digits? Is it balance sheet growth, loan growth needs to pick up to get us there?

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

And then as we think about future sort of Bank of Canada rate cuts, how do you sort of think about the direct impact on NII relative to what the Bank of Canada or the Fed does? And I see the disclosure on slide 26, but would love some color around that. Thank you.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

Good morning, Ebrahim. Thanks for the question. So in relation to, I guess our outlook on the NII excluding trading, maybe I'll just take you through our underlying assumptions on how we arrived at that guidance. And as I go through that, you'll get a sense of what could move us in that range. So if I start off with volume, our volume, we're holding to the guidance that we've disclosed actually back in Q4.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

So on a mortgage basis, we are still targeting low single digits. And as Dave would have mentioned in his remarks, we're cautious on the outlook on that front, but we're still seeing progress in that low single digits. As it relates to commercial for the full year, to still hold volumes at high single digits. But for the second half, again, the cautiousness that we are seeing is from some clients, we're expecting that to be more towards mid to high in the second half of the year. And then on our Corporate Banking, continuing to see moderate growth and we're expecting that to hold as we go through the second half of the year.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

So overall in the volumes, those are our expectations where it could shift is really around the client behavior for the second half of the year and around the cautiousness and how we see that play out. As we move to NIM, that was obviously another key part of our guidance. A couple of items there, so on the tractor front, continue to see that positive moving through. What could continue to underpin that is a strong growth in deposits that we're seeing, which is obviously key to our overall deposit acquisition strategy. And so what we're seeing with that higher growth is we're putting more into tractors, not an immediate impact, but it's positive overall.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

As I said in my remarks, we have the seasonal movements, that will impact NIM as we go forward. And then I guess a couple of the unknowns that I've spoken about before really ties into the mix shift as well as competitive behaviors. On the mix shift, we've been seeing that as a positive tailwind as we're seeing GIC start to come down, we're seeing the non term maturities continue to grow and clients are holding their funds there. And so that's accretive to NIM. So as we go throughout the rest of the year, if we continue to see that trend, that would be accretive.

Katherine Gibson
Katherine Gibson
CFO at Royal Bank of Canada

And then on the competition front, we continue to see pressures on the GIC front, a little bit on the mortgages, it's starting to pull back. But depending on how that plays out through the second half of the year, that's another item that could move us in our guidance on the net interest income excluding trading.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

Thank you.

Operator

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

Mario Mendonca
MD and Senior Financial Services at TD Securities

Good morning. Graham, you sound a little bit more cautious on credit than I'm hearing from other banks. Like your point about PCLs peaking in 2026 is a little different. We're hearing slightly different sentiment from the other banks. This morning you probably would have seen that The US Court Of International Trade has sort of struck down the reciprocal tariffs, the 10% baseline tariffs.

Mario Mendonca
MD and Senior Financial Services at TD Securities

I know this is hot off the press but does that change your outlook if in fact this whole tariff scare was just one giant head fake? Would that build greater confidence for you on PCLs for oil?

David McKay
David McKay
President & CEO at Royal Bank of Canada

Mario, it's a fair question. It's Dave and I'll start on the macro side and hand it to Graham. Obviously when we set our scenarios a number of things, we set our scenarios well over a month ago. The world has evolved and continues to be volatile and that's part of our challenge and part of the reason we built formations is the uncertainty in the world around us. We still have to go through a Kuzma renegotiation with The U.

David McKay
David McKay
President & CEO at Royal Bank of Canada

And we still don't know the impact on the auto industry. We don't know the impact on the dairy industry and agriculture and forestry. So

David McKay
David McKay
President & CEO at Royal Bank of Canada

I guess while the short term reciprocal tariffs appear to be illegal, it doesn't mean that we have an overall extended agreement with The United States on future trade and therefore very much involved in that and we have to kind of manage that going forward. So I think our uncertainty still applies in the medium term that we still have to progress through a number of other elements. So I think it's fair some of the shorter term volatility and reciprocal tariffs and the cost of that, all of this is creating uncertainty, right? It's creating uncertainty and allocating capital from mortgages right through to M and A. And therefore, while this cloud overhangs the Canadian economy, it's having a real impact and we think the momentum and the potential of the economy going forward.

David McKay
David McKay
President & CEO at Royal Bank of Canada

So I still don't think we're shaking the overall uncertainty level just because of that ruling last night, but it helps. It helps set the stage for renegotiation of USMCA that we expect will happen over the coming six months. Graham?

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Yeah, I think they've covered a lot. What's transpired in May, there would be some positive signals in May that didn't exist in April. But I would also say I'm not sure those positive signals are taking us anywhere towards conclusion on kind of where this is going to land, where it's going to land or quite frankly, when it's going to land either. So I think yes, we'd have a degree of caution with that Mario and we'll certainly evaluate kind of what we learn in the coming months and adjust accordingly. We feel a lot stronger that this is going to land sooner and better than we are thinking right now, then that will lead us to adjust our weights and reserves accordingly.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

They are intended to be dynamic, but I think at this point in time, it was prudent to be building against that uncertainty.

David McKay
David McKay
President & CEO at Royal Bank of Canada

I think just back to Dave here, I think it's just important that this is a stage one and two provision. We haven't spent it, it's in our pocket, And happily if we're wrong, then we will release it. It's just there's no downside in being cautious given this uncertainty of how we feel.

Mario Mendonca
MD and Senior Financial Services at TD Securities

Thank you.

Operator

Thank you. The next question is from Paul Holden from CIBC. Please go ahead, your line is open.

Paul Holden
Analyst at CIBC World Markets

Thank you, good morning. Two quick questions, or hopefully they're quick. First one maybe for Derek and sort of dovetailing off what Mario just asked. Given your pipeline for, say, M and A, ECM, etcetera, and maybe some improvement and certainty around tariffs? Like how quickly do you think IB activity can bounce back if the market gets more comfortable with the tariff outlook?

Derek Neldner
Derek Neldner
Group Head & CEO of RBC Capital Markets at Royal Bank of Canada

Sure. Thanks for the question, Paul. I'd really break into two things, sort of how quickly does activity bounce back and then how quickly does activity actually lead to consummated transactions revenue in the business, because there obviously is a time lag depending on the nature of the transaction. I think if you look at where we were sitting in April, at the peak of uncertainty around tariffs and the economic outlook, we saw a very short, but very pronounced slowdown in activity. As Dave alluded to, there was a lot of uncertainty and clients really hit pause, whether that be on financing activity or longer term strategic capital allocation decisions, including M and A.

Derek Neldner
Derek Neldner
Group Head & CEO of RBC Capital Markets at Royal Bank of Canada

As we have seen more signs of optimism, including obviously some of the announcements last night and this morning, we certainly are seeing a pickup in activity as we've come through recent weeks. You tend to see that in different phases. So the first is you see that pickup in your flow financing activity, whether that be DCM, ECM, high yield issuance, term loan issuance. And already in May, there's been a reasonably healthy improvement in that regard, both in terms of activity, but also just client dialogue. Any of that kind of flow activity also then results in transactions being completed quite quickly.

Derek Neldner
Derek Neldner
Group Head & CEO of RBC Capital Markets at Royal Bank of Canada

The second part then is, longer term, strategic M and A activity. We certainly are seeing an improvement in sentiment and more dialogue and lots of client dialogue going on. But where there still is uncertainty is how quickly does that actually translate into announced transactions and then what's the period of time through closing. I think in the month of May across all of our geographies, we've seen some very nice transaction activity and some deals being announced, but there's a lot where boards and executive management teams are still evaluating what the world's gonna look like over the next twelve to twenty four months. So there will be a delay in some of that coming to fruition.

Derek Neldner
Derek Neldner
Group Head & CEO of RBC Capital Markets at Royal Bank of Canada

And then obviously, depending on the sector, the nature of the transaction, closing can be anywhere from three months to eighteen months, depending on regulatory approvals or otherwise. But overall, certainly the outlook is notably improved from where we were six weeks ago.

Paul Holden
Analyst at CIBC World Markets

Okay, that's very helpful. Thank you. And I'll just sneak in a second quick one if you don't mind. For Sean, just very strong growth in Commercial Banking and we heard from Catherine sort of the outlook somewhat slowing in the second half. But just maybe a reminder on where you're growing in commercial because it looks like you're picking up some share based on what we've seen from your peer banks.

Paul Holden
Analyst at CIBC World Markets

And then two, quite a big difference in the net interest margin Q over Q in Commercial Banking versus the Personal Bank. So maybe just want to better understand why the NIM is going lower in Commercial Banking given the strong loan growth? Thank you.

Sean Amato-Gauci
Sean Amato-Gauci
Group Head of RBC Commercial Banking at Royal Bank of Canada

Maybe I'll start with thanks for the question, Paul. Maybe I'll start with the second one. It's primarily driven by the BA migrations and the shift between NIM and other income, So it's mostly offset on sort of the other side of the other contributor to revenue. And on a year over year basis, that starts to have less of an impact as we as that completes in the next quarter. With respect to growth on the portfolio, your first question, this is the continued execution of sort of a multi year strategy to invest in coverage and underwriting expertise and structured banking expertise to drive growth in the larger segments of the portfolio, sort of our senior commercial and corporate client client group segments.

Sean Amato-Gauci
Sean Amato-Gauci
Group Head of RBC Commercial Banking at Royal Bank of Canada

And that's been executed really well. It is also returning off of a base of underperformance in the early part of this decade. And so on a five year basis, our growth rate is actually very close to the industry average, at about 1% greater. In terms of recency of growth, as Dave mentioned, through all the uncertainty there, we're definitely seeing sequential growth slow. On a rolling four quarter basis, for example, our quarterly sequential growth was averaging about 2.5%.

Sean Amato-Gauci
Sean Amato-Gauci
Group Head of RBC Commercial Banking at Royal Bank of Canada

In Q1, that was 1.8%. In this quarter, relative to Q1, it was 1.6. And as Catherine highlighted, our outlook is sort of in the mid single digits to low end of high single digits on a full year H2 basis this year, which would imply about a 1% to 1.5% sequential growth on a quarter over quarter basis for the next two quarters.

Paul Holden
Analyst at CIBC World Markets

Great. That's it from me. Thank you.

Operator

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Your line is open.

Sohrab Movahedi
Sohrab Movahedi
Equity Research Analyst at BMO Capital Markets

Okay. Thank you. Graham, roughly half of the performing build looks to have been kind of charged to the commercial bank. Can you talk a little bit about the industry sectors there that were targeted by the build?

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Yeah, thanks, Rob. Yeah, I mean, so commercial, again, this is all about kind of the go forward macro and how we playing out going forward. I would say the sometimes it's kind of continue to put pressure on some of the same sectors that have been under pressure to date. So that very much that supply chain sector, the industrial, the manufacturing, the transportation sectors. So that's really, I would say the core components of where we see being hit there.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

We have done bottom up analysis here to really kind of try and assess which sectors overall we think are going be hit most directly by tariffs. I mean, that's again a challenging exercise because those tariffs seem to change day to day, week to week, both in their magnitude and where they're going to be applied. So we go through the book really looking at those sectors that have kind of the biggest import export kind of dependencies. And then within that kind of refined which of those we think have, you know, more challenged abilities to absorb costs or not. So that's kind of the analysis we do that kind of supports that.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

But I'd say there's significant chunks that really kind of point back to some of those same sectors that have been kind of challenged to date.

Sohrab Movahedi
Sohrab Movahedi
Equity Research Analyst at BMO Capital Markets

Okay. And just with Sean, staying with the commercial, I mean, your ROE obviously reflecting the reserve build lower than capital markets ROE this quarter. You have an 18% type target out there. How long do you think before you hit that 18%?

Sean Amato-Gauci
Sean Amato-Gauci
Group Head of RBC Commercial Banking at Royal Bank of Canada

Yes, as we articulated in our Investor Day presentation, that's a three year target. So to your point, there's a number of contributing factors that's driven it lower than the recency. Obviously, the reserve build this quarter, as Catherine highlighted last quarter, the allocation of the capital methodology into the businesses was about 70 basis points. And then about 90 basis points of the reduction is also the goodwill allocation from the HSBC acquisition. And so our projections are to rebuild to 18% in three years.

Sohrab Movahedi
Sohrab Movahedi
Equity Research Analyst at BMO Capital Markets

But it would be very hard for this year anyway, right?

Sean Amato-Gauci
Sean Amato-Gauci
Group Head of RBC Commercial Banking at Royal Bank of Canada

Yes, not something Thank you.

Operator

Thank you. The next question is from Mike Rizvanovitch from Scotiabank. Please go ahead. Your line is open.

Mike Rizvanovic
Managing Director at Scotiabank

Hey, good morning. Question for Graham and this is more of a qualitative question. But when look at your GIL ratio on the mortgage book, I get it that it's relatively low among your peers, but it's actually deteriorated the most over the past year. And I'm sort of wondering if that's largely related to the HSBC client base coming in. I do think there's a perception in the market that Royal's customer base, including on the retail side, tends to be a better quality, lower risk, probably better FICO score.

Mike Rizvanovic
Managing Director at Scotiabank

Are you still sticking with that narrative if you do agree with it? And is this largely HSBC related?

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Yeah, thanks, Mike. No, I do not think that's HSBC related. The client base we absorb from HSBC is a very high quality, actually skews higher than the rest of our consumer book and mortgage book. So no, that is not driving that narrative. Think the partly what's driving that is a mixed question and the markets that are more challenged by kind of the higher payment environment, this would be the GTAs of the world that are really driving our impairments these days.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

So I think again, overall, the quality of our client base continues to be very strong, the performance there continues be very strong, we feel very good about that book and the structure there and the ultimate write offs if you follow that through have been very low because of that. But we are seeing impairments as more clients are facing more challenges in this higher rate environment at the end of the day.

Mike Rizvanovic
Managing Director at Scotiabank

Okay, that's helpful. Then just one quick one for probably for Erica. Just in terms of the mortgage business in your segment, are able to provide at least maybe like a high level of what the revenue contribution is? So if you to the extent that you might have that handy, so if you look at the spread and the fees related to originations and any activity in the RESL book or just the mortgage book per se, could you ballpark that? Like is it 10% of revenue? Is it closer to 20% in your segment?

Erica Nielsen
Erica Nielsen
Group Head of RBC Personal Banking at Royal Bank of Canada

If I think about where we've been over the last twelve months in that mortgage book, what we're seeing is the balance that we talked about and how we think about the volume that we're putting on the books and the margins that we're putting that business on at. I would say, on a year over year basis, we are seeing our ability to continue to have the mortgage business start to come back from low levels of profitability when we saw our spreads really degrade to levels that probably from an ROE perspective, we need to be back up to a higher degree of ROE in the business. And so I think on year over year basis, we continue to see green shoots in that business contributing more in the profitability of the aggregate earnings of the personal bank. But we're certainly not at the levels of profitability that we would have seen twenty four months ago, thirty six months ago in terms of the contribution of that mortgage book back to the earnings of the personal bank. And so we still are balancing our growth expectations and how we're pursuing growth in that market with the returns in that business and taking a calculated march to getting back to higher earnings from the aggregate mortgage business.

Mike Rizvanovic
Managing Director at Scotiabank

I'm not sure if you're comfortable providing a ballpark number or we can take it offline, but is 10% a reasonable number? Would the mortgage business contribute roughly 10% of the segment revenue, or is it something a bit higher or lower than that?

Erica Nielsen
Erica Nielsen
Group Head of RBC Personal Banking at Royal Bank of Canada

So let's take that question offline, and we can discuss both.

Mike Rizvanovic
Managing Director at Scotiabank

Okay, all right. Thanks for the insights.

Operator

Thank you. The last question is from Lamar Persol from Cormark Securities. Please go ahead. Your line is open.

Lemar Persaud
Equity Research Analyst - Financials at Cormark Securities

Yes, thanks. My question is for Graham. I guess going back to last quarter, I guess the bank felt the downside scenario appropriately accounted for trade uncertainty. Can you walk me through what drove your decision to introduce another scenario? Because I would have thought that with a sufficiently conservative downside scenario before the ability to shift weights between scenarios and layer in ECJ, there would have been a very compelling reason to introduce a whole new scenario.

Lemar Persaud
Equity Research Analyst - Financials at Cormark Securities

So I guess walk me through like why you decided you needed to go through the trouble of introducing a new scenario rather than using some of the levers I mentioned, because those seem to me much simpler than introducing a new scenario. Does it feel like perhaps a trade war has a real risk of persisting far longer into the future than perhaps the banks are messaging this quarter?

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

Yeah, mean, I would say where we were after Q1, you remember like, I mean, things had just started to play out literally in the February, after we closed our quarter. And so we, while we had been doing analysis and using this scenario kind of in the background, as we kind of persisted through Q2 and things really amped up, I mean, really at the April at Liberation Day, this kind of went to a whole different level of concern and uncertainty. Well, we had a pessimistic scenario that was kind of broad nature and of similar severity. We really wanted to invoke something that really addressed the current kind of concerns and what that might look like and the risks we're facing here now. It's why it didn't by itself change the overall numbers, it certainly does change where we're allocating reserves and really highlights the pockets of risk that we'd be more concerned about.

Graeme Hepworth
Graeme Hepworth
Chief Risk Officer at Royal Bank of Canada

So that just again, allows us to directly leverage our framework as opposed to just kind of using overlays and management judgment and kind of, I would say a little bit more subjective ways, if you will. So I think we just relate the framework we have and we like to use that framework rather than just override it with our judgment. Thank you.

David McKay
David McKay
President & CEO at Royal Bank of Canada

Okay, so I think that's our last question and I will wrap things up. We appreciate your comments. As we went through the quarter and we prepared for the call today, we knew that your focus would be on our reserve build and the GILs in the portfolio. Now let me just take us back to the top though. We did show very strong pre tax pre provision growth, very strong client levels, activity levels, particularly in personal and commercial banking and on the deposit side.

David McKay
David McKay
President & CEO at Royal Bank of Canada

We delivered really good revenue growth. We had very strong operating leverage. As you heard on the credit side, as we went through these scenarios in our stage one and two reserve build, we knew conservatism. We didn't know it would be that different than our peers at the end of the day, but we do these things obviously in isolation. We knew that would cause us at the top of the house to miss expectations, but we still took them at the end of the day because that's what the scenarios advise us.

David McKay
David McKay
President & CEO at Royal Bank of Canada

But they are a conservative scenario where 80% of that reserve builds is macroeconomic estimates of the future, and everyone can have a different view, but we took that. It's not like we spent that money that goes into an ACL, and if we're wrong, we'll release it. We knew that conservatism may cause the types of questions you asked today. And the other fair questions you've asked is on our gross impaired loan build. You heard Graeme say 40% of that build was administrative, right, and mature credits that had to get renewed.

David McKay
David McKay
President & CEO at Royal Bank of Canada

So you offset that and you get a 60% build. We didn't even talk about how we're confident in our allowances for that GL bill because of collateral and structure and the types of clients that we know we have. So we expected kind of your conversations to come back to that. Don't forget the very strong overall performance we saw execution HSBC, we saw execution on City National, all that led to very strong overall revenue and pre tax profit results and strong net income results. And I'll remind you again, we increased our dividend by $06 showing our confidence and we continue to do buybacks because we know where the intrinsic value of the firm is and we'll continue to buy back shares even at these elevated evaluations.

David McKay
David McKay
President & CEO at Royal Bank of Canada

All that signifies notwithstanding, we took some prudent reserves that you're reacting to our confidence in the future. So thanks very much for your questions and we look forward to seeing you next quarter.

Operator

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

Executives
    • Asim Imran
      Asim Imran
      SVP, Head of Investor Relations & Enterprise Performance Management
    • David McKay
      David McKay
      President & CEO
    • Katherine Gibson
      Katherine Gibson
      CFO
    • Graeme Hepworth
      Graeme Hepworth
      Chief Risk Officer
    • Derek Neldner
      Derek Neldner
      Group Head & CEO of RBC Capital Markets
    • Sean Amato-Gauci
      Sean Amato-Gauci
      Group Head of RBC Commercial Banking
    • Erica Nielsen
      Erica Nielsen
      Group Head of RBC Personal Banking
Analysts
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Key Takeaways

  • Reported adjusted Q2 earnings of $4.5 billion, up 16% in pre‐tax, pre‐provision profit year-over-year, with revenue growth of 11% driven by strong volumes and higher spreads across personal, commercial, wealth, and capital markets.
  • Core deposit franchises continued to expand, with average personal banking deposits up 13% and commercial banking deposits up 15%, improving the loan-to-deposit ratio to 97% and underpinning efficient, stable funding.
  • Built $568 million of prudent stage 1 and 2 reserves (ACL ratio of 74 bps) and saw a rise in gross impaired loans—partly due to administrative renewals and sector pressures—reflecting caution around trade uncertainty and economic volatility.
  • Maintained a strong capital position with a Common Equity Tier 1 ratio of 13.2% (approximately $5 billion of excess capital), approved a 4% dividend increase, and announced a normal course issuer bid for up to 35 million shares.
  • Highlighted ongoing macroeconomic and trade‐policy uncertainty—including potential U.S. tariffs—but noted resilient consumer spending, dovish central bank stances and a diversified business model as factors supporting stability.
AI Generated. May Contain Errors.
Earnings Conference Call
Royal Bank of Canada Q2 2025
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