Good morning, ladies and gentlemen. Welcome to RBC's conference call for the Q4 2021 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Nadine Ahn, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Neil McLaughlin, Group Head, Personal and Commercial Banking, Doug Guzman, Group Head, Wealth Management, Insurance, and I&TS, and Derek Neldner, Group Head, Capital Markets. As noted on slide one, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. 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.
Thank you, Asim, and congratulations on your recent appointment to RBC's Head of Investor Relations. Good morning, everyone, and thank you for joining us today. This morning, we reported fourth quarter earnings of CAD 3.9 billion. Our results include further releases of PCL on performing loans, primarily reflecting improvements in our macroeconomic and credit quality outlook. Pre-provision, pre-tax earnings of CAD 4.8 billion were driven by robust client activity, driving fee-based revenue growth in Canadian Banking, Wealth Management, and Investment Banking. In addition, Canadian Banking and City National continue to generate strong volume growth. These factors were partly offset by a moderation in our global markets businesses, the continued impact of low interest rates, and higher expenses, largely due to variable compensation. As we continue to invest in our core businesses and strategies, we're committed to running our bank efficiently and driving improved productivity.
Looking back, 2021 was a year that saw RBC stepping up for our clients and communities while supporting our employees. Across our core businesses, we saw robust client activity, and as a result, we delivered record revenue of nearly CAD 50 billion. We earned CAD 16 billion in net income and generated 19% ROE while paying CAD 6.1 billion in taxes, over CAD 6 billion in dividends, and meeting all of our medium-term objectives. Also noteworthy was our strong double-digit growth in book value per share, highlighting our ability to compound the value of our business while maintaining the quality and risk appetite of the RBC franchise. We ended a strong year with a record CET1 ratio of 13.7%, up 120 basis points, with CET1 capital up CAD 7.5 billion from last year.
As we turn our focus to 2022, from a macro perspective, we continue to see a strong recovery, with consumer spending almost 20% above 2019 levels, increased mobility in society, and corporate management teams actively pursuing growth opportunities. At the same time, we recognize our significant challenges, including supply-demand imbalances, disrupting supply chains and various parts of the economy, including labor, housing, and energy markets. These factors are driving uncertainty and adding to inflation risk, which we are closely monitoring. While higher interest rates could add some drag to economic growth, we do not see material credit concerns given excess client liquidity, strong underwriting, including testing for higher rates. As Nadine will speak to later, we are well-positioned to benefit from rising interest rates given our leading Canadian deposit franchise and the asset-sensitive nature of U.S. Wealth Management's balance sheet.
To highlight the potential benefit over time, the impact of lower interest rates reduced our revenue by approximately CAD 1 billion in each of the last two years, the majority in Canadian Banking and U.S. Wealth Management, including City National. Additionally, we are poised to benefit from the deployment of unprecedented buildup of liquidity that we expect Canadians will use for a better tomorrow, whether that is to buy a home, increase discretionary spending, or invest in financial markets. Within this context, let me expand how our momentum and ability to create value for clients, along with our premium franchises, position RBC to succeed heading into 2022 and beyond. Our strong balance sheet gives us flexibility to continue supporting our growth momentum and strategic initiatives, in addition to driving increasing shareholder returns.
This morning, we announced a CAD 0.12 or 11% increase in our quarterly dividend while also announcing our intention to repurchase up to 45 million common shares under a normal course issuer bid. We remain focused on driving premium organic growth, including expanding our market-leading position in Canada. We see growth opportunities in each of our Canadian businesses, and our results this year reflect the value we create for our clients. In Canadian banking, we added over CAD 35 billion in mortgages and over CAD 22 billion in personal deposits over the last year, leading to market share gains in both these anchor products. We have added and continue to add to our 1,750+ mortgage specialist sales force. We also continue to invest in digital tools and capabilities to enhance the client experience and the productivity of our sales team.
Looking forward, we expect mortgage growth to be strong in a high single-digit range, supported by low interest rates, supply, demand imbalances affecting prices, and increasing immigration activity. We are seeing a strong recovery in transactional purchase activity, which helped drive a sequential increase in credit card balances, including revolvers. Though commercial utilization rates remain well below pre-pandemic levels, we are seeing an uptick, which is helping drive the emergence of stronger commercial lending activity. We are also hiring commercial account managers in priority industries, including in RBCx, where we provide capital and advice to the growing innovation ecosystem. As we move up the value chain and continue to reimagine banking and innovation, we are well positioned for a world of payment modernization and open banking. RBC Ventures remains core to accelerating our growth by creating value beyond banking, including in our healthcare and youth ecosystems.
We are excited about Dr. Bill, a venture which helps reduce the complexity of medical billing for physicians. We are currently serving nearly 3,000 Canadian physicians, up 28% from last year. Also within the healthcare vertical, we continue to support Canada's medical community with our exclusive multi-year strategic partnership with the Royal College of Physicians and Surgeons of Canada. In the youth segment, Mydoh is a new pillar that helps kids learn and practice money management. We recently hit a milestone, having onboarded 10,000 Canadian households. Over the last two years, we have added 350,000 net new Canadian banking clients, including over 200,000 this year alone. In a period when clients weren't making as many decisions to switch banks, and immigration activity was muted.
Given the value-added initiatives we put in place, we are well positioned to continue attracting even more clients, an important area of focus. Almost 70% of our Canadian banking clients who have a core checking account and/or mortgage with us also have a card and investment relationship. Clients with mortgage and checking accounts that were onboarded three years ago in 2018 have deepened their relationship to all four products at a rate that is three times greater than any other acquisition relationship. This leads to another core part of our Canadian strategy, which is to deepen our client relationships, including providing access to best-in-class, award-winning service and advice, which has defined our leadership in wealth and asset management. As I noted earlier, we expect much of the buildup of liquidity in the system will be used to increase discretionary spending or be invested.
Our full set of an integrated end-to-end industry-leading wealth and asset management solutions have well over CAD 1 trillion in client assets. These cover the full spectrum of client segments and needs, ranging from digital-only solutions up to full-service discretionary wealth management. Following a record year last year, RBC Direct Investing finished 2021 with another year of exceptional growth, including record trading volumes and record new client acquisition, with nearly half of new clients added this year being under the age of 35. InvestEase has seen account openings double from the last year. In the wealth advisory space, our leading scale is complemented by our differentiated technology and investment expertise, including private banking, insurance, estate, philanthropy, and business planning solutions.
These factors drive strong advisor productivity, with RBC Dominion Securities ranked number 1 amongst bank-owned advisory firms in 2021 Investment Executive Brokerage Report Card. MyAdvisor, our digital platform to review financial plans, now has nearly 3 million clients. Overall, our wealth management businesses continue to see strong growth in client assets. On a year-over-year basis, Canadian banking and Wealth Management Canada AUA increased 26% each. With RBC Global Asset Management, we have a leading North American asset manager at scale, with 85% of AUM outperforming the benchmark over the last 3 years at below average fees. As a testament to the strength of the platform, RBC Global Asset Management was recognized for its outstanding investment performance at the 2021 Refinitiv Lipper Fund Awards. RBC GAM AUM was up 15% year over year.
While higher markets were a large contributor, we also saw record Canadian long-term retail net sales of over CAD 20 billion or 17% of all industry-wide flows, adding to its leading market share in industry AUM. Though we can't control where equity markets will go, we are well positioned to add to our market share in industry net flows, as clients can choose from a broad range of products and advisory services, which increasingly include an ESG and alternatives product suite. Our scale, innovation, and ability to deepen client relationships with leading value propositions underpin our 30% ROE across our banking, wealth, and asset management platforms in Canada.
Turning to the U.S., I want to focus on our diversified growth strategy. Our client franchises across wealth management, private and commercial banking, and capital markets generated $10 billion or 25% of total revenue over the last 12 months. Our U.S. Capital Markets franchise, our largest U.S. business, had yet another great quarter as we reported strong investment banking revenue on higher M&A advisory and loan syndication activity. We are increasingly deepening relationships and winning significant M&A advisory mandates with important partners such as Blackstone. Earlier this year, RBC Capital Markets acted as exclusive financial advisor to Blackstone on the acquisition of Ellucian, a leading education technology solutions provider. This followed being the advisor on their acquisition of Signature Aviation. Looking forward, our investment banking pipeline remains strong, benefiting from the strength of our franchise.
Our goal is to be a top 10 global investment bank while maintaining our position as a clear leader in Canada. With this in mind, we have added a number of managing directors in U.S. investment banking, especially in technology and healthcare sectors, while also focusing on sustainable finance, a growth opportunity for us and our clients. City National continues to be a growth company, with wholesale loans up a further 3% over last year or up 11% excluding PPP trends. Our mid-market strategy, along with expansion of market coverage, is expected to add to our growth trajectory. Mortgages at City National were up 23% year-over-year as we continue to grow our high net worth private banking capabilities with a mortgage-led growth strategy. Deposit growth was up a strong 25% this year.
Going forward, we continue to expect strong loan growth in our City National businesses. In U.S. Wealth Management, we grew client assets 30% year-over-year to nearly $570 billion, including the addition of high-quality advisors to our private client group platform. We are increasingly adding lending products to provide holistic advice to our U.S. Wealth clients. Our securities-based lending portfolio has increased by over CAD 2 billion or nearly 60% year-over-year. Beyond our underlying business performance in 2021, we recognize we have an important role to play in accelerating clean economic growth. A key pillar of our enterprise strategy is to play a leadership role in the transition of our economy to net-zero emissions, including helping clients work through an orderly energy transition.
As part of that, we are committed to providing CAD 500 billion in sustainable finance by 2025. In addition to our own net zero commitments, we are pleased to have joined the Net-Zero Banking Alliance. To sum up, we are entering 2022 with strong momentum and are well-positioned to take advantage of secular and macro trends and deliver client and shareholder value over the near and long term. Our focus will be to drive growth while maintaining prudent risk management and expense discipline. We will continue to leverage the size and strength of our balance sheet to consolidate our broad-based leadership position in Canada, including deepening client relationships and investing for the innovation economy. In the U.S., we will continue to execute on our multi-pronged growth strategy across capital markets, City National and Wealth Management.
Before I conclude, I want to thank our more than 87,000 colleagues for their relentless dedication in living our purpose through these extraordinary times. Now I will pass it to Nadine Ahn. Our new CFO, who is well-known to the investment community from her time as head of investor relations and CFO of RBC Capital Markets previously. Nadine brings a wealth of experience gained over 20 years at RBC, including a number of positions of increasing responsibility in our corporate treasury group. Nadine, over to you.
Thank you, Dave, and good morning, everyone. I will start on slide 11. We reported quarterly earnings of CAD 3.9 billion, up 20% from last year, including the benefit of a CAD 355 million release of PCL on performing loans. Earnings per share of CAD 2.68 was also up 20%. Pre-provision, pre-tax earnings of CAD 4.8 billion were up 4% year-over-year, including the impact of a legal provision at City National. Before I expand on earnings drivers, I will speak to capital on slide 12. Our CET1 ratio was up 10 basis points sequentially to a strong 13.7%. Our strong earnings net of dividends added 42 basis points to our CET1 ratio, highlighting the capital generation power of our diversified business model and premium ROE.
Robust client-driven business growth across our largest segments was partly offset by CAD 2 billion of net credit migration. Looking forward, we will continue to take a disciplined approach to deploying capital to create long-term value for our shareholders. We will lead with client-driven organic RWA growth and look to revert back to our traditional policy of twice-a-year dividend increases, returning to the midpoint of our 40%-50% dividend payout ratio objective. This morning, we also announced a normal course issuer bid, which will allow us to repurchase up to 3% of our common shares outstanding, giving us yet another lever to manage our capital levels. Moving on to slide 13. Net interest income was up 1% year-over-year, or up 4% excluding the impact of lower fixed income trading revenue, which was impacted by lower spreads on repo balances.
Strong volume growth more than offset continued margin headwinds, driving solid net interest income growth in both Canadian Banking and City National. Turning to slide 14. At the segment level, we had outsized NIM compression in our largest banking franchises. Canadian Banking NIM decreased 9 basis points sequentially, partly due to an accounting adjustment of 2 basis points or CAD 22 million, which we do not expect to repeat going forward. Another 2 basis points was due to lower mortgage prepayment revenue, a reversal of favorable trends we noted on our Q2 earnings call. The 3 basis point impact from lower asset spreads is largely related to strong mortgage originations, as the benefit from sequential credit card growth was offset by growth in lower spread mortgage loans.
City National NIM was down 20 basis points sequentially, with 11 basis points related to lower loan fees, largely from the forgiveness of the first round of PPP loans. Another seven basis points was due to lower loan-to-deposit ratio trends as deposit growth continued to outpace strong loan growth. Going forward, we expect both Canadian Banking and City National margins to stabilize around current levels with a bias to the upside as central banks raise interest rates. While City National's interest rate sensitivity is largely driven by an increase in short-term rates, Canadian Banking would benefit more from a broader across-the-curve increase. We estimate that a 25 basis point increase in interest rates across the curve could result in over CAD 250 million of additional revenue over 12 months across Canadian Banking and U.S. wealth management, inclusive of sweep deposits.
We expect the benefit from a rate hike in the second and third years will be higher than seen in the first year. Turning to slide 15. Non-interest income was up 20% year-over-year. We continue to see strong growth in higher ROE investment management and mutual fund revenue in Wealth Management and Canadian Banking. Strong M&A deal flow and loan syndication activity were reflected in higher advisory and credit fees as we execute on our capital markets client-centric growth strategies. Higher card service revenue in Canadian Banking reflected Canadians' increased spending on travel and entertainment heading into the holiday season. As we continue to enhance our rewards programs and drive higher client engagement through increased options to earn and redeem points, we adjusted our rewards liability by CAD 29 million this quarter.
Offsetting this was an expected moderation in global markets revenue, which I'll provide more details on shortly. Turning to expenses on slide 16. Non-interest expenses were up 9% year-over-year. A legal provision of CAD 160 million in City National impacted expense growth by approximately two percentage points. Adjusting for this provision and excluding higher variable and share-based compensation across our businesses, expense growth was 2% year-over-year. As quarterly capital markets compensation ratio typically experiences volatility in the fourth quarter, it's important to look at full-year trends. The 2021 annual ratio of 35% is consistent with 2020 levels. Salaries and benefit costs were up 4% from last year as we continue to add employees in Canadian Banking and City National to support increasing client activity.
Marketing costs were also higher as the economy opened up and we increasingly engaged with new and existing clients across our businesses. However, there is also an element of seasonality in the quarter-over-quarter increase of certain line items. Looking forward to 2022, we expect marketing costs to trend higher than pre-pandemic levels as we execute on our strategic growth initiatives. However, corporate travel costs are expected to remain below pre-pandemic levels in the near term. Overall, we expect annual expenses, excluding variable and share-based compensation, to grow at the higher end of the low single- digits range as inflationary pressures and higher investments to support growth initiatives are expected to be offset by our continued focus on driving efficiencies and productivity gains. Moving to our business segment performance beginning on slide 17.
Personal and Commercial Banking reported earnings of CAD 2 billion this quarter, including the benefit of lower PCL. Canadian Banking pre-provision, pre-tax earnings were up a strong 8% from last year as solid revenue growth was supported by strong operating leverage. Looking forward, we expect annual operating leverage to be closer to the high end of our historical 1%-2% guidance, with the potential to be above that range as central banks raise interest rates. Canadian Banking revenue was up 6% year-over-year, with net interest income up 2% from last year. On a sequential basis, an uptick in commercial loan growth added to continued strength in mortgages. Growth in credit card balances was largely related to higher purchase volumes, with payment rates remaining elevated relative to pre-pandemic levels.
Non-interest income was up 15%, largely due to higher mutual fund distribution revenue underpinned by higher AUA, including record net sales as client liquidity continued to move into investment products. Card service revenue was up on higher purchase volumes. Turning to slide 18. Wealth Management reported fourth quarter earnings of CAD 558 million, driven by strong investment management and mutual fund revenue growth and robust volume growth at City National. These were only partly offset by a commensurate increase in variable compensation, higher non-compensation costs, and a legal provision and lower spreads at City National. Double-digit client asset growth across our North American wealth businesses benefited from both higher markets with strong North American equity markets more than offsetting weakness in bond indices as well as strong net sales.
RBC GAM attracted total net sales of over CAD 12 billion in the quarter, with strong institutional flows adding to continued momentum in Canadian long-term retail net sales, which added CAD 4 billion to AUM. The majority of Canadian retail flows went into balanced mandates. Turning to insurance on slide 19. Net income of CAD 267 million increased 5% from a year ago, primarily due to favorable annual actuarial assumption updates, partially offset by lower favorable investment-related experience, including the impact of realized investment gains in the prior year. Insurance revenue benefited from higher group annuity sales and growth in longevity, reinsurance, and Canadian insurance sales. Looking at I&TS on slide 20. Net income of CAD 109 million increased 20% from a year ago, primarily driven by higher revenues from our asset services business.
Funding and liquidity revenue was also higher year-over-year as the prior year reflected heightened impacts from elevated enterprise liquidity. Turning to slide 21. Capital Markets reported earnings of CAD 920 million, up 10% from last year. Pre-provision, pre-tax earnings surpassed CAD 1 billion for the eighth quarter in a row. Corporate and Investment Banking reported strong investment banking revenue as our platform performed very well in an environment of robust deal flow and elevated sponsor activity. In contrast, Global Markets moderated from elevated levels last year. FICC revenues were down 14% year-over-year, reflecting similar trends across the industry. Lower spreads continue to impact repo and secured financing revenue, which was down 18% year-over-year. Equities revenues were down 17% as volatility levels normalized closer to pre-pandemic levels.
To conclude, we continue to drive strong growth in volumes and client assets and are well-positioned to benefit from higher interest rates. While we look to accelerate our growth momentum, we remain focused on expense management and effectively deploying capital to continue delivering value for our shareholders. With that, I'll turn it over to Graeme.
Great. Thank you, Nadine, and good morning to everyone. Starting on slide 23, allowance for credit losses on loans of CAD 4.4 billion is down CAD 1.7 billion from its peak in Q4 of last year, reflecting the ongoing improvements in our macroeconomic outlook and the credit quality of our portfolio that Dave noted earlier. In 2021, we released over 50% of the pandemic-related reserves on performing loans built in 2020. The releases this quarter were primarily in our commercial, personal lending, and cards portfolios in Canadian banking, reflecting further improvements in our macroeconomic outlook and the credit quality of those specific portfolios. Allowances for these portfolios do remain above pre-pandemic levels, given ongoing headwinds that I will touch on later in my remarks. Turning to slide 24.
Our gross impaired loans of CAD 2.3 billion were down CAD 253 million, or 4 basis points during the quarter. Impaired loan balances decreased across all our major businesses, and new formations of CAD 298 million remained close to the 9-year low set last quarter. In Canadian banking, we had modest increases in new formations during the quarter, with increases in the unsecured personal lending and small business portfolios. In capital markets, new formations were limited to just CAD 7 million as clients continued to benefit from favorable market conditions. Turning to slide 25. PCL and impaired loans of CAD 137 million or 7 basis points was down by 1 basis point and declined for a sixth consecutive quarter.
Overall level of provisions throughout 2021 reflect the quality of our client base, our prudent underwriting practices, the economic recovery underway, and the impact of government support programs on delinquencies and impairments. In the Canadian banking retail portfolio, PCL and impaired loans was down CAD 12 million quarter-over-quarter, due primarily to lower write-offs on credit cards. During the year, the retail portfolio has benefited from higher client deposit levels, decreasing unemployment rates, and ongoing government support programs. For context, this quarter, approximately 6% of our retail lending clients were still receiving government support, down over 60% from the peak observed in 2020. In the Canadian banking commercial portfolio, PCL and impaired loans was down CAD 3 million quarter-over-quarter. Provisions taken this quarter continued to be primarily in sectors impacted by COVID-19.
However, the portfolio overall continues to see low and stable delinquency rates, net credit upgrades, and reductions in credit watchlist exposure. In capital markets, we had a net recovery on impaired loans for the third consecutive quarter. This portfolio is not materially impacted by government support programs and has benefited from a constructive operating environment and strong market liquidity. Finally, in wealth management, PCL and impaired loans increased CAD 14 million quarter-over-quarter. During the quarter, we took additional provisions on a loan written off in the information technology sector at City National. Overall, we continue to be pleased with the positive trends in our loan portfolio, supported by favorable market conditions. While many individuals and businesses have weathered the worst of the pandemic, a number of headwinds remain, as Dave noted.
Rising and persistent COVID-19 cases and the prospect of new variants create the potential for continuation or resumption of COVID-19 related containment measures. Inflationary pressures may also impact our clients through increasing costs driven by supply chain disruptions and labor shortages and through increases in interest rates. We have incorporated many of these risks into our provisioning scenarios, which leaves us comfortable with our current levels of allowances. Looking forward, we do expect our PCL ratio and impaired loans to trend back toward long-term averages over time. In addition to the headwinds I've already noted, the wind down of government support now underway will also impact both our commercial and retail clients, though the full impact will take time to materialize due to the strong levels of liquidity, savings, and job demand currently in place.
Additionally, we have seen strong recoveries on impaired loans over the past few quarters, which we do not expect to persist given the low levels of impaired loans now remaining. That said, as I noted for a number of quarters, we expect to be able to draw down on the existing allowance on performing loans such that our total PCL across all stages will remain below long-term averages. Importantly, we remain steadfast in our commitment to supporting our clients and delivering advice, products, and insights to help them navigate the evolving macroeconomic and operating environment. With that, operator, let's open the lines for Q&A.
Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from John Aiken from Barclays. Please go ahead.
Good morning. Wanted to start off on capital markets. Derek, we saw, you know, an exceptionally strong year. As the second half evolved, we saw revenues trailing off a little bit, and the revenues in the quarter were one of the lowest over the last eight quarters. Was there anything in the quarter you'd highlight as unusual, either positive or negative? Is this a run rate you're looking for in terms of 2022 or can we get the revenues a little bit higher from here?
Sure. Thank you for the question. I think, you know, I'll address it in two parts. First, looking at Q4, I think overall it was we feel it was quite a solid quarter. As Nadine reviewed, we had very strong activity on the investment banking side, both in M&A and in loan syndications. We see that level of activity continuing and our pipeline heading into next year continues to feel very healthy. Obviously, the one area where we saw a slowdown in revenue was in the markets business. I would say that, you know, there were a couple things driving that. One is just the ongoing normalization we've seen in client activity and in volatility that we saw in markets in Q4.
Now, that's obviously picked up as we've come into the fall again, but it was a little more tepid as we went through the summer. Second, when you're comparing over the last eight quarters, recall obviously Q4 tends to be seasonally slower just given August and the summertime lull in activity that we tend to see. So we certainly would not look at Q4 as indicative of where we see normalized quarters going. You know, I think the third item I would say is, you know, we were quite careful managing risk coming into the fall. It was uncertain on what COVID and dynamics would bring as, you know, kids returned to school and communities continued to reopen.
I think we came in with a cautious risk mindset, and you saw that in some of our, you know, VaR metrics and no trading losses in the quarter. You know, obviously, the return in the fall turned out to be pretty smooth and markets stayed very, very robust. You know, in hindsight, were we a little cautious on risk? Possible, but I think it was probably a prudent way to approach it given what we were facing at the time. If I then turn to the outlook going forward, you know, we do, as we've communicated, see normalization in markets, but we think that our run rate will settle above pre-pandemic levels.
You know, if I look at pre-tax, pre-provision earnings, pre-pandemic, we were generally running in the CAD 800 million-CAD 850 million a quarter range. As we saw the elevated client activity throughout the pandemic, that was more in the CAD 1.1 billion-CAD 1.2 billion range. As Nadine highlighted, we've now had eight consecutive quarters over CAD 1 billion. Importantly, that does include the first quarter of 2020, which was before the impact of the pandemic, which was our first quarter to that CAD 1 billion mark. That is certainly an area we're focused on. While we see things normalizing, our objective would be to try to keep that run rate above the CAD 1 billion level in terms of pre-tax, pre-provision.
Great. Thanks for the color, Derek. I'll requeue.
Thank you. Our following question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Good morning. I guess, just a question, Dave. As we think about capital allocation, I think that's gonna be a big deal, in terms of just some of the decisions you will be making. Talk to us in terms of when we think about the CET1 ratio of 13.5, beyond funding for organic growth, the announcements you made this morning, how do you think about inorganic growth? Last quarter, you talked about strategic partnerships for asset generation. Talk, would love to hear your thoughts around asset management, wealth management, distribution, if there might be opportunities there where you could deploy some of this excess capital.
Yeah, I think you covered, you know, part of my answer in your question. You're on all the right themes. I think one of the things we're trying to highlight in our comments this morning is that more capital-intensive, higher return growth opportunities are starting to present themselves in credit cards and commercial lending in Canada. Certainly, our mid-market corporate strategy in the U.S. capital markets, corporate banking, we're looking to put more balance sheet out there. Again, as you said, we have very strong organic capital generation ability that will fund the majority of that. We do expect to see really good RWA growth as our clients start using their balance sheet and our balance sheet to a greater degree. That's obviously the primary use is organic growth.
As far as inorganic to your question, you're starting to see a number of our ventures take flight. We highlighted two more ventures to you today, Dr. Bill, you know, partly through inorganic acquisition, looking to build out the healthcare vertical. It's been, you know, with the partnership with the College of Physicians, it's been a fantastic partnership, up 28% as you heard. We're gonna look to continue to build out that vertical. We introduced Mydoh today, which is in, you know, the family finance vertical. Incredibly exciting opportunity. If you see some of the similar capabilities in the U.S., you know, would there be an opportunity there to kind of build out that early stage client pipeline and to bring clients into the organization in very different ways than we have historically.
Again, part of future-proofing the organization, we are looking to make acquisitions in those verticals in addition to the small business vertical that we've talked about. The mortgage vertical, as we look at OJO and building out our ability to help clients find homes and close homes. All of those capabilities will present opportunities north and south of the border for us to grow acquisitions that'll generally be fairly small, I would think. It's better to get these acquisitions early-stage than pay significant goodwill in later-stage.
I think the few other firms that are pursuing this strategy, not that many, were distinct in this strategy, have found similar things that, you know, paying a huge premium for, you know, in mid-stage, is very expensive, and therefore trying to find these in earlier stages in that CAD 20 million-CAD 150 million range. Again, it's not gonna consume a lot of capital, but very important to our growth strategy. The other place we can deploy capital is we've got four major ventures that we need to scale, and we have an aggressive plan to scale nationally ventures like Ownr that we've talked to you over the last couple quarters we're very excited about, and our Dr. Bill we talked about today, OJO on the home side. Again, we can deploy capital now into scaling, those ventures.
That's a whole growth segment that we'll need and we'll see more capital as we try to really build significant momentum into capabilities that have proven a very strong client reaction to. We've managed these ventures, we've built them, we've tweaked them, we pivoted to where we found a customer market fit. Those, you know, four or five that have a strong customer market fit that we keep talking about are gonna get capital to scale. Then it leads to your third question around in our more traditional wealth management distribution. Absolutely we're interested in acquiring wealth management distribution either, particularly in the United States obviously, but in Europe as well, to build out that franchise.
We're looking for quality platforms, and therefore we're being prudent and we're thinking about, you know, the value and the dilution to the shareholder at the same time because we have the ability to grow these organically at the same time. Again, it comes back to real discipline around we have to create shareholder value, and we're very conscious of the dilution. The last alternative is to return capital to you, which we are starting to do and have that ability through share buybacks and continued share buybacks. Again, nothing strategically changing. The capital doesn't have a half-life to it. It will sit there and it gives us enormous strategic optionality.
Got it. Thanks, Dave, and congrats to Nadine and Asim on your new roles.
Thank you. Our following question is from Meny Grauman from Scotiabank. Please go ahead.
Hi, good morning. Graeme, you talked about normalization of PCL ratios back to where they were pre-pandemic, and I just want some clarification there in terms of the timing. Is this in your mind a 2023 story where we basically get back to where we were pre-pandemic? Is that the right year to think about?
Yeah, I think the hesitancy on timing is because I think there's a high degree of uncertainty out there as you know, and certainly you can just reflect on the last week and we see kind of the emergence of new variants and kind of the uncertainty associated with monetary policy to remind us of that. You know, I'd say we are obviously an exceptionally benign credit environment, and that's manifested itself with incredibly low levels of loan losses. I think last quarter we were at 8 basis points, this quarter at 7 basis points. So you know, having said that, we do see that kind of trending back to more normal levels. It will happen over time.
You know, there's a number of factors that we look at in kind of thinking about the timing and those will hit different portfolios at varying paces. You know, some of those factors are certainly around kind of the strong asset prices and the implications that's had on recoveries. On the wholesale side, you know, we've seen I think I said net three quarters in a row now where we've had net recoveries in capital markets. Certainly we don't see that persisting in the coming quarters, and so that'll influence our provisions there and kind of return us back to more normal levels over time there. On the retail side though, we've benefited from strong asset prices more in the housing and auto space.
Those will persist for a longer period, and so that'll take time for that to kind of revert to normal, and that'll be related to kind of the portfolio turning over. Secondly, I think I mentioned government support. Certainly we've assumed that government support has, you know, had the degree of suppressing loan losses in the near term. Our debate has really been around, you know, degrees to which that is mitigated or simply deferred. You know, as government support has been extended a few times, that's really had two implications. The first is, you know, it's mitigated more of the losses than we originally anticipated, and that's, you know, due to more consumers being bridged to reemployment, businesses being bridged to a reopening.
Secondly, it's also delayed the timing and when we think that's gonna kind of start resulting in increasing loan losses. I think we're on a more definitive path now on the government support winding down. Certainly we're seeing that on the consumer side, and I think the small business is gonna happen over the coming months. We'll be looking for signals in our portfolio on that kind of side in the coming quarters, whether that be through kind of ratings changes or delinquencies, and particularly in the unsecured consumer products there. Lastly is, you know, around the macroeconomic environment that we kind of talked about. You know, the current economic environment is very robust and supportive of the credit outcomes.
We don't see that changing and tipping things in the near term. We are looking at inflation and supply chain, and those will have impacts over time, and the prospect of rising rates also will factor in over time. You know, so you put all this together, like, things like supply chain will have more of a near-term impact on our small business and commercial portfolios, whereas higher interest rates will take more time. It'll affect, you know, our real estate portfolios and pockets for our corporate portfolio. That's unlikely to be a factor this coming year. I think in 2022 we'll see rising levels of loan loss allowances. As I said in my comments, I think the total PCL there will still be well below kind of historic norms.
I think it's more into 2023 and beyond that you start to get into kind of more normalized levels.
Thanks for that detail.
Thank you. Our following question is from Paul Holden from CIBC. Please go ahead.
Thank you. Good morning. I wanna ask you a broad question around inflation and related risks. Now, you've already addressed sort of your expectation for operating expense growth, and you've talked about expectations for central bank rate tightening in response to higher inflation. Wondering if there's any kind of other impacts, whether negative or positive, that we should be thinking about in terms of bank earnings in a higher inflationary environment?
Well, maybe I'll start, and then I'll see if anyone wants to jump in. I think Graeme put his hand up here. Well certainly an inflationary environment helps our asset growth, helps the economy grow, right? As you think about asset inflation, you know, if it's healthy and under a normalized channel, not excessive, then you don't build a bubble, and that can be supportive of overall balance sheet growth and profitability growth from that perspective. Where you start to worry is when you start to see excess asset growth in a certain area, and that inflationary impact has to be watched in a number of asset classes. You worry about it from obviously your customers' cost management and their margins and their ability to maintain healthy kind of debt coverage ratios.
We do worry about it from a risk perspective. Maybe Graeme will touch on that. There's a positive and negative, and that's why, as a bank, you have to watch these things carefully on the asset and CPI side and what impact they're having. We'll get a look into that increasingly with the, you know, the quarterly numbers that we see from our clients and their income statements and balance sheets. You know, off the top of my head, those are two areas that, you know, we certainly talk about as a team. Graeme, did you wanna jump in on that?
Yeah, I was gonna. I think the inflationary kind of ranges we're entertaining right now, I think that's a net positive for the bank overall. I mean, while rising, you know, we'll see kind of enhancements and improvements to our revenue, those will be attended with higher credit costs that come with that, kind of in relation to what I referred to earlier. Again, it's gonna affect different portfolios in different ways. You know, you look at, say, our small business and commercial clients, you know, they're more price takers than price makers. They're gonna have less supplier flexibility. You know, they're gonna see a higher implication towards our credit costs, and that's kind of referring back to the comments I made earlier around our forecast going forward.
You know, this will all ultimately translate into higher interest rates as well, but as I said, that's. I don't think a much longer time to really translate into our credit costs. When you look at our fixed rate portfolios, it's gonna, you know, those low rates are locked in, and it'll be when we get to those points of refinancing. Those are kind of more measured in years than they are in months and quarters in terms of the implications there. Different portfolios will see that and absorb that in different ways. The corporate portfolio is probably more resilient again, because again, they have better ability to pass on their inflationary costs, more resiliency in their operations.
We look at those implications in different portfolios across the board, but overall it will over time, you know, contribute to the rising kind of loan loss costs.
Just quickly, can you tell us what your inflation range expectations are?
Well, I think we have a number of scenarios that we analyze, and each of those scenarios is gonna have slightly different assumptions embedded in it. We look at the different ranges for kind of extreme purposes and capital resiliency. I'm not sure there's a single answer we'd give you on that. Really, look at a wide range as we think about both capital and earnings on that front.
Okay, thanks. I'll leave it there. Thank you.
Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi, good morning. Just looking at the wealth management division, I mean, pre-tax, pre-provision earnings, I've got up 3% if I exclude the legal provision. It doesn't really match with what we're seeing in the asset growth. I guess my question is there any other unusual items? I guess where I'm going is I know there's several segments in here, you know, Canadian asset management, wealth management, CNB. I'm just hoping you can provide maybe some perspective on what you're seeing pre-tax, pre-provision wise, because I think there's probably some good news stories on the asset management side. That may be overshadowed by some just near-term pressure in CNB, City National Bank.
I guess this isn't maybe a question but a statement, it would be helpful to have City National Bank removed from the wealth division because I do think sometimes it clouds it out. I'm just hoping to get some color on that.
Thanks. It's Nadine. I'll start, and thanks for your advice on the segmentation. Appreciate that. Just as it relates to the U.S., I'll start with U.S. Wealth Management. You're right, there are a couple of elements in there. We spoke about the strength on the wealth management side, particularly in Canada and the U.S. with the high growth in the AUA. Obviously, with that business, you do have the variable compensation that scales with it, so very strong margin there. We have been adding a lot of advisors in order to generate that growth on the AUA side. I would say that's the strong momentum in that business going forward from a PPPT perspective. When you look at City National, we spoke a bit around the margin compression that we saw.
If you look at what some of the drivers were related to that, the PPP loans in particular, which we expect that to taper off, going into next year, so that will no longer be a headwind. Then as we look at the mix, we've seen a lot of strong asset generation, but that deposit level has still been quite high. That loan to deposit mix ratio has put some pressure on margins. Then as we start to see rates increase, like typically next year, you'll start to see that margin expansion as it relates to City National. On the cost base there, we have grown that bank a lot, and so we do have to invest in our infrastructure in order to support that.
That's why you're seeing a bit more of the uptick in cost as it relates to the City National platform outside of the provision. I would say going forward, though, given the expectation around some of those changes as it relates to the stabilization of the NIM that we do expect you know strong operating leverage overall in that business segment. Maybe I'll turn it over to Doug if he wants to speak about the.
Yeah, sure. I think the hypothesis and the question is a very good one. If you looked at the core Canadian larger franchises of Global Asset Management and Wealth Management Canada, a couple things that are probably not obvious. There are some compensation true-ups in the quarter. That's a good-news fact, in that while we didn't get the accruals right throughout the year, those are performance-based or profitability-based compensation programs. That's not a normalized run rate. There's seed capital that quarter-over-quarter was a little bit lower than the prior quarter, but they're again not fundamental to the success of the business. You know, you're right.
The big franchises that drive the bulk of the earnings in the non-U.S. part of the segment are very healthy and fundamentally very strong.
Good. Thank you.
Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Good morning. Just a follow-up though for Derek on the capital market outlook. You know, I get some of the indications there, but do you think earnings growth and PPPT growth in your segment can be positive in the coming year? A separate question, Dave, Nadine. Well, Dave, in your opening remarks, you talked about paying CAD 6 billion of taxes in this past fiscal year. It makes me think about the Liberal proposal to introduce the surtax on, you know, banks on their Canadian earnings, presumably. Have you done any work to quantify the impact of that proposal? Thanks.
I'll let Derek go first, and I'll follow on with the tax question.
Sure. You know, good question. Not an easy one to answer in terms of, you know, the outlook on client activity. I guess the way I would approach it is, you know, obviously 2020 was a very strong year for us given elevated client activity, and coming into 2021, we had expected there'd be some normalization of that activity. It probably didn't normalize as much as we feared, and so we had to construct the backdrop for this year, and you saw that result in, you know, 3% growth in revenue and 5% growth in pre-tax, pre-provision for 2021 off of what was, you know, a prior high water mark in 2020.
Notwithstanding, you know, some expectation of normalization, we did manage to drive strong revenue pre-tax, pre-provision growth, and then obviously very strong NIAT on the back of the PCL recovery. I think as we now look forward to 2022, it's a little bit of a similar situation. Client activity on both the investment banking, corporate banking side as well as in markets still continues to be very healthy. We see that continuing right now, and against that backdrop, you know, I think we feel quite good about our pipeline and level of activity.
What's obviously difficult to predict is, you know, particularly building off of some of Graeme's points, as we see dynamics around variance and changes in monetary policy and inflationary pressures and how policymakers may react to that, you know, it's difficult to predict what the capital markets environment will look like for the full year. You know, certainly our objective is to continue to drive growth, but it will be somewhat dependent on the market backdrop and level of client volumes.
Well, are expenses a lever, though, that you can't pull because you would have, I mean, a lot of investment banks would have expanded staffing levels in the past year or two?
You know, certainly cost is something we'll continue to keep a close eye on. You know, a large component of our costs are compensation, which are linked to performance of the business. That does give us a natural lever that if for some reason activity slows and revenue slows, there will be, you know, an offset in compensation expenses. You know, more broadly, we are still very focused on broader productivity and efficiency initiatives. You know, two items that we do feel very good about exiting this year, we did manage to bring our even though we had great results in 2020, we managed to bring our efficiency ratio down by almost another 100 basis points this year and continue to drive positive operating leverage in 2021.
You know, obviously our clear objective is to drive the client volumes, but we will manage our NIE closely to try to ensure we continue to drive strong productivity and positive operating leverage.
Thank you.
Maybe a quick high-level comment on the overall bank tax environment. You know, I think from a macro perspective, the most important thing that we have to think about as a country is we need to attract capital. We need to attract capital domestically, and we need to attract capital from foreign direct investment. We're going through an enormous transition of our economy, supply chain transition, climate transition journey where we're gonna need up to CAD 2 trillion, and therefore creating an environment that attracts capital and where the rules around the economics are certain for a longer period of time is really important. I think when you start proposing taxes right now in this narrow way can have a real detriment to the overall investment thesis for Canada.
For the first reason there, we're obviously articulating that perspective that's really important for Canada to think about long-term investment in our country. The second is, you know, a tax on banks, a unique tax like that means less capital for small business, less capital for investment in our clients. As you know, we retain roughly 45%. We pay out 45% of our income, and then we reinvest the other 55% mostly in this country and in North America and North American supply chain. Therefore, that just means less capital to reinvest. I think from those perspectives, now is not the time to look at these types of policies. We need to rein in our spending.
We need to think about inflation, and we need to make sure we attract the future generation of supply chain and manufacturing and investment and climate to this country.
I hear you, but and I tend to agree with everything you say, but you know, there may actually be a tax that's imposed nonetheless. Have you evaluated these?
I don't have any details on it right now.
Yeah. I would just say that we're still working out some of the details, and nothing's been announced as yet.
Right.
It's a little difficult for us to comment on an impact until we get more information on it.
Understood. Thanks.
Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning. Graeme, can we go back to a comment I believe you made in Q3 2021? I think you suggested that PCLs, the impaired loan PCLs ratio in 2022 might in fact be higher than the long-term averages. I think a few of us observed that that seemed a little bit high. I'm getting the sense from this call that you're now suggesting that it might be below long-term averages. First of all, have I characterized that correctly? Secondly, can you talk about that change, if in fact I've characterized it properly?
Yeah. Thanks, Mario. Sorry. I think if you go back, I think when we were making those comments, we were referencing to at peak points, i.e., a certain quarter, not certainly on an annual aggregate, right? There's part of the context is that. I think then that kind of leads into this quarter in my earlier comments, right?
Which I said, I think as we've gotten further into the recovery, as we've seen that government support continue to extend, as we've seen more clients bridge to kind of reemployment and bridge the reopening of the economy, again, those all factor into our comfort and confidence that more of those loan losses that we think had been suppressed have actually, you know, also been mitigated and not just simply deferred to a later date. You know, again, there's a lot of uncertainty out there, and so to my comments earlier, the timing on kind of when we kind of get back to those more normalized levels is still uncertain. It's gonna vary by portfolio.
I kind of went through the factors as to how, you know, the retail portfolios will be impacted by different factors in some of our wholesale portfolios, that some of these effects will take longer to kick in, such as rising interest rates. But that's just to give you a little bit more color, I think, on kind of how we're thinking about it in our commentary now this quarter versus in the comments we provided last quarter.
To make sure I understand the comments you're providing this quarter then, you're suggesting that, in 2022, the impaired loan ratio will probably be a little lower than what we've seen in prior years or long-term averages, and that perhaps by 2023, it starts to normalize. Is that, have I characterized you correctly there?
I think that's roughly fair. Again, it's just the timing of when we get to that peak is part of the question mark there.
Okay. Nadine, can we go to an expense type question? I'm looking at the measure that Royal likes to use, and it makes sense, the one where you look at your year-over-year expense growth excluding variable comp and stock compensation. That number had been declining fairly consistently year-over-year for some time now. I imagine some of that was COVID related. Then this quarter, of course, it sort of moves higher and materially so. Can you talk about what was it about this quarter that caused that measure to really reverse course? It had been trending down, and then it really reverses course specifically in Q4. Can you speak to that?
Sure. Thank you, Mario. In terms of a couple of things I would comment on, we mentioned in my remarks around the marketing costs, and part of that would be seasonal, but part of that also is just from a Canadian banking perspective, really starting to ramp up on our marketing, as you would have seen probably through the summer and into the fall. In addition to that, we have been increasing our headcount overall and as that starts to pull through in terms of a run rate. That is something that as we talk about the growth we've been generating around our strong volume, that was a bit of an inflation pressure, but going forward, we look to see that we will have continued growth on the top line in order to support that increase in staff costs.
In terms of technology as well, this is one area that we continue to invest. We've been investing through the pandemic. I would say that what we're focusing on going forward, really around those optimization and productivity and efficiency gains that I spoke to, is how can we continue to make sure that we're finding opportunities to invest in our big franchises going forward and create that capacity with reductions in other areas that we can find some efficiency and productivity gains. A bit of it, Mario, just in terms of some of it with seasonality, but also we are seeing that just some of the increase as it relates to some of our growth initiatives.
You know, as I mentioned, with our low single-digit guidance, still we're looking to advance that into next year.
For next year, maybe you may have answered that, and I may have missed it.
Yeah, sorry. Our guidance is still in low -single digits with potential with the inflation pressures moving it up a bit on the low -single side.
Positive operating leverage. Is that fair?
Correct. Yes.
Thank you.
Thank you. The following question is from Sohrab Movahedi from BMO. Please go ahead.
Thank you. I appreciate we've gone over the hour, so I appreciate you taking the call. Maybe just can I start there, Nadine, for a second? Call it around 4%, let's just say expense growth, including inflation. You've talked about the positive operating leverage, and a number of times I think you made reference to higher rates. Can you tell us what is assumed in your budgeting process as far as rates increases next year?
Sohrab, we've looked at it from as we would have done it earlier in the fall, would include probably two rates in Canada, which would been probably mid-year and then towards the end of the year. In the U.S., we didn't anticipate any rate hikes.
That would be the basis of the assumption when you're talking about positive operating leverage, for example, as far as the impact on your margins and spreads are concerned?
Correct.
Okay. If I can just clarify one thing with Neil. Neil, mortgage growth. Can you talk to us a little bit about what mortgage spreads were like during the quarter, maybe throughout the quarter compared to prior periods?
Yeah. Thanks for the question. You probably have a sense, I mean, you know, exceptionally strong volume across the industry, you know, record amount of originations in our business. With that really strong market and all that demand, you know, increased price pressure from competition. It's been a very tight market. I think we've talked in the past, you know, we haven't led on price. We just basically have a strategy. We know we have to be competitive and make sure we're providing good value for our clients. Without a doubt, there's been price pressure in the mortgage business.
Can you quantify some of that for us, like, you know, how were spreads this quarter versus prior quarters or any point of reference?
Yeah. I mean, I would say, in terms of overall in the portfolio, we've seen them come off a little bit, but they do bleed in over time. As originations in Q4, they were, I'd say, the tightest we saw all year. In terms of the total portfolio, that's one quarter's worth of originations, and it will, you know, bleed into the portfolio and impact the entirety of the book over time.
Okay. I appreciate that. If I can just have one last question. If I look historically at the total bank level, your RWA growth has been, call it mid-single digit, sometimes 6%, sometimes 3%, but let's call it in that 4%-5%. This year was obviously on a full year basis, lower, although you had some growth in the fourth quarter. If I think about next year, can you give us any guidance as to how you expect, you know, given the business plans that you have, how that RWA is going to trend? Is it going to revert back to that mid-single digit, or could there be a year of catch up where it could be more like 10% given that you hardly had any growth this year?
I think it would revert back to higher than average, Sohrab. I mean, I think we also had the benefit this year of some of the parameter changes, particularly around the capital markets business, which would have muted some of the growth trajectory. I think as Dave mentioned, the growth potential in our commercial loan book as well as in City National has the opportunity for that to be maybe higher than the regular previous run rate we saw this year.
Thank you very much. I appreciate you taking the calls.
We're going to stay on a bit longer because I think we have a couple more people in the queue and three more. We're going to keep going. Stay with us.
Thank you. The following question is from Scott Chan from Canaccord Genuity. Please go ahead.
All right. Yeah, thanks for taking my question. Maybe a bigger picture outlook. We kind of think about the Canada and the U.S. and your P&C franchises, U.S. being City National. Where do you think the better region is in terms of the outlook over the next few years and potentially related to P2P growth would be helpful? Thanks.
Well, better. I mean, still, you know, Canada is 70% of our earnings, so it's important that Canada delivers for us, strong growth. It's hard to say better, but I would say
You know, when I look at the City National U.S. Wealth franchise, we had, you know, in the first kind of 4 or 5 years of City National, we had a great run. Higher rates helped us. We've tripled the size of that bank. We've seen more muted growth in the last, as you've noticed, in the last, you know, 4 to 6 quarters because we're re-platforming City National for the next phase of growth. We've tripled that bank to an CAD 80 billion balance sheet right now. For us to continue to grow at rates well above the industry, we need to re-platform from a customer perspective and from an operational efficiency perspective. I am very excited about the U.S. growth opportunity from a PPPT because of the higher rates that Nadine referenced. It's of a significant impact on us.
You just can't underestimate how asset-sensitive this bank is, also from a greater efficiency perspective. As we re-platform City National, we're looking for greater efficiency, and we've grown this bank on the top of a CAD 20 billion bank platform. Now as we re-platform this thing into an CAD 82 billion-plus, you know, CAD 150 billion bank, it's gonna have to grow more efficiently and more effective. I'm very excited about the dual opportunity of revenue growth and better bottom line growth there. At the same time, when you look at venture starting to kick in, you look at the momentum we have in our Canadian banking franchise, you know, you look at our quarter-over-quarter growth is still very strong.
We're exiting the year with really good volume growth and momentum across capital markets, as you heard Derek say, in Neil's business across mortgages, credit cards, commercial lending starting to pick up. You look at the quarter-over-quarter momentum into 2022, and then the flows that we're seeing in AUM and AUA in the Canadian Wealth franchise. I'm very excited about Canada, and the numbers kind of speak to that as we accelerate the exit the year with very good momentum. I don't have a favorite child, if that's what you're asking. I like them both equally, and they both have great opportunities, which you can see in our exit numbers. I would say, yes, we are somewhat disappointed, like some may be, in how much we're able to drive to the bottom line this quarter.
We had a number of puts and takes. You saw margins came off. That doesn't take away from the momentum that we're going into, the cost control that we'll be able to demonstrate, stabilize margins, and therefore the opportunity level into the next year, in both markets. I think we're feeling. While we're not as happy with the bottom line this quarter, we're happy with the momentum and the overall franchise core.
Dave, you talked about stabilized margins. When do you think that will happen? It seems that theme of quarter-over-quarter stabilization really, you know, really hasn't come, and your quarter-over-quarter decline was probably a bit more than expectations.
Yes, on our forecast too. Yes, we do feel good about it. Nadine's gonna jump in on kind of the why we're more confident of the stabilization timeframe.
Yeah, maybe I'll just speak first to Canada to give you some perspective. In terms of, you're right, we saw the decrease this quarter. There were a few one-offs, I would say, that we highlighted. If we look at what's been happening with some of the rate increase that we've seen, in particular for Canadian banking, it is prominent in the long end. We look at the two- and five-year rates. We see that that will start to price through. That takes a bit of time in terms of how it averages in for our deposit book. As we also start to see some of the expansion into some of the commercial mortgage or as we start to see the revolve rates pick up in the credit card book, that will be positive.
When I say stabilize, it's thinking about some of the headwinds that we've seen that relates to the mix around the mortgage book and at a lower spread, as well as some of the tailwinds we saw this year on the mortgage prepayment. As those rates start to rise, you will see less of that revenue coming through from prepayments. That's where the stabilization really comes in. The benefits we'll have, some of those one-time items are gonna come back. In addition, as rates start to price through, that's when you're gonna see the lift.
All right. Thanks for your time.
Okay.
Thank you.
Okay.
Following question is from Lemar Persaud from Cormark Securities. Please go ahead.
Thanks for taking my question. Graeme, this one's probably for you. I'm wondering if we could go to slide 23 and talk about the outlook for the ACL rate. At the end of Q1 2020, 53 basis points, and now you're sitting at 60 basis points. Would it be fair to suggest that releases moving forward will normalize a big way heading into 2022? Or is the bank comfortable letting that ratio trend below 53 basis points? Any comments there would be helpful.
Yeah, sure. I mean, I don't think there's such thing as a steady state in your performing ACL. The ACL is meant to be a reflection of kind of the macroeconomic forecast that you have at any given point in time and the uncertainty around that, right? Those are the two factors that always go into it that we have to reassess each and every quarter. You know, to put a forecast out there on a forecast is a bit of a difficult exercise right now.
You know, I think as we look out over 2022, that, you know, assuming that we continue to progress through the macroeconomic kind of strength we see right now, assuming we see some of this uncertainty come down, then yeah, we would see that potentially drawing down further. But the reason it's still at the level that is, you know, we're in a macroeconomic environment that's really strong right now that would indicate that we should be at lower levels of ACL, but there is a high degree of uncertainty still in this environment. That is, you know, those are some of the factors I referenced earlier. So, you know, as we progressed here, we've gotten more confident in bringing some of the reserves down from prior years. But I wouldn't say there is a steady state there.
Certainly, as we look forward into 2022 and we continue to progress, as we expect and some of the uncertainty kind of, you know, reduces around us, then yeah, we would expect that can come down further.
Is the 53 basis points not appropriate to use as the low end of what that could go down to? Like it could go down lower than 53?
Again, there's no steady state there, and it's gonna really be dependent on the environment we're in at any given quarter.
Okay. Thank you.
Give you a fixed number that we kind of end up at any given time.
Okay.
Move on to our last question. Wrap up.
Thank you. Our last question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Thank you. Good morning. I wanted to circle back on an earlier comment. You mentioned that you have conducted testing for the impact of higher rates on potential credit risk, and I was wondering if you could flesh that out and give us some color on the type of scenarios you were testing for, the timing and pace of interest rate increases and how you thought about that impact in relation to credit experience?
Yeah, as I said, we do a lot of different scenario analysis and stress testing for different purposes, right? I mean, you know, at the most granular level, we do that as part of our origination practices when we're originating a new residential mortgage, or we're originating commercial mortgage. Some of that's quite prescriptive in the residential mortgage space, where B-20, you know, has us looking at a client's capacity to service debt, you know, for a +200 basis point increase in interest rates, similar in the commercial real estate side. Certainly we also obviously do this much more at the portfolio level. Whether it's our, you know, determining our loan loss provisions and our ACL, again, we don't have a single scenario there.
We have certainly a baseline exercise, and Nadine referenced some of the assumptions there that go into our baseline. Then we look at our range of. I think we involve about five different scenarios that we look at that kind of describe different interest rate environments. Some more moderate increases, some more severe, likewise. Then we also contemplate, you know, much more implausible environments that really go into our stress testing program, where we're really kind of making sure we continue to have the right level of capital adequacy in place. You know, we do those exercises across the bank. We do those in conjunction with our regulators as well.
Again, some of the earlier comments on inflation, there isn't a kind of a fixed single scenario that we kind of lock in on. But we look at a range. We weight those different ranges appropriately, and then that all factors into how we determine the ACL as an example that we do.
Okay, that's helpful. If I could just wrap up on a comment earlier on inflation. I think you mentioned when you look at asset growth, you wanna look at healthy asset price appreciation versus excess asset price appreciation. Could you provide some context on how you look at, you know, the recent price appreciation for Canadian real estate? Is that one where you view it as excessive and there's concern for broader economic or credit risk implications? How do you think about it?
Yeah, thanks for the question, it's Neil. I'll start just in terms of what we see in terms of housing, as we went into the market, in relation to the mortgage book. I mean, I think you've seen it over time, obviously the biggest driver of what we're seeing in terms of HPI in some of the biggest markets, Toronto, Vancouver, and more lately markets like Ottawa, really moving up into strong double digits. You know, rates is the biggest factor, so affordability, and consumers being able to just go through the metrics that Graeme laid out, and carry those payments. That's the biggest driver. I think, you know, in terms of on the go-forward view, we would say immigration has been, you know, almost completely turned off.
That's a demand that we haven't seen in the housing market. We'd expect that to provide some offsetting demand as we expect to see the rates come up on the timing that Nadine laid out. I think those are the factors. If we look at over time where we've seen different levers pulled, for example, on the regulatory front, whether it's in British Columbia or Toronto, we have seen, I'd say sort of moderate corrections in those markets. Then subsequently over, let's say, the next 18 months, you know, those home prices have come back. I, you know, I think those are the factors we would look at.
I think Graeme laid out fairly well in terms of, you know, the confidence we have in the underwriting and the stress testing we do to make sure that whether it's on an LTV or whether it's just in terms of, a repricing of that debt, that the consumer and/or commercial customer can manage it. So that's the, I think the primary lenses we would look through, in terms of, you know, our loan book. I don't know if, Graeme, you want to add to that.
Yeah. I think our risk approach to the mortgage book is to make sure we are very consistent in our approach through the cycle. We're not using risk as a lever to drive growth here. I would just remind, you know, everyone that, like, we have our focus in terms of our client base is a very high-quality prime client base. We're not engaged in the subprime space. You know, our product set is again very focused on first lien products, and it's very resilient. I mean, we talked about the, you know, the stress testing around interest rates to make sure our clients can be resilient for a higher rate environment. We have a risk-based approach to our loan-to-value ratio.
Again, it's a very prudent approach that allows us to be consistent in our engagement with clients and manage through a cycle very effectively.
Okay. Thanks, Graeme.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. McKay.
Thanks everyone for questions. We covered a lot of ground today. I think in my takeaways, in summary, I kind of covered a lot of it in one of the questions I took. Overall, I think the takeaways are really strong client activity and growth, market share gains across Canadian banking, Canadian wealth, capital markets, City National, U.S. wealth, U.S. capital markets. You know, very strong momentum. You saw the momentum in the quarter-over-quarter numbers, which positions us well. You know, our disappointment also is that we didn't drive as much to the bottom line as we would normally with that type of volume. We walked through kind of the margin impacts and, you know, trying to price mortgages in a rising rate environment as was called out, was a little trickier.
had a number of one-offs this quarter on the margin side. Expenses were a bit elevated, some one-times in there. Therefore, as we look forward, our degree of control. That's a great question, thanks, Sohrab. We plan for a rate environment that was less tightening, and therefore, there's upside opportunity to our own forecast. We're confident in our operating leverage going forward and the momentum we have in the business. Thanks for your questions. All great questions. We wish everyone a good holiday season and look forward to seeing you in the new year. Thanks very much.
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