All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to RBC's conference call for the fourth quarter 2019 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, good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer. 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 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 Investor and Treasury Services, and Doug McGregor, Chairman, Capital Markets. Derek Neldner, our Group Head, Capital Markets, is also with us today. As noted on slide one, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially.
I would also remind listeners that the bank assesses performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Adjusted results reflect the items identified on slide 30. With that, I'll turn it over to Dave.
Thanks, Nadine. Good morning, everyone. Thank you for joining us. Today, we reported fourth quarter earnings of over CAD 3.2 billion, largely driven by continued strength in our Canadian banking, Wealth Management, and Insurance businesses. I'm pleased with our results, particularly given the challenging operating environment, including low interest rates and continued trade tensions. Canadian banking recorded strong volume growth as we continue to leverage our scale to take an outsized share of industry volumes and generate strong operating leverage and earnings growth. Our Wealth Management businesses continue to extend their number one position in Canada, benefiting from constructive markets and strong net sales, also driven by a growing advisor base and our leading asset management platform, which continues to outperform the industry. Investor and Treasury Services had another challenging quarter, impacted by secular industry trends and difficult market conditions.
In this quarter, we took a number of steps to reposition the business, which I will speak to shortly. In capital markets, solid fixed income results were offset by the impact of declining global fee pools on investment banking revenue. Stepping back and looking at 2019 overall, our diversified business model and disciplined approach to cost and risk management enabled us to deliver record earnings of close to CAD 13 billion. Our leading ROE of 16.8% allowed us to generate 60 basis points of capital this year, ending 2019 with a strong CET1 ratio of just over 12%. Our profitability and balance sheet strength enabled us to keep investing in our leading franchises and navigate an uncertain macro environment while also returning over half of our 2019 earnings to our shareholders through dividends and buybacks. Let me now provide some highlights on our business segment performance.
Canadian banking generated record earnings of over CAD 6 billion in 2019, nearly half of our total earnings. We continue to leverage our scale and unique client value proposition to achieve strong client-driven volumes. We added approximately 300,000 net new Canadian banking clients this year, in addition to the 300,000 acquired in 2018. With the momentum we are building, we are on the way to meeting our client growth target of adding 2.5 million clients by 2023, set at our 2018 Investor Day. We also delivered an all-time low efficiency ratio of 41.8% while continuing to invest in our future, reflecting cost discipline. Overall, I'm extremely pleased with the segment's continued momentum and the fact that we're earning market-leading client loyalty scores.
This year, we added an additional CAD 50 billion of volumes to our market-leading franchises, reaping the benefits of our significant multi-year investments in both sales power and innovative digital capabilities. We added over 200 investment advisors and mortgage specialists in Canadian banking over the last year. Our strategy is more than just adding capacity. It's also about having the right talent and capabilities to deliver differentiated advice, products, and experiences across our channels, backed by the number one brand in Canada. One example of this is MyAdvisor, a digital platform for clients to activate their personalized financial plans, which now has nearly 1.4 million clients online, 14% of which are new to RBC. Our digital channel has now over seven million active users, and our mobile banking user base is up 16% year-over-year to nearly 4.5 million.
Across all key product categories, we continue to be a market leader with either a number one or number two market share in Canada. Our credit card business saw growth across both spend and lend revenue streams, with card balances and purchase volumes up 6% and 7% year over year, respectively. Our relationship with Petro-Canada continues to drive new clients to RBC, while also delivering fuel savings for RBC cardholders at any of Petro-Canada's 1,500 retail locations nationwide. With RBC Ventures, we continue to move beyond banking with a focus on engaging clients in new and innovative ways. To date, we have accumulated 3.2 million connections with Canadians across our portfolio of ventures, including those we've both built and acquired. We now have 17 ventures in market and another 14 under development.
One of these is MoveSnap, a digital concierge to help clients move from home to home, providing home buyers with compelling insights and support as they make this significant investment in their future. Client feedback has been very positive, and our mortgage specialists saw this as an important addition to RBC's existing competitive advantage. We plan to scale this venture nationally in 2020. Ampli, our new loyalty program, which launched in July of this year, already has active participation from over 40 leading brands, and we are seeing good early signs of client engagement. We're excited about the possibilities, and we'll be scaling up this venture as well in 2020. In business banking, our strong results are driven by a focus on high-return sectors that align with our risk framework.
They also reflect the benefit of multi-year investments we've made in talent and cash management solutions, and increasingly, in unique digital capabilities. For example, with the launch of RBC Insight Edge, an industry first, our Canadian business clients can now leverage aggregated data to gain relevant insights into their industry, customers, and markets to enable them to make more informed business decisions. Turning to wealth management, where we also reported record earnings this year, even after adjusting for a gain this quarter. With over 80% of our assets under management outperforming the benchmark on a three-year basis, RBC GAM continued to build on its leading market share in Canada, adding CAD 8 billion of retail net sales this year alone. In these uncertain times, our clients are trusting us with more of their business, valuing our advice, service, and capabilities.
Illustrating this, RBC GAM was recognized for investment excellence in the 2019 Canada Lipper Fund Awards, winning seven individual fund awards, with PH&N winning two group awards. Our Canadian wealth management business remains an industry leader in both revenue and fee-based assets per advisor. Their clients continue to benefit from the insights, distribution, and digital capabilities we offer through our team of nearly 1,900 advisors in Canada. Our U.S. wealth management business generated pre-tax earnings of $1 billion this year. Our U.S. Private Client Group is the sixth largest in the U.S. by AUA and had a record year for advisor recruitment, attracting a number of experienced advisors from large wire houses across the industry. Our momentum also continued at City National with double-digit growth in both commercial lending and jumbo mortgages, offsetting some of the industry-wide margin pressure.
This year, City National expanded further into our core markets of Los Angeles, New York, San Francisco, and Washington, D.C. We are upgrading our treasury management systems and technology to streamline the onboarding of new clients. This, along with our recent acquisitions of Exactuals and FilmTrack, are important steps in continuing to grow our U.S. deposit base. Our insurance business had a strong year with earnings of over CAD 800 million, our second highest year on record. We continue to develop innovative solutions to serve our five million insurance clients, including a digital tool to simplify the application process for our term life insurance offering. This segment continues to generate a high ROE while serving a diverse client base, including being a market leader in individual disability insurance. Moving to Investor and Treasury Services.
As we've highlighted in our prior quarters, it's been a challenging environment, and this quarter we took steps to reposition the business. This journey is not easy. As part of this process, this quarter, we made the difficult decision to reduce roles in Europe and reduce our footprint in Australia. Looking ahead, we remain focused on key markets where we can provide the most value to our clients, where returns are most attractive. This includes Canada, which continues to provide a diversified source of deposits. Turning to Capital Markets. Against the challenging market backdrop, we generated over CAD 2.6 billion of earnings this year. Corporate investment banking was impacted by an industry-wide decline in fee pools, as some clients stayed on the sidelines given ongoing economic uncertainty. Our results were further impacted by delays in the completion of deals in our pipeline.
Within this context, I'm proud of our teams continue to be awarded some significant mandates, including as lead financial advisor to Blackstone on its recently announced CAD 6 billion cross-border acquisition of Dream Global. This and other recently announced deals highlight the strength of our franchise and add to a healthy pipeline heading into 2020. In global markets, our client-centric model drove robust results in our fixed income business, and our fixed income business performed well despite an unfavorable market environment. Before moving to the outlook, I want to touch on the macro environment. In North America, our core markets continue to be supported by a healthy U.S. consumer and their spending, and a resilient Canadian household sector, both backed by strong labor markets and low interest rates.
The Canadian housing market has also stabilized, and business investment intentions remain healthy in Canada, including spending to expand the workforce and update technology to support higher demand. As we look out to 2020, while we still see strength in our core markets, there's no question it's expected to be a challenging macro environment. Uncertainty is weighing on both global growth and trade, and was a key factor in the recent Fed rate cuts. The Bank of Canada is balancing solid economic growth against elevated external risks, leaving the door open for an interest rate cut in 2020. Based on what we're seeing today, the next couple of years are likely to be challenging given interest rate trends, uncertainty around global growth, trade tensions, and normalized credit conditions, amongst other factors.
With this backdrop, we are maintaining our medium-term objectives, recognizing that our performance relative to these objectives will be largely dependent on the macro environment. We believe we are well-positioned to meet our medium-term objectives around ROE, capital strength, and dividend payouts. While meeting our 7%-plus diluted EPS growth objective may be challenging in the near term, we are focused on meeting this target in the medium term, as we've done in recent years. The power of our leading scale, balance sheet strength, and diverse revenue streams will allow us to continue investing in technology and sales capacity. In this period of secular change, we will maintain a disciplined approach to balancing near-term operating leverage with creating long-term sustainable value for our clients and shareholders.
We also maintain a consistent and prudent approach to risk management through the cycle. To sum up, we enter 2020 with strong momentum in all our Canadian retail franchises, driven by multiyear investments in our people, products, and technology. We believe our focused growth strategy positions us well to continue to deliver an exceptional client experience, gain market share, and return capital to our shareholders. To close, I'm proud of what we've achieved this year, and I want to take this opportunity to thank all 85,000 colleagues across the bank. These are talented and engaged employees who give back to communities and deliver leading advice and service to our clients. With that, I'll turn the call over to Rod.
Thanks, Dave. Good morning, everyone. Starting on slide seven, against the challenging macroeconomic backdrop, we delivered solid fourth quarter earnings of CAD 3.2 billion, down 1% year-over-year. Diluted EPS of CAD 2.18 was down 1% as well. For the last two quarters, I've given an update on our cost management progress, and I'll do so again this quarter. We are focused on driving efficiencies so that we can continue to invest in future growth during this prolonged low interest rate environment. This quarter, expense growth was 7.4% year-over-year, or 4.4% on an adjusted basis. Over 40% of the increase was in client-facing roles as well as technology and digital initiatives as we invested in serving clients and continued business growth.
Indicative of our expense discipline, expense growth in the second half of 2019 slowed to 3.4% on an adjusted basis as compared to 6.6% in the first half of the year. In other words, the growth rate was cut nearly in half. Looking forward to 2020, we expect to continue to slow expense growth by leveraging our scale while continuing to strategically grow our client base and deepen client relationships. Turning to slide eight, our CET1 ratio of 12.1% was up 20 basis points quarter-over-quarter. Strong internal capital generation was partly offset by organic RWA growth and share buybacks. This quarter, we bought back four and a half million shares for a total of CAD 474 million. That puts us at 10.3 million shares repurchased for the year, or CAD 1 billion.
Moving to our business segments on slide nine, Personal & Commercial Banking reported earnings of CAD 1.6 billion this quarter, up 5% year-over-year. Canadian banking net income of CAD 1.6 billion was up 6% year-over-year. We continued to see strong volume growth of 8% year-over-year across our core products this quarter. Residential mortgages grew at more than 7% year-over-year, driven by strong double-digit mortgage origination volume growth and strong retention results. Business loan growth was up nearly 10% year-over-year, slightly lower than the growth achieved over the last nine quarters. Deposit growth was strong across both personal and business deposits. In particular, we continued to see strong growth of 14% in personal GICs as clients continued to shift towards deposits in response to macroeconomic uncertainty.
Our net interest margin of 2.76% was down four basis points from last quarter due to the impact of competitive pricing pressures. Looking forward to 2020, we expect NIM to drop approximately four to six basis points for the year given current competitive mortgage pricing. Expense growth was nominal for the quarter due to strong cost management and our ability to leverage scale as a driver of efficiency. Operating leverage in Canadian banking was 4.3% for the quarter and 2% for the year, within our previous guidance of 2%-3% range for the year. Looking forward to 2020, we expect operating leverage to be 1%-2% given the impact of interchange and expectations for a sustained low interest rate environment. Our historical operating leverage trends can be seen on slide 22. Turning to slide 10, Wealth Management reported earnings of CAD 729 million, which were up 32% year-over-year.
Adjusting for the gain on sale of BlueBay's private debt business, earnings were up 8% year-over-year. Global asset management revenues were up 39% year-over-year. Excluding the gain, revenues were up 10%. This was largely due to higher fee-based revenue on higher AUM, driven by market appreciation and net sales. In Canada, global asset management increased its retail mutual fund industry market share by 70 basis points year-over-year to 15.8% as of September. Canadian wealth management revenues were up 3% year-over-year, driven by higher fee-based assets on market appreciation and net sales. Over the course of the year, including in Q4, we continued to add investment advisors to deliver more advice and insights to our clients. Our non-U.S. wealth management sufficiency ratio was 60.8%. Adjusting for the gain, our efficiency ratio was 66.5%, which improved 220 basis points year-over-year.
In U.S. wealth management, revenues were up 14% year-over-year in U.S. dollars, driven by 19% loan growth at City National and record fee-based asset growth at our U.S. Private Client Group. Despite the declining interest rate environment in the U.S. in the latter part of 2019, City National continued to generate solid growth in net interest income, up 8% year-over-year. Deposit growth in Q4 was up 14% year-over-year, reflecting funding benefits from higher sweep deposits, as well as accelerating growth in business deposits. This quarter, we saw net interest margin decline 29 basis points quarter-over-quarter to 3.14%. Excluding the eight basis point gain on recoveries from legacy loans last quarter, NIM was down 21 basis points.
Looking forward to 2020, we expect NIM to decline in the first quarter, albeit at a slower rate, reflecting the full quarter impact of the September and October U.S. rate cuts, as well as the impact from the implementation of IFRS 16. Absent any further U.S. rate cuts in 2020 and increasing competitive pressure on deposit pricing, we expect margins to tick lower before stabilizing in the latter half of 2020. Moving to insurance on slide 11, net income of CAD 282 million was down 11% from last year, primarily due to lower favorable reinsurance contract renegotiations and less favorable annual actuarial assumption updates. Higher claims costs and lower favorable investment-related experience also contributed to the decrease. These factors were partially offset by the impact of new longevity reinsurance contracts. From 2016 to 2018, approximately 60% of insurance earnings were recorded in the second half of the year.
In 2019, the percentage earned in the second half of the year was also 60%, but with a higher proportion earned in Q3. Moving to Investor & Treasury Services on slide 12, net income was CAD 45 million. As Dave mentioned earlier, we are committed to improving the profitability of I&TS, and as such, recognized CAD 83 million after-tax repositioning costs in Q4 associated with repositioning the business. Excluding this charge, net income was CAD 128 million, down 17% year-over-year. I&TS was impacted by lower funding and liquidity revenue, primarily driven by the short-term interest rate environment and lower gains from the disposition of certain securities. We also saw lower asset services revenue due to reduced client activity and lower client deposit revenue, largely driven by margin compression. On slide 13, Capital Markets earnings of CAD 584 million were down 12% year-over-year.
Corporate investment banking revenues were down 14%, primarily due to lower M&A activity across all regions. This quarter saw investment banking fee pools decrease 13% year-over-year across most products, with M&A down 21% year-over-year. Despite a challenging quarter across the industry, we rose to 10th in the global league tables for fiscal 2019, up from 11th in the prior year. Global markets revenues were up 6%. Despite the challenging market environment, we saw solid fixed income trading, which was partially offset by lower equity trading revenues. Overall, our trading businesses performed well against our peers on a year-to-date basis, given our diversified geographic and product mix. Looking ahead to 2020, our investment banking pipeline remains strong, with the timing of several large deals expected to close in the first quarter of 2020.
In conclusion, we are pleased with the resiliency of our franchise to manage through the challenging environment. Our core retail franchises continued to grow in Q4, offsetting market and wholesale industry challenges and macroeconomic headwinds. Our results reflect the strength of our diversified business model and commitment to long-term value creation for our stakeholders. With that, I'll turn it over to Graeme.
Thank you, Rod, and good morning, everyone. Starting on slide 16, this quarter, we had provisions on impaired loans of CAD 434 million, which equated to 27 basis points. Additionally, we established provisions on performing loans of CAD 71 million or five basis points, for a total of CAD 505 million or 32 basis points. Provisions on performing loans increased by CAD 41 million or three basis points from last quarter. Unfavorable changes in our overall portfolio mix, including seasonal factors related to our cards portfolio and credit migrations, contributed to the quarter-over-quarter increase. These factors were partially offset by a more favorable macroeconomic forecast in areas such as Canadian housing and the impact of model changes for a few of our retail portfolios.
Provisions on impaired loans increased by CAD 35 million or two basis points from last quarter, mainly due to higher provisions in Canadian Banking and City National, which were partly offset by lower provisions in Caribbean Banking. For fiscal year 2019, PCL on loans totaled 31 basis points, up eight basis points from last year. Provisions on impaired loans totaled 27 basis points, up seven basis points from last year, which represented a shift from the cyclical lows of 2017 and 2018 to more normalized levels this year. Let me now provide some additional detail on three of our businesses. In Canadian Banking, PCL on loans of CAD 400 million increased by five basis points from last quarter. About half of the increase was due to provisions on performing loans related to the factors already noted.
The remaining increase is a result of higher provisions on impaired loans, primarily attributable to our cards and personal lending portfolios. In wealth management, PCL on loans of CAD 34 million increased by CAD 7 million from last quarter, mainly due to a new impaired loan in the consumer discretionary sector in the U.S. This sector has been the largest source of loan losses for City National Bank in 2019, largely in relation to the quick serve restaurant industry, where clients are being impacted by rising labor and capital costs. Notwithstanding higher provisions in our City National portfolio in fiscal 2019, it continues to perform ahead of our expectations. In capital markets, PCL on loans of CAD 78 million increased by CAD 22 million from last quarter, mostly due to higher provisions on performing loans, reflecting downgrades in our oil and gas portfolio. Provisions on impaired loans were up CAD 7 million from last quarter.
This reflects ongoing weakness in the oil and gas sector, as well as provisions in a few other sectors. Turning to slide 17, gross impaired loans of CAD 3 billion were relatively stable from last quarter, as higher new impairments in Canadian Banking were mainly offset by higher repayments in Caribbean Banking, as well as repayments and loan sales in Capital Markets. Overall, we saw a decrease in new formations in our Capital Markets portfolios, even though we continue to see heightened levels of formation in the oil and gas sector this quarter. We remain comfortable with our exposure to the oil and gas sector, which represents about 1% of our total loans. This portfolio is governed by borrowing bases and sized to the proven reserve of the borrowers, which provides good protection against credit losses.
Looking at our retail portfolio on slide 19, we saw an increase in insolvencies, primarily in the form of consumer proposals in our personal lending and cards portfolios. Prior year's interest rate increases have impacted some of our clients by raising debt servicing costs, notwithstanding the overall strong labor markets and income growth this past year. We also saw an increase in delinquencies and insolvencies in our cards portfolio in Quebec. This increase follows the implementation of a new rule on minimum credit card payments, which took effect in the province last August. While these factors contributed to a moderate increase in PCL this quarter in our unsecured retail portfolios, the overall credit profile of our retail clients remains strong, with stable levels of delinquencies, high FICO scores, and low LTVs.
Looking to fiscal 2020, we would expect provisions on impaired loans to be in the range of 25-30 basis points, and provisions on performing loans to be in the range of 3-5 basis points should credit conditions continue to normalize. As we've cautioned in past years, there'll be inherent volatility from one quarter to the next, particularly for our wholesale portfolios where provisions tend to be more concentrated. We also expect some degree of volatility in our provisions on performing loans based on volume growth, changes in macroeconomic variables, and portfolio mix. To conclude, we maintain our prudent risk management approach and are closely monitoring the macroeconomic environment. We are confident that our credit performance will remain resilient throughout the credit cycle given the strength of our underwriting standards, the diversification of our portfolio, and the quality of our client base.
With that, operator, let's open the lines for Q&A.
Thank you. If you have a question and you're using a speakerphone, please lift your handset prior to making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Ebrahim Poonawala with Bank of America. Please go ahead.
Good morning. I had just a two-part question on expenses. I guess, Rod, you mentioned expenses should taper off relative to the 3.5% growth we saw in the back half of 2019. Does that imply something like a 2%-3% expense growth expectation for 2020, all else equal? Just taking a step back and just listening to Dave in terms of his cautious outlook on the revenue environment, is there anything bigger that the bank needs to do in terms of flexing the expense lever more as we think about 2020 and beyond?
Thanks, Ebrahim. Yeah. On the expenses, recall that we have a large Wealth Management business and Capital Markets business. As revenue ramps up or down, we have a natural hedge on expenses. If the first quarter ends up being strong for Capital Markets and/or Wealth Management, you might see expense growth tick up a little bit, or if it is weaker as it did in the second half of the year, as it came down a little bit versus the growth in the first half of the year, expenses will be a little bit lower. It does moderate. We are taking the core rate of expenses down in terms of the growth rate, and you will see that in a number of line items. If you look in our supplement, our marketing costs and travel costs, things like that, we have taken the rate of growth of that down.
Our technology investment, we have been growing that over the last five years significantly and over the last year or so, and we expect to continue to take that rate of growth down. Given the macroeconomic environment, largely the interest rate environment now.
been providing us tailwinds for two plus years, enabling us to invest in future growth, invest in continued market share. We have a lot of the pieces in place, both from a technology standpoint and a talent standpoint and distribution standpoint, to continue to grow revenue, despite those macroeconomic uncertainties, and expenses toggle down a little bit with it. The guidance that I gave that we expect to continue to see it to moderate would hold, and we'd expect to see low single digits.
We shouldn't be expecting any bigger actions on expenses like the restructuring you did. I know it was specific to the investor strategy business, but anything much larger is something that should investors anticipate something like that over the course of the next year or so?
Hey, Ram, it's Dave. What I'd like to reinforce is we continue to look at our cost structure, and we're managing it the same way across the organization we have over the last five or six years, which is try to get ahead of our cost structure, invest in technology, manage through various levers over time, and bring our base down. We don't forecast having to take an aggressive short-term repositioning because we are trying to get ahead of things. We have a number of programs across the organizations. We saw this coming, I think you can expect from us, generally, a continued management of costs programmatically across the organization. That's how we see the world right now.
Having said that, we did take a short-term repositioning of Investor Services because we had to make a quick pivot from Europe into Asia in a number of roles and adjust our cost base more quickly given the things that we're trying to do in the business. That came at us quite quickly, and I'd say that was more out of the ordinary for how we manage our cost structure than typical of what you've seen us do in the past. The core message is continue to expect us to manage our base down programmatically across the organization the way we've done in the past.
That's very helpful. Thank you both.
Thank you. The next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.
Good morning. I want to ask Graeme about your outlook for 2020 on the PCL loss range. I didn't come across it in your materials. You were a smidge above your target range this year. I know there were some idiosyncratic losses earlier in the year. On the other hand, maybe some seasoning effect in the cards portfolio. Capital Markets seems to be in an upswing there for PCLs. Balance of factors, where do you see the ratio lining up in 2020?
Yeah, I think as I made in my comments, we're forecasting the ratio in that stage 3 to be 25-30 basis points. For the stage 3 side of it and an additional 3-5 basis points in stage 1 and 2. I think some of your observations in the comments I made all factor into that. As you referenced, certainly in the first half of the year, we saw some more idiosyncratic events in our wholesale portfolios, particularly in both Capital Markets and in commercial and Canadian banking. In the latter half of the year, I would say it's been a bit more broad-based, but a bit more what we would view as more normal.
When you look at longer-term trends in retail at around 34 basis points and in wholesale around 31 basis points, we still feel we're certainly coming off two very strong years from a PCL perspective in 2017 and 2018, where I think on the wholesale things, I would say they were abnormally low. We're still, I would say, below the long-term averages, but at acceptable levels and levels that don't concern us.
Well, you also mentioned in the cards and personal loans as drivers, the seasonality, and I always thought of that as more of a Q4 thing. The Quebec regulatory change there for making minimum payments, and that's like a five-year phase-in, so I'm a bit surprised to hear that's already having an impact. We are seeing insolvency data moving higher across Canada, and just wondering, is that where you see the most pressure coming in next year in terms of normalization or seasoning in that portfolio?
Well, I'd say normalization is not specific to retail. Again, as I highlighted, in wholesale, 2017 and 2018 were quite exceptional years. They would be more abnormal than what 2019 was. In wholesale, again, I think we continue to expect to see a continuation of what we saw in the latter half of 2019. Retail had continued at very low levels. We expect to see that tick up moderately. Overall, there'll be some puts and takes there that give us comfort to that overall 25-30 basis point range. Retail, more specifically, yes, we've seen some factors. I don't want to overstate the factors that we've seen in cards. I was just trying to highlight what we are seeing there. Cards overall this year was up 12% year-over-year. About half of that is just related to growth.
There's a portion that I would attribute to weakness in Alberta and the insolvency factor that I highlighted. Overall in retail, outside those factors, we're continuing to see very stable delinquency profiles. Our origination quality continues to be very strong. Again, we feel quite comfortable with the profile there. Do reflect the fact that we're probably coming off some very strong years, and we'll see it normalize to some degree.
Thank you.
Thank you. The next question is from John Aiken with Barclays. Please go ahead.
Good morning. Taking a look at your objective for U.S. wealth management, given the challenging year that we've had, as well as the margin compression that we've seen in those operations, what's the level of confidence in achieving the stated objective for 2020 as we sit here today?
I think if you look at the progress we've made in City National, the real strength is we've doubled the size of the core franchise over the past four or five years from a balance sheet perspective. We continue to maintain
Double-digits lending growth numbers throughout the cycle. We dipped a bit on deposits, but you'll see our deposit strength came back nicely in Q4 to, I think, roughly 14%. Our primary focus is to continue to invest in that core franchise, expand geographically, grow our mortgage and our commercial business, and continue to expand our private banking business. From that perspective, from a balance sheet growth perspective, a client growth perspective, we're at or a little bit ahead of our overall targets. What we can't control in our forecast that we gave you when we did the presentation in, what, 2016, was the level of interest rates.
When we made that forecast of where earnings were, we had rates coming back and holding a bit longer than they've held, and we didn't forecast the quick reduction in rates and Fed rate cuts that you've seen over the past year. If rates continue to hold where they are and go lower, it's going to be tough for us to generate enough margin off of balance sheet growth, which has exceeded our expectations, to meet those targets. We are looking at slowing cost growth. We're looking, as I've talked about in a recent investor conference, we've significantly ramped up our cost structure beyond where we thought we'd be to try to meet the growth opportunities we saw in the marketplace. The U.S. economy doesn't perform where it has its potential.
You could see us pull back on some of that cost structure and deliver some earnings there. We've got a number of levers, but I think you should focus on the core franchise customer balance sheet growth has been significant. It's double. It's ahead of where we thought it was. The margins are a bit off, and we can't control that, but the core franchise has performed exceptionally well.
Thanks, Dave. As a bit of a follow-on, given what we're seeing on margins, now I understand the overall profitability of the platform remains quite strong, but as margins are under compression, is there any discussion about slowing the growth that we've seen over the past year?
Yeah, I just referenced that as we've talked about. I'm heading out to L.A. tomorrow. Absolutely. We've accelerated our growth. We've opened in Hudson Yards. We're opening other stores in New York. We're opening in Washington. We can slow some of the staffing of those stores. We can certainly slow our back office growth, which ramped up for a significant growth. If the growth doesn't materialize, even having said that, I think we've kind of run up our back office growth quite aggressively, and there's an opportunity to reduce it through technology investment, but also just through kind of managing that cost structure down in a slower growth environment. We do foresee the ability to grow our earnings by managing our cost structure as another lever that we haven't pulled to date.
We've allowed that cost structure to move ahead to grow because we have not made an acquisition, and therefore we've invested in organic growth where we get the highest returns. I think the answer is absolutely. That's something that I'm focused on and Kelly Coffey, our CEO of City National is focused on. Thanks for your question. I think we'll take the next question.
Thank you. The next question is from Meny Grauman with Cormark Securities. Please go ahead.
Hi, good morning. Rod, in your commentary in Canada, you talked about, I think it was four to six basis points of additional margin pressure given competitive dynamics. Just a clarification. I assume that doesn't include any Bank of Canada rate cuts, I just wanted to see how that would change your outlook.
Yeah, thanks, Meny. That's correct. The market is not forecasting with a high likelihood of a rate cut until potentially the end of next year, so it wouldn't really have an impact certainly on the first three quarters and maybe marginally on the fourth quarter if it happens. A lot of that is really the stock and flow of the growth in the book. I think it's important to step back and look at the strong volume growth, 8% in Q4, the strong net interest income growth, which was 5.6% in Q4 and over 7% for the year. Part of this is mix. The mortgage market has come back, and there's continued reports on that. We continue to grow share in that space. Those products tend to have a lower spread than other unsecured products.
As we grow that book, as the market grows at a higher level, you're going to just see some mix issues cause that NIM to come down. Overall, with good volumes, it's still a positive, and it's still a positive revenue story. Part of this is a little bit of math. When you look at the underlying rates versus five years ago, a lot of our deposit, the tracking and the internal transfer pricing on that, it is positive. Interest rates, the five-year rate, actually, despite the low rate environment today, is still higher than it was five years ago. Structurally, on the deposit side, we're okay. The mortgage is a competitive pricing element. There's nothing that is actually ominous in this outlook. It's just a factor of what the market is bringing us and our continued market share growth.
I wouldn't look at that as a negative per se. I think the business is quite strong.
Just as a follow-up on that, you highlight improved mortgage growth, and I'm just wondering your perspective on what's driving that, and is there an element there that is concerning in terms of that re-acceleration?
It's Neil. I'll handle that one. Definitely nothing concerning. We would look at the strong mortgage performance in 2019 directly as a result of a review we did around some internal processes and just making sure that we were following up on better lead management, following up on leads more quickly, getting back to customers more quickly.
As well as some changes in our adjudication process that made sure that once we had a transaction in front of us, we didn't lose that customer. Graeme spoke to the underwriting, which continues to be very strong, and we would look at both house prices and home sales across the country being quite balanced and starting to stabilize after B-20. We have seen the fall have more activity and sort of the buying season a little bit elongated. As we look at it all around, we would feel very comfortable with the performance of the mortgage business.
Thank you.
Thank you. We'll have to move on to the next question.
Thank you. The next question is from Steve Theriault with Eight Capital. Please go ahead.
Thanks very much. If I could just start with a quick follow-up. Rod, last quarter, you talked about 40 basis points of NIM or thereabouts over five quarters, given rate cut expectations. Maybe does that still hold? If so, should we be thinking of the Q4 impact of 29 basis points or the 21 basis points you mentioned on a more adjusted basis?
Thanks, Steve. I assume you're talking about City National.
Yeah, sorry, City National, yeah.
Yeah. Yeah, I would think of in terms of the 21, that CAD 8 was a one-time gain, and we tried to call that out last quarter as well as this quarter, so not to build that in. Yeah, we ended at kind of 3.14%. I spoke to last quarter that if the Fed was cutting, which the Fed ended up doing both in September and October, that basically the Fed funds rate was going to be back to levels that you'd seen in 2017-ish, which is when City National had spreads in the high twos, the 285-29 range. And absence a big tick up in the 5-year rate, which would help with some of the asset pricing and the tractors on the deposits, you'd expect the margins to come into similar levels as what it was. So on adjusted basis, you were at 3.35% in Q3.
40 basis points would take you down to the 295 range. I think you're within that range. As I mentioned, I think my message is, we expect to continue downturn in Q1, given the two Fed cuts. Then we see it leveling off, and we see modest spread compression from there. That's what the markets are saying right now based on their expectations for Fed activity. We'll see what happens with the trade discussions and tariffs, and future Fed activity one way or the other, that would change the outlook for us.
Okay, that's helpful. Just lastly, a question on Investor and Treasury Services. Post the restructuring and repositioning, can you talk about what can you offer up in terms of the earnings power going forward? What type of bottom-line benefit we'll see from that CAD 83 million of restructuring this quarter?
Yeah, it's Doug. Couple things. One is the charge that we just took, the effect of that, as Rod said in his statements, is really going to be seen kind of leaking into the P&L in terms of reduced expenses over the course of the year. As you get towards the back end of the year, you'll see, I think, more improvement on the expense side. In terms of the revenue side, we have been struggling with a flattening yield curve at the short end and some margin compression. We've changed how the trading reports, we put on some more term, and the accrual book is producing more regularly right now. We're just going to try to manage that. On the revenue side, we'll see what the market will give us.
On the investor services side, we're just working away in terms of trying to do more business with customers. We'll see how it plays out.
Thanks, Steve. We'll move on to the next question.
Sure.
Thank you. The next question is from Robert Sedran with CIBC Capital Markets. Please go ahead.
Hello, good morning. Just want to follow up with Neil on the mortgage question. Everything we hear is that mortgage spreads are at historic lows. When the market leader is growing at market leading rates, it would suggest that this is something you're doing rather than something that is happening to you in terms of the competitive pressure. I understand all the process issues you talked about. I presume you're also not shying away from the price competition as well. Is this just part of a client acquisition strategy, or are you comfortable with the mortgage as a standalone strategy that you can continue to grow at these rates as profitably as you'd like to?
Yeah, thanks for the question. Our strategy is not obviously to lead the market down in terms of price. I think we're leading with advice, and we're leading with distribution. Dave mentioned in his commentary, we added mortgage specialists, and my comments were more about the productivity of those mortgage specialists in terms of making sure they got back to customers more quickly, making sure they got better leads, and they can action those leads. Reality is we do participate in the market. We don't have as much influence as I think some feel in terms of setting the price. That said, we are not going to have other customers come in and put a mortgage into our customers' hands when we feel it should be with us. We're going to remain competitive on price.
Absolutely agree with your comments in terms of the level of competitiveness and spreads. I think there's just a lot of competition out there, and especially in the last half of this year.
Given all that, above average market growth is still what you'd expect?
We're maintaining mid-single digits. That's still really our target range.
Okay. Thank you.
Thank you. The next question is from Sumit Malhotra with Scotia Capital. Please go ahead.
Thanks. Good morning. For Dave, we've spoken many times about how the stars really aligned for the bank in the timing of the purchase of City National. A lot of questions on this call about the interest rate environment and the growth of that business. If it's affecting your franchise, it's obviously affecting your competitors as well, especially with your capital ratio, one of the stronger aspects of the quarter sitting something like 11.8%, 11.9% on a pro forma basis. Does the acquisition or external capital deployment supplementing that business become more attractive given what's happening to some of your competitors in this rate backdrop than it has been in the last few years? Are you content to hold capital and continue to buy back a larger amount of stock?
I think it's a great question. I would say certainly leaning towards the latter than the former. We're going to continue to grow organically. You've seen the double digits, mid 14%, 15%, 16% loan growth, 14% deposit growth. We're investing in new branches, investing in expanded sales force capability, launching new products, building our brand in the U.S. The organic build we've invested heavily with. We continue to focus on that because that drives the highest ROEs for our shareholders. Being patient and waiting has paid off already. I think it's going to pay off even more to continue to be patient and watch the U.S. marketplace as we watch the economy, we watch valuation of banks, we're being very careful.
We would only look at something that drove a strong shareholder return, grew our franchise geographically or grew our product capability and enhanced the existing strong growth rate that we have right now and doesn't overly distract management with something that's too small. I think those are the same parameters we've talked about, organic growth first and with our strong CET1 ratios, it gives us an opportunity to return capital to shareholders while meeting all our organic growth objectives across all our businesses. We sit in a very strong position to continue to create relative total shareholder return for our investors.
That's very clear. Thanks for that. Lastly, for Rod Bolger. We've talked a lot this year on these calls about the declining trend in the tax rate in the Capital Markets segment, and it took another significant step down this quarter. I know there's some competitive factors at play here, Rod, so I'd appreciate any insight you could give us as to what exactly has driven the tax rate down to something like 3% this quarter, and are there any risks to the bank in terms of impact on revenue or normalization in this line in 2020 for how we think about earnings for that unit?
Yeah, thanks for that, Sumit. I wouldn't call it a risk to the bank. I would expect it to normalize a bit and be back into double digits in 2020. You saw some updated guidance out of the U.S. even this week on the BEAT tax, for example. I think they're coming out with more guidance. There is a natural upward bias on the tax rate, I think globally, as countries try to capture more of a tax base, especially, and banks fall into that even when they're going after technology companies. Also there's an ebb and flow to this as the earnings were a bit off in Q4 in Capital Markets.
The geographic mix ends up being favorable oftentimes from a tax perspective. As earnings normalize going forward and increase, as we highlighted with the strong backlog and strong pipeline, I would expect that the geographic mix would be less favorable from a tax perspective than it was this quarter. As a result, all indications are that we would be back towards a more normalized double-digit tax rate in this business in 2020.
Thanks for your time. Doug McGregor, I think this is your final call. Thanks for your help over the years.
Thank you for that comment.
Thank you.
Next question.
Thank you. The next question is from Doug Young with Desjardins Capital Markets. Please go ahead.
Hi, good morning. Most of my questions have been asked and answered, one I wanted to go back to because I think you addressed the adding 2.5 million new clients by FY 2023 for Canadian Banking. I think at the Investor Day, you also threw out a target for RBC Ventures of adding 5 million active users and converting 10% to Royal Bank clients. Hoping just to get a bit of color of how that transition is going because I think you mentioned 3.2 million connections, but looking at that conversion to Canadian Banking clients, I just wanted some color on that. Thank you.
Thanks, Doug, for your question. I'll start with the overall Ventures targets. Neil will talk about the bigger impact of 2.5 million net new clients, of which we said 500,000 conversions would come from Ventures. We're a couple of years into this now. We've really focused on building those 5 million new connections that we would have had to buy in a social media or digital channel before. Now we have a connection to a new Canadian potential client that we never had before. They've come through those 17 Ventures. We've really made that the primary focus. We actually haven't tried to convert them to RBC product holders as yet.
We're trying to build deeper relationships, trying to get to know them, and that's going to pay off over the long term. Having said that, 2020 is a big scaling year where we are going to start the conversion process through a number of these ventures. I gave the example of MoveSnap, which we embedded into our overall mortgage process, our mortgage sales force of over 1,600 specialists, that it was one of the biggest tools they had to help close mortgages in a price competitive marketplace, as you referenced. I would say, though, that RBC did increase our mortgage rates over the past year, given the volatility, I think twice, right, Neil? You can comment on that further. Having said that, we're competing primarily on creating value for our customers, and MoveSnap came into that fray.
We have another five or six ventures in the mortgage space that's creating value that we're ready to scale nationally. I think we focus on 3.2 million. We're already 65% towards our 5 million target after a year and a half to two years. We feel that we'll likely exceed the 5 million. The conversion proof's going to come over the coming quarters. We're very much focused on scaling Ampli. I think when you can add 40 retailers over a two-year period, and if you look at what it took AIR MILES or Aeroplan to add retailers over a decade, the fact that we have a team now of high-profile brands creating value for Canadians, you're going to see us scale that aggressively in 2020 and convert off of that.
I think we're really positioned well to start to show you some numbers on the bank conversion side, which is still not insignificant. I think we've done over 50,000 conversions just in pilot phase without any real marketing spend behind it. We've already factored marketing budgets in to scale these things nationally. I think that is a little more color on RBC Ventures. I'll turn to Neil to talk about the overall client acquisition and how we're building on the 300,000 each year over the past two years.
Thanks for the question. I think the ventures we'd say is on plan. It's where we wanted it to be. Dave talked about the first play we needed to make is to actually get the client engagement. That's the first milestone, is to engage customers that we didn't have a relationship before, have them coming back to these digital experiences. We've also been very cautious about managing what is referred to as the load factor. How many times we want to put the RBC brand or an RBC value proposition in front of them is something we're really testing, and we don't want to limit that engagement we're having. You've seen this in other digital business models. I think in terms of we have seen some of the ventures, for example, Ownr, which is a venture focused at new small business originations.
We're seeing a very good conversion rate there. Small business owners can go into the app. They can register the small business. They're immediately offered a small business banking package, and we're seeing upwards of a 40% conversion rate on that venture. Things like the DRIVE venture, we've actually integrated that into our mobile app. Dave talked about the number of customers we have logging into the mobile app multiple times a month. We're able to give exposure to the value proposition there. MoveSnap was one of the offers we put out to our customers this summer. It proved to be actually as or more valuable than some of the more traditional offers like, for example, just cash incentives. We're feeling that three good examples already providing value. In terms of Ampli, Dave mentioned the relationship with merchants. We really look at this as key.
Part of it to have the quality of the merchants. Right now, in the Ampli app, we have merchants like Home Depot and Rexall, WestJet, The Keg, Indigo. The key there is that we've got these relationships with merchants. They're willing to put value on the table for our clients. Again, it's that virtuous circle of getting the engagement, providing the value, and then us testing into how we drive the conversion. That's really how we're thinking about it.
Okay. I think we should move on to the next question. Thanks. I know we're almost at time, but we'll try to get a couple more in.
Thank you. The next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.
I just wanted to go back to that new client stuff, Neil. 300,000 you say I think you've added this year, 300,000 last year to the two and a half million target. I know we're short on time, but can you give us a sense of how that is translating into your segment's results and whether or not you are actually having to still provide incentives, whether it's iPads or cash, to pick up some of these customers?
Yeah, sure. Thanks for the question. The new client acquisition, those are both step-ups from where we'd be running with net new client acquisition in the previous three years. To your point, incentives still are part of the strategy. We are out again with the iPad campaign. As we do the analytics, those are well-performing, solid-returning investments. You will see us on a go-forward basis, there will be a mix. There'll be some new value propositions that we feel can really start to drive an increase in the trajectory, and we'll look for that in the back half of the year. Right now, we're pleased with our new client results, and we're also seeing in terms of just the core checking account service fees, we are actually one of the drivers of other income.
We are seeing it pull through in that line.
I appreciate that. Thank you.
Thanks, Sohrab. We'll take one more.
Thank you. The last question will be from Scott Chan with Canaccord Genuity. Please go ahead.
Good morning. Just quickly on the oil and gas portfolio, maybe just a two-part question. Just on the credit you cited, was that U.S. or Canada? The second part, just in terms of the strong growth, I know it's modest part of your portfolio, but I think it was up 34% year-over-year. Is that kind of like a comfortable growth trajectory with that book going forward? Thank you.
Sure. Thanks for the question. This is Graeme. I'll provide a little bit more commentary on oil and gas. Our oil and gas portfolio is about 70% Canada and 30% other, if you will, the other being mostly the U.S. Of that portfolio, about three-quarters of the exploration production, the mix between investment grade and non-investment grade would be roughly, I think, 23% investment grade, the remaining non-investment grade. In terms of the growth that's happened there and just how that kind of influences credit quality the growth over the last year that we've seen, I would say, has been more balanced between investment grade, non-investment grade, roughly about 50-50 there. We've actually seen the portfolio quality skew up a little bit over the last year.
The non-investment grade piece, as I mentioned in my remarks, is certainly the credit risk we really mitigate through a really high-quality structure, the borrowing-based structure, so that even though we see impairments in that sector as our clients struggle with some of the headwinds there, the amount of loan losses that ultimately accrue to us have been relatively moderate. I think our loan losses over the last five years there have been around just over 100 basis points despite the real difficulties that sector is facing. That would be just a kind of a quick summary on the credit profile there. I don't know if Doug or Derek wanted to comment on what's driving the growth.
It's Derek. I'll maybe comment just briefly. I think as Graeme said, the growth we feel quite comfortable with. It's been an even balance between investment grade names and some borrowing-based names that would all be conforming. Part of the growth was driven by a couple of larger investment grade M&A-related transactions that came onto the books. We think overall it's quite a comfortable risk profile.
Great. Thank you very much.
Thanks, Scott Chan. Before I end the call, I would like to recognize two of our leaders who are retiring shortly. Jennifer Tory, who's our current Chief Administrative Officer, for her illustrious 42-year career at RBC, which includes roles, as you know, as Group Head of P&CB and as I said, most recently as our Chief Administrative Officer. We'd like to sincerely thank her for her contribution over her career, and we'll certainly miss her. As I've already acknowledged on the call, Doug McGregor for his incredible 37-year career at the bank, including the past 11 years as Group Head of Capital Markets. Doug, sincere thank you for everything you've done. Thanks for everyone on the call. Thanks for the team for their leadership and for our 85,000 employees for their dedication to our clients, communities, employees, and shareholders. Thanks.
We'll close off the call and have a good end to the year.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.