Our next speaker, I'd like to introduce the Chief Executive Officer of Royal Bank of Canada, Dave McKay. Dave, very nice to see you.
Good to see you.
Awesome. Maybe we could start with the quarter.
Yeah.
Just because it was a bit of an outsized result once again. Basically.
It is a good thing.
It is a good thing. I mean, beat expectations. Your ROE now sits at north of 18%. Just maybe start with the ROE, actually. Are you somewhat surprised with how much it has gone in terms of the positive traction that you have seen?
No. You saw us two years ago set a 17%+ ROE target, but we kept saying "plus plus," because we knew the significant opportunities we had to drive the market-leading ROE in the country and improve upon that. If you look at the drivers of that, excuse me, is very much revenue efficiency and cost efficiency. We added 100 basis points in 2024 from 15.5% - 16.5%. Then in 2025, 16.5% - 17.5%, and now you see us moving through 2026 close to 18% with a number of tailwinds to that ROE. A few headwinds, but a number of tailwinds, like the cost efficiencies from the articulation that we had in Investor Day of our AI benefits of CAD 1 billion after costs are just starting to kick in now. We are driving an 18% ROE on a 13.5% CET1 ratio.
Still waiting for those benefits to really kick in on the revenue side, on the cost side. You will see us continue to, I am sure we will talk more about AI, up our ambition around AI. Even with that first series of opportunities are still starting to kick on the revenue expense side. We have growth tailwinds that we have seen in a number of areas. We have cost opportunities that we can talk about. When we look at where we are today and where we think we can take our business, we fully plan on continuing to expand that ROE into the plus plus plus area. You will see us either in Investor Day next year or in Q4, articulate what our next ambition is around those ROE targets. No, we are not surprised.
In fact, we think we can continue to improve upon it at a 13.5 CET1 ratio. As you know, once we get through the uncertainty of the trade friction that we are having and the economic uncertainty, and the growth footing starts to reemerge in Canada, we can start to pull that 13.5 back. Therefore, that is ROE enhancing as well. When I look at all those tailwinds on revenue cost, efficiency, CET1, returning capital to shareholders, that plus plus plus is going to kick in even more. Very excited about the story of capital efficiency, returning capital. We generate the most amount of capital of any bank in Canada, by a wide margin. I think from that perspective, to create that capital, generate the highest return on it, and be efficient, I think is a big part of our thesis. We are super excited about what we can continue to do.
The excess capital, a nice problem to have, for sure. When you think about it in terms of capital deployment, how does that current valuation dynamic impact how you sort of see the buybacks? I know in some cases you might want to be strategic, but obviously the market seems to be happy with buybacks, even at these levels. Secondly, just in terms of M&A, obviously, it would make it a lot easier to do larger M&A. Where is your mindset on that?
When you are issuing your shares or using your shares in exchange, it does when your currency is strong.
Yeah.
When we look at, obviously, we look at doing share buybacks, we are very aware of the intrinsic value of our stock, and we know what our plans are and what our ability to continue to drive our pre-tax, pre-provision and our NIAT growth forward. We continue to buy back shares at a 2% level because we have a good understanding that we feel the intrinsic value of the firm is higher than the current valuation. That is obviously a core metric in our decision-making of do we buy back. We are continuing to buy back at healthy levels, at that 2% level at these valuations, as you saw in the last quarter from our numbers, and you see in the month-to-month share numbers. Second thing is we also know that book value per share growth is also very important in the overall as another valuation metric.
There is a balance between accelerating your buybacks even beyond that, but continuing to grow book value per share. We grew book value per share at 10% in the last trailing four quarters. It would have been 12% had we not bought back those shares. We are obviously looking to make sure that we hit our book value per share growth targets as well, and we continue to do that by growing our bottom line profit growth, which we have done quite significantly. We look at both those metrics, but intrinsic value obviously is really super important. When we turn to organic growth, we have very significant organic growth opportunities in our WA growth. You saw that in the capital markets growth. You will see that in the United States in our commercial banking growth and City National there.
When it comes to acquisitions, look, we are not looking to do a transformational acquisition or a need to use our shares, even though they are strong currency. We would do a tuck-in acquisition in wealth or in the United States, or a tuck-in in U.K., or a tuck-in acquisition in commercial banking in the United States where we are going to use that surplus capital, and it will be very accretive to the shareholder. The opportunity in front of our organization is the transformation of the business using artificial intelligence. That is going to drive by far the greatest shareholder return and the focus of the management team. That is where the focus of the organization is right now. It is fundamental, and it has a huge opportunity to drive those ROEs higher, to drive a significantly higher growth rate in the bottom line.
That is where the focus is and the priority is in not making an acquisition would distract us right now, and therefore, that is where the focus of the organization is. That is how we go through capital. That is how we think about acquisitions. We are super focused on driving those core valuation metrics that have propelled our stock forward in the last 10 years.
Thanks for that, Dave. Maybe switching over to credit. Obviously, a lot of uncertainty in the market right now with respect to CUSMA, Middle East tensions, geopolitical risks seem to be elevated right now. How does that sort of inform you on your outlook on credit, what you're hearing from clients? Do you think we're in the later innings of this credit cycle? Where do you sort of see all that shaping out right now? Then maybe touch on your reserves, post the build that you had last year. Are you still comfortable with your level of reserves?
I think there's significant uncertainty in a number of those tariff-impacted sectors, obviously. So we're keeping our CET1 ratio a little higher for that uncertainty. We're running at 13.5 instead of moving it down and eating into some of that buffer. We've grown significantly, but our growth on our balance sheet has been more investment-grade than non-investment grade. We've been selective in our growth in the commercial bank in Canada for that reason. I would say our credit challenges have not evolved from tariff-impacted sectors. In fact, I just saw a report where we're seeing accelerated pay-downs in a number of those sectors as those clients kind of retrench and are very conservative and are managing their debt.
Our losses, as we've talked about publicly, have been more in the supply chain, transportation, logistics sector in Canada, because we still are in a goods recession in our economy, and therefore, the infrastructure built during the pandemic, the flow of goods has not been sufficient to fund all of that debt that was taken on during the pandemic. So we've seen logistics sector and transportation sector losses. We've had some challenges in the HSBC portfolio that we've worked through. Logistics sector as well, and a little bit of retail sector. We've worked through those. That's been a historic driver. We've had some real estate challenges in the United States that you saw in the last quarter. We're kind of working through those. Then in one specific utility in Europe that we keep talking about, that we can't wait to get through that situation.
Those have been the drivers of some of the elevated PCL, still within what we forecast. With the tariff uncertainty, it might bump along sideways. I was hoping to say, yeah, I think we're at the peak and coming down. We're certainly seeing that in the commercial book. We had a very good quarter in the commercial book other than one credit. So, we're seeing that come off capital markets. You can always have a surprise here and there, but should be normalizing. I'm a little cautious because of the escalation of the trade war right now. But what we're seeing outside of that consumer, commercial, U.S. commercial, is getting better.
Okay, thanks for that. Maybe switching over to some of your operating segments, starting with personal banking.
Yep.
That's an area where I got a lot of questions post-quarter, just in terms of the volume picking up. Is there anything, on the loan side, anything to suggest that maybe you're being a bit more aggressive now, whether on the pricing, trying to get more client acquisitions? What's happening in the personal banking business right now from a volume perspective?
Yeah, we are definitely on our front foot of growth. I think that is one of the messages you should take out of the first quarter. We did really well on growth across all our businesses. Our balance sheet growth in capital markets, our balance sheet growth in the consumer bank, both on the lending side, deposit growth in the commercial bank. You look at the volume growth, we put on over CAD 80 billion of lending growth across our consumer, commercial, and corporate banks. The sustainability of what we've done is very strong. It's less based on equity finance and some of the more transient things that are going on in the markets business. We had very strong core growth, and we acquired customers in the credit card business, which you haven't seen that growth yet.
We acquired a lot of new commercial banking customers, a lot of treasury management customers. Yes, we put on a growth spurt, and we're throwing our weight around. But I hear that. How did we use price? When I look at the roll-on, roll-loss in the mortgage business, they're the same as they were four years ago, five years ago. So it tells me that we're not using price any differently than we had before, and our competitors are using that price. We gained all this business and drove an 18% ROE, so there's nothing wrong with that. That's because we have a structural funding advantage with our deposit business, and we have a structural cost advantage. We run the consumer commercial bank at a 35% efficiency ratio. Our competitors are at 45%.
We put CAD 0.10 of every dollar of revenue to the bottom line they don't have. That's a fundamental advantage to go on the market and drive a higher ROE and win business. We're throwing our weight around, and we're going to continue to do that. You saw the volume production ratio. We're very happy in the past couple of years, but particularly in the quarter. The client wins on long-term assets in our wealth business, on credit cards, mortgages, corporate banking, commercial banking deposits. City National, 8% led kind of its peer group in the U.S. You're seeing really stable long-term growth metrics coming out of the bank, and that's how you build a bank in a sustainable growth trajectory that you expect of us.
Dave, in terms of that volume coming into that business line I'm guessing some of it's sort of monoline initially. You want to cross-sell to these clients.
Yeah.
How does that dynamic work at Royal? What's a reasonable timeline of when those customers become more fulsome customers of the bank?
Well, each business is different. We certainly have a focus when we bring a mortgage client on or a core banking client on to cross-sell within the first two weeks. At the end of the day, or three weeks. Mortgages can take a little bit longer. You've got a really short cross-sell cycle and capture that moment in truth with the consumer client. We bundle products more upfront, so you see more of that in the first six months. On the consumer side, the commercial banking side, it takes a little bit longer to bring the cash management business and the treasury management business in. So a longer sales cycle there. Similarly, on deploying our balance sheet into the investment-grade space with sponsors in the energy sector and the hyperscaler sector, in the AI infrastructure sector.
80% of that growth in the capital markets balance sheet was investment-grade, and a very different client strategy than you saw us in the last 10 years, which was a lot of sponsor-based business, but a great cross-sell into advisory and M&A on that side. That cycle around energy infrastructure, around AI infrastructure, around IPOs could take a bit longer. Each one of those balance sheet deployments have a different realization cycle. But we've proven over time, over the last decade, that we execute very well on that cross-sell. That RBC One strategy, we lead the market, particularly in the consumer commercial bank, by 30% in our cross-sell ratio. It's proven that it's a differentiated capability, which is why we invest so much upfront. It's just why you saw the consumer banking cost ratio increase.
It had negative operating leverage, which was fine because we acquired more core banking accounts than we have in the last four years. During the quarter, we acquired more credit cards. We pay for that business knowing that we have a great cross-sell cycle that has worked over a decade. We have great products. Part of that elevated run rate is, yeah, we went out in one business, which will continue to return, and we did it in the quarter at 18% with the cross-sell to come, again, enhancing that future ROE. That's kind of the tale of the tape. We're really, really excited about the customer volumes that we won, as you can tell.
This, that elevated expenses was primarily just winning customers, the pricing dynamic, and I guess short-term pain for long-term gain.
Exactly.
Okay. Just in terms of the RESL business, so real estate-secured lending, it's a big part of your book. In terms of its profitability and how it contributes to the bottom line, if you have a market in Canada where real estate-secured lending is just not growing as robustly, and it kind of lingers to that low single-digit percentage range where it has been for a while now. If that continues, let us say over the next few years, what sort of impact does that have on your ability to grow that pre-tax, pre-provision, earning line, credit aside?
Yeah, great question. It is our largest balance sheet item, right? With over CAD 400 billion in mortgages. There are a couple things. One, I do think we will get back to immigration growth in the country, or we have cooled it down. It is not going to be this low, I think, forever. So immigration growth is really important in driving demand for your housing stock. I think we have suppressed demand from the existing population, and that we have, we will get back with more confidence in a world where we reduce the uncertainty around economic growth because of the trade agreements. You will see demand manifest itself. So I am hopeful of that. As I said, our roll-on, roll-off spreads have not changed much, and I do not know with the competition whether they will change that much. Then where do you go from there?
You have to take out cost out of the business. I think with the ability to use artificial intelligence to increase our efficiency ratio, not just on the operations side, but on the distribution side. This is a very expensive distribution business, right? You pay a significant. Most banks use broker. We do not use broker, but we have an in-house commission sales team that we think through artificial intelligence, we can have a significant improvement in the return on that sales force, and therefore, we have to optimize both back office and front office cost structure to get the ROEs up in this business and to grow the bottom line, even though the number of unit sales. It is one of our highest focus in our AI use cases, is getting after our mortgage business.
Not just on back office, but that front office distribution cost is really expensive, and we have to bring that margin back to our bottom line. So I am very excited about that. So that is how I think about maybe a low-growth mortgage business, but I can drive the bottom line faster than the top line.
Okay, thanks for that. Maybe switching over to commercial banking, and I do recall last year we sat here and we talked about how the ROE was running at sub 15%, and I think year to date, you're close to 18% now.
Yeah.
That's a pretty sizable jump in only a year. Maybe just walk investors through what's changed. How have you driven that? Obviously, the volumes coming back to life are, I'm sure, a big part of that. But what has RBC done specifically to drive that ROE so much higher?
Yeah, there are a couple of things. One, you had, when it was down there 15%, we were just absorbing HSBC, and we had some credit normalization we had to go through with the HSBC portfolio and work our way through that. So that hurt ROEs in the first couple of years of HSBC. We've worked through a lot of that now, and the portfolio is performing very well. So you're seeing a credit normalization. Other than one account, we could have had even a much better Q3. So we think the ROEs can get enhanced just from a little bit more credit normalization going forward. So there's one driver. Two, you've seen very significant volume growth on both sides of the balance sheet. Deposit flows have been fantastic. We did CAD 19 million growth year-over-year in Q3.
As you saw, I think that was greater than all the other banks combined. Huge focus on deposits. You get treasury management fees with that. You get FX fees. So it's a fee-based business. It's a source of funding for our match-funded Canadian banking consumer and commercial banking division, which is really important to be match funded. So that asset is part of our funding advantage. So you're seeing great deposit growth. You saw up until the last quarter, kind of very strong commercial banking growth on the lending side. Well, last couple of years, we've moderated that a bit given some of the uncertainties in a number of sectors. So it's still around 3%, 3.5%. It's probably middle of the pack-ish, not leading the market, but overall, that growth has been good. And the tailwinds from that growth have helped improve our ROEs as well.
We're just starting to deploy artificial intelligence into commercial auto adjudication and credit adjudication. Significant opportunity to lower adjudication costs through auto adjudications, filling out spreadsheets, preparing the credit submission with AI right now. All that accelerates our time to decisioning, accelerates our response rate to the client, and takes out the cost structure of the business, and we're deploying that right now. It's built, and we just demoed it to the board. All that's to come as another major use case. I just gave you the huge use case in mortgages. You've got the use case in commercial banking. You've got all these incredible use cases. That's again, another driver of an enhanced ROE going forward. I think that's the teletape. Good growth, good cost management, PCL normalization, AI deployment for greater than 18% performance in that business.
Just in light of the tariff risk, it sounds like your corporate commercial clients in that segment are sitting on pretty healthy balance sheets. Is there anything that you think could derail that? I'm just wondering how sensitive that would be to maybe the tariff issue escalates a little bit. Is that something that you think could just completely change that trajectory on the commercial volumes that have been coming in lately?
I think, as I said, as the sectors that are targeted expand, you'll see as existing companies are retrenching a bit and being more conservative in their investment appetite and managing their own costs. As the trade war expands, yeah, more people pull back, and therefore, they're not going to borrow. They're going to pay down as they're doing today. They're going to manage their expenses, not knowing the duration of this conflict and the magnitude of the loss of those clients base and whether they can pivot their sales to another market or not. It's very dependent on each client. We work client by client going through that.
Yeah, I am worried about the expansion of this, but it's important that we get to a good long-term deal for Canada, and there's enormous benefit on both sides of the border. I think Americans are telling their congressmen the same thing, that this relationship's important to America, and it's important to Canada, and my hope is we will come back to what's good for both countries, which is where we started all of this.
Right. Here's to hope. On the wealth business, can you maybe talk about the tie-in between wealth and your other segments? I know you've been clear in the past about how the bank does tend to keep any GICs coming out of the market. Or sorry, it sort of goes into wealth. Comes out of GICs, goes into wealth. How does that tie-in work, and has that been getting better? Is it just generally been stable for a long time? But it seems like it's been a pretty big driver for the wealth business as well, keeping those assets in-house.
Exactly. We track it very closely because we do what's right for the customer, and the customer's interested in capitalizing on the momentum that's in the equity markets right now. Therefore, we call it the money in motion and the flow business. We saw significant flows from GICs in particular into long-term net asset sales or long-term net new assets gain market share yet again this quarter, and that's from the internal flow from GICs. A little bit from core checking as well. So one of the reasons you didn't see very much growth in the consumer banking overall deposit space was you saw significant flows into long-term net asset sales. So you saw quite tepid growth. In fact, it almost shrunk a little bit. So I think we monitor those flows.
It's a big part of giving good advice to the client and doing what's right for the client, and they certainly want to take more risk over the last number of quarters, including into the third quarter, and putting more money into equity returns. So I think that's very much part of how you deliver advice, whether it's in Dominion Securities and Wealth or in our branches through a financial planner and advisor. And we track all of that, and we incent doing what's right for the client. At the same time, we have our financial advisors and wealth cross-selling core banking account and private banking capabilities, which has gone exceptionally well. So the flywheel effect of always putting the one RBC hat on, whether you're a wealth advisor or a branch advisor, a commercial banker, we're always thinking about cross-selling the bank's capabilities.
That was built into our Investor Day presentation, and you're seeing that come to fruition in the significant volume growth that we're seeing in AUA, AUM. Private banking just keeps growing, and it's almost constrained by getting enough good people to go into the private bank that Kim's running. We're doing exceptionally well in client growth there. So I think that's the benefit of that cross-sell, the flywheel coming out of wealth and commercial banking.
Dave, obviously, the flows have been very strong on the retail side.
Yep.
I think institutional has had a bit of a pullback, bit of outflows.
Yep.
Last quarter. Is it just the industry dynamic of active to passive or assets being brought in-house? Is it just an industry dynamic, or is this something specific to Royal?
I think it's a mix. I don't focus on institutional quite as much. It's a much, much lower margin business for us compared to the retail side, where we make the bulk of our revenue and profitability. It's an important business. We grew it significantly with the acquisition of PH&N. It's a mix. We have seen some moves to passive. We lost one customer, and we saw some roll-off of some ultra-high net worth families into other asset classes. So it's been a mixed story there of a bit of runoff, and our net sales have been slow. The head of the business is very much aware that expectations are higher to return that. But at the end of the day, given the really thin margins, institutional is not a huge driver of our overall revenue flow. But we don't like to lose in any business that is important to our client. So, I think it's a narrow where we under perform a bit. For sure.
And then maybe can you touch on that level of profitability on the retail side? I guess when you say that it's such a profitable business, first thing that pops into my head is there any risk that maybe that fee structure sort of moderates over time? Like we've got some new entrants in the market that have picked up a lot of traction. How do you sort of see that playing out? And I know it's all about catering to the customer and what the customer wants, but it does seem like.
Yep.
There's a cohort of.
Yep.
The younger generation that wants something a bit maybe different than what's been offered in the past. Any thoughts on that?
Yeah, certainly. Competition's great, and I think it's pushing us to be better on our side. I think what consumers have responded to, what you're referring to specifically, is first and foremost a better experience. So a slicker onboarding experience, a slicker interaction with the technology, and we need to respond to that, and we are. We're building. We've launched pieces of it, but you'll see a greater launch from us. We need to improve our overall customer experience. I think that is the most important, and we've underinvested in a couple of our platforms. So we're all over that, and you'll see a relaunch and a rebranding of our approach to that. It comes with pricing where you'll have a lot of loss leaders, and you'll make your money elsewhere. We're very aware of that, and we'll respond to that in different ways.
At the end of the day, we have a deep understanding of what this customer wants and what they value, why they've moved, some of them that have left the overall banking system for these alternative offerings, and we have every capability of winning them back. Part of it's a crypto story at the end of the day, and this chapter on crypto is to be written, right? There's a lot of risks in storing crypto that everyone should be aware of. Certainly hacking risks of crypto and quantum compute risks that are coming down, that is being well articulated in the market by leading technologists who are building quantum compute right now. So that all plays into how far do you want to progress into storing crypto and other services that appeal to this audience and balance your approach.
We're very aware of what's driving that business, and our response is coming.
Okay. Awesome. Then maybe just on City National.
Yeah.
I do recall a few years ago it was all about the interest rate sensitivity and all the upside that was potentially there.
Yeah.
Then, obviously with the regional banking crisis in the U.S., things sort of changed. But now you've gotten that business to what seems to be a much better place. It's on solid footing, and it looks like you're back into growth mode. Maybe talk about the opportunity on City National.
Yeah. We are super excited about our U.S. story in general, but I'll start with City National. We made $183 million. That's almost what we made when we bought it 10 years ago. $183 million , CAD 230 million. And that's before we've taken out any of the real cost of our significant remediation efforts and our re-platforming efforts, which will start to come down the end of 2026 into 2027. So we have very significant opportunity to improve on that even before we grow the business on a profitability side through reducing our cost structure that we built up significantly, as you know, over the last 2.5 years. So cresting and taking that down. We grew the balance sheet on both sides at 8%, so you're seeing the benefits of management pivoting from remediation to growth. We are hiring teams in California.
We're hiring teams in the South. We're looking into Texas. We are in growth mode now, and you're seeing that production in 8% + growth already as those teams just start to become productive. We're growing our private banking offering. We haven't even started cross-selling jumbo mortgages into our significant affluent and high net worth wealth base. You'll see that coming as Greg talked about Investor Day. That's just about to launch. So the significant growth opportunity from the bottom line on cost and from the revenue side is just starting to kick in at City National. It is a big growth story for us, and you'll see us articulate that either in Q4 and Investor Day next year. Where the next three-year horizon is very meaningful to you as a shareholder, so excited about that.
You're seeing our announcement of our Global Transaction Banking and the opportunity to build out from RBC Clear and our Canadian transaction ability are now merged into this global transaction liquidity management, treasury management that first focuses on the United States and on cross-border. Those products are being delivered and being sold now and being enhanced through product delivery. Very significant opportunity. You'll get an update on RBC Clear in Q4. We gave you some big targets. We feel very good about them, and you'll see that in the next couple of months. Then this capital markets operation on investment banking, corporate lending, as you talked about, very significant performance in our tech banking practice and our energy practice and our FIG practice and our industrials practice. Lagged a bit on healthcare. We can do better there for sure.
The corporate lending into the investment bank advisory, very strong in the U.S. On the markets side, we underperformed in markets, as you saw. Not happy about it. We missed a big part of that prime equities financing cycle in the U.S., and we'll capture a bit more of it. But what we've built in capital markets in the U.S. through balance sheet, through cross-selling with advisory, is very sustainable and stable because of that process, and therefore we think the U.S. platform has a great opportunity going forward. Great progress. You can see why, circling back, why I'm so excited about improving on that ROE of 18% that we talked about. With everything going on in AI, with growth, with City National, with Global Transaction Banking, which is off balance sheet, low capital accretion with Wealth Management, with the cross-sell.
When you think about the organic momentum we have, more efficient growth, we can be even more efficient in the use of our capital and drive premium growth at an even higher ROE. I think that's what gets me super excited about the next 12 months.
Okay. Thanks for answering my final question.
Well, it's.
Which would've been on the capital markets business.
Okay.
Maybe I'll just turn it back over to you, Dave, for maybe some quick thoughts.
I think that was it. I think I kind of wrapped up that this is a great ROE story. You saw sustainable client growth. At the end of the day, huge opportunity. We didn't really get into AI, and then I touched on some of the use cases. Our ambition and our conviction around how AI can make our employees more efficient, how we can drive a higher ROE from it, how we can take out cost, is at multiples of what it was when we had our Investor Day two years ago and what it was a year ago. This is a foundational technology that's going to transform our business.
Awesome. Well, we'll wrap it up here. Thank you very much, Dave.
Thank you. Thanks, everybody.
Good insights and fantastic having you. Thank you, Dave.