All right. I'd like to welcome to the stage Erica Nielsen , Group Head, RBC's Personal Banking division. A job you've had for just under two years now.
Yeah.
Thanks for coming to Montreal, Erica.
Thank you.
really appreciate it, and I look forward to this discussion. One thing I wanna start, kick off with is HSBC Canada. The reason for that is when it was acquired, and a lot of the emphasis, I think the words, you know, the crown jewel is the commercial business, right?
Right.
I think that's it. Hopefully I'm not misquoting anybody. It kinda made us overlook a little bit of the Personal Banking business that was acquired. You know, we'd looked at the mortgage business. Maybe that one's gonna get shrunk because HSBC was a price leader in that. In short, overlooking the Personal Banking business of HSBC, which was probably not a good thing. Maybe you can, you know, highlight some of the, you know, assets you picked up, some of the new capabilities and something to get excited about with that acquisition on the personal side.
Yeah, thanks. Yeah, we've been really pleased with the acquisition of HSBC for the Personal Bank. I know as has the Commercial Bank. I know we set out to really dramatically change the cost profile of the bank. If you think about the scale play that is for the Personal Bank, material change in cost profile when we brought that business in. I think RBC writ large has met and is on pace to exceed the cost expectations that we had for that acquisition. Likewise, on the revenue synergy side, we'd say we are on track for the CAD 300 million that we'd committed in revenue synergies. A lot of those revenue synergies are associated with the Personal Bank and what we do in the Personal Bank.
To your point on, we talked about crown jewel of commercial, like, what does that mean for the personal bank? A couple of things to highlight related to HSBC. Like, it's a very strong client franchise in Canada. The quality of those customers in their personal bank is exceptionally strong quality. In fact, in pockets of their credit is stronger quality credit than what RBC had on its books, and we feel very confident about our own quality of our book. Those customers also had broader relationships than just single serve. You talk about the mortgage portfolio, and I know there's a lot of conversation about the price sensitivity of the mortgage portfolio for HSBC, and yet over 90% of those customers were embedded with core checking accounts.
These weren't, you know, sort of fly-by-night customers who may have just been price shopping. They had entrenched relationships with HSBC. Now, that said, there is a substantial opportunity for us related to depth of relationship and cross-sell. You say, "Well, why Erica? You just told me they had a good relationship." They did.
That's a good follow-up question actually.
Right. They did, but they don't have the level of depth of relationship that RBC enjoys with its own customer base. There is, you know, a lot of activity happening now with that customer base. As we start to recognize financial needs with those consumers, then getting those consumers more engaged with more RBC products, and that's one of the core levers that we have. That matures over time. Right. If you think about that as a, as a synergy, it doesn't just manifest. It's not the same as a cost takeout. Like, I either took the cost out or I didn't. When we talk about cross-sell and depth of relationship, that has to occur when a client has a need.
As we're listening to the HSBC customers, as we're identifying the needs of those customers, we're then able to come in with a secondary or third or fourth product behind that's gonna meet their needs. I've been really pleased. We're meeting our expectations both on retaining those customers inside the franchise and growing those customers inside the franchise. The other part of the synergies that are available for the Personal Banking was that there were a number of capabilities that we built in order to meet the needs of the HSBC customer, things that they were accustomed to. Foreign currency accounts, money movement items that they were accustomed to at HSBC that wasn't part of our product lineup. But they are in demand from the RBC pool of customers.
Now that I've built these capabilities, I'm able to then cross-sell those into RBC's customer base as part of the synergies of the transaction. All of that told, I feel, we feel good about the franchise that we bought, the growth inside the franchise, our ability to hit those synergy targets in the Personal Banking.
Okay, great. You know, the deposit business is, you know, something that's obviously been in focus for a number of years now, and there's been a big cycle of, you know, big influx post-COVID.
Yeah.
There was a big price war on term deposits. Today, we're in the phase where deposit growth is, you know, in some cases stagnating or shrinking. We see that headline number, and we get you know the general description that, "Oh, that's term deposits," old term deposits maturing and the core deposits still growing. Can you know, maybe flesh that out a little bit more so that we can appreciate what's going on in the deposit book and whether it's good?
Yeah. A number of dynamics happening inside the deposit book when you peel back the onion. When we were in that deposit gathering and we talked about sort of GICs and sort of the resurgence of that as a category again.
You know, we always talked about the notion that for some of that money, it was sitting in a GIC product partly because of the rate that was available, partly because of uncertainty related to the consumer. Those were dollars that historically would have found themselves into markets, right? At that period of time, the consumer is uncomfortable with the volatility that they'd been seeing inside the market, so uncomfortable to place that.
With the pricing, GIC is a really good place for that to stay. Our commitment all along through this sort of oscillation of cycles, and I'll talk about what the other half of that cycle looks like now, is to actually make sure that we're meeting the need of the customer and that the product that they're getting and the placement of that investment funds is sitting in the right product relative to what they need for their long-term health. When we look at what's happening now and the drawdown of some of those GIC portfolios, I have a lot of confidence and conviction into where those flows are going. We see material increases on a year-over-year basis into our markets-based business, so into Dominion Securities, into Direct Investing, as those GIC dollars find natural homes inside the market.
I think what that means is when you look at the headline numbers, you could see some retraction or holding steady of the absolute level of deposits. But what I see underneath is a material outflow of those deposits into our wealth businesses, which is exactly what we need for the client, right? At the end of the day, the question is RBC well-serving the need of the client? For many customers, planning for retirement means they need to be in the markets, whether you know that's the equity market or the bond market. They need to be in the markets. We need to get those customers placed there. We also reduce our retention events when we're into placement into the market. We feel really good that that flow is actually happening.
You say, "Well, what's actually happening then underlying inside your deposit accounts, and are you comfortable?" We continue to, you know, grow our account-based business in a material way. Those deposits of existing customers and new customers are building in the way that we would see. The net-net of that is we're in a part of the cycle where we'd see this natural rotation into some of those equities businesses, for the consumer, and that's what they need for their long term. The strength of all of those products underneath is healthy.
I guess I don't know if it's dots I can connect, but when we go back in time and look at the big fluctuations in the deposit business over the past few years, there may have been strategic decisions made during the time with how you manage that book, the invested liquidity, and how the margins are performing today. 'Cause we're seeing quite a bit of margin divergence between some banks, and I'm wondering what your... You know, and yours has been relatively flatter. You know, revenue growth is a different thing, of course. People do focus on margin. You know, what's your view on why some banks, like yours, the margin performance has been flatter, whereas some have been kind of shocking?
I think how each of the different banks think about their how they track their book of business is different across the institutions. I think really important for us to go back and think about, like, in post the rate increase cycle, where have your margins performed? If you look at the NIM expansion for us, we've had very healthy near top of the stack NIM expansion through that period. Then even over the last 12 months, I'd say our NIM is second best inside the marketplace. I think more important, because some of these things are structural, to look at longer periods of time, because each of the banks treat those things differently from a structural perspective.
The other part would be, like, as I think about sort of the quarter-over-quarter, as we've talked about, for us at least, we are rolling down the PPA, which has a NIM drag for us. We, you know, we talked about.
Yeah
two basis points in the first quarter, four basis points as we go into next quarter. My intention is to grow through that and maintain, right, as I think about where our NIM performance is. You know, I think about that rotation as some of the key aspects on as you think about comparative NIM performance.
Yeah. I mean, we do. Some of us focus on the quarter-to-quarter as opposed to the, you know, five-year kind of trend.
Yeah
that plays into it. What about the mortgage book's impact on your margin? 'Cause there's the you know, we've heard that spreads are quite good from some banks, and maybe from some other banks, the comment's a little bit more neutral and how that plays into your margin outlook because the mortgage book itself might not grow, which is in and of itself a good thing for margin. The repricing on mortgages retained is actually coming into higher spreads. Is that something we can look forward to?
Yeah, I think we always talked about. For us, we always talked about the back half of 2026 getting into a period of. If you reflect back on when that business went onto the books, it was. There was a lot of levity in the mortgage market at that time. There was a lot of deals to be done, but there was also a lot of price competition, and that's really when we started to see. In this period, we're in this period of when did we start to see margins inside that business really retract. That business is now coming up for maturity.
I think, you know, as we look at the second half, if you're just to play out retention, one would say that there's opportunity for mortgage expansion from a margin perspective because the mortgages that are coming off our books and renewing are at very thin spreads. But I put a big caveat on that because this is a very intense mortgage market from a pricing perspective as we think about the available to acquire share that's inside the market. We're not seeing a healthy purchase market right now, which means that the activity for switch is intense. You know, the necessity of each of the institutions to retain their back book is very important, right?
That's part of how we're gonna compete, is to make sure that that back book of mortgages stays with each of us. Obviously, as a fierce competitor, I wanna go out and switch in as much of my competitor's business as possible, to grow my book of business. There is opportunity for margin expansion as we go through this year, but I think we'll have to also be very aware of where the price competition sits in the marketplace at that period of time. If I could wave my magic wand and say it's great, I'd say retention rates stay amazing and price competition stays neutral, and we have a good period on margins. I don't control all those aspects.
What's really important for us is that we ensure that our back book is well protected, so our retention activities across the organization and the depth of those activities are happening as we see each month of cohort coming in so that we are performing as well as possible from a retention perspective. Out there fighting for every switch piece of business that we can do.
All right, great. More of a risk type question, but you know, if I look at mortgages and HELOCs, not the same product, and I believe you disclosed HELOCs as the non-amortizing balances. Mortgage growth has actually been surprisingly strong, whereas the HELOC growth has been, you know, flatter. I think, you know, one thing that comes to mind is you know, the demand or people just not drawing on equity to, you know, pay for renovation or whatever. Is there also an element or banks and Royal specifically doing anything to maybe limit people's abilities to. Or actually, that's the wrong wording. Just not push that product because, you know, the home market is not very strong right now. You don't wanna increase your exposure to that asset.
Yeah. It's a really interesting question. I would say there is no change in the way that we sell the mortgage product. For example, we would never have conversations with our salespeople about different mortgage products being more on sale and less on sale. It's just not part of our psyche. The most important thing that we do in this period is to, like, have a robust conversation with the customer about the options that are available and to then ascertain what their degree of comfort level is across all the different types of products.
I think what you're seeing reflected is that in these periods of uncertainty, clients are looking for more certainty, and the HELOC business is a little bit more managed versus if I know that I'm going to have a fixed-rate mortgage, and I know that this is my payment, and I know that then this is my amortization of that mortgage. Like, they're looking for more certainty. I actually think what you see reflected in the volume is reflective of how Canadians are thinking about what mortgage product and the way in which they construct their mortgage is gonna best meet their needs, as opposed to like, are HELOCs not on sale at RBC? That would be completely false. For certain customers, the home equity line of credit is absolutely the right product.
We still see volume in that business.
It's just not growing in the same way that it is. To the question about it's a non-amortizing product. It is, but there are LTV, you know, 65% loan-to-value caps that are placed inside that product, right? It's a home line is not a product for somebody who is, like, high loan-to-value.
Right, right.
They have to have 65%. They need 35% down in their home to be able to be in that mortgage construct, because it is non-amortizing.
Got it. Credit card book. Are the payment rates still too high? By that, I mean, is it still, 'cause for a number of years, the credit card book, Royal and others, surprisingly, people are still paying off a high percentage of their monthly balance, so they're not revolving as much, which is good from a risk standpoint, but from a revenue standpoint, it hasn't been as positive for the top line. What's the dynamic right now?
Yeah, we still see the characteristics sort of getting us back to where they were pre-COVID.
Okay.
Which I think, as in this part of the cycle, I think some people would say that's surprising from, you know, the amount of payment to that notion of paying to revolving. That sort of maybe it speaks to the resiliency of the Canadian consumer in this part of the cycle, and that, you know, there still is resilience inside that consumer as we look at those payment rates.
I guess the credit question, more specifically. We have seen delinquency rates rising. Like, what's your statement on that trend, where it's going, especially now when or maybe, you know, got caught up in the moment of higher rates maybe down later this year. Like, or should we be concerned about this trend, I guess?
I would say both. When we look at delinquency, and in particular, maybe specific both to the credit card question you just asked me, Gabe, but also to inside our mortgage portfolio, I would say that we are seeing delinquency rates in line with what our expectations would have been. I feel really confident about the business that we have on our books, the quality of that business, the way it's performing, and sort of the rate of delinquency that we're seeing is more driven by the macro factors than feeling like we have, you know, any type of vulnerability inside our own credit book. A lot of those are the factors that we've talked about. It's employment, right?
Without employment, it's difficult for Canadians to make their debt payments, mortgages, credit cards. That's where, you know, we've been talking a lot about some of the vulnerabilities that we've seen inside Ontario, GTA, the surrounding areas around Toronto in particular, inside BC, but we also see elevated unemployment inside those communities. That's where we have, you know, that we've seen more stress in those areas than we see, you know, in other provinces across the country. It's really not necessarily a general Canadian story. It's more, you know, about how each of the different provinces are reacting and the employment in each of those different provinces.
You touched upon the competitive dynamic of the market earlier when we were talking about mortgages. Then another, you know, facet of the competitive discussion is the new entrant risk and OSFI's making it easier for fintechs to operate in Canada or plans to anyway. You know, how credible is the threat? I ask that because over the years I've heard about the fintech threat multiple times, multiple iterations, and, you know, nothing really happens other than the way I respond to it. Banks are investing. It causes their expenses to go up, essentially. That's the real threat because the, you know, player doesn't actually amount to much, but to build up your moats, you gotta spend more.
Right.
Is there anything, you know, any different angle that might be applicable this time?
Yeah, I mean, I'd certainly say that we like, we're looking at all of the competitive disruption and the fintech entrants in a very material way. I think what's really important to understand when we look at where those entrants are, they are often looking and taking parts of a client experience where you'd say historically maybe the bank was suboptimal in the way that they delivered value into those very specific niche parts of our offering. There's obviously a competitive response, right? What that means is that as we see the validity of those competitors coming and we understand the products, then we're going to respond. You can be rest assured that RBC is going to, you know, very
take very seriously any of those competitors, understand what they're offering customers, make an assessment of should we be offering that service to customers manifested in that way, and then determining what's our path from there. You talk about does it increase your expense base? I mean, it depends on whether I feel like we have to differentially invest or whether I can move pockets of money around to invest if we believe, you know, we believe that we need to make any changes. What I'd say is that, like, it's incumbent on an organization like RBC to have value propositions and digital experiences and human experiences for our customers that clearly meet their needs, and those customer expectations are changing rapidly.
If you went back 10 years ago and you said, "Okay, well, what's RBC's appetite for, like, an experience change from a digital perspective?" Many times we found we were trying to lead customers in places that they weren't probably ready to go yet.
Now I would say the consumer is maybe more ready than the banks have the speed to get out there. My challenge to our team is we need to get moving, that the customer is telling us that their appetite for the way in which they want to experience RBC in a more convenient way needs to increase, and therefore we are increasing the pace at which we are digitizing things that customers expect to be digitized. In doing so, we're doing two things. One, I'm better meeting the needs of consumers and what they're asking for us, but we're also better shoring up against the disruptors who are trying to take pieces of our experience and say, "Hey, RBC, you're suboptimal here." It's a win-win strategy on both fronts.
It's helped me create a moat, but also helps me better win with the consumer.
Anyway, you know, anecdotes or examples you can share? 'Cause it's quite interesting that.
Yeah, I mean, I think.
Like, when you identify something happening and then, oh, what's your response?
Right. I think, like, we would look at, like, the continued evolution of the things that we're doing in payments, right? That, like, I wanna be able to do payments. I wanna be able to do it easier from my couch. I wanna be able to not have to come and see you for those payments. As we evolve where we go in payments, we better meet client expectations. Also an area where there's lots of competitive fintech activity, right? There's a lot of fintech seeing payment flows and deciding that's a place for them to compete. That's not an area that I want to cede, and I want to better meet my consumers' expectations.
I don't want to be able to pay for stuff quicker from my couch. I'm not your typical customer.
Well, there's a difference between doing your banking versus purchasing.
Yeah. Yeah, okay. The operating leverage, it's been phenomenal in your-
Yes
your business. Like, what's high single digits. You know, are we gonna take a you know, sharp correction there back to a more normalized rate? Or what's your expectation in the near to medium term?
Yeah, I would say a couple things. I'd say the strength of that operating leverage really driven by the momentum and franchise at RBC and a lot of the expansion in margins that we saw on that side. I said as that starts to normalize, i.e., be in the margin of, you know, the year prior and the year prior to that, you'll start to you know, you should start to see that retrenched back to our guidance on the 1%-2% operating leverage is where I'd expect that we'll sort of we'll start to land. I think that's normal based on where we're seeing the market, tying to the whole conversation where we started, Gabe, on what are you seeing on deposits and how is that franchise moving.
I think that's in line with how we see, you know, what's normalizing on that side of the business.
Okay. Just to wrap up on the, you know, banal topic of AI. I wrote the question, like, do you see more upside from revenues or cost reduction? We can talk about that, but things happen so fast. How, you know, when you make an investment today, how do you know you're gonna get the benefit from it in the future? 'Cause it could easily be disrupted within, you know, months perhaps, you know, theoretically.
Yeah, that's a really great question. I think to your comment, like, where were you a year ago to where are you now, and how do you feel about the places where you're making investments, we are very much learning. I think that's exciting because I could sit here today with more confidence about the places where AI is really going to differentially change our business and have more assurance that I see what those outcomes are going to be because they're being revealed in the work that we're doing. One of the things I would guide to would be the places where you can clearly create differentiation competitively.
Places where I can use my scale, the scale of the breadth of the RBC client base that we have, the depth of those relationships with us, where I can use that to create models, I can materially outperform those who do not have that scale. You'd say, "Well, why do you feel that way?" It's like, well, I can actually see it as we're now doing the modeling. If RBC had a client base that was 50% of the size, what's the outcome of that modeling? If RBC has 75% of what we have, what's the outcome? You can start to see how those large models actually perform very differently, which a year ago, we had hypotheses about this, but now we can actually see model performance very different.
In places where I can't go to market to buy that kind of data, right? If you don't have that breadth of client base, you will struggle to have the same performance that somebody with our scale would have inside the marketplace. That gets me very excited. On the opposite side of that question, there's probably places where, you know, could there be providers who are going to provide AI tools to us to help us scale faster in places that become less of a competitive advantage? Yes, but necessary for us as we think about cost takeout, et cetera, right?
Now the question is, I think the question we're asking ourselves very clearly is, how do I ensure that my finite resources inside RBC, who are exceptional in Borealis, are then placed on those things that are gonna create competitive differentiation, and I go to market to purchase AI tools from others where that benefit is not existing. Why do I wanna do that? Because it allows me to increase my pace. I can take advantage of my own resources on the things that are gonna be most important to drive our business, and while looking at and using others to help me scale faster in places there'll be less competitive differentiation.
Got it. Okay. Well, we're into the overtime a little bit, and I'd like to thank you again for taking the time out of your day to, you know, chat with us, and nice to meet you as well or get to talk.
Yeah.
All right.
Thanks, Gabe.