Good morning, ladies and gentlemen. Welcome to the RBC's Conference Call for the First Quarter 2021 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations.
Thank you, and good morning, everyone. Speaking today will be Dave Mackay, President and Chief Executive Officer Rod Bolger, Chief Financial Officer and Graeme Hepworth, Chief Risk Officer. Also joining us today to answer your questions Neil McLaughlin, Group Head, Personal and Commercial Banking Doug Guzman, Group Head, Wealth Management, Insurance and INTS and Derek Neltner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially.
I'd also remind listeners that the bank assesses its performance
Thanks, Nadine, and good morning, everyone. Thanks for joining us today and we hope you and your loved ones are keeping safe and well. Today, we reported very strong earnings of $3,800,000,000 with earnings per share up 11% year over year. Our results are a testament to our diversified business model and revenue streams. We benefited from higher fee based revenue in our Capital Markets and Wealth Management Businesses and strong client driven volume growth in both Canadian Banking and City National.
Expenses remained well controlled and top of mind even as we increasingly saw heightened client activity levels across the bank. We also saw small release of reserves this quarter, which Graham will speak to later. These factors partly offset the impact of the 150 basis points of rate cuts in March of last year, which negatively impacted our earnings by approximately $400,000,000 Strong volume growth, elevated client activity and our diversified business model allowed us to earn through this significant headwind. Our strategy is also delivering results in the U. S.
Where we are capitalizing on our investments across capital markets and wealth management. This quarter, we reported record results in our U. S. Operations, generating over US2.5 billion dollars in revenue and over US650 $1,000,000 in earnings. Our robust capital ratio of 12.5% was flat quarter over quarter As record internal capital generation was effectively deployed to drive strong organic growth across our businesses, while also paying $1,500,000,000 in dividends.
Our CET1 ratio provides a significant 19,000,000,000 surplus over the current OSFI minimum. Furthermore, our ACL on loans is over 2,000,000,000 higher than pre pandemic levels in Q1 2020. We remain well positioned to continue funding organic growth opportunities that create value for our clients. I will now speak to how we see the macro environment unfolding. As we approach a year into the global pandemic, We are encouraged by both the number and efficacy of vaccines.
This in addition to significant pent up demand, Rising prospects of further stimulus programs, expectations of a gradual easing of lockdown measures and pledges of continued low interest rates to support a sustained Economic recovery. Recent data shows CEO confidence of Corporate America has reached a 17 year high. We're also seeing the benefits of increasing public private partnerships in the U. S. As companies are engaging with governments to distribute vaccines effectively in a timely manner.
Canadian housing activity also remains elevated. While rising permit issuance is building up the new construction pipeline, we expect a lack of supply, low interest rates, elevated savings rates, Continuing work from home arrangements and the potential resumption of immigration to underpin continued demand. While the timing and path of vaccination programs has been uncertain and uneven so far, particularly in Canada, we expect an accelerated pace of vaccination distribution over the coming months to drive a strong economic recovery through 2021, resulting in GDP growth of 4% to 5% across North America. Against this macro backdrop, we will continue our unwavering support for our clients as global economies pivot to recovery. I now want to speak to the strong volume growth and increased momentum across our largest businesses.
Part of our competitive advantage is how we leverage our scale, Investments in technology and our talented teams to deliver differentiated value and experiences to our clients. Our premier global capital markets platform crossed a record $1,000,000,000 in quarterly net income driven by very strong performance in global markets underpinned by robust equity trading and continued strength in credit trading. Corporate Investment Banking surpassed $1,000,000,000 in revenue For a 3rd straight quarter, benefiting from a constructive environment for new issuance and mergers and acquisitions. We continue to be awarded significant mandates by some of the largest global clients, including serving as M and A advisor to Blackstone and providing fully committed Canadian Banking recorded strong volume growth year over year, adding over $100,000,000,000 of average volumes across lending and deposit products. While expanded central bank balance sheets, government support and reduced spending have added significant liquidity to the system and increase the savings rate of Canadians.
We have also seen market share gains of over 50 basis points in personal core deposits over the last 2 years, which is a reflection of our technology investments, client support and distribution strength. We have similarly added 100 The entire end to end process over a number of years from adjudication to fulfillment to retention, which reached an all time high of 94% this quarter. We've also seen elevated activity in our wealth management businesses, which have remained resilient over the turbulence of the last 12 months. Our diversified RBC Global Assets under management or AUM grew by $60,000,000,000 from last year to a new high of $540,000,000,000 as more clients chose RBC as a trusted steward for their investments. Our retail funds captured over 25% of industry wide Canadian net sales over the last 12 months, adding to our leading 32% market share amongst bank owned fund companies.
Along with market appreciation, our recent growth It's been the result of investment outperformance with over 80% of AUM outperforming the benchmark on a 3 year basis. Assets under administration or AUA in Canadian Wealth Management crossed $450,000,000,000 for the first time. Strong net sales and industry leading recruiting efforts added to our number one high net worth and ultra high net worth market share in Canada, which is built on the trust of our clients. Similarly, U. S.
Wealth Management, the 7th largest wealth advisory firm in the U. S, Surpassed US460 $1,000,000,000 in AUA for the first time, benefiting from our proven ability to bring in both net sales and attract experienced advisors to meet the needs of our clients. City National continued to report double digit loan and deposit growth as we continue to execute on our organic plus growth strategy. Our expanded jumbo mortgage platform is yielding results, growing over 15% year over year. Our market share gains across our businesses are not only reflection of our scale, but also our continued investments in technology and client facing colleagues.
We've seen an acceleration of digital trends as Canadians are increasingly reaching for their phone to fulfill their banking needs. Our active mobile user base increased 12% year over year to over 5,000,000 this quarter As mobile sessions cross 100,000,000 for the first time, new clients to RBC can now complete a full end to end account open in minutes on the RBC mobile app, and now over 50% of personal deposit accounts are opened through our mobile browser. Since the launch of Nomi in 2017, our mobile clients have benefited from actively reading more than 1,500,000,000 financial insights using its predictive analytics to help manage their finances. Over the years, we have also made significant investments Beyond digital functionalities and into digital businesses, MyAdvisor, our digital platform for clients to activate Personalized Financial Plans was launched in 2017 and now has 2,300,000 clients online. In AUM at investees, our robo advisor has continued to trend higher.
Our success in commercial banking has also been underpinned by multiyear investments in cash management solutions and technology, where we expect InsightEdge fueled by our data analytic capabilities to be a key differentiator. Aden, our AI based electronic trading platform in capital markets, continued to gain traction during these volatile times. The number of shares and notional volumes traded on this platform are up over 45% 75% year over year respectively. Investments in sales power have also been a key driver in the growth of our personal and commercial franchises, with our mortgage specialists, advisors, and commercial account managers benefiting from the investments that we made in technology. And similarly, we've made investments in the bench strength of managing directors in capital markets, which helps us deepen client relationships and win key mandates.
Despite the significant increase in capital ratios, delivered a premium ROE of over 18% this quarter. We are focused on the continued creation of long term shareholder value. Going forward, our priorities have not changed with respect to deploying capital. We remain focused on building on our momentum and driving accretive organic growth. Capital Markets, we will continue to deepen client relationships and further diversify our revenue stream towards Less capital intensive investment banking advisory revenue.
We will also look to further strengthen senior coverage teams in key sectors. In Canadian Banking, we expect continued high single digit mortgage growth and significant pent up demand to drive a consumer led recovery. And with commercial utilization rates below pre pandemic levels, higher Canadian commercial volumes could further support the acceleration of economic activity. Continuing our innovative approach to loyalty linked partnerships with leading Canadian partners such as Petro Canada, RBC and Rexall recently announced a new strategic partnership that will allow our clients to earn and receive even more value in savings while accessing Rexall's health and wellness resources. And as we see increased online shopping, RBC has launched PayPlan, offering Canadians yet another solution for purchases at participating retailers and merchants throughout Canada.
In our U. S. Wealth management platform, we expect to see further benefits from our recent expansion into new geographies, investments in our treasury management platform, hiring of experienced private bankers and financial advisors. We are also expanding and deepening Our existing client relationships through the interconnectedness of our businesses. Over 65% of Canadian Wealth Management clients now have a Canadian banking product, We expect this to continue to grow over time as we expand the continuum of offerings to our retail and wealth clients.
Also, 19% of our Canadian Banking clients have all 4 transaction account all 4 of transaction accounts, Credit cards, investments and borrowing products with RBC. We're also looking to increase Operation between our Capital Markets and Wealth Management franchises to provide a broader set of capabilities to both sets of clients, including acting as bookrunners for debt and equity issuances. City National has seen almost $2,000,000,000 of mortgage flow through our U. S. Wealth management channels, benefiting from our team of bankers covering RBC Wealth Management offices in key markets.
Looking forward, City National is looking to make a focused push into mid market Not only am I proud of what we delivered, but also how we continue to deliver on our purpose of helping clients thrive and Communities Prosper. In Wealth Management, alongside our existing RBC Vision ESG Funds, The RBC iShares brand has launched new ESG focused ETFs. RBC Capital Markets is playing a leading role in helping clients meet their goals and objectives, serving as exclusive financial advisor To both E and I SPA and to Greencoat UK Wind on acquisitions of offshore wind farms and demonstration of our growing role in Europe related to renewable power. RBC Capital Markets also acted as joint book runner on Enbridge's $1,000,000,000 sustainably linked Revolving credit facility, the first such issuance by an energy borrower in the North American market. Also, I'm proud to share RBC has received this year's Global Catalyst Award, an honor recognizing businesses dedicated to increasing the representation of women in leadership and promoting equal access to career opportunities.
RBC is also recognized as an ESG leader by 3rd party rating agencies with a high 86 percentile ranking on priority ESG indices. And as a reminder, Today, we are kicking off our first ever RBC Capital Markets Global ESG Conference. So to sum up, Our scale, innovation and talent are our competitive advantage as we create even more value for our clients. We continue to execute on our strategy with purpose to prudently invest in sustainable growth and strong returns for shareholders. I'll now turn it over to Rod.
Thanks, Dave, and good morning, everyone. Starting on Slide 9, we reported quarterly earnings of $3,800,000,000 Earnings per share of $2.66 was up 11% from last year. Despite operating in a near zero interest rate environment, generated nearly $5,000,000,000 in pre tax pre provision earnings this quarter. Moving to slide 10, we reported a robust CET1 ratio of 12.5 percent, unchanged from last quarter. We had record internal capital generation of 41 basis points this quarter, higher than our historic average of 30 to 35 basis points.
This was largely offset by higher risk weighted assets. Outside of the impact of foreign exchange, RWA growth was underpinned by 4 key drivers. 1st, Strong client driven volume growth in Canadian Banking and City National. 2nd, elevated client driven trading, derivative and underwriting activity in capital markets. 3rd, approximately $3,000,000,000 of transitional methodology changes our securitization framework and an additional $2,000,000,000 from maturities of existing securitization notes.
4th, these factors were partially offset by a modest $1,000,000,000 benefit from net credit upgrades. This partially offsets the cumulative $13,000,000,000 impact from net credit downgrades over the last three quarters of 2020. Our CET1 ratio was also impacted by a partial reversal of OSFI's Transitional capital modification, primarily driven by the reduction of the Scalar rate from 70% to 50%. The remaining 19 basis point cumulative benefit should reverse over time given further reductions in scalars and migration to PCL on impaired loans. We expect to continue generating significant capital as the economy recovers.
Our strategy for capital allocation has not changed. We will invest additional capital to support accelerated and prudent organic growth in order to further expand our market share in key businesses. Now moving on to slide 11, all bank net interest income declined 4% year over year as strong volume growth in Canadian Banking and City National We're more than offset by the impact of lower interest rates and the impact of fiscal and monetary stimulus, which continues to drive excess liquidity into the financial system. However, after adjusting for trading results, net interest income has been steadily increasing after bottoming out in Q3 of 2020, up 3% on the back of strong volume growth. All bank NIM declined 2 basis points from last quarter, primarily due to changes in asset mix, including towards lower yielding securities.
At the segment level, Canadian Banking NIM declined 2 basis points quarter over quarter as the impact of low interest rates and asset mix more than offset the benefit from strong deposit growth. Looking forward, we expect Canadian Banking NIM to continue to decline modestly throughout 2021. City National's NIM was down 12 basis points relative to last quarter, largely due to the influx of deposits being invested in low yielding short term securities. However, City National net interest income increased for the 2nd consecutive quarter. Recall that City National has a more asset sensitive balance sheet with approximately 50% of its loans being floating rate commercial loans.
Also, approximately 50% of deposits are non interest bearing. We expect the narrowing of City National's NIM in Q1 to largely reverse in Q2 given expectations for accelerated Paycheck Protection Program loan forgiveness as well as an improved balance sheet mix as we redeploy our strong deposit growth into higher loan balances. Following this benefit in Q2, we expect City National's NIM to return back to current levels in the second half of the year. More importantly, we expect Strong volume growth at Canadian Banking and City National to completely offset the headwinds of lower interest rates by Q3. And as a reminder, our results get impacted by fewer days in Q2, particularly Canadian Banking.
While we don't expect short term rates to increase in the near term, the steepening yield curve serves as a good reminder of the value of our low beta core deposits, including substantial non interest bearing check-in counts. Now turning to Slide 12, non interest income, which represented 60% of revenue, was up 4% over year, providing an important countercyclical offset to the impact from low interest rates. Our diversified business model is performing as it should In times of stress, we have strong trading results across our businesses and our wealth management businesses continue to provide a growing revenue stream. Furthermore, we expect upside from our M and A advisory business as the economy strengthens. In contrast, we continue to see Certain fee based revenue streams in Canadian Banking being impacted by COVID-nineteen, particularly those affected by lockdown measures and restrictions on travel.
Targeted lockdowns have also lowered wholesale loan demand, which in turn decreased credit fees. Looking forward, we would expect to see some of these revenue streams begin to pick up as economies open. Now on to slide 13, expenses were up 2.6% year over year, largely commensurate with strong performance. Excluding variable and stock based compensation, expenses were down 1% from last year. This follows on a similar year over year decline last quarter after adjusting for severance and related costs associated with the repositioning from reductions in discretionary costs such as marketing, travel, stationery and printing, which were down approximately $80,000,000 from last year.
However, we are cognizant that some of these costs could start to increase as economies begin to open back up. We will continue to balance investments in key growth areas such as technology and innovation with project prioritization in other areas. We already have a number of cost containment programs in place across our businesses and we expect to generate efficiencies from the accelerated digital adoption that Dave spoke to earlier. Looking ahead, we expect full year expense growth excluding variable and stock based compensation to remain well controlled in the very low single digits. Moving on to our business segment performance, beginning on slide 14, Personal and Commercial Banking reported earnings of over $1,700,000,000 Canadian Banking quarterly net income was up 8% from last year as the impact of lower interest rates and service charges was more than offset by strong volume growth, Elevated market related client activity and reserve releases, largely in our retail portfolios.
Loan growth of 6% was largely driven By continued double digit mortgage growth, which was a function of both the strong retention rate as well as new originations, which were up over 40% from last year. Commercial and credit card growth continues to be constrained by the impact of COVID-nineteen. Growth in business deposits remained robust at 25% and growth in core personal checking accounts was also very strong, up over 30% year over year. And RBC Direct Investing also saw a material increase in client activity by individual investors with average trading volumes up nearly 200% year over year. Turning to Slide 15, Wealth Management reported quarterly earnings of $649,000,000 up 4% from last year.
Canadian Wealth Management revenue was up 7% year over year, benefiting from higher average fee based line assets with AUA and AUM of 7% 12%, respectively. Global Asset Management revenue increased 17% year over year, primarily due to higher average fee based client assets. Results also benefited from higher performance fees as a result of strong investment performance. These are generally earned in Q1, if at all. Favorable changes in the fair value of seed capital investments also contributed to the increase.
GAM AUM increased by 13% or over $60,000,000,000 year over year with nearly 60% of the increase coming from total net sales. Net sales were $7,000,000,000 for the quarter. Canadian long term retail net sales remained strong at over $5,000,000,000 in Q1, particularly in the fixed income and balanced products. Long term institutional net sales largely from Blue Bay partly offset money market outflows. Very strong volume growth at City National continues to be more than offset by lower interest rates.
Deposit growth remains exceptionally strong at 36 percent outpacing double digit retail and wholesale loan growth. We also saw solid growth in U. S. Wealth management with AUA up nearly US50 $1,000,000,000 from last year. Turning to insurance results on Slide 16, net income of $201,000,000 increased 11% from last year, primarily due to improved claims experience and higher favorable investment related experience.
These factors were partially offset by the impact of lower new longevity reinsurance contracts and lower international life volumes. Turning to Slide 17, Investor and Treasury Services net income of $123,000,000 decreased 14% from a year ago. Earnings were up 35% quarter over quarter, partially due to seasonality. Both funding and liquidity and client deposit revenue declined year over year They were negatively impacted by the current interest rate environment and elevated enterprise liquidity. This was partially offset by higher gains from the disposition of securities.
Turning to Slide 18, Capital Markets reported quarterly earnings of over $1,000,000,000 This was the 5th quarter in a row with pre provision, pre tax earnings in excess of 1,000,000,000 Corporate Investment Banking reported yet another strong quarter. M and A advisory fees generated this quarter were the 2nd highest After the record fees reported in Q1 from a year ago, we continue to see strong equity origination fees underpinned by increased confidence and constructive markets. While debt underwriting has come down from elevated levels in 2020, they remain strong this quarter given the low interest rate and narrow credit spread environment. Looking further into 2021, we remain actively engaged with our corporate investment banking clients across all regions With respect to their strategic objectives, our ECM and M and A pipelines are strong. Global Markets had yet another strong quarter with revenue up 12% from last year to $1,600,000,000 benefiting from favorable market conditions across multiple asset classes as well as from an increase in primary activity.
FICC trading remained strong as credit trading benefited from tightening spreads. Interest rate, FX and commodity trading all saw increased client activity on market volatility. Client activity was also strong in equity trading. Looking ahead, we expect trading activity to moderate over the coming quarters. In conclusion, we remain committed to improving productivity, attracting new clients through our differentiated products and services, and continuing to increase our market share over time.
And with that, I'll turn it over to Graham.
Great. Thank you, Rod, and good morning, everyone. Starting on Slide 20, Allowance for credit losses on loans of $5,900,000,000 was down $201,000,000 compared to last quarter. This reflects PCL impaired loans of $218,000,000 or 13 basis points, which was down 2 basis points from last quarter as lower provisions in capital markets Wealth Management were partially offset by higher provisions in Canadian Banking. It also reflects a $97,000,000 release of reserves on performing loans.
Notably, this is the Q1 since the onset of the pandemic where we have released reserves in relation to our performing loans. For context though, this represents less than 4% of the reserves taken during 2020. Our lease balances a more optimistic economic outlook Driven by the introduction and approval of vaccines in December of last year with concerns around the new variants and challenges with the rollout of vaccines. Turning to the credit performance of our key businesses starting with Capital Markets. Compared to last quarter, gross impaired loans of $857,000,000 decreased 348,000,000 And PCL and impaired loans of $18,000,000 decreased $50,000,000 These decreases reflect limited new formations clients continue to benefit from access to debt markets and substantial liquidity.
As well, we saw good resolution of previously impaired accounts, mainly in the oil and gas sector, as prices rebounded from the lows we saw in 2020. We also released $37,000,000 of reserves on performing loans following a $38,000,000 release last quarter. This reflects continuing improvement in our credit outlook for this business. In Wealth Management, gross impaired loans of $289,000,000 decreased $56,000,000 from last quarter due to lower new formations at City National, mainly in the consumer discretionary and consumer staples sectors. Improvements in these same sectors also led to $27,000,000 of recoveries on previously impaired loans.
In Canadian Banking, gross impaired loans of $1,400,000,000 was up $95,000,000 primarily in the residential mortgage and personal lending portfolios. PCL on impaired loans of $217,000,000 was up $48,000,000 from last quarter with increases across all portfolios with the exception of our cards portfolio. As expected, delinquencies and impairments have begun to increase from the exceptional low levels that were experienced last year when clients benefited from our deferral programs. While delinquencies and impairments are increasing, they continue to be at or below historical levels as government support programs remain in place benefiting many of our clients. We do expect delinquencies and impairments to increase through the remainder of 2021 as many government support programs are scheduled to conclude this summer.
Additionally, this quarter, we released $63,000,000 of reserves on performing loans in Canadian Banking. This release came primarily from our cards portfolio, reflecting lower balances and from our residential mortgage portfolio, reflecting very strong housing market conditions. Before concluding, let me touch on our overall credit outlook. As you recall in Q2 last year, we materially increased our reserves against performing loans. At that time, our expectation for credit losses were guided by a rapid deterioration The economic indicators caused by the significant uncertainty around the pandemic.
In particular, there was uncertainty around the speed and timing of an economic recovery, The degree of government support, the size and duration of additional waves of the virus and the availability and efficacy of a vaccine. To date, bank and government support programs have been robust and beneficial to our clients, resulting in better than expected credit performance. Additionally, the economy has outperformed our expectations since the onset of the pandemic, with economic indicators such as GDP and unemployment faring better than we originally expected. Although some sectors continue to be severely impacted by containment measures, other sectors are experiencing robust growth in this current environment. Despite these positive developments, concerns around the new variants of COVID-nineteen, including the efficacy of the vaccines against these new variants and current vaccination delays could negatively impact the timing pace of the economic recovery.
Over the course of this year, we expect PCL on impaired loans to rise, but timing and level will be dependent on the success of the vaccine rollout and how and when government support programs come to an end. Concurrently, we would also expect our allowance on performing loans to decline as performing loans migrate to impaired. As well, our performing loan allowance could be positively impacted as uncertainties around vaccination rollouts abate the reopening of the economy supports more confident outlooks on unemployment rates and GDP growth. 8 5 percent of loans and acceptances, our ACL continues to be well above our pre pandemic levels to reflect the noted uncertainty. Thus far, we have been very pleased with resiliency of our portfolio, which reflects our disciplined approach to underwriting and the quality and diversity of our lending portfolios.
As we have done since the start of the pandemic, we will continue to actively work with our clients to help them navigate through these uncertain times. And with that operator, let's open the lines for Q and A.
Thank you. We will now take the questions from the telephone from Bank of America Securities. Please go ahead. Your line is now open.
Good morning. I guess, Dave, if I heard you correctly, you talked about making a push at City National, particularly on the mid market side. I was wondering if you can elaborate on that relative to my sense was we had a little bit more of an emphasis on private banking recently. Just talk to us, if you don't mind, around both the middle market push that you're making, what it entails, and how we, from the outside, should measure the success of that strategy.
Yes, thanks for that question. Those are two important parts of our growth strategy in City National. We're very excited how we've grown the business Over the last 5 years, as we look to the next phase of growth, I would say, Ebrahim, the first point is really important that balancing the growth between private banking, jumbo mortgages and the commercial bank is a big priority of ours and we've made significant progress on the mortgage strategy, 15% growth year over year, but we originated $5,000,000,000 of jumbo mortgages last year in the U. S. And if you annualize the Q1, it's up to the $7,500,000,000 So we're well underway with that strategy to grow the balance sheet and to balance the balance sheet off Between Private Banking and Commercial Banking.
And we're doing a good job cross selling those customers Into core banking. So, the strategy as we've talked about the last 5 years is really starting to play out and accelerate. We've built a strong back office to Great client experience and that we're executing the way I hoped we'd execute. That leaves us an ability to continue to grow our commercial franchise And what we're thinking there is we have some really strategic advantages, we think, on a couple of fronts. 1, we have this fantastic Global Capital Markets business was very strong industry verticals that create ancillary fee based opportunities on the advisory side for clients that will Bring in through the mid market strategy.
We're thinking in a range of between $500,000,000 $2,000,000,000 in revenue as a target market to give some guidance there, And we've also just reinvested in our treasury management capabilities. So when we think about using our balance sheet and then cross selling into fee based products, which is our strategy across every business globally. This is very consistent with that. We put our balance sheet out to a new client. Within our credit risk appetite.
So, this is certainly within our credit risk appetite and therefore, the ability to balance off private banking and mid market allows us to grow and accelerate growth At our target ROEs.
Got it. And just tied to that, Dave, is M and A a distraction or a potential contributor to the strategy?
M and A would have to be meaningful enough to take management's attention away from the incredible opportunities we have to grow. We were growing At double digits, pre these strategies really taking off. So we feel very good about our organic opportunities in the U. S. And The more M and A that happens with our competitors and they're distracted from their clients, the more organic opportunity we feel we've had.
So we've been growing our NIE, Growing our private banking sales force and commercial banking sales force, anticipating some disruption in the marketplace, but if something fits that accelerates growth On those paradigms, commercial, private bank, then we'll look at it, but we've got significant organic opportunity to deploy capital in front of us.
That's great. Thank you.
Thank you. The next question is from John Aiken from Barclays.
Since I don't really have any significant complaints on the results, I was does drive some variability within the segments metrics. Can you remind me what the purpose of the plan is? And then also what the mechanics are that cause
The purpose of the plan is part of our compensation And pay for performance and it allows our employees and our financial advisors to basically put some of their deferred income into the market And have it earned in the market. And since that's what their profession is, that makes perfect sense. And then as a company, what we do is we hedge that. So if because the compensation expense will rise and fall as markets move up and as they've been moving up recently, especially in the Q1 of this year, our fiscal Q1, Our compensation expense would mark to market or mark up. And to hedge that, we basically buy a basket of securities to offset What our financial advisors and employees have put into the market.
And you can see that on Page 10 of the sup, And we spell out the impact of revenue and expense there quite clearly. And you can see for the last two quarters, they've almost matched Perfectly, but they won't match perfectly because the compensation expense amortizes in as it vests over the 3 years, whereas we have to buy the securities to hedge it Immediately upfront. And you have seen that dislocation in Q2 and Q3 last year where there was about a $20,000,000 difference. But year over year, you'll see a big increase in revenue and a big increase in expense for that, and that's why we adjust it out when I talk about non interest expense growth Year over year because it has no economic impact except to the financial advisors where it's a positive because it allows them to invest in the market as their Salaries and compensation is deferred.
That's great, Rod. I think I almost get it. Thanks.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead. Your line is now open.
Thank you. Good morning. And Rod, you provided some very helpful commentary around the NIM outlook as well as Helpful perspective on the slides. There is but there is an increasingly Bullish narrative for the banks broadly around the steepening of the yield curve. And I'm just wondering if there is beyond that Deposit benefit you highlighted, if there is any treasury opportunities or other opportunities within NIM today given that curve steepening?
Yes, sure. Thanks, Paul. As the yield curve steepens, it's important that you look at the 5 year, maybe even the 7 year swap rates. We don't play out at the 10 30 year End of the curve, except in our own pension plan and in our insurance business. But when you look at the benefits to the deposit book, it largely relates to the assets That we deployed those into and those are largely 5 year fixed rate mortgages in the retail book here in Canada, Variable rate commercial product in the U.
S, but also growing impact to the mortgage book in the U. And credit card balances also will benefit, and that has hurt us from a mix standpoint As those balances have come down substantially, the spending down, those yields are usually much higher. So that will help NIM as it goes up. For us to take treasury actions, we would have to be hedging basically at the 5 year swap rate these days or longer if we want to take a long term interest rate position. But we would rather put those deposits into client facing assets and we think the impact Year over year of interest rates is really going to start moderating after the Q2.
Remember, the rates were cut by 150 basis points about halfway through Our fiscal Q2, so we'll see a little bit of year over year headwinds this year, this quarter. But starting in Q3, those headwinds are largely going to be behind us We're going to start to see more revenue growth from the strong balance and market share growth that we've been achieving. And I think that's going to be an important Driver of our growth and important driver of our growth story going forward.
Right. If I hear you correctly, the NII story starting Q3 Will be closely tied to revenue growth, but not necessarily tied to NIM expansion?
Correct. Yes, NIM is going to start to level off after dropping Precipitously since Q2 of last year with the 150 basis points cut by both the U. S. And Bank of Canada. Now Volume growth is going to translate better into revenue growth and more directly.
So that will be a significant positive for us as we continue to grow that market share.
Got it. Got it. That makes sense. Thank you.
Thank you. The next question is from Meny Grauman from Scotia
It's another quarter of outsized growth in the mortgage book. I'm just wondering I understand why it's happening, but I'm wondering is there a point where it's suboptimal to have that kind of, call it, lopsided growth in the Canadian Banking Business?
It's Neil. Thanks for the question. We definitely don't look at it as a negative.
A couple of reasons there.
I mean, one, it's a really sticky product. We like the risk and there's high ROEs on Mortgages. Our strategy is to own the entire relationship of the customer and the mortgage plays a huge part of that as one of the most profitable products That we can anchor with the client. So, no, we still feel very strongly about the strategy and we're really, I think, encouraged by Market share gains and just the volume we're able to pick up in the last three quarters.
And Neal, just follow-up on that, at what point when you look out in your forecast, when do you see the business mix bouncing out a little more? What quarter? When do you think that will happen?
Yes. Well, I think in terms of the housing market, I mean, we feel good about the dynamics. So we expect to, as Dave mentioned, still see strong growth throughout the rest of the year, high single digits. Immigration was dampened and we expect to see that come back in Q4 and provide some more demand. In terms of Other parts of the business.
Our credit card business, Rod touched on, in terms of NIM impact, we were down $3,000,000,000 in balances there. So that's Providing some real headwinds, not only in our NIM, but just in terms of revenue. Credit card spending will also we expect to bounce back. That will provide Tailwinds of revenue there. And I think part of the unknown is, Dave mentioned, utilization down in terms of commercial revolvers.
Entrepreneurs need to have the confidence to invest and to tap into those revolvers. So I think as the economy opens up, entrepreneurs gain You'll start to see commercial lending start to come back hopefully in the back part of the year.
Thanks,
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is now open.
Hi, good morning. Again, sticking with Neil, just looking at your Deposit growth in Canadian Banking has been phenomenal. I'm just wondering about that $70,000,000,000 or So, increase in deposits over the past year, how should we look at that retail, commercial In terms of inhibiting your loan growth, meaning it could push back consumer borrowing a few years because they're just going to tap into Their savings before they start borrowing again and I'm talking about everything excluding mortgages obviously because that's growing. And if you can make a similar comment on commercial lending, just trying to figure out behavior and how that affects your loan growth outlook.
Yes, great question, Gabriel. We are seeing obviously that this liquidity build up. On the consumer side, it was Somewhat attached to the comment I made about the credit card book. There just isn't a place for consumers to spend right now. Travel and dining and entertainment.
Travel is our biggest category. We are just not seeing the consumer spending there. So, some clients in terms of Credit cards are paying it down more quickly. We've had customers that used to revolve with us that don't have to revolve. They're able to pay in full.
We have seen a decrease in utilization of the retail credit lines as well. So they are paying down debt. In terms of mortgage, to your point, that hasn't dampened that at all. I think this will be it will release over time, I think is probably the outlook and in terms of the trajectory Of that coming back, tied to liquidity, I think it's going to be tied to the economic recovery.
Does it change your outlook though? I think last quarter you said 2nd half, you'll have positive revenue growth in Canadian Banking or something along those lines? Could it be a couple of years before The non mortgage categories start to grow again?
No, no, no. I mean, in terms of the Consumer lending portfolio? Yes. I mean, there's sort of 2 categories within there. There's Lending, we do direct to consumer through our branches and then the auto business.
Auto last year was down dramatically. And if you look at you take an indicator from the Commercial book, we were down over $1,000,000,000 about 30% in terms of floorplan finance. So as that auto business starts to come back, you'll see That portion of consumer lending spiked back. And then just utilization of and consumer activity, In terms of branch based lending, yes, that part of the year is probably a fair bet.
All right. Thanks.
Thank you. The next question is from Sohrab Mohad Hevy from BMO. Please go ahead. Your line is now open.
Yes, thank you. Maybe a question for both Dave and Graeme. If back in December, I thought your tone was a lot more cautious just around the outlook, the operating environment and the like than it is today. And obviously with I don't remember. I think I don't know if Graeme may have it up to top of this.
I don't remember the last time total bank PCLs would have been Low single digits or mid single digits. What has changed? And, Graham, what should we be I understand it's incredibly difficult environment to
prepare for, but What caught you off guard or what was
the pleasant surprise? And how are those, I guess, surprises going to manifest the balance of year, do you think?
Saurabh, thanks for that. I'll start with kind of the macro view of what we're seeing and why we're certainly Becoming more confident in the trajectory that we're seeing. 1st and foremost, to my points around the vaccines, the effectiveness, the number of vaccines, The plans coming together, the progress Europe's making, particularly the UK, a core market for us to progress, the United States is making and vaccinating its high risk population and its ability to reopen its economy. And even though Canada has been delayed, We're talking months here. We're not talking quarters.
So we're growing in confidence in the trajectory The vaccination of our population and the mitigation of risk. We're not there yet, so we're still waiting to see the execution of this, but we're getting more confident that The timing is starting to narrow around this when this will happen. So, I think that certainly is no shock there. It's just an evolution of the process that we're going through in a very complex operational process, But it's coming together. And I think that allows us to see through to more normal economic activity, increased credit card spend in the fall, as Neil referenced even that surplus cash, there's $200,000,000,000 of cash sitting on Canadian consumers' accounts right now waiting for a place to use it.
Some of it's gone into the market, some of it's gone to pay down debt as we just talked about, but a lot of it's poised to grow that service sector that's been shut down and most impacted By the variance in COVID right now. So, I think that's leading us to feel very good about Where we are as an organization, where the economy is and how this should play out the rest of the year? Graham, why don't you talk about your view on risk from that perspective?
Sure. Just a few comments. I would say, what's different now versus Q4? Well, I would say by far and away the most notable event is when we sat here at the end of Q4, There was no known vaccines or approved vaccines. And so that is absolutely a huge game changer in terms of kind of putting a different lens on I think one of the biggest issues that we were facing in 2020 was just uncertainty around the timelines for this pandemic.
And that was a huge factor. So with the introduction of vaccines in Q4, that certainly is a huge point of optimism. Now, the flip side of that is we're obviously seeing challenges in getting vaccines rolled out. We're seeing variants come into play. So that still does leave a significant level of Certainty and caution in play with us, but that is really, I would say, the biggest point that kind of toggles this quarter last quarter versus this quarter.
As to how that translates through the provisioning, I mean, you quoted the total bank PCL, I would really kind of dissect that into the 2 components. What we're seeing in Stage And then kind of the dynamics of IFRS 9 and how we treat performing loan loss allowances. So certainly in Stage 3, 13 basis points a very low number. I think that would certainly be kind of the bottom end of our historic range. And that's really a byproduct of, I would say, 2 significant things.
We're certainly seeing The benefits and effects of the deferral programs that we put in place as well as certainly the positive implications of the support programs that were provided by governments Across the board. As deferrals come to an end, we're starting to see those delinquencies tick back up and so we do expect stage 3 impairments and delinquencies to trend positive or trend upwards over the remainder of 2021. Government support is a big part of this though and Right now, as it stands, government support is expected to conclude largely this summer. And that really is what will kind of Our expectations going forward is to the degree that that's extended or it's morphed into new forms of support. That will really drive kind of And implications for our credit performance in the latter half of the year.
When it comes to performing loan loss allowances, this is more about kind of the expectations As opposed to the actuals that we're experiencing. As I said, so certainly the vaccine is positive and that's translated to a more positive macroeconomic forecast with Robust recovery really starting in the latter half of twenty twenty one, as Dave referenced, but still some degree caution on that at this point That I referenced. And so these are all the things that are in play. But when it comes to the Stage 1 and 2, that's why we did make a small release this quarter is because That ACL, that full quantum of risk we see has abated to some degree since where we were standing at the end
of Q4. Just for posterity, our last time at this level is Q1 of 2,005 at 12 basis points.
Thank you. Thank you. The next question is from Mario Mendonca Omkar from Nikede Securities.
Graham, I just want to put maybe a slightly finer point of what you just went through. If we look at credit cards as a proxy for the Canadian consumer, credit card loss rates were like 150 basis points This quarter, about half of what we saw before the pandemic even played out. When you think about credit card losses and how they play out over the next, say, year or 2, How should we think of that? Should we think of the deferrals as the expiry of the deferrals and maybe the end of government support Causing those loss rates to go through 300 basis points and then migrate back down to normal? Or do you think of that As the upper bound that we're unlikely to even get through what we were before the pandemic.
I guess what I'm trying to get at is, Has this government support essentially negated that spike in PCLs that we're all sort of bracing for earlier on in
Yes. Thanks, Mario. I think it's a really good question. I think this whole debate around the degree to which loan losses have been deferred or mitigated It's a really great question right now and it's part of the uncertainty that I think we're facing. So well, yes, right now we are experiencing exceptionally low levels of loan losses and Quite contrary to where you'd expect it to be at this point of the cycle, that is certainly a byproduct of the deferrals and the government support, as you've noted.
Putting the government support aside for a second, credit cards was down for us this quarter, which is different than the other retail products, that's a byproduct of the fact that credit cards have 180 days impairment as opposed to a 90 day impairment. So we would expect The flow through of deferrals to start to pick that up over the coming quarters. The implications of the government support part are the other very material part of this, right. And So as I indicated earlier, we do expect on the retail side our delinquencies and impairments across the board to increase throughout 2021. The level that gets to the degree that that's deferred versus mitigated, I think is really dependent on this bridge that the government has created and whether it's not just robust Whether it really extends to the other side and that does fully mitigate losses or whether these are really just deferred to kind of more elevated levels at the latter half of this year and early 2022.
But that is a big point of the uncertainty that's really difficult to work at at this point in time.
Real quickly then for Rod. Rod, help me think through What's going on with the non loan earning assets? So think of all the liquid assets the bank has. It dropped last quarter, increased a little bit this quarter. What are the big drivers of that?
Is it simple as saying if loan growth reemerges in the second half, That loans will sort of crowd out some of this liquidity? Or is it really being driven by just client demand right now? I think it is a combination of both. If you look at City National in particular, and We don't pool all the money because of different bank requirements and regulations and The fact that we have legal vehicles and government requirements, so if you look at just City National over the last year, We've had $9,000,000,000 of loan growth, which is very strong, but we've also had $18,000,000,000 of deposit growth. So That extra $9,000,000,000 has basically displaced wholesale funding.
And we've done the same thing in Canadian Banking. Numbers are slightly different, but we've displaced wholesale funding with that loan growth, but the deposit growth has been much higher. So As we kind of grow loans into that, that will be able to take lower yielding securities down and replace those with higher earning Client assets.
Next question please.
Thank you. The next
Thanks. Maybe for Rod, I think you had mentioned that some of the discretionary costs could be coming back as we begin to the economies began to reopen. How much of that I think it was $80,000,000 in discretionary costs are you baking back, coming back post pandemic in your expense outlook?
A portion of it. Some of that is certainly travel, which may not return to pre pandemic levels. We will see. Some of that is marketing, Which as the economy opens back up, as people venture out, there will be more opportunity to grow the client base. So some of that certainly will return, but I wouldn't expect all of it to return.
So you can factor a portion of that coming back. But again, we're going to grow earnings And revenue faster than that expense growth is going to resume.
So then what areas are you expecting expenses to grow in your low single digit expense outlook then?
So this is everything Outside of variable comp and stock based comp is that very low single digits. It's basically all other expenses. And that includes our continued investment in technology, in digital capabilities. We still have to invest in new regulatory requirements, Invest in people, so I'm not excluding people from that very low single digit and we continue to add headcount so that we could continue to grow market share. So we've added over 1500 people over the last year to respond to market growth.
To Rod's point, this is Dave. Neil has added private bankers, Kelly Coffey and the team have added private bankers, writing commercial bankers. So, we are growing Our capacity to serve clients, expecting the market to surge and client demand to surge yet again. And this is on top of the outstanding growth that we've got now. So, We've been ceding growth, expecting the recovery, and it's playing well for us right now.
Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Dave, please go ahead. Your line is now open.
Good morning. Dave, in your opening remarks, you talked a lot about Wealth Management, specifically on the U. S. And if I look at Slide 4, you've onboarded $40,000,000,000 plus with new advisors over the past few years, which is a significant amount. Maybe you can kind of talk about that onboarding process.
Is it benefiting from new geographies? And kind of looking out over the next 2 years, Is that going to continue?
We've been doing that both in Canada and the US as core strategy. So, I'll talk to the US and maybe Doug can talk To the Canadian process, but certainly, I think the value proposition we've invested heavily in financial planning technology, Our core margin lending capability, so the infrastructure that was lacking in the platform 5 years ago, we have a very strong Adviser offering platform right now with a great culture and we're attracting advisors from the big platforms. And that's It's been a consistent consolidated effort. Culture is a big part of it. We sell the culture that we have in Canada and the The capabilities we have, the teamwork we have, the cross sell and then referrals that we get through our banking partners on both north and south of the border, All that combines to be a very attractive offer to financial advisors and FAs, IAs in Canada and the U.
S. So, That's been a core success of ours in Canada and in the U. S. For many years and we see an opportunity to really accelerate that. So, we've got And to increase that growth, particularly in the United States over the coming years and are ramping up our branch manager and sales efforts to do that.
We're pretty excited about that opportunity. Doug, you've been executing this and your team, Dave Agnew, for years. It's a well proven formula for us.
Yes, it is. And it's the story for those of you who were at the Investor Day a few years ago, the flywheel that I put up is really working. And I'd add in the U. S. To Dave's comments A couple of things.
One is the shift to fee based, in some cases, discretionary assets And the addition of a credit product has allowed our advisors to have more to serve for their clients. But in Canada, the story we told at Investor Day was An ability that exceeds our competitors to invest in highly skilled subject matter experts at the center, allowing our Advisors to become much more than investment advisors, obviously anchored in goals based discovery and planning, but bringing in Real expertise in insurance, in philanthropy, in trust and estate and giving advisors, frankly, more to sell than our Competitors have or more to provide clients than our competitors have, which makes us a destination of choice for advisors. So we're seeing through the last Number of quarters of disruption as we're stronger than ever interest from other firms' advisors to join our platform because we've got just More firepower for them to face the client base.
Great. Thank you very much.
Thank you. The next question is from Mike Ryszvanovich from Credit Suisse Securities. Please go ahead. Your line is now open.
Hi, good morning. A quick one for Neil. Just wanted to go back to the gains that you've been making on the deposit, the retail deposit share in Canada. And it seems like it's a pretty competitive market like with the incentives provided, whether it's like a $300 cash upfront or I guess over time for a new checking account, it just seems like a very competitive market. I'm wondering given that you have to pay for that growth to some degree, How long does that typically translate into gains in other areas?
Like we've clearly seen it in the mortgage But I haven't seen it in the other retail loan balances in terms of your share. So How is that trending? Is that just the lag or do you expect that to maybe accelerate at some point in the near term?
Yes, thanks for the question. Absolutely, it's competitive. We've had since Investor Day, we put out our goals in terms of new client acquisition. It's been a real focus. We were really pleased with the trajectory of acquiring new consumers and making RBC their home bank.
Pre COVID, obviously, we needed to really kind of shut things down once that hit. We have opened things back up really starting late Q3 And I've been really pleased about the rebound in terms of being able to go out and connect with consumers and have them join the franchise. In terms of the incentive costs and our ability to cross sell, we track it literally by cohort and channel. So we are able to get down and understand What product the consumer came in on, what channel they came in on, what offer they came in on and then we see the curves in terms of when we know over what period of time What investment products, borrowing products, card products or mortgage products they are going to add. And at this point, we continue to invest because those cross sell rates Continue to hold really, really solid.
And so our conviction around the strategy and ability to consolidate to be the core bank and earn that extra business It's exactly where it was a couple of years ago. The other thing underpinning that strategy, to Doug's point we talked about at Investor Day, Unlike some of our competitors, we actually incent the client to consolidate their business. We don't have a minimum balance deposit product And we would point to that as one of the reasons that we're able to cross sell at a higher rate.
So you are seeing some good cross sell. I guess we just don't see the numbers. Any Metrics you could offer on that?
I mean, the metrics are essentially as we look, we break it down into 4 categories, The transaction account, investment account, borrowing account and card and we have the highest cross sell rate both in terms of third party benchmarking studies. And like I said, across each of those four product categories, we've seen consistent cross sell rates over time. So That's probably the best way to describe it.
Okay. Appreciate the color. Thanks.
Go ahead, operator. Thank you.
That is all the time we have today for questions. I would now like to turn the meeting over back to Dave.
Thank you. Thanks everyone for your questions today. A few themes We really wanted you to take away. 1st and foremost, the very strong client franchise growth that we saw across capital markets, Wealth platforms, both north and south, US and Canada, and obviously our retail bank with over $100,000,000,000 of client growth. That really allowed us Earned through very significant interest rate headwinds.
We talked about a $400,000,000 Naida impact to the interest rates on our US and Canadian businesses, and we're Happy to have earned through that and that positions us very well, as Rod referenced, as those headwinds start to diminish through Q2 into Q3, that strong momentum We have is going to be even further accelerated by a return to the credit card business, return to the commercial businesses as we reopen the rest of the economy In the second half of the year. So we feel very good about where we are. Our ROEs of 18.6% stand out. So we're earning A premium on the capital we're investing in the business because we're cross selling, because we've got multi product relationships and stands out in our fee based revenue. While NII was challenged, you saw very strong fee based growth, which I think was a proof point of the cross sell off of our balance sheet activity.
So, All that, we feel very good. We're very proud of our quarter. Thank you for your questions and we'll see you in 3 months.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.