RBC Capital Markets Financial Institutions Conference

Mar 6, 2018

Thank you. I am Gerard Cassidy at RBC Capital Markets. I want to, on behalf of my colleagues in the research area, John, Jake, Jason, Ken, and Mark, we want to thank everybody for joining us this year for the Annual Financial Institutions Conference. It was a real great effort by everybody in our organization to get the turnout that we have this year. Our sales team did a great job in getting clients to come to this event. We are up well over 30% in attendance. It is a record year for us, so I want to thank everybody for coming, and hopefully you will find that the next two days are very useful in garnering nuggets of information that makes your investment decisions more effective in the upcoming year. What we would like to do is we are going to start off with a fireside chat with Dave McKay, who is President and CEO of RBC. Dave was promoted to this position in 2014. He has been with RBC since 1988. He came in as a computer programmer, and over his career, he has elevated himself to this position, working throughout our organization around the world. In 2012, Dave was named Retail Banker of the Year, and we are very proud to have him with us today to share with us his views of where RBC will be going in the future. With that, Dave, if you could come up and join me for our conversation. Morning. Thank you again for joining us, Dave. I was going to lean back here. It's great. Maybe we could start off. RBC has experienced some great growth since you've taken over. Geographically, where are the real opportunities for RBC as we go forward? Also, from a product standpoint, what are some of the opportunities that you see? Well, thanks for inviting me back. I think it's been two or maybe three years since Yep I've been on the stage here, and a lot's changed in the last three years. A lot's changed in the last year. In our industry, there's never a shortage of things to talk about, as we'll chat today. As we look at our global franchise and where we're going to invest, this market here in the U.S. is clearly where we see significant opportunity. Our wealth franchise, City National plus the legacy broker-dealer that we've combined together, is very, very strong. Our capital markets franchise here, we're growing. We're adding coverage research and generally trying to grow that franchise both on the investment banking, lending, and trading side of the business. We look to Canada. We continue to surprise ourself with the growth in Canada. Obviously, uncertainty with NAFTA. I'd be surprised if we didn't talk about that over the coming hour or days. Certainly, an economy that's diverse, that continues to grow. Soft on the mining, soft on the energy side in Canada. Very strong on the services side, manufacturing, trade, agriculture. So a diverse economy where you're seeing strength in BC, strength in Ontario and Toronto, strength in Quebec. Well-balanced economies. Weakness in our mining and energy sectors. But still, overall, an economy that's driven maybe too much by the consumer. Consumer spending, particularly on housing, is overdriving the economy. We're running significant deficits in the country to continue to spur growth in a time where maybe we should be running a surplus given the economic strength out there. Therefore, you get a consumer government-driven economy that continues to produce growth for us, particularly obviously on the lending and deposit side of the business and investment side of the business. United States wealth, United States capital markets, I think our first and second opportunities continue to see good growth in Canada, and we have strong results out of our European capital markets franchise, where we are seeing increased client activity, particularly on the M&A and debt capital market side. A little bit on the ECM side. Resurgent trading activity, particularly in January as you saw in our Q1 numbers coming off a very, very strong quarter where we saw really good results across all our core franchises. Global capital markets, global wealth management, and retail banking all producing very, very strong results. That is how we look at kind of our franchise and really digging in on our U.S. growth opportunities. Speaking of the U.S. growth opportunities, obviously RBC acquired City National. When you look back at that acquisition in 2015, it looks like it has been very successful. Maybe you can expand upon the success that they have had and how they have been able to achieve it. Yeah, City National is a crown jewel franchise that I think I had a chance to talk about it. Yes, you did. Yep. three years ago. We had just announced the transaction. I do not think we had closed the transaction at that time. It is a fantastic franchise. A group of entrepreneurs serving entrepreneurial customers in the QSR segments. Entertainment, they are famous for real estate, professional services. Largely a California franchise with good expansion here into the New York marketplace, a little bit into Nashville following entertainment clients, a little bit into Las Vegas and Nevada. But a franchise that we have combined with our legacy. We have the, I think, seventh, sixth largest broker-dealer in the United States with 2,000 financial advisors. We put those two franchises together, allowing the product shelf of City National to be cross-sold into the broker client base. We have 400,000 mass affluent and high net worth customers in our legacy broker franchise. We did not have a private banking, jumbo mortgage, commercial banking product set to sell into those 400,000 customers, so we are cross-selling into that group. With our balance sheet, we are able to grow with our clients to a degree that City National could not with a $20 billion-$30 billion balance sheet. They could not take the hold levels that their clients needed. They had to syndicate deals early. They could not keep up with the growth of many of their client segments. So putting a bigger balance sheet behind City National allows us to attract new clients, stay in relationships, lead relationships to a greater degree, cross-sell our capital markets capabilities on the ECM, DCM side. Bringing these franchises together has so many synergies. The big synergy that we unlocked with our broker-dealer was we were sitting on $20 billion of broker deposits, sweep deposits, that we could not deploy into a lending franchise. City National balance sheet was perfectly positioned for us to bring our broker deposits into that lending balance sheet and deploy those into mortgages, into commercial mortgages, into commercial relationships. So that was kind of the strategy, and we have executed that exceptionally well. You look at the performance in Q1, which we just announced two weeks ago, and our U.S. wealth franchise is up 40%. 14% loan growth in the marketplace. We have averaged, over the last number of years, double-digit deposit growth. It came off a little bit. In the last quarter, you saw us produce 3%-4% deposit growth. A little bit of a sign of what is happening in the deposit market we might talk about, and some of the changes going on, and betas changing. But certainly, you are seeing organic growth, cross-sell opportunity, and expansion of the City National franchise geographically. We have opened in Washington. We have opened in Boston. We have ambitious plans to continue to grow in New York City. We are growing in Nevada, and obviously, California market is the size of Canada. We have so much run rate opportunity in the home market of California. So very excited about the combination of RBC, City National, and our U.S. wealth franchise, and the growth opportunity going forward to serve high net worth and ultra-high net worth clients and their commercial enterprises in the United States. Speaking of deposit betas, as throughout this conference, if there are questions for the speakers, please let us know, raise your hand, and that is certainly the case for Dave McKay as well. Speaking of deposit betas, we were talking about this yesterday with our sales force about the right side of the bank's balance sheet. I happen to believe this is going to be the area of focus for investors over the next two years as the Federal Reserve goes into the shrinkage of their balance sheet. They went from $750 billion before the crisis to $4.5 trillion. They want to take $2 trillion of that out over the next five years. There is a greater concern now that banks are going to have a tougher time finding deposits, and the betas have been pretty low in the U.S. Can you share with us what you are seeing on the deposit beta side? Certainly, we are seeing a little bit of upward pressure in betas. I think we entered the cycle, and we looked at the structure of most institutional balance sheets in this market in the United States. They are long deposits, and it is difficult to find a productive asset within your risk appetite. Therefore, various deployment of strategies and duration mismatching that you find in this marketplace. As you have tried to project where betas would be in a rising rate environment, which we had not seen in quite some time, I think most of the market entered a rising rate environment with expectations that you would see low betas, continue to see low betas given the structure of the balance sheet. But the QE factor, as you have mentioned, throws a different dimension into that, and you have to track back, as the Fed bought those assets, what balance sheets did they get liquidated from? What did the clients do with that cash, and whose balance sheet did they go on? You saw that a lot of the money center banks certainly had the client franchises that attracted that type of deposit. So I think you are starting to see some of the large money center banks, the first impact of the QE unwinding, and therefore, clients taking those assets back on their balance sheet, those securities, and therefore, seeing a bit of an offset to the deposit franchise. If you are really managing a regional bank or your core kind of retail commercial customer, they were not buying those assets in the first place. So the initial impact will be probably you are seeing slower beta creep. Ultimately, you got to expect that it'll come down when the market is. If your institutionals are off center deposits, you've got to go into the commercial consumer space to replace them, and therefore, the competitive pressure will put, I think, upward movement generally through the market on betas. Still, given the structure of balance sheets in the U.S., you still think it would be moderate pressure. Right. We're seeing a little bit of that right now in City National as we compete for ultra-high net worth, sophisticated client balances. You're seeing a little bit of creep in spread. Having said that, it's been more than offset by the ability to reprice our assets, and therefore, we're seeing strong NIM expansion, and we expect to see continued strong NIM expansion. There's a bit of erosion from the deposit cost structure. Pivoting a bit. There's been a lot of talk in the U.S. for the last couple of years about the amount of money that banks are spending on technology, particularly the digital channel. JPMorgan Chase last week had their investor day, and Jamie Dimon said they're going to spend $10.8 billion all in on technology this year. Brian Moynihan at Bank of America at dinner in November in Boston pointed out to us he's spending $10 billion. So there's an arms race amongst the biggest banks, and granted, they're global. Can you share with us what you see? You started out as a computer programmer, so you've been in this space your entire career. You know it well. Can you share with us what you see going on and how important it is to be on the cutting edge with this digitalization? Yeah, we spend roughly the same percent of our revenue on technology as be it a BAML or JPM, but still in absolute dollars, that's going to be less. Let's hope they don't spend it well at the end of the day. It is a lot of money. We would spend over CAD 3 billion, and we think that's sufficient to create the competitive franchise that we're looking to build. As you think about technology, as we digitize everything that we're doing from the back office to the front office, we're focused on customer experiences, we're focused on integrating back office operations, we're focused on taking out cost and streamlining the customer experience. All good things, and I think that's a factor, as I say, of time and money for most banks. You might have to do things in sequence instead of parallel, you might fall behind, but ultimately, you should be able to catch up over time. Therefore, is it sustainable competitive advantage that you're creating or timing factor? You'd have to ask yourself a question. If it's just about digitizing who you are today, which I don't think that's the game at all. I think, spending money to digitize your bank, at the same time, we're creating problems around that. We're creating greater security risks from cyber hacks and from obviously disruption of your services and your processes from invasion and theft of data and client information. So we have to protect our system, our payment system, and our idiosyncratic institutions from those threats, and that's costing a significant amount of money. While we solve problems, we're creating problems we have to defend. We play offense, we play defense, and that's the nature of our business. We started from the premise when we, 5 to 10 years ago, that we had to build a foundation based on defense first and security. When we thought about our payments networks and we thought about digitizing our franchise, we thought about the security element of that and built a security platform that we patented, that we're incredibly excited about. Rather than many of our peers rush to market with the next bell and whistle on a mobile phone and then try to figure out the security protocols around that capability afterwards, we did the reverse. We put the security protocols and the platform on the mobile phone first and then built the customer functionality on top of that. That served us very well as we now have significantly escalated our customer functionality on top of what we think is a bedrock of secure technology, private cloud-based, that we've actually patented in the U.S. I think that's how we went about it. While we lagged early on mobile capability, we, in the Canadian marketplace, which we were ranked number one J.D. Power for our mobile and digital capability, we launched more functionality in the past 12 months than our peers combined. So, by setting the right foundation to launch into this, we've accelerated our ability as a platform to accelerate in a safe environment, and we think that those two things are really mission-critical to do. I think there's a number of banks I see don't have both equations going. Some banks get ahead on customer functionality and advertise it, but they haven't built the secure platform that it has to stand on, and therefore are retrofitting that. I think you got to do both really, really well. But what technology has done in its most fundamental way, it's transformed what we are to a client. I think my one message to the group is, for 150 years, we're going to be 150 years old as an organization in 2 years' time, the customers always come to us with their needs first. They might have told their family, their spouse what their financial needs, what their life stage was, but the DNA was you went, and you talked to your bank. First you walked there or then you drove a car there. But you always went to your branch, you talked to your banker. You're buying a home, starting a business, having a family, getting divorced, planning for the future, retiring. Whatever it happened to be, you were programmed to ask your banker about how my financial needs, my mortgage, my loan, deposit, investment, whatever it happened to be, you went to see your banker. No one really got between that customer intent and the bank. We all competed on roughly the same premise for 150 years on convenience and service and brand and operational execution. We put branches on every corner to be closest to. We hired more bankers that go out and cover on the commercial and capital markets side, and we were advisors in our customers' lives. We had first opportunity to meet that need, and we competed against each other on the same premise for roughly 150 years. We took branches into telephones. We took telephones into ATMs. We took ATMs into online banking, into mobile. It was the same premise that when you had a financial need, transact or invest or borrow or deposit, we had first shot at that as an industry. For the first time ever with these platforms and with the way social media is working, a whole new set of players are seeing customer needs at the same time or largely before we as an industry get to see those needs. Now they're being broadcast on Facebook pages. They're being broadcast in your Google search. They're being broadcast in your Amazon intent and what you're looking for in your use of your iPhone, your Android platform. Therefore, others are seeing what's going on in our customer lives, and they're going to anticipate that, and they're going to put AI wrappers on top of that. They're building platforms to meet and serve those needs. We saw the announcement with Amazon yesterday as they have a deep insight into what's going on. Therefore, what technology has done is kind of created a bifurcation of being able to read what's going on in a customer's life, and we don't have sole domain anymore of them coming to tell us what's going on. We all know that from the number of visits to our branch, the number of calls into our call center, the number of clicks on our website. We see the declining traffic as an industry. Therefore, how do you respond to that as a bank? You have to go out and find your way back in to that customer flow and that customer information flow. Where it hinges on, and it's the whole reason behind yesterday's announcement with Amazon, is the same fundamental. Where we move money, we have deep insight into what's going on in the customer's life. Corporate, commercial, institutional, consumer. Therefore, building out a service model and a data model around the moving, I call it money movement in its broadest sense. Whenever you move things and create value, you have an incredible data and information flow. You have to reinvent your business around the payments and money-moving business to capture the information flow. I call it back to the future. Our customers in the 1950s and 1940s and 1930s and 1960s, 1970s, came into our shop three, four times a week to transact with us, and we learned everything we needed to know. That 3, 4 times a week went to once a week, went to once a month, went to once a quarter, went to once a year, went to once every 5 years when you are renewing a mortgage with them or transacting. We have to compress all that back into 3 times a week. You have to be on top of your customer and understand them deeply, because others are. Therefore, what type of business model are you building on top of your franchise to stay connected to your customer and have deep understanding from corporate through to commercial, particularly consumer, as they are letting everybody else know what is going on in their life and are not necessarily making that effort they used to make to give us first domain on what is going on. Therefore, our strategy at RBC is to build out a platform, and we have largely, through that build, to partner, to collect that data, have that engagement model, to have that intimacy with a customer multiple times a day or a week, that we are able to anticipate those needs, to build an AI capability around it, which I know you want to talk about, so that we are engaged with the customer and we have insight before other platforms see that. Or at a minimum, at the same time, and we are able, through a multi omni-channel approach, to engage that customer, and we are not beholden to receiving that information and buying access to that client through someone else's platform. I will give you an example, and it is the same thing here in the market. We used to lend against the auto car purchase industry, mostly on the retail side. When a consumer wanted to buy a car in the 1950s and 1960s and 1970s and 1980s, they came into the branch, they said, "I want to buy a car." We said, "What kind of car? Okay, it is an expensive car. We will lend you this much money." Pre-approve them. They went and bought at the dealership, they negotiated with dealers, and they drew down on us. Now that transaction occurs in the dealer channel, as you know. Therefore, the dealer never wanted to lose that customer, so they said, "I got to put the financing because they are telling me they have to go talk to their bank before they buy the car. I cannot let that consumer out of that dealership without signing that purchase agreement. Therefore, I got to wrap the financing and bundle the whole value proposition inside the store." They control that flow, and they decide which bank, through these portals, gets to bid on that loan. Because they control that flow, they get a huge share of the economics because they control a moment of truth. The ROEs of indirect lending have gone from the 30s to the single digits because you do not control the customer moment of truth. So we have lived this world before, and therefore you have to think about that core moment of truth and make sure you are present and you anticipate it and see it, and you are not paying someone else for the economic opportunity to do that. I think that is certainly how we think about using data as a critical platform, using technology, using artificial intelligence and blockchain to build out a deep understanding of customers to, as a growth opportunity, but also as a defense of the economic value you create for a client, therefore the margins you are able to earn from providing the core services that we have provided for 150 years. So that, in essence, is how we are looking at the world with enormous opportunity, but also with that understanding our customers have fundamentally changed. This is fundamental to how we have always done business, and therefore the competitive premise has to change. It is exciting because it is a chance for banks to differentiate their strategy more so than ever. Before, it was like, how many branches are you going to own? How much capital do you have? Do you have better processes? Who cares? Do you have a better brand? Absolutely, you care. What is your execution ability? The competitive dimensions and levers to pull were much fewer. Now you have got a lot more, and partnerships in fintech as partners create even more levers to pull among banks. So you are going to see much more competitive differentiation, and scale has never been more important. Mm-hmm. You were talking about customer functionality. I think many of us personally can see it on our phones. Can you take that into the corporate or commercial side of the business, that customer functionality? How important is it to be really good at that in attracting new corporate customers? Yes, certainly as we grow commercial into corporate, the coverage model has not changed significantly, certainly in investment banking, M&A, DCM, ECM. As building relationships, bringing value through your understanding of markets, through your understanding of the transaction ability, through your understanding of corporate strategy of an industry or of a given company still is kind of the primary competitive driver. Bringing your balance sheet to bear certainly is mission critical because size and ability to fund a balance sheet is continuing to be a driver, and you are seeing some of the boutiques have to change their strategy to be more balance sheet driven to have an opportunity to offer the fee-based services. So our strategy in capital markets, I think, has evolved very nicely over the last number of years from a trading operation and an advisory operation, which produced a fair amount of volatility in earnings. If trading was off or advisory was off, you would see volatile earnings, and that was a tougher story to sell to our investors. You saw the business make a very important transition about a decade ago to a balance sheet-led strategy to lend then or obviously serve and originate. That strategy has proved to be very good. Use your balance sheet to move up, obviously, in a syndicate and where you sit there, bring great people against a client to build relationships and create positive advisory knowledge and advice opportunities, and therefore position yourself to compete and serve the client when a transaction presents itself. We have grown our loan book significantly. We have added hundreds and hundreds, if not 1,000 clients on the platform along that model. You have reduced the volatility of earnings because a greater percent of your income comes from net interest income now than it does from pure fee-based business. That model has served us incredibly well, particularly here in the U.S. marketplace, as we really accelerated that market in 2007, 2008, 2009, 2010. When others didn't have the balance sheet to do it, we stepped in. Customers remember when you are there in tough times. It is great to be there now when times are fantastic in competition, but customers have told me over and over again, "We remember when you were there in tough times." We will go through cycles. Sure. This feels really good right now, and there is lots of competition, but cycles happen. Cycles will happen, and customers remember how you behave through a cycle. I think being there in tough times with great people has really built our franchise and our brand. You can't forget that. I think that is certainly on the corporate side. The question about technology has really affected the trading side of operations and the cash management side of the equation with corporates, which is all very, very important as we think about fixed income and equity trading and think about the risk of that and putting your balance sheet out there and how customers are thinking about moving, particularly your asset managers and larger and larger ability to block trades. Certainly, we have had to rethink particularly our equity capital markets, and equity trading operations. Fixed income, obviously, with the fundamental review of the trading book coming. Yep. New rules coming that, again, will alter your ability to drive profits in the marketplace. It's been a tough go. Yep. It really has. If there are any questions, we have microphones. You could raise your hand if anybody has a question. Is there somebody? No. Dave, can you elaborate, you touched on AI and blockchain, and I believe we're in a test phase with blockchain. Can you give us some color? How is it going? What are you seeing from that experiment that you guys are working on? Yeah. Blockchain is the one that got a lot of hype probably 2, 3 years ago, and was first out of the block as an underpinning, obviously, to Bitcoin and cryptocurrencies. I think the market rightfully was very quick to separate the two concepts between cryptocurrency and obviously the blockchain underpinning of that. The concept of a decentralized ledger and record-keeping system does have the potential to offset the barriers of a centralized record keeping. As an industry, we've operated on centralized record-keeping systems, from our payment systems and the Visa, MasterCard rails, down to our deposit and lending systems, are all centralized record-keeping systems. They're accurate, they're strong, they're defensible, but they're expensive to deploy into a network. Therefore, as you think about the way value's exchanged in our society, reconciling value exchange in the society, trading of goods, the centralized ledger system is a cumbersome and expensive way to evolve our economy. Therefore, as you think about a decentralized record-keeping system with more nodes of records and an interconnectivity of those records, it enables a whole different business model. We've built a new loyalty system on top of blockchain because to go around to all these merchants in North America and say, "Please buy a terminal and connect it to my centralized record-keeping system," is a non-starter. Not interested, too expensive, too cumbersome. Why would I do that? When you offer them a decentralized record-keeping system that's internet based, and for the click of three buttons, they can set up a ledger, and they can participate in a new platform. The sales model and deployment model is at a fraction of the cost of the old model. Therefore, your probability of success goes up exponentially in attracting a new customer into a simple platform that can deploy a service and record who owes who what and who transacted with who. In its most elemental basic, it has traction to many different types of exchanges of value, from securities record-keeping systems to loyalty record-keeping systems. It is going to enable, going forward, a whole new set of business models that are easier to deploy and faster to deploy into a one-to-many or a many-to-many relationship with customers than our old system, which would never got off the ground because of the sheer weight of a centralized record-keeping system. With that comes problems. Computing power and capacity to manage all these different nodes out there can be more expensive and cumbersome than the daily operating costs of a centralized system. Easier to get off the ground, maybe more expensive to run. Do we really understand the cybersecurity safety of a multi-node decentralized system? We are still testing and learning about that. What we have decided to do is put a pseudo currency on there, our loyalty points, which is easily replicatable, easily correctable. We are not losing real money if something goes wrong, and we are testing it. We have looked at trade systems and built exchange of value on the trade side with blockchain. There is a lot of experimentation going on. There is certainly some great uses of the technology in deploying new business models and solving some old, expensive business models. Security of that over the long term is a question. How you defend against predatory cyber risks. I think we are hopeful but cautious on the blockchain side. There is a lot of investment and a lot of time, and a lot of smart people trying to solve, so you are hopeful something good will come of this beyond early experimentation and deployment. On the AI side, I think even more transformational. If you go back to the premise I just talked about in deeply understanding a customer, anticipating needs, acting on those needs, using analytics and AI to take data into knowledge, into value, I think is the core differentiating capability all companies, package goods companies, B2C, B2B banks will have to have. We have invested heavily in artificial intelligence. We have got an AI center, we call it Borealis AI. We have got roughly 50 researchers, half applied, half pure researchers. To attract a great scientist, we need to do pure research into the field of AI to have great applied researchers that want to sit beside pure researchers into the discipline. Cost of a really good AI person is approaching the cost of an investment banker, so it is getting expensive at the end of the day. There is a huge competition for talent with all the typical platform companies that you would think about. I will give you an example of a moment where the power of AI really connected for me. About two or three weeks ago, we just held the Canadian International AutoShow in Toronto. Every major city has an international auto show, and we were the sponsor with Automotive News of a session with the major dealers in Canada. We have used that session before to get up and talk about the same, "RBC's great. Please put us on your indirect portal and ping us when you have a customer come into your franchise, and we're going to give you great service. We're going to approve that loan really quickly. We're going to fund it the same day. It's the same old kind of pitch that everyone's trying to get on the front of the dollar in an indirect loan. Instead, we said, "Why don't we put our head of our Borealis AI up there?" Fotini got up in front of 300 or 400 dealers and she said, "I now have the ability, through these new models I've built, to predict exactly when this customer is going to buy a car and which car they're going to choose, and which brand. Therefore, if I work with you, I can tell you out of these 3 or 4 million potential customers, you should target these 100,000 because you have the highest probability of selling to them. By the way, of those 100,000, these 10,000 will be buying a car in the next week. How much is that worth to you?" There was a lineup of 75 people to talk to her after her presentation because you're creating real value for the customer. So the business model shift, back to my previous point, is how are you creating value for your customer? Are you just giving them cheap financing? Are you giving them better approval rates? Are you operationally executing at 100% where you get the money in at the right time without error? Are you going to your customer and saying, "I'm going to grow your revenue line, and this is how I'm going to do it. Oh, by the way, I'd like to do the financing." But if you can find ways to create value, do you think we're going to be negotiating for prime plus a quarter or prime plus 50? No. We're not going to be talking about that price. We're going to be talking about, "Hey, we just added 1,000 customers to your franchise. That was worth X dollars. We've got incredible information. Do you want to work with us next quarter or not?" Therefore, by creating these value propositions. So that is an example of taking data, which we see incredible data. We're growing that data. We've ingested more data in the last 18 months than in the last 20 years. Data from our own sources. We're now increasingly seeking partners in multiple sectors to add to our data stream so that we have different angles of insight. We just brought in an entire geolocation team to add geolocation capability and overlays to everything we're doing. So taking data into knowledge, into value is the competitive premise. AI is a capability that you have to build to take the equation from just data, structured, unstructured, into knowledge, into value. Those who are able to make that transformation equation and have that conversation that we did with 400 dealers are going to win. Mark. Yes. Hey, David. It's Jimmy Hannah. Yeah. I picked up on one of your comments, which was scale is more important today than it's ever been, and the tone of this whole conversation is you come across as very confident in the capabilities that you've developed at Royal, the investments you've made. If I go to the U.S. franchise, about three years ago, I think you announced the City National acquisition, which was a healthy price, but it was a premier franchise, and three years later, the earnings from that franchise are much higher today. I guess the question is back to scale. Do you have enough scale in the U.S.? Would it be helpful to have more? Three years post City National, are you in a position where you'd operationally be able to integrate additional inorganic opportunities? Yeah. Great question. We consciously chose We do not have consumer scale. We have capital markets scale, without a doubt. I wouldn't even say we have broker scale. With 2,000 FAs up against BAML and others. While we're seventh in America, we're a distant seventh, and there's a big difference between one, two, and three and five, six, and seven. We consciously chose a customer segment that valued and needed complex services that were very difficult to industrialize through AI and technology. So you're dealing with an ultra-high net worth client who has complex set of tax and investments, and savings and lending needs, married with a complex commercial institution and their entertainment or wealth. The client groups are those relatively small. It's not worth going after an AI stream and a data stream to industrialize that. It's about people with expertise. We've consciously chosen customer franchises in a market where we don't have scale that are really about people and expertise, capital markets, institutional, corporate, high net worth. That was very conscious, which is why we chose to sell Centura and reinvest in an incredible franchise, as we did with City National, who are really about serving customers well. So we chose that customer segment that we think is defensible without the same degree of scale. Our scale is clustered, though, so we can't dilute ourselves too much. It's difficult to go into new markets, without a doubt. We have great scale in California, particularly in L.A. We have scale, and our brand is well-known. We have much less scale here in New York, and I think with the three franchises that we've got here, we've done well, but we've got to grow. New York is kind of our second focus, where you have to build scale. Organically, it takes time. City National has been in New York for a decade. You probably wouldn't know it. We are going to put our balance sheet and our ability, but we can't be in 10 markets. We have got to pick two or three and build out. But again, it's a focus on the same verticals. We are not a general commercial lender. We are going after the entertainment sector. Quick service restaurants really do very well because those owners of five, six, 10 franchises create enormous commercial and personal wealth. Real estate, that everyone goes after, but at the high end of real estate. Professional services, lawyers, doctors, dentists, but again, a narrow space. We are deep in verticals. And what City National has done well in protecting those niches is they have combined that with technology. This Datafaction technology that we have allows us to take our cash management linkage and create connectivity to our customers that's very difficult to unlock. Therefore, you have to look at defensible niches when you don't have scale, that you leverage technology. While we think about inorganic growth through acquisition, I think the first thing we are looking at is more capability like Datafaction to embed technology in those verticals of entertainment, real estate, professional services that link our customers in and defend it and are very hard to pull away. That's kind of our It's a great question. We don't have data scale here. But we are a great partner to others who have data scale. And it's a traditional play. We will not be a mass retail bank like we are in Canada that starts with data scale. We have to find more innovative ways of creating it. But that's our customer niches in the U.S. and why we think they're defensible without the typical definition of scale. We can put technology scale against that. We have the balance sheet to buy fintech partners to add to that defensible capability, and that's how we are thinking about our niche strategy in the United States. Yeah, great question. Yes, there's a question in the back. A microphone will come right to you. Good morning. If you are talking about size and amount of budget put into technology, how is it from a global perspective? If you think about Chinese bank and their budget are even higher, they are far more aggressive, the costs are lower. Is it actually a call on Chinese banking, which you are doing here? No, certainly, if you're thinking of competing in the domestic Chinese marketplace, you'd want to think twice, two, three, four, five times about that, as they have enormous scale. But I was just with one of the top banks yesterday, in China, and with the CEO, and we talked a lot about We spent our whole time talking about WeChat and the threats from WeChat. Then we talked about Alibaba. Then we talked about other models and how were they integrating their banking model into WeChat and that all-encompassing If you don't know what WeChat is, I would highly recommend going online. It's the combination of Facebook and Amazon and Netflix all into one platform in the U.S. Sorry, in China. Therefore, has this encompassing financial services at the same time, and payment mechanisms all embedded in these incredible integrated customer experiences. Whereas in North America and Europe, it's still a disaggregated experience that's not yet linked, and these platforms are competing very heavily against each other, trying to vertically integrate Sorry, horizontally integrate across their value chains. But in China, they're already integrated from the start, and therefore, a very powerful platform. So I think from a perspective, banks are focused on how they're going to defend their core franchise against those, how they're going to integrate their core franchise. But then the question is, as a bank, what do you have to export into a market that's not being built already? Therefore, you just saw an announcement with Alibaba, I think, in trying to build out a commercial platform in partnership, I think, with Kroger, as you just saw, and there may be other announcements along that platform as a competitor to Amazon coming. I think the bigger change is going to come from the social media platforms as they think about expansion into the marketplace before you see Chinese banks, I think, expanding. You'll see the typical expansion. They want to put their large balance sheet to work in the corporate institutional marketplace by participating in syndications. I'm sure they'll try to hire coverage teams and compete there. But on the consumer side, I think the bigger foray will come from the social media platforms who have done an exceptional job. Tencent, Ping An, have built very powerful social media digital platforms that I think have expansion capabilities into the market because the way they've integrated services. If you continue to see the fragmentation and competition among the FANGs in North America, it may present an opportunity for a WeChat as a horizontally integrated platform to come into the market and offer something completely different. I would say that would be probably first and foremost what you would want to watch for. They are large, well-capitalized, but they have competitive challenges in their own market, and therefore, what value proposition would they bring to a well-served market where we are investing heavily? Scale is a threshold thing. I do not know if 10 billion is more than three. I could not tell you that. I know three is a lot more than 500 million because there are a lot of things you have to get done. It depends if you focus all your money on one platform or on 10 platforms. If you are number one in everything, you are going to want to spend that money over defending your customer franchise and multiple customer segments and product areas. If you are concentrating it on being really good in two, that is the question you have to ask. It is not the absolute amount of money, it is how are you spending it? What is the proportion compared to others? Because you could spread like peanut butter across a global franchise, or you could direct that to say you are going to win two places, that is it. Therefore, how you are spending that money. Scale has to be in the context of the breadth of your operation and where you are trying to compete globally, and how focused it is versus other kind of monoline focus players within that customer segment sector is probably the most important question to ask. Not sure that gets, but I think that is some of the ways I think about China and the conversations I have with my peers in that market. Another question right here. Mark. There is a microphone. Straight ahead. Yep. Dave, when you were talking about blockchain and cryptocurrency before, we kind of quickly passed over the cryptocurrency side. Some of our large bank competitors have been aligning themselves with currencies like Ripple and others. Do you have a view there? Do you have a perspective on whether that makes sense, why you think they are doing it, and how close we are going to get? Obviously, we have been making some initiatives there as well, so maybe you could just dig into the more the crypto side as opposed to the currency side as well. Certainly, we have maintained a broad set of research interests. We are a partner in the R3 consortium who has got some ideas and with a bunch of peers and areas we want to focus on. We initially partnered with a company called Manifold to build early blockchain capabilities. We have talked to Ripple and looked at ideas with Ripple. We are part of the Ethereum, and we have used Ethereum to build products and capabilities. Like many of our large peers, we are experimenting with a number of blockchain concepts and technologies, trying to figure out the strengths and weaknesses of each one and deployment abilities. I think that is part of being in the experimentation phase. That is where scale helps because we have got four or five different blockchain themes going on in the organization versus maybe one at a smaller competitor. We are going to be able to see the strengths and weaknesses and pick an avenue and a platform and develop and design in the right way that accelerates our deployment of what we are doing. I think that is where scale really helps. Did you have a specific question about cryptocurrency and our views on crypto? Dave, do you have a view of whether Ripple, which seems to be a little bit of a follow us from the large banks around that particular one, are they more seemingly more acceptable solution than that? Do you have any particular view there? No, I don't. No, because I think there's other Ethereum is very strong, too, in other areas. I probably wouldn't comment on Ripple in particular because there's other. We've obviously been included in a number of those discussions. It's an evolving space, and I think there's different ways of going about the outcomes here. Pivoting, Dave, you were chatting earlier about cycles. Okay. We all know how strong the economy here is in the U.S., Canada. The credit cycle is truly very positive today. What do you look at on a regular basis to see if any cracks are starting on credit? I mean, what do you have you guys send to you to keep an eye on? Again, it's great. It doesn't look like it's going to get bad at all this year and maybe even next year, but what do you keep your eyes on to make sure you got a finger on the pulse? These are good times, right? Consumers are working. Companies are making money. Companies are transacting. They're paying us back. Interest rates are going up, but not slowing growth as they do so. Tax cuts are stimulating the economy and stimulating our bottom lines. Man, these are good times. Certainly government intervention has extended the economic cycle, whether it's fiscal spend or tax change or monetary stimulus that we've seen is relative low rates, even though they're still climbing. Therefore, we've extended the cycle, as we've talked about a lot. We are in extra innings without a doubt. We could have a long extra inning game here. It's hard to predict, but the game will end at some point, and we'll go into a cycle. Therefore, we're trotting out all our pitchers in an extra inning game. We know we have to play a double header tomorrow. And so this prolonged cycle will turn at some point. Therefore, from our perspective, we can't get out over our skis. You got to maintain your risk standards, your risk appetite. We don't change our appetite through a cycle, on and off, because you have to carry your customer, and you want to be there for your customer through the cycles, as I just said, to build those relationships. Therefore, you're certainly thinking consistently of the volatility of your book through a cycle, volatility of your client franchise. We certainly don't accelerate things in good times from a credit perspective, because you can't dig your way out of that when the cycle does turn. So what do I watch? I certainly look across the organization. I go through all the commitments that are coming through on the corporate banking side and the capital markets side. I look at the terms and structure of those terms. We have a commitments committee. I get all the minutes and the loan structures that are coming through, all the clients that we're thinking of lending to. I usually look at that on Friday night, Saturday morning to see what we've done this week. I'll usually lob a call into the leader capital markets either on Sunday or Monday if I see something I'd like to learn more about. That's often before it gets to risk to see what is the business looking at, what's the business thinking about. At the same time, on a monthly basis, I get all the scoring models from the consumer side of the business. I look at what type of customers have walked in our door for a credit card or mortgage application, what our approval rates are, what our decline rates are, where we've overrided our models to make a credit decision. I look at early loss rates in our 30, 60, 90 day. Tells me, are we seeing a change in the type of customer? Are we seeing a change? So I'm just looking for deltas well before we get to 90-day, 180-day delinquencies. What's changed? Is there something out there? Usually it's on the consumer side, you're going to see job loss and unemployment before you start to see that. So you've got external marks against that. On a commercial side, again, you're looking at types of customers, covenant structure. We've lent through many cycles before. We know how to manage our books through a cycle. It's really in a competitive dynamics of the market, do you start to change what you're doing? The competition has changed. There is a ferocity out there that has generally eroded some lending standards, I think, and it's typical of a cycle. You see that through cycles that you're towards the end of a cycle. But overall, I would say structures are still strong, and I watch for that. So across your customer franchises, you're looking to see an erosion of market standard, change in deltas and performance, trying to pick it up early so you can correct it within your institution, trying to understand what type of credit customers are asking for. Is there a change? And then the competitive dynamics. Okay, we didn't get this deal. Why? What did the competitor pitch? Whether it's a mortgage price in the market or a large, sophisticated capital markets client, if we miss or we don't get a lead left or we're not included, what happened? Are we too conservative on the risk side? Were we not able to underwrite that type of appetite? They're all signals for a CEO to understand deltas over time, and it's a lot of work, but I think it's really important to understand your client changes in the organization and how your organization reacts to what's going on in the marketplace is what you're trying to read at the end of the day. In terms of real estate, you've had a great, strong market in Toronto, Vancouver. Can you share with us what you're seeing in talking to regulators, officials, of how they're managing those markets so that they don't drop down in price materially? What's been going on in our core marketplaces is we've got this cocktail of factors that are leading to unconstrained growth in home prices. You've got a growing population that you're concentrating, particularly from new immigrants in Toronto and Vancouver. You've got two kind of cities, one landlocked with water around it that doesn't have any more land to grow, therefore land is scarce. You've got Toronto, which has got lots of land to grow, but it's restricted by a green belt, so there really isn't any land that's being released to grow. So you've got demand growing, you've got supply constraints. Add to that highly stimulative interest rates and a huge desire by your customer to own a single-family detached home, and you've got a mix of domestic supply-demand imbalance with stimulative economics that causes people to put more and more disposable income on the table for a home. If that wasn't bad enough, you've got an influx of foreign capital that want to use those markets as a piggy bank. It's not speculative capital. It's long-term capital that wants to put cash into a home in Canada, into those markets, because they want their family to live there, or they want to rent it out. That's adding more gasoline to already constrained marketplace, and therefore you're seeing house price increases that are unsustainable, which is crowding out normal market dynamics in a healthy community. You can't attract people into your market to work because they can't afford a home. People are moving outside of the core region. The services, you saw it in California, in Southern California. Your teachers, your doctors, your nurses, your policemen and women, they cannot afford to live in your community, so they move, and then the commute becomes a problem. They move out of your core market, and you see services crumble. The policies have been designed to constrain foreign capital for a while. We do not need foreign capital using Canadian real estate as a piggy bank. You don't need it as a society. If capital is coming in to create productive products and services that hired people, absolutely. If capital is coming in to sit in a home unproductively and is distorting your marketplace and the livelihood of your residents, no thank you. I think the governments have every right to manage capital inflows and the distortive effects that they're having, and we're very supportive of the tax changes on foreign capital, the unoccupied changes, ensuring that your population has an ability to live, work there, earn a reasonable income, raise a family, and contribute to the economy and maintain a healthy society. What society wouldn't want to be able to do that in America, in Canada, even back in China? I think that's the philosophy in what's going on in the marketplace and why you're seeing these changes. We've been able to constrain demand now through all the changes, through who qualifies for their first mortgage, foreign capital. So demand is down. House prices have been stable. There's still intensive bidding, but to a lesser degree. You're seeing a little bit more healthy dynamics, even though with numbers off, housing price is stable. And I think we've been supportive of it because we care about the long-term health of our communities and the long-term health of our economy. We don't want too much disposable income going into housing because it crowds out all your other product and services sector, and it hurts your economy over the long run. If you've been here 150 years and you plan to be here for another 150 years, you care about these things. And it's about balance and trying to grow in a balanced, sustainable way, because that's what our shareholders want. They want sustainable growth, and sustainable growth occurs through good strategy on top of a sustainable economy and society. And therefore, our purpose is about helping clients thrive in communities prosper. And we take that prosperous community seriously because it is the engine behind being a financial institution. And therefore, we've been strong advocates on policy around healthy real estate markets. Well, very good. We've run out of time, but three years ago when you were here, I saved my hardest question for the end. Yeah. I'm going to do it again. When are the Leafs going to win the Cup? Getting closer. Getting closer. It That's- I've watched a lot of crappy hockey games over the last 10 years, but they're getting better. But I know this is a Rangers town, which is a great franchise in itself. So we're getting closer, but who knows? I think the Raptors might be closer than the Leafs are, to tell you the truth. Thank you. Please join me in a round of applause thanking Dave McKay. Thank you. We will now move up to the fourth floor for the breakout sessions and for the presentations. Thank you.