All right. I'd like to welcome our next guest, Neil McLaughlin, RBC's Group Head of Canadian Personal and Commercial Banking. Neil, thanks for joining us.
Thanks, Gabe
Again this year. Not much has changed, I don't think, since last... Oh, maybe. I'd like to start off in you know, you're the biggest deposit business or, depending on which category you look at in Canada, your perspective's very important. Couple things. Percentage of uninsured deposits, people are asking about that, and then the trends. So,
Right
you know, we've obviously seen what's happened in the U.S. Are we seeing any indication of, you know, similar customer behavior in Canada?
Right. Right.
Let's start with that.
Maybe the first thing, we've seen a real consolidation of liquidity over the pandemic. I would say we've probably seen peak core deposits in terms of in our business. That liquidity is starting to, as rates have moved up, really go out and get yield on that, and we're playing a role to really help clients go out and get that yield. You see some very attractive GIC rates out there. Liquidity strong deposits, I think we really look at that funding, that access to funding, as a core competitive advantage, and it's anchored in the relationship strategy.
If you own a relationship with a consumer or the entrepreneur, that's gonna be the primary place you compete for deposits. In terms of the trend and what you saw south of the border with the regional banks and SVB in particular, I mean, we haven't seen any of that. I mean, you know, we've been monitoring all the liquidity trends daily. Saw a bit of a bump up after SVB, you know, naturally sort of flight to quality and the credit rating, we saw some inflows.
Generally, you know, the sort of takeaway was nothing concerning, and, you know, the parallels with the U.S. just aren't there. We don't have, for example, you know, we have an LCR we have to report. It's a regulatory requirement. You don't have the concentration of deposits you saw with SVB. You don't have a concentration in the sector.
We have an exceptionally diverse deposit base in terms of both consumer and commercial, by region, by sector, you know, by segment, whether it's small business consumer, affluent, mass affluent, ultra-high net worth. The conditions just aren't there. Similarly on the, on the business side, we're seeing, you know, generally updraft, but very stable, business deposits, I'd say in Q1.
We always have a little bit of fluctuation in our Q1 numbers. We have a couple of very large corporates who put some capital to work, whether it's for dividends or large CapEx expenses. We would say, you know, sort of very stable type flows there. Probably the biggest trend to call out in our business is we are seeing that movement of deposits from the core checking account.
We're actually seeing some of it come out of mutual funds as, you know, the retail investor is still in a risk-off position and put it into a term deposit where they're getting, you know, north of 4%. That has been a exceptionally strong trend for us. It's put some pressure on margins, but generally it's been allowed us to gather more deposits, put that funding to work and strengthen the relationship.
What I was hearing from a couple other presenters today was some of those trends, the shift out of core into, you know, term GIC products as, you know, is still happening, but the pace of it has decelerated. What's RBC's experience?
We would say it's still going on.
Okay.
I wouldn't. It may be a little bit slower. Q1, I'd say, was one of our strongest quarters. We were, from Q4 to Q1, we were up CAD 15 billion. We were up CAD 40 year-over-year. You know, it's coming in multiple flows. It's coming in external to RBC, it's coming in from the core checking, it's also coming in, like we said, from the mutual fund book, but it's still strong.
or I guess that's the. You're seeing a lot of inbound GIC, some of it's the substitution effect.
Yep
... but, some of it's, you know, wealth customers coming in to, you know, secure products. You know, Is it mostly that, or is it a 50/50 kind of thing?
It would be almost a mix of those three categories. I wouldn't say it's probably not the biggest flow is not from new customers. This is mostly from existing customers, just sort of deciding, you know, where they, where they're gonna get that yield, what type of risk appetite do they have.
Then some of them, they're just saying, "Oh, I'm building up excess liquidity in my core checking account. I just don't need it there." There's actually now a reason to move it. I'm going off, I'm gonna put some term on it, or even some of them are saying, "I'm just gonna put it into one year cashable." You know, which again, good for the relationship a little bit of a you know, a little bit of pressure on margin.
Another source of margin pressure that has been talked about, and Royal's been very transparent and vocal about it, is the, you know, the deposit betas, which are still low, but, you know, moving higher. My question is, given your market position, can't you hold the line a bit more on betas and, you know, minimize that the pressure?
Well, listen, I think, maybe two comments. One would be, you know, we have some deposits that are actually prime linked. They're gonna move, in lockstep, particularly on our commercial deposits. You have more sophisticated, commercial clients who are just saying, "I expect to have that benefit." On the consumer side, for example, in savings, you know, I would say we did so-show some constraint.
Early on in the pandemic, we actually moved up a little bit slower than some of our competitors. We just felt that, you know, if you looked at where our margins were and how much we'd given back, we'd floored a whole bunch of these, you know, of these deposit products earlier on, and we were sort of making up for that as rates started to come back.
Over time, you saw the competitive dynamics kinda really even out, and I think everybody ended up in pretty close to the same place, Gabe. We'd say we started with a little bit of that, but there's more in the business side, we just have less control over that.
Okay. On the lending side, inflation can be good and bad. On the, you know, more of a headwind, you know, situation, mortgage growth has obviously decelerated. What about the ancillary type of lending where people would renovate? Is that, you know, is inflation having a negative impact there? Then flipping it to more of a tailwind, on the credit card side.
Yeah
... revolving balances have been, you know, much lower...
Slower
... to recover. Is that having, you know, is that having more of a positive impact on revolvers as just things cost more, people are carrying higher balances, things, you know, things of that nature?
Yeah. I mean, I think, listen, concern around inflation has slowed. You know, just some headlines around, like, the more macro rental boom is starting to slow as things just cost more, and people, I think, are more worried about inflation, the cost of groceries, and just disposable income, and just not having that to be able to continue to put money into their primary residence.
The other part is just this belief that, hey, whatever it costs to renovate this place, it's going up 10% a year, so this is a safe investment. I think that mindset has shifted a little bit. We're still seeing relatively low revolve rates, for example, like on a HELOC line of credit or on an unsecured line of credit. You know, still relatively low.
Starting to bounce back off the bottom, not dissimilar to how we see operating lines with commercial business. Your question on. We still have room to go there, I'd say, is kind of the answer on revolvers. In terms of credit cards, I think if you look across the industry, the one of the defining sort of metrics is what is the product and who you're attracting as a cardholder.
There's a shift between kind of the super prime, and non-prime customers. Like, it manifests itself in the revolve rate. If you think about, you know, one of our largest products is our Avion product. It's built on a, you know, exceptionally successful rewards program that we own and operate. We have a point manufacturing cost advantage there.
It attracts a super prime customer. The super prime customer is, you know, lower revolve rates, higher payment rates. What that does is that as the spending is increased, and we have very, you know, very robust spending growth, which, you know, sort of flows back to that, the cardholder, fee revenue line. You don't get the layering effect of the balance build.
You are seeing, for example, issuers who have more of a skew to transactor portfolios grow a little bit slower, coming out of the pandemic, and you're seeing some issuers who have more of a revolver, "Hey, I'm here for the credit, and I, you know, may have a little bit of a higher charge-off rate, but I'm getting more revolve, interest income off the portfolio and less reliant on that interchange side." Generally, we would look and say, you know, strong purchase volume, and our portfolio is now back to where we were pre-pandemic. At one point, we were down about three and a half billion dollars.
Yeah.
That's a 10% plus yielding portfolio. It was material. We're seeing exceptionally strong originations coming out of Q1, one of our best quarters for new card originations, so we're feeling quite bullish.
Got some plumbing issues upstairs, I guess. I noticed the offer, the public offers for, you know, new card acquisition have been pretty generous and aggressive across the industry. Is that something, well, you know, 2-fold question, I guess. Is that something that you expect to, you know, maintain in the early stages of, you know, back to normal travel patterns? Well, I'll wait, I'll wait on B, actually.
Yeah. Listen, I think every issuer played it differently. You know, we took a bit of a pause really in the pandemic, really focused a lot of the energy to support clients we already had on the books rather than going out and trying to onboard credit risk in an uncertain environment. We're now back to being, you know, sort of full-time, very business as usual kind of risk posture.
We're seeing really great returns. I mean, the other thing is we took a really analytical lens on those originations. They're about two-thirds of those come in through purely digital channels. They're highly targeted. So we can calculate an ROI sort of cohort by cohort, channel by channel, product by product, month by month and understand what are the returns. We also have an airline partner in WestJet.
you know, when you're not flying, it's hard to, you know, convince people you need to get a WestJet card. But now they're back up, and we're out there visiting with the CEO, and we're seeing exceptionally strong, you know, demand for flights. All that really helps in terms of having an environment to drive origination. We're feeling, you know, really bullish again on the quality of what we're seeing come through the book. We're seeing really great returns in terms of the ROIs in these cohorts. There's nothing there that would have us kind of step back.
The part B of my question, not really that related, though, is the budget last night or afternoon had some, you know, a section on interchange fees and reducing interchange to charge the small businesses. What are your early impressions about that news?
Um-
Were you expecting it?
We were expecting it. Listen, I'd say the, you know, the government, I think the CEBA early on, you know, were really concerned about small businesses in the pandemic. Let's be honest, they haven't all recovered.
You know, we put out a huge amount of, what, CAD 8 billion in these CEBA loans in cooperation with the government, and I think this is sort of an extension of how you get out and support small businesses. You know, the government went through. They were very transparent. This was a, I don't know, a year and a half in the making in terms of a promise the government put out. I think it'll, you know, one, it should've helped small business.
That there is some, you know, if you were a small business that actually accepts credit cards, there's some marginal benefit you get there to lowering your costs. They've done it in a way that's not really gonna upset the ecosystem. I always think about the payment system is, it's a four-party model. You have a cardholder, an issuer, an acquirer, and a merchant, and there's a value exchange there.
Right now we'd say that ecosystem of payments is in balance. What they've done here is to say, you know, not all merchants, but to small merchants, they wanted to give a little bit back, and they've done that, but they've done it in a way that'll keep that payment system in balance. We're supportive of what they've announced.
Probably not a material, revenue item for you.
In the grand scheme of the... You know, when you look at, you have strong double-digit purchase volume growth, you know, from new originations and back book, you know, not something with that type of volume, that we're anticipating any real sort of call outs in terms of headwinds.
Okay. It's sunny outside. The spring mortgage season is upon us, I guess. What's the early impression so far, and what are you expecting this one to look like compared to... let's forget about 2022, 2021, but.
Okay. Yeah. I mean, it's sunny outside, but I don't think just because it's sunny, you're gonna see a real spring back in mortgage originations. I mean, we're coming into the season. I mean, maybe two things. One, if you go through the pandemic, the pandemic kind of took the seasonality out of the mortgage market, you know, where we used to see this very sort of traditional kind of curve, and we'd base it off of that seasonality.
The pandemic and all the craziness in terms of whether it was rates and affordability and people just wanting to change their environment, we got rid of that seasonality. If we go back to sort of pre-pandemic, you know, probably more seasonality coming back, but we're still down 40-plus percent in terms of originations. I don't think we're off.
You know, that's pretty much where you see the market. If you go, you know, city by city, real estate is a very local business. Mortgage origination is a market-by-market business. You're seeing, you know, you're already seeing 12% and 15% HPI reductions in some markets, and I think we're approaching the point where in some markets, we're getting to probably the, you know, the bottom.
Mm-hmm.
You'll start to see. You're hearing some reports in some markets that prices are starting to come back. I think you're still, if you look at where the swap curve is, you look at where, like, five-year rates, you still have a lot of really short terms from two-year terms of the business we are doing. I think to really get that affordability back in check, I think you still got a little bit of room to go.
Whether it's coming from rate or it's coming from the price of the home, I think you have a lot of folks on the sidelines still waiting to see, "Hey, are rates gonna come off? If they do, then maybe I'll upgrade or maybe I'll get into the market." We're anticipating a slow start to the season.
The... You know, correct me if I'm wrong, but I believe about 10% or thereabouts of your book is the investor. Might be probably less than that, but-
In that, yeah.
Are you starting to see them come back? The rental market dynamics are still very attractive or even getting more attractive because, you know, housing supply can't keep up with.
It hasn't really changed that much.
Okay.
When you look at the investors, I mean, our take on the investor portion of the mortgage business is, you know, one, we do look at it as a separate segment. It performs exceptionally well. Actually performs better than the average of the mortgage book. We have a separate underwriting policy around it, so we don't allow quite the LTVs that we'd allow in terms of a owner-occupied unit.
It plays an important role. I mean, there hasn't been enough purpose-built apartment units in the country to really support it. We have a couple markets like Halifax where you have, you know, a very large percentage of that market is purpose-built rental. In Toronto, it was a couple years ago, it was the first project that was brought to market in 20 years.
you know, the private investor has played a role in actually providing inventory to help with Canada's housing problem. We, you know, we don't have concerns about it. I think you have the same. It's been attractive in terms of the rent you can command. We haven't really seen a move off there. I think it's probably the private investor saying, "I'm gonna pause as well.
Mm-hmm.
Haven't really shifted as a mix.
Spreads in the business, are they I know they probably were at their tightest in fall of 2022. Are they, you know, I don't know if you can throw numbers. What's the mortgage spread like these days?
It's better, but not great.
Right.
What we'd say is, you know, I think we still have, again, room to go to get back to more traditional type spreads. It got to a place where they're exceptionally tight and right now you're starting to see them move up into... Maybe we're two-thirds of the way back to where we think they'll probably be in the long run, but we think there's still room to go.
Part of it, we'd say is just the rate in which the rates moved up so quickly. The industry had a hard time adjusting. At some point, we were changing prices, you know, like nine days. Every nine days we're putting out a new price. It's just the market has a hard time digesting that number of price increases in a short period of time. That and competitiveness really the two drivers that we think kept them down. The level of price competitiveness in that market remains intense.
It's early going as far as customers that are renewing mortgages that were, you know, paying, I don't know, 2%, 3% and getting, you know, 5%, 6% today. So the payments are... On the variable side, the catch-up payment to get amortization back on track. What are you... You know, are you seeing any change in borrower behavior where they're just eating it versus a higher proportion are looking to refinance or renegotiate terms? Is there any, anything to note there?
Yeah. I mean, we're spending a lot of time on this when, especially on the variable rate product, where we've had customers hit their trigger rates. We've had about CAD 75 billion of volume who are customers that hit their trigger rate. I think, you know, there's a couple of probably the one surprising trend we've seen is customers actually come in and at renewal, actually come with a one-time payment to almost kind of buy down the outstanding balance to sort of, you know, moderate their payments.
We didn't anticipate that. We've had a lot of client reach outs, as we sort of sub-segmented the book to look at places where we think there could be some capacity weakness. Thankfully, there's more false positives than there are concerns.
A lot of places where you'd reach out, and we do a lot of work to understand the liquidity or our clients, where we have view of the liquidity or just to see the flow coming through the deposit account. A lot of the clients will say, "Listen, I have other income you don't see," or, "I have support from other places, private investment income, support from friends and family."
I think that's been a positive. But you're seeing increase in mortgage payments in like, you know, depending on, to your point, what rate they're coming off, what they're renewing into, between CAD 200-CAD 600. This is... for some clients, it's pretty material.
Excuse me. We're seeing on those variable rate products, probably the other trend worth noting, the delinquency rates in that book started much lower than the fixed rate book. They're moving up where we're actually seeing the fixed rate book kind of move sideways, slightly down. So, you know, that's what we're monitoring and kinda drilling into. In terms of the overall quantum, as we, as we overlay, you know, LTVs and HPI, you know, there's not a very, very small percentage of the book that we're spending this type of due diligence on.
Right.
-and make sure we support the borrower. Not unexpected, we'd say.
I wanna spend the last five minutes or so on.
Yeah.
lending. In the Canadian P&C Bank, how much of the commercial book is commercial real estate?
In terms of our commercial book, about a third.
Okay.
Is-
Consistent with the overall, I guess, wholesale portfolio.
Yeah. Yeah. About a third of the book. The majority of the book is commercial mortgage. We have a strong developer book as well. We almost have exceptionally little office.
Right.
That's really a category, we put a lot of focus on.
Commercial-- so various industries, mortgages, I guess. Okay. I, having said that, I think about the linkage between commercial lending, the growth has just surpassed the mortgage growth. How long does it take for, you know, the mortgage growth slowdown to start dragging down commercial lending? Commercial lending is, you know, feeding off of the housing market in Canada.
Yeah. I mean, you'd have to look in terms of... The link I kind of, you know, mentally draw there is just like, HPIs that links to GDP.
Mm-hmm.
Right? Excuse me. Listen, I think, you know, we've been quite transparent in our book. We were underperforming a couple of years back.
Sure.
You know, we've taken some strategies to really look and say, "Listen, we have a funding advantage in the category. There's no reason we shouldn't be out there." We like the risk. We had to do some work to really get our salespeople lined up against the right segments.
You've seen us, you know, we ended Q1 up about 14%. Our non-real estate book is growing as fast or faster region by region, as our real estate book. Our story is really one about, you know, we're accelerating our growth in commercial real estate. We think the funding advantage is part of that.
Probably the bigger driver is that, you know, we've just really retooled the team and got them, you know, and upskilled the team, put them in front of larger clients, and we now have, I'd say, a very updraft, diversified commercial lending story going on. Mortgage operators, you know, working capital right across the spectrum.
I was actually with that team who's having a meeting here in Montreal this morning, and we're just seeing, like, the pipeline and deal flow is exceptionally strong. That's kinda where we are. We know some of our peers were, you know, maybe a little bit more concentrated more recently in commercial real estate, and we like the asset class. It's not about that.
We just, you know, we're expecting to see strong growth throughout the rest of this fiscal and into next.
What... I mean, you're in double digits now, probably heading towards more sustainable level of high single digits or?
Yeah, I think by the end of the year.
Okay. Now, what about, I mean, I when growth slows, I mean, that's still a good number, don't get me wrong. When growth is decelerating in commercial and in other areas, the pricing and competition intensifies. Are you seeing that yet? Are you still? Are spreads today better than they have been or not?
In commercial?
Yeah.
is they're a little bit tighter in commercial. I think the other thing to point out, though, is if you look at it right now, commercial lending has much better spreads than the, than the retail, the residential mortgage book. That's something we're looking forward to actually providing a little bit of buoyancy to spreads, whereas historically we've been, you know, when I'd mentioned we weren't growing our commercial lending as fast as we're growing residential, we have the opposite.
You're starting to see, you know, we're gonna end the year residential mortgage probably mid-single digit. Like I said, we will end the year in terms of commercial lending, you know, high single digit, low double digit. You know, net-net, that'll just the asset class mix will actually be better for margins.
Got it.
Commercial margins, lending margins are in a little bit, not like mortgage though.
Got it. Any questions from the crowd? Well, I guess that's it. Thanks again for coming this year.
For sure.
You're back next year, hopefully it's a quieter in-between period, though I doubt it.
Yeah. Appreciate it, Gabe. Thank you. Good to see you.
You bet.
All right. Take care.
Got your.
Keys. Thanks.