Royal Bank Of Canada

Good morning, ladies and gentlemen. Welcome to RBC's conference call for the fourth quarter 2021 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Nadine Ahn, 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, Asim, and congratulations on your recent appointment to RBC's Head of Investor Relations. And good morning, everyone, and thank you for joining us today. This morning we reported fourth quarter earnings of $3.9 billion. Our results include further releases of PCL on performing loans, primarily reflecting improvements in our macroeconomic and credit quality outlook. Pre-provision, pre-tax earnings of $4.8 billion were driven by robust client activity, driving fee-based revenue growth in Canadian banking, wealth management, and investment banking. In addition, Canadian banking and Citi National continue to generate strong volume growth. These factors were partly offset by a moderation in our global markets businesses that continued impact of low interest rates and higher expenses largely due to variable compensation. As we continue to invest in our core businesses and strategies, we're committed to running our bank efficiently and driving improved productivity. Looking back, 2021 was a year that saw RBC stepping up for our clients. and communities while supporting our employees. Across our core businesses, we saw robust client activity, and as a result, we delivered record revenue of nearly $50 billion. We earned $16 billion in net income and generated a 19% ROE while paying $6.1 billion in taxes, over $6 billion in dividends, and meeting all of our medium-term objectives. Also noteworthy was our strong double digit growth in book value per share, highlighting our ability to compound the value of our business while maintaining the quality and risk appetite of the RBC franchise. We ended a strong year with a record CET1 ratio of 13.7%, up 120 basis points with CET1 capital up $7.5 billion from last year. As we turn our focus to 2022, From a macro perspective, we continue to see a strong recovery with consumer spending almost 20% above 2019 levels, increased mobility in society, and corporate management teams actively pursuing growth opportunities. At the same time, we recognize our significant challenges, including supply, demand, and balances, disrupting supply chains and various parts of the economy, including labor, housing, and energy markets. These factors are driving uncertainty and adding to inflation risk, which we are closely monitoring. While higher interest rates could add some drag to economic growth, we do not see material credit concerns given excess client liquidity, strong underwriting, including testing for higher rates. As the Dean will speak to later, we are well positioned to benefit from rising interest rates given our leading Canadian deposit franchise and the asset-sensitive nature of U.S. Wealth Management's balance sheet. To highlight the potential benefit over time, the impact of lower interest rates reduced our revenue by approximately $1 billion in each of the last two years, the majority in Canadian banking and U.S. wealth management, including Citi National. Additionally, we are poised to benefit from the deployment of unprecedented buildup of liquidity that we expect Canadians will use for a better tomorrow, whether that is to buy a home, increase discretionary spending, or invest in financial markets. Within this context, let me expand how our momentum and ability to create value for clients, along with our premium franchises, position RBC to succeed heading into 2022 and beyond. Our strong balance sheet gives us flexibility to continue supporting our growth momentum and strategic initiatives, in addition to driving increasing shareholder returns. And this morning, we announced a $0.12 or 11% increase in our quarterly dividend while also announcing our intention to repurchase up to 45 million common shares under a normal course issuer bid. We remain focused on driving premium organic growth, including expanding our market-leading position in Canada. We see growth opportunities in each of our Canadian businesses, and our results this year reflect the value we create for our clients. In Canadian banking, we added over $35 billion in mortgages, and over $22 billion in personal deposits over the last year, leading to market share gains in both these anchor products. We have added and continue to add to our $1,750-plus mortgage specialist sales force. We also continue to invest in digital tools and capabilities to enhance the client experience and the productivity of our sales team. Looking forward, we expect mortgage growth to be strong in a high single-digit range, supported by low interest rates supply, demand, and balances affecting prices and increasing immigration activity. We are seeing a strong recovery in transactional purchase activity, which helped drive a sequential increase in credit card balances, including revolvers. And though commercial utilization rates remain well below pre-pandemic levels, we are seeing an uptick, which is helping drive the emergence of stronger commercial lending activity. We are also hiring commercial account managers in priority industries including in RBCX, where we provide capital and advice to the growing innovation ecosystem. As we move up the value chain and continue to reimagine banking and innovation, we are well positioned for a world of payment modernization and open banking. RBC Ventures remains core to accelerating our growth by creating value beyond banking, including in our healthcare and youth ecosystems. We are excited about Dr. Bill. a venture which helps reduce the complexity of medical billing for physicians. We are currently serving nearly 3,000 Canadian physicians, up 28% from last year. Also within the healthcare vertical, we continue to support Canada's medical community with our exclusive multi-year strategic partnership with the Royal College of Physicians and Surgeons of Canada. In the youth segment, Mido is a new pillar that helps kids learn and practice money management. We recently hit a milestone, having onboarded 10,000 Canadian households. Over the last two years, we have added 350,000 net new Canadian banking clients, including over 200,000 this year alone. In a period when clients weren't making as many decisions to switch banks, and immigration activity was muted. Given the value-added initiatives we've put in place, we are well-positioned to continue attracting even more clients an important area of focus. Almost 70% of our Canadian banking clients who have a core checking account and or mortgage with us also have a card and investment relationship. And clients with mortgage and checking accounts that were onboarded three years ago in 2018 have deepened their relationship to all four products at a rate that is three times greater than any other acquisition relationship. This leads to another core part of our Canadian strategy. which is to deepen our client relationships, including providing access to best-in-class, award-winning service and advice, which has defined our leadership in wealth and asset management. As I noted earlier, we expect much of the buildup of liquidity in the system will be used to increase discretionary spending or be invested. And our whole set of integrated, end-to-end, industry-leading wealth and asset management solutions have well over $1 trillion in client assets. These cover the full spectrum of client segments and needs, ranging from digital-only solutions up to full-service discretionary wealth management. Following a record year last year, RBC Direct Investing finished 2021 with another year of exceptional growth, including record trading volumes and record new client acquisition, with nearly half of new clients added this year being under the age of 35. And InvestEase has been... has seen account openings double from the last year. In the wealth advisory space, our leading scale is complemented by our differentiated technology and investment expertise, including private banking, insurance, estate, philanthropy, and business planning solutions. These factors drive strong advisor productivity, with RBC Dominion Securities ranked number one amongst bank-owned advisory firms in 2021 investment executive brokerage report card. And my advisor, our digital platform to review financial plans, now has nearly 3 million clients. Overall, our wealth management businesses continue to see strong growth in client assets. On a year-over-year basis, Canadian Banking and Wealth Management Canada increased 26% each, with RBC Global Asset Management We have a leading North American asset manager at scale with 85% of AUM outperforming the benchmark over the last three years at below average fees. It's a testament to the strength of the platform. RBC Global Asset Management was recognized for its outstanding investment performance at the 2021 Canada Lipper Fund Awards. RBC GAM AUM was up 15% year over year. While higher markets were a large contributor, we also saw record Canadian long-term retail net sales of over $20 billion, or 17% of all industry-wide flows, adding to its leading market share in industry AUM. And though we can't control where equity markets will go, we are well positioned to add to our market share in industry net flows, as clients can choose from a broad range of products and advisory services, which increasingly include an ESG and alternatives product suite. Our scale, innovation, and ability to deepen client relationships with leading value propositions underpin our 30% ROE across our banking, wealth, and asset management platforms in Canada. Turning to the U.S., I want to focus on our diversified growth strategy. Our client franchises across wealth management, private and commercial banking, and capital markets generated US$10 billion or 25% of total revenue over the last 12 months. Our US capital markets franchise, our largest US business, had yet another great quarter as we reported strong investment banking revenue on higher M&A advisory and loan syndication activity. We are increasingly deepening relationships and winning significant M&A advisory mandates with important partners such as Blackstone. Earlier this year, RBC Capital Markets acted as exclusive financial advisor to Blackstone on the acquisition of Ellucian, a leading education technology solutions provider. This followed being the advisor on their acquisition of Signature Aviation. Looking forward, our investment banking pipeline remains strong. benefiting from the strength of our franchise. Our goal is to be a top 10 global investment bank while maintaining our position as a clear leader in Canada. And with this in mind, we have added a number of managing directors in U.S. investment banking, especially in technology and healthcare sectors, while also focusing on sustainable finance, a growth opportunity for us and our clients. Citi National continues to be a growth company, with wholesale loans up a further 3% over last year, or up 11% excluding PPP trends. Our mid-market strategy, along with expansion of market coverage, is expected to add to our growth trajectory. Mortgages at City National were up 23% year-over-year as we continue to grow our high net worth private banking capabilities with a mortgage-led growth strategy. And deposit growth was up a strong 25% this year. Going forward, we continue to expect strong loan growth in our city and national businesses. And in U.S. wealth management, we grew client assets 30% year-over-year to nearly $570 billion U.S., including the addition of high-quality advisors to our private client group platform. We are increasingly adding lending products to provide holistic advice to our U.S. wealth clients. Our securities-based lending portfolio has increased by over $2 billion, or nearly 60% year over year. Beyond our underlying business performance in 2021, we recognize we have an important role to play in accelerating clean economic growth. A key pillar of our enterprise strategy is to play a leadership role in the transition of our economy to net zero emissions, including helping clients work through an orderly energy transition. As part of that, we are committed to providing $500 billion in sustainable finance by 2025. And in addition to our own net zero commitments, we are pleased to have joined the Net Zero Banking Alliance. To sum up, we are entering 2022 with strong momentum and are well positioned to take advantage of secular and macro trends and deliver client and shareholder value over the near and long term. Our focus will be to drive growth, while maintaining prudent risk management and expense discipline. We will continue to leverage the size and strength of our balance sheet to consolidate our broad-based leadership position in Canada, including deepening client relationships and investing for the innovation economy. And in the U.S., we will continue to execute on our multi-pronged growth strategy across capital markets, city-national and wealth management. Before I conclude, I want to thank our more than 87,000 colleagues for their relentless dedication in living our purpose through these extraordinary times. And now I will pass it to Nadine Ahn, our new CFO, who is well-known to the investment community from her time as head of investor relations and CFO of RBC Capital Markets previously. Nadine brings a wealth of experience gained over 20 years at RBC, including a number of positions of increasing responsibility in our corporate treasury group. And Nadine, over to you.

Thank you, Dave, and good morning, everyone. I will start on slide 11. We reported quarterly earnings of $3.9 billion up 20% from last year, including the benefit of a $355 million release of TCL on performing loans. Earnings per share of $2.68 was also up 20%. Pre-provisioned pre-tax earnings of $4.8 billion were up 4% year-over-year, including the impact of a legal provision at City National. Before I expand on earnings drivers, I will speak to capital on slide 12. Our CT1 ratio was up 10 basis points sequentially to a strong 13.7%. Our strong earnings net of dividends added 42 basis points to our CT1 ratio, highlighting the capital generation power of our diversified business model and premium ROE. Robust client-driven business growth across our largest segments was partly offset by $2 billion of net credit migration. Looking forward, we will continue to take a disciplined approach to deploying capital to create long-term value for our shareholders. We will lead with client-driven, organic RWA growth and look to revert back to our traditional policy of twice-a-year dividend increases, returning to the midpoint of our 40 to 50% dividend payout ratio objective. This morning, we also announced a normal course issuer bid, which will allow us to repurchase up to 3% of our common shares outstanding, giving us yet another lever to manage our capital levels. Moving on to slide 13, net interest income was up 1% year over year, or up 4%, excluding the impact of lower fixed income trading revenue. which was impacted by lower spreads on repo balances. Strong volume growth more than offset continued margin headwinds, driving solid net interest income growth in both Canadian banking and City National. Turning to slide 14. At the segment level, we had outsized NIM compression in our largest banking franchises. Canadian banking NIM decreased nine basis points sequentially, partly due to an accounting adjustment of two basis points or $22 million, which we do not expect to repeat going forward. Another two basis points was due to lower mortgage prepayment revenue, a reversal of favorable trends we noted on our Q2 earnings call. The three basis point impact from lower asset spreads is largely related to strong mortgage origination, as the benefit from sequential credit card growth was offset by growth in lower spread mortgage loans. City National NIM was down 20 basis points sequentially, with 11 basis points related to lower loan fees, largely from the forgiveness of the first round of Triple P loans. Another 7 basis points was due to lower loan to deposit ratio trends, as deposit growth continued to outpace strong loan growth. Going forward, we expect both Canadian banking and City National margins to stabilize around current levels with a bias to the upside as central banks raise interest rates. While City National's interest rate sensitivity is largely driven by an increase in short-term rates, Canadian banking would benefit more from a broader across-the-curve increase. We estimate that a 25 basis point increase in interest rates across the curve could result in over $250 million of additional revenue over 12 months across Canadian banking and U.S. wealth management, inclusive of sweep deposits. We expect the benefit from a rate hike in the second and third years would be higher than seen in the first year. Turning to slide 15, non-interest income was up 20% year over year. We continue to see strong growth in higher ROE investment management and mutual fund revenue in wealth management and Canadian banking. Strong M&A deal flow and loan syndication activity were reflected in higher advisory and credit fees as we execute on our capital markets client-centric growth strategies. Higher card service revenue in Canadian banking reflected Canadians' increased spending on travel and entertainment heading into the holiday season. As we continue to enhance our rewards programs and drive higher client engagement through increased options to earn and redeem points, we adjusted our rewards liability by $29 million this quarter. Offsetting this was an expected moderation in global markets revenue, which I'll provide more details on shortly. Turning to expenses on slide 16. Non-interest expenses were up 9% year over year. A legal provision of $116 million in City National impacted expense growth by approximately 2 percentage points. Adjusting for this provision and excluding higher variable and share-based compensation across our businesses, expense growth was 2% year-over-year. As quarterly capital markets compensation ratio typically experiences volatility in the fourth quarter, it's important to look at full-year trends. And the 2021 annual ratio of 35% is consistent with 2020 levels. Salaries and benefit costs were up 4% from last year. as we continue to add employees in Canadian banking and City National to support increasing client activity. Marketing costs were also higher as the economy opened up and we increasingly engaged with new and existing clients across our businesses. However, there is also an element of seasonality in the quarter-over-quarter increase of certain line items. Looking forward to 2022, we expect marketing costs to trend higher than pre-pandemic levels as we execute on our strategic growth initiatives. However, corporate travel costs are expected to remain below pre-pandemic levels in the near term. Overall, we expect annual expenses excluding variable and share-based compensation to grow at the higher end of the low single digits range as inflationary pressures and higher investments to support growth initiatives are expected to be offset by our continued focus on driving efficiencies, and productivity gains. Moving to our business segment performance beginning on slide 17. Personal and commercial banking reported earnings of $2 billion this quarter, including the benefit of lower PCL. Canadian banking pre-provisioned pre-tax earnings were up a strong 8% from last year, as solid revenue growth was supported by strong operating leverage. Looking forward, We expect annual operating leverage to be closer to the high end of our historical 1-2% guidance with the potential to be above that range as central banks raise interest rates. Canadian banking revenue was up 6% year-over-year with net interest income up 2% from last year. On a sequential basis, an uptick in commercial loan growth added to continued strength in mortgages. Growth in credit card balances was largely related to higher purchase volumes with payment rates remaining elevated relative to pre-pandemic levels. Non-interest income was up 15%, largely due to higher mutual fund distribution revenue underpinned by higher AUA, including record net sales as client liquidity continued to move into investment products. Card service revenue was up on higher purchase volumes. Turning to slide 18, Wealth management reported fourth quarter earnings of $558 million driven by strong investment management and mutual fund revenue growth and robust volume growth at City National. These were only partly offset by a commensurate increase in variable compensation, higher non-compensation costs, and illegal provision and lower spreads at City National. Double-digit client asset growth across our North American wealth businesses benefited from both higher markets with strong North American equity markets more than offsetting weakness in bond indices, as well as strong net sales. RBC GAM attracted total net sales of over $12 billion in the quarter, with strong institutional flows adding to continued momentum in Canadian long-term retail net sales, which added $4 billion to AUM. The majority of Canadian retail flows went into balanced mandates. Turning to insurance on slide 19, net income of $267 million increased 5% from a year ago, primarily due to favorable annual actuarial assumption updates, partially offset by lower favorable investment-related experience, including the impact of realized investment gains in the prior year. Insurance revenue benefited from higher group annuity sales and growth in longevity, reinsurance and Canadian insurance sales. Looking at INTS on slide 20, net income of $109 million increased 20% from a year ago, primarily driven by higher revenues from our asset services business. Funding and liquidity revenue was also higher year over year, as the prior year reflected heightened impacts from elevated enterprise liquidity. Turning to slide 21, capital markets reported earnings of $920 million, up 10% from last year. Pre-provision, pre-tax earnings surpassed $1 billion for the eighth quarter in a row. Corporate and investment banking reported strong investment banking revenue as our platform performed very well in an environment of robust deal flow and elevated sponsor activity. In contrast, global markets moderated from elevated levels last year. FIC revenues were down 14% year-over-year, reflecting similar trends across the industry. Lower spreads continue to impact repo and secured financing revenue, which was down 18% year over year. Equities revenues were down 17% as volatility levels normalized closer to pre-pandemic levels. To conclude, we continue to drive strong growth in volumes and client assets and are well positioned to benefit from higher interest rates. And while we look to accelerate our growth momentum, we remain focused on expense management and effectively deploying capital to continue delivering value for our shareholders. With that, I'll turn it over to Graham.

Great. Thank you, Nadine, and good morning to everyone. So starting on slide 23, allowance for credit losses on loans of $4.4 billion is down $1.7 billion from its peak in Q4 of last year, reflecting the ongoing improvements in our macroeconomic outlook and the credit quality of our portfolio that Dave noted earlier. In 2021, we released over 50% of the pandemic-related reserves on performing loans built in 2020. The releases this quarter were primarily in our commercial, personal lending, and cards portfolios in Canadian banking, reflecting further improvements in our macroeconomic outlook and the credit quality of those specific portfolios. Allowances for these portfolios do remain above pre-pandemic levels, giving ongoing headwinds that I will touch on later in my remarks. Turning to slide 24, our growth impaired loans of $2.3 billion were down $253 million, or four basis points, during the quarter. Impaired loan balances decreased across all our major businesses, and new formations of $298 million remained close to the nine-year low set last quarter. In Canadian banking, we had modest increases in new formations during the quarter, with increases in the unsecured personal lending and small business portfolios. capital markets new formations were limited to just seven million as clients continued to benefit from favorable market conditions turning to slide 25 pcl and impaired loans of 137 million or seven basis points was down by one basis point and declined for a sixth consecutive quarter a low level of provisions throughout 2021 reflect the quality of our client base our prudent underwriting practices the economic recovery underway and the impact of government support programs on delinquencies and impairments. In the Canadian banking retail portfolio, PCL on impaired loans was down $12 million quarter-over-quarter, due primarily to lower write-offs on credit cards. During the year, the retail portfolio has benefited from higher client deposit levels, decreasing unemployment rates, and ongoing government support programs. For context, this quarter, approximately 6% of our retail lending clients were still receiving government support, down over 60% from the peak observed in 2020. In the Canadian banking commercial portfolio, PCL on impaired loans was down $3 million quarter over quarter. Provisions taken this quarter continue to be primarily in sectors impacted by COVID-19. However, the portfolio overall continues to see low and stable delinquency rates, net credit upgrades, and reductions in credit watch list exposure. In capital markets, we had a net recovery on impaired loans for the third consecutive quarter. This portfolio is not maturely impacted by government support programs and has benefited from a constructive operating environment and strong market liquidity. And finally, in wealth management, PCL and impaired loans increased $14 million quarter over quarter. During the quarter, we took additional provisions on a loan written off in the information technology sector at City National. Overall, we continue to be pleased with the positive trends in our loan portfolio, supported by favorable market conditions. While many individuals and businesses have weathered the worst of the pandemic, A number of headwinds remain, as Dave noted. Rising and persistent COVID-19 cases and the prospect of new variants create the potential for continuation or resumption of COVID-19-related containment measures. Inflationary pressures may also impact our clients through increasing costs driven by supply chain disruptions and labor shortages and through increases in interest rates. We have incorporated many of these risks into our provisioning scenarios, which leaves us comfortable with our current levels of allowances. Looking forward, we do expect our PCL ratio in impaired loans to trend back toward long-term averages over time. In addition to the headwinds I've already noted, the wind-down of government support now underway will also impact both our commercial and retail clients. Though the full impact will take time to materialize due to the strong levels of liquidity, savings, and job demand currently in place. Additionally, we have seen strong recoveries on impaired loans over the past few quarters, which we do not expect to persist given the low levels of impaired loans now remaining. That said, as I noted for a number of quarters, we expect to be able to draw down on the existing allowance on performing loans, such that our total PCL across all stages will remain below long-term averages. Importantly, we remain steadfast in our commitment to supporting our clients and delivering advice, products, and insights to help them navigate the evolving macroeconomic and operating environment. 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 are 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. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from John Aiken from Barclays. Please go ahead.

Good morning. Wanted to start off on capital markets. Derek, we saw an exceptionally strong year, but as the second half evolved, we saw revenues trailing off a little bit, and the revenues in the quarter were one of the lowest over the last eight quarters. Was there anything in the quarter you'd highlight as unusual, either positive or negative? And is this a run rate you're looking for in terms of 2022, or can we get the revenues a little bit higher from here?

Sure, thank you for the question. I think I'll address it in two parts. First, looking at Q4, I think overall we feel it was quite a solid quarter. As Nadine reviewed, we had very strong activity on the investment banking side, both in M&A and in loan syndications, and we see that level of activity continuing and our pipeline heading into next year continues to feel very healthy. Obviously, the one area where we saw a slowdown in revenue was in the markets business, and I would say that there were a couple of things driving that. One is just the ongoing normalization we've seen in client activity and volatility that we saw in markets in Q4. Now, that's obviously picked up as we've come into the fall again, but it was a little more tepid as we went through the summer. Second, when you're comparing over the last eight quarters, recall obviously Q4 tends to be seasonally slower just given August and the summertime lull in activity that we tend to see. So we certainly would not look at Q4 as indicative of where we see normalized quarters going. You know, I think the third item I would say is, you know, we were quite careful managing risk coming into the fall. It was uncertain on what COVID and dynamics would bring as, you know, kids return to school and communities continue to reopen. So I think we came in with a cautious risk mindset, and you saw that in some of our, you know, bar metrics and no trading losses in the quarter. You know, obviously, the return in the fall turned out to be pretty smooth and market stayed very, very robust. And so, you know, in hindsight, where we a little cautious on risk possible, but I think it was probably a prudent way to approach it given what we were facing at the time. If I then turn to the outlook going forward, you know, we do, as we've communicated, see normalization in markets, but we think that our run rate will settle above pre-pandemic levels. And, you know, if I look at pre-tax, pre-provision earnings, pre-pandemic, we were generally running in the $800 to $850 million a quarter range. As we saw the elevated client activity throughout the pandemic that was more in the 1.1 to 1.2 billion range and as Nadine highlighted we've now had eight consecutive quarters over a billion. Importantly that does include the first quarter of 2020 which was before the impact of the pandemic which was our first quarter through that billion dollar mark and so that is certainly an area we're focused on and while we see things normalizing our objective would be to try to keep that run rate above the billion-dollar level in terms of pre-tax, pre-provision.

Great. Thanks for the call, Dirk. I'll recue.

Thank you. Our following question is from Ibrahim Poonamalla from Bank of America.

Please go ahead. Good morning. I guess just a question, Dave. As we think about capital allocation, I think that's going to be a big deal in terms of just some of the decisions you will be making. Talk to us in terms of when we think about the CET1 note of 13 and a half, beyond funding for organic growth, the announcements you made this morning, how do you think about inorganic growth? Last quarter you talked about strategic partnership for asset generation. Would love to hear your thoughts around asset management, wealth management distribution, if there might be opportunities there where you could deploy some of the success capital.

Yeah, I think you covered part of my answer in your question, so you're on all the right themes. But I think one of the things we're trying to highlight in our comments this morning is that more capital-intensive higher return growth opportunities are starting to present themselves in credit cards, in commercial lending in Canada, certainly our mid-market corporate strategy in the U.S., capital markets, corporate banking. We're looking to put more balance sheet out there and again as you said we have very strong organic capital generation ability that will fund the majority of that but we do expect to see really good RWA growth as our clients start using their balance sheet and our balance sheet to a greater degree. That's obviously the primary use is organic growth. As far as inorganic, to your question, you're starting to see a number of our ventures take flight. We highlighted two more ventures to you today. Dr. Bill, you know, partly through inorganic acquisition, looking to build out the healthcare vertical. It's been, you know, with a partnership with the College of Physicians, it's been a fantastic partnership, up 28%, as you heard. So we're going to look to continue to build out that vertical. We introduced Mido today, which is in, you know, the family finance vertical, incredibly exciting opportunity. If you see some of the similar capabilities in the U.S., would there be an opportunity there to kind of build out that early stage client pipeline and to bring clients into the organization in very different ways than we have historically. So again, part of future proof in the organization, we are looking to make acquisitions in those verticals. In addition to the small business vertical that we've talked about, the mortgage vertical, as we look at OJO and building out our ability to help clients find homes and close homes. So all of those capabilities will present opportunities north and south of the border for us to grow acquisitions that will generally be fairly small, I would think. It's better to get these acquisitions early stage than pay significant goodwill in later stage. I think a few other firms that are pursuing this strategy, not that many, were distinct in this strategy. I've found similar things that paying a huge premium in mid-stage is very expensive and therefore trying to find needs in earlier stages in that $20 to $150 million range. So again, it's not going to consume a lot of capital, but very important to our growth strategy. The other place we can deploy capital is we've got four major ventures that we need to scale. And we have an aggressive plan to scale nationally ventures like Owner that we've talked to you over the last couple quarters. We're very excited about. Dr. Bill, we talked about today, Ojo on the home side. So again, we can deploy capital now into scaling those ventures. So that's a whole growth segment that we'll need and we'll see more capital as we try to really build significant momentum into capabilities that have proven a very strong client reaction to. So we've managed these ventures, we've built them, we've tweaked them, we've pivoted to where we've found a customer market fit. and those four or five that have a strong customer market fit that we keep talking about are going to get capital to scale. And then it leads to your third question around, in our more traditional wealth management distribution, absolutely we're interested in acquiring wealth management distribution, either particularly in the United States, obviously, but in Europe as well, to build out that franchise. We're looking for quality platforms, and therefore we're being prudent, and we're thinking about you know, the value and the dilution to the shareholder at the same time because we have the ability to grow these organically at the same time. So, again, it comes back to real discipline around we have to create shareholder value, and we're very conscious of the dilution. And the last alternative is to return capital to you, which we are starting to do, and have that ability through share buybacks and continued share buybacks. So, again, nothing strategically changing. The capital doesn't have a half-life to it. it will sit there, and it gives us enormous strategic optionality.

Thanks, Dave, and congrats to Nadine and us on your new roles.

Thank you. Our following question is from Manny Grauman from Scotiabank. Please go ahead.

Hi, good morning. Graham, you talked about normalization and PCL ratios back to where they were pre-pandemic, and I'm just wondering want some clarification there in terms of the timing. Is this, in your mind, a 2023 story where we basically get back to where we were pre-pandemic? Is that the right year to think about?

Yeah, I think there's some hesitancy on timing because I think there's a high degree of uncertainty out there. And certainly you can just reflect on the last week and we see kind of the emergence of new variants and kind of the uncertainty associated with monetary policy to remind us of that. You know, I'd say we obviously have an exceptionally benign credit environment and it's manifested itself with incredibly low levels of loan losses. I think last quarter we were at eight basis points, this quarter at seven basis points. So, you know, having said that, we do see that kind of trending back to more normal levels. It will happen over time. You know, there's a number of factors that we look at in kind of thinking about the timing and those will hit different portfolios at varying paces. You know, some of those factors are certainly around kind of the strong asset prices and the implications that's had on recoveries On the wholesale side, you know, we've seen, I think I said net three quarters in a row now where we've had net recoveries in capital markets. Certainly we don't see that persisting in the coming quarters. And so that'll influence our provisions there and kind of return us back to more normal levels over time there. On the retail side, though, we've benefited from strong asset prices more in the housing and auto space. But those will persist for a longer period. And so that'll take time for that to kind of revert to normal. And that'll be related to kind of the portfolio turning over. Secondly, I think I mentioned government support. Certainly, we've assumed that government support has, you know, had the degree of suppressing loan losses in the near term. Our debate has really been around, you know, the degree to which that is mitigated or simply deferred. You know, as government support has been extended a few times, that's really had two implications. The first is, you know, it's mitigated more of the losses than we originally anticipated, and so that's, you know, due to more consumers being bridged to re-employment, businesses being bridged to reopening. But secondly, it's also delayed the timing, and when do we think that's going to start resulting in increasing loan losses? I think we're on a more definitive path now on the government support winding down. Certainly we're seeing that on the consumer side, and I think the small business is going to happen over the coming months. So we'll be looking for signals in our portfolio on that kind of side in the coming quarters, whether that be through ratings changes or delinquencies, particularly on the unsecured consumer products there. And then lastly is around the macroeconomic environment that we kind of talked about. And the current economic environment is very robust and supportive of the credit outcomes. And so we don't see that changing and tipping things in the near term. But we are looking at inflation and supply chain, and those will have impacts over time. And the prospect of rising rates also will factor in over time. So you put all this together, things like supply chain will have more of a near-term impact on our small business and commercial portfolios. Whereas higher interest rates will take more time. It'll affect our real estate portfolios and pockets for our corporate portfolio. But that's unlikely to be a fashion this coming year. And so I think in 2022, we'll see rising levels of loan loss allowances. But as I said in my comments, I think the total PCL there will still be well below kind of historic norms. And I think it's more into 2023 and beyond that you start to get into kind of more normalized levels.

Thanks for that detail.

Thank you. Our following question is from Paul Olden from CIBC. Please go ahead.

Thank you. Good morning. I want to ask you a broad question around inflation and related risks. Now, you've already addressed sort of your expectation for operating expense growth, and you've talked about expectations for central bank rate tightening in response to higher inflation. But I wonder if there's any kind of other impacts, whether negative or positive, that that we should be thinking about in terms of bank earnings in a higher inflationary environment?

I'll start and then I'll see if anyone wants to jump in. I think Graham put his hand up here. Certainly an inflationary environment helps our asset growth, helps the economy grow, right? So as you think about asset inflation, you know, if it's healthy and under a normalized channel not excessive, then you don't build a bubble and that can be supportive of overall balance sheet growth and profitability growth from that perspective. Where you start to worry is when you start to see excess asset growth in a certain area and that inflationary impact has to be watched in a number of asset classes. And then you worry about it from obviously your customer's cost management and their margins and their ability to maintain healthy kind of debt coverage ratios. So we do worry about it from a risk perspective. Maybe Graham will touch on that. So there's a positive and negative and that's why as a bank you have to watch these things carefully on the asset and CPI side and what impact they're having and we'll get a look into that increasingly with the quarterly numbers that we see from our clients and their income statements and balance sheets. So off the top of my head those are two areas that we certainly talk about as a team. Graham, did you want to jump in on that?

Yeah, I think the inflationary kind of ranges we're entertaining right now, I think that's a net positive for the bank overall. I mean, so while rising, you know, we'll see kind of enhancements and improvements to our revenue, those will be attended with higher credit costs that come with that kind of in relation to what I referred to earlier. And again, it's going to affect different portfolios in different ways. You know, you look at, say, our small business and commercial clients, you know, they're more price takers than price makers, they're going to have less supplier flexibility, you know, and so they're going to, you know, they're going to see a higher implication towards our credit costs, and that's kind of referring back to the comments I made earlier around our forecast going forward. You know, this will ultimately translate into higher interest rates as well, but as I said, that'll take a much longer time to really translate into our credit costs. When you look at our fixed rate portfolios, it's going to, you know, those rates are locked in and it'll be when we get to those points of refinancing, and those are kind of more measured in years than they are in months and quarters in terms of the implications there. So different portfolios will see that and absorb that in different ways. The corporate portfolio is probably more resilient again because, again, they have a better ability to pass on their inflationary costs, more resiliency in their operations. So we look at those implications in different portfolios across the board, but overall it will, over time, contribute to the rising kind of loan loss costs.

And then just quickly, can you tell us what your inflation range expectations are?

Well, I think we have a number of scenarios that we analyze, and each of those scenarios is going to have slightly different assumptions embedded in it. We look at the different ranges for kind of extreme purposes and capital resiliency, so I'm not sure there's a single answer we'd give you on that, but really do look at a wide range as we think about both capital and earnings on that front.

Okay, thanks. I'll leave it there. Thank you.

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

Hi, good morning. Just looking at the wealth management division, I mean, pre-tax, pre-provisioned earnings, I've got up 3% if I exclude the legal provision. It doesn't really match with what we're seeing in the asset growth. And I guess my question is, is there any other unusual items And I guess where I'm going is I know there's several segments in here, you know, Canadian asset management, wealth management, CNB. I'm just hoping you can provide maybe some perspective on what you're seeing pre-tax, pre-provision-wise, because I think there's probably some good news stories on the asset management side that may be overshadowed by some just near-term pressure in CNB, a city national bank, and And I guess this isn't maybe a question but a statement. It would be helpful to have City National Bank removed from the wealth division because I do think sometimes it clouds it out. So I'm just hoping to get some color on that.

Thanks. It's Nadine. I'll start. And thanks for your advice on the segmentation. Appreciate that. Just as it relates to the U.S., I'll start with U.S. wealth management. And you're right. There are a couple of elements in there. And so we spoke about the strengths. on the wealth management side, particularly in Canada and the U.S. with the high growth in the AUA. So obviously with that business, you do have the variable compensation that scales with it, so very strong margin there. And we have been adding a lot of advisors in order to generate that growth on the AUA side. So I would say that's the strong momentum in that business going forward from a PPPT perspective. When you look at City National, we spoke a bit around the margin compression that we saw. But if you look at what some of the drivers were related to that, the PPP loans in particular, which we expect that to taper off going into next year, so that will no longer be a headwind. And then as we look at the mix, we've seen a lot of strong asset generation, but that deposit level has still been quite high. And so that loan-to-deposit mix ratio has put some pressure on margins, but then as we start to see rates increase next year, you'll start to see that margin expansion as it relates to City National. On the cost base there, we have grown that bank a lot and so we do have to invest in our infrastructure in order to support that. That's why you're seeing a bit more of the uptick in cost as it relates to the City National Platform outside of the provision. I would say going forward though, given the expectation around some of those changes as it relates to the stabilization of the NIM, that we do expect strong operating leverage overall in that business segment. Maybe I'll turn it over to Doug if he wants to speak about the... Yeah, sure.

I think the hypothesis and the question is a very good one. So if you looked at the core Canadian larger franchises of global asset management and wealth management Canada, a couple of things that are probably not obvious. So there are some compensation true-ups in the quarter. That's a good news fact in that... while we didn't get the accruals right throughout the year, those are performance-based or profitability-based compensation programs. So that's not a normalized run rate. There's seed capital. The quarter-over-quarter was a little bit lower than the prior quarter, but they're, again, not fundamental to the success of the business. So, you know, you're right. The big franchises that drive the bulk of the earnings in the non-US part of the segment are, are very healthy and fundamentally very strong. Thank you.

Thank you. Our following question is from Gabrielle Deschain from National Bank Financial. Please go ahead.

Good morning. Just a follow-up for Derek on the capital markets outlook. You know, I get some of the indications there, but do you think earnings growth and PTPP growth in your segment can be positive in the coming year. And then a separate question, Dave, Nadine. Well, Dave, in your opening remarks, you talked about paying $6 billion of taxes in this past fiscal year. It makes me think about the Liberal proposal to introduce the surtax on banks on their Canadian earnings, presumably. Have you done any work to quantify the impact of that? proposal? Thanks.

So I'll let Derek go first and I'll follow on with the time.

Sure. You know, good question, not an easy one to answer in terms of, you know, the outlook on client activity. I guess the way I would approach it is, you know, obviously 2020 was a very strong year for us given elevated client activity and coming into 2021 we had expected there'd be some normalization of that activity it probably didn't normalize as much as we feared. And so we had a constructive backdrop for this year. And you saw that result in, you know, 3% growth in revenue and 5% growth in pre-tax pre-provision for 2021 off of what was, you know, a prior high watermark in 2020. So notwithstanding, you know, some expectation of normalization, we did manage to drive strong revenue pre-tax, pre-provision growth, and then obviously very strong NIAID on the back of the PCL recovery. So I think as we now look forward to 2022, it's a little bit of a similar situation. Client activity on both the investment banking, corporate banking side, as well as in markets, still continues to be very healthy. We see that continuing right now, and against that backdrop, you know, I think we feel quite good about our pipeline and level of activity, but What's obviously difficult to predict is, you know, particularly rolling off to some of Graham's points, as we see dynamics around variance and changes in monetary policy and inflationary pressures and how policymakers may react to that, you know, it's difficult to predict what the capital markets environment will look like for the full year. So, you know, certainly our objective is to continue to drive growth, but it will be somewhat dependent on the market backdrop and level of client volumes.

Are expenses a lever, though, that you can't pull because you would have, I mean, a lot of investment banks would have expanded staffing levels in the past year or two?

Yeah, no, certainly costs is something we'll continue to keep a close eye on, and a large component of our costs are compensation, which are linked to performance of the business, so that does give us a natural lever that if, for some reason, activity slows and revenue slows, there will be you know, an offset in compensation expenses. You know, more broadly, we are still very focused on broader productivity and efficiency initiatives and, you know, two items that we do feel very good about exiting this year. We did manage to bring our, even though we had great results in 2020, we managed to bring our efficiency ratio down by almost another 100 basis points this year and continue to drive positive operating efforts in 2021. And so, you know, obviously our clear objective is to drive the client volumes, but we will manage our NIE closely to try to ensure we continue to drive strong productivity and positive operating leverage.

Thank you.

And maybe a quick high-level comment on the overall bank tax environment. I think from a macro perspective, the most important thing that we have to think about as a country is we need to attract capital. We need to attract capital domestically and we need to attract capital from foreign direct investment. We're going through an enormous transition of our economy, supply chain transition, climate transition journey where we're going to need up to $2 trillion and therefore creating an environment that attracts capital and where the rules around the economics are certain for a longer period of time is really important. And I think when you start proposing taxes right now in this narrow way, can be a real detriment to the overall investment thesis for Canada. So for the first reason there, we're obviously articulating that perspective that's really important for Canada to think about long-term investment in our country. And the second is, you know, a tax on banks, a unique tax like that means less capital for small business, less capital for investment in our clients. As you know, we retain roughly 45%. We pay out 45% of our income, and we reinvest the other 55% mostly in this country and in North America and North American supply chain. Therefore, that just means less capital to reinvest. So I think from those perspectives, now is not the time to look at these types of policies. We need to rein in our spending. We need to think about inflation, and we need to make sure we attract future generation of supply chain investors and manufacturing and investment in climate to this country.

I hear you, and I tend to agree with everything you say, but there may actually be a tax that's imposed nonetheless. Have you evaluated the answer? I don't have any details on it.

I would just say that we're still working out some of the details, but nothing's been announced as yet, so it's a little difficult for us to comment on an impact until we get more information on it.

Understood. Thanks.

Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.

Good morning. Graham, can we go back to a comment I believe you made in Q321? I think you suggested that PCLs, the impaired loan PCLs ratio in 2022 might in fact be higher than the long-term averages. And I think a few of us observed that that seemed a little bit high. And again, I'm getting the sense from this call that you're now suggesting that it might be below long-term averages. First of all, have I characterized that correctly? And secondly, can you talk about that change in the process if I've characterized it properly?

Yeah, thanks, Mario. And I think we go back, I think when we were making those comments, we were referencing to at peak points, I had a certain quarter, not certainly on an annual aggregate, right? And so... So part of the context is that. And I think then that kind of leads into this quarter and my earlier comments, right, which I said I think as we've gotten further into the recovery, as we've seen that government support continue to extend, as we've seen more clients bridge to kind of re-employment and bridge the reopening of the economy, again, those all factor into our comfort and confidence that more of those loan losses that we think had been suppressed have actually ultimately been mitigated and not just simply deferred to a later date. You know, again, there's a lot of uncertainty out there. And so, as my comments earlier, the timing on kind of when we kind of get back to those more normalized levels is still uncertain. And it's going to vary by portfolio. And I kind of went through the factors as to how, you know, the retail portfolios will be impacted by different factors in some of our wholesale portfolios. Some of these effects will take longer to kick in, such as rising interest rates. But that's just to give you a little bit more color, I think, on kind of how we're thinking about it in our commentary now this quarter versus in the comments we provided last quarter.

So to make sure I understand the comments you're providing this quarter, then, you're suggesting that in 2022, the impaired loan ratio will probably be a little lower than what we've seen in prior years or long-term averages, and that perhaps by 2023, it starts to normalize. Is that how I characterize you correctly there?

I think that's roughly fair. And again, it's just the timing of when we get that peak is part of the question mark there.

Okay. Nadine, can we go to an expense-type question? I'm looking at the measure that Royal likes to use, and it makes sense, the one where you look at your year-over-year expense growth excluding variable compensation. And that number had been declining fairly consistently year-over-year for some time now. And I imagine some of that was COVID-related. And then this quarter, of course, it sort of moves higher, and materially so. Can you talk about what was it about this quarter that caused that measure to really reverse course? It had been trending down, and then it really reverses course specifically in Q4. Can you speak to that?

Sure. Thank you, Mario. In terms of a couple of things I would comment on, we mentioned in my remarks around the marketing costs, and part of that would be seasonal. but part of that also is just from a Canadian banking perspective, really starting to ramp up on our marketing, as you would have seen probably through the summer and into the fall. In addition to that, we have been increasing our headcount overall, and as that starts to pull through in terms of run rate. So that is something that as we talk about the growth we've been generating overall, around our strong volume. That was a bit of an inflation pressure, but going forward, we look to see that we will have continued growth on the top line in order to support that increase in staff costs. In terms of technology as well, this is one area that we continue to invest. We've been investing through the pandemic. I would say that what we're focusing on going forward, really around those optimization and productivity and efficiency gains that I spoke to, is how can we continue to make sure that we're finding opportunities to invest in our big franchises going forward and create that capacity with reductions in other areas that we can find some efficiency and productivity gains. So a bit of it, Mario, just in terms of some of it with seasonality, but also we are seeing just some of the increase as it relates to some of our growth initiatives. But, you know, as I mentioned, with our low single-digit guidance, still we're looking to advance that into next year.

For next year, maybe you may have answered that and I may have missed it.

Yes, sorry, our guidance is still in low single digits, but potentially with the inflation pressures moving it up a bit on the low single side.

But positive operating leverage, is that fair?

Correct, yes. Thank you.

Thank you. Our following question is from Saurabh Movahedi from BMO. Please go ahead.

Thank you. I appreciate we've gone over the hour, so I appreciate you taking the call. Maybe just can I start there, Nadine, for a second? So call it around 4%, let's just say, expense growth, including inflation. You've talked about the positive operating leverage, and a number of times I think you made reference to higher rates. Can you tell us what... is assumed in your budgeting process as far as rates increases next year?

So, Saurabh, we've looked at it. We would have done it earlier in the fall. It would include two rates in Canada, which would have been probably mid-year and then towards the end of the year. And in the U.S., we didn't anticipate any rate hikes.

So that would be the basis of the assumption when you're talking about positive operating leverage, for example. as far as the impact on your margins and spreads are concerned. Correct. Okay. And then if I can just clarify one thing with Neil. Neil, mortgage growth, can you talk to us a little bit about what mortgage spreads were like during the quarter, maybe throughout the quarter compared to prior periods?

Yeah, thanks for the question. You probably have a sense. I mean, you know, exceptionally strong volume across the industry, you know, record amount of originations in our business. And with that really strong market and all that demand, increased price pressure from competition. So it's been a very tight market. I think we've talked in the past. We haven't let on price. We just basically have a strategy. We know we have to be competitive and make sure we're providing good value for our clients. But without a doubt, there's been price pressure in the mortgage business.

And can you quantify some of that for us? Like, you know, how are spreads of this quarter versus prior quarters or any point of reference?

Yeah, I mean, I would say in terms of overall in the portfolio, we've seen them come off a little bit, but they do bleed in over time. So as originations in Q4, they were, I'd say, the tightest we saw all year. But in terms of the total portfolio, that's one quarter's worth of originations, and it will bleed into the portfolio and impact the entire of the book over time.

I appreciate that. In fact, I just have one last question. If I look historically at the total bank level, your RWA growth has been, call it, mid-single digit, sometimes 6%, sometimes 3%. But let's call it in that 4% to 5%. This year was obviously... on a full year basis lower, although you had some growth in the fourth quarter. If I think about next year, can you give us any guidance as to how you expect, given the business plans that you have, how that RWA is going to trend? Is it going to revert back to that mid-single digit, or could there be a year of catch-up where it could be more like 10% given that you hardly had any growth this year?

Yeah, I think it would revert back to higher than average SORAB. I mean, I think we also had the benefit this year of some of the parameter changes, particularly around the capital markets business, which would have muted some of the growth trajectory. But I think as Dave mentioned, the growth potential in our commercial loan book as well as in City National has the opportunity for that to be maybe higher than the regular previous run rate we saw this year.

Thank you very much. Appreciate you taking the call, sir.

We're going to stay on a bit longer because I think we have a couple more people in the queue. Three more, so we're going to keep going. Stay with us.

Thank you. Thank you. Our following question is from Scott Chen from Canaccord Genuity. Please go ahead.

All right. Yeah, thanks for taking my question. Maybe a bigger picture outlook. We kind of think about Canada and the U.S. and your P&C franchises, U.S. being a city national franchise. Where do you think the better region is in terms of the outlook over the next few years and potentially related to P2P growth would be helpful? Thanks.

Well, better, I mean, still, you know, Canada is 70% of our earnings, so it's important that Canada delivers for us, you know, strong growth. So it's hard to say better. But I would say, you know, when I look at the city national U.S. wealth franchise, we had, you know, in the first kind of four or five years of city national, we had a great run. Higher rates helped us. We've tripled the size of that bank. We've seen more muted growth in the last, as you've noticed, in the last four to six quarters because we're replatforming City National for the next phase of growth. We've tripled that bank to an $80 billion balance sheet right now. And for us to continue to grow at rates well above the industry, we need to replatform from a customer perspective and from an operational efficiency perspective. So I'm very excited about the U.S. growth opportunity from PPPT because of the higher rates that Nadine referenced, which have a significant impact on us. You just can't underestimate how asset-sensitive this bank is. But also from a greater efficiency perspective, as we replatform City National, we're looking for greater efficiency. And we've grown this bank on the top of a $20 billion bank platform, and now as we replatform this thing into an $82 billion, plus $150 billion bank, it's going to have to grow more efficiently and more effectively. So I'm very excited about the dual opportunity of revenue growth and better bottom line growth there. At the same time, when you look at venture starting to kick in, you look at the momentum we have in our Canadian banking franchise, you look at our quarter-over-quarter growth is still very strong. We're exiting the year with really good volume growth and momentum across capital markets, as you heard Derek say. in Neil's business, across mortgages, credit cards, commercial lending starting to pick up. So you look at the quarter-over-quarter momentum into 2022, and then the flows that we're seeing in AUM and AUA and the Canadian wealth franchise, I'm very excited about Canada. And the numbers kind of speak to that as we accelerate the exit of the year with very good momentum. So I don't have a favorite child, if that's what you're asking. I like them both equally, and they both have great opportunities, which – you can see in our exit numbers. And I would say, yes, we are somewhat disappointed, like some may be, in how much we're able to drive to the bottom line. This quarter, we had a number of puts and takes. You saw margins came off. But that doesn't take away from the momentum that we're going into, the cost control that we'll be able to demonstrate, stabilized margins, and therefore the op-lev into the next year. In both markets, I think we're feeling... We're not as happy with the bottom line this quarter. We're happy with the momentum and the overall franchise core.

Dave, you talked about stabilized margins. When do you think that will happen? It seems that that theme of quarter-for-quarter stabilization really hasn't come, and your quarter-for-quarter decline was probably a bit more than expectations.

Yes, and on our forecast, too. So, yes, we do feel good about it. Nadine's going to jump in on kind of why we're more confident of the stabilization timeframe.

Yeah, maybe I'll just speak first to Canada, give you some perspective. So in terms of, you're right, we saw the decrease this quarter. There were a few one-offs, I would say, that we highlighted. But if we look at what's been happening with some of the rate increase that we've seen, in particular for Canadian banking, it's prominent in the long end. We look at the two- and five-year rates. we see that that will start to price through. That takes a bit of time in terms of how it averages in against our deposit book. And then as we also start to see some of the expansion into some of the commercial mortgage, or as we start to see the revolve rates pick up in the credit card book, that will be positive. When I say stabilize, it's thinking about some of the headwinds that we've seen that relates to the mix around the mortgage book and at a lower spread. as well as some of the tailwinds we saw this year on the mortgage prepayment. So as those rates start to rise, you will see less of that revenue coming through from prepayments. That's where the stabilization really comes in. So the benefits will have some of those one-time items are going to come back. And then in addition, as rates start to price through, that's when you're going to see the lift. All right. Thanks for your time.

Thank you. Our following question is from Lamar Persaud. from Cormac Securities. Please go ahead.

Thanks for taking my question. So, Graham, this one's probably for you. I'm wondering if we could go to slide 23 and talk about the outlook for the ACL. So, at the end of 2021, 23 basis points, and now you're sitting at 60 basis points. So, would it be fair to suggest that releases moving forward will normalize a big way heading into 2022? Or is the bank comfortable letting that ratio trend below 53 basis points. Any comments there would be helpful.

Yeah, sure. I mean, so, I mean, I don't think there's such a thing as a steady state in your performing ACL. The ACL is meant to be a reflection of kind of the macroeconomic forecast that you have at any given point in time and the uncertainty around that, right? And so those are the two factors that always go into it that we have to reassess each and every quarter. So, you know, to put a forecast out there on a forecast is a bit of a difficult exercise right now. You know, I think as we look out over 2022, that, you know, assuming that we continue to progress through the macroeconomic kind of strength we see right now, assuming we see some of this uncertainty come down, that, yeah, we would see that potentially drawing down further. But the reason it's still at the level that it is, you know, we're in a macroeconomic environment that's really strong right now that would indicate that we should be at lower levels of ACL, but there is a high degree of uncertainty still in this environment. And that is, you know, those are some of the factors I referenced earlier. So, you know, as we progressed here, we've gotten more confident in bringing some of the reserves down from prior years. But I wouldn't say there is a steady state there, but certainly as we look forward into 2022 and we continue to progress as we expect, and some of the uncertainty kind of reduces around us, that yeah, we would expect that that can come down further.

So is the 53 basis points not appropriate to use as the low end of what that could go down to? Like it could go down lower than 53?

Again, there's no steady state there, and it's going to really be dependent on the environment we're in at any given quarter. I'll give you a fixed number that we end up at any given time.

We'll move on to our last question. Thank you.

Our last question is from Nigel de Souza from Veritas Investment Research. Please go ahead.

Thank you. Good morning. I wanted to circle back on an earlier comment. You mentioned that you have conducted testing for the impact of higher rates on potential credit risk, and I was wondering if you could flesh that out and give us some color on

type of scenarios you were testing for the the timing and pace of interest rate increases and how you thought about that impact in relation to credit experience yeah as i said so so we do a lot of different scenario analysis and stress testing for different purposes right i mean so you know at the most granular level we do that as part of our origination practices when we're originating a new residential mortgage or we're originally commercial mortgage Some of that's quite prescriptive in the residential mortgage space where B20, you know, has us looking at clients' capacity to service debt, you know, for a plus 200 basis point increase in interest rates, similar in the commercial real estate side. Then certainly we also then obviously do this much more at the portfolio level. And so whether it's our, you know, determining our loan loss provisions and our ACL, again, we don't have a single scenario there. We have certainly a baseline exercise, and Nadine referenced some of the assumptions there that go into our our baseline. But then we look at a range of, I think we involve about five different scenarios that we look at that kind of describe different interest rate environments. Some were moderate increases, some were severe, likewise. And then we also contemplate, you know, much more implausible environments that really go into our stress testing program where we're really kind of making sure we continue to have the right level of capital adequacy in place, you know, and we do those exercises across the bank. We do those in conjunction with our regulators as well. So Again, some of the earlier comments on inflation, there isn't a kind of a fixed single scenario that we kind of lock in on, but we look at a range, we weight those different ranges appropriately, and then that all factors into how we determine BACL as an example that we do.

Okay, that's helpful. And if I could just wrap up on a comment earlier on inflation. I think you mentioned when you look at asset growth, you want to look at healthy asset price appreciation versus excess asset price appreciation. Could you provide some context on how you look at the recent growth price appreciation for Canadian real estate? Is that one where you view it as excessive and there's concern for broader economic or credit risk implications? How do you think about it?

Yeah, thanks for the questions, Neil. I'll start just in terms of what we see in terms of housing as we move on to the market in relation to the mortgage book. And, I mean, I think you've seen it over time. Obviously, the biggest driver of what we're seeing in terms of HPI in some of the biggest markets, Toronto, Vancouver, More lately, markets like Ottawa are really moving up into strong double digits. Rates is the biggest factor, so affordability and consumers being able to just go through the metrics that Graham laid out and carry those payments. That's the biggest driver. I think in terms of on the go-forward view, we would say immigration has been almost completely turned off. That's a demand that we haven't seen in the housing market. we would expect that to provide some offsetting demand as we expect to see the rates come up on the timing that Nadine laid out. So I think those are the factors. If we look at over time where we've seen different levers pulled, for example, on the regulatory front, whether it's in British Columbia or Toronto, we have seen, let's say, sort of moderate corrections in those markets. And then subsequently over, let's say, the next 18 months, those home prices have come back. I think those are the factors we would look at. I think Graham laid out fairly well in terms of the confidence we have in the underwriting and the stress testing we do to make sure that whether it's on an LTV or whether it's just in terms of a repricing of that debt that the consumer end or commercial customer can manage it. So that's, I think, the primary lenses we would look through in terms of our loan book.

I think our risk approach to the mortgage book is to make sure we are very consistent in our approach through the cycle. We're not using risk as a lever to drive growth here. I would just remind everyone that our focus in terms of our client base is a very high-quality prime client base. We're not engaged in the subprime space. Our product set is, again, very focused on first lien products, and it's very resilient. We talked about the stress testing around interest rates to make sure our clients can be resilient for a higher rate environment. We have a risk-based approach to our loan-to-value ratio. So, again, it's a very prudent approach that allows us to be consistent in our engagement with clients and manage to recycle very effectively. Okay. Thanks, Graham.

Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Mackay.

Thanks, everyone, for questions. We covered a lot of ground today. I think in my takeaways and summary, I kind of covered a lot of it in one of the questions I took today. But overall, I think the takeaways are really strong client activity and growth, market share gains across Canadian banking, Canadian wealth, capital markets, city national, U.S. wealth, U.S. capital markets. You know, very strong momentum. You saw the momentum in the quarter-over-quarter numbers, which positions us well. And, you know, our disappointment also was that we didn't drive as much to the bottom line as we would normally with that type of volume. We walked through kind of the margin impacts and, trying to price mortgages in a rising rate environment, as was called, that was a little trickier, and a number of one-offs this quarter on the margin side, expenses a bit elevated, some one-times in there, and therefore, as we look forward, our degree of control, we plan for a rate environment that, to a great question, thanks, Saurabh, we plan for a rate environment that was less tightening, And therefore, there's upside opportunity to our own forecast. So we're confident in our operating leverage going forward and the momentum we have in the business. So thanks for your questions. All great questions. And wish everyone a good holiday season and look forward to seeing you in the new year. Thanks very much.

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