Royal Bank Of Canada

Good morning, ladies and gentlemen. Welcome to RBC's conference call for the third 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 recue. With that, I'll turn it over to Dave.

Thanks, Nadine, and good morning, everyone. Today we reported earnings of $4.3 billion, driven in part by strong client activity as we continue to attract new clients and deepen existing relationships across our market-leading franchises. Our performance reflects disciplined execution of our strategy, strong expense control, volume growth, higher fee-based client assets, and record investment banking revenue. This was partly offset by expected normalization in global markets revenue and continued pressures from low interest rates. We also saw improvements in our macroeconomic outlook and credit quality, resulting in significant release of reserves which Graham will speak to later. PCL unimpaired loans and new GIL formations remain at cyclical lows as our well-diversified portfolios continue to perform in these uncertain times underpinned by strong underwriting and well-defined risk appetite. Our CT1 ratio increased 80 basis points to 13.6%, net of 15 billion of RWA growth. This was to support client demand and business growth across our platform. We leveraged our franchise and balance sheet strength to generate strong organic growth and an ROE of 19.6% this quarter or 19.2% year-to-date, well above our global peers. We continue to create long-term sustainable value for our shareholders in support of our 17 million clients. as underscored by our 12% year-over-year growth in book value per share. And even though regulatory restrictions remain, we paid $1.5 billion in common dividends to our shareholders, the majority of which are based in Canada. I will now offer some perspective on the macro environment, which we view with cautious optimism in the near term, but see growing in strength into 2022. We remain cognizant of the near-term challenges to global growth posed by new variants, an inconsistent global vaccine rollout, supply chain disruption, rising geopolitical risks, and continued global travel restrictions. However, we are encouraged by the economy progressing as it reopens based on trends we are seeing in credit card spend on both goods and services and business investment in term assets and in working capital. While the momentum that is building could moderate in the near term by rising virus cases, even with 75% of the eligible Canadian population being vaccinated, we believe the foundation of the economy remains solid and will manage through the threat of the Delta variant. As I noted last quarter, we are well positioned to leverage the scale and embedded profitability in our core franchises to significantly grow earnings in a more favorable economic scenario which would include rising interest rates, higher credit card revolve rates and growth in business lending. With or without a rate hike, our diversified business model and scale by geography, channel, product or service is poised to generate strong growth, particularly asset growth, through cycles and with a consistent risk appetite. Our success comes from our investments in significant client, data and geographic scale. This combined with our cross-sellability, brand and people have produced premium growth in average earning assets and market share gains in our core products. In Canadian banking, we added a market leading $37 billion in mortgages year over year, including over $9 billion this quarter. And we expect strong mortgage growth to continue, albeit at a lower rate than we've seen over an exceptional last 12 months. We are seeing green shoots of growth in our higher-yielding Canadian credit card and commercial loan portfolios, both up quarter over quarter. In the U.S., we are seeing particular strength at Citi National, where we've added $15 billion U.S. dollars in loans over the last two years, including over $5 billion U.S. dollars in mortgages. The recent launch of a new strategy supporting mid-corporate-sized companies across the United States is also proving to be successful. already booking over $1 billion in new commitments over the last few months. On the other side of the balance sheet, our long-term strategy to grow our core deposit business and provide exceptional service and advice continues to succeed. Over the last year, we added $43 billion of personal and business deposits in Canadian banking and a further $14 billion in deposits at Citi National. Our North American wealth management businesses have also been generating strong growth in fee-based client assets, both sequentially and a year-over-year basis. Canadian banking assets under administration were up over $63 billion, or 22% year-over-year, partly benefiting from strong equity markets and an increased client preference for investments, which I will speak to shortly. Furthermore, Canadian wealth management AUA increased 23% or $95 billion from last year, crossing $500 billion in client assets for the first time. RBC Global Asset Management had $35 billion in total net sales over the last 12 months, increasing assets under management 13% or over $67 billion year-over-year to record levels. And in U.S. wealth management, We added over $115 billion U.S. dollars of AUA, growing client assets 27% year-over-year and surpassing $550 billion U.S. dollars for the first time. We're continuing to invest in our people to capture a greater share of growth, adding managing directors and core investment banking verticals such as technology, healthcare, and aerospace. We're also adding ultra-high net worth private banking teams in City National on the East Coast along with an expanded presence in our core California markets. In Canadian banking, our team has added 1,700 employees year-over-year to capture strong client activity in mortgages, commercial banking, and investments. Another differentiated element of our strategy is building ecosystems that go beyond banking to enable RBC to participate in a broader part of the client journey and value chain. One example is an increasingly competitive Canadian commercial and small business segment. Several of these capabilities are made in RBC proprietary solutions. Owner, an RBC venture, has helped 45,000 entrepreneurs launch their businesses online, including 20,000 year-to-date. With RBC Insight Edge, our business clients can leverage aggregated data to gain relevant insights into their markets to enable them to attract more customers. We continue to make investments in building a digital platform with enriched payments and cash management capabilities for our business clients. RBC PayEdge helps our clients save time and money with a secure solution for their account payable process. We also launched RBCX, a platform to help entrepreneurs scale up their ideas through access to partnerships, capital, and advice in the tech, clean tech, and life science verticals. And to further support the Canadian tech ecosystem, RBC recently announced the Calgary Innovation Hub, while also signing on to become the anchor financial sponsor for Hub 350, a new technology park near Ottawa. And both RBC PayPlan and Amply allow us to increasingly partner with merchants across Canada to provide even more value for our retail and business clients. We have expanded our slate of partners, who continue to be a differentiator for RBC. And with the recent addition of DoorDash and FinanceIT, it will help attract new clients and create more value for existing clients. I've spoken a lot this morning about our asset generating opportunities. Also core to our client strategies is a fundamental belief in reciprocity, which rewards clients for the depth and breadth of their relationship with us. Last quarter, we provided a number of metrics highlighting our multi-product relationships, The recent launch of RBC Vantage further incentivizes the consolidation of our strong client relationships. And Vantage adds a further retail banking value proposition to our existing investment capabilities such as MyAdvisor, Direct Investing, and InvestEase. This expanded continuum of offerings allows us to support our clients with advice and solutions to help them make the best decision based on the prevailing macro backdrop. The continued low interest rate environment is making it increasingly attractive for our Canadian banking clients to shift out of lower yielding GICs and savings accounts and putting their money to work into investment products such as mutual funds. The related fee-based revenue along with higher client savings and card payments rates have been positive for credit quality and risk-adjusted revenue metrics, helping offset margin pressure. And even as we invest in our core client franchises to achieve premium asset growth, we remain committed to managing our costs as we have done in the past. This includes implementing a zero-based budgeting methodology where we judiciously and consistently reevaluate every cost and activity across the bank. To sum up, our diversified business model, scale, financial discipline, risk management culture, and robust capital position continues to provide the foundation for delivering differentiated client and shareholder value over the long term. And we will continue to grow in an inclusive and sustainable way that enables our clients to thrive and our communities to prosper. I will now turn it over to Rod.

Thanks, Dave, and good morning, everyone. Starting on slide eight, we reported quarterly earnings per share of $2.97, up 35% from $2.20 per share a year ago. Pre-provisioned pre-tax earnings of $5 billion were up a solid 6% year-over-year with strong client-driven performance in Canadian banking and wealth management non-U.S., along with record investment banking revenue more than offsetting a moderation in capital markets trading revenue as client activity decreased across the industry. Excluding the impact of foreign exchange and lower interest rates, pre-provisioned pre-tax earnings were up a strong 10% from a year ago. These results, yet again, highlight the resilience of RBC's diversified business model. Moving to slide 9, our CET1 ratio of 13.6% was up 80 basis points sequentially, including the benefit from model parameter updates net of the increase in SBAR multipliers guided to last quarter. This quarter saw a further $2 billion of net credit upgrades, lowering the cumulative net credit downgrade since the start of the pandemic to $8.5 billion. and strong internal capital generation, net of dividends added nearly 50 basis points of capital. This was partially offset by strong client-driven business growth across our largest segments. Going forward, we expect RWA to continue to grow given the client-driven organic opportunities Dave highlighted earlier. I also wanted to give an update on our initial analysis of the impact of the upcoming Basel changes. We expect a net impact of the reforms to be moderately favorable as the benefit from the implementation of the guidelines in 2023 are partly offset by adverse market risk impacts under the fundamental review of the trading book coming into effect in 2024. Moving on to slide 10, net interest income was down year over year. Excluding trading revenue, net interest income was up 6% from last year as strong client-driven volume growth in Canadian banking and Citi National more than offset continued margin pressures. Canadian banking NIM decreased four basis points from last quarter, largely due to competitive pricing pressures in mortgages and changes in asset mix. City national NIM was down 10 basis points relative to last quarter, largely due to the dilutive impact of a lower loan-to-deposit ratio with excess deposits being deployed into low-yielding short-term securities. Although NIM was lower in each business, largely due to mix, More importantly, net interest income was up at least 5% year-over-year in each business. Going forward, we expect all bank net interest income, including trading results, to continue to increase year-over-year as strong volume growth more than offsets moderating modern margin pressures. Turning to slide 11, while we don't anticipate short-term rates to increase in the near term, both Canadian banking and Citi National are well-positioned to benefit when they do rise, partly because nearly Half of the deposit base has near zero rates. Looking forward, we expect a 25 basis point increase in the short-term interest rates. The long end of the curve unchanged would increase Canadian banking net interest income by $90 million, and U.S. wealth management revenue would increase by another $80 million U.S. dollars in this scenario, including the benefits from our sweep deposits. Turning to slide 12, higher non-interest income, net of insurance fair value change was largely driven by strong growth in our higher ROE investment management and mutual fund revenue streams. This quarter also saw a shift in the revenue mix in capital markets. Strong loan syndication and M&A fees boosted underwriting, advisory, and credit fees. This was offset by a decline in global markets revenues. Higher service charges and card service revenue reflected the benefits of higher client activity in Canadian banking. On slide 13, non-interest expenses were well controlled, up only 1% year-over-year, largely due to higher variable compensation on stronger wealth management revenue, partly offset by lower compensation on reduced capital markets revenue and market-related movements in our U.S. wealth accumulation plan. excluding growth in variable and share-based compensation and the impact of FX expenses were up 1.5% year-over-year, partly due to higher salary and benefit costs. Non-compensation costs declined largely due to lower facility and cleaning costs. This was partly offset by higher technology and equipment costs, as well as higher marketing and travel expenses from prior year lows. We are cognizant that some of these discretionary costs could start to increase as economies begin to open back up and as we implement new client acquisition strategies. And as Dave noted, we will continue to execute on the zero-based budgeting program while continuing to invest in our people and technology to drive revenue growth. Moving to our business segment performance, beginning on slide 14, personal commercial banking reported earnings of over $2.1 billion, up 55%, mainly on lower PCL. Canadian banking pre-provisioned pre-tax earnings were up a strong 13% from last year. Canadian banking revenue was up 8% year-over-year, partly due to volume-driven growth in net interest income. Non-interest revenue was up largely due to higher mutual fund distribution fees underpinned by very strong AUA growth. Well-controlled Canadian banking expenses, up 2% from last year, combined with strong revenue growth, drove operating leverage of 6% this quarter and 3% year-to-date. On average, we expect operating leverage to remain at or above the higher end of our annual 1% to 2% historical guidance over the next four to five quarters based on current economic projections. Turning to slide 15, wealth management reported record quarterly earnings of $738 million, up 31% from last year. Pre-provisioned pre-tax earnings were up a strong 16%. Robust client asset growth across our wealth management franchises was underpinned by both constructive markets and higher net sales. This, in turn, drove strong double-digit growth in mutual fund and investment management revenue. In addition, strong volumes drove 9% year-over-year growth in city national net interest income in U.S. dollars, or up 5%, excluding the benefit from Triple P loans, which is expected to moderate in the fourth quarter. RBC GAM attracted net sales of over $10 billion in the quarter, with institutional flows into money market mutual funds, adding to continued strength in Canadian long-term retail net sales, which added nearly $6 billion to AUM. As with recent quarters, the majority of retail flows went into balance and equity mandates. Turning to insurance, slide 16, net income of $234 million increased 8% from a year ago, primarily due to the impact of new longevity reinsurance contracts, lower claims costs, and the favorable impact of actuarial adjustments. These factors were partially offset by the impact of realized investment gains a year ago. Turning to slide 17, Investment Treasury Services reported net income of $88 million, up 16% from an even more challenged quarter last year. Funding and liquidity revenue increased from low levels last year, and lower interest rates continue to drive deposit margin compression, negatively impacting client deposit revenue. Turning to slide 18, capital markets reported earnings of over $1 billion for a third straight quarter and pre-provisioned pre-tax earnings of over $1 billion for the seventh quarter in a row. Corporate investment banking reported record investment banking revenue. Strong loan syndication and M&A advisory fees were driven by robust deal flow and higher industry fee pools. Recall last year also included recoveries in loan underwriting marks following the thawing of leveraged loan markets. Global markets revenue normalized from recent elevated levels, down 31% year over year due to lower client activity. Pick trading results were down 35% year over year as tightening credit spreads last year drove mark-to-market gains as well as robust activity in our spread business. Macro products were also down from last year, which benefited from elevated market volatility. Lower spreads amidst elevated market liquidity and lower balances continue to impact our repo and secured financing business. Equities results were down 20% from last year, underpinned by lower levels of market volatility. Going forward, we see a solid pipeline of M&A advisory mandates. Equity issuance activity is also expected to remain solid, but lower than peaks experienced in the first half of the fiscal year. We anticipate debt origination and trading activity will continue to normalize from recent peaks, but remain above pre-pandemic levels. In summary, we continue to exhibit strong momentum across our core franchises, and we are well positioned to accelerate our growth trajectory while remaining focused on expense management. And with that, I'll turn it over to Graham.

Thank you, Rod, and good morning, everyone. Starting on slide 20, allowance for credit losses on loans of $4.9 billion was down $658 million compared to last quarter. This includes a $638 million release of reserves on performing loans, primarily in capital markets and the Canadian banking cards and personal lending portfolios. The release reflects improvements in both our macroeconomic outlook as well as the credit quality of our portfolios during the quarter. We have now released about 40% of our pandemic-related reserve build with ACL of 0.67% of loans and acceptances down from its peak of 0.89% in Q4 of last year. Our level of allowances remains well above pre-pandemic levels given the ongoing uncertainties associated with the COVID-19 Delta variant and a conclusion of the significant government support that has benefited both consumers and businesses. Turning to slide 21, our gross impaired loans of $2.6 billion were down $216 million or five basis points during the quarter. Impaired loan balances decreased across all our major businesses, and new formations of $293 million were at nine-year lows this quarter. Muted new formations in Canadian banking are due in part to ongoing government support programs, as noted earlier, On capital markets, clients continue to benefit from active debt and equity markets providing strong access to capital and the improving macroeconomic environment. Turning to slide 22, PCL on impaired loans of $146 million, or eight basis points, was down three basis points from last quarter and has trended lower in each of the last five quarters. In the Canadian banking retail portfolio, PCL of $136 million was down $25 million from last quarter with decreases across all products, with the exception of our residential mortgage portfolio, where PCL was flat quarter over quarter and remains at its lowest level in more than five years. In the Canadian banking commercial portfolio, PCL of $25 million was down $9 million from last quarter. The credit quality of the commercial portfolio is strong, with sustained low delinquency rates, positive net credit migration, and reductions in our watch list exposures. In capital markets, we had a net recovery for the second consecutive quarter. The net recovery of $16 million was due to PCL reversals in the real estate and related and oil and gas sectors, partly offset by a provision in the transportation sector. Our strong performance on credit continues to be a reflection of the quality of our client base, the diversification of our portfolios, and our prudent underwriting practices. With government restrictions easing and companies starting to return employees to premises, I'd like to provide an update on our commercial real estate portfolio on slide 23. Our portfolio is well diversified by geography, business segment and property type. As I noted in prior quarters, the retail segment of this portfolio has been most impacted by COVID-19 restrictions. Rent collection has been most challenged for enclosed malls, which have faced closures and reduced foot traffic. However, our exposure to enclosed malls is limited and the loans were well-structured heading into the pandemic. As for the office segment of this portfolio, we have not seen material changes in rent collection or occupancy rates. However, the outlook for the office segment remains uncertain as companies will need to balance remote work capabilities with physical distancing requirements and the need for more space per employee when in the office. The remaining segments of this portfolio where a majority of our exposure sits have not been materially impacted by COVID-19. We continue to monitor the portfolio and are carefully managing exposure to the retail and office segments. To conclude, we are pleased with the positive trends in our credit portfolio that we are seeing as the economy recovers. We have seen pandemic-related government restrictions easing and significant progress on vaccine distribution, which has contributed to the strong credit performance this quarter. While pandemic-related uncertainty has declined, translating into a large release of reserves on performing loans this quarter, uncertainty does remain elevated due to a rise in cases of the COVID-19 Delta variant. This could impact the timing and pace of the economic recovery. We do, however, remain adequate provision for an expected increase in delinquencies and impairments in 2022, that we believe will result in 2022 PCL and impaired loans trending above our long-term average. However, as I noted last quarter, we expect to be able to draw down on the remaining balance of our unperforming loans we built in 2020, such that our total PCL across all stages will remain below long-term averages. And with that, operator, let's open the lines for Q&A.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. If you wish to cancel the question, please press star 2. Please press star 1 at this time if you have a question. There will be a brief pause while participants register. Thank you for your patience. And the first question is from Ibrahim Poonawalla from Bank of America. Please go ahead.

Good morning. I was wondering if we could... Maybe, Dave, address just your view around the housing market. As you think about, obviously, it's become a big election issue with the ban on foreign buyers being promised. Just talk to us in terms of how, given just your mortgage business being very strong, how you see the housing market today, and do you see the appropriate policy responses coming through to kind of make housing affordable, especially in the metro markets?

Thanks for that question. I'll say a few comments, and Neil, who's also very close to the issue, I'll ask to make a few comments. So we look at the structural elements of the housing industry in Canada on a monthly basis. We have a lot of stats. We track on supply-demand and supply-demand imbalances. Those obviously continue to persist where you have a shortage of supply and highly stimulated demand marketplaces from all the things we talked about, low rates, consumer preference changes and lack of general supply, as I talked about, and an inability to fill that gap quickly. So obviously price increases are part of this. And as an employer in the major metropolitan areas, we certainly worry about the cost of housing and the effects on our employees and our ability to attract talent to the country and to the cities where we operate. One of the reasons why we created the Calgary hub for technology is to diversify our employee base across the country and access talent in different marketplaces. So to your question, the rising cost of housing have an impact on all employers, our cost of operating and our inability to operate the way we want to, and therefore we're starting to make the moves like you saw in Calgary to diversify our areas. We don't worry about the quality of our credit book. It's well adjudicated. There's good equity positions. Still a third of it's insured. Therefore, we're confident in the cash flows and the stress tests and the policies that have gone into changing those stress tests to make sure adjudication is solid. So this is more a long-term macroeconomic issue. And where I do worry, Ibrahim, to your point, is the more cash flow that consumers are putting into housing stock, the less is available to drive the economy. So I think all policymakers are worried partly as well about long-term economic drag from that much cash flow going into servicing housing. So those are all elements that lead us to think about policy for the country and policy that tries to keep everything in balance. From an economic growth perspective, from a cost of living perspective, from an attractiveness and quality of life perspective, we're all trying to keep those things in balance. So I think it's important that we look at policy initiatives that try to balance the needs of Canadians and the prosperity of Canadians and the happiness of Canadians. So with that, I'll pass it to Neil.

Thanks, Dave. Ibrahim, the only other things I would add is I think just if we focus on our mortgage business and the underwriting in that business, I mean, I think B20 has been a positive for the industry, a lot more granularity on the different segments and transactions in the book. The stress test, I think, has built in confidence that there is resiliency there. I think in terms of the supply-demand imbalance, maybe just a couple other points to build on Dave's. I think more recently you've started to see the supply side start to get more airtime. I would say that's something that does need a lot more focus. We have, I think, a very strong immigration policy, but a big portion of that new household formation comes from newcomers. So we see what's driving it. Beyond some of the things I would say that are maybe more macro in nature, some of the things that could be shorter term, we get a lot of feedback from some of Canada's largest developers that a more cooperative municipal set of policies could help them actually increase bringing more supply to market. So that may be a tactical thing that could be done, but I think the supply side is something we need to be talking more about.

Got it. Helpful, Kala. Thank you.

Thank you. The next question is from Manny Grauman from Scotiabank. Please go ahead.

Hi, good morning. Dave, you touched on the macro outlook in your opening remarks, but to put a finer point on it, if I think back to the call last quarter, you made a very bullish case for the recovery and for oil's ability to really take advantage of that recovery. And I'm wondering, given the Delta variant, things have evolved. Is there any change in your outlook, anything you would highlight that's different now than it was when we were speaking, I guess it was early June?

I think net-net, when you think over the medium term, as I said, through 2022, we're still equally as positive about the opportunity for the economy to grow, to accelerate beyond where it was in 2019. We're seeing that economic activity progress nicely, right? We look at our credit card spend. We look at the activity levels that are now above 2019. We're starting to see draws on our operating working capital line. So that was the green shoots I referred to, all symbols of confidence returning. We're seeing term asset lending start to grow. We've seen our authorized credit book increase, I think, almost 10%. So you're seeing all the signs of economic confidence What's going to happen with the Delta variant, it may pause things for a month or two as we have to work through and make sure we don't overwhelm the health system. It's a little concerning to see the numbers. But we're always starting to see in other parts of the world a little bit of a turn on the Delta variant. So we'll manage through this. With 75% of vaccination rates, we don't expect we're going to have to shut down the economy the way it was last year or early in 2021. So we should have every ability to manage through this. given what we've achieved so far and therefore, I think you're talking months of maybe slowing return to work, slowing the full reopening of some of our service sector until we deal with this. Governments will make that decision, but that will not, I think, upend the majority of the momentum we have. So still very positive about the continued progress on the reopening economy through the next 12 to 24 months. Thank you.

Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.

Good morning. I'm just looking at the new Canadian banking slide that you provided on slide 6. And it's just on the revenue yield showing stable, the NIR offsetting, the NIM pressure. So just on the NIR side, on the yield, what kind of factors are kind of driving that? And is the message that the NIR is more stable or that could potentially increase over time as well?

Yeah, thanks for that question, Scott. You know, the NIM is obviously a factor of what you're paying on the deposits, as you well know, and what you're receiving on the loan. So the mix has been a significant driver of our overall NIM. and the NER as you referenced. And so as we continue to grow mortgage at an elevated rate, that will naturally come down because those products, because they're secured and well underwritten, tend to have a lower rate with the client. But as the green shoes happen that Dave talked to, and we start to see credit card balances come up, and we start to see commercial balances come up, we would expect that to start to bottom out and then start to increase again. And that will help NIM overall bottom out and increase again. But importantly, because the volume growth is so strong and because the deposit growth is so strong and it's very low costing, the net interest income has bottomed out and it has been growing and will continue to grow.

And what about on the NIRS side? Is that also forecasted or expected to increase like it has over the past year?

Scott, it's Neil McLaughlin. I'll jump in. Yeah, I think what we're trying to get across there is, you know, on the other income side, you know, really good growth year over year. I think a reflection of the diversification, just what we have in terms of the retail bank, you know, strong growth in mutual fund trailer fees, our new client acquisition over the last couple of years paying off in higher service charges. We're starting to see a little bit of bounce back in FX. you know, our direct investing business, obviously benefiting, you know, from the macro trends there. So I think the message here is, you know, there is a strong contributor in other income, and that's, I think, really, you know, while NII is up 5%, NIMS are down, obviously, but between the two, you know, I think that's, we're just trying to decompose the overall revenue contribution. Got it. Thank you very much.

Thank you. The next question is from Sora Movahedi from BMO Capital Markets. Please go ahead.

Thanks. That's actually a great segue to my question. I guess, Neil, there is also a slide in here that talks about beyond banking for the Canadian business. So you're not attributing any of the fee income or other income results in your segment to these initiatives over here, listed on page five?

Yeah, I mean, I think what we're really trying to get to there in terms of our strategy is, you know, two things we'd say really, you know, our continual focus is, you know, the value for money we're providing clients and our distribution to be able to get in front of more clients year over year. What we're really trying to lay out here is we're starting to play upstream and downstream in terms of the client's value chain. And an example here with owner that Dave talked about, we are seeing an increase in new small business accounts related to our investment in owner. And really pleased with the trajectory, really pleased with our ability to turn those new business registrations into RBC customers. So there would be one example. Another example around the value play is RBC Inside Edge you see there. This is an example where we're taking our data and we're turning that into new value in terms of being able to tell a merchant, a B2C business client, more about who their consumers are. MIS that they wouldn't usually have that we can then provide them on a confidential, sorry, on an anonymized basis. So those are a couple examples as you get in sort of further down the value chain there. RBC PayEdge, that was something else Dave touched on. This was a product we developed and really built out after our 2019 acquisition of a small company called WayPay. And what this does is it automates the accounts payable and reconciliation process. So again, taking another part of that entrepreneur's business and really simplifying it so they can save costs and drive more convenience. So those are the types of things that you start to see represented on this slide. And our confidence in terms of the strategy just continues to grow.

Neil, if I could just have a follow-up. Is it fair to say then that... The benefits of these initiatives listed under the Beyond Banking slide primarily, first of all, accrue to your business, number one. Number two, they accrue probably both in terms of top-line growth, but maybe even efficiency improvements, I suppose, and operating leverage. But most importantly, through increased customers, which ultimately in a kind of concentrated mature space, I guess what I'm trying to figure out is how much of it is growing the pie, how much of it is increasing your share of the pie, and is this primarily a market share grab or benefit or gain or win in Canadian banking, and how much bigger can you get, I suppose?

Yeah, great question. So something like owner would be what we think about as top of the funnel, so that would be driving new clients. An example like InsideEdge, there is a fee revenue stream that comes off of that as we charge those merchants. As you move down into the RBC PayEdge, the other example I used, or in PayPlan, which is another value proposition we're putting into merchants' hands, this is fee income. And so there is, I would say, a share of wallet and another income contribution from both of those. So it is really both.

This is Dave. I think that's the key. It's both attracting more clients and new clients. As I mentioned, 20,000 new clients on the small business side this year alone. We could also show you an ecosystem like this in home equity and in everyday payments and shopping. So we gave you an example of a well-constructed ecosystem in our business and commercial side, but this is obviously a big part of the strategy we articulated in Investor Day four years ago that's really coming to life to drive both client acquisition, but also an expansion of fee opportunity and new revenue streams to the bank.

Thank you all. Thank you. The next question is from Gabriel Deschain from National Bank Financial. Please go ahead.

Good morning. A couple quick ones here. One on expense, the outlook there for Rod, up 1% down 1% in the non-comp, variable comp category. Let's focus on that number. Is that one where you're continuing to grind it down over the next year and a half or whatever? Or do we start to see a ramp up? And then on the discount brokerage side, could you quantify the revenue exposure there where we're seeing some competition on the commission rates?

I'll start. Thanks, Gabriel. I'll start on the expenses and then hand it off to Neil for the discount, I'm sorry, for direct investing. So on the expenses, yeah, I mean, this is a continuation of our cost management program, of our efficiency initiatives. You know, we look to spend dollars where it makes sense to continue to grow market share, to continue to invest in distribution. We think, you know, that's one of the key reasons why we're growing market share in our core businesses, and that's not only people but also technology. and we will continue to do that. But we're also going to continue to, as you referred to, grind down other costs in an effective way as we digitize and leverage that technology. We expect other cost growth to moderate. Now, is it going to be negative or zero for five straight quarters after it's been negative or zero for the last five straight quarters? Unlikely. It's probably going to have a little bit of uptick on that, but it's not going to grow wildly. It's not going to get up to mid single digits. It's going to be lower single digits. And then the rest of the expenses will flow in accordance with variable compensation, you know, for our financial advisors, for our managing directors and whatnot, and for our employees at large. So that, I think, is the outlook for expenses. And I'll hand it off to Neil for direct investing.

Sure. Thanks, Gabriel. Yeah, in terms of the competition we're seeing there, I mean, we've seen one more player, you know, go to zero on commissions. We have another player in the market who's already there. announcement this week was from a player who has a very, very small market share. As we look at, again, the focus on value for money for our customers, we feel there is good value in the RBC direct investing platform in terms of the tool sets we have there, the top tier research, one of the few to provide free streaming quotes. So I think the value is there. I think one of the differences is also we look at the investment market on a holistic basis. So between Doug's business and ours, between the branch retail customer, a DI customer to a DS customer or the robo offering, we have value propositions in every portion of that market. A large portion of our direct investing customers are also banking customers. So again, the value comes from what they're paying for trade, but a good portion of those also participate in the RBC Vantage program and they're actually receiving discounted banking fees for that. So another way that we're delivering value. I think those are the things we're focused on. We'll obviously watch the market, but we're committed to having a strong value proposition in every space of that market. And in terms of what that would mean for us, I wouldn't say as we look forward, this is not a material part of the retail bank's revenue line.

It doesn't sound like you're in a rush to follow that pricing strategy. We'll move on to the next question. Thanks.

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Hi, good morning. Just on the credit card business, balances are up quarter over quarter, still down year over year, but I'm curious the percent of clients that are paying down balances monthly today versus pre-pandemic, and so how much of the growth is coming from the revolver side and And maybe, you know, given the higher liquidity, you know, might the rebound on the net interest income from higher card balances lag? Is that a fair assumption? And then maybe if I can tag on something else in terms of what you're doing or what you're seeing from a buy now, pay later trend perspective and how if you feel that's a threat, I believe you've done some stuff in that marketplace. Maybe you could talk a little bit about your thoughts on that as well. Thank you.

Sure. So in terms of the card book, I mean, I think that's the appropriate split is you want to look at it in terms of the two large segments, the transactors, you know, who are paying their credit card bill in full every year, where the focus is really on the fee side as well as interchange. You know, those transactors are driving disproportionately this increase in spending, and they're also driving disproportionately the increase in what you're seeing in terms of balances. On the revolver side, we actually have seen that mix, actually. The percentage of revolvers come down versus pre-pandemic and a direct correlation to the stimulus in the economy and the conversations we've had about the average Canadian just having more in their deposit account. So there has been a segment that used to pay us interest that no longer pays us interest. I would say the timing of when that comes back, I think, is obviously really hard to predict. But I would say your point on it will be expected to lag is absolutely right. I mean, when we look at it, the encouraging signs Dave touched on is spending is up even versus 2019. And we talked about categories, I think, last quarter that everything was up except for travel and dining. We're seeing dining get fairly close to those 2019 levels. And while travel isn't there, it's really spiked since sort of mid-May. So a lot of positive signs. So the effective yield in the portfolio is down, and that's part of our NIM story. In terms of buy now, pay later, what I would say is there are options that clients have, and there was a good article in The Globe about how this may play out differently in Canada than other markets. You're already seeing a number of credit card issuers launch capability for clients to select almost any transaction over a certain threshold and be able to term that out. I think that'll play out differently in Canada. But we do look at buy now, pay later as something that merchants have said, this is a value, and they want to have it particularly in their digital properties. And that's really what led us to launch PayPlan. So we're participating on both sides of that equation and really look at it as more so not a real headwind for a lending business, but more so a value proposition merchants are going to expect. Thank you.

Thank you. The next question is from Lamar Persag from Cormark Securities. Please go ahead.

Thanks. So I have a more of a big picture question. I didn't think I'd be sitting here talking about Royal delivering a near 20% ROE while holding 13.6% in common equity tier one capital. But here we are. Is there any reason you think that a 20% ROE wouldn't be sustainable going forward? I appreciate there's a number of big puts and takes, normalizing credit environment, but on the plus side, potential return of capital. So I guess where I'm going at is maybe can you talk to me about where you see the ROE for Royal playing out over the longer term? Thank you.

Thanks for that question. It's obviously something that we think about as well. I can give you maybe some of the bigger drivers of positive and negative to those ROEs, and we can talk about the ranges, we obviously see ROEs well above our medium-term objectives. So some of the positives, as we've talked about on the call already, are higher yielding asset growth, such as credit card revolve rates coming back, credit card spend, all the revenue drivers, the NIM stabilization, the NIM expansion, being really positive for ROE, particularly in Kennegan Banking, but also City National. You can't underestimate the impact, and we have inserted interest rate sensitivities on City National balance sheet of the impact on our revenues of the year-over-year rate decreases. So I think as those come back, as rates come back, those are all positive drivers for ROEs on our existing balance sheet and our existing capital base. So if you don't have to put more capital against return of revenue, that's obviously ROE enhancing. Our very strong fee-based revenue generation and the mix that we have, which is market leading, is again really positive for ROEs. The strong investment banking pipeline we have and our goal to continue to advise clients and generate fees off our existing balance sheet and generate more turns to that balance sheet than we have in the past. All our ROE enhancing capabilities. And obviously, as we've talked about, returning capital to shareholders and through dividend share buybacks, are we enhancing as we manage that base of excess capital? And knowing that if we do make any inorganic play, it will certainly be for strong growth and very conscious of any dilution. So those are how we're thinking about capital. So I would say when you net the tailwinds, headwinds, our particular franchise has significant opportunity to and enhance revenues from the existing deployment of balance sheet in RWA. And I think that's, you know, we've earned through that, as I've said almost every call up until, you know, Q3, quite nicely in those headwinds, and therefore when those headwinds become tailwinds, they're ROE enhancing. Now, Rod, I'll hand it to you to add some more color. It's a really important question.

Yeah, thanks, Dave. Dave covered the key core business drivers. You know, a couple things I look at, and we have it on the slide, one of the first slides, you know, book value per share growth at 12% year-over-year, tangible book value at 17%. Part of that is showing that our organic client-driven growth is going to be ROE accretive. And Dave mentioned the Citi National acquisition and how it accelerated our organic growth. Since then, our RWA has had an annual CAGR of 3% growth since that acquisition, and our EPS has grown nearly 12%. And so as long as we can continue that velocity of growing earnings and client relationships faster than capital, we're going to continue to be accretive to ROE. But as Dave pointed out, you know, as you pointed out in your question, it's not going to be at this level because we're not going to have big reversals every quarter on PCL. So you strip that out, and you should see ROE in the high teens and with an upward bias.

Great. Thank you.

Thank you. The next question is from Mario Mondonca from TD Securities. Please go ahead.

Good morning. Grant, can we go back to some of the outlook you offered? You suggested that impaired loan PCL in 2022 might be above the long-term average for Royal. I think that's how you phrased it. If I look at the long-term average for Royal Impairs, we're probably talking something like 25 to 30 basis points over the very long term. And this year, the impaired might only be about 10 basis points. So we're talking about a near tripling of impaired loan PCLs in 2022 relative to 2021. So to offer that outlook, it would seem to me that you're seeing something that's encouraging you to call for a near tripling in the impaired loan PCLs. Firstly, did I get my numbers right? And secondly, what might you be seeing?

Yeah, thanks, Mario, for that question. I mean, yes, I think your general numbers there are about right. You know, I'd comment on a few things. You know, one is I think we talked about in past quarters, like, you know, there's really three things we've been looking at here to kind of assess our forecast and uncertainty around those. One was progress on vaccines, two was the subsequent reopening of the economy, and then three was the government support and significant levels of government support. And certainly while we've seen, you know, really great progress on those first two points, it's that third point that still, you know, is significant out there and will impact, you know, the trajectory of loan losses as we head into 2022. You know, part of the debate that we've seen over the last year is the degree to which that government support you know, defers or mitigates those losses. And I think the further that government support goes and the further it goes into the economic recovery, you know, it pushes more and more towards mitigate and not just deferring those loan losses. And so I think there could be a period in 2022 in certain of our portfolios that we will see our loan losses, our stage three loan losses, get up to or around our long-term averages. But as I said in my comments, you know, we have very significant stage one and two reserves in place right now and that we would expect that really to be offset or funded by releases in stage one and two so that that kind of total mix, if you will, kind of remains well within our long-term averages as you articulated.

So if we go back then to the notion that the impaired loan losses could be higher in 2022 than the long-term average, would it be possible for you to highlight what specific product lines you would point us to? Would it be something like credit cards and personal loans? Would it be more like commercial? Or is that just a little too granular at this point in time to comment on?

Yeah, I would more point it towards, you know, where we see government support most significant, right? And so that's going to be in large part more in our personal and commercial businesses where we've seen significant government support both benefiting consumers as well as businesses. You know, we've seen that factor in significantly, you know, along with all the actions that consumers have taken themselves, obviously, to effectively suppress loan losses to very low levels that we're experiencing right now. As we've noted, we're seeing, you know, the lowest level of new formations that we've seen in a long, long time. And so those are all positive factors in the near term, but ones that we don't necessarily expect to see persist over the long term. As well, you know, recently we've seen, obviously, in the wholesale side are – PCL, our Stage 3 PCL, has benefited from recoveries. We've seen recoveries in all three businesses that have kind of, again, suppressed the near-term Stage 3 reserves we put in place. So, again, I think some of those will normalize, but certainly we're really looking to see how the government support rolls off and how that consumers transition back into the economic recovery, how it will impact our loan losses. And so we do expect it will rise over 2022. So we get to that point, as I indicated, and as I said, it will be funded in part by our releases in Stage 1 and 2.

Let me put another lens on it, Mario, which might help also. I don't know if you picked up on this in Graham's comments, was this is, you know, we still have a significant Stage 1 and 2 build since the pandemic, and we still have 60% of what we added on our balance sheet. And so implicit in that is that we will incur losses on those, which means higher Stage 3 than what we've been seeing. So if we don't see those losses, we would expect to release some of the reserves. If we do see some of the losses, we would use the stage one and two against those. So I think what Graham is talking about is implicit in our allowance for loan losses as well.

Okay, that's helpful. Thank you.

Thank you. Once again, please press star one if you have a question. And the next question is from Ibrahim Poonawalla from Bank of America. Please go ahead.

Thanks for taking my question. I just wanted to follow up. Dave, you spend a lot of time talking about RBC Ventures, new ways of client acquisition. Just talk to us. I think one of the conversations with long-term investors has centered on, one, what does a structured open banking framework in Canada mean with regards to your grip on the client's wallet share? Like, is there a risk to Royal? And then looking externally, does fintech create M&A opportunities or partnership opportunities in the U.S. or in Europe for RBC to play a disruptor role as we've seen with some of the U.S. big banks trying to do?

That's a great question, and thanks for coming back on and asking that. I'll give a strategic perspective. And, you know, Neil's obviously a very active investor on the strategy and on the policy within Canada that's being discussed right now. I have to say, we're anticipating a more open market. We're anticipating disruptive tech platforms that we've talked about for the last five years. And therefore, when you think about ventures, when you think about owner, you think about these ecosystems, we feel they're all designed to compete in this type of marketplace. So when we think of open banking, the ability to to see more clients and attract them through our beyond banking ecosystems, we think we're well prepared to compete in an open banking world. We've been preparing for this. One of the reasons why create more value for customers is the rallying cry and the core strategy is around wrapping your arms around clients, creating value, making it very hard through RBC Vantage, through our partners like DoorDash and PetroCanada to pull a client away. So we feel really well prepared with how we've wrapped our clients in value to compete. And therefore, if we have access to other clients with all the channels we have, we think open banking can create a significant opportunity for RBC, and we don't fear it. So with that, Neil, specifically, you worked on policy, you worked on the strategy. Over to you.

Yeah, thanks for the question. So in Canada, I mean, this has been a file that's been open for quite a few years now, and the advisory committee has just now submitted the report to the government. The industry has been working very collaboratively to make this come to market faster than some may think. We've already landed as an industry on what's called the FDX standard, so we have a format that we can start to put in place to exchange data in a safe and private way. I think these are some of the paramount concerns. At the end of the day, I'd say we are supportive of open banking and look at it as, you know, it's something that clients are asking for. It's not about being made to do it. It's about something that we see, you know, clients really, you know, having a right in terms of the portability of their data. I think it's important to sort of call out if you look at other regions, particularly in the UK, which was one of the early movers, you know, there wasn't in that market, you know, a real increase in churn and there hasn't been, you know, many markets where you've really seen a lot more competition. I think if that does happen, if Canada were to play out differently, I think we view this as an opportunity a lot more than a risk. We look at our value propositions. Dave spoke to some of the new ones we're bringing to market, but our core retail banking value propositions of our product line, our ability to reach out to customers and the way we use data now, we believe there's a real consolidation of the wallet opportunity in an open banking environment that net-net we come out as a winner. I think those are probably the things to take away, is that the industry is working together to try to get this to happen, and that there's a lot of safety and privacy concerns to get right. But it will enable some of the things Dave spoke about, and if there is more churn, then we're ready to get into it.

That's helpful. And just in terms of when you look at the U.S., Dave, is there an opportunity on the consumer side, given like City National is a very niche-focused company, Is there an opportunity for oil to play the disruptor role in U.S. retail banking and on the consumer side?

Yes, that's a great question. It's something we've been thinking about for quite some time. I think the key strategic capability you need is a partner that gives you access to those clients. It's very straightforward to build a direct-to-consumer deposit bank, but you pay... wholesale rates are plus for those deposits that make it very difficult. The key is to have an asset generator along with a deposit taker where you need a core strategic partner is the best way to go to market. We've talked to many partners. It's still on the strategic table. And, yes, it's something that I could see RBC doing in a direct-to-consumer way. As I said before, we do not see ourselves being a mass consumer branch-based bank. I'll say that again just because I know investors want to hear that. but a direct-to-consumer with a strategic partner is a very effective way to go to market versus a funding model of direct-to-consumer, which is high-cost savings, is always accessible to us. We've held off given, obviously, the long deposit position we have right now. It's not worth launching that. We have it on the shelf ready to go, as we've talked about before. So that would be how I would think about direct-to-consumer strategically in the U.S.,

That's helpful. We'll stay tuned. Thanks, Dave.

And one more question I think we'll take, and then we'll wrap up.

Thank you. And the final question will be from Nigel D'Souza from Veritas Investment Research. Please go ahead.

Thank you. Good morning. I just wanted to touch on risk-weighted assets and PCO reversals in the quarter. And should we expect those two items to move in tandem? So what I'm getting at here is as you reassess and lower your probability of default assumptions? Do we expect that to drive your PCL reversals as well as have a benefit on the RWA side through a lower risk weighting? Is that the right way to think about it?

I'll start with that. If Rod wants to chip in, he can add to it. They should be correlated, but they don't correlate one-to-one. The default probabilities that go into RWA are are designed to meet regulatory purposes there, and so they're really meant to be very long-term averages. And so while we do reassess those annually, they won't change dramatically from year to year. We saw, obviously, a significant shift this year, but that was a byproduct of a big investment on our part to kind of reevaluate our methodology there, a big investment in data to get more granular, and then kind of a one-time methodology change. IFRS 9 is meant to be more of a point-in-time estimate of defaults. And so that's more of a real-time impact that will translate through. So directionally they should correlate, but they certainly don't correlate one-to-one.

Yeah, the only thing I'll add, and then I'll turn it back to Dave, is I would expect, because that was a one-time decrease in our parameters, wholesale parameters, I would expect RWA to have an upward bias from here as we continue to grow clients and our businesses. And I would expect the allowances to have a downward bias as we continue to to work through the pandemic and the reserve bill that we built since then. So with that, I'll turn it back to Dave.

Thanks, Rod. Maybe I'll just say a few wrap-up questions. We really appreciate the comments today, which thematically were centered around how are you going to grow, how are you going to adapt to a changing world, whether it's a policy-changing world, deal with variance, and deliver shareholder value. And I think just to reinforce our comments around growth, whether it's in Canadian banking from cards markets Revolving credit growth, you know, well positioned on commercials, have drawdown in lines and more term lending with our existing facilities. One thing we didn't mention is, you know, one-third of all our mortgage volumes are now new clients, first-time clients to the bank. And now we have a unique opportunity to cross-sell those clients into RBC Vantage and to a number of other investment products. So, you know, very attractive client. And that's different than it was, you know, five to ten years ago where, you know, potentially 80-plus percent would have been already existing clients. On CISI National, we've talked about our core commercial capabilities. We've talked about moving into the mid-corporate area and growth in our high net worth core banking are all key abilities for us to continue in a lower risk, higher ROE core growth that we've enjoyed now for the last five years. We didn't get a chance to talk about Canadian wealth today, but outstanding growth. results in our asset management business and global asset management and in our Canadian wealth franchise, capturing a disproportionate share of investment growth in the country, whether it's AUA or AUM, and obviously well poised to continue to grow that. We've invested not only in our people but our technology, and we're cross-selling better off of that. So when you look at capital markets in the investment banking pipeline, obviously we're really well positioned. We didn't get a chance to talk about that today, but a really strong pipeline and obviously looking for year-over-year in our trading businesses. It was particularly in FIC was a difficult year-over-year adjustment, but we hope some of that does come back. Really strong cost control, and I would say on the risk side, we don't see anything in the portfolio. Very strong adjudication, and our growth has been increasing in higher ROE, lower products, particularly mortgages in the U.S., mortgages in Canada, which is why we inserted that new slide to give you an idea. It's not just the NIM, but it's the NIM after risk, adjusted that you have to also be cognizant of, and what ROEs are you driving for your organization? So when I think about risk, our strong ability to manage risk or premium growth, investment for growth, and we got some great questions on ventures today and around the ecosystem beyond banking, which will drive not only new customers, but are already starting to present new revenue streams for the organization. So thank you for a very strong series of questions today. I will see you in Q4.

Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.