Good morning. My name is Darko Mihelic. I'm the research analyst here in Toronto. I cover the large Canadian bank space, and I'd like to formally welcome you all to the 2024 RBC Canadian Bank CEO Conference. Similar to prior years, the presentations today will be in a fireside chat format. Now, the schedule and each speaker's biography are available on the website, so this allows me to dive right in. I wanted to say a few words, though, before we start. This will be the 10th year that I've run this conference for RBC. Calendar 2024 is also a special year to me, too. In 1999, RBC hired me to be a research associate covering the Canadian bank stocks. So by the summer of this calendar year, I will have been professionally researching Canadian bank stocks for 25 years. Thank you.
And in fact, a funny story. In my very Q1 of being a research associate covering the bank stocks, I'll never forget this: I waited beside the fax machine to get the results. And, and when the fax machine died and punching it didn't fix it, I ran across the street to TD's IR department to get the results printed, and they were just waiting for me to hand me over the results. So a lot has changed. Technology has really changed the way we do our work. But over this time period, for fun, I saw the Canadian banks go from Basel I to Basel II, and now to the final vestiges of Basel III. I've watched them purchase over CAD 150 billion of acquisitions.
I had a front-row seat through the tech wreck, financial crisis, and the pandemic. There were almost 600 U.S. bank failures over the time that I've covered the Canadian banks. I don't think I'm gonna see a Canadian bank ever fail. Throughout my professional career, I have interacted with 26 different CEOs of Canadian banks and 12 different Lifeco CEOs, too, by the way. So all of this to say that despite all of my experience in covering the banks over this long period of time, a lot of people come to me and say, "Darko, what makes a good bank CEO?" Is this actually a legitimate question to be asking me? Is this a legitimate thing you all need to know? I absolutely believe that it is. Here's the trouble, though.
At this conference, the very nature and timing of it necessitates that I ask questions about the outlook. I mean, we just had Q4 earnings, and it's the beginning of the year. So I ask a lot of my questions aimed at getting the outlook, and I try to sneak in a strategy question here and there to help you all with your investment decision. But the reality is, I'm never gonna get that right. I'm never gonna get all your questions properly asked and answered at this conference. So all of this has been leading up to something that I really want to impress upon you today, which is, there is an opportunity for audience Q&A.
You can use the Slido app, and I intend to put aside a couple of minutes for each one of these fireside chats, and I'm gonna ask the most popular questions voted by you, the audience. So if you'd like to submit a question during any of the sessions, please click on the QR code on your table, log into Slido, and once you're in Slido, you know, choose the corresponding room and please ask a question. It has been a great privilege to be up here and trusted to ask these questions of the CEOs for all these years, but I know I can't get it quite right, and so I do absolutely hope that you all ask questions today. So now I'm gonna give you the list of my top CEOs. Yeah, right. 25 years. I want another 25.
So I won't do that. Without further ado, I'm gonna ask Dave McKay to join me on the stage for our very first session. Dave?
Good morning.
Congrats on 25 years.
Yeah, yeah. Thank you. I was like, "Where is he going with this?
Can I answer the question?
Sure, anytime.
Welcome.
Now, one thing hasn't changed in 10 years. It's gonna snow today.
Yeah.
So thank you-
Yeah, it's always-
For everyone who came in from out of town, who traveled to get here.
It's always a tough, always a tough thing to have these terrible snow days on the conference. But so, as I'd mentioned in my opening remarks, I think we'd love to get a little bit of discussion going on the macro outlook. This is... It's been a remarkable last six months where expectations for interest rates have really changed. And so maybe this is a great chance to sort of flesh out some of the issues around perhaps falling interest rates and maybe they fall significantly. So let's start first, I think, with your outlook. I mean, last year, Royal had a bit of a, you know, a run with net interest margins. We had some deposit betas move fast on us, some issues.
So maybe we can, we can talk, and you can flesh out how you see net interest margin evolving throughout the year, NII, and what happens if we do in fact get aggressive rate cuts later this or even early this year?
... Yeah, I think the rate environment is one of the big uncertainties out there as it keeps changing. I think forward curves keep coming down as, you know, monetary policy does its job and slows the economy in both the U.S. and Canada. A little more quickly in Canada, obviously, because of consumer borrowing costs. Slower in the U.S., obviously, because the 30-year fixed makes it harder to slow down the U.S. consumer, which has been driving the economy along with the U.S. fiscal deficits keep it going.
But in Canada, so as we think about, you know, lower more quickly, and we did come off some pretty aggressive beta changes overall as clients put their money to work with, you know, rates moving so quickly, clients shifted into fixed income assets across the spectrum, not just wealthy clients, but all clients, commercial entities. Everyone made an effort to invest their surplus cash, as they should. So we've come into a world where you're going to see kind of lower rates at the short end, for sure. Longer end, you'll see some movement as well, but certainly we expect the short end to come down, you know, in the next, by the end of 25, certainly by 200 points, and then probably a resting place around 3%, where I don't think we're going back to where we were.
So that's good overall, I think for banks to see 3% kind of net neutral rate in the economy. That's positive for overall profitability. So as we navigate then a rising rate environment last year to a declining rate environment this year, we think we're really well positioned to capitalize on that. You know, one, we still think NIMs are going to increase modestly year-over-year, as we have a roll on, roll off, as mortgages roll off and roll on it. And, depending on duration choices of the customer, anywhere up to 200 basis points increase, even though that's, you know, be a bit less. So I think that is, you know, positive overall as we think about our business. You'll see, you know, some margin expansion even in this environment, which is positive.
Then you're going to see money in motion. You're going to see consumers make different choices. You're seeing markets, equity markets start to move as you see institutional money shift, you see consumer money start to shift. And when you have the largest deposit franchise and the largest wealth management franchise, capturing that money in motion is a core part of our capability that we've proven and our strategy. Going forward, as you see it shift from fixed income and savings into equities, into long-term funds at higher margins, as consumers put their money to work in different ways, we're really well positioned to capture that money in motion at a higher earned margin in our wealth business than we're earning in our core deposit business or even our GIC business today.
So I think from that perspective, we'll see the magnitude of that shift and the choices that consumers and businesses make about investing their surplus cash. But over the next two years, you'll start to see that money move, and you saw a little bit of that before the holidays, as there was a really significant bullish move on markets. We'll see if that sustains at that pace or it slows for the coming year. I would expect a little bit. But overall, there will be a money in motion play that we intend to capitalize on, and our position as the money is within our sort of control. It's in our accounts, it's in our GICs, and we'll help customers make the right choices about moving that into different productive assets over time. Then some of it will get consumed.
Some of it's going to get consumed in higher interest payments as a buffer to potential, you know, payment challenges on unsecured products and credit products. So I think that the lower rates are gonna help on the credit side. They're gonna alleviate some of the payment shock we're seeing in our economy, gonna free up more cash flow for consumers to spend in the economy and help drive a quicker recovery in a shallow, you know, a shallower recession, a softer landing, as you might say, particularly in Canada. So I think from that perspective, lower rates more quickly help on the credit side, help the economic growth and recovery mode for the country out of a shallow recession. So I think from that perspective, it's good, right? It helps alleviate that payment shock that we're seeing.
And the consumers are, I'm sure we'll talk about it, are handling that payment shock quite well right now, and this will make it easier for them, going forward. So from that perspective, lower rates help on the credit side. And the third thing I will say in a capital markets business, you'll see more confidence in moving deals forward. There's a lot of discussion, there's a lot of advisory work going on. Customers will get conviction now that they can fund at a certain rate, that the economics work on their transaction, and they're ready to move it forward. And therefore, you'll see pipelines firm up, and you'll see more activity come to close and more commission and more advisory fees at that, at that point in time.
You'll see more debt capital markets work and more issuance, so on the bond side, and hopefully a continued rally in equity. So from the capital markets perspective, it feels like the pipelines are strong, and it'll be a good year, and we'll capitalize on that. So when you think about our franchise, retail, wealth, and capital markets, we are the best positioned, most diversified bank to capture whichever way consumers and businesses make choices and whichever way rates go, we have the business to capture the flow and take advantage of the margin expansion and profitability expansion. So sitting here with a franchise, I feel very good about handling whatever comes at us in the new year. We're ready to handle that and excel at driving differentiated performance for our shareholders.
So if we can expect a little bit of margin expansion, but what about loan growth? Are people waiting for lower rates before they make that big commitment, commercial loan growth?
Absolutely.
Maybe, so you could tie that in together with a sort of over-
It's a great point, Darko. So obviously, demand is suppressed both on the corporate lending side, and I would say the consumer side, as a number of projects on the development side aren't going forward. There's a huge need for housing, as everybody knows, in our economy, and but rates are at the point where it's uneconomic for many consumers to make that commitment to a presale. So lower rates will trigger more confidence, and presale activity will allow more projects to go forward and start to build that capacity. So we have a lot of work going on to clear the red tape, to create zoning, to create infrastructure, to create housing. We need some rate support that consumers feel confident in making that presale commitment, and then we'll see that go forward.
So in the absence of that, in a higher for longer world, you'll see slower mortgage growth, you'll see slower mortgage demand, as you've seen that resale activity come off significantly. That will stimulate, obviously, certainly new construction, but also resale activity. So no more positive for volumes on the mortgage side as well.
Before we leave this topic, I just want to touch on a couple of things, because last year, especially last year, and especially with all the events given in the U.S., there was a significant move in deposit costs.
Mm-hmm.
Today, I can't remember in my entire career so much discussion around deposits and the deposit environment. So the question for you is: You're expecting margin expansion, but there's got to be a lot of competition for deposits.
Yeah, there's absolutely gonna be competition. There is competition, significant competition in deposits, particularly in the public sector side and the commercial side, where they come up for bid on a regular basis, and those are very expensive, kind of, hot deposits. But where we've invested and where the core asset of RBC is, is in our core consumer business and our core cash management business of commercial, which we've been investing in for 20-25 years. It's the value creation, it's the technology we've built, it's the scale that we have in distribution and branches, ATMs, it's online capability. It's all the partnerships that we've built and the value that we create from Petro-Canada to Rexall, to Metro, to all the partners in our suite that create value for our customers.
It's that ecosystem that rewards a customer for the depth and breadth of their relationship with us. We've been building that for 20 years, and you can't pull a customer away on price for that. It's the whole relationship value creation that they look at, saying, "I'm not gonna leave. I want more because I'm getting all this value from, from RBC." That... The creation of that ecosystem leads to a very significant low beta consumer, and, and on the commercial side, with the cash management investments and treasury management investments we've made, and further investments in the United States now, which we should talk about, creates an ecosystem and a capability set that allows us to earn a higher NIM and allows us to, to weather some of these, these margins.
That's the margin expansion comes from, the very strong core cash management and core consumer banking offering that we've been building and building and building. And you just can't come in with a price lever as a competitor and say, "Hey, I want that customer. I'm gonna price that." You've got to offer all the other value, and we have the best ability to match price because we are the lowest cost funder at the end of the day, and we have the, you know, the highest rating. So if we want to and have to match on price, if it's a price-sensitive sector or price-sensitive product, we have the best ability to do that, given our operating scale and our operating margin allows us to do that at a profit where others aren't doing that at a profit.
So I think the investment we've made, the core capability around core cash management, is an asset in a competitive space that we're already in, we have always been in, and will become, to your point, more acute, as you know, a number of banks wake up and find out, you know, they haven't invested in funding. It's a long-term investment that you have to make to create value. It's not just a price game.
And so despite that deposit competition, still looking for some NIM expansion.
Yeah.
So it's gonna be, like, a mixed thing. It's gonna be a little bit of asset reprice, pressure on deposits, but still some NIM expansion with low loan growth. I think that's a good way to sort of think about. So that's the revenue impact of falling rates. Last year, and even moving into last year, we were a little bit concerned that these high rates would cause some harm to your mortgage borrowers and create a situation where you have a lot of renewal shock. How do you look at that situation today? And maybe, is there any way you can put some meat on the bones here for the crowd? Now, if we were to use the implied forward curve, how much has this changed the concern for you on mortgage renewal shock?
For us, as we look at the renewal segments that are coming through, 2024 is still a fairly light year by standards. Only 14% of our overall CAD 300+ billion mortgage book comes up for renewal in 2024. And 25% again in 2025, and then over 30% in 2026. So it's still back-ended renewals to 2025 and 2026. And we fully expect, based on my previous comments, that rates will come down significantly by 2025 and 2026. But if you think about the renewal strip that's gonna come through in 2024, if we look at the current rate forecast or rate forecast from December, which are even lower now under last week's forecast, we expect roughly a CAD 400 payment increase to the average mortgage holder in Canada.
That's somewhere between a 20%-25% increase in payments. That's not dissimilar to what a number of mortgage holders were going through in 2023. Our experience in 2023 as an industry and as RBC is consumers are doing a very good job of, you know, using their savings, of changing their spending habits, if necessary. But also, don't forget that 20% payment increase matches, on average, a 20% disposable payroll increase. So income has gone up on average 20% since 2019. So income is up, costs are up, and that, those reasons, the income is up, they built up a bit of a cash surplus. They have the ability to change their spending patterns if necessary. They're handling that CAD 400 increase very well for all three of those reasons.
So that experience will likely get replicated it, with a very similar payment shock in 2024. Employment has stayed very stable and, you're seeing a little bit of movement on employment. It could be more from more immigrants coming in, and the denominator increasing than actual loss of jobs. We got to continue to create more jobs in Canada, which is one of our challenges. So the consumer, for those three reasons, is handling this payment shock very, very well. And when they can't, you're seeing because of the significant demand in Canada for housing and the shortage of housing, you're seeing home price indexes are still very strong.
So in the, you know, few cases where we have to, as an industry, realize on a home, there is a strong demand for that, and the realization values on that home are good. That you can contrast a little bit to CRE, where because of the interest rate cycle, because of cap rates, because of lower demand, realization values on commercial real estate are being challenged. And part of the reason that you're seeing losses now is that when realizing on a property, the realization values are lower than what we expected. So just to contrast the two worlds. So to your point, consumers, particularly in Canada and in the U.S., are handling this payment shock very, very well for those three reasons.
So I want to switch gears and talk a little bit about capital and maybe even jump into... Actually, why don't we talk, why don't we talk about HSBC here? Because, you know, you reported your earnings, and then we find out later...
Yeah.
In the month that the deal has been improved. So, so with that deal now being approved, a little bit of a delay, a few conditions around it, can you give us a bit of an update on how to think about HSBC? And if, is there anything new we should be thinking about with respect to that acquisition?
I think we're very happy to see this phase and get the approval on HSBC, because it's good for Canada, it's good for HSBC employees, it's good for clients, and we get to move this transaction forward at speed now. And while delayed, we are on track to deliver all the benefits that we articulated in our investor presentation in 2022. CAD 740 million of cost saves, roughly about 55% of the overall cost base, I think is right on track for us. We have about a year to think about that and to get to know the organization and to firm that up. So, you know, the concessions that you saw come out around the approval of the deal, the vast majority of that we had already contemplated, is important in the transition of this organization to RBC.
Working with employees, protecting clients, protecting the front line, creating a global center of business in Vancouver was really important to us because we're looking at consolidating work from the U.S. into Canada to save on costs, particularly from California, where it's very expensive to hire bank employees, that they're harder to find, harder to find, given all the consolidation in the California market. So creating a center of expertise in B.C. in the same time zone was a strategic part of our plan when we entered into the transaction, and therefore, making that formal commitment was important to us. But it was all part of an overall strategic resourcing plan that we had thought through quite significantly.
So as we thought through, so when you look at the broad range of representations we made, the vast majority are important to the transition and the health of this franchise going forward, and we are happy to make them. So doesn't materially change in any aspect, any of the cost takeouts or the revenue synergies that we have yet to articulate to you going forward. So we're very excited about this transaction. We're very excited about bringing HSBC clients and employees into our fold in the coming months. And makes a big positive impact to the overall investment thesis and overall profitability of RBC and scale of RBC.
So when you think about the capabilities that HSBC brings on trade finance, on multicurrency accounts, on global view of your overall banking structure, on the consumer side, on the business side, all that capability is now going to be on the RBC tech stack and has been built there, and will be offered to all 15 million of our consumer clients and all our commercial and corporate clients. So from that perspective, all that capability will be cross-sold into our existing customer base, and we're very excited about doing that.
And then the HSBC employee side, they'll have a better cash management access, better access to mobile banking, everyday banking capability, and therefore, the cross-sell off a single service mortgage holder into credit cards, into banking, into investments, will be, you know, a material part of our overall offering to that client base. So as you think about how complementary these two businesses, which creates, at the end of the day, this very strong cross-border global consumer and commercial offering in Canada that's, that's offered to all Canadians, that's where the investment thesis gets really exciting for us, and that's why we're so excited about pursuing this opportunity with HSBC and why we can't wait to close this and get on with it. So, stay tuned to, you know, when we'll actually close this in Q1 2024.
So in a number of months, we'll be able to close this transaction. And what's different about this, don't forget, it's not just a financial close. It's an operating close and a financial close on the same day. So we close this, and we convert the entire technology onto RBC on the day of financial close, and that's different than what you see in most transactions, where you have a financial close, you take ownership of the technology and the assets, and then you migrate it when you're ready. Everything will occur on one weekend in this deal, which moves forward all your synergies at the end of the day, to the day of the financial close. So a lot of work's been done in the last year.
What work we couldn't do, we'll start doing now, given the approval by the Minister of Finance, and we're excited to move forward. We are very excited about the future.
You mentioned CAD 740 million of cost saves, and you said the word revenue synergy. Is it too early for me to pin you down on a number today?
It is, not today. But we will... As we get closer to the close in the coming months, we will certainly articulate that number. We'll have an investor day, you know, later on in the year. We expect to go through more formally the longer-term plans for a number of our businesses. But certainly, as we get closer in coming weeks to that close, and we get, locked in on, on the close date, then we will articulate the full suite. But firming up to CAD 740, you know, plus, we'll come back to you on the revenue synergies around those categories that we talked about.
So you'll, when you close HSBC, you'll have comfort... I think it's comfortably above 12% Common Equity Tier 1 ratio.
Yeah.
So last year at this conference, we were thrown a bit of a curveball. The DSB was increased. It was increased again in June, and throughout the whole year, we watched as other parts of Basel III reform were being implemented. We've now got a floor coming up, FRTB. And then there's just this general view that globally, there's a fight for more capital. There's pressure for more capital everywhere. And yet, when I sit back, and I see this pressure for higher capital, I've seen it for 10 years, you haven't changed your ROE outlook. And so the question is, shouldn't we expect a bit more pressure on capital ratios? And why would this not pressure the long-term ROE objective of RBC?
There's two parts to that question. Maybe I'll start with the first part around capital ratios. I think you've heard from the Superintendent of Financial Institutions that he feels Canadian banks are strongly capitalized. He's got a better feel for the overall cycle that we're going through and therefore, you know, kept the DSB at 3.5%. And we expect that to kind of remain that way unless there's a significant change in the outlook for the economy and the risks that you see systemically within Canada. So we're operating with a construct of 12%+, then we've always operated with a 50 basis point buffer to the regulatory minimum, as you should in a prudent way. You never want to touch that regulatory minimum.
And therefore, we'll continue to operate with that philosophy of, you know, 50 basis points kind of premium, therefore, you know, 12%+. We've told you for a year now that we will continue to have the ability to generate significant capital and close the HSBC transaction with a 12%+ CET1 ratio, and we continue to espouse that view of being strongly above 12%+. So absorbing that, that will be accretive to ROEs. And they've been obviously dragging down our ROEs, carrying 240+ basis points of surplus capital to do that, and therefore, that will be, you know, part of an ability for us to continue with all the synergies that we've talked about, with the revenue synergies coming on.
So we are maintaining our view of a 16%+ to 17% ROE, 'cause it's very important for our franchise to continue to deliver that for our shareholders. And we feel our franchise is positioned to do that with a growing wealth platform, with more tailwinds behind the wealth business. It's a higher ROE business, continue to do that. The operating efficiencies that we feel we can gain will continue to play into that. Stronger performance out of our U.S. franchise will continue to provide tailwinds.
So when you look at the mix of businesses and how we feel we're positioned to capitalize on capital markets growth, on U.S. wealth growth, Canadian wealth growth, bringing HSBC into the fold and our overall competitiveness as a, you know, cross-border and Canadian retail and commercial bank, the commercial banking momentum that we have, and we think about the mix of that and the margin expansion we think we can attract and the overall operating efficiency, we feel confident that we are going to drive a 16%+ ROE, notwithstanding we're carrying higher absolute capital levels than we were five years ago, that there, you know, may be some buffer impact in, you know, 2026 that we'll manage through.
With all that going on, we feel that this franchise, given the diversification, the strength across those businesses, can deliver over the medium term, longer term, the premium ROE in Canada, 16%+, and we're still strongly of that view. And it's a really important message to deliver today.
If I were modeling Royal, which I don't, but if I were, you know, I would probably see some capital generation ramp up throughout the year and into next year. So the question then becomes: what do you do with the capital?
Right. So we're already to that question already. So yes, the answer is that there is gonna be significant capital generation from our franchise and significant core book value growth from that. And therefore, as we rebuild those capital ratios, I don't have any significant strategic gaps to the franchise to be successful, either in Canada or the U.S. So it would have to be opportunistic and create, you know, significant shareholder value. We'll start by, you know, removing the DRIP and this year and returning capital to you as an ability to continue to drive a premium shareholder return that we haven't been able to do over the last kind of 18 months. So I think that's really exciting for us to do that.
But even with that, we'll generate significant excess capital from the high ROEs that we're driving and the growth that we foresee, and therefore, we will prudently invest that capital in the existing businesses that we have, organically, obviously, and then inorganically, you know, the focus will continue to be in the United States. Tactically, maybe to follow up on the Brewin Dolphin acquisition with attack on there to create a little bit more scale in the U.K., but that would be a secondary objective. Primary would be in the U.S. wealth or commercial space, but the opportunities are few and far between, and the market is too uncertain right now to do that, and therefore, isn't in our short-term objectives in any way.
We want to continue to rebuild capital as we did for HSBC and do a cash transaction and, you know, find that right opportunity, which we don't clearly see right now, to tell you the truth. There's been a lot of volatility in U.S. markets. There's been a lot of volatility in betas, as you talked about. There's still a lot of uncertainty around regulatory outcomes in the U.S. as far as the rules go, and all that has to kind of walk down before you can make a significant capital investment and generate predictable returns. So in the absence of that, we will continue to drive shareholder value by returning capital to you and looking for opportunities, but it's not the primary objective right now.
So we feel very good about being in that place, and I think we've earned the reputation of being very judicious about how we allocate capital, and there is no half-life to capital that day. You can only misspend it. So it. We'll be very careful how we use that.
So I wanted to touch on two other topics real quick. Maybe credit. We'll start with credit quality, maybe just one of the things that, you know, as I sit back and I look at each bank's sort of outlook and guidance on, on credit quality, I wonder if you can help me with a bit more color around how you see provisions for credit losses evolving, because last year we had some CRE. You talk about increase in consumer losses in the unsecured books. Can you give us, like, a view of how you think PCLs will evolve this year, and maybe upside, downside around some of that?
Yeah, I think as you saw in our Q4 comments, we still expect kind of peak PCL to come through 2024 as we still will see consumers struggle with higher rates. You'll still see some more leveraged businesses struggle with higher rates. You saw very strong job numbers still, so, you know, consumers are working and generating cash flow, but its ability to meet their obligations. So as we forecasted from, you know, 25 basis points in 2023, upwards to 30-35 basis points through the peak in 2024. And then when you get to that peak, you can start thinking about reducing your, your ACL and your Stage 1 and 2 build into a release over time.
But, you know, through 2024, we expect it to be a little bit worse than 2023, in a number of fronts. Commercial real estate will continue in the United States to see some pain as realization values, as I said before, are still low, and you'll see, you know, some office and some, you know, multifamily res, depending on the markets, struggle a little bit. And we'll see those losses in capital markets. We'll see the odd loss in the CNB, commercial portfolio. And while we've seen, you know, no losses to date in our Canadian commercial real estate book, you might see the odd loss. It'd be hard for me to sit here and say we'll continue to have no losses whatsoever. But you'll probably see some losses there. So commercial and commercial real estate will continue to...
You would expect to see some losses. You'll see some unsecured, consumer losses as you're seeing delinquency rates increase in, credit cards and consumer credit cards. That's the normal part of the cycle, is still tracking as we see to, towards more a normal credit cycle there, and you can time, usually, your, your cycle peaks around the unsecured business. So feel to my points before, very good about the secured business, consumer business, but the unsecured business, you'd have to expect, given the delinquency, build a little bit more loss. So that's the backstop to why we think it'll be closer to 30-35 basis points through 2024.
That, you know, hopefully, you know, given everything else I've said, with rates coming down, with the economy performing strongly and being able to cover more cash flow released into the economy, you'll see it get better thereafter. So I think that's the driver, a little bit on delinquency, a little bit on weaker realization values in the commercial side and, but general strength.
I want to go to a question from the audience: Why should investors not be concerned about City National, considering the capital injection in September? What about in a lower interest rate environment?
... Yeah, so from City National's perspective, that was just a movement of assets from one booking point to another. And those assets still so we haven't realized the loss on those assets, so it was just taking those yielding assets, rebooking higher yielding assets. So we basically moved forward earnings into the City National franchise. But there's been no loss to the shareholder in that, and we expect those assets to pull to par over time. And there is a tax positive tax impact of doing that, that you probably should have noticed in our Q4 results, that it really helped us, the transaction, quite significantly.
So from that perspective, it was more of a moving forward of earnings, for the City National franchise that would have taken a number of years to let those maturities come up in those securities and then rebook them at that time. So I think it was a really good transaction for RBC to do that. From a City National perspective, though, they did see higher betas throughout the year, as all regional banks saw in the United States. You saw a greater volatility of cashes, particularly when you have a wealthy client base like we do. More clients put their money to work, and it started pre-crisis, banking crisis in March. We saw our consumers move into fixed income product more significantly, and to retain that business, we had to increase betas.
That's probably started in the fall of 2022, but really accelerated through 2023, particularly into the banking crisis, where a lot of different things happened and some clients moved their money right out of the U.S. banking system through money markets onto the the Fed balance sheet. And that was a very significant move, I think, as you saw over, what? $2.5 trillion move out of the U.S. banking system onto the Fed balance sheet, and largely still there for a number of reasons. And that's hurt the liquidity of the regional banks and including City National. So from that perspective, betas went up, and that beta shock we absorbed into overall profitability. And the overall costs of running a bank in the U.S. and the increased regulatory expectations just keep going up.
You've seen that across a broad spectrum of commentary in the U.S., and City National is not immune from that, as it's a bank that's tripled and had to continue to invest in technology, invest in process. The cost of that with inflation has continued to go up, and our cost structure and building out, you know, from a large... I'd say, a small regional bank into, well, now designated as a large regional bank, just the cost of that infrastructure is now within kind of the run rate of CNB. So you've seen that cost increase come. Then we took a little bit of PCL on the entertainment side and media side of the business, given the strike, and then one or two properties on the commercial real estate side.
So went from zero PCL to a little bit more PCL. So all that came at us in a given year in the United States, and therefore, you still may see some PCL going forward here and there, obviously. But as far as the cost side, we're starting to get a much better handle on the cost structure, and there remains a very significant opportunity for us to start to bring that cost structure in line with the size of the organization. So we reduced our overall complement of employees last year by 5%. You'll see the run rate benefits from that, while continuing to manage the overall cost infrastructure to be more appropriate given the size. We benchmarked that.
You know, a bank our size, we have a number of competitors in the US market that we benchmark, and in the regional banking side, they're running, you know, $70 billion-$80 billion balance sheet with a productivity ratio of around low 60s%. And we're running a $70 billion bank with a productivity ratio in the high 70s%. And therefore, we see that as an opportunity, even at our size, to be more efficient than we are. And that's the mandate for Greg Carmichael and the new team at CNB. They've done this at Fifth Third. They're enormously experienced leaders and successful leaders, and they have the mental model now, as they've executed it as a team before. How do you build a regional bank from $70 billion to $200 billion?
This team knows how to do that in an efficient way, and I think with the new team, with the ability to get more leverage and revenue out of our existing asset side of the balance sheet, with the ability to reduce cost, absorb the PCL, you'll see CNB perform better in 2024 than it did in 2023, and better yet again in 2025, and we'll be back on track. So it's a six-month blip. It was a hard hit to us. It's still a small part of RBC, but it's going to become a tailwind to us in the next couple of years, and we're very excited about the long-term potential and the new team that's in place.
This is a very experienced team that's proven they can build a regional bank and win long term in the regional bank space, and I feel I'm very excited about the tailwind that they'll, again, provide RBC going forward. Notwithstanding, it was a difficult year for us, but we earned through that. But that's the power of the diversified franchise we have, that we took it on the chin in one of our, our businesses, and we earned through that, and we produced very strong, differentiated earnings for our shareholders.
With that, we're running out of time, so maybe-
Okay, I could go on and on. Thank you. Thank you, everybody.
I could leave you maybe just a couple of key messages, for, for the... That was, that your key, your key message for the, for the crowd?
A model, diversified model, Capital Markets, Wealth Management, Retail, and Commercial, that's positioned to profit and outperform no matter what the market brings at us in 2024. So we're feeling very, very good about things.
Awesome. Thank you so much for your time.
Thank you.
Appreciate it.