Good afternoon. Welcome to our Global Financial Institutions Conference, which we're very excited to have all of you here. As you know, this is a true partnership across a number of areas of RBC Capital Markets from our partners in equity research, equity sales, corporate access and marketing, and global investment banking. This conference will only be as successful as the companies that come to participate here, and also the investors who come to engage in a very thought-provoking discussions, especially based upon the landscape and the environment we're in.
Thank you for being here, and I know it'll be two very active days of engagement, especially considering, you know, the macroeconomic environment. I'm very pleased to introduce our lunch keynote session. I would like to welcome Derek Neldner, CEO of RBC Capital Markets, who will moderate our lunch keynote session with Dave McKay, our President and CEO of RBC.
Derek, Dave.
Thanks, Vinnie. Welcome everybody, and thank you for taking the time to join us today and participate in our annual Global Financial Institutions Conference. It's a very important event for us, and hopefully you'll find the next couple of days really productive and engaging for all of you. Just as we kick off the fireside discussion today, reflecting on recent years, I think it's fair to say the last few years have been anything but ordinary for the sector. When you think about organizations in the financial institution space, there's been enormous volatility and change that all organizations have had to navigate. Whether that's a shifting interest rate environment, a changing economic outlook, geopolitical and trade uncertainty, or the ongoing implications from technology advancements and AI, it has certainly been a lot.
I think that pace of change will continue, and it certainly is not gonna stand still. When you look at all the things the sector has been through the last few years, I think it is starting to redefine sort of a new normal operating environment. I think it's very timely that we have the pleasure of having a discussion with Dave McKay, our President and CEO today, Dave, to get your thoughts on the environment and how you're positioning RBC strategically to continue to be successful against this new backdrop. I'd like to start there and really start with the macro. We could, I'm sure, spend the next 45 minutes just on that. We won't do that, but I think it's an important place to start.
If you think about 2025 and how we entered the year, there were actually a fair number of tailwinds. We had equity markets at all-time highs. We had credit spreads at tights. I'd say we had a reasonable economic backdrop. Then obviously in recent weeks, you've seen more volatility introduced, initially with some of the sell-off in the software sector, questions around private credit, and then obviously the geopolitical events over the last 10 days. Can you maybe start, Dave, just with your view of, and I know it's changing daily right now, in terms of the macro environment, but just your views of the economic and market environment we find ourselves in, implications of sort of the geopolitical events as you think about the outlook, and just your thoughts on how RBC's positioned for that.
Yeah. Thanks, Derek, and well, welcome, everybody. I can't believe a year has gone by. Man, time starts to fly. We usually have bad weather for you this time of year. Shoveling to get here this time, the volatility's in a far-off place and having contagion back to what we do every day. But certainly, as you look at the opportunities that arise from the challenges that we have and where we are, and as far as growth and change, the world of AI is having kind of a profound effect, I think, on our sector, and I'm sure we'll talk about that. As far as resilience and geopolitical, I characterize our clients and leaders in our own organization as coming through certainly a year of volatility and uncertainty.
I think tariffs and CUSMA, particularly between the U.S. and rest of world, Canada in particular, given CAD 400 billion crosses the border every year tariff-free. Before that, we've built all our supply chains in so many sectors around that. There's relative advantage in doing that. Our automotive companies, our steel company, everyone benefits from that. We wouldn't have built a two-decade integrated supply chain if it didn't work and it wasn't creating prosperity and wealth for everyone on each side. CEOs have been communicating that to the administration for the better part of the last 12 months, that this tightly integrated supply chain works and creates competitiveness and reduces inflation, and we shouldn't mess with it 'cause it's good. I think generally that's well understood by the trade offices and the administration.
Therefore, as we restart our negotiations as of Sunday, apparently, and as communication lines are open, it's from the base of knowledge that vast majority of this is so good for both sides, and this tight integration, it reduces inflation, creates competitiveness, and therefore there are changes that are needed. The world has changed since even the most recent negotiations, and we have to adjust the agreement. At its core, it's core to prosperity and core to competitiveness and our economies, and therefore we have to be very careful as we try to shift too much of this. I think Congress will have an eye on that as well. 36 U.S. states have Canada as their number one trade partner export, 36. Many of those, most of those are red states at the end of the day.
There's a strong interest among Republican governors, Republican senators, and representatives that this is really important to the majority of U.S. states as well. We start from that perspective of that has caused a lot of calories being burned. What does a new agreement look like? The U.S. economy is outperforming the Canadian economy right now. A number of European economies have kind of bounced back, outperforming the Canadian economy. I would call the Canadian economy resilient. 1.5% forecasted growth versus kind of 2.5% in the United States. It's off a little bit because that trade uncertainty has manifested itself in investment uncertainty, whether it's residential housing and worried about your job, worried about making that type of investment. Prices are declining in Canada, so another reason to hold off.
You're seeing rates are less of an issue in Canada as we brought short end of rates down more quickly. The rate environment has really helped on cash flow and disposable income, and you're seeing Canadians consume more. I'm not gonna buy a house, so I'm gonna go on a trip, and I'm gonna travel more to Europe and to the Caribbean, and I'm gonna consume hospitality, food, beverage. That's created jobs, and therefore the jobs have been resilient in the Canadian economy. Overall, that consumer spend and the overall economic environment is stable with, I think, poised for significant growth, as we'll talk about in a second. You all know the U.S. economy exceptionally well, driven by 10% of Americans who have prospered significantly from equity markets, who are consuming, what, 50% of domestic consumption, 10%.
It's a massive K- shape in the U.S. economy. That wealth creation from markets has propelled that. Secondary effect is, you know, running an 8% structural fiscal deficit at the government level is very stimulative to the U.S. economy. Those two factors have offset what has seen declining employment and activity in so many sectors outside of artificial intelligence and the infrastructure built around that. You've got a bit of a skew to the U.S. economy that also has potential to expand when rates come down. You're seeing high long-term rates in the U.S. economy really also impede residential house buying and construction. Very much part of both North America, Canada, U.S. economies has been driven historically by housing. It's been probably too much of a story in Canada.
It needs to be more of a story in the United States. Therefore, there is a tailwind when longer-term rates eventually come down. You know, the challenge with the short-term disruption, it's inflationary. Can be inflationary if it continues and persists. Right now, it's come off a fair bit, and it could be just a pass-through, and it won't distort overall, consumer purchase habits and consumer disposable income. That's the hope if it moderates relatively soon. If it prolongs and that gets embedded into the price of goods and the price of services with higher energy costs and higher input costs, becomes inflationary, rates can't come down, disposable income gets impacted, and that's gonna start to constrain consumption. That's the risk that all of you are watching, and that's the risk that markets are watching.
When the word of it's gonna go on longer, oil goes up, and the impact on the economy comes down, and then the market. Warren Buffett said it best. The market starts as a voting machine then gets ultimate to a weighing machine. The market as a voting machine is voting that this is gonna have an impact, and I better pull back. The weighing will come later. How much? I think that instability in the short term, hopefully, we resolve this issue for everybody's sake, and we can move forward with a more stable world. Therein lies a risk to the build-up that we're all trying to weigh right now. The votes are out, but the weighing goes forward. A resilient economy with, I think, a number of tailwinds that can really, really help build on that.
You're seeing a little bit of credit risk. We'll probably talk about private credit and the consumer side, both sides of the economy. Subprime struggling. You saw a major, I think, B2C company on the subprime space make an announcement today. It was, I think, go easy. Subprime is weak on both sides of the border, given the leverage and the worries there and inflationary costs impact the ability of those consumers to service that. That's particularly isolated to the Toronto economy, the Greater Toronto Area. Majority of Canada is pretty stable and fully employed. The Canadian economy is mostly the impact of CUSMA has been directed to Southern Ontario and Toronto, and that's where you're seeing most of the job loss, manufacturing job loss, slower issues, supply chain challenges, default, commercial default in the supply chain, trucking.
We're largely in North America in a goods recession. We're consuming services and consuming experiences, but we still have a goods recession across North America. You've seen that in the layoffs at Amazon and UPS, and therefore that impact you're feeling into the economic environment as well. When you're seeing commercial and consumer loss in Canada, you're feeling it acutely in central Canada, where you've got large supply chain, large transportation hubs, steel hubs impacted by CUSMA, and therefore the weakness you're seeing in some of the bank credit results are largely related to that. I think those are certainly some of the impacts you're seeing from a macro. That's the kind of negative.
The positive side of this, as you think about energy and where it's going, Canada is very much on a mission to leverage our resources again after 10 years of ignoring them and trying to diversify our export and trade relationships with multiple countries, whether that's with China, South Korea, Japan, India and Asia, and then certainly Germany, U.K. and Europe. Leading with our liquefied natural gas, our LNG, which is in desperate demand in Europe to offset, you know, the shorter supply initially from Russia, now from Qatar and others through the Straits that are becoming more volatile. Then longer term with India offtake less Russian energy into India, more from the West, petrochemicals and energy into Japan, Korea and China.
Therein lies a huge opportunity for Canada to leverage these resources that we haven't been able to get government support for and then First Nations support. We feel under the Carney government is a complete 180-degree pivot towards a more prosperous future. Minerals, rare earth minerals, LNG, energy petrochemicals to start, forestry, agriculture as well. As you think about the opportunity, the world is sensing this unprecedented opportunity. We've never seen more FDI flow into our economy in the last 15 years. We had 2025, the first positive year of FDI flow. Now, Canadians have been a huge exporter of capital because we have these large pension funds that are centralized, and they export capital every year. We only invest 6% of our own domestic pension funds in the Canadian economy and 94% outside.
Canada's been a net exporter, a significant exporter of capital. Some of you benefit from that and see that. There's a chance to index that a bit higher for Canadian infrastructure, and you'll probably see some of that money stay home. We've also seen unprecedented interest from Europe, from the Middle East or, you know, Abu Dhabi committing and Qatar committing CAD 50 billion of infrastructure funding for Canada. We want to help intermediate that and need to be there to do that. This FDI flow at CAD 96 billion gross in the last year more than offset the outflows. We've turned positive, and we're sensing as we bring these projects to market for the first time, we're in a really good place to really start to drive an incremental leg of growth.
We're quite hopeful that we'll renew CUSMA, and it will be a stable agreement for a long period of time. We're super excited about a growth leg that we're not going to pivot away from this, but we're going to leverage that investment, renewed relationships with all those countries, and that's a stimulant of growth. The next stimulus of growth is we're going to spend 2.5% of GDP on defense, which, yes, we're going to run a fiscal deficit to do that, like the U.S. is doing in other areas. That CAD 70 billion of incremental spend is being used in dual purpose, military, industrial.
If we're going to build a road and an energy pipeline or an electricity pipeline, energy pipeline to the north, it's going to be for a naval base, and it's going to be for a mineral mining base. Trying to dual purpose everything we do in the north as we defend the Arctic and grow the Arctic. You'll see this multi-use capabilities coming through our infrastructure that will grow our economy, access resources, help defend North America, play a greater role in NATO, and therefore that is a significant stimulus to the Canadian economy. As we look at handing out these contracts, you know, the first one that's under discussion, the F-35 has been under discussion for 15 years now, and they're debating back and forth. The real one that's being leveraged is our CAD 100 billion submarine deal.
We're looking at buying 12 subs for CAD 100 billion. The two candidates are South Korea and Germany, therefore it's a grand bargain agreement. The contract on our side, we want to export more energy, and we want an investment in our automotive sector, whether it's Hyundai or Volkswagen coming in. Therefore, those being able to leverage significant purchase contracts in the defense side into a growth investment into the country is also another tailwind. When you think about defense, energy exports, new deals, reigniting the real estate sector with investments and more certainty around the economy. While we're hanging in there and we're doing well and we're resilient at 1.5%, you can see the stimulus that could come to accelerate this growth. I'm really bullish about that.
I'm really bullish about accelerating prosperity and growth, and it creates opportunities for RBC to intermediate that capital, and it creates opportunities for us to use our balance sheet to support that infrastructure and that growth. You know, you look at Europe and Canada, it's different in the United States because of scale, but a lot of that defense spend is in the mid-corporate space, not in the senior market space like it is in the U.S.. There's a lot of commercial mid-corporate companies that need to scale, whether it's ammunition manufacturers in Alberta or others, they need capital to scale their production. Therefore, with an offtake agreement, we will be able to lend against, you know, that type of scaling into the big corporate space.
Germany's in the same place. A lot of the spend that's coming out of the German commitment to NATO is going to be in the commercial and mid-corporate space versus in senior markets. We're very well captured as being Canada's largest bank for business to lend and intermediate that type of capital flow and investment. Super excited. The last thing I'll say, the uncertainty that we're currently feeling just lends more weight behind the need for Europe and Asia to diversify to Canadian energy as a more stable long-term source of energy. As we're in the market right now trying to secure LNG offtake agreements in many of these countries, this disruption, the Strait of Hormuz, and this instability plays into Canada's strength, a stable long-term supply of energy.
Now is the time to close those contracts, get those deals done. I think, you know, from that perspective, macro, you know. You can see so many ways that this will be a great growth agenda for North America and for Canada.
Feels like a trailing 12 months of a lot of change, a lot of uncertainty, but resilience as you described it. Some near term uncertainty once again, but a lot of reason for optimism and tailwinds in particular around the Canadian economy as you look forward.
Yep.
Which is great. If I take that Dave, and I then pivot to RBC and our strategy, we're coming up in a few weeks' time on the one-year anniversary of our Investor Day. I think some very bold ambitions and targets that you and the team put forward. One year in, how are you feeling about progress? Where are you feeling great and maybe where there's some places because of the changing landscape or otherwise, you know, we need to continue to work or reflect?
You know, we've accomplished a lot, you know, in the last year. I think we're right on track and in more areas than not ahead of where we thought we'd be. Whether it's the AI commitments we've made and the CAD 700 million-CAD 1 billion of benefit to our bottom line by year three, I think feeling very good. I think we're one of the first banks to make a monetary commitment at all, but the only bank to do it net of investment. Which means that we had a deep understanding of how much it was gonna cost to train and build these models, deploy these models.
A lot of banks have followed us with commitments to benefits, but because they weren't as certain about the cost structure to leverage their data, get their data in shape, which is a big part of the challenge, is making sure your data is capable of training a model. A lot of banks are struggling getting clean data, and it's very expensive. We've been training reinforcement learning models, machine learning models for 12 years now in our AI institute and have deployed those models into your business. I think one of our most successful examples is Aiden on the block equities trading side. Been doing for what? Seven or eight years now. We've built models, we've learned how to train models. Our data's in great shape.
Therefore, retraining those LLMs on the AI side has gone faster, and it's. We've done that largely on the timelines and the cost structure we thought. Now we're integrating those models into our consumer banking business, into our commercial adjudication business, into your investment banking advisory side, into our coding. I think 40% of the code produced in our technology group now by lines of code is done by an LLM. A series of LLMs, not just one. We're seeing good adoption there. Therefore, we're still producing more lines of code for the same cost, and ultimately we'll produce lines of code for a lower cost as we've committed, and it's a significant benefit.
As we think about, in one of the big articulations of our Investor Day around AI, we remain incredibly excited about the impact on our internal operations and on our B2C direct to consumer capability from capital markets advisory, capital markets trading to commercial banking credit, to commercial banking operations, deposit to consumer banking advisory call centers. You know, through the whole gamut insurance. There isn't a part of our business that's not being impacted by AI, and therefore, there'll be multiple waves. This is just wave one, the nine projects and CAD 700 million-CAD 1 billion. There are multiple waves.
To accelerate that, I've changed the organization, and I've asked our Bruce Ross, who headed up our technology and operations group for the past 15 years to step over and be head of AI, reporting into myself. I've put one of my most senior leaders in charge of making sure externally we understand everything going on, and we're bringing best in class into the organization. Making sure internally we share best practices, and we push these ideas out. Three, he's responsible for making sure we execute against building the models, integrate the models into the business and function process flow.
I really felt I needed a senior leader to be on this 24/7, pushing the organization forward, helping the organization understand and execute with excellence. It's that important because it impacts everything you do from how you think about the overall cash flow of your business and how you think about your customers to how you think about other potential opportunities in the marketplace. You have to understand the impact of AI on your own business, on your customer businesses, and your competitor businesses.
The best way to do that is from a base of knowledge of having done it, not surmising or trying to extrapolate from a theory. The faster you can move, the better you understand the world, and the better able you are to take advantage in what's going on around you. AI was a foundational component of our investment thesis. Then each business head, including yourself, Derek, got up there and articulated a bold vision of how you're gonna build your markets business, how you're gonna build your capital markets advisory business, how we're gonna build the commercial business, the deposit business.
We laid out KPIs for each of our businesses and KPIs that stretched us into what we felt would lead to market leading TSR and market leading revenue and profit performance at the most efficient capital rates and product productive capital rates. As we look through that, to your question, we're performing very well. There's a couple KPIs that we're behind. We committed to a certain level of alts penetration, and we're still kind of building out the product bench, and we're trying to get to market with that. We're lagging a bit on our alt side. You look at the sectors, the commitment you made in FX progress and in equities progress. I mean, we had a fantastic quarter in equities, and we're seeing, you know, significant turn there.
You're seeing the momentum build in FX and the capability, the hiring that you're looking to do on the advisory side, right sector, very competitive marketplace. In some areas, you might be ahead, some areas you might be a little bit off. That's really important. The key drivers of our business and the capital markets feels pretty good. The key drivers in our wealth business, I think the flows that we're looking at, although it's a bit behind, but some of the core was good. The overall performance of some of our funds is lagging a bit. It's what we thought we needed to do, we got to improve a bit on, you know, some of the investment performance that perennially had been at the very top of the industry has slipped a little bit, and we could kind of improve that.
I think that hasn't really had an impact on flow yet, but if it persists, it will start to impact flow a little bit as all the asset managers in the room would know. You know, our acquisition of new customers into the consumer bank and the cross-sell of those is ahead of plan. I think we are impacted a little bit by immigration. You know, immigration has slowed more quickly in Canada as it has in the United States, and therefore, we don't see that household formation at the same rate we did.
It will come back a bit, probably not to where it was because we're, you know, we're still trying to gauge as a country the impact of artificial intelligence, the impact on jobs, and therefore will be more cautious in how many we can let in and employ in our country as all countries are looking at that. Like, what is the demand for labor? Therefore, let's not overwhelm our labor market with too much immigration that we don't create the experience that we're looking to create for both sides. I just caution generally globally around trying to gauge the impact of AI in your labor force and then your overall demographic strategy as a country.
As we think about all of that, I think setting that stretch goal is propelling us, you know, we've had great results again in Q1. We had a really outstanding 2025. We significantly exceeded market expectations, like we're CAD 0.20 above estimates, drove a 17.8% ROE well above market estimates. We're incredibly capital efficient, and we're capturing a disproportionate share of the client flow in each of our businesses. That's our strategy, right? Capture client flow at a higher efficiency ratio, driving more profit per dollar of revenue. We measure all of that. Our efficiency, your productivity, efficiency. HSBC for us was a transformational play when we acquired HSBC Canada because we took our efficiency ratio in our consumer commercial bank, which is +50% of RBC, from 42% to 35%.
Our competitors average 43%-49%. If you're dropping CAD 0.15 per dollar of revenue to the bottom line more than your competitors, think about the competitive opportunity you have. You can give that to pricing, you can put that to shareholder. That operating competitive gap is significant, and therefore we can lever that to scale growth and compete in the marketplace. We haven't even got the benefit of our artificial intelligence at number yet. That productivity efficiency ratio has been best in class for a while, but then has a quantum mode to it now, post HSBC.
We have that strategic advantage where we can do the same piece of business at the same price as our competitor, be 15% more efficient, and therefore drive a 17.5% ROE off the same piece of business that our competitors are doing a 13% or a 14% on. I think that's the structural difference between our businesses. Efficiency, productivity really drives a huge part of our investment thesis and our overall ROE.
That's probably a good segue into a topic I know is very top of mind for investors right now, which is capital allocation. 'Cause as you say, Dave, with that, best-in-class efficiency ratio driving premium ROE, which is driving very strong quarter-by-quarter organic capital generation. It's a good problem to have, but we've got excess capital at 13.7%.
In an environment today where, you know, you're trying to strike the right balance between growth, continuing to deliver premium ROE, managing an uncertain risk environment, how are you thinking about capital allocation?
We think a lot about it, and I know some of our investors are stressed about, you know, what is RBC gonna do with all this excess capital. I think what I generally hear though as well, and what I think we've earned is we haven't misspent your capital to date. Capital, it doesn't have a half-life. It doesn't disappear. It can only be misspent. Therefore, I think we have for the majority a lot of confidence that we will spend it in creating the most amount of shareholder value possible, and we won't dilute and do something, you know, dumb with it.
First and foremost, we have significant RWA growth opportunities and all those initiatives I just talked about. Therefore, we look forward, and we anticipate the demand coming out of the real estate sector, anticipate demand coming out of manufacturing, out of energy, and we see RWA growth to consume this organically, and we're super excited about deploying it that way.
Second, we see returning capital to shareholders, and that's our primary mechanism. We have slowed the cadence of our buybacks to the low end of our range, given market volatility and uncertainty. Part of it, CUSMA uncertainty and the impact that we saw on the economy, on our customers, you know, partly, you know, significant run-up in our stock in one quarter. We're, you know, looking as we exited Q4, and we beat by CAD 0.35, I think, and our stock went from CAD 206 to CAD 235.
It was like, "Whoa, that was quick." We were planning on buying back a bunch of shares at CAD 210, and now we're buying it back at CAD 235. Maybe we'll slow things down and see how stable that price is, and that it grew to CAD 238. Kind of the short-term positive volatility in the stock caused it to pull back a little bit, but we still maintained our floor of buybacks. Then now you see a bit of a systemic pullback because of what's happening in the Middle East and an opportunity to accelerate again. Returning capital to shareholders is our strong second lever here. We'll continue to return that capital regularly and consistently over time, no matter what the stock price is.
You have to give us a little bit of flexibility to accelerate that when we see there's a tactical opportunity. We're trying to get the best return on that capital. Like JPMorgan, we're buying back our stock at 2.5x book. We're trying to be efficient with that, looking at all other opportunities to do that. One thing I can tell you, I am not saving capital to make an acquisition. It is not in my mindset right now. It's organic growth. We have huge opportunity and tailwinds that we can talk about. Returning capital to shareholders is sufficient for us to outperform and drive premium TSR. I don't have strategic gaps in any of our businesses I really need to fill through acquisition.
I'm not out there saying this business won't survive unless I make an acquisition. I don't have to do that. I've got opportunities to grow in Europe, opportunities to grow across capital markets, wealth and commercial banking in the United States, and opportunities to grow significantly in Canada with all that efficiency and productivity and leverage we have. We've got enough to deliver on a premium growth mandate at a premium ROE that don't have to make an acquisition. I look and I make sure I'm not missing anything, but it is not in the strategic mindset of a priority for us. Therefore, you can rest assured that growing organically and returning capital to shareholders gets it done, and that is the focus of the organization.
I think a number of investors kind of left the Q1 call saying, "I think Dave's really pushing hard for an acquisition." I said, "No. My job is to make sure I don't miss something. I'm always looking and thinking, but it's not to push." We're not pushing for something because it's very hard to make an acquisition work. HSBC was pure gold for the organization, and we tracked that for years. There's very few HSBCs that are so accretive that you can get done. If another HSBC comes along, I will do it, let's say, but there isn't one. Rest assured that organic growth and capital return drives a premium TSR, and that's our focus. Yes, we have significant capital to do that, and we're just trying to lever that capital into the best return possible along those guidelines.
I think that's really important for the market to hear. It's great to have that flexibility to be able to grow, support customers, and support your national strategy in the markets like America, that we're a significant player with more capital. This is our second home market. We're very excited about the growth opportunities of our U.S. wealth and U.S. capital markets business and U.S. commercial business. City National had a fantastic quarter. We've got City National. It's got a great tailwind behind it. It's performing, you know, much better and very well. We made over CAD 210 million in City National last quarter, and we see upside from that. I think we're very, very excited about all the growth levers that we can pull. That capital efficiency +17% doesn't. It's not a cap.
We're not trying to manage 17%. We'd love to do 18% with premium growth, but we don't need to set a target to do 18%. We just need to set a target that allows us flexibility to grow at a premium and deliver a premium capital return. It's a balance between all of it. I could run the bank at 19% and not grow it. I could run the bank at 18% and grow it, right? I can run the bank at 25% if I want to and shrink it. ROE, or ROE maximization is not the objective function here. It's growth, premium growth at a premium ROE together gives an optimized TSR, total shareholder return. I think you know that.
It just feels like the market forgot that for a while, and they're chasing kind of ROE growth without thinking about what type of EPS growth is coming now, coming with that. For us, the ROE tailwinds for the ROI story are credit normalization, you know, continued improved performance from City National, from a cost takeout, from the remediation work we've been finishing, and from, you know, growing the balance sheet again, as you're seeing quite significantly. We're excited about the customer flow coming in, credit normalization, improved margins, particularly in the mortgage, where we've seen historic margin compression. Some of that can come from AI, some of that will come from a more disciplined market, leveraging our funding advantage as well, improved performance across our markets business as we're looking at an opportunity there. Some of the hitting of the targets we've set in Investor Day.
We haven't seen yet the CAD 700 million-CAD 1 billion bottom line contribution from AI. I think overall, you think about the tailwinds we have along that, we're already at 17.7% ROEs, and we don't have to change the target to execute even better against that. I sit here saying, "Oh, we've got a lot of momentum." We've operated in generally constructive economy, particularly for our global markets and our markets-based businesses and wealth and capital markets. We can have a more constructive business, I think, for Canadian consumer and commercial businesses going forward with those types of tailwinds.
I look through the short-term dislocation of the market today to all of this positivity and say, "We will get through what's happening in the world today." I think North America is poised to really accelerate from here on in.
Bringing a few things together, Dave. I mean, you touched on AI, but I mean, if you step back, you know, look under your leadership, frankly, RBC has been very forward-looking, very future-looking. We got on data early, we got on AI early, but the world is changing very quickly. You've got lots of challenger models trying to disrupt a variety of different businesses. Technology and AI are sort of a key part of that. You've been in this business a long time. You've seen different technological evolutions.
Just interested, how are you thinking about this period for financial services? Do you think this is, you know, fast but incremental change? Do you think it is fundamental structural disruption of businesses? How do you see that playing out? You touched on around AI a bit, but how are you positioning the bank to win against a period of potential disruption?
In my, I don't know, somewhere near my fortieth year in this business. You know, 12th year as CEO. I've seen a lot. I can't say I've seen it all. I've seen a lot in different roles. The one kind of fundamental framework I use to kind of look at change and forces of change, particularly technology change, is what problem is it solving? Is it a technology looking for a problem? Which has been a lot of the case over the last couple decades. Is there a fundamental problem that this technology is designed to solve? Whether it's AI, which I think is a technology solving fundamental problems of efficiency and knowledge and capability and predictability. You know, technologies like blockchain have struggled to solve problems. They've created new products for sure.
Those products have had, you know, a limited speculative appeal to them. We look at products like stablecoin, which is kind of a hybrid solution, and we say, "Can it solve a fundamental problem?" I think, yes, there are some fundamental problems that stablecoin can answer, particularly the friction and timeliness of cross-border payments. When you look at your domestic payment system, is it solving a problem? No. It's a different way of serving the same value to the customer. Therefore, it has. How much friction is there in implementing the technology? It's high, right? Don't forget, you have to defend these new technologies from quantum computing risk, cybersecurity risk, AML risk, onboarding risk. The nature of integrating a new technology into your value chain in a bank, faced with all those responsibilities to society, is very, very high.
You look at these challenger technologies, and the second question asked, if it is serving and solving a problem, you know, though limited it may be, can the incumbent build it? Or is there a uniqueness to the fintech in applying that technology with IP uniqueness or just a technological limitation of the incumbent in solving that? What you've seen historically is the innovation that's come out of fintech, there's been a lot of innovation coming out of fintech, has been rather easily adopted by the incumbent banks as they've invested in that technology, bought that technology, and integrated in their supply chain without disruption.
Therefore, I look at something like stablecoin, and I say, "Are we gonna change our entire off-ramps and on-ramps to build a new highway of stablecoin to take out the cost and friction? Is SWIFT just gonna build a better blockchain network and eliminate that friction themselves?" The answer is, well, SWIFT is building that right now, and will they build it as well as some of the challenger Ethereum networks and others? Maybe, maybe not. Probably. Therefore, will the incumbent defend and adopt a new technology, or will the attacker replace that? That has been a bet. What's happened much more than not is the incumbent has adopted a new technology and adjusted their business.
I think that is why we've been so successful as an industry. We've been able to adapt and take on these new technologies and change our business. Customers have benefited. I think, again, I look at this new suite of technology, and I encourage you to apply those two lenses. Are you solving a problem? Can the incumbents execute against it? If the answer is yes and yes, you'll probably get a lot more of what you see in the past. We'll defend our customer franchises, we'll serve them better, and we'll continue forward.
I don't see anything out there now that I can't build, whether it's through, you know, stablecoin blockchain network or AI at the end of the day. That we know we have the scale and the capacity to build our own models, to buy these models, to integrate these models into our business, and therefore it's changing us for the better. It's giving more customer value, and it's changing the overall equation. I'm super excited about the opportunity to adopt that technology and help our customers be better and help RBC be better.
I think I've seen enough of this that model works today, and I think the market's kind of sorting through that. For the most part.
Well, I think that's a great framework, Dave, 'cause it's, I mean, there is so much change going on, it's easy to sort of get lost in it. I think that's a good couple pillar principles.
Buy now, pay later.
How people can think about this. We're almost at time. That's been terrific. We've covered a lot, but with sort of one minute left with our audience, any final thoughts you'd leave on RBC, our strategy, our positioning?
No, I think the message is we have significant flexibility. I mean, what does it require to be successful as a large universal bank in the world of serving the customer groups we do? You need scale, and I define scale across the following dimensions. You need brand scale. Brand scale helps you win in a digital world, 'cause as you used to acquire customers in a physical world by the physicality of your branch and putting your name on a corner, you have to have brand scale that pulls in a digital world, an all digital world. Brand scale becomes all the more critical. When you look at big banks like RY and JPM, we have brand scale that transcends into the digital world. You need brand scale. You need customer scale, 'cause customer scale gives you data scale.
Data scale is critical. What we've already learned is that the breadth and depth of data produces a higher performing LLM, large language model, and that large language model is more predictable, more predictive, and creates greater value. Data scale creates a moat now in this world of LLMs and generative AI, and we've kind of empirically proved that. We're very excited. Data scale gives you ability to be more relevant to customers, to attract ancillary value through partnerships, as other organizations want to partner with you 'cause of your data scale helps them with their data scale. Data scale is critical in a digital and a world for all those reasons. You need balance sheet scale.
Customers are growing, the world is growing. Customers are shortening their supplier chain from key integrators to banks. Therefore, the size of balance sheet you bring to support your customers, absolutely critical, and to absorb the equity base, to absorb the shocks that we're seeing in the world today and continue to be there for your customer. Balance sheet scale includes funding scale, maybe bigger than capital scale. Funding scale is absolutely critical. You need operating scale. That efficiency ratio I talked about, dropping more profit to the bottom line, having pricing flexibility, operating scale is part of that. Brand scale, data scale, balance sheet scale, operating scale.
Life goes pretty well from there. Thank you. Thank you for being here. Thank you for participating in this conference. Being together and talking these things through is critical, and I love being here and appreciate you attending today.
Terrific. Thank you, Dave.
Thanks.
Appreciate everybody joining us.
Thank you.