Royal Bank Of Canada

Please stand by. Your meeting is about to begin. Good morning, ladies and gentlemen. Welcome to RBC's conference call for the second quarter 2021 financial results. Please be advised that this call is being recorded. I would like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.

Thank you and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer Rod Bolger, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions, 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.

Thank you Nadine. Good morning everybody. Thank you for joining us in our Q2 call. Today we reported earnings of $4 billion driven by strong client activity across our businesses. Our results reflect market share gains in Canadian banking and wealth management, as well as record investment banking and equities performance in capital markets. Even with heightened client activity, we leveraged our scale, past investments, and disciplined approach to cost management to drive positive operating leverage. Pre-provision, pre-tax earnings increased 11% year over year, despite absorbing approximately $450 million of headwinds related to lower interest rates and a stronger Canadian dollar. Although uncertainty remains, credit and market risk indicators are relatively benign when compared to the start of the pandemic. Our portfolios have performed exceptionally well through the cycle with very low PCL on impaired loans. We are confident that our wide range of strategic initiatives will enable us to continue growing our balance sheet well within our current risk appetite. we remain very well capitalized with a CT1 ratio of 12.8%. In addition, next quarter we expect the implementation of parameter updates, net of other items, to add 55 to 70 basis points to our capital ratios, pushing our CT1 ratio to well above 13%. Even with these elevated capital levels, we generated a premium ROE of 19% for the first half of 2021. we will continue to leverage the strength of our balance sheet and recurring internal capital generation to further accelerate organic growth across our businesses. In addition, when regulatory restrictions are lifted, we will look to accelerate capital return to our shareholders through a mix of share buybacks and higher dividends, given our payout ratio is currently at the bottom end of our 40 to 50% range. Highlighting our organic value creation, our book value per share grew 8% from last year, with tangible book value per share up over 11%. I will now speak to how we see the macro environment unfolding. While we are in the early stages of an economic recovery, there is still uncertainty about the risk posed by new variants and stresses in supply chains. The time horizon for how the recovery will evolve continues to be correlated to the success of the vaccination rollout. It remains uncertain when international borders will fully reopen. Although there is still work to be done to open up all parts of the economy, we are encouraged by the progress so far. As vaccine distribution gains momentum, we anticipate an acceleration of economic activity alongside easing virus containment measures. Until then, fiscal and monetary stimulus remains in place to bridge the gap and stimulate the recovery. However, the combination of these actions and supply shortages is increasing the risk of inflation in certain asset classes. Consequently, there is a higher likelihood of central banks raising their benchmark interest rates in the second half of 2022. With respect to Canadian housing, we continue to monitor supply, demand, and balances across Canada, and we support recent actions taken by regulators to adjust mortgage stress tests to take some pressure off the demand side of the equation. but we encourage policymakers to also address the problems of limited supply, which are exacerbating house price inflation. As always, we manage risk through a cycle, and the credit metrics of our most recent mortgage originations remain strong and are consistent with our existing high-quality portfolio. Next, I will speak to a number of drivers that position us for strong performance going forward, starting with two Canadian banking businesses that are poised to rebound – And then I will highlight the embedded profit growth in our core deposit in U.S. wealth management franchises, followed by a number of initiatives we have to accelerate organic growth. I will start by commenting on our credit card and commercial banking businesses, which have disproportionately been impacted by suppressed economic activity. Over the last 12 months, total revenue associated with our credit card business was down approximately $400 million year-over-year largely due to lower net interest income as utilization rates fell 300 basis points. A stimulative macro backdrop sets the stage for higher yielding card balances and purchase volumes to recover alongside economic activity. This relationship is one that is highly correlated, and we are confident that it will hold coming out of the pandemic. As a result, we expect that our leading credit card franchise will see total revenue rebound towards pre-pandemic levels. Business lending activity has also been restrained, even though we have added $60 billion of business deposits over the last two years. Commercial banking utilization rates on operating lines have fallen below pre-pandemic levels. However, we do expect to see commercial activity resume over the coming quarters, fueled by client investments and inventory and receivable growth and rising utilization rates. In addition, we have two businesses which are better positioned than most to benefit from rising interest rates. Our strong growth in personal core deposits in Canadian banking has increased our sensitivity to higher interest rates and will drive outsized revenue growth in a rising rate environment. U.S. wealth management is also well positioned to benefit from rising interest rates given the asset-sensitive nature of Citi National Bank's balance sheet combined with nearly $40 billion of sweet deposits. I will now speak to the second pillar of future performance. our investment in technology goes well beyond just adding digital functionalities. These investments have helped create differentiated digital businesses and additional client touchpoints, accelerating cross-sell of existing clients and new client acquisition. We expect to see accelerated client growth through MyAdvisor, InvestEase, InsightEdge, Nomi, RBC Ventures, and Aiden, which have been in market for a number of years now. We made early and continuous investments in our distribution network and client-facing talent, including mortgage specialists, commercial account managers, and investment advisors. The combination of these investments over a number of years is driving better outcomes for our clients, strong volume growth, deeper client relationships, and increasing scale and profitability. We are proud to note that RBC has yet again been ranked number one in overall customer satisfaction among the Big Five retail banks by JD Power. So specifically, Canadian banking added over $55 billion in mortgages, $45 billion in personal deposits, and increased AUA by over $50 billion over the last two years, leading to market share gains in these anchor products. Our long-term strategy to grow our core deposit business and provide exceptional service and advice is a core driver of our differentiated ability in building deeper relationships. The result is Roughly 65% of our Canadian banking clients have more than just a transaction account with us, many of which also end up getting a credit card, a mutual fund, or a mortgage. Our mortgage relationships have higher retention rates for these multi-product clients, with mortgage profitability up roughly two times higher when a client is retained for a second term. Going forward, we are also excited about the potential of two new strategies to further accelerate client acquisition and growth in Canadian banking. We recently announced the national launch of RBC Vantage, a new everyday Canadian banking offering that brings together a comprehensive suite of powerful benefits for RBC clients, incentivizing even deeper client relationships. Our new offering gives clients the ability to use their debit cards to earn RBC rewards, save on monthly account fees, and earn more rewards and savings when they take advantage of partner offers. We launched our exclusive multi-year strategic partnership with the Royal College of Physicians and Surgeons in Canada to support the unique needs of Canada's medical specialists. Furthermore, 45% of our Canadian high net worth retail client base has a relationship with both Canadian banking and Canadian wealth management. We expect this ratio to increase over time as more of our clients shift surplus deposits into investment products, further accelerating the growth trajectory. Moving now to wealth management, where we've added to our leading scale by investing and hiring experienced investment advisors and technology investment capabilities to meet our clients' evolving needs. And this quarter, RBC Global Asset Management posted its strongest quarterly long-term mutual fund net sales performance ever. and has increased its assets under management by over $100 billion over the last two years. Furthermore, Canadian Wealth Management has increased more than $80 billion over the last two years. We expect to similarly benefit from trends in U.S. wealth management, where our past investments have included strong advisor recruiting. This quarter alone, we added a further $4 billion of assets under administration by hiring more experienced advisor teams. This is on top of the US $22 billion added over the prior eight quarters. These seasoned advisors are attracted by our client-first culture, coupled with the capabilities and resources of a large bank, including an integrated technology platform. We also expect the strong loan growth in Citi National to continue as the US economy opens up leveraging past investments to add private and commercial bankers, and expansion to new markets including our office in Hudson Yards in New York City. Growth will be further accelerated by the recent launch of City National's new National Corporate Banking Division, which specializes in meeting the complex needs of larger commercial and mid-sized companies across the United States. As you've seen in the last five quarters, we have benefited from the strong earnings provided by our capital markets business, which has delivered consecutive quarters of record results. Over half of RBC capital markets revenue is earned out of the United States and will continue to benefit from an improving economic outlook, constructive equity markets, and structural trends in technology and ESG mandates that are creating further opportunities in the world's deepest and most active markets. To better leverage this opportunity, we've continued to strengthen and expand senior coverage teams in key sectors. We are already seeing strong results with a solid pipeline of mergers and acquisitions, advisory and equity underwriting revenue. We have also reorganized our global markets unit into newly created cross-platform groups, including the Sales and Relationship Management Group to further strengthen our client-centric approach, the Digital Solutions and Clients Insights Group will work to further scale RBC's data science, artificial intelligence and digital expertise across product lines. To sum up, we have strong momentum across our core franchises and we will continue to focus on providing holistic solutions to grow and deepen client relationships with a goal of delivering long-term sustainable value. While we will continue to invest in new strategies, we remain committed to running our bank efficiently with an emphasis on driving productivity. We're also committed to delivering on our purpose of helping clients thrive and communities prosper. This includes our commitment to play an active and accelerated role in addressing climate change. Supporting and financing our clients' efforts in the transition to net zero is central to our strategy. I'll now turn it over to Rod.