Good afternoon and welcome back to our afternoon session. Our next presentation is from Royal Bank of Canada. Joining us from the company, we have Katherine Gibson, the CFO. Welcome back, Katherine.
Thank you.
Now, it's been quite a year since the last time you joined us, you know, being named CFO on a full-time basis, as well as your first Investor Day. Maybe just start off with some lessons learned on your first year in the role and how things shaped up against your expectations a year ago.
Thank you. Let me start by saying thank you for having us back. This was one of my first conferences, and it's a fantastic conference that you put on, so thank you. I can't believe a year has gone by. It feels like we were on this stage not that long ago. I would describe the year as fun, definitely busy. A couple of items that I would share as key moments throughout the year. Start off HSBC. When we were here last year, we were just a couple of months past our close of HSBC and really pleased with how our integration of HSBC has progressed. In Q3, we announced that we had hit our run rate on our cost synergies, so I hit that target of $740 million, slightly ahead of schedule. Another key date for us was completing the final conversion of our complex commercial clients.
We hit our target date there in March as well. We're also making quite good progress on our revenue synergies. As part of our Investor Day, we had called out $300 million in revenue synergies. Through our year one, we've hit our milestones on that and looking to move forward now into year two and three. The other item I think everyone probably here at this conference has had tariffs playing in and out of their day-to-day. When I think about RBC, I would describe it as there's been upside from that and downside. From my direct role, top of mind has been ensuring we've got adequate capital, adequate liquidity, and prudent provisioning. As of Q3, I feel like we're in a good place on all three fronts there. We reported CET1 of 13.2%. We have an LCR of 128%.
In Q2, we took steps to increase our stage one and two provisioning. I feel like we're well placed on all the three fronts. You mentioned Investor Day. I'd be remiss if I didn't call that out, as that was obviously a big part of my first year and a big event for the organization. It was the first time that we hosted Investor Day since 2018, and it was our very first time hosting an all-bank strategy session. It was a big day. It was a very full day. We've received positive feedback from the day, positive feedback on the strategies that we presented. Overall, a really good experience for the organization. We look forward to providing an update on our Investor Day targets as part of our Q4 analyst call. It's been a full year, a great year.
If that wasn't enough for your first year, you also had to manage with the ever-changing policies on tariffs. Maybe talk about how have your customers been handling the uncertainty around tariffs? What is your perspective from Canada on the path forward as it relates to the tariff situation?
As you would know well, our business model is diversified. When we look at tariffs, the impact of tariffs as it's flown through our business is positioned differently. We're seeing our clients react differently to tariffs. If I take you through retail, commercial, wholesale, starting with the retail, we are seeing the Canadian consumer continue to be resilient. The Canadian consumer is sitting with higher liquidity than they were before the pandemic. We're also seeing them continue to spend. Discretionary spend is happening. When we look at the credit card data, we're seeing the Canadian consumer build their liquidity, but at the same time, continue to go out to restaurants, continue to travel. We're seeing a good balance there. We are seeing a pause on mortgage originations.
That Canadian consumer, with the uncertainty in the environment, we are seeing slower mortgage growth in line with our expectations and our guidance, really looking for, I'd say, that Canadian consumer uncertainty on that economic outlook before they make that major investment. Turning to commercial, we are seeing slowing growth. In the third quarter, we continue to see 6% loan growth year over year. What we're seeing is a different impact across the sectors. There are some sectors that are having no impact at all. It's business as usual, like healthcare, professional services, still seeing good growth. Then others where there is a more direct impact, like aluminum, steel, and we are definitely seeing slowing growth. We're finding that clients are, I'm describing it as business as usual, continuing to operate and draw on their operating lines, move forward.
Any major infrastructure spend, it's similar to that retail client in that they're looking for greater clarity on that economic outlook. Our pipelines are solid, but it is that pause. We feel like we're well positioned when our clients are ready to help them through the next step. The last one I would just close out with is wholesale. Obviously, wholesale is a major segment. What we're seeing, and Q2 was very quiet on the M&A front, Q3, we started to see the transactions come back, the activity pick up. As we're talking to clients regarding the outlook, we're hearing more and more around optimism and confidence. That outlook is sounding much more activity as we go into the fourth quarter. That's a bit of a snapshot on how we're seeing tariffs move through our business by the various client segments.
Okay, great. Let's move on to credit. In the second quarter, investors were surprised by the relatively larger PCL build on performing loans for RBC. There was a significant improvement in the third quarter. Maybe can you walk us through the reserving process for Q2 as it pertains to performing loans? Were there any specific loan sectors that were particularly impacted? Were there any economic metrics impacting that as well? How much of that was just uncertainty around tariffs? As you sit here looking towards Q4, what do you think will be the biggest drivers for PCLs on performing loans?
Nice. Let me come at it in components. I'll start with Q2. In Q2, in response to the elevated, I would say, dialogue around tariffs and also the elevated uncertainty around what the path forward would look like with tariffs and, you know, discussions globally around tariffs would be, we took the steps in Q2 to do two things. One, we introduced a new scenario into our downside calculation for IFRS 9, and we also shifted our weights from our base case to our downside. Let me give just a little bit of color on how we approach our IFRS 9 calculation. For our performing provision, we have five scenarios. We've got an upside scenario, we've got a base scenario, and then we have three downside scenarios.
Back to that, creating that new scenario, in the downside, we put in a scenario that we felt would represent potential, kind of a more severe impact if we had an escalating trade war across North America. That was captured in the scenario. In addition to that, because there was this elevated uncertainty around, you know, would the path forward be aligned to our base case, or would it be more aligned to one of these downside scenarios, we shifted weight from our base to our downside. In Q2, we did have an outsized increase in our performing loans versus peers. It was up about $570 million or about 6 basis points quarter over quarter. Just to put that into perspective, about 40% of that increase was the result of the changes we made to the weightings to the downside in this new scenario.
Nothing to do with what we were seeing in the portfolio. It was all to capture that potential, I guess, headwinds that could be coming at us. Another 40% that drove that increase was related to an update in the macro outlook. Every quarter, you refresh your macro outlook based on the next 12 months to come. If you go back to kind of thinking about Q2 versus Q1, that macro outlook after Liberation Day had taken quite a turn. Between the two of them, that was largely 80% of the increase that went through. Pushing forward to Q3, uncertainty we felt, you know, hasn't changed. We've left our weights on the downside scenario. The small release that you saw in our Q3 numbers, it's all tied to that macro. That 12-month outlook for the macro is slightly better than where it was in Q2.
That's what drove the majority of that stage one and two release. To the last question around Q4 and outlook, I would say that to have a release on the stage one and two, it would be highly dependent on that uncertainty being removed from the market. Greater clarity on what it looks like for the tariffs and the negotiations going forward is needed. The flip side, because there might be also a natural question of, okay, that's on the release, is there a possibility that you could have further significant build? I would say at this point, we feel like we're prudently provided based on what we know. However, if there was something that would come along and be a significant impact to the macro, then it's part of normal course. We always go through and look at the macro and weave that into our calculation.
One thing I was thinking about is the USMCA agreement comes up for renewal in July next year, but the trade representative has to start filing in the CFR in October. Now, and then would make a recommendation, I think, two weeks later, two months later. Do you think that could have a significant impact, or it really would have to wait to see what those documents look like?
I think we have to wait to see what those documents look like. Between Canada and the U.S. at the moment, USMCA governs about 90% of the trade, and the tariffs that are in place are on a more limited portion of trade between Canada and the U.S. Depending on how the discussions progress with the USMCA, that could be something that weaves into the overall calculations. At the moment, really seeing like that timeline was set. We already, you know, it's nothing unique to the situation. That June timeline was set many years ago, and it's really part of normal course working our way through it.
All right. Keeping with the big topics, in your recent Investor Day slide deck, you mentioned AI 51 times with a goal of generating $700 million to $1 billion in enterprise value from AI by 2027. Maybe can you just give us an update from Investor Day on your progress towards these AI goals across your business lines? What is your role as CFO in implementing?
Yeah. You can tell we're a little bit excited. I love that someone's counted and we talked about it 51 times. I would say that it's nothing new for us. It's been top of mind for us for about the last decade when we stood up our Borealis Research Institute. Today we have, I guess, over 100 PhDs in the team. We have over 850 engineers, data engineers, AI engineers. For AI, kind of the differentiator, one of the key differentiators is data and scale of data. We have access to over 360 petabytes of data. As part of that 360 petabytes, that's capturing over a billion business events that's happening across our organization. For us, we are looking at using leading industry-leading AI models as well as creating our own proprietary models. We're feeling like we've been at this for a while, really excited about it.
As we put out there as our Investor Day target, we see that there's value, and by 2027, value in the range of $700 million to $1 billion. You know that value is twofold. It's across costs or driving costs down or driving efficiencies as well as top-line productivity. We're seeing that across all of our businesses. There are use cases that underpin that number that we put out, and it's across our businesses as well as across our functional areas as well. We're looking forward to providing an update on that as part of our Investor Day targets as well at our Q4 analyst call.
Okay. Let me meet within the Canadian market. The consumer has still been surprisingly resilient despite concerns around tariffs, scaring the economy, unemployment levels. We just got unemployment data last week.
Yeah.
is the impact of the residential mortgage renewals? Are there any segments or geographies that you're seeing signs for concern?
Good question. If I step back, our credit, the retail book is continuing to show strong signs of quality, strong signs of resilience. Our overall credit score for our retail book is 796. If I break that down into mortgages and cars and unsecured, our mortgages would be around 800, and our cars and unsecured are in the range of 735 to 760. Just a little bit of color to highlight the overall kind of credit quality. What we're also seeing, back to my earlier comments, is around that resilience from our consumer clients. We've got wage inflation. We've seen increase in net worth through higher markets. We're also seeing the responsible spending behavior by those clients. Overall, we're seeing a strong performance in the book. Specific to the regions, when we look across Canada, what we're seeing is a bit more pressure in the province of Ontario.
It's not across the board. It's really more tied into where there are segments that are sectors, excuse me, that are feeling more the pressure from tariffs. For example, Windsor is an area that has more of our auto manufacturing. We are seeing there a greater pressure. Overall, everything is still aligned with our expectations for the books.
I'd say balance sheet growth for both loans and deposits seemed to be a little bit better than peers in 3Q.
Yep.
Can you talk to what you're seeing from a loan demand side, particularly differences between commercial and retail customers?
Overall, I'd actually tie it back to my earlier comments that we are seeing slowing growth on both that retail side as well as the commercial side. In line with our guidance, I would say it's slowing growth. It's not no growth. Where I would tie it then back into is our overall kind of top-line resiliency. You know, loan growth, deposit growth, obviously a focus for net interest income. What we're seeing is continued top-line resiliency in both our net interest income as well as our other income. That stability is really coming from that diversity in our book. What we're seeing back to the overall Canadian economy is like resilience. We're seeing near all-time high on equity markets. We're seeing near lows for credit spreads around the cyclical lows. We're seeing that overall with the diversification of our business performing well.
We're earning through that, maybe that lower loan growth in certain pockets of commercial and certain pockets of the retail side. Overall, that diversification is playing out well on that top-line resiliency.
Great. Let's just talk about, you know, one area too, we haven't talked about too much in City National in third quarter. City National witnessed improved earnings growth. What steps are you taking to support further EPS growth, return expansion in this business unit? What is a reasonable return from City National that you believe is achievable over the next few years?
Yeah. City National, we've been very pleased with the progress. In the third quarter, we reported earnings of $114 million U.S. and on an adjusted basis, $139 million. It's really been a continuation of our areas of focus that we set up about a year and a half ago when we brought in Greg Carmichael and his leadership team. They've been doing an incredible job. I'd break it down into three areas. One is, our top priority is continuing to build out the infrastructure in response to heightened standards from a regulatory expectation. Number one priority is moving through on that regulatory front. Number two has been around improving the profitability of the book. We grew quickly and didn't necessarily grow as profitably as we had the opportunity to do.
What the team has been really focused on is looking at our book, looking at how do we bring all of our products and services to our clients to deepen that relationship. Have a loan, have a deposit, and also ensure that as we are entering into new client relationships, we have that broader relationship with them within our thresholds that we've set. The third thing that has been a key focus for City National is driving our efficiency down. We've got opportunities to be reducing our costs, and the team has been doing a great job at looking at how do we optimize our real estate footprint, how do we optimize our operating model, looking at non-core businesses and removing them from the overall mix. On that efficiency front, there are a couple of pieces here. One is overall our operating model.
Two is we are at a higher run rate for that number one priority that I commented on, higher reg spend. We anticipate that will continue to come down as we go into the future. Another part of this, which ties into our broader kind of U.S. region strategy. For City National, we see it as a key part of our U.S. region strategy. We talked about it at our Investor Day that we see it as a significant opportunity for growth, ROE improvement as we go forward. Really looking at how do you bring our businesses across the U.S. to a more cohesive operating model. In doing that, you're going to lower our cost profile for all of the businesses in the region. At Investor Day, we put out some targets for the U.S.
region to take our ROE from 9% to 12% by 2027, our efficiency from currently 83% to the low 70s by 2027. City National, strong performance in the individual business. As you put that into the mix of the broader kind of US region, you know, opportunity there as you bring the pieces together. We think about cross-sell opportunities, funding opportunities, and this cost profile that I talked about as well.
Great. A couple of other banks that have been presenting here today have been talking about Capital Markets.
Yep.
Capital Markets business for RBC is relatively smaller on a global basis. Maybe kind of what areas are you investing in to gain market share? Do you believe increased scale is necessary to generate higher returns in this business?
Capital Markets had a fantastic quarter. Let me just start with that, and then we'll build into our areas of growth and our areas of targets. Capital Markets had a record quarter, reported revenue of $3.8 billion, PPPT of $1.7 billion, and NIAT of $1.3 billion. It's not just one quarter on its own. They've been having a very strong year, year to date, revenue of $11 billion and NIAT of $4 billion. We're really seeing that as strength across both our Global Markets as well as our Corporate and our Investment Banking businesses. For areas of focus and also targets, maybe let me start with our targets because in the Investor Day, it was very clear that Capital Markets is a key part of our growth strategy. We put out targets on a couple of fronts.
One was this business hitting an ROE of 14% by 2027 on a pre-tax, pre-provision basis, looking at a CAGR growth in the high single digits. It was also important for us to be looking at revenue by RWA, as that kind of looks at your volatility of revenue. We put out a target of increasing our revenue per RWA by 40 basis points. In addition to that, we also put out some market share targets. For Global Markets, we were looking at moving that up to 2.5% versus a current basis of 2.1% in 2024 for market share. On the Investment Banking side, taking that up to 2.75% versus our current level of 2.3%. Seeing bold targets across all of that front. The natural question is, how are we going to do this? It's really, I'd mark it down into three areas.
One is continuing to deepen our relationships with clients and expand into new clients' areas. Two would be increasing our capabilities and also deepening our capabilities when it comes to Global Markets, looking at equities, FX, commodities. There are a few areas to call out on the Investment Banking, continuing to grow in FIG, invest in healthcare, invest in technology. Another key part of our capability build has been the introduction of U.S. transaction banking that we started last year. We're seeing really good progress. We put out a target on that of hitting $50 billion in deposits over the medium term. Very pleased with the progress that we're seeing back to incredible results for Q3. We have a really clear path of what we're focusing on and the bold targets to give you an idea of where we see this business going.
Okay, great. You know, maybe we talk a little bit about expenses. Quarter expense growth in 3Q was a bit elevated, though largely driven by revenue-related costs and technology investments. Maybe as you look towards 2026, are there areas where you see opportunity for improved efficiencies? How long do you think before the benefits of AI become apparent in expenses?
Yeah, no, great question. I've been really pleased with the kind of the discipline cost management as we've operated throughout the year. Our expense growth has come in slightly above our guidance, but it's largely been the result of higher variable comp, which I'm always okay with because that's coming with higher commissionable revenue. If I maybe break down Q3, it's a good basis for kind of the broader as we look forward. Q3, we reported year-over-year growth on the NIE front of 7%. If we take that to a core basis, adjusting for FX, stock-based comp that gives some noise on the accounting front, we would have reported NIE growth of 8%. 3% of that is variable comp, and the 5% that's left over is really us investing in our team from an HR perspective. You're always going to have your base salary increase.
In addition to that, back to some of the strategies that we've been talking about, investing into Wealth Management for FAs, investing into Capital Markets with MDs, investing into Commercial Banking with commercial bankers. Technology investment is key, investment in our operations as well as safety and soundness. Those really are the pieces that have been driving our growth. Having said all that, we are always focused on driving a positive upleve. The guidance we provided in Q3, reinforced in Q3, is that for the fiscal 2025, we are expecting strong operating leverage to close out the year. That is always top of mind for management. It's key that as we go forward, we're continuing to look at how are we driving that strong operating leverage, looking at how are we driving efficiencies across the base to fund items like AI.
To your question on AI and how quickly will it come through, we're already seeing it come through. I would expect back to the target that we put out, that $700 million to $1 billion, we'll see that flow through more towards 2026 and 2027 as we hit our run rate on those initiatives and implement them.
Okay. You know, another big item at Investor Day was a discussion for the One RBC strategy. Maybe you could talk a little bit more about the One RBC strategy and how this has improved your ability to serve clients. Have you completely implemented this model, and do you expect incremental benefits from doing so?
Yeah. No, it was a theme that we wanted to be kind of loud and clear throughout Investor Day. We got actually quite positive feedback on how, as we went through each of our segments, how that really resonated and that we're looking at our segment, but then also looking at from that client lens, how do we bring all of the products and offerings that Royal Bank of Canada can offer. We are, I would say, more advanced on that front. In Canada, we've got a history of strong collaboration across our businesses and really supporting our clients as they're moving through the lifecycle and looking for broader products and services. We see that there's further opportunity in Canada to continue to advance that and greater opportunity even more as we look into our other footprints that we operate in. For example, in the U.S.
and even in the UK, there's a few examples that were called out at Investor Day, but maybe just to bring it to life for this conversation today, Wealth Management is a great example where we are looking at, say, in the U.S., our Wealth Management clients are looking for more banking products. With that, we can bring all of kind of Royal Bank of Canada around that, our One RBC around that in the U.S., and City National Bank has banking products, so credit cards and mortgages, and bring that all together as one complement. We're also looking at transaction banking. We have transaction banking in Canada. We're building out transaction banking in the U.S. We have clients that are going North-South, so Canada, U.S. How are we bringing that together as top of mind to, again, service our client?
Back to the maturity of our model in Canada and what we're looking to replicate as we're moving to the other regions is that we support our clients from that starting point and are with them as they progress through kind of a natural evolution. A retail client comes in as they grow their wealth, for example, have the products and services for private banking, or we have opportunities and the products and services within Dominion Securities for our financial advice. If they're a business, we have the commercial side of our business. Moving to small business as they continue to grow, moving to commercial as they look at retiring or selling the business. We have those opportunities through Capital Markets, back into Wealth Management with trust planning.
Just to give you a little bit of bringing that to life, when we think about One RBC, what we're able to do today and how we're looking at doing more of that across our broader footprint.
All right. Moving on to capital, the CET1 ratio has been very consistent in the low 13% range. What are your priorities for capital deployment? Are you looking to increase the pace of buyback? As you look at potential ways to deploy the capital, are there any geographies or segments that are particularly attractive?
Yeah. Capital deployment, our strategy has remained kind of unchanged. We are always prioritizing capital deployment into organic initiatives that meet our, you know, cost of capital return and also have a timeline that's within, you know, short to medium. That's always going to be our number one priority. Number two on the list is dividends. We are committed to a, you know, dividend payout ratio of 40 to 50%. Always looking at optimizing within our dividend and that payout ratio. Buybacks, you've referenced buybacks. You've seen we've been active in our buybacks throughout Q3. We view buybacks as a tactical lever, and, you know, depending on our, you know, capital needs for whether it's organic, whether it's dividends, etc., market conditions, you'll see us go kind of in and out on that. We view it as an important tactical lever. We believe strongly in the intrinsic value.
We've obviously got comments around our price to book and our high share price, but we feel strongly in our intrinsic value. That confidence obviously showed in Q3 as we were elevating our buybacks through that window. Inorganic is that last item on the list when we talk about capital deployment strategy. Inorganic has a very high bar for us to meet. We need to see that it is squarely on strategy. We need it to be a strong cultural fit. We need to see, like, operationally how that comes together. We need to see that right fit. We have to have the highest confidence that it will be accretive to shareholder value. For areas that we would be open to hitting all those, you know, tough criteria, I would say that Wealth Management would be a space that we would be open to.
In the U.S., in the UK, it plays on point with our strategy, our growth strategy. Wealth Management is generally a little bit easier from an operational perspective, so there's some positives there. We'd also be open to, I would say, in the U.S. for Commercial Banking if, you know, there is the right opportunity that came along to expand our commercial banking footprint.
Okay. I have a couple of questions maybe towards interest rates and the NIM. Maybe while RBC's balance sheet remains asset sensitive, you still have some NIM pressure in 3Q. Assuming rates remain stable from here, do you think you could start seeing some NIM expansion?
NIM expansion. Maybe a couple of things because I know we look at an all-bank NIM level.
Yeah.
I've got to put my thoughts on the table. All-bank NIM level is a bit of a difficult metric to forecast. One of the key reasons for that, you would have seen in our Q3 numbers that we were down 5 basis points. That was largely due to transactions within Capital Markets, all normal course transactions. The accounting for that, though, results in one side being booked to net interest income. Part of, say, for example, wholesale funding, which would be similar to our HQLA. Wholesale funding, you'd have the one side going through net interest income. The other side, the hedge or the swap related to that, is typically a financial instrument. That's booked to other income. The two of them together is pretty nominal impact to revenue.
Given only one side is being picked up in net interest income, you're seeing that negative impact on NIM quarter over quarter. That's why I've always liked trying to put the all-bank NIM aside. I do think NIM is a relevant metric for, you know, Personal Banking and Commercial Banking. It can move around a lot. We were guiding or changing our guidance to overall net interest income, excluding trading. What we're seeing from a growth projective, what we're guiding towards is mid-teens growth for fiscal 2025. To make that a little bit more helpful, maybe let me take it down into what do we see as kind of headwinds, tailwinds, and I put in the bucket of unknowns. On the tailwind front, we're continuing to see the positive benefit of our deposit tractor strategy.
You've seen that play out now for several quarters, and we continue to expect that will be a tailwind for us as we move forward. We're also seeing the continued benefit from the product mix shift. As our term deposits are maturing, we're seeing those flows move into checking and savings, which is accretive to our NIM. GICs or term deposits are fiercely, you know, or the competition is high. As a result, the margin is quite low. As that moves into checking or savings, that is accretive to our bottom line. Moving to the unknown buckets, I would put this as competitor behavior and consumer behavior. Competitive behavior, back to the GICs and the mortgages. We're seeing improvement in spreads, but it's still an area where there's lots of competition. As we move into the broader mortgage renewal strip, we expect that will continue.
On the consumer behavior front, back to that large portion of funds that's sitting in term deposits, as that matures, we are starting to see with increased confidence in the consumer that it's moving into investments. It is positive to the top line as investments margins are higher than your GIC margins, but you will see that as a headwind to our NIM. The last item, I mentioned it in my Q3 comments, is just around HSBC and purchase price. Katherine, we had that flowing through our results, and that will kind of finish as of Q2. I just wanted to be clear that that will be kind of a headwind. All those pieces coming together, expect that to still support that mid-teen guidance for net interest income.
Thanks. We only have a few minutes left before we open up to questions. Maybe if there's any comments, things that we didn't cover or things that you want to leave us with?
No, thank you for the opportunity to close it. I would say that maybe a couple of things. If I start with the macro from the Canadian front, as we've mentioned, we're seeing continued resilience in the overall economy. We're seeing resilience in our client base. RBC, we pride ourselves on our risk framework, our risk appetite. In this environment, we're not looking to change. We are focused on supporting our clients as we move through the overall cycle. I would maybe close out with our Investor Day strategy. We put out bold targets that showed us a clear path to getting to 16%+ ROE by 2027. We're on our way. We reported really strong results in Q3. We even put it out there, upside to that ROE through the AI benefits of the path of 17%+. I'll close out with that and let us open up to questions.
Anyone has any questions in the audience? Okay. All right. Okay, please join me in thanking Katherine Gibson for her presentation.
Thanks.