Good morning, everyone. Welcome to our Global FI Conference. It's actually truly global more than ever. And despite, you know, everything that we're seeing in the broader marketplace, it's a great time for us to bring, obviously, our clients to being able to meet with investors and share, you know, how the emerging landscape is going to impact our sector. Our sector has actually seen a significant amount of attention and greater investor interest recently for a number of reasons. And obviously, the sector is very critical to the overall economy. And, you know, no better way to start off, obviously, with our morning session. To kick off the morning session, I'd like to introduce Derek Neldner, who's CEO of RBC Capital Markets and Group Executive.
Good morning, everyone. Welcome, and thank you for participating in RBC Capital Markets' annual Global Financial Institutions Conference. I'm pleased to say we have record-breaking attendance at this year's event, and it's terrific to have all of you with us. I know we've got a very engaging agenda, lots of opportunity for conversation, idea sharing, and hopefully building some new connections over the next couple of days. For those of you that were here last year, looking back on 2024, it was a very significant year of economic recalibration, where the global markets grappled with the direction of interest rates, was inflation coming under control, and on top of that, a lot of geopolitical instability and political change across a number of major economies. Needless to say, three months into 2025, it seems like an equally or more complex environment.
Some new themes, obviously, around AI, which we'll chat with Dave about, and how different organizations are navigating the opportunity and implications of AI across industries. Lots of continued questions on the trajectory for inflation and the rate response, and obviously, most notably, shifting policy, trade, and geopolitical dynamics that are at the forefront of the daily public discourse. Certainly, as we move through this rapidly evolving and complex period, we're getting lots of questions from our clients on how to navigate their businesses. We're obviously talking a lot with themes around agility, flexibility of strategy, and resiliency of business models, appreciating that uncertainty and volatility are just themes that are continuing to be defining factors in the global landscape, and I think will be for some time ahead. So that obviously sets a great stage for the discussion over the next few days.
I think there's no better way to kick that off with our keynote session this morning. So I'm delighted to have the opportunity to introduce Dave McKay, RBC's President and CEO, to share his views on how RBC is navigating these important issues. As President and CEO of one of the largest banks in the world by market cap and the largest company and bank in Canada, Dave has been a leading voice on reimagining the future of financial services. He became CEO in 2014, and over the last decade plus, he's been very actively transforming RBC, focusing on deepening our client franchises and delivering unique advice and insights to our over 19 million clients worldwide. During his tenure, he's led major key strategic initiatives, including the acquisition of Brewin Dolphin, City National Bank, and last year, HSBC Bank Canada, which was a once-in-a-generation opportunity for the bank.
Dave is active on a number of boards, including those of the Business Council of Canada, the Institute of International Finance, and the Bank Policy Institute, and is a member of the U.S. Business Council. Dave, thanks for joining us, and look forward to our conversation.
Morning.
Morning.
Thanks for coming today.
Mm-hmm. So obviously, lots to talk about. We only have 30 minutes, Dave, so we're going to jump right in. As I mentioned in my remarks, the last year was characterized by a lot of change in the macro environment, rates, inflation, economic growth, where we all saw this landing. But obviously, we're starting this year with more of the same. And so we'd love to just start from the vantage point you have running one of the world's largest banks. What's your outlook? What's on your mind when you think about the macro environment for 2025?
I think not much different than anybody else on what I just said on Squawk Box and CNBC this morning. Tariffs, tariffs, tariffs. No, certainly, when you think about, you look at our Q1 results and our outstanding Q1 results and record results, as we went into Q1, we had a lot of momentum from all aspects of our business: capital markets, wealth management globally, Canadian banking, Canadian commercial banking, insurance, and we saw a constructive, and still see a constructive environment for the most part across all our customer franchises on the macro side. You saw it with record capital markets results, whether it was in the investment banking side, corporate banking, and market side, too. A lot of our clients increased their activity over the quarter as they started to hedge some of the macro risks that they saw, including around geopolitical.
You look at the business, accelerated out of the end of 2024 into 2025, markets were strong for our wealth businesses. We had doubled, 20%+ growth in AUA and AUM, over $700 billion of assets in our U.S. wealth franchise in AUA. So when you look into the Canadian bank, we started to see lower interest rates start to really kickstart the Canadian economy. After a lull in mortgages, you saw mortgages start to tick up. So consumers had confidence. Spending was really solid in Canada. You saw commercial enterprises investing and hiring people, buying equipment, capital, putting money to work. So when you look at our Q1 results, it manifested all of that across every single business. We saw a strong macro improving through November-December construct.
That allowed us to deliver CAD 5.3 billion in adjusted earnings, which was a record for us, and we're up 20+% year- over- year. So that's pretty good for a bank today. What we did see, though, in the latter part of the quarter was the impact of the tariff narrative. Starting with, obviously, in January, with the new president coming in, and that negative narrative and the volatility around that narrative from January to today and to last night has had an immediate impact on the psychology of consumers, the psychology of small businesses, and the psychology of large corporates in your business, and that they're holding back. So we saw housing start to slow. And we saw consumption start to slow on both sides of the border as consumers are more concerned.
Now, there's other things going on in the U.S., like layoffs and things like that that are causing, and that's consumer psychology. You saw in Target's results this morning, as Brian was on just before me, talking about forecasting forward the impact of uncertainty on the consumer. We saw it in the small business commercial side, again, slowing down hiring, not making that investment decision. You're seeing M&A transactions start to slow. So as you look at the impact of uncertainty, we've seen this thousands of times over the last cycles. Like when there's uncertainty and unpredictability, it's harder to put capital to work from a consumer to a large corporate. And that's what's manifested itself into the month of February that things are slowing a little bit and a little more cautious. And markets are reacting to that quite significantly.
So I think the macro backdrop was very constructive into this. And you see it in our results. And now you see the uncertainty start to creep into the overall macro picture. And therefore, that uncertainty, that potential inflationary impact of these tariffs, makes it harder for the Fed. We had an 85% probability the Fed was going to cut in June. Well, it's going to get a lot harder if you see the inflationary impact of the tariffs from China. We announced reciprocal tariffs today. Canada announced reciprocal tariffs. That was going to have a material impact on Americans. It's going to get a lot more expensive to buy a car. It's going to be more expensive to buy a lot of stuff. And as you think about the overall kind of strategy of the U.S. Government to find a way to fund tax cuts, the people who are going to pay for those tax cuts are often the ones who are going to be impacted by the tariffs, right?
So if that's a funding vehicle for the tax cuts, those tariffs impact the key part of the economy that's struggling the most in Canada and in the United States. So it'll disproportionately affect the less fortunate economically. And therefore, we have a challenge, right? So I think from that perspective, it's a little frustrating to see the loss of momentum at the end of the day. We have to deal with it.
Still hope for the best outcome that these tariffs are short-lived and we get back onto a growth agenda on all sides of the border that we were on before, and keep moving forward in partnership, where I think, as I said on TV this morning, the great strength of America is the multilateralism over the last 100 years. Building partnerships around the world that allowed America to focus on what it does best, and that's allocating capital and leveraging the strengths of other countries and being the center of that economic gravity. I mean, that multilateralism has allowed capital to flow to the United States at unprecedented levels. And that's the great secret sauce of the U.S. economy in many ways. Tariffs impede that at the end of the day. They don't enable that. So the concern is this is a grand experiment.
We've not seen this level of tariff before, and it's a real departure from what's built, I think, some of the great pillars of success in this country.
Thanks, Dave. Obviously, if you go back to last year before tariffs, just with the slowdown in the economy, the direction of interest rates, lots of attention on credit outlook across consumers, commercial, and wholesale clients. Obviously, tariffs bring an added level of uncertainty and potential headwinds for a lot of clients. Can you talk a little bit about, and recognizing it's very uncertain at this stage, but how are you thinking about the outlook for credit? How is RBC managing through what could be an uncertain period of time?
Yeah, before I talk about the potential impact of tariffs, because it's really, it could be a wide range and hard to quantify yet, because duration of tariff, magnitude of tariff, and how it rolls out, the ability for companies and consumers to adjust, all of that is unknown at this point. But as we came through the quarter, as you saw, we had slightly elevated credit losses, mostly attributable to one account at the end of the day in capital markets and corporate banking. But we still reiterated our view for 2025 that we'd still range bound an overall credit cost of about 30-35 basis points. So notwithstanding, we popped up to 39 basis points in stage 3 credit loss for the quarter. Seven basis points of that was this one specific client with an outsized position.
It would have been 32 basis points rate smack in the middle of the range. So we look at the rest of our book, the consumer book, the commercial book, the small business book, the remainder of capital markets book. It's all performing largely the way we expected because of all the macro comments I just made at the end of the day. We're working in a largely constructive environment where unemployment's coming down in Canada, U.S. employment's stable, the backdrop for consumer commercial is good, and we're moving forward. So I think that's the construct. The market reacted negatively to that 39 basis points. They didn't understand it. Once they got a handle on it, they traded it back largely on Friday. But that event was a bridge loan for a large bridge loan for investment-grade utility at the end of the day.
Within our normal credit appetite for an investment-grade utility in a very large city with an essential service. When we look at credit risk and where we take them, where we don't, and why would you lend CAD 1.5 billion to this type of utility is for all those reasons, right? Investment-grade, essential service to the community, long history, long client record. This wasn't a new relationship. We knew them well. Things didn't go as well as planned. That happens. That's the world of credit. At the end of the day, not everything blows. This was a tail event for us. We feel that we're very, very well provided for at roughly 10 cents on the dollar. I think that was the event, and that spooked the market a little bit.
But if you look at the macroeconomic backdrop, we feel generally that we are well within the range that we forecasted. And I think that hopefully gave and will give the market comfort that this is an event here. The rest of the book is fine. As far as the impact of tariffs and why we didn't take, or most banks haven't taken a stage 1 and 2 provision for the expected loss, this is very different than the pandemic, right? We shut the global economy down within a couple of weeks. Many, many people were out of jobs. Companies stopped working. They stayed at home. We stopped producing goods. GDP plummeted. That was a shock event to the economy. And therefore, we came out and we took roughly a CAD 2 billion stage 1 and 2 provision, which we didn't use for the most part.
I don't think we used any of it. We released most of it over time. But at the time, you had an event, had a closed economy. We'd never seen that before. We thought that was prudent. Tariffs are very different. One, we don't know how long they'll stay, right? Because if they don't make sense, let's say, hopefully, we'll move through this and reverse it. Even if we don't, let's say they'd have duration to them, and we maintain these high tariffs for a longer period of time, companies can adjust. At the end of the day, companies can find new markets for their product if the existing markets stop buying them. Consumers will have to absorb the cost. You'll get more efficient. If you have the margin, you'll absorb some of the cost. Exchange rates will adjust to eliminate some of the impact.
All of these variables will have differing impacts on corporates, commercial, and consumers. And we have to wait to see how that plays out. And at the end of the day, how does the economy adjust? How do customers adjust to these scenarios if they have duration, if they don't have duration? And even if tariffs start to come down or become more selective, they start here, then you drop some here, you drop some here, you drop some here as sectors like auto will feel enormous pain, and consumers will feel the pain from that, given the integration of supply chains. So for us, it's a read and react. We'll read and react. And then will there be fiscal plans like there were during COVID to help certain consumer segments or certain business segments that were impacted?
I don't think you can expect to see across the board support that you saw during COVID, but maybe you'll see individual segments of the economy buffered a little bit as we try to get through this and get back to the growth agenda that we had previously. So all that to say, we're in a read and react, and we come from a good place, and we don't want to lose the momentum that we experienced in Q1.
So pivoting a little bit, Dave, we're obviously in New York. The U.S. is a big part of our business. It's our second home market, very important strategically for us. We obviously employ a lot of people. We do a lot of work in the communities here. Maybe you can just touch on the importance of the U.S., why it's so key to our strategies we look forward.
The U.S. is our second home market, and we have big ambition for the United States. You'll see that in our Investor Day in a couple of weeks as we articulate kind of the U.S. 3.0 for us. And we're really excited as we think more horizontally across the U.S., whether it's tech horizontally or legal entity horizontally or operating more efficiently from a cross-sell and funding perspective, which have synergies to them in their own right. And then how do we think about the customer segments that we serve and get after these customer segments in a more integrated way across wealth management, capital markets, commercial banking, private banking, the core pillars of our business? So we're very, very excited about the platform that we have. We've operated it, I think, sub-efficiently for a couple of decades now. We've let each of these silos kind of build up.
And you'll see a more horizontal integrated strategy from us that I think really brings to the market the best of RBC, and in this market is a winning value proposition on technology, service, advice, ideas. Our customers tell us that. Our customers from large corporates here and sponsors here to private banking clients that was out with last night here in New York, they love the culture of RBC. They love what we bring. We are differentiated in our offering vis-à-vis the U.S. banks and other global banks. And they encourage us to do more. And they want us to be successful. There's never a better place to be when your customer wants you to be successful. And they're willing to give you more business. And we're hustling for it. So we're very excited about the U.S. strategy. We're investing in the market organically here.
We have work to do and continue to build out a strong technology and operational platform here. You've heard me talk about that a lot. We're spending a significant amount of money doing that. It's embedded in our run rates. We're starting to get near completion of some of the pillars of that, which is great. And we expect some of those costs to start coming off as we're knocking things off. And this is a big, heavy-lifting year in 2025 for us to get a lot of that work completed. And therefore, we're working hard at it. It starts with having a strong foundation operationally, risk-wise, compliance-wise. And then from there, you kind of build out your client offering. So we're very excited about the U.S. opportunity and a market that we know well.
We have, I think, it's close to 16,000 employees in the United States from New York to LA. And I was just out in LA a week ago, and I could feel the excitement about growing this franchise and some of the things we're building, like RBC Clear and our cash management. Critical to our long-term success is to have a transaction banking platform that goes east-west and across our segments from large corporate and Fortune 200 down to mid-corporate and commercial. And then integrating that north-south is absolutely critical too, as we see even with all the tariffs, we're going to have a lot of trade. There's $400 billion going across the border now. I hope that grows in the future. But what we learned from HSBC is we need more global connectivity in our transaction banking. As you'll see, Canada, U.K., Europe diversify its global partnership base.
We're never going to bring this thing back together again exactly the way it was because of what's happened. There'll be more opportunity, I think, for global connectivity going forward.
Certainly for the capital markets business, where last year over 50% of our revenue was in the U.S., critical market for us, largest part of our business today, but I share your excitement. Huge opportunity for us going forward. If I maybe bring it back to Canada, you touched on HSBC, largest acquisition in the bank's history. We're coming up on the one-year anniversary of closing. Maybe, Dave, you can just talk about lessons learned through the integration process, the opportunities you see, and really the strategic impact and importance as we approach the one-year mark on the transaction.
Yeah, this has been a transformational opportunity for us from so many dimensions. One, first and foremost, for our shareholders. At the end of the day, to create this type of accretive value so quickly in a year is pretty remarkable, and I think that's reflected in our share price. It came with a ton of effort and work. This was not easy to do, and we've been at this three years now, from the time we kind of put the deal together to negotiating it to prepping to executing now a year post-close. We've achieved so much, and I think we hit a landmark in February where we finally finished our Transition Services Agreement.
We migrated 99% of our clients on day one a year ago, which was remarkable in a 72-hour window where we lifted all their clients, 800,000 clients off their platform from large corporates to consumers on a weekend. And we moved them over on top of our platform because we bought branches, acquired their team, and we acquired customers. But we didn't get any hardware or software. That was all an essential instance in Canada. So we had to lift out the entire franchise on a weekend and put it on top of our tech stack, which is really hard to do. But once you do it, then you've eliminated a ton of cost on day one of the transaction. So we got 25% of the cost structure out on day one. So we targeted CAD 740 million of cost takeout.
At the end of the day, our run rate now is at CAD 500 million after a year, and now, by turning the transition services agreement off in March, I stopped sending a check to HSBC on March 1st, the day, and that's another big chunk of the remaining CAD 250 million of cost savings, which will kind of show the market in our Investor D ay, so we're well on our way now to 75%, it feels like, of the cost takeout with another hundred and some odd million to go, and we have a line of sight, a strong line of sight on that, so the cost takeout objective has worked exceptionally well. Now, this HSBC team played defense in trying to retain customers for two and a half, almost three years.
You can imagine how hard it was to convince a new customer to join them when they knew they were going to go through a migration to RBC. And they weren't actually joining HSBC. They were joining RBC. So they did an amazing job retaining and wrapping their arms around customers before they went through the transition. But the pipeline was completely empty, as you can imagine. You can't expect them to go acquire new customers. So, because they're focused on retention, defense, conversion, all the work we had to do with the complex customers, we're just starting to rebuild the commercial and private banking pipelines. And now you can see commercial growth come through Q1, whereas that pipeline has started to really fill now.
We're seeing 1%-1.5% kind of quarter-over-quarter growth, which is great from kind of zero and runoff mode that we were for the first year,, as we didn't have a lot of sales activity going on. So you think about those 4,000 employees now into sales mode, into customer acquisition mode, and cross-sell mode, we're pretty excited. That's a 10% increase in our capacity as an organization. And we've got that team turned on, and they're exceptional. We've learned a lot about cross-border transaction banking from HSBC. We've learned a lot about covering markets and clients differently.
They have an account management concept that they stay in front of the customer a lot longer, like you do in capital markets, where at the bank, we were more staggered in our approach. We would move clients through a series of more senior coverage officers instead of keeping the coverage officer and letting that person grow with the customer. So we're learning from them about different ways of managing a market segment, all to lead us to be, I think, better at serving the customer and then faster at growing the franchise. So very excited about not just the financial impact, but the operational and strategic impact that HSBC has shown us how to serve a global customer from a transaction banking perspective, and we aspire to greater things.
So, earlier, Dave, you touched on the U.S., more of a horizontal approach to connect the silos. Obviously, that I know is a theme beyond just the U.S., and how do we drive greater connectivity as one RBC, more collaboration. Can you share your thoughts on opportunities you see, synergies, and how we go about better connecting some of those dots?
I think just part of its structure. I think we've always and our DNA is to collaborate internally. So it's never an issue of not wanting to collaborate, but what are the structures and systems that sometimes prevent you from doing that? And in the U.S., as I just mentioned, you had operational silos where the wealth business, obviously, capital markets, and even the commercial business were operating in extreme silos without enough metrics and enough incentive to really work together. Now, they were in their own right very successful in each of their silos, and therefore, you didn't feel the impetus. We weren't fixing a problem. You're trying to make sure you enhance the overall opportunity. So with some of the recent restructuring that we've announced in the U.S. and moving to a more of a North American or a U.S. str ucture operation from a leadership perspective, I think that sets the tone that we're going to collaborate around these customer segments.
And an example you're seeing here a lot more about this in Investor Day, you're seeing Greg Carmichael and Howard build a set of banking products for a wealth franchise in partnership. And that's going to be the manufacturing center of mortgages and jumbos. It's going to be a manufacturing center of credit cards. But the opportunity to cross-sell, we took a stab at it before this. We weren't structured operationally from a compliance and regulatory perspective to really get after that product properly. Greg's completely rebuilt that structure to allow that synergy to happen. And we're really excited about articulating where we think we can take that overall.
So as an example of being very clear on who's manufacturing, who's distributing, who's managing the overall platform, then the incentive system has to push for these joint outcomes. And you think about doing that, you think about how we've achieved that in Brewin Dolphin. And as we look at our various franchises where we're in silos, breaking down those silos to cross-sell like we do in Canada so well. Now, we've been at it in Canada for 50 years. So it's not like we shouldn't be good at it.
The culture just evolves to that.
The culture evolves to that if you structure it and have the right incentive systems, and we haven't done that as well outside of Canada, and therein lies a big opportunity.
Yeah. Yeah. Thanks. I mentioned in my intro remarks AI, Gen AI in particular, lots of implications across industries. In your time as CEO, you've always been one of the leaders in our industry at really spearheading how we can better leverage digital data, particularly to better serve our clients, but as well to drive efficiency, productivity improvements internally. Can you talk about some of the things that are top of mind for you now, Dave, as you think about implications of AI use cases? And I know one thing a lot of organizations are talking about, but certainly we are, is kind of how do you take things from sort of pilot and testing to commercialization, really assessing returns, ROI? But maybe your thoughts on that.
A lot's happened since ChatGPT, what was, I don't know, 2.0 came out almost two years ago, so I would say what's ahead of schedule and what's outperformed are the models themselves. When you see where we came from when I was out in the valley for a week looking at everyone who produced these models in 2023, I guess it was, and where I thought we had to get to for it to be commercially applicable to RBC, I thought the models were going to take through, and I was told by whether it was Anthropic or others, it's going to take three years to retrain the model in your data, and it's going to cost you $50 million-$100 million for a macro model, LLM. And that seemed plausible given they've been trained in all this massive public data and you had to pilot it over.
That process took not three years. That took a year, and about a tenth of that cost that day. So the models themselves are incredible. And they're not perfect. They still have accuracy issues. You call them hallucinations. But in some instances, it doesn't matter. I mean, 80% is good enough, or 90% is good enough. In some instances, you need 99.9%. So the models themselves have retrained exceptionally well and have high, high potential. So why haven't we seen more benefit? Because if you have to take a model and embed it into an existing process or change your processes, have people change to use the model differently, whether it's a developer using Copilot to code, it's a significant change to what they're used to doing. And that takes time to embed into the overall workforce, the psychology of the workforce, and your operational processes. That's what's taking time.
It's not the model development that's hard. It's the process management and change management that's hard. Therefore, that's taking a little bit longer. It will happen. It's just you're on this curve. Where we've seen more significant success is our Salesforce applications. Because Salesforce is embedded into our sales process and our CRM process today, and because of that process, they've collected all this data. When you put the agentic workforce on top of that, you get the models produce great outcomes, and it's already embedded in your process. Therefore, we've seen significant lift with Salesforce because it's already embedded into the architecture of the bank. There's the proof point of when it is, you can move fast. When it isn't, the models take longer to integrate. Will happen. Sometimes they won't happen.
I'm not sure we'll get all the coding gains because experienced coders reject it some of the time. Some coders like to use it. It's a wide variety of preference of your employee. So we'll see how that evolves over time. So that's why we've had such amazing success of Salesforce. And you've seen Marc Benioff, who's done an amazing job with the agentic models, talk about RBC as one of the global leaders in using generative AI models in the agentic workforce. And it's kind of mind-boggling to see the sophistication of these models and how it can lead to productivity and cost savings, and how it can lead to incremental cross-sells and customer experience. And then you build the model and give it to the client at the end of the day. So there's the evolution here.
So I think that's kind of where, in my experience, my peers and other leaders of other sectors, where the bifurcation of results versus modeling is happening. This is the real deal. And I think it's just a matter of time. It's not an if. It's just a matter of time and how you adapt to these models when you move it forward.
You mentioned earlier our Investor Day coming up. Three weeks' time, roughly, March 27th. I know you can't go into a lot of detail, but what should people be expecting in terms of the next chapter for RBC?
It's going to be good. No, this is really important for us to articulate the next leg of growth for RBC. We haven't done this in six years, and it's the first time we've done an all-bank investor day. We've usually done two of our four businesses to let focus. We're going to go through four and a half hours and do it really, really well, and you'll see each leader get up and articulate a three-year vision of how they're going to compete, and what's new? In our quarterly calls and our investor meetings, we haven't gone out and said, "This is the next leg of growth. We're working on all these things. Over the next three years, we will execute against this new market segment, this new product capability. And we're going to monetize that.
We're going to say, "And this is the impact we think by year three, which we think is a reasonable time frame." You'll see these types of gains, whether it's revenue gains or a cost takeout. And we'll put all that together into what we think is a story for the next leg of growth and valuation for one of the top banks in the world. So we're very excited about it. It's a lot of work, but the process itself is really good for us to lock down and say, "Okay, these are the big rocks. We're talking publicly about these big rocks. We're going to lift them. And we're all in.
And we've got to get it done," and I think that process of just focusing an organization with 100,000 people and a $2-trillion balance sheet anda $250- billion market cap, how do you move an organization like that? This is part of the tools that a CEO uses and a team uses to make sure you're focused on the big things, the important things, declare yourself to your investors, and go get it done.
We're at time. I think that's a great way to finish, Dave.
Thank you.
So thank you. Appreciate you taking the time. And all our participants, thank you.