Royal Bank Of Canada

Our participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to RBC's conference call for the fourth quarter 2020 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Han, Head of Investor Relations. Please go ahead, Nadine.

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer of Rod Bolger, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer. Then we'll open the call for questions. Also joining us today are Neil McLaughlin, Group Head, Personal and Commercial Banking, Doug Guzman, Group Head, Wealth Management, Insurance, and INTS, and Derek Nelner, Group Head, Capital Markets. As noted on slide one, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then re-queue. With that, I'll turn it over to Dave.

Thanks, Nadine, and good morning, everyone, and thank you for joining us today. I'll start with some context on the fourth quarter and then provide my thoughts on the macro backdrop and how we are positioned heading into 2021. Today we reported fourth quarter earnings of $3.2 billion driven by continued strength in our leading Canadian banking, capital markets and wealth management businesses. Despite the significant impact from near zero interest rates and a challenging operating environment brought on by the COVID-19 pandemic, earnings per share were up 2% year over year. We benefited from strength in trading and underwriting revenue in capital markets, strong fee-based revenue growth in our wealth management businesses and double-digit volume growth in both Canadian banking and Citi National. Our results this quarter also benefited from our continued focus on risk management and cost control. Now for a few thoughts on the macro environment heading into 2021. The economy has rebounded well to date, but given the emergence of the second wave of COVID-19 in core markets, we expect economic growth to slip over the next couple of quarters and project Canadian economic growth to end 2020 down over five percent. However, we project GDP growth to rebound four to five percent in 2021. The pace of economic recovery still remains contingent on the uncertain trajectory of the pandemic. While we've received positive news on the development of a series of vaccines, much uncertainty remains on the timing and execution of the rollout of a vaccination program. As a result, we will need to continue to focus on bridging and mitigating the impact of the pandemic on our citizens. We applaud the significant support government programs have provided our clients to date and are pleased to see key programs extended. Measures to curb the spread of the disease must put the health and safety of people first and foremost, but also remain flexible and dynamic to manage the damage done to the economy and particularly to small businesses. For RBC's part, we will continue to work with our clients to support them through this difficult time. Since the start of the pandemic, we provided significant support to our clients, including deferrals on more than $90 billion of loans. While the majority of clients have returned to making payments on their loans, some will experience further difficulties with the effects of the second wave, and Graham will speak to this later. Therefore, while long-term interest rates have started to move higher, we are operating with the belief that low short-term interest rates will persist for an extended period. Low interest rates combined with elevated levels of monetary and fiscal stimulus provide both a buffer for individuals and businesses to manage the uncertain year ahead. It also provides a catalyst for growth once the health risks have been minimized. Throughout the uncertainty and volatility of the past year, the strength and liquidity of our balance sheet has remained a constant. We ended the year with a record CP1 ratio of 12.5%, with common equity Tier 1 up nearly $6 billion over the past year. This provides a $19 billion buffer against the current regulatory minimum of 9%. In addition, we increased our allowance for credit loss to over $6 billion, up nearly $3 billion from last year. This represents over 4.5 times coverage of our last 12-month write-offs and nearly 90 basis points coverage of loans and acceptances. Our strong balance sheet gives us flexibility to not only manage the uncertainty ahead, but also allows us to continue supporting our clients, spur growth in the economy, and drive shareholder returns. This year, we paid over $6 billion in dividends to our common shareholders, up slightly from 2019. Despite the significant increases in capital levels, we delivered a premium ROE of 16% in the fourth quarter and continued to create value for our shareholders growing tangible book value per share 5% in a stressed year. Heading into 2021, we are maintaining our three- and five-year medium-term objectives. However, we recognize that meeting these targets in the near term will be challenging or be challenged by the ongoing impacts of COVID-19, the prolonged low interest rate environment and capital deployment restrictions. One path to higher ROE and EPS growth will be through our continued emphasis on prudent cost control. Our past investments in digital capabilities, data, and cyber and risk management systems have underpinned our ability to support our clients and manage the last nine months with operational resilience. While we continue to invest in our core businesses and strategies, we remain committed to running our bank more efficiently with an emphasis on containing expenses and driving productivity. I now wanted to speak to the full year performance of our businesses. All our core businesses reported strong client volumes, driven by our investments in technology, our advice-led Salesforce capability, award-winning client experience, and simpler, easier-to-use products matched with resilient customer needs. Canadian banking reported net income of over $5 billion for the year, underpinned by strong volume growth. We have added over 60 basis points of market share and core checking accounts over the last two years alone. We view this as a core relationship product, and our goal remains to add more clients by expanding our digital capabilities and reach, and leveraging our scale to add more relationship value. Our Canadian banking and wealth management teams continue to partner to provide a continuum of offerings to our retail and wealth clients. covering the full spectrum of client segments and needs, from our InvestEase robo-advisor and direct investing brokerage platforms up to our full-service discretionary wealth management. We have seen significant expansion of client relationships through this closer collaboration with over 65% of Canadian wealth management clients now having a Canadian banking product and with further cross-sell initiatives in progress. We are proud of the success we have had in our advisory role with clients. MyAdvisor, where clients can meet virtually with digital financial specialists, surpassed 2 million clients onboarded with a personalized plan since its launch in 2017. Turning to the mortgage business, we recorded very strong residential mortgage growth of 11% year over year. The Canadian housing market has been exceptionally strong as work-from-home arrangements have driven an increased desire for more space, including in suburban areas and smaller markets. A limited supply of detached homes and pent-up demand have also contributed to housing activity. We continue to gain market share through our 750 strong mortgage specialists, driving more new originations and an overall focus on client loyalty, where we're seeing retention rates at nearly 92%. While low interest rates will continue to support buyers, we expect mortgage growth to slow going forward as pent-up housing demand begins to cool. In credit cards, our partnerships and engaged membership base drove nearly $120 billion of purchase volumes this year, despite the reduction in travel. With RBC Ventures, we continue to advance our strategy to differentiate the bank by creating value beyond banking. Owner, for example, which provides digital incorporation services, has now supported 13,000 new business starts in 2020 alone. Of those we incorporated, we've been able to convert 57% to RBC Business Banking. In addition, Owner recently acquired Founded, adding both scale and new product offerings, including higher margin subscription services to our existing book. Turning to wealth management, where we generated over $2.1 billion in earnings in 2020. In these volatile times, we are seeing an increased demand for holistic wealth management and active asset management solutions. RBC Global Asset Management retail funds captured over 40% of Canadian net sales this year, consistently outpacing industry trends, and added to our leading 16% market share in Canadian retail AUM. The strong performance in net sales was driven by our expanded advice and planning capabilities, along with very strong investment performance in our funds, with 70% of AUM outperforming the benchmark on a three-year basis. More broadly, the RBC iShare Alliance continues to be a strong partnership, capturing a significant 20% of year-to-date industry flows as of September. In our Canadian wealth management advisory business, we continue to hire experienced investment advisors, while also seeing very limited attrition rates. Our industry-leading recruiting efforts have added nearly $15 billion in AUA over the last two years, and our over 1,850 investment advisors drive revenue per advisor that is nearly 30% higher than the Canadian average. We saw yet another strong year of organic franchise growth in our U.S. wealth management and city national franchises. We brought in over $60 billion of AUA since 2018, through hiring experienced financial advisors in our U.S. private client group. We continue to organically scale up the platform, which is the seventh largest wealth advisory in the U.S. by advisor count. We also continue to see strong volume growth at Citi National, with loans up 25% and deposits up 31% from last year, with broad-based growth across all business lines. Citi National grew its client relationships by nearly 14% over the last two years, and we will drive targeted efforts to deepen these relationships. We also continue to add private bankers to accelerate our strategy to provide complete financial solutions to high net worth and ultra high net worth clients. Turning to our insurance segment, which generated net income of $831 million in 2020. This segment continues to generate high ROE earnings, and provides a good source of diversification against credit and interest rate risk. Our diverse insurance client base is building relationships with our other Canadian retail franchises and have added over 800,000 clients since 2018. Capital markets had an exceptional year, generating near record earnings of $2.8 billion and a strong ROE of 11.7% while absorbing total PCL of $1.2 billion. The strong results speak to a diversified business in a geographic mix, balance sheet optimization, and a well-managed risk profile, which together results in lower than average earnings volatility relative to global peers. Our global markets businesses reported very strong results this year as they benefited from robust client activity and successfully navigated a volatile market environment. Looking ahead, we expect trading activity to moderate in the year ahead. Client engagement was exceptionally strong in our fixed income and equity desks. And to further value clients, RBC Capital Markets launched AIDEN, an AI-based electronic trading platform, which has already traded over 2.5 billion shares and 65 billion of notional volumes over the last 12 months. We also supported our corporate and investment banking clients financing needs through various stages of the pandemic. As liquidity concerns moderated, our clients continue to take advantage of low interest rates and constructive equity markets to raise capital, thereby boosting our underwriting revenue. Looking into 2021, we do not see this elevated pace of underwriting activity continuing. Although M&A activity was on pause through most of 2020, we have led some very significant transactions. For example, Recently, RBC Capital Markets acted as financial advisor to Synovus as part of their $24 billion merger of equals with Husky. In the very active technology sector, RBC acted as active joint book runner on Nuve's IPO and as the exclusive financial advisor to Lightspeed on the acquisition of Shopkeep. Looking ahead, we're more engaged with our well-capitalized clients on strategic advisory mandates and are seeing the M&A pipeline start to build again. Also, we are deepening client relationships in the U.S. and will also look to strengthen senior coverage teams in key sectors. So in conclusion, our performance in 2020 speaks to the scale, strength, and resilience of our diversified business model and the significant investments we've made in technology and our people over a number of years. Despite the significant impact of COVID-19, we seamlessly mobilized to support our clients, strengthened our balance sheet, invested in our core franchises, supported communities, and paid dividends to our shareholders. We enter 2021 with strong momentum, strength, stability, and operational resilience to support our clients and continue creating value for them. And to our shareholders, we are grateful for your support, and we remain focused on executing our strategy to deliver long-term value. I also want to take this opportunity to thank our more than 86,000 colleagues across the bank for their relentless dedication in supporting our clients, communities, and each other in such an extraordinary year.