Royal Bank Of Canada

Good morning, ladies and gentlemen. Welcome to RBC's conference call for the second quarter 2023 financial results. Please be advised that this call is being recorded. I would 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 Arnn, 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 and Insurance, 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 read Qt. With that, I'll turn it over to Dave.

Thanks, Asim. Good morning, everyone, and thank you for joining us. Today, we reported second quarter earnings of $3.6 billion. or adjusted earnings of $3.8 billion. Pre-provision, pre-tax earnings of $5 billion were up 1% from last year. We also announced a 3 cent or 2% increase in our quarterly dividend as part of our cadence of twice-a-year increases and commitment to returning capital to our shareholders. Net interest income was up 16% from last year, benefiting from solid client-driven growth in Canadian banking and wealth management, as well as higher interest rates. Capital markets had yet another strong quarter, reporting over $1.1 billion in pre-provisioned pre-tax earnings, despite a challenging environment for global investment banking fee pools. The revenue contribution was equally split between global markets and corporate investment banking, reflecting the segment's well-diversified business model. Our all-bank performance this quarter reflected the strength and diversity of our leading client franchises and strong balance sheet. However, shifting client deposit preferences, expenses, and provisions for credit losses point to an increased cost of doing business. Before I provide context on our key growth strategies and the expense trajectory, I will speak to what remains a complex environment. Markets are facing structurally different circumstances following the end of an era of low inflation, low interest rates, and increased globalization. This is in addition to absorbing game-changing challenges from technology and decarbonization. as well as more near-term risks, including implications from U.S. debt ceiling negotiations. While recent stresses in the U.S. regional banking sector appear to have eased, the fallout will likely include more liquidity and capital regulations and a subsequent tightening of lending capacity. The Canadian financial system is already subject to many of these liquidity and capital requirements and performed exceptionally well through the recent U.S. regional banking liquidity crisis. It appears that the magnitude and steepness of central bank rate hikes has started to rein in headline inflation. Given signs of softening consumer demand for discretionary goods and rising debt service costs, we continue to forecast a mild recession, partly due to the lagging impact of higher interest rates on economic activity. However, with labor markets remaining firm despite declining levels of attrition and job postings combined with higher jobless claims, we do not expect central banks to cut interest rates through 2023. It's important that inflation doesn't become anchored into the psyche of the economy. The importance of balance sheet strength comes to light in these challenging moments. And it's in this environment that we strengthened key ratios, including ending the quarter with a C2N ratio of 13.7%. Looking ahead, we continue to expect that our C2N ratio will remain above 12% following the close of the planned HSBC Canada transaction pending regulatory approval. We expect the transaction to close in the first calendar quarter of 2024. This mutually agreed upon timeframe will help us ensure a smooth transition for clients. In addition, the purchase price is structured using a lockbox mechanism, and accordingly, all of HSBC Canada's earnings from June 30th to 2022, to close, will accrue to RBC. We remain comfortable with the synergy and accretion assumptions we made at the time of the acquisition. Another important pillar of RBC's balance sheet strength is the addition of a further $173 million of PCL on performing loans this quarter, We've now increased our ECL and performing loans by over 20% since last year. We also have a diversified funding and liquidity profile, which includes our leading Canadian deposit franchise built on deep client relationships. Canadians appreciate the client value proposition that we offer, including RBC Vantage, our partnerships and leading digital banking capabilities. Nomi Forecast was recently recognized for best use of AI for customer experience at the 2023 Digital Banker Awards. Furthermore, we entered into a strategic partnership with Conquest Planning to leverage its artificial intelligence platform to identify financial strategies for clients. Our clients also value our continuum of alternative offerings. In the current environment of higher interest rates and increased uncertainty, our clients are looking for both safety and yield. We continue to see a shift in personal deposit mix towards term GIC products. In the quarter, personal term deposits saw $10 billion of inflows, of which a third were from external sources. GICs have seen nearly $50 billion of deposit flow over the last 12 months alone. We're also seeing a shift in mix for business deposits at the same time, as we're seeing continued competition for assets. While there's been a significant tradeoff to near-term margins, we have gained new clients who provided valuable advice to deepen relationships, which will become increasingly profitable over time. Furthermore, we expect to retain most of these balances and look to support our clients in reallocating their assets into our leading investment franchises at the right moment. These deposits are also an added source of lower-cost retail term funding as we continue to support our clients' financing needs Their Canadian banking loan-to-deposit ratio has remained relatively flat at near 100% over last year. While Nadine will get into the details, I want to provide my thoughts on the expense trajectory. Reported expense growth was 16% year-over-year. However, after excluding for acquisition and macro-related factors, expenses were up 8% from last year. The largest driver of expense growth this year has been higher headcount to support client needs as well as base salary increases. We are committed to actively reducing expenses. We are using a number of different levers to do so. This includes deliberate actions that we've already initiated, such as managing headcount growth through attrition and slower hiring, while also preparing for a complex transition with respect to the planned acquisition of HSBC Canada. The remainder of the core drivers of expense growth reflect inflationary pressure and, importantly, strategic investments to enhance our value proposition and infrastructure to drive future operating leverage and client-driven growth, which I will speak to shortly. In addition to driving strategic growth and accretive capital allocation, one of my top priorities is an increased discipline around costs. The entire leadership team is committed to actively executing on our efficiency playbook We are focusing on curtailing expense growth and prioritizing investments without impacting our ability to serve our clients or opportunities to attract new clients. I will now speak to key growth drivers across our largest segments. Starting with Canadian banking, mortgages grew 7% from last year, down from 8% growth year-over-year last quarter. Origination activity is expected to continue moderating towards 2019 levels as limited supply and increased demand from immigration is muted by concerns around affordability. We expect annual mortgage growth to slow to the mid-single digits. Earlier this quarter, we announced the acquisition of Ojo Canada, a fintech that supports Canadians at every stage in their home-buying journey, including providing connections to real estate agents. We're also investing to enhance the efficiency of our mortgage lending platform. While credit card balances reached a record high of $20 billion with record new card openings, revolver levels remained below pre-pandemic levels. We expect revolver balance levels to surpass pre-pandemic levels by early 2024, which would have positive implications for net interest margins. Business loans were up over 15% from last year as we continue to see improving utilization levels in operating facilities and CapEx investments. The growth was balanced, but the majority non-CRE related. We expect business lending growth will continue over the next few quarters. Moving to Canadian wealth management, assets under administration were up 4% from last year, hitting a record level of $540 billion. We also recently announced we will bring over all advisor teams from Gluskin Chef. Part of the agreement also includes the distribution of ONIX alternative investment strategies and funds. And going forward, we will look to continue expanding our set of alternative asset strategies, which currently includes a partnership with QuadRail and our Blue Blade family of funds. Despite challenging market conditions, RBC Global Asset Management increased from last quarter and last year, while also generating positive net flows in the quarter. U.S. Wealth Management AUAs were also up from comparative periods. Advisor recruiting will remain a key source of growth for Wealth Management USA, and we added over 20 new advisors this quarter. Since the beginning of fiscal 2022, we've recruited 135 advisors who are expected to drive over $20 billion of assets under administration. We also look forward to future contributions from RBC Brew and Dolphin. And amidst the volatile backdrop in U.S. regional banking, Citi National deposits were down from last year as clients put their money to work. But most importantly, deposits remained stable sequentially, evidence of the new client relationships and the strength of the RBC balance sheet. Citi National loan growth was up 14% year-over-year with our mid-market strategy based on a diverse foundation of over 200 relationships, Going forward, we expect loan growth to slow as the focus increasingly shifts to improving business profitability while we continue to invest in enhancing city national technology and governance infrastructure. Capital markets generated $1.1 billion of pre-provision, pre-tax earnings despite declining global fee pools, which are down over 40% from last year due to the challenging economic environment. Investment banking, we continue to invest in talent, in key verticals such as technology and healthcare, as well as across important coverage areas, including M&A and equity capital markets. These investments are increasingly reflected in new mandates as well as in our market share, which has improved to seventh place so far in 2023, up from 10th through 2022. We're looking to strategically add further hires in key positions. We're also building out our U.S. cash management business, which we expect to provide a steady source of revenue and additional deposit funding capacity over time. We are excited about this opportunity and look forward to sharing more over the coming quarters as we look to launch it to market. We believe we can meaningfully compete in this space given our existing corporate banking client relationships and leading credit ratings. In global markets, we aspire to continue gaining market share over time We are currently investing in technology to further modernize our client tools and infrastructure to drive scalable growth in the future. In closing, while we continue to operate in the challenging macro and operating environment, we have momentum and are seeking meaningful gains across our core client franchises. We are focused on enabling future growth, including through our intended acquisition of HSBC Canada, and to moderating our expense growth to sustain our premium valuation. Before I turn the call over to Nadine, I do want to express our support for Western Canada in light of the ongoing wildfires across the region. We have contributed to the Canadian Red Cross relief efforts and are supporting our communities, clients, and employees in the impacted areas. Nadine, over to you.