Scotiabank Financials Summit Conference

Sep 9, 2021

Welcome back. With me now is the President and CEO of RBC, Mr. Dave McKay. Dave, good to see you. Hi, Meny. It's great to be here. When I speak to investors, there's a lot of debate about which bank can outperform in the short to medium term. There seems to be a lot more agreement among the investor base about RBC's edge in terms of the long-term outlook. I'm wondering if you could talk about your competitive advantage as you see it both over the next 12 months, but then also if we could focus on the long term as well, and how you see that. Well, thanks, Meny, for that question. I can take that and run with it for the next 25 minutes, so I appreciate the opening. You get a coffee, and I'll see you at 9:15. In all seriousness, it is great to be here and have a chance to talk about our franchise and the strength of it. To your question, I think, certainly over the long term, when you think about the strength of a franchise and how it goes through cycles is really important, but also in the short term, momentum and opportunity to grow. We feel very strong about where we are. When you're looking at a long-term franchise that outperforms, ours certainly has the strength of the depth and breadth of our customer franchise. When you think about the depth of relationships, powered by our unique capabilities to cross-sell. We have cross-sell ratios much higher, particularly in the retail bank, but when you cross-sell across wealth to retail, capital markets, commercial, the synergies we are seeing in U.S. between commercial and capital markets, that cross-sell ability drives a number of outcomes that are really beneficial for investors. One, higher ROEs and premium growth. Also a lower risk volatility from that. You get to know your clients, you have deeper, broader relationships. Those relationships lead to better conversations, lead to ability to work out situations, and you get to choose your credit book as you build it versus from acquisition. When you think about the breadth and depth of relationship, powered by the capabilities of cross-sell, of scale, of unique capabilities such as RBC Rewards, which allows us to have the richest reciprocity formula with customers in the country. That franchise, and the moat around that franchise allows us to outperform in the short term, medium term, and long term, and is powering the significant growth. Then is the platform under our investor thesis of premium growth, premium ROE, and lower volatility. That is how we built our franchise. That is how we seek out geographies, customer segments to compete in, and how we build capabilities to deliver through an economic cycle and over the long term. In the short term, all of that is enhanced by a significant embedded profitability in our existing book of business. We talk about it consistently, whether it is future drawdowns on authorized credits in our revolving credit book, in our term lending books. There is significant opportunity as we see business confidence return, and we are seeing it return sequentially. We are seeing more and more business confidence, greater drawdowns, a greater business activity, whether it is interest rate changes that eventually will come have a significant opportunity. Client acquisition from all of the investments we have made in customer value, in new channels and acquiring. RBC Ventures, a big part of that, not only new client acquisition, but potentially new revenue pools from new activities and new services to our client franchise. In the long term, being able to manage through cycles with lower volatility, leverage those unique capabilities, build deep and broad relationships, drives a higher ROE, lower risk, and our scale, our operating and data scale are significant, and that is the game globally in every industry. We generate 10%-20% more on the retail bank operating margin per CAD of revenue than our competitors. That can be reinvest in the business, some of that goes to investors, and you get in a flywheel where you are able to continue through your scale of operations and data, invest in the business at a faster cadence, creating more value. RBC Ventures is a great example of that, and I know you want to talk about that. Those are the dimensions, breadth and depth of relationship, operating scale. The third one I would add is the opportunity we have in the United States. We have a unique franchise, one through City National, U.S. Wealth, and our U.S. Capital Markets operation. Not just the synergies between them across institutional, corporate, high net worth, and commercial customers, but the organic growth opportunity within each of those spaces is very significant to us. CNB, obviously, in commercial, but extending into the mid-corporate space, which is a significant space. The revenue pool in mid-corporate is approaching $60 billion-$70 billion in the U.S., which we're competing for. That's lending and transaction where we want to compete. We aspire to acquire a significant number of new clients through those channels. Therefore, it's an opportunity. We aspire in the U.S. side to extend and cross-sell ability around from commercial into high net worth, but also acquire more high net worth customers directly through our preferred and private banking capabilities. So these are all growth factors for us in a very large but competitive profit pool. It all starts with the acquisition we've made with City National that provides that glue and that foundation to grow. Right. Banks like that don't exist anymore in the marketplace, and we're very fortunate to have that platform. So those are the three platforms I think over the short and medium and long term allow us to outperform. I asked a broad question, and I got a lot there. I got what I asked for, but I was hoping we could dig in a little more specifically, first off, just on new client acquisition and retention. You talk a lot about that, and I just wanted to delve into that and specifically talk about your customer acquisition strategy and how it differs from peers. It definitely sounds like it does. So if you could just address that specifically. It looks like you kind of took the foot off the pedal a little bit early in the pandemic, but now, after the Q3 call, it seems like very much back in full focus for you. Yes, absolutely. Whether it's in Canada, in particular in the retail bank, we did. It wasn't the right time. Clients weren't in the mood to switch banks. They weren't looking for new services. So we stood it down for the better part of 14 months. As you saw through the Olympic campaign in the latter part of the summer, through the RBC Vantage launch, was a significant new capability and customer value proposition where we're really amping up our customer acquisition. So on the consumer side, RBC Vantage and our credit card capabilities through Avion and WestJet will be primary customer acquisition capabilities for us. But increasingly, as we think about small business, traditionally we'd have acquired small business when accounts were open and small businesses walked into our branches. Now, increasingly, Ownr and Ventures is driving a significant proportion of our small business acquisition. In an earnings call in Q3, we talked about 40,000 in the last year alone. We think that can grow to 100,000 new clients coming in alone just through Ownr. From that perspective, building the funnel that we talked about to connecting with customers sooner is going to provide enhanced customer acquisition campaigns supported by value propositions like Vantage and others, WestJet, Avion, that allow us to compete and provide exceptional value. Then our cross-sell capabilities, which are proven over time, we're decades now to perform extremely well. One of the reasons we cross-sell so well is we're cross-selling the number one product or advisory capability in the market. So you feel good in front of a customer saying, "Well, if you're looking for the number one credit card, you got Avion. If you're looking for the top mortgage capability, if you're looking for the top asset management capability, we have it." Part of our cross-sell capability is not only the excellence of our people and the software we use and the support, but also the value that we're offering our customer through our capabilities allows us to be successful. So when I think about acquisition, I think about it as cross-sell, but also new customers coming in through traditional channels and through our new channels, which are unique to RBC. Dave, you talked about RBC Vantage. Is that primarily a new customer acquisition tool, or is it retention, or both? How do you view the value proposition there? Or what really is Vantage trying to do in terms of your client base? First and foremost, it's customer acquisition. We don't have a retention issue. We have number one customer service by J.D. Power. We have number one digital capability. We have the most number of branches. We've got great advisory capability. So we don't have any problem retaining customers and cross-selling as we just talked about. So primarily, this is a customer acquisition. We're putting more value on the table backed up by number one service, number one technology capability. Try us, you'll love us is really. So that value proposition of offering rewards, having your back, having our AI capability, kind of help you manage your accounts, all of those capabilities, we think are premium performers in the marketplace. So this is a customer acquisition tool, and our results so far prove that out. Right now, we do not have a lot of new immigrants in the marketplace, so we are comparing a bit of apples and oranges to past campaigns. But when you look at our acquisition trends in the early parts of this campaign, they are very strong. We are just at the start here. This is a program that is going to be around for a significant amount of time. We are very excited about what we have built. We have been impatient to launch it because Canadians were not ready for it, but now it is go time, and we have got the foot down on the accelerator. You mentioned RBC Ventures. You have been talking about that for a while. It is a simple question, just is that strategy working? If I go back to your 2018 Investor Day, you talked about 5 million RBC Ventures users by 2023, and you were talking about converting 10% of those, so half a million, into new RBC banking customers. How are you tracking to those goals that you set? Important question. In the new connections to Canadians, out of that 5 million, we are at 4 million. But one thing we have learned, not every synapse or connection is equal. A connection to a small business owner who registers their company through Ownr is much more significant than a synapse you might create in some of our other applications, like Rocketman or Drive. But we do have connectivity, and we do have channels to communicate with those 4 million. The value of an Ownr client coming through and signing up their bank relationship with us is three or four times what it would be a normal consumer. You look at the different value of the synapses, and we have invested in converting those ventures, connections, and relationships and users where we see the most significant value creation for the customer. Ownr through to business relationship through to accounting partnerships has been a significant opportunity. When we look at OJO and moving up the funnel into the home search ability and understanding what customers' needs are much earlier in the home financing process is an important part of that. When we had Ampli, we stood down Ampli for the better part of a year because merchants were not marketing for the most part to consumers. But we have hundreds of thousands of users in our Ampli program. When you think about the conversions, we stood down for a year and a half. Pre-pandemic, we did roughly 150,000 of the 500. But you can see if we take Ampli from its current 40 to we expect 100. We can get there just on, sorry, Ownr. We can get there in Ownr alone. We really do believe that we continue to curate our small business value chain through Ownr. When we look at the ecosystem we are building around home and OJO being an important one. When we look at newcomers with Arrive and families with Mydoh, a new launch, I am very excited about the early traction. We have Dr.Bill, which is really focused on helping medical professionals in their billing. Again, creating a service for a customer segment that we have relationships with, that we want to deepen. It is a great customer acquisition channel. As you can see through medical, small business, homeownership, everyday shopping, we are very active and therefore we are well on our way as we start to amp up our marketing campaigns and our conversion campaigns. We have learned a lot over the last three years. It was hard to build, and that is good because if it is hard to build, it is really hard to replicate at the end of the day. In terms of, where does the venture strategy go from here? What is the next logical step in terms of the venture strategy? It sounds like it is an unqualified success from your perspective, but are there more verticals to add or is it just about, as you mentioned, just marketing and just getting the word out and just funneling more people through that value chain? It is the latter. It is a great question. We are competing in the value chains that are really important to our franchise. This is about building national scale in those key ventures, four or five of them that we think will make a difference to RBC and to our customers. Therefore, those ones that I articulated, we are about scaling and putting marketing dollars and conversion dollars into that. A lot of efforts got into understanding how to do that. It is not simple in all cases. It really is a true fintech startup at the end of the day. Most of these are built in-house. A couple were built in-house, then we acquired capabilities to enhance them. These value chains are a really exciting part of our growth future and create value for customers, and we think that's the game, where you have to create more and more value for your customers. To your point, this is about scaling for acquisition now and conversion. I wanted to talk about the linkages between your wealth business and your Canadian banking business, and you highlighted that as a key strength. In terms of, we've seen such a huge growth in deposits. You've seen such huge growth in deposits. How important is it to take those deposits and to convert them into AUM? Is that a clear strategy that you've directed the bank to implement? No. No, because it has to be right for the customer at the end of the day. So it's only important if it's important to the customer at the end of the day. Given the nature of the franchise and the types of customers we have, they've had the propensity to invest some of their surplus liquidity into markets, and we've met that need through discovery, through being there at the moment of truth, and having a great asset management franchise to invest in. But it starts with the customer. We're not pushing anything at the customer that they don't want. From that perspective, there has been strong demand from consumers to invest excess liquidity. We're seeing continued strong long-term fund sales coming from that, but there still remains a very significant component of liquidity on the sidelines right now, and some of that may move its way into long-term funds. Some of it will go into growing the economy, and some will probably stay as liquidity buffer. So that's going to be the big shift to see how fast the economy grows, how fast wealth management grows. But the numbers that we put forward in our Q3 slides, those were all flow numbers. That wasn't any market appreciation. So when we said 25% of our flow or retail deposit flow has gone into mutual funds, that's flow. That has no market appreciation in that number. So it gives you an idea how much change in delta there's been in consumer aptitude and psyche towards investing in markets. On the Q3 call, you talked about the trend you are seeing into higher ROE, lower risk products, mortgages on both sides of the border, and really the importance of risk-adjusted margins. I am just wondering, when you look at those trends as we move through the recovery period, is this all going to reverse? Or do you have a strategy to keep those gains that you have made, even through a recovery where we might see other more higher risk, lower ROE products start to come back again as the economy moves forward? The products that we are focusing on have been higher ROE because that is where customer needs have been. Obviously, our mortgage capabilities have been really helpful in accelerating and driving premium growth. That is first and foremost driven by customer need and responding to customer need. We do expect some of the more capital intensive but still higher ROE products like credit cards to gain. That is going to be, I think, a benefit to ROEs when we start to see drawdowns in our credit card portfolio and revolving. We are down CAD 4 billion almost in our revolving balances, yet economic activity is back or above where it was pre-pandemic. So we are still kind of waiting to see the drawdowns. That will happen over time. Again, commercial. Very strong ROEs in our commercial draws. There are some more capital-intensive services that meet customer needs that are growing. I see them while enhancing ROEs and enhancing our NIM over time. I do not see that as dilutive to NIM. I see that as enhancements, particularly the credit card business. I want to turn to your US Wealth business and City National in particular. Basically a straightforward question, and it is really, do you believe that the Street is underappreciating the value of the franchise that you have built in the U.S.? I know if you look at certain U.S. peers, they are trading at 20 times multiples. So what is your view in terms of, is the Street looking at this franchise that you have built south of the border properly? Well, some of our peers we benchmark ourselves against are trading at a 30 times multiple. Meny, I would love to say yes to that answer. Obviously, we would love to get a 30 times turn on those earnings, but over time, you have to prove the growth and sustainability of that. We feel very good about the growth potential. As I talked about in my opening statement about our U.S. franchise, it is a unique capability to generate assets in the United States. You are seeing so many franchises that are seeing shrinking lending books, and we have differentiated our ability to meet customers' borrowing needs, particularly in our commercial, but increasingly now in our high net worth and affluent customer space. Our residential mortgage, jumbo mortgage capability is a great customer acquisition channel. Our commercial business has been really driving a lot of our asset growth and even earning through some of the PPP loan paydowns. We have seen a significant paydown of PPP loans, as expected, as they were drawn through the pandemic and are paying down with the government payments coming through. I think from that perspective, the asset growth is even more impressive. That is a unique capability. It is built on understanding and having deep vertical industry expertise in entertainment, in technology, and obviously real estate, in food and beverage, amongst others. Those are really the ones that we are focused on. We are focusing, again, like we are in Canada, in building ancillary services, whether it is in entertainment, in healthcare, in technology, trying to build value propositions to those customers. We have a deep understanding. We have grown significantly on the asset side within our risk appetite and a very low risk appetite. Again, this is a really strong from a credit perspective, customer base, and we are very happy with the overall credit and market risk performance with this premium growth. I think that, Meny, is really a differentiating capability. Everyone is growing their deposit base right now with surplus deposits. Very few are growing their asset base, and we have done that. Therefore, we are looking to do that in the right way, in the right risk controls, the right operating controls, but very excited about the opportunity with that unique capability. As I said, through mid-corporate lending now, accelerating our acquisition of private banking, preferred banking clients is a really big part of the growth story in the United States. Again, hiring more teams in those businesses, but also in our U.S. wealth management franchise. We have been very successful in lifting out teams. They have come to us because of our new technology capabilities, because of our culture, because of our franchise and capital markets. We cannot forget this huge strength in our U.S. capital markets business. We have brought in new leads of our technology team, very excited. They will be starting with us soon. Our healthcare capabilities have grown. Areas that we missed business in in the last two or three years, particularly healthcare and technology, we have enhanced teams that are ready to help us grow. I think we are very excited about capital markets in general, but also our U.S. capital markets franchise. That is a differentiating growth vector for RBC. Yeah. I think you talked about being able to speak for 25 minutes, in terms of your long-term growth. I think, this US Wealth Management business, we could talk for a long time on it. As the time ticks to an end, I wanted to touch on capital deployment. What I'm very interested is getting your perspective on capital deployment in technology specifically. I think I asked you this question last time, but I wanted a check-in one year later, just in terms of huge amounts of excess capital at Royal Bank, almost CAD 13 billion, according to my calculation. What's your view in terms of, or your appetite in terms of significant capital deployment in technology, a fintech, for example. I'm talking about a billion-dollar plus kind of acquisition. I'm just thinking, something like Morgan Stanley bought Solium Capital for about CAD 1 billion. Are you looking in the, what we call the fintech space? Is that a place where you're hunting, where you're ready to write a big check for obviously for the right kind of platform, the right kind of fit? Strategically, the answer is absolutely, we're looking in that space. We've made acquisitions in the CAD 50 million to CAD 100 million range in entertainment, whether that's FilmTrack specifically or Exactuals, and we're really excited about those. We've looked at acquisitions in the healthcare vertical space, trying to attract more medical professionals to our franchise. We bid, and we didn't win. But they were in the sub CAD 500 million range. But again, the amount of capital is really not the issue. It's what can it do for your franchise. You don't necessarily have to spend a lot of money to create something that can be accretive to your franchise and customer acquisition. To the hypothetical question, would I spend CAD 1 billion on a fintech? Yes, if it drove an appropriate amount of shareholder value at the end of the day, and I was confident of that shareholder value, and I could stand in front of you and all our investors and say, "We made this acquisition. These are the synergies. We will execute this, and we will create the shareholder value doing that," then the answer is yes. I guess part of what I am asking, if you look across the large cap Canadian financial landscape, the largest Canadian financial that made a fintech acquisition was actually an insurer. The question when I see all this excess capital to banks is, are banks kind of going to miss an opportunity with so much excess capital to really move ahead in the tech space? I am just curious your perspective on that. Are capital rules maybe part of the issue that make the math on such an acquisition just very difficult for a bank? What do you think, Dave? Well, given that there is no asset and it is 100% goodwill on the price, and they are often losing money when you acquire them, yes, it is expensive and it is dilutive, and therefore you have to be really confident of your synergies and your business plan. What we have found through Ventures is that we can build it ourself because we have got a lot of smart people and we have got money. Therefore, it is a lot cheaper to fund these ventures. You have to be patient. That is why I started five years ago, because we have built 30 ventures, we have curated 10 of them, and we are scaling them. That is no different than what a fintech started at. We saw the game. We said, "Let's start it ourselves." We are adding on where we can, opportunistically, and as I said, anywhere from CAD 10 million to CAD 100 million. You can play that game as long as you give yourself time to do it. That is why we started five years ago. When you are looking at making the bigger acquisitions, yeah, they are dilutive because you are paying someone for all the work that we did in our ventures at the end of the day. It is a harder hill to climb. When we looked at something in the healthcare space, it was losing money at the end of the day. You had to look at this sticker price and say, what type of synergies do I have and what does my shareholder get versus the seller? Too much of the benefit often goes to the seller. You are better off executing it yourself. Everything we do is that at the end starts with what customer value we are creating and what shareholder value are we creating at the end of the day. We have given ourselves optionality because we started Ventures five years ago. We are not sitting here with nothing in our portfolio. We have got a really healthy portfolio that we are trying to add to. We have great strategic optionality. Well, with that, we're out of time, unfortunately. But I want to really thank you, Dave, for being with us again, and looking forward to speaking to you next year in person, hopefully. Thanks very much. Absolutely. Thanks so much for the invitation. Thanks again, Dave.