To welcome our next guest today, which is Dave McKay, CEO of Royal Bank of Canada. Morning, Dave. Very nice to see you.
How do you want me in the middle here?
Yeah, middle should be good. Awesome. I'd like to start on the quarter, in particular, just given the very, very strong results, you know, relative to expectations. It certainly was a bit of a blowout quarter for Royal Bank of Canada. If you want to pat yourself on the back, please do. Just any sort of high level...
You could do that for me, actually. Just tell the story.
Any sort of high-level thoughts without going into too much detail? I got a bunch of questions for you, but any high-level thoughts on the quarter, what you really liked, and what you're excited about?
No, it was, I mean, quarters happen because you build towards them, right? They're a combination of a lot of work, and you saw that momentum over time. I think a couple of things are happening. One, we integrated HSBC Bank Canada, which was a major significant integration for us, our largest acquisition ever. You just can't underestimate the amount of effort and time that took to do. It distracted us from other parts of operating the business. Now you've got the full force of RBC focused on operating the business from Capital Markets right through to the consumer bank. You're seeing the results of the full focus of the organization. It was a real distraction to integrate HSBC Bank Canada. When you look across our businesses, every business is performing really, really well. A consumer bank just knocked it out of the park.
You see the efficiency ratio, the growth is strong, the margins are strong. You see global markets, which we've lagged in global markets. Very strong quarter across credit, macro, FX, equities. We've lagged in equities. Jonathan and team have done a great job in rebuilding our equities business. Strong markets performance, strong Investment Banking performance. You look at the flows that we've had, we're targeting double-digit growth of AUA, AUM, very strong market share gains in our fund flows. When you look across the business and what I think the power of our earnings comes out of the diversification. When you think about our non-interest income growth and our other income growth, we're 50-50, roughly between the two as a share. That's the strength of the organization: advisory, fee-based revenue, using the balance sheet. The two come together to holistically serve the client. That really showed through in the quarter.
I think from that perspective, when you look at the strength across the business, the balance between NAI using the balance sheet and taking risk versus advisory, whether that's Wealth Management, consumer bank, Commercial Banking, and obviously Capital Markets. The strength of the franchise and the focus of the team just started to show that build. We're extremely excited about the opportunity as we articulated in our investor day early in the year of continuing to build on that. A really strong outcome, but just a culmination of a lot of work and a lot of building in the core infrastructure that we're really happy about.
Got it. I think the obvious question that's being asked today about Royal Bank of Canada is on your ROE target.
Yeah.
You sort of blew right past it. I recall in your investor day, you did suggest some upside to that 16% plus target with AI and repurchases. On the repurchases side, you've been pretty clear in terms of your priority there. I guess the question is, would you consider maybe even upping the target just given you sound confident on the near-term outlook as well?
Yeah, we'll go through that process. I think we helped the market understand where we thought we did exceptionally well in the quarter and where some areas might pull back a little bit, but overall continue to build on year over year the momentum that we've shown. Therefore, we did show a 17.7% ROE in the quarter. As we go through the process, I think our only caution was we want to watch the economy, we want to watch Kuzma renegotiation, to see where Canada comes out through that. That's a source of potential volatility going forward, even though we still remain hopeful of a balanced outcome there that Canada can manage going forward. For us, give us a quarter to kind of digest some of the changes going on in the marketplace. We're starting to see credit kind of stabilize in the economy.
The economy's been incredibly resilient going forward. You're seeing strong equity markets. As we indicated, so much of what drove our Q3 results shows stability going forward. We had strong equity markets driving it. We had strong client activity in the advisory side and investment banking. We had reasonably good consumer banking activity with very good margins and exceptional cost control and cost takeout. When you look at our balance sheet and the stability there, you look at the advisory pipelines, so much of what we did as we signaled continues from quarter to quarter. The crosswinds that can change that and can change client demand generate from geopolitical instability and uncertainty. Let us watch that a little bit over the coming quarter. So much of what we did is sustainable.
We'll update the market in Q4 as to where we think in the medium term we can drive those ROEs. Our job is to, and our investment thesis, as you know so well, is to have a premium ROE and driving a premium ROE is a big part of our investor thesis and story. We're focused on that, continuing to improve the premium. To your point, we still have a significant amount of capital to buy back shares. We know our intrinsic value is, and we'll continue to do that. We still have a number of exciting projects on the AI side to implement that will drive further efficiencies. We have a number of tools to continue to pull to drive those ROEs higher. Even though we showed you in the core machine that keeps working so well, it can produce organically a 17%+ ratio on its own.
It gives us so much flexibility to continue to improve on our ROE. We're very excited about the momentum, but we'll communicate more formally in our Q4, after our Q4 result.
Got it. I'd love to talk about credit a little bit. Go back two quarters. Looks like the market had been a little bit spooked by the size of the reserve build. Fast forward to Q3, certainly a much better number. The impaired loan number was better as well. I think importantly, the guidance sounded a lot more constructive from your perspective. If you had to use the baseball analogy, I know there's still a lot of uncertainty out there, but which inning do you think we're likely in with respect to the current credit cycle?
Yeah, we're a conservative bank. We run a conservative, that's again part of the investment thesis. You want a premium ROE and you want lower volatility and premium growth. We've delivered that and we'll continue to deliver that. It's a big part of our valuation into our price to book and our price to earnings ratio. We're very conscious of growing within our risk appetite. You saw us take a large stage one and two build last quarter or Q2 because that's just a conservative thing to do. We changed our outlook on the models and the economy and it kind of drove mathematically that increase. We took it. We didn't override it the way others might have done. There's a conservative built in there that maybe confused the market a bit.
When you see the actual outcomes starting to stabilize in the economy, even on the consumer side, and even in our book, particularly not every book, our book, you started to see the unsecured credit stabilize and come off a little bit and strengthen. That's an important signal of the resilience of the Canadian consumer. In our book, we have a more affluent consumer, so you would expect that a little bit, that they have more resilience built into their income. We started to see that. That gave us confidence on the consumer side. There's still some lumpiness, as you saw in the capital markets portfolio that we experienced in Q3 and a little bit of lumpiness again in the commercial portfolio. All that indicated that things are stabilizing at kind of current levels.
We kind of forecasted that it'll bump along maybe at these levels for a number of quarters and start to come off in the latter part, hopefully of next year, as we get rid of this geopolitical uncertainty and we continue to build our economy. I think that was a very positive signal. We're seeing kind of a stabilization and an improvement in some areas that you pointed off. That gave us confidence that we didn't build at all in our really on our stage one and two and that we released in certain areas. We maintained an overall conservatism. There wasn't a significant release because of that geopolitical uncertainty still. Net-net kind of stabilization and a progression forward. I think that gave the market confidence that we're through a lot of the uncertainty, but a little bit to go.
Got it. Now maybe switching over to some of the different business lines, starting with personal banking, and not to ask you about the secret sauce, but certainly Royal's been winning for a long time on the personal banking side. Can you just maybe shed some light on what it is that Royal does better to gain market share and basically win?
It comes down to our overall value proposition to the customer, right? Where we offer convenience, the largest network to the consumer, whether it was historically ATMs and branches, now increasingly building a fantastic digital capability. Convenience is a big part of it. Largest mobile mortgage specialist, largest mobile investment specialist. When you look at the convenience of going to the customer and being where the customer is, we offer unparalleled convenience to access advice and service. The service we offer is best in class. I think we won J.D. Power, what, six out of the last eight years or seven out of the last nine years.
We're one of the only institutions in the world that deliver premium service at scale. There are small institutions that deliver a great experience, but when you talk about an institution, top 10 in the world that delivers J.D. Power number one service, that's pretty impressive. Differentiated service levels go with differentiated distribution capability. We have some exceptional product, differentiated product, particularly around our rewards capability. Our overall personalization of that, big part of the investor data that you saw, the massive amount of data. We have brand scale, we have data scale, and we have operating scale. We can package that into an offering to the customer that supports those dimensions I talked about on advice and convenience in an unparalleled way. The competitive premise now is increasingly evolving to data scale, brand scale, and data scale.
As you compete in a more digitally connected world, you need brand scale. We've invested heavily in brand scale. We have the number one brand in the country, one of the top financial brands in the world. That brand scale is incredibly important. That brand scale comes with data scale. You need data scale to train large language models (LLMs). You need data scale to work with partners. We've accumulated a partnership team with Canadian Tire, with the Pattison Group coming in, with Rexall, with Metro in Quebec. When you look at that partnership and the value they put on the table for our customers, the data they bring, the connectivity, we help each other grow their businesses. That partnership scale is unprecedented.
No one can replicate it because there's not enough grocers and drugstores and gas stations and retailers to accumulate into a partnership team that we've put together that helps create value for Canadians. You look at that, that is a differentiated capability that can't be replicated as well. We've really focused on building moats over decades now that's created value propositions for customers that win in the marketplace. It didn't happen overnight. It started 20 years ago. We started building this vision towards a very different world. Part of it was designed to compete with Apple and Google. We saw them as long-term competitive threats. We still do. That has played well into this digital world where you add large language models (LLMs) on top of the data that enhance everything that we've done and accelerated. That storyline has allowed us to build a fantastic deposit base.
It's allowed us to acquire more new accounts than any other competitor. It's allowed us to build, and we still cross-sell out of a core checking account better than we cross-sell off any other product. We've invested heavily in building an advantage and reciprocity around that, along with rewards. It all ties into a holistic strategy that has a moat around it that we think is really, really hard to replicate. We're very excited. You see the efficiency ratio that that cross-sell and that scale has brought. We're running Commercial and Consumer Banking now at a 35% efficiency ratio, which is best in class globally, I think, at this point. That creates so much flexibility to get into a price war with a competitor when we have a 30% margin advantage, or competitors are averaging a 45% efficiency ratio.
We have 10 points to play with in efficiency scale to create value for shareholders and compete. When you wrap all that together, to your point, you've got this incredible franchise that is really propelling the organization.
Thank you for that color. Very insightful. What about the branch network? I know it's still an important part of your presence in the Canadian retail space. What about optimization? Just given where your efficiency ratio is and how low it is, does it actually move the needle even further over time?
We think there's more productivity opportunity in their branch. We have a number of programs. This is where large language models (LLMs) could really help. You take specialists into generalists with an LLM. You can create more capacity to do mortgages and to do advice through LLMs in their branch. Therefore, we have a strategy to enhance the channel. It's very important to new Canadians to have a personal connection when they come to the country. It's very hard for someone who's new to our financial system that doesn't understand our system to sit down in their mobile phone. We see a lot of our new account openings still coming through the branch. It's predominantly new Canadians looking for advice and looking to learn about the system.
As a country that's going to continue to bring new immigrants in to help us grow and innovate, it's really important to have that physical connection. It might morph into more digital face-to-face, if you can call it that, or we call it kind of a bionic capability. Overall, those channels have been super important in attracting new clients into the organization, particularly on the core banking side. Therefore, we're focused more on increasing the efficiency and the productivity of those units than closing them right now. We think we could continue to build distribution and convenience advantage by reinventing them to be lower cost operations, but more productive, more flow through through those markets. Therefore, we think we can lower that 35% given the mix and the cost mix of our commission and non-commission channels.
There's a better hybrid for the customer and a better hybrid for the shareholder there that involves the branch as well. I think we're looking at it through that lens more than let's just close them because they have great potential to be part of an overall channel mix.
Got it. Switching over to Commercial Banking, and I guess if there's one sort of area where you might need to do a bit more work, I think you have a target of an 18% ROE by 2027. You're trending somewhere around 14% year to date. Maybe talk about the pathway of getting to that 18% and if you're still confident that you'll be able to achieve that by 2027.
Yeah, we're very confident in achieving it. I think we reinforced that in the last call. You look at, you know, where we've come from over the past year. One of the reasons, the largest reason we're not at 18% now is the heightened PCL credit charges within the business. The areas where we were strong, the areas where HSBC was strong, was predominantly in supply chain and supply chain in Ontario. Therefore, we're running the business right now at a 60 basis point PCL ratio the last couple of quarters when our historic average has been 35 - 40. We're running a 50% higher PCL ratio, some of that coming from HSBC on supply chain, transportation, manufacturing, moving goods in our society. A lot of those are showing weakness right now. We've taken kind of a disproportionate loss. That will rectify, that will normalize, that will strengthen over time.
Some of the weaker players in those industries are being weeded out given the slower demand. As we come through that, we feel we're coming through that pretty well. We'll stabilize that when that turns down to more historic averages, because we haven't taken, we feel, more risk in the book. It's just a disproportionate share of supply chain, which should be an integral part of your economy. It has been so strong for decades. It's turned sour, particularly in Ontario. We've just taken a few losses there, disappointingly. When that works itself through alone, that's a significant enhancement to our ROEs. We still have a lot of opportunity to deploy AI into the business. We ingest an enormous scale. We have the cross-sell from HSBC, which is just starting to materialize.
Cross-selling treasury management capabilities, FX services, multi-currency accounts, all that connectivity, and all that amazing capability that came in from HSBC. We're just starting to get after that $300 million of cross-sell, a lot of that within the commercial bank as well. We hit our year-one numbers. We're excited. We have a much bigger target for year two in 2026. We're on track to do that. That will enhance ROEs as well, along with having all those HSBC commercial account managers. They've been in defensive mode for three years, a year and a half before close, massive conversion effort over the past year that we just finished in the spring. All those commercial account managers in HSBC were on defense, just protecting their client base, helping them convert, the complexity of conversion to the RBC tech stack. For the first time, they built their pipelines. Now they're out there selling.
The pipelines are filling really nicely. We've got the whole team energized now, as I said off the top, on just running the bank really well for our customers.
Awesome, awesome. Maybe switching over to City National. I do recall a few years back, ahead of rate hikes, there was a lot of excitement about the rate sensitivity on City National. Obviously, the rate environment kind of surprised everybody in terms of how quickly rates rose. You've taken some actions to sort of right the ship and position City National for growth again. Maybe talk about that dynamic. In the context of the size of City National, does it need more scale? Do you sort of plan on scaling it over time just through organic means, maybe a bit of capital infusion, or is it potentially some M&A tuck-ins there as well?
There's enormous organic capability. Greg Carmichael and the entire team he's built around himself has transformed the organization in the last 18 months. For those of you who don't know Greg, he was prominent at our investor day. He was CEO and Chair and CEO of Fifth Third for a decade and did an amazing job at Fifth Third, which is one of the largest regionals. We needed a leader like Greg who knows how to build a regional bank, a large regional bank. He's brought capabilities and talent to City National Bank. It's allowing him to pursue a very different growth agenda. To be more specific, we struggled to build a jumbo mortgage capability to serve our affluent private banking and wealth clients within the U.S. wealth franchise.
Greg's been able to build that and will start for the first time to really, truly cross-sell jumbo mortgages into both bases. We're building a transaction banking capability for the private bank, but also for the wealth franchise and Neil's business in the U.S., and Greg is leading that. We're taking our higher-end RBC clear corporate treasury management capability into mid-corporate and into commercial, and Greg will benefit from that. As you think about the capability expansion, it's very significant. Doing mortgages and syndicating them, selling more credit cards, opening transaction accounts, and getting into transaction banking with that 450,000 wealth clients is significant, competing in mid-corporate. We've got product capability expansion. We have the geographic expansion at the same time. We're expanding into the Southeast and probably into the South, potentially looking at Texas again, getting back into Texas.
He's done a great job in California, New York, and a number of other markets. We've got product capability. We've got geographic expansion. We're bringing teams in. He's seeding all of that growth. We're back on our front foot in our core businesses, really looking at growing with all those capabilities. He's built the team to do that. It took a year and a half to bring the talent in. When you think about the organic capability in front of us and the momentum he's built in the business, as we come through and we continue to finish the remediation of the bank and to build a large regional infrastructure that can continue to grow prudently is a big focus. We've achieved so much. We're very excited about the future. That can stand alone. That doesn't require us to buy anything to make that happen. We built all that ourselves.
We're just going to continue to run that playbook. Having said that, growth, you know, if we could bring another organization in and put it on top of our tech stack like we did with HSBC Bank Canada and create cost synergies to do that, we'd be open to looking at that. There are a lot of buyers and very few sellers out there. You have to expect that the premiums on any type of M&A are going to get bid up so high that it's going to stress your playbook. It's going to stress your synergy story. I can tell you we're very much focused on creating shareholder value. Crucially, because we don't need to do M&A for capability reasons, we can continue to grow. That's the best way to drive a premium ROE. Therefore, the growth scale in U.S.
wealth, in City National Bank, and in capital markets, which we haven't talked about, is very significant. We don't want to distract the team like we chose to do with HSBC Bank Canada unless it's a meaningful opportunity to create premium shareholder value. It's got to check all those boxes. I would expect the transaction is going to get tough to check all those boxes because there are a lot of buyers out there with excess capital, and they're going to bid everything up. While there are some attractive properties out there, can you be the successful acquirer and achieve the creation of premium shareholder value? I think that's going to be a challenging formula, honestly. It doesn't mean you don't look and you don't try.
I can tell you we are super disciplined about creating premium ROE and not diluting the shareholder unnecessarily unless it has a great story to it. Mostly, we do not want to dilute, and we want to create a creation. It's going to be tough, I think, to execute something like that. We're just focused on organic right now, and we'll keep our eyes open. We're not going to miss anything, but we'll be disciplined. I know every CEO tells you that, but we've been through it. I think we've hopefully earned your trust that we will not spend capital unless we really do drive premium shareholder value for it. That's really our commitment to you.
Got it. Maybe looking at another non-domestic opportunity for growth, the wealth business with Brewin Dolphin. Obviously, you've got scale there in the European market. Maybe talk a little bit about what the longer-term play is there as you think about capital allocation.
We operate in a highly fragmented distribution environment where no one has more than, what, 3% or 4% market share max. I think we're the number four player in the marketplace right now with the acquisition of Brewin Dolphin. I still think we're in our maturation process with Brewin Dolphin in that we achieved our cost synergies quite well and on time. We achieved some revenue synergies, but we haven't achieved the majority of our revenue synergies yet, largely because it required new product capabilities that have taken us longer to build than we expected. When we made the acquisition, we had a tech deficit that we fixed that we knew about. Getting the new product capabilities built on top of that tech stack has taken us about a year and a half to two years longer than we hoped.
We're just getting to the process of starting to offer those services to clients. It'll take us a little bit of time, quarters, a year to see that. Those assumptions would be important in any further acquisition you made. You'll have some modest cost takeout in these wealth businesses. You're really trying to get after growth synergies, cross-sell of the same services we cross-sell into our U.S. consumer. We're going to cross-sell into our U.K. high net worth. We're going to cross-sell secured lending. We're going to cross-sell the advisory side. We're going to look at transaction banking. We're going to look at mortgages. All those cross-sells we're in the process of offering to the Brewin Dolphin client. We're going to have to make assumptions of how you would cross-sell into any further acquisition.
I wish we were further along in proving our hypothesis to give us a huge confidence of doing that. We've seen a lot, and we've learned a lot. I wouldn't rule out the ability to continue to add on, you know, smaller U.S. wealth distribution companies that are similar to Brewin Dolphin where we could continue to push that playbook forward. We'll have to make assumptions. We'll only run an accretive playbook for you. We'll look at those capabilities. We've learned a lot with Brewin Dolphin. I have to say we haven't hit our numbers yet. We're continuing to close that gap.
Have to ask a question on Capital Markets. It's just been such a great story for all the Canadian banks this year. Obviously, there's going to be an expectation for client activity to moderate if volatility comes down in the market. That should be expected. Maybe talk about Royal and how you're doing in market share in Canada to the extent that you measure it across your business lines. Maybe talk a little bit about the U.S. opportunity, which is a big part of the revenue driver for Capital Markets. How do you compare those two markets and how you sort of position in those two?
Yeah, we really focus on global market share. We're a global business. We're 11th in the world. Overall, I focus a lot more on our global share of fees and revenue across our markets business and across our advisory and investment banking and corporate lending business. I know those figures more. We're kind of stable at around 2% of global fees, slightly down a few basis points from a couple of years ago. I think we were as high as ninth or 11th. We bounce around against a number of competitors in that range. The market's grown. I think our revenues have grown very nicely in that space as we continue to invest in more MD capability. A big part of it is to continue to hire Managing Directors to cover your bigger sectors like healthcare and a number of others.
We're strong in FIG and we're strong in tech, but we need bigger teams and more people to cover the sector. We continue to hire into a very aggressive marketplace where there's a lot of hiring activity going on from the top 10 and then the bottom kind of 20 continue to look to grow their capability. It's very competitive on the talent side. I think from that perspective, we are continuing to grow our business very well in line with the market. Largely right now, I think you've seen a significant improvement in our markets business. As I mentioned before, we lagged in equities. We really closed that gap. We used to lag in FX. I think we're closing that gap very nicely now. We have strong credit business that ran against us in Q1 and Q2. We have very good credit trading performance in Q3.
In macro, it's always been super competitive. The strategy to your question then is to lever our scale in the United States to outperform our Canadian peers. The Canadian market is for us a third to half the size of our U.S. business right now. Our U.S. capital markets business is well over half our revenues. Therefore, it's that U.S. scale and that U.S. differentiating capability that's important for us to lever to outperform our Canadian peer group where we compete for capital with investors. I think that story can and we expect to have greater differentiation going forward. That story's lagged a little bit. If there's anywhere where competitors have kept up and maybe outperformed us, it's in the markets business. They've closed the gap on some of the performance differentiation in consumer and commercial banking and wealth. You're seeing us get after that now.
Q3 is a demonstration when you get after that business and you start to serve and seeing all that amazing outcomes in the markets business and how truly we can differentiate when all four of our major businesses are outperforming. I'm excited. I think Q3 really showed you when you start to close those gaps and you start to see that what ROI can do when everything's performing. We're just focused on continuing to do that going forward, heads down, serving our clients and trying to get every business to outperform organically. That came through in Q3 quite loudly. We expect that to continue pushing that.
All right. Any final sort of key messages for investors?
No, I think you're seeing the diversification, the strength of this franchise, and now the focus of the management team on running it. We've had a lot of stuff we've had to deal with. When you start to execute the way we did with focus and continue to do that as a team, we're incredibly excited. You saw that in our investor day targets. At the end of the day, we're well on track. We'll give you an update in Q4 on all those metrics that we put out there, how we're doing. We're feeling really good about things. It's fun. We're going to go get it.
Awesome. Thank you very much, Dave, for the insights. Thank you for joining us today. Appreciate it.
Thank you.
We'll be taking about a 10-minute break and we'll reconvene at 10:10 A.M.