Good morning, ladies and gentlemen. Welcome to RBC's Conference Call for the First Quarter 2020 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. Please go ahead, Ms.
Ahn.
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. Then we'll open the call for questions. To give everyone a chance to ask a question, we ask that you limit your questions and then re queue. We also have with us in the room, Neil McLaughlin, Group Head, Personal and Commercial Banking Doug Guzman, Group Head, Wealth Management, Insurance and INCF and Derek Nellner, 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 would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. With that, I'll turn it over to Dave.
Thanks, Nadine. Good morning, everyone, and thank you for joining us. We had a great start to the year, delivering record quarterly earnings of $3,500,000,000 We reported record results in Canadian Banking and Capital Markets and very strong results in Wealth Management despite interest rate headwinds and a good quarter in insurance. Our results were driven by strong volume growth across our leading client franchises, lower PCL and prudent expense management. We continue to win market share while maintaining a risk profile at the lower end of our appetite and generating an ROE of 17.6%, a premium relative to our global peers.
I am pleased to announce a $0.03 increase to our dividend, bringing our quarterly dividend to $1.08 per share. Our strong capital generation and robust 12% CET1 ratio are proof of our disciplined capital deployment strategy, which is one of RBC's core strengths. Along with the dividend increase, we bought back 7,000,000 shares this quarter, supporting our focus on delivering long term value for our shareholders. While share buybacks will always be an effective and flexible lever to improve returns, allocating capital for net income growth will continue to be our primary focus. Our leading scale and diversity of revenue streams enables us to invest concurrently in technology, sales capacity and client value, positioning us to succeed in this period of secular change and macro uncertainty.
In addition, we constantly review our portfolio businesses to ensure they provide long term sustainable growth opportunities and meet our return hurdle rates. Along with repositioning part of our international custody business as announced in Q4, we entered into agreements to sell all of our banking operations in the Eastern Caribbean this quarter. Similarly, we actively manage our capital markets loan book to build sustainable relationships and returns. Before moving to segment results, I want to touch on the macro environment for a minute.
While the
start of the fiscal year saw a reduction in global trade tensions, which was positively impacting market sentiment and yield curves, recent uncertainty related to the coronavirus is reigniting downside risk to the global economic outlook given the potential for disruption to global supply chains. We are monitoring the situation closely. While we have limited direct exposure to the regions impacted hardest by the virus, we are concerned for those affected by the recent outbreak. Turning to our domestic business, the Bank of Canada's tone has become more cautious given recent economic data showing weaker business investment, exports and consumer spending despite positive business sentiment and low unemployment levels. A key strength of the Canadian economy is housing.
We continue to see strengthening in Toronto's housing market with low interest rates and constrained supply pushing prices higher. We are also seeing signs of recovery in Vancouver and high activity levels continuing in Montreal and Ottawa. With household demand being supported by economic and population growth, including immigration, we would support measures to address an increasingly limited housing supply. Against this backdrop, I want to update you on our business segment performance. Canadian Banking reported another record quarter with net income of over $1,600,000,000 We continue to leverage our multi year investments in sales capacity and digital capabilities to drive strong client driven volumes.
Over the last year, we added over $60,000,000,000 in total volumes across loans and deposits. With respect to deposits, our growth in checking accounts accelerated to 6% over last year. As a key Canadian banking product, this has been a core focus for us as we continue to deepen relationships with our clients. 18% of RBC clients of all four of transaction accounts, credit cards, investments and borrowing products with RBC higher than the peer average of 12%. Along with a personal checking account, Canadian residential mortgages are a core long term product and we're seeing strong client acquisition and retention.
Over the last year, our leading distribution and differentiated value proposition has added over $21,000,000,000 in mortgage volumes to our market leading franchise and nearly 95% of our mortgage clients have more than one product with RBC. While our mortgage growth has impacted Canadian Banking's total margins, Canadian Mortgage remain a high ROE product given their low risk weighting, getting returns well in excess of our medium term ROE objectives. We're still originating prime Canadian retail credit. The credit risk indicators and profile of our new mortgage originations are as strong as our existing portfolio. With strong offers and integrated campaigns, we have deepened the value proposition of our proprietary loyalty program and we are seeing higher credit card acquisitions year over year.
We remain committed to meeting our client acquisition target of 2,500,000 new Canadian Banking clients by 2023. With net new client acquisitions up 30% from last year, we have had a good start to 2020. Turning to Wealth Management, we had a 3rd consecutive quarter with earnings over $600,000,000 and revenue over $3,000,000,000 benefiting from both strong markets and net sales. In Global Asset Management, we added another 40 basis points to our leading Canadian retail market share over the last 12 months. With an uncertain macroeconomic and geopolitical backdrop, our clients continue to come to us for trusted advice and exceptional service.
With 82% of AUM outperforming the benchmark on a 3 year basis, we added to our track record of superior net flows, generating a further $11,000,000,000 of retail sales of retail net sales over the last 12 months. In Canadian Wealth Management, we continue to grow our top tier distribution, adding more than 50 investment advisors over the last 12 months, building on the capabilities of our existing team of over 2,000 advisors. Going forward, we expect to continue to leverage our distribution scale to drive sustained growth. Our U. S.
Wealth management franchise continues to perform well despite headwinds from lower interest rates. We continue to see very strong double digit volume growth across AUA, AUM, loans and deposits as we execute on our accelerated organic growth strategy. With double digit growth in deposits, we are seeing the results of a wide range of initiatives we spoke about in the first half of twenty nineteen, including the rollout of our new treasury management platform and investments into Exactuals, FilmTrack and DataFaction. A priority for us is to grow our U. S.
Private client group and City National franchises giving funding synergies and opportunities for increased client referrals, including over $1,000,000,000 of mortgage flow through our U. S. Wealth management channels. Similar to Canadian Banking, mortgages are an important low risk anchor product that allows us to build deeper long term relationships with our city national clients. We are also increasingly focused on leveraging our strengths to boost City National's digital bank offerings.
We continue to expect strong loan and deposit growth given the multiyear investments in sales capacity. Our Capital Markets business delivered record earnings this quarter, more than $100,000,000 higher than our previous record. We benefited from the closing of landmark transactions, including BB and T's merger with SunTrust, Apollo's acquisition of Cox Media Assets and Broadcom's acquisition of Symantec Assets. Our strong results this quarter propelled us to 9th in the global league tables. The quarter provided a more favorable environment for the industry relative to last year, narrowing credit spreads low interest rates created a favorable environment for companies looking for financing.
Likewise, dovish global central banks and low equity volatility helped provide a constructive backdrop for equity markets and deal flow. Our investments over a number of years been an important driver in the rising strength of our capital markets franchise, the benefits of which can be seen by increased roles and global mandates. Our investment banking pipeline remains healthy, reflecting reasonably strong market conditions. However, the conversion of deals to realize revenue remains dependent on market and regulatory conditions, which could be volatile through the year given the uncertainty around the geopolitical landscape and concerns over the coronavirus. Global Markets had an impressive quarter with strong performance in our FIC business, reflecting healthy client engagement and the strength of our client focused franchise.
Overall, we delivered a very strong quarter and are starting 2020 from a position of strength. We have scale, leading market share and momentum across our core franchises. We are well positioned to continue providing value added advice and service to our existing clients, while attracting new clients and gaining market share across our segments. While we face challenging headwinds from lower interest rates, moderating global growth and normalizing credit conditions, we remain committed to balancing our investments
and Thanks, Dave, and good morning, everyone. Starting on Slide 5, we had record earnings of $3,500,000,000 up 11% from last year. Diluted EPS of $2.40 was up 12% year over year. I'll start with a few comments on cost management. Expenses were up 8% year over year.
However, most of the growth was driven by staff related costs such as variable and stock based compensation, which was commensurate with strong revenue growth in Capital Markets and Wealth Management. Excluding these, expenses were up 3% year over year. Total headcount across the bank declined from last quarter as we remain vigilant on controlling costs and driving efficiencies. Moving on to capital on slide 6, as Dave noted, with a CET1 ratio of 12%, we remain well positioned to fund organic growth opportunities in our leading franchises and to return capital to our shareholders. Our strong earnings allowed us to generate 38 basis points of internally generated capital, more than offsetting the combined impact of previously disclosed accounting and regulatory changes.
Strong client driven RWA growth in Canadian Banking, City National and Capital Markets as well as the impact of lower discount rates in determining pension and post employment benefit obligations was partially offset by normal course parameter and methodology updates. We also distributed $2,200,000,000 to our common shareholders in the form of share buybacks and dividends this quarter. Our share count is now at its lowest level since 2010. Moving to our business segment performance on slide 7, Personal and Commercial Banking reported earnings of nearly $1,700,000,000 Canadian Banking net income of over $1,600,000,000 was up 5% from a year ago. Our commitment to exceptional client experience and innovative digital offerings continue to resonate with clients.
Strong volume growth across our Canadian Banking businesses led to 5% year over year growth in total revenue. We are seeing increased momentum in our mortgage portfolio, up a strong 9% year over year. Total real estate secured lending was up 7%, net of lower HELOC balances. Similar to last quarter, mortgage volumes were driven by strong origination volumes, up 40% year over year and strong client retention of over 91%. Following double digit growth in commercial lending over the last year, as expected, we saw moderation in the growth rate across a number of sectors.
However, we still added over $5,500,000,000 of volumes. GIC growth rates moderated somewhat to a still strong 10% year over year as our clients shifted into mutual funds. Higher fee income this quarter was largely driven by strong double digit growth in assets under administration, helping offset some pressure from lower margins. Net interest margin declined 4 basis points from last quarter, largely from compressed spreads from competitive pricing on both mortgages and GICs. Should we see continued pricing competition and strong mortgage growth through the spring housing season, our NIM could compress a further 3 to 5 basis points for the rest of the year.
Expense growth was contained at 4% year over year, driving positive operating leverage of 0.7%. We saw a reduction in headcount through attrition and continue to reduce branch square footage. We still expect positive operating leverage for the full year, but expect to see increased pressure in the back half of the year from upcoming changes in the credit card landscape and continued pressures on loan and deposit spreads. We do not expect any material impact to earnings from the sale of our banking operations in the Eastern Caribbean that Dave highlighted earlier. Turning to slide 8, Wealth Management earnings of $623,000,000 were up 4% year over year.
Adjusting for the favorable accounting adjustment related to Canadian Wealth Management in Q1 twenty 19, earnings were up 9% year over year, largely in line with recent quarters. Both Global Asset Management, AUM, and Canadian Wealth Management, AUA, were up double digits year over year, largely due to North American equity markets rebounding from challenging market conditions last year. We continue to gain market share in Global Asset Management adding nearly $3,000,000,000 of Canadian retail net sales this quarter. While equity markets drove market appreciation, the majority of our retail flows were long term fixed income and balanced solutions. In U.
S. Wealth Management, revenues were up 12% year over year in U. S. Dollars. Assets under administration grew a strong 16% year over year, reflecting both market appreciation and net sales, partly due to our successful recruitment of experienced financial advisors.
Net income was relatively flat year over year as robust volume growth was offset by the cumulative impact of the 3 Fed rate cuts from July to October, as well as by higher costs to support organic business growth. Loan growth of 19% at City National continued to be led by commercial lending. However, we also saw continued very strong mortgage growth at 24% year over year. On a geographic basis, we are seeing an increased contribution from our East Coast expansion with loans in the region up 40% year over year. Expansion in new markets contributed a quarter of total loan growth.
Total deposit growth at City National was up 19% year over year or 11% excluding sweep balances. City National NIM was down 17 basis points quarter over quarter, largely due to the average Fed funds rate declining 45 basis points. Given the asset sensitive nature of City National's balance sheet and continued competitive pressures on deposit pricing, we expect margins to tick lower throughout the remainder of 2020, albeit at a much slower pace. Moving on to insurance on slide 9, net income of $181,000,000 was up 9% from last year, mainly due to new longevity reinsurance contracts, partly offset by the lower impact from reinsurance contract renegotiations. While insurance first quarter earnings are seasonally lower from strong Q4, earnings this Q1 were higher relative to prior Q1 results.
Expenses in this segment are well controlled and remain fairly consistent at around $150,000,000 over the last 2 years even as we grew our revenue. Looking forward, we continue to target modest earnings growth for the full year. This segment continues to generate a high ROE, which is well in excess of our bank wide medium term objectives. Investor and Treasury Services results are highlighted on slide 10. Earnings of $143,000,000 were down 11% from last year.
Total revenue decreased mainly due to lower client deposit revenue largely because of the short term interest rate environment. Asset services revenue was lower due to reduced client activity and continued pricing pressures, reflecting secular market and industry headwinds. Recall funding and liquidity revenue was seasonally higher in the 1st quarter, driven by increased money market opportunities. The business also experiences some earnings compression when we see the flattening of the yield curve. Going forward, we expect seasonally lower earnings next quarter and hope to see increasing levels of profitability towards the end of 2020 and into 2021 as we work through the repositioning of the business that we announced in Q4.
Turning to Capital Markets on slide 11, the segment generated record net income of $882,000,000 up 35% from last year, benefiting from strong revenue growth as an unusually elevated number of transactions closed in the quarter. Earnings also benefited from lower PCL as the prior year included provisions related to one account in the utilities sector. Also, capital markets generated positive operating leverage of 4.7%. Expense growth outside of the performance based compensation was modest amidst record revenue. Capital Markets ROE expanded this quarter as we generated higher revenue off a lower RWA footprint.
Corporate Investment Banking revenue was up 23% year over year as we realized revenue from the closing of significant transactions in line with guidance provided in our year end call. The constructive market conditions that Dave highlighted also drove higher debt and equity origination results, especially in North America. We increased our market share in global feed pools across M and A, DCM and ECM. Global Markets revenue was up a strong 18% from last year, largely due to higher fixed income trading revenue across all regions. We had particular strength in credit trading, benefiting from secondary flow from strong debt underwriting results and narrowing credit spreads.
Rates trading also performed well in a volatile interest rate environment. In addition, we deployed balance sheet towards our repo business. Equities trading had a solid quarter despite lower volatility and recall that Q1 last year was a record quarter for this business. Overall, we had a strong start to the year. We continue to focus on our strategy of creating more value for our clients and shareholders while driving premium growth in a prudent manner.
And with that, I will turn it over to Graeme.
Thank you, Rod and good morning everyone. I will begin my remarks starting on slide 13. This quarter, our provisions on performing loans of $83,000,000 or 5 basis points were flat quarter over quarter, albeit at the higher end of our expected range of 3 basis points to 5 basis points. This mainly reflects portfolio growth in the quarter, especially in our cards portfolio, which typically sees an increase following the holiday season. It also reflects changes in our macroeconomic forecast where moderately higher long term interest rates, weaker oil and gas markets and higher unemployment rates were offset by favorable housing trends in Canada.
On the other hand, our provisions on impaired loans of $338,000,000 or 21 basis points were down 6 basis points from last quarter and were below our expected range of 25 basis points to 30 basis points. This is mainly due to lower provisions in personal and commercial banking and wealth management. Let me now provide some additional color on PCL for some of our businesses. In Canadian Banking, PCL and loans decreased by $33,000,000 from last quarter, largely reflecting lower provisions on impaired loans in our commercial portfolio across a number of sectors. This was partially offset by the increase in provisions on performing loans this quarter, mainly in our cards and commercial portfolios due to the factors I noted earlier.
In Caribbean Banking, PCL and loans decreased by $18,000,000 from last quarter due to recoveries in our commercial portfolio and lower provisions in our residential mortgage portfolio. In City National, PCL and loans decreased by $40,000,000 from last quarter, reflecting provisions we took last quarter in our consumer discretionary sector and high recoveries this quarter. Lastly, while PCL and loans in capital markets were stable quarter over quarter, we did have higher provisions in both the oil and gas and other services sectors. Turning to Slide 14. Gross impaired loans of $2,900,000,000 was down $40,000,000 from last quarter.
In City National, we had higher impairments mainly due to new formations in our consumer staples discretionary sectors, partially offset by repayments across a number of sectors this quarter. In Canadian Banking, we had higher impairments this quarter, the level of new formations in both our retail and commercial portfolios and the level of write offs in our commercial portfolio have declined from last quarter. In Caribbean Banking, we had higher recoveries, which I noted earlier, lower allowances in our residential mortgage portfolio, which is partially offset by an increase in new formations this quarter. In Capital Markets, we continue to see elevated impairments in the oil and gas sector this quarter as the sector remains under pressure. However, consistent with last quarter, we are seeing the trend moderating with higher repayments and fewer new formations this quarter.
While impairment levels in capital markets in City National remained elevated this quarter, need for material provisions were mitigated by the strength of our underwriting, both in terms of collateral and guarantees supporting our loans. Turning to Slide 16, PCL across most of our retail portfolios, including our residential mortgage portfolio were generally stable quarter over quarter. We did see ongoing weakness in our unsecured portfolios in certain regions. In Alberta, unemployment levels remained elevated at 7.3% due to ongoing weakness in the oil and gas sector, which most impacted our personal lending portfolio. In Quebec, the impact of the minimum credit card payments implemented last August continued to lead to higher insolvencies, mainly the form of consumer proposals impacting both our cards and unsecured lending portfolios.
While the impact of rising consumer proposals was most pronounced in Alberta and Quebec, we do see a modest degree of weakness in other regions as well. To conclude, our retail portfolios continue to be generally stable and areas of weakness have been manageable. Our wholesale portfolios continue to benefit from our strong underwriting practices, industry diversification and geographic mix. However, ongoing challenges such as the weakness in the oil and gas sector and global geopolitical risks as well as the emerging concerns related to COVID-nineteen and rail blockades do create considerable uncertainty that we are monitoring closely and actively managing. Overall, while our portfolios have performed slightly better than expected this quarter, in light of the noted uncertainty, we are maintaining our previous guidance on PCL.
With that operator, let's open the lines for Q and A.
Thank Thank you. Our first question is from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Good morning. I guess my question is on capital allocation. I'm just trying to understand whether we should expect the CET1 to build from the 12% in the context of I think Dave's comments around priority and capital allocation remains net income growth. And what I'm trying to understand is in the world where organic growth remains relatively steady state, do we assume buybacks ratchet up or is your motivation to do a deal rise? If we can talk about that, that would be helpful.
Hey, Bahram, I'll start and then I'll hand it over to Rod for questions. So our strategy on capital allocation hasn't changed over the last couple of years. You see the strong organic growth that we're generating. We're investing in further growth which will require capital. So I think from that perspective, it becomes the best way to drive shareholder returns and we'll continue to allocate capital there.
You saw us buy back shares at a greater rate in the last quarter and returning capital to shareholders. And you can expect that we'll use that tool as an ongoing capability to manage our capital base and our returns for shareholders. So I don't think there's any real change in strategy. We continue to look for opportunities to grow our business inorganically and we've got very strong criteria for that. And now the time is not right or the opportunity is not right, so there's nothing in the pipeline right now that would cause us to allocate capital along those lines.
So I think that's generally a consistent perspective of for us their strong momentum in organic growth and driving shareholder value from it, we're going to continue to run this playbook.
Got it. And I guess Dave or Rod, should we expect a meaningful buildup from the 12% CET1 levels or are reluctant to do that? Just your thought process there.
Yes, I think it's Rod. I think Ebrahim, if you go back a couple of years, we were at 10 point 6% in mid-twenty 17. By mid-twenty 18, we're kind of at the 11%. Even a year ago, we were at the 11.5%, 11.4% in Q1 2019. And so we built up to 12% given some of the macro economic uncertainty that Dave was talking about.
And we're very comfortable at 12%. When we run all of our stress tests, 12% gives us adequate buffer for even a most severe scenario. So, we are quite comfortable and do not see a need for it to go up above it. It might go up. There's always 10 basis points up or down on a given quarter depending on how RWA comes out or interest rates with the pension discount rate, but we don't see a need to build from here.
Got it. That was helpful. I'll requeue. Thank you.
Thank you. Our next question is from Meny Grauman with Cormark Securities. Please go ahead.
Hi, good morning. Wondering what you expect the impact of the changes to the stress test on insured mortgages to be? And then if you could also comment on what a change a similar change to uninsured mortgage stress test would be as well?
Thanks for the question. It's Neil. I guess maybe the first point we'd make on the stress test that we've said in the past, we've been quite supportive of the policies and by both the government and the regulatory changes, I think our first priority is to really have a strong housing market. With that said, the change that was announced recently, we view it as actually quite having quite a minimal impact. Our analysis so far looks like it would be about 25 to 30 basis points reduction in the qualifying rate.
That will really translate into a fairly small increase in purchasing power for the average borrower, probably in the neighborhood of about $20,000 $25,000 on an average mortgage. So, I think right now, the focus still, you see a lot of commentary in the marketplace, is around supply. And I think the lack of supply in the major urban markets is still the real focus for where the policy needs to go.
And if the rule it looks like the rule will be extended to the uninsured market. Do you think that will have a bigger impact?
I wouldn't I think it would have at this point, we would think it would have the exact same impact.
Okay. And then just as a related question, you're now consistently growing mortgages well above the market. And I'm wondering, is there a gap between you and the market where you would start to get concerned? And what would that gap be?
Well, I think in terms of the market,
there was a
player a couple of years ago that was originating
at an exceptionally high clip.
And I would also look back in 2018, we were not we wouldn't say we were at our best in terms of running the mortgage business. So we have commented in the past after 2018, the back half of that year, we did a full end to end review and we are now really seeing the gains from that review right from additional sales power with more mortgage specialists on the ground meeting with customers right through to our operational processes, how we underwrite and specifically how we are turning around and getting back to customers. So one of the things that's been a big improvement is just turnaround times and really having a customer centricity. So those would be the levers we have pulled. Graham mentioned and Dave mentioned as well in his comments, our origination profile, we've not at all gone down the risk curve.
We have exactly the same FICO profile and LTD profiles that we have had. So at this point, we are feeling really good about what we are originating. Some of what you are also seeing is that activity is up and in the first quarter, you are seeing home prices jumping has also led to some increases. So that's really, I guess, the underlying rationale for our performance and we will have to wait and see what the back half of
the year looks like.
Thank you.
Our next question is from Steve Theriault with 8 Capital. I
had a question on Capital Markets, but maybe, Neil, since we have you, just a couple of quick follow ups. Could you speak just to the mix of HELOC versus mortgages? Like is that has that come as a function of some of the considerations since 2018? Is it something proactive?
Steve, I'm going
to limit you to one question. So do you want to ask a capital markets question or a retail question?
All right, fair enough.
The fixed income and rate trading, you mentioned the strength there, but it's pretty close to 2x run rate levels. And looking at the U. S. Peers and what they did, FICC was up 40% or 50%, it looks like. So it does seem to be on another level of growth.
So maybe, Derek, you could talk a bit about the drivers there? And maybe remind us about the mix of credit versus rates within your portfolio versus some of your competitors?
Sure. Thanks, Steve. I appreciate the question. I think if you obviously, from a starting point, if you look at industry overall. And as you noted, a number of our U.
S. Peers that reported saw increases in that business. So we did have a strong environment that we were working within. If I break that down into a few different components, obviously, the low rates and the tightening of credit spreads we saw drove a very strong new issue environment that drove higher primary origination for us really across our various geographies. On the back of that then, we did see heightened client trading activity, building on the DCM issuance as well just given the strong secondary markets in general.
So that drove very good ongoing secondary trading revenue for us in credit and in rates. I would say the 3rd driver was an increased focus on our corporate and FI Risk Solutions Group, so working on interest rate, foreign exchange, hedging. I think that's really been a function of just driving improved collaboration across our businesses and across our geographies. As well, I would say, behind our trading businesses, the team has made a number of investments over the last year in people, in some systems, and Frankie, I think, has just brought very good execution and risk management that's being reflected in the trading results that you're seeing this quarter.
And has that, for the most part, carried on into the 1st few weeks of February?
Well, obviously, the market environment in terms of low rates and credit spreads remaining tight has continued. To the extent that continues in place, we expect that will be a positive backdrop for us and others. But as Dave and Rod have mentioned, there certainly are some potential risks on the horizon. And so we'll just continue to monitor that carefully and see how it impacts our client trading flow. I would just maybe finally add related to one of your questions, we are carefully managing the risk profile of the trading book.
And as you'll see in one of the slides, our bar for the quarter was actually down. So we don't see the improved results being driven by any change to our risk profile or risk appetite.
Great.
Thanks a lot.
Yes. Please re queue for your retail question. We'll try to get through this.
Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.
Good morning. My question is for Graham. Thanks for the outlook commentary on the factors that could affect your provisioning. I'm wondering if maybe you can fine tune that guidance. COVID-nineteen rail blockade, will that keep your loss rate on performing loans at the upper end of that range or maybe even above?
And are you seeing any maybe issues on the non performing due to the rail blockades probably showing up?
Yes. Thanks, Gabriel. It's Graham. I'll try and address a few points around COVID-nineteen and the rail blockades. I'd say our risk focus has been on kind of the 3 elements there.
1, 1st and foremost, is just the health and safety of our employees and then ensuring that we have the operational continuity and resiliency to work through this period and work through a period where it could potentially get worse. So that's just been some great leadership by our teams there and working with these external bodies to deal with these challenges. And then we look at the financial side of it, in terms of the direct risk there, we are not an operator player in Mainland China. So we have really no direct exposure to what's happening in the most acute part of this in China itself. And so that really brings us back to kind of the area we are most focused on, which is that kind of secondary risk as a consequence of what's happening.
And there's really 2 elements there that we're kind of focusing on. 1 is the impact of the Chinese consumer kind of disappearing for a period here. And then the second part would be the supply chain impact with China as a manufacturer to the world. Right now, I'd say, we are monitoring that. We are looking at evaluating the sectors that we think are most impacted.
We are engaging with our clients. But the reality is this is too early, too soon to really have a view as to the real impact here. It's going to really depend on the duration of this and the severity going forward. And right now, that's highly uncertain. We're not seeing any impacts on our portfolio at this point in time.
And so really, as I said, we're just monitoring for potential at this point. You did comment on Stage 1 and 2, whether it's COVID-nineteen or the rail blockades. That would be the place that would manifest itself first. And so that would be something we'll be considering in Q2. But right now, as I said, it's too uncertain.
It's too early to provide any guidance as to how material that could
be. And then the rail blockades, are you seeing anything in the Stage 3 near term horizon?
No. My comments would apply both the COVID-nineteen and the real blockade. It's too soon to see impact. They're talking to clients and certainly clients are being impacted, but it really depends on the duration of this and whether it has any staying power or not.
Thank you. I might requeue.
Thank you. Our next question is from Sumit Malhotra with Scotia Capital. Please go ahead.
Thank you. Good morning. My question is for Rod. It's going to relate to margin and mix in City National. When the bank bought that business a few years ago, I have here according to my notes, the mixture of the loan book was about 80% floating rate or adjustable.
Has that mix changed significantly since Royal took over the business? And relatedly, I think your adjective Rod was that you expect margins to tick lower. Obviously, we've seen a substantial move over the course of the past year as we've had 3 rate hikes. Is the more moderate outlook for margin compression based on your view on what the Fed does? Or is the variability of this book based more on, let's call it, market rates like SEDAR as opposed to the Fed?
Yes. Sumit, thanks for that. I believe my comments were that we'd expect a continued decrease in Q1 because of the Fed decreases, The 2 of them in our fiscal Q4 had to flow through for the full quarter, including the ones in October, and then we thought it would tick lower from there. We continue to see that. We saw obviously the pronounced decrease of 17 basis points quarter over quarter in Q1.
We expect that to moderate. Right now, if you look at the Fed futures, there's an 86% this is as of yesterday afternoon, 86% chance of a Fed cut by July. That gets priced into the Fed futures and so therefore that gets priced into our modeling into the out quarters. So it might be 3 to 5 basis points on the Fed funds, which is not going to impact us as much. We still have a majority of our loans on the variable rate as you cited, but part of this is also mix.
So we've been growing that mortgage book in the over 20% range, which tends to have a lower margin than some of the other products. Also it's funding sources. So yes, we've had very strong deposit growth, but when City National was acquired 4 plus years ago, the majority of the funding was in non interest bearing deposits. And as we've continued to grow the loan book double digits, the mix of non interest bearing deposits was over 50% as recently as Q1 last year. It's mid-40s now.
So as that shifts a little bit, it will have a modest impact on your NIM and cause a few basis points of NIM compression here and there. But overall, we are adding new profitable client relationships, strong client relationships, bringing more product and more services from a stronger platform, both from City National's platform as well as RBC's platform. So this is all part of the strategy and we can't control the Fed funds, but we are still very comfortable with the business that we are adding.
And just to be clear, I'll stop here. Your comments on what Fed funds futures, as far as pricing for your commercial portfolio is concerned, is it SEDAR that's the governing factor or is it specific movements by the Fed that drive that, meaning market rates or actual Fed fund movements for the most part?
Well, most lending in the U. S. Is based off of LIBOR based product at this point, so that changes. But that is influenced by Fed funds. And so it might be more direct in other countries than it is in the U.
S, but there still is a correlation there.
Appreciate it. Thanks for your
time. Thank you. Our next question is from Doug Young with Desjardins Capital. Please go ahead.
Hi, good morning. Just thinking about the U. S. Wealth management business, we've seen some changes by some of your peers. I mean Goldman has come out and stated they want to be bigger mass affluent and we see Morgan Stanley going into E*TRID.
And I think Royal's focus has been mostly high net Just want to get a sense of the strategy for that wealth business. And I think we always talk mostly about the banking side, but maybe just strategy for the wealth side of the business, does that have to pivot here as well?
Yes, thanks for the question. I'll take it. Certainly, as we think about our strategy and how we want to grow the business and how we want the balance sheet to look at a $100,000,000,000 bank in the U. S. Versus the $50,000,000,000 bank it is today.
As Rod alluded to and we talked in our comments, we are shifting to a high net worth consumer balance sheet as a different balance from largely a commercial driven cash management organization with a wealth management cross sell. Hence, we know we're really focused on products like mortgage and cross selling into core checking and then cross selling into advisory and wealth management products. So that strategy continues to build out. We're opening branches in New York and expanding into Washington and Nashville, as you've heard us tell that story, and that growth has accelerated. At the same time, the loan book has been growing faster than deposit book.
So growing our deposit strategy has become of paramount importance. So you'll see us likely launch a direct to consumer bank in the United States sometime at the end of this year, early year, really focused on a higher net worth customer, not just similar to some of our competitors in the U. S, what they've done. We have a number of strategies to looking at that to move it from high beta to mid beta type relationships, and I think that strategy will help us fund our longer term growth. So as we evolve in the U.
S, we shift from a largely commercial cross sold into wealth to a balance between kind of a high net worth, ultra high net worth client will move down a little bit down market into and I'm super affluent and looked at the direct to consumer strategy filling in behind there. So you'll see us bring in some new capability around that to make sure that we're able to continue to grow both our loans and deposits at a strong ratio that you're seeing today. So that would be the shift for us and we feel good about the organic strategy versus having to go out and acquire deposits through an acquisition. Great. Thank you.
Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning. Probably for Graham, when you look at the performing loan PCLs, the numbers have been small from the very beginning from when these new standards came to be. What I'm thinking about is when you test the models, when you run scenarios through the models, what sort of what do you have to build in, in terms of unemployment or an outlook for rates or oil and gas or any variable really to make these numbers meaningful? And meaningful to me would be something not 5 basis points, more like 15 or 20 basis points. What sort of environment do we need to see to make these numbers meaningful?
Thanks, Mario. It's a good question. I think we a couple of things I responded there. So to some extent, we actually already do build some variability into that. We as part of our performing loan analysis, we build in 5 different scenarios into that.
There's the base case and the pessimistic, which we provided some disclosure on historically. But in addition to those, we do run 2 other scenarios that one that focuses on kind of a much more depressed oil and gas environment and one that focuses on a much more depressed housing environment. And so those are factored in and we weight those accordingly because we do view those as lower probability events. And so when we bring those into play, that is why our overall allowances is materially higher than our base case would articulate. As the environment shifts, unemployment moves with that, certainly unemployment, interest rates would be some of the bigger factors that would drive that allowance.
But the sensitivity of that's really going to be dependent on the portfolio and dependent on the business mix that we're looking at. But I don't think to date, we've really disclosed more specific than what you'd seen in our disclosures at Q4.
So if I could just paraphrase. If Royal's business mix were to shift toward, say, aggressively into leverage lending, I'm not suggesting that's what's happening. But if the business mix were to shift into something that was a lot riskier and you moved your weightings toward the those unfavorable scenarios meaningfully because you saw a big deterioration coming. Is that the scenario are those the scenarios or conditions under which those performing loan PCLs would rise meaningfully?
There's a lot of different stories. It's if we adjusted our base case in a meaningful way, that would drive it. And as I said, unemployment would be one of the sheer size of our retail business. Businesses like cards are inherently more volatile than other businesses. So again, the factors there will be driving that will be things like unemployment.
On the wholesale side, it is factors like interest rates and actual market performance, commercial real estate indices that drive the models there more so. So different factors driving different parts of our portfolio. Credit quality will drive that. So we see deterioration in our credit quality. We will see an impact there.
But as I said earlier in the comments, growth is what drove it on one side this quarter and some of the macro changes we made this quarter drove it. Credit quality this quarter, for example, wasn't really a contributor to the overall allowance.
Okay. Thank you, Graham.
Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.
Thanks. Neil, I'm sorry if you mentioned this and I missed it, but can you just provide a little bit of additional detail as to geographically where the mortgage growth is coming from? And when you share the statistics around, I think Dave may have mentioned it around how many new customers you're picking up. Is this a measure against that? In other words, are you picking up new mortgage customers and it's counting towards your, I think, goal of getting to around 2,300,000 net new customers by 2023?
Thanks. Sure. Thanks for the question. Mortgage growth really being driven out of the eastern part of the country, so Ontario being the strongest. We are seeing really strong performance around the Toronto, and the GTA.
Southwestern Ontario, strong housing markets in places like Hamilton have been very supportive. And then in Quebec, we have a very we are the number 3 player in Quebec. We have got a strong footprint there and well described as the strong housing market in Montreal. So those would be the fastest growing regions in the portfolio. We have seen DC start to pick up as that market start to recover from the price corrections we saw a little over a year ago.
In terms of sorry, the second part of your question was around new clients. In terms of new clients, I guess, a couple of comments we'd make building on Dave's commentary. We set out a plan to get to the targets that we laid out for 2023. We have an action plan in place. So we are feeling confident about the plan.
We are up about 10% in terms of new client origination. And specifically your question around is new mortgage clients part of it, it is. But the primary sort of first products we are onboarding clients into would be the core checking account as well as the credit card. So those would be the 2 largest, but absolutely new mortgage clients would go into those totals.
Thank you.
Thank you. Our next question is from Scott Chan with Canaccord Genuity. Please go ahead.
Good morning. Maybe just switching to the U. S. Side, you called out mortgage growth up 24% year over year. Is that driven by kind of core City National Bank in in terms of its core location or is it kind of new branches or is it just the U.
S. Housing fundamentals are picking momentum as
well? Our growth is across our markets. Our core market of Los Angeles and California in general continues to perform very well when you look at MSAs. We are growing the number of branches we have in New York and it's become a core kind of lead product to acquire client relationships. Similarly in our other cities that we've expanded to.
And that was part of the strategy that we articulated from day 1 as we could accelerate our expansion and our breakeven expansion by bringing new products to bear. So this is part of the strategy we've been talking for 4 years. It's fantastic to see the team execute it. We've spent a significant amount of time building the back office to handle this type of volume growth and to deliver an exceptional experience and a quality experience for our clients. And you are acquiring a lower risk customer.
So, this is exactly what we are looking for and how we want to grow the bank. We are adding new branches in New York City this year into next year, including into Hudson Yards and this will be a core part of the growth strategy for our business.
Thank you.
Thank you. Our next question is from Mike Brzeanovich with Credit Suisse. Please go ahead.
Hi, good morning. Just wanted to go back to the margin guidance for Canadian Banking. And I think the guidance was for 3 to 5 basis points of further compression potentially if we see the same sort of trends. Would that incorporate not just the competition that was cited, but also low mix?
Yes, it's Rod. It factors in the pricing competition. It factors in what we are seeing out of the Bank of Canada in terms of the forward rate curve as well as product mix. And so similar to a year ago, when in the fallwinter season, fixed rate mortgage spreads came to a low point. They rebounded a bit last year in December and then into January and into the spring season.
This year, that rebound was delayed. It didn't happen until January, but we've seen those spreads rebound in January and again in February, so we would expect that to hopefully continue. Again, it's a dynamic marketplace. So yes, you have mix, you have the markets, and you have competitive pricing pressure. Competitive pricing pressure has been the biggest driver of the last two quarters' decreases and what we are seeing in the marketplace right now is for that to abate somewhat for the rest of the year.
Okay. So that does incorporate some sort of spread pickup.
I am just looking at what's happened
in the last two quarters and you have had about 8 basis point decline. So is it fair to say you're expecting a little bit of improvement in the actual spread relative to where it was or something to mitigate what we've seen in the last two quarters, I guess what I'm getting at?
Well, what you've seen in the last two quarters, in Q4, you saw a mix. So that was mix and pricing competition. So that was a combination of the GIC growth and the mortgage growth being the predominance of our volume growth in Q4, which are lower spread products, so that's a mix issue. You also saw some of the fall and into winter season spread compression that we've seen in the last 2 years on the mortgage side. So that was the predominance of the 4 basis point in Q4.
This quarter it is again the weakness in the marketplace from a pricing perspective on the mortgage side is the primary factor this quarter. Now that we're seeing spreads normalize a bit as we saw in January and into February, as well as last year, we expect that impact to moderate similar to what we saw last year. Last year rates were still going up, so you didn't actually see all of this because you thought rates were going up last year, but now that rates are coming down, this is more dynamic in what you're seeing, but we don't expect that 4 basis points each quarter to continue. In fact, we think it's going to be the 3 to 5 basis points the rest of the way.
That's very helpful. Thanks very much for that.
Thank you. Our next question is from Nigel D'Souza with Veritas Investment Research. Please go ahead.
Thank you. Good morning. If I could point you to slide or Page 16 of your presentation slide. So you mentioned Graham mentioned weakness in your unsecured retail portfolios. And when I'm looking at your personal lending 90 day delinquency rate, it's relatively stable along with CCL.
So I'm wondering if you could provide some color first on what's driving that stability, given also a lower mix of HELOCs in that lending bucket? And then second on credit cards, there's a sizable increase quarter over quarter in your 90 day delinquency rate. I'm wondering if you could provide some insights on to how much of that is being driven by the rule change you noted in Quebec. And also when we look at the PCLs and write off rates for credit cards, they are actually down sequentially. So could you provide some color on what's driving that divergence there between delinquencies and PCLs and write offs?
Yes. So this is Graham. Maybe I'll address that. I guess, I'm just reiterating some of the comments I think I made in my speech earlier that the 2 main effects we're seeing are 1 in Quebec specifically is the impact of the change in the minimum card payment amount. And so that's translating through both uniquely to credit cards there, but is also impacting overall insolvencies in the form of consumer proposals.
And as I said earlier, the personal lending, we see Alberta influencing that in part and that's just the weakness in the Alberta situation there. And then additionally, we are seeing rising insolvencies and consumer proposals more broadly than that. That's I think driven by a few things outside of Alberta where, say, in Toronto, we have got a very strong employment situation in Toronto, but you are seeing a rising cost of living. There is a latent effect associated with rising rates from 2018. And then more recently, you would see rising rental costs that are influencing the cost of living for clients, but despite strong employment is tripping through into the personal lending piece.
So those are some of the factors that we're seeing. So maybe I will Neil may have some comments here just on the growth side that could be influencing that as well.
Yes. The one other thing
I would just add to Graeme's comments. On the personal lending, we talked in previous calls, that was a portfolio that was flat to actually had negative growth and that's returned to about a 3% growth. So you are starting to see kind of just the denominator effect of growth on the PCL as well. And then the credit card book, seasonality is one of the biggest drivers there and Graeme mentioned that in his comments, coming out the holiday season, very predictable.
It's Rod. I'm just going to give you for what it's worth in Q1 of 2016 and Q1 of 2017 and in Q1 of 2018, the 9 days past due for credit cards was 80 basis points each quarter. So very similar to what we are seeing today. I think what you saw last year in Q1 was more of a cyclical low.
Okay. That's really helpful. Appreciate the color. Thanks.
We'll try to take one, maybe 2 more.
I think there's a couple in the queue. So try to answer quickly and ask quickly. Next.
Thank you. Our next question is from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
So we'll make it quick. Just for Graham, following up on credit means I think when you talk to sort of global investors, a lot is made out of the consumer proposals and insolvency is rising. I think you addressed that a little bit in some of the questions you answered. But outside of the coronavirus, outside of the rail strike, just if you can talk about, 1, should those proposals and the insolvency increase worry your shareholders and investors around sort of increasing credit risk around the consumer or you think that's kind of a little bit more bouncing off the lows, idiosyncratic in nature? I think that would be helpful.
Again, if we look at our consumer portfolio overall, on the secured products, and trends overall are very strong. They are very consistent. What we see in our origination has been a very consistent profile. When we look at the mix of our credit ratings on the consumer books, it's been very consistent and the delinquency trends have been strong there. And so I called out specifically the effects that we're seeing on the unsecured because that's really the one pocket of weakness that we're seeing driven by the rising consumer proposals and the effects that drive those are really the ones we've talked about here.
The weakness in Alberta on one hand, the minimum payment effect in Quebec and then the general cost of living impact elsewhere. And so outside of those pieces that we've called out, again, I would say the consumer portfolio has been a very, very stable credit profile for us. We have not changed our origination strategies there. And so we've been very persistent and consistent in what we're bringing into the front door. And so I think those are the key messages that I would continue to leave you with on the consumer side.
And do
you think the 3 things that you pointed out, do they get worse or do you think that should be relatively stable?
We have to cut you
short there. I'll take one more question, sorry.
Thank you. Our next question is from Steve Theriault with 8 Capital. Please go ahead.
Thanks Steve. Okay. ROI, last question to you.
I'll keep it quick. Part of it was asked and answered. But Neil, if you could just complete the loop a bit for us in terms of some commentary around the HELOC versus the insurance mortgage mix?
Right. Yes. I think Rod actually made a touched on it in his comments. We have seen so the HELOC book is actually shrinking. We are seeing customers move those into fixed term mortgages, partly because I think clients' outlook on rates and really wanting to have a predictable payment.
And then also, as they work with our team, if that's the right advice for the clients, there is, as Rod touched on business mix, there is a margin reduction we take on that, but we do focus on the client. If that's the best advice for the client, then that's what we do. And we did see an acceleration of that in Q1 versus our sort of run rate for 2019.
Okay. Thank you.
Thank you. I will now turn the meeting back over to Mr. McKay.
Thank you, everyone, for attending today's call and for your comments. There's a couple of themes we really wanted you to take away from today's results and call that we just finished, and that is around strong volumes across all our core franchises. You look at the capital markets results out of our global markets business, out of our investment banking business, you look at our Canadian Banking franchise from mortgages to cards to commercial. You look at the wealth management results, which no one in Canada, which no one asked about, but generating great core volume, great share gains, very strong results there that we didn't touch on in any of the questions. You look at the City National volumes just pushing 20% from both deposits and lending, you'll get strong insurance results.
So it really talks to core momentum from the investments we've made in capacity and digital capabilities and investing in value for our customers have really delivered core volume growth. We've done all of that while maintaining high ROEs, so there's a lot of questions about margin, but at the end of the day, we drove 17.5 percent ROEs on a 12% CET1 base. It talks to the returns we are getting off of the business we are booking, the cross sell ratios we are getting, all done within a consistent credit appetite. So, we feel very good about our start to the year. Thank you for your questions.
We look forward to speaking with you in Q2.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.