Earnings Call: Q3 2018

Aug 22, 2018

Good morning, ladies and gentlemen, and welcome to RBC's conference call for the third quarter 2018 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Dave Mun, Head of Investor Relations. Please go ahead, Mr. Mun. Thanks, and good morning. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer. Then we will open the call for questions. To give everyone a chance to ask a question, please limit your questions and then re-queue. We also have with us in the room Neil McLaughlin, Group Head of Personal and Commercial Banking, Doug Guzman, Group Head, Wealth Management and Insurance, and Doug McGregor, Group Head, Capital Markets and Investor and Treasury Services. As noted on slide 2, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. With that, I will turn it over to Dave. Thanks, Dave, and good morning, everyone, and thank you for joining us. We reported record earnings and record revenues in the third quarter against a strong economic backdrop. We have been investing to grow organically in our key markets, and our investments are paying off. All of our large businesses saw strong earnings growth in the third quarter, and we had market share gains in our core franchises. Our focus on risk and cost control is leading to strong credit quality, as well as efficiency improvements in our retail banking and wealth management businesses. We are also managing capital efficiently to drive a premium ROE and long-term shareholder value. Our capital ratios grew in the quarter, even as we invested to grow client relationships, and our CET1 ratio is now over 11%. I am pleased to announce a 4-cent increase to our dividend this morning, bringing our quarterly dividend to $0.98 per share. Before expanding on our results, I would like to touch on the macro environment. Globally, we are seeing rising protectionism and trade uncertainty, which is translating into some volatility in financial markets, as well as instability in countries like Turkey and Venezuela, where we do not have any material direct exposure. Although geopolitical and trade risks have risen, our core markets remain stable. GDP growth remains healthy, and employment trends remain strong in North America for a near-term outlook. Against this solid economic backdrop, our Canadian banking business generated record revenue this quarter, surpassing $4 billion. We are leveraging our unique assets, such as scale and distribution and payments, to drive client activity and market share growth. For example, we service our clients holistically across our broad product suite, including deposits and investments, which are growing over 7%. We are seeing strong industry demand for commercial credit, and the investments we have made in commercial banking continue to support double-digit business loan growth. There has been a lot of discussion on the recent disruption in the rewards and loyalty space, including the reduction of average interchange fees by 10 basis points starting in May 2020. We believe that having control over our proprietary loyalty program, along with leading scale and partnerships, makes RBC Rewards a unique and privileged asset. Given the depth and breadth of our leading program, we have the flexibility to offset much of the potential impact from the reduction in interchange fees. We offer a comprehensive and superior value proposition to our 5 million RBC Rewards customers with significant scale and partnerships. This includes being able to use points to pay for virtually anything at the point of purchase, the first loyalty program in the country to provide this level of value and flexibility. With card purchase volumes up 11%, we are growing organically and at a premium to the market. In wealth management, we achieved another record quarter for AUM and revenue. We increased our advisor base again this quarter, which is one of the industry's largest and most productive advisor bases. Advisor trust, a strong distribution network, and strong product performance are key to driving net sales, and RBC Global Asset Management continued to capture outsized market share. We generated positive mutual fund inflows in a very tough quarter for the industry, which saw net redemptions in many Canadian asset classes. In recognition of its advisor services and innovation, RBC Global Asset Management was awarded Fund Provider of the Year by Wealth Professional Canada. In U.S. wealth management, our strong momentum continued. This business now represents almost 60% of total U.S. revenue, and we expect a higher contribution from this business to overall earnings in the future. We added commercial and private bankers to our growing teams in Nashville and Atlanta, and we further diversified our commercial banking portfolio by adding to our professional services and aerospace teams, and we expect strong loan growth to continue at City National. During the quarter, City National also announced the acquisition of Exactuals, based in Los Angeles. The company is a unique payments provider for the entertainment industry, leveraging artificial intelligence tools to provide innovative payment solutions to clients of all sizes. Our two companies have had a strong partnership over the years, and we look forward to helping the firm continue its growth. Our capital markets business generated very strong results this quarter. We supported our clients' financing needs across the globe and generated record revenue in corporate and investment banking. We have been hiring top-caliber bankers to expand our presence in the U.S. and in Europe while leveraging past investments in these growing regions. This has led to more relationships with larger global investment-grade clients. For example, this quarter we acted as a joint book runner on Vodafone's $11.5 billion bond offering, one of the largest U.S. high-grade offerings this year. We were also appointed as joint lead arranger on Walt Disney's $36 billion debt financing to support its acquisition of select assets of 21st Century Fox. Our trading businesses also performed well, and we generated higher revenue in equities trading. This was underpinned by strong client engagement in a constructive environment, award-winning equity research content, and an innovative trading platform. In conclusion, we continue to execute on our strategy to invest prudently for sustainable growth and strong returns for shareholders. I am very proud of our continued innovation across the organization. At our Investor Day in June, we introduced our RBC Ventures platform, which is focused on reimagining the role we play in our clients' lives. To date, we launched nine ventures and have already registered over 200,000 users, even with limited marketing and its early stages. Another successful initiative is our RBC Amplify Student Program, which provides students with real-world business challenges to solve and allows us to build a talent pipeline around the world. This summer, the program generated 15 patent applications, which is up 15% from last year. Overall, I am pleased with how our progress is paying off with record results this quarter. We have met our financial objectives year-to-date. We are well positioned to meet those objectives for the full year. Before I conclude, I would like to comment on the wildfires impacting a number of regions, including British Columbia and California. It is a devastating situation for many communities across North America. We are committed to supporting our clients and employees who are being impacted. The efforts of first responders and the acts of kindness from local teams and neighbors speak volumes about the difference we can make when we pull together to support our communities. With that, I will now pass it over to Rod. Thanks, Dave, and good morning, everyone. Starting on slide six, we had strong third-quarter earnings of CAD 3.1 billion, up 11% from last year. Diluted EPS of CAD 2.10 was up 14%. We had higher than normal severance costs last year, which provided a lift to earnings growth this quarter. This was mostly offset by a CAD 90 million increase in PCL on performing loans, which I will touch on shortly. Revenue from retail banking was bolstered by strong client volumes and rising rates, and our wealth management franchise continued to benefit from strong net sales and market appreciation. Our expenses were up 6% from a year ago or 8% excluding the severance we took last year. While we have been investing strategically in technology and ventures, we have delivered strong operating leverage this quarter in both Canadian banking and wealth management. Our investment discipline is leading to revenue growth opportunities in our core franchises, and we expect to drive efficiencies as we set out at our Investor Day in June. The increase in PCL on performing loans largely reflects accounting rules as well as solid volume growth. Cautionary elements were reflected in our stage 1 and 2 provisions as external risks to the macroeconomic outlook have risen. The complex nature of IFRS 9 accounting creates quarterly volatility despite strong underlying fundamentals, and I would point to our year-to-date PCL on performing loans, which was just CAD 79 million or two basis points. Our credit quality remains strong, as evidenced by lower impaired loans, continued low PCL on impaired loans, and overall favorable credit trends. Our effective tax rate was slightly above 20% in Q3. Given our business mix outlook, we expect our total effective tax rate to be near the low end of a 21%-23% range over the course of a year. Turning to slide seven, we have added U.S. disclosure to reflect the importance of this geography as a key driver of our growth strategy. Earnings in the U.S. were up 30% from last year on a USD basis as we continue to invest in top talent and win business. Turning to slide eight, our CET1 ratio grew to 11.1%, up 20 basis points from last quarter. Our strong internal capital generation in the quarter was partly offset by higher RWA, reflecting improved growth in client relationships while maintaining our strong risk profile. Moving to our business segments on slide nine, Personal and Commercial Banking reported earnings of CAD 1.5 billion, and Canadian banking net income of nearly CAD 1.5 billion was up 11% year-over-year. This was driven by an 8% increase in revenue from higher spreads, reflecting rising rates, as well as solid volume growth across most products, including strong card purchase growth as well as higher investment AUA. As Dave McKay mentioned, we have seen a healthy normalization in Canadian housing, and our mortgage portfolio continues to grow. We saw mortgage growth of nearly 6% year-over-year and increased renewals of nearly 92%. Net interest margins of 2.74% increased 13 basis points year-over-year and were flat quarter-over-quarter. We had expected some NIM improvement in the back half of this year. Although this is still possible, mortgage pricing competition has increased, and if this persists, then the benefit from a Q4 rate hike could be realized in Q1 instead. For now, we expect NIM expansion of up to 3 basis points over the next two quarters. Recall that we typically see prime-BA spread compression in the weeks ahead of an expected Bank of Canada rate increase, putting temporary downward pressure on margins. This happened in Q3 and may happen again in Q4. Turning to expenses, we continue to make thoughtful investments in talent and technology to support digital investments and long-term growth in our Canadian banking business. Our non-interest expense growth of 3% year-over-year was partially offset by higher severance in the prior year. We recorded positive operating leverage of 5%, or 3.7% if you exclude severance. On a year-to-date basis, our reported operating leverage was 1.3%, or 2.7% excluding severance, the Moneris gain last year, and the Interac gain this year. We expect our operating leverage to be at the high end of a 2%-3% range in the near term. Turning to slide 10, Wealth Management reported earnings of CAD 578 million, up 19% year-over-year, driven by growth in both our U.S. and non-U.S. businesses. Cash earnings were CAD 626 million. This quarter also included a gain related to the sale of a mutual fund product and the transfer of its associated team, which was mostly offset by a loss on an investment in an international asset management joint venture. Excluding the JV loss, global asset management revenues were up 5% due to higher AUM, driven by capital appreciation and net sales. Canadian wealth management revenue was up 10% as a result of higher fee-based revenue. This was driven by higher fee-based assets due to capital appreciation and solid net sales from referrals, as well as continued momentum from strategic hiring. We continue to drive down the efficiency ratio of our non-U.S. wealth management business to 68.5% this quarter, down from over 70% a year ago. We focus on positive operating leverage in every segment, and operating leverage for total wealth management was 2% in the quarter and 3.8% year-to-date. In U.S. wealth management, including City National, revenue was up 14% year-over-year in USD due to strong 15% loan growth and double-digit loan originations at City National. We also saw benefits from higher U.S. interest rates and the U.S. tax reform, as well as higher fee-based revenue. Excluding the gain mentioned earlier, revenue was up 11%, and net income from this business was about $200 million, and you can see this disclosure on slide 23. Moving on to insurance on slide 11, net income of $158 million was down 2% from last year, reflecting increased expenses supporting sales growth and client service activities, and partly offset by improved international claims experience. On slide 12, Investor and Treasury Services earnings of $155 million were down 13% year-over-year. This was largely driven by lower funding and liquidity earnings as the prior year benefited from interest rate movements. Our investments in technology also grew in order to drive growth and efficiency. Revenues in our asset services business continued to benefit from improved margins, strong sales, and growth in client deposits. In capital markets on slide 13, earnings of $698 million were up 14% year-over-year, marking our second highest quarter. In addition to higher revenues in our equity trading business, we saw higher loan syndication in the U.S. on higher volumes and higher equity origination activity in North America, despite a decline in global fee pool. There was also moderate growth in our North American corporate loan book after a period of portfolio optimization. Looking ahead, we have strong RWA growth with a robust deal pipeline as we hire new bankers, win business, and gain share with no change in risk appetite. In conclusion, we are pleased with our results this quarter as we continue to invest in future growth for our clients. With that, I'll now turn the call over to Graeme. Thank you, Rod, and good morning. During the quarter, we continued to see a strong macroeconomic backdrop in Canada and the U.S., as both economies exhibited low unemployment, steady inflation, and solid GDP growth. This macroeconomic backdrop continued to deliver a positive and stable credit environment, and our baseline expectation is that it will continue in the near term. However, as Dave mentioned earlier, there is some uncertainty related to trade and other geopolitical events. As such, we've taken this uncertainty into account in our credit provisions on performing loans this quarter. We are actively monitoring our exposure to trade-related developments and remain confident that we can manage within our risk appetite. Overall, our credit quality remains strong, as evidenced by PCL and impaired loans, as shown on slide 15. Slide 16 shows our PCL on impaired and performing loans by business line. In Canadian banking, PCL and impaired loans were relatively flat quarter-over-quarter, with lower PCL in commercial offset by personal lending and HELOC. Caribbean banking also had lower PCL on impaired loans. In wealth management, PCL on impaired loans decreased CAD 10 million from last quarter, primarily reflecting recoveries associated with loans returning to performing status at City National. In capital markets, the quarter-over-quarter decline was driven by recoveries on a few accounts, as well as low levels of new impaired loans. As mentioned earlier, the increase in PCL on performing loans reflects both volume growth as well as a greater uncertainty in the macroeconomic outlook. Year-to-date, PCL on performing loans is CAD 79 million or two basis points, which is largely in line with the growth of our portfolio. Turning to slide 17, gross impaired loans have declined to a relatively low level of CAD 2.3 billion. This was largely driven by our wholesale portfolio with repayments, loans returning to performing status, and low levels of new formations all contributing to the decline in the quarter. Our gross impaired loan ratio of 40 basis points was down seven basis points from last quarter. On slides 18 and 19, we have more detail on our Canadian banking portfolio. Consumer debt levels have made households more vulnerable in the event of an economic downturn. However, rising rates in the cooling housing market have tempered growing consumer debt, leading to a slight improvement in consumer debt-to-income levels. We continue to focus on consistent and prudent underwriting standards and portfolio monitoring practices, ensuring resilience through all phases of a credit cycle. Overall, we are pleased with the credit performance of our lending portfolio. We expect PCL on impaired loans to largely be in line with our ratios year-to-date, although we may not see the same level of recoveries in our wholesale book that we saw this quarter. The baseline for PCL on performing loans should be aligned with portfolio growth, though we may experience some volatility on a quarterly basis. Together, we expect our PCL ratio in the near term to be at the low end of our typical 25 to 30 basis point range. With that, operator, let's open the line for Q&A. Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making a selection. If you have a question, please press *1 on your telephone keypad. At any time you wish, you can cancel your question by pressing the # sign. So please press *1 at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. The first question is from Ebrahim Poonawala from BofA Merrill Lynch, Bank of America. Please go ahead. Good morning. Rod, I just wanted to follow up on your comments on the Canadian net interest margin outlook. In terms of you mentioned some pressure on the mortgage lending front. If you can help us understand as we look out over the next year, do we need overall volume growth for the economy to pick up that there's less competition and spreads both on the asset and the funding side get better? Or do we need a change in sort of the yield curve to get sort of margin back to kind of what we previously expected? Does your update today change the disclosure you provided at the investor day where you kind of laid out your NII expectations through 2021 from exit current and future rate hikes? Thanks, Ebrahim. On the last question, no, our outlook has not changed. That is partially because the outlook for interest rate increases in Canada is a little bit higher than it was in June. I would say that there's a partial offset given the pressures that I outlined, which are twofold, and you asked if it was pricing and/or yield curve, and it's both. On the pricing side, certainly the competitive pricing is there, but part of that is driven by the yield curve. If you look back three months when we gave the prior guidance, the overnight rate is up 25 basis points. The three-year swap rate is down four basis points. The five-year swap rate is down 16 basis points. As a result, the five-year fixed rate mortgage pricing in the market has not changed over that three months. While you had an increase in the overnight rate, the mortgage pricing did not increase. Part of that is competitiveness and volume driven, and part of that is the yield curve. As you look out and try to anticipate what's going to happen in the future, I would look at the relationships between that overnight rate, the three-year and the five-year to look towards that. I would also say that the deposit betas have not behaved differently than what we would've expected. Understood. Just as a follow-up to that, anything on the commercial loan spreads? Obviously, all banks have seen strong growth there, but sort of tying it to Dave's comments around business investment, NAFTA overhang, et cetera, do we start seeing pressure on commercial loan spreads? Have they behaved differently from mortgage over the last year? They have behaved better. That is a competitive market as all these markets are. So there is always pressure there, but they have held up better, in terms of spreads, than the mortgage side. Got it. Thank you. Thank you. The next question is from John Aiken from Barclays. Please go ahead. Good morning. I appreciate the disclosure that you added in on the U.S. side of the equation in terms of the total revenues and earnings. But it begs the question, does Royal actually have an optimal mix that you are looking out towards, call it longer term, 5 years down the road, in terms of contribution from the U.S.? And within that, do you see any shifting of the components within wealth management and capital markets within that contribution? Thanks, John. It is Dave. I will start with that question and maybe Rod wants to chime in. Certainly, one of the reasons we made the acquisition of City National was the ability to lever our existing wealth platform for growth. And we are very excited about the growth opportunities you saw Outstanding growth in City National, not only the balance sheet growth, but also the P&L growth margin expansion. A very exciting story and a very exciting growth opportunity. The answer is yes, we do see increasingly a shift as we scale that operation in the U.S. as we move into new markets, as I talked about, whether it's Nashville or Washington, expand in New York. We see a geographic expansion of that market. I would see the overall mix at the bank level as you see strong capital markets in U.S. wealth opportunities for growth. I would also say within the U.S. market, you should see accelerated growth opportunities in U.S. wealth on the organic side. Yes to both at the top of the house and within the U.S. But Dave, no specific target that you're looking to achieve within a sustained period of time. The flip side to that is then if the U.S. continues to grow, there's no concern about being on a relative basis overweight the U.S. relative to the Canadian contribution. No, I think we don't set targets in the context of changing our strategy. We're trying to grow long-term client franchises with deep client relationships with multi-product cross-sell from capital markets through to our commercial and high net worth customers, and we see strong growth opportunities. Given that it's a good return on investment for us, it represents a deep and attractive marketplace. We don't bound the growth there from that perspective. They're quality clients, quality assets, good credit risk. We like that customer franchise and we want to grow it. It's a deep market. Thanks, Dave. I appreciate the color. I'll recue. Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Hi, good morning. I just wanted to go back to the Canadian margin. In Q2, you mentioned that if mortgage balances grow at half your expected rate, that the impact on 2019 revenue would be less than the benefit from one BOC rate hike. I'm wondering whether you'd still stand by that statement or that changes in light of sort of discussion on margin pressure that you mentioned. Yeah, I'd say that still holds. If you look at the margin expansion over the course of the year-over-year is 13 basis points, so that's given us quite a lift in net interest margin and revenue. I would expect continued upward pressure on that, which is a good pressure to have. As I also mentioned, our mortgage growth rate has held up at just shy of 6%. We had talked about if that had fallen by half, the impact on revenue in the year would've been less than the benefits from the rate increase, and that still holds. Thanks for that. If I could just ask about capital markets. U.S. financial regulators are proposing changes to ease the Volcker rule. Some U.S. banks have come out opposed to that. Wondering what your view is, and does this potential change create an opportunity for Royal or is it a headwind? What's your view? Well, I don't think any of the contemplated changes, at least the ones that I've read about and heard about would cause a problem. I think the Volcker rule's complicated and it's difficult to manage because of the issue of inventories and client demand and really just being compliant. I would say there's a significant expense in the compliance around Volcker, and hopefully we're going to get some relief from that. I don't think we'd go all the way back to prop trading. We had a significant business before the Volcker rule came in, but I don't see that happening. But I think any of the changes that are contemplated will probably just give us some relief on some of the compliance costs. Thank you. Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead. Thanks so much. A couple for me. First question on the capital schedule and capital accretion. When I look through the schedule on the slide, it looks like Capital Markets drove a lot of the RWA increase in the quarter. And in the supplement, was it on page 30, it looks like Capital Markets drives about $6 billion of the closer to $10 billion increase in RWA this quarter. When looking at the division, loans are up a couple of billion dollars. So can I just get a better sense? Is the rest trading RWA? Is it currency? Is it a bunch of things? Can you help reconcile that for me a bit? Yeah, it's Doug. The biggest other contributor to that RWA increase is underwriting. In our U.S. business we've been quite active as the market's been very active, both on the M&A side and the buyout side. Our leverage finance business has a number of mandates where we have put on underwriting risk and will sell down over the next couple of quarters and receive, we expect significant fees for that. That's the largest other contributor away from the core growth in the loan book, which has been growing more than it has the previous couple of years. Is that more on the debt side? Yeah. You mentioned leverage, yeah. It's finance for private equity customers principally and some underwriting for corporates and M&A transactions. As I referenced in my comments, Steve, right around Disney and others. Okay. Just a follow-up probably for Rod. In your comments, Rod, you mentioned accounting rules as the driver of the CAD 90 million of Stage 1 and Stage 2 PCLs. In just a little more detail, I am wondering how, as you went through the process and the Stage 1 and Stage 2 numbers came out as they did, how prescriptive was that process? We are early days here in terms of understanding the new PCL standards and testing it through time, but how much of that comes through judgment versus sort of a prescriptive approach to how the PCLs flow through? Yeah, that's a great question, and as you look at the CAD 90 million increase on the Stage 1 and 2 for performing loans, we wouldn't have had that last year. I would think that as you compare performances globally, that you will see inconsistency there because there is a lot of judgment. The way that certain banks would interpret some of the tariffs and global trade risk, as well as the fact that many economists are calling it we're at full employment or below full employment in the U.S. and Canada, with the addition of the cycle being so long, with the addition of interest rates moving up, there is heightened risk. It's not to say that we're in the ninth inning of a nine-inning game, but maybe we're in the eighth inning of a 13-inning game. Who's to say, right? Each bank is going to apply judgment against those risk factors differently. There's no central clearing house for providing these sorts of assumptions. So, we might have a CAD 90 million increase and another bank might have a CAD 20 million decrease. So I would encourage you to maybe look past some of that and look at the core underlying trends, and our trends are quite strong. We did feel that it was prudent this quarter to build some of that Stage 2 because of potential storm clouds that aren't there now, but could be there in the future. If you also bifurcate it between Stage 1 and Stage 2, think of it about a third of it being growth in the portfolio, and two-thirds of it being that prudent element that I mentioned. Okay. Thanks for that, Rod. Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Good morning. I actually want to follow up on this Stage 1 and 2 stuff. Is there any additional granularity you can provide on which portfolios received the increase? We can see that Canadian P&CB took about two-thirds of the CAD 90 million. Just wondering if that gets filtered out into small business loans or commercial loans or anything, or credit cards, stuff like that. Yeah. You can probably see a little bit of it in Footnote 5 of our report to shareholders. Okay. You can see kind of the flow of that across the different portfolios. There is some movement there between Stage 2, Stage 1, and then Stage 2 over to Stage 3. It's not a simple chart to understand, but I would say that it is across the board and it was applied ratably or evenly across the portfolio, both on a commercial and a retail basis, as well as on a secured and unsecured basis. Okay. Is there any merit to looking at these allowances in relation to your loan book? So you're at about 40 basis points or so of gross loans. Is there any metric or, I guess it's cycle dependent, but is there a target of some sort that you guys have? There's no target because it will change over the course of a cycle. If you look at coverage ratio, I would also encourage you to add in the expected loss Basel deduction that we have as part of our Tier 1 capital, which is a common equity, which is over CAD 600 million in addition to what we have in our GAAP books, and look at the coverage ratios. An interesting way to look at that is that you would expect the coverage ratio to move up in terms of versus your trailing 12 months write-offs. You would expect that to move up as the unemployment rate moves down, and there would be an inverse relationship because as unemployment moves up, your write-offs will also move up. So there's a couple of tools that you could employ to kind of look at that. But I would say our coverage ratios are quite strong on a historical basis right now. Got you. If I can ask about the cards, your growth in the cards business has been phenomenal, both in the fees. Phenomenal, maybe that's an overstatement, but strong, let's put it that way. Positive. Yeah. Okay. Are you seeing anything on the consumer behavior side, like substitution using more credit card balances that they have available as opposed to HELOC? Are they carrying higher balances than they normally would, making minimum payments? Or is this really net new customer growth that's driving that? Yeah. Thanks for the question. I think there's a couple primary drivers for the performance you're seeing. We're not really seeing any trends I would point to in terms of product substitution from HELOCs and that sort of thing. What we're really seeing is growing our customer base, actually acquiring more customers, and then we are seeing customers consolidate their spending onto a couple value propositions that we think are quite strong. Our Avion value proposition continues to lead the marketplace really powering our growth. Our RBC Rewards program gives those customers an incentive to consolidate that spend. The third value proposition in our WestJet RBC Mastercard, we're seeing great growth there. Customers, especially out West, are finding that a really attractive product, and we have a great partner helping us to originate those new customers. So those would be the primary drivers. Okay. Thank you. Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead. Thank you. Good morning. A couple on credit to get started, and probably for Neil originally. Rate hikes over the last year for the Bank of Canada, there's now been four of them. We've spent a lot of time talking about the benefit to net interest margin. There is some risk that the longer we go in a tightening cycle, we start to see more pressure for consumers in terms of their ability to manage debt loads. Frankly, we're not seeing any sign of that in your numbers. Maybe more qualitatively, what are the ratios or what are the metrics that you look at internally, in terms of the ability of your customers to handle the increased interest rate expense that they face with Bank of Canada hikes? Yeah. Thanks for the question. There's a couple things we would look at. Obviously, the traditional metrics like delinquency and roll rates in terms of severity of delinquency, of which I think we're feeling really confident about. Qualitatively, we get a lot of feedback from our frontline sales advisors that these changes in interest rates in the housing market have been really well telegraphed, that consumers are adjusting proactively. We were expecting to see customers be a little bit more caught off guard, and our frontline sales advisors really aren't sharing that. The customers are thinking about either extending amortizations if they need to manage the payments on mortgages. They're thinking about, frankly, just buying less expensive homes and actually moving down. In terms of our renewal rates, we're actually seeing a real nice increase in our renewal rates on our mortgages. That has been a real positive. It seems a little too simplistic to ask it this way, but is there an interest rate level in terms of number of hikes where you start to have more concern about the ability of customers to finance? As I say, we have put on 100 basis points over the last year, and it does not look like your metrics are any different at all. If anything, they seem to be getting stronger. Yeah. We do look at our TDS ratios, and we are seeing some pressure there. The pressure on TDS ratios was not as high as we were expecting. Again, we attribute that back to customers really self-adjusting. It is something we keep an eye on. We have our advisors out there talking to clients, reaching out and making sure they can manage the credit we provided them. I will wrap up a similar credit trend with Doug. Given the global scale of your business, you are probably the best person to talk to about this. In conversations with investors, there seems to be this emerging view that we are in a later cycle from a credit quality perspective, and I guess it has been a decade since the last real credit cycle, and it is fair to say that a lot of that weakness originated in the U.S. capital market space before spreading into the broader economy. At least in terms of some of the transactions that you have seen, maybe that you have passed on, are you seeing what I will call more stretching on the part of banks to get transactions done, or have things been still relatively sanguine in terms of the risk appetite that investment banks are participating in, and maybe more specifically to bring that to RBC? I would say in the investment-grade space that I'm not seeing significant credit deterioration. We obviously saw some problems going back over a year ago in the energy space when the commodity price came off significantly, but we've kind of worked through that, and so things are back in line there. There's a lot of talk about the leverage finance space and EBITDA multiples and financing leverage multiples on these deals. I would say there's a lot of scrutiny around that. The regulators have been very vocal about it and have been communicating with us regularly and looking at the deals we're doing. I would say I don't think that's out of hand right now. Clearly, valuations are up in the leverage space, and leverage multiples are up. But we look at each transaction one at a time. We sell that risk. We underwrite risks that we like. If we don't like the risk, we don't do it. The book right now is really quite good, and we'll just continue to be careful and do what we do. Thanks for your time. Thank you. The next question is from Robert Sedran from CIBC Capital Markets. Please go ahead. Hi, good morning. Just first, one quick follow-up on the domestic margin. The renewal rates have been mentioned a couple of times, and I am wondering if you are seeing the better margin that was anticipated on some of those renewals, considering some of the changes under the revised B-20. Thanks for the question. It's Neil. We have seen a better margin on the renewals. I think the bigger driver in terms of the performance of the book has been we have seen an over 200 basis point increase in those renewal rates. Some of the competitiveness, I would say, we are seeing now starts to make us question if we continue to see the trend, but we are quite happy with the 92% or the over 90% that Rod had mentioned. When you talk about the pricing pressure, it's more on the client acquisition front then? It is. Okay. Just a quick one for Doug. When I look at the or maybe it is for Rod. When I look at the average daily trading, I see a pretty big spike on the last day of the quarter, and I do not know if that is accounting, timing, or just a really good day. I also see through the quarter, just kind of eyeballing it, a pretty meaningful drop in VaR over the period. Could I get maybe a bit of an explanation on both of those, please? It is Doug. The trading on that last day was a trade in our equity derivatives business with a significant counterparty in Europe, and it was just a structured trade that had a significant payoff. That was much of the results for that day. We work months to get those trades positioned and discussed with the client, and it just really happened to occur on that day. In terms of VaR, part of the reason for the VaR coming down as much as possible is two things. One, we have just got less complex trading books than we ever had, and less risk, really, in our trading books. The second thing is the data set that you are using to calculate VaRs move through the financial crisis period. You are getting calculations that are just lower as a result of that. Okay. Thank you. Thank you. Next question is from Scott Chan from Canaccord Genuity. Please go ahead. Good morning. Just a few questions. There has been a lot of questions on the Canadian margin, and I was just wondering about the U.S. margin, which continues to be robust, looking at the sequential increase in NIM, and maybe talk about the near-term outlook there and what we can kind of expect on the U.S. front. Yes, it is Rod. I will take that. You can see the NIM movement on page 23 of the slides, as you pointed out. It has been strong, and the outlook in the U.S. is for continued increases, despite the tweets that are out there. If that continues, we would expect there to be continued upward pressure on industry beta on deposit pricing in the U.S., which has impacted us a little bit less than some of our peers, and then continued improvement on the loan margin. So we would expect to see a continued benefit from that, and we included that in our investor day expectation, and nothing has changed on that front. Okay, great. Scott, what I would add to Dave here is that one of the reasons we acquired Exactuals is to continue to build out our payments franchise, defend and grow value for our entertainment clients, but also create a source of lower cost, lower beta deposits in the future. So investing in payments in Canada and the U.S. has been a big part of the strategy, and therefore, the deposit growth we are looking for is at a lower beta deposit. And I think that has been City National's success, is that they are a strong core payments bank and core franchise bank, and therefore, we have seen lower betas to date than maybe some of the industry. Having said that, you are seeing a little bit lower growth in our deposit side because high-net-worth customers and ultra high-net-worth customers are putting their money to work in different ways, and we are seeing that across competitors in the industry. And is the- You want to follow up? Is the payments acquisition driving the employee increase? If I look at the FTE, it was up 4% quarter-over-quarter in both Canada and the U.S. If I look back at last quarter, it has been pretty much flattish for the past two years. Maybe just some explanation just on maybe if it is organic or inorganic growth on the FTE line. City National has not made acquisitions other than Exactuals. It has not closed, so it would not include FTE numbers in this quarter. I would say, if you look at FTE growth, it is on two fronts. First, it is on we are hiring private bankers, we are hiring commercial bankers, we are expanding into new markets, we are growing our existing footprint. But we are also beefing up the back office for future growth, particularly on the mortgage side, as we have a new mortgage team, and we are building out the capability to accelerate our mortgage growth. I do not know if you noticed, but our mortgage growth was 19% this quarter, year-over-year. You are starting to see the strategy just play out now. And we have strong ambition to increase customer acquisition using jumbo mortgage strategy. We had to build the back office to create the type of high touch, high net worth experience that our target customers expect. That is part of the cost structure. And obviously, as we went through the CCAR process for the first time, public CCAR, there is some expense base that had to go into that to build our regulatory compliance for that CCAR process. Those are kind of the three fronts where we have been investing heavily in this franchise for growth, for strong infrastructure, and yet we still delivered almost a 60-plus percent growth target year-over-year. So very happy with the progress of the U.S. Wealth franchise. Yeah, Scott, it is Rod. I will just add, if you look at the supplement on page 11, you will see two things. One is the growth year-over-year, Q3 to Q3, 2016 to 2017, and 2017 to 2018. It has been fairly consistent, and a lot of that growth appears to take place in Q3 because of summer students. So there is some seasonality to it. So I would encourage you to look more year-over-year, and the growth, I think, over most of those time frames has been more consistent and not inorganic. Got it. Thank you very much. Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Thanks. Neil, you talked about. I think you basically mentioned there's a little bit of money in motion in Canada. You talked about the debt service ratio being helped a little bit or not as bad as you had anticipated. Your deposit growth, probably one of the better deposit franchises, but it's kind of a little bit below your loan growth, at least outside of the commercial space. Can you talk a little bit about the dynamics in retail deposits and what you see happening there over the next, call it, four or six quarters? Sure. Thanks for the question. Maybe start on personal. We've shared that our personal core banking product is critical to us. We're seeing good growth there. Our new client acquisition in the personal market space is up over 10% year-over-year and benefiting from more activity this year. We are seeing quite a marked shift in terms of personal savings going from our high interest savings account into one year cashable GICs as customers look for a substitution there. And the trade-off in terms of the expected growth has been almost one for one. So we're seeing that as a real substitution effect. In terms of on the business side, we feel quite good about business deposits. Continue to see growth across all the segments from small business up into our larger business customers. Spreads, we have had a little bit of more competition than expected for our largest interest-bearing deposits on the business side. Other than that, pretty much as expected. In terms of growth, I think one of the things we're focused on is that core checking account growth, and that will be our focus for the next four quarters. Likely expect to see, at least in the near term, that continued substitution effect on personal savings into GICs. What about on the credit side? Are people paying down debt at a bit of a higher rate than they would have in the past? I wouldn't say that we've seen that trend in any material way, no. Okay. If I can just sneak one more in for on the PCL side. The stage 1, 2 kind of build up, if you will, in anticipation of some macro or geopolitical type stuff that you mentioned. If you had to think about where the needle is on that geopolitical factor alone, you mentioned Turkey, you mentioned Venezuela, I guess tweets and all of that stuff is part of it. Just to try and gauge it, given what we know today, is the direction arrow or is that factor at a 9 out of 10 or a 5 out of 10? I'll start, and Graeme can also add in. I'd say it's much lower than that. I'd say the economic outlook is strong, it's favorable, it's robust across Canada, across the U.S., which are larger markets. You're seeing a little bit of slowdown in Europe. But in the core European markets, it's still seeing growth. I would not say that it is at a high rate. I'd say people always worry about things. Last 10 years of bull market, people have had something to worry about every year, and it's consistent and it's natural. I would not say Just to clarify, I wanted to try and disaggregate the credit cycle from the geopolitical factor. I know they're probably both one and the same as you talk to us about it, but I think you've made a good case that the credit cycle has still some room to run. With that said, you've still increased because of, I think, ultimately some geopolitical concerns to stage 1 and 2, and I think you specifically mentioned Venezuela, Turkey. I'm just trying to get a sense for if that's as bad as it gets on the geopolitical factor, or it could get way worse, I guess, with North Korea and a variety of other factors. That's what I'm trying to figure out. Where are we on that tail risk type metric on the geopolitical scale? Sohrab, I would also add NAFTA in there as probably more of a primary driver of the stage 1, stage 2. When we kind of sat down and think about the impacts of macro drivers on our portfolio and our credit quality, we talk about more things like NAFTA and trade agreements and auto tariffs, which were still at the time of this cycle. Now recently, in the last couple of days, it seems to ease off. So there's volatility around these macro factors. But at the time we made these judgments, there was uncertainty around things like NAFTA. I would say things like Venezuela and Turkey had nominal impact. As I said, we don't have direct exposure to those countries. I mentioned sources of volatility in the market, but not weighing heavily on our decision around stage 1 and 2. It's more what are the direct geopolitical macro drivers that have impact on our core markets of North America and Europe, and those are really more NAFTA driven, those types of uncertainty. And just where are you in the credit cycle? So out of prudence, we used some judgment To take a bit of stage 1 and 2 this quarter. It is simple as that. It is not that we have lost the money. It goes into an ACL reserve, and if those judgments change, it will be released. Yeah. I will take it offline, Dave, but I am actually pleasantly surprised that given everything you said, the number is only $19 million. That is it for me. Thank you. Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Good morning. One of the bigger issues or concerns expressed from accounts throughout the quarter was related to commercial loan growth, specifically how long it has been, how long and strong a run it has been with very good commercial loan growth. When I look through your supplement, I do not really see any individual category that is dominating the growth. It does look well diversified, but maybe this is for Neil or Doug. Can you just speak to the sustainability of this commercial or wholesale loan growth that we have seen, what is driving it and how long you expect this to continue? Yeah. Thanks, Mario. It's Neil. I'll start. To your point, the growth has been well diversified. We have targeted a couple of sectors that we wanted to grow because we thought they had really strong risk-adjusted returns in the retail bank. Those are moving. Those are the ones that we're really investing time and energy into. But we're seeing good diversification across all sectors. We're seeing good diversification across the geography in Canada. In terms of when we look out how long we'll continue to go, we're connecting with business owners. There's still, we'd say, a very positive and optimistic sense from our entrepreneurs. They continue to see good demand for the products they're selling. I think what we're monitoring is Dave mentioned trade uncertainty. We think that would be a limiter, and then interest rates would be the other limiter over time. But as we look for the near term, at least for the next few quarters, we continue to expect strong growth in the commercial franchise. What were those two areas you were targeting? There's a few areas. One of them was supply chain. We're doing some work in agriculture and also in healthcare and seeing good strong momentum in each of those. Could you just sort of help me think through, just philosophically, why would commercial loan growth be running so much faster than nominal GDP growth for, I can understand it over a short period of time, but over a long period of time, what supports that? It is something we have talked about. I think we come back to what is our risk appetite, what type of credit are we putting into the portfolio? We haven't deviated from our risk appetite. We continue to revisit policies and continue to have confidence. But it is something, Mario, we have debated over time. Okay. Mario, if you look at the Bank of Canada report, if you look at over the last six or seven years, business investment has lagged the cycle, right? You're starting to see a bit of that catch up right now on equipment and machinery. You're seeing fairly bullish outlook as far as future growth goes and the opportunities to grow, notwithstanding some of the uncertainty around trade is having a little bit of a mitigating impact. But business investment has lagged the cycle a little bit, and you're seeing that catch up. I think those macro drivers do support healthy growth and prudent growth in our commercial segment. Yeah, that's helpful. Neil, the final thing, or Dave, when you look out now, is now a time when you want to take market share in mortgage and commercial loan growth in Canada? Does this feel like the right time to be doing that? Thanks, Mario. It's Neil. Our strategy, we'll start with commercial. Our strategy within commercial has been very purposeful. We sat down a couple of years ago, looked at each of those sectors. I mentioned three. We actually looked at quite a few more. We looked at our policies, we looked at our sales power and distribution, and set out on a very purposeful path to actually restart what we looked at as an underperforming franchise at the time. The commercial results you're seeing are execution on a very deliberate strategy. Yes, the answer is the intention is to take market share in commercial. We believe we understand the risks we're taking on, and we like the performance and the return on those risks. In terms of return to the mortgage market, we would look at that, or say, over the last 36 months, and we have really maintained our discipline around risk. We haven't deviated from the deals that we thought we should be putting on the books. We saw some competitive pressures make the overall market bigger and start to originate deals that, frankly, we didn't have appetite for. We're not growing the mortgage book. We're growing the mortgage book. We're not growing the market share in the same way we're seeing some competitors do that. Again, prudence in maintaining our risk appetite in the mortgage business. What we're really doing is we're competing on distribution, competitive pricing, but leading with distribution. If I could just. We don't change our credit strategy through a cycle. We're looking for a consistent customer franchise and a risk profile, and therefore, you don't have to worry about the timing as much because you're consistent through the cycle. It's not like you have to turn something off that you've been aggressive with, and I think that's the core to our lower volatility and high performance through a cycle on our credit book. Was there anything you can highlight in the Caribbean from a credit perspective that was worrisome or was it just status quo? In the Caribbean, there was slightly higher PCL. We had some expenses that came through in the quarter that a number of them were one-time, non-repeatable expenses, and we would really expect that to return to more normalized levels in Q4. I think we have time to take one more question, and then that will be it, and I will wrap. Thank you. That will be Doug Young from Desjardins Capital. Please go ahead. Thanks. I'll keep this quick. Wealth Management, obviously quite strong, and I think we've covered off City National. But if I exclude City National out of Wealth Management, and correct me if I'm wrong, it looks like earnings was up 5%, but your assets under management up 14%, AUA up 13%. I'm just wondering if there are some unusual items in there. Why the divergence? Yeah. That's just pretty straightforward one, actually. Rod mentioned the accounting adjustment we made on one of our joint ventures internationally that was flowed through Global Asset Management. If you reverse that back out of the Asset Management segment, what you'll see is fee-based income or not revenue and earnings growing in a logical fashion in relation to assets under management. The derivative of that is that we have not seen earn rate pressure or fee pressure on our Asset Management business. The piece that's not made perhaps obvious is that accounting adjustment on the joint venture went through the revenue line in Global Asset Management. But I'm talking more earnings because I thought both of the adjustments went through Wealth Management and both were outside of City National. I can take it offline if it's- The offsetting gain was in City National. It was in City National. Yeah. The one gain was in City National, and the loss was in Asset Management. Yeah. Okay, perfect. Thank you. Well, thank you for your questions and your participation in today's call. I think to characterize our quarter, we are very happy with the results. As you saw, strong core growth across our core businesses, Capital Markets, and Retail, Commercial, and in Wealth Management, both in Canada and in the U.S. And so we are very happy with our customer franchise growth, market share gains, and good cost control, strong capital levels, and ROEs. So overall, we are feeling good about the momentum and looking very positively towards Q4. So thank you, and we will see you next quarter. Thank you. The conference is now ended. Please disconnect your lines at this time, and we thank you for your participation.