Royal Bank Of Canada

Good morning, ladies and gentlemen, and welcome to RBC's conference call for the fourth quarter 2023 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 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 it considers both to be useful in assessing underlying business performance. With that, I'll turn it over to Dave.

Thank you, Asim. Good morning, everyone. Thank you for joining us. Today, we reported fourth quarter earnings of $4.1 billion. We also announced a 3% or 2% increase in our quarterly dividend, continuing our policy of increasing dividends every other quarter. Our revenues were up 4% from last year, reflecting the strength of our diversified business model, including market share gains in both investment banking and global markets, solid volume growth in Canadian banking, and higher fee-based revenue from wealth management. Reported expense growth of 13% year-over-year was impacted by several factors, which Nadine will speak to later. Importantly, core expense growth declined to 5% year-over-year or about 2% sequentially. This is a trend that underscores our heightened focus on expense control and includes higher than normal severance costs. Our results were also impacted by higher PCL uncared loans. We added a further $194 million of PCL on performing loans this quarter in recognition of the evolving macro environment and more challenging credit conditions. Our allowance for credit losses now covers three times the Stage 3 PCL that we incurred over the last 12 months. Looking back at the 2023 fiscal year, RBC delivered earnings of nearly $15 billion in a very challenging operating and macro environment. We met all our medium-term objectives while investing to further strengthen our core businesses. As part of our regular strategic review, we also simplified our business model by exiting our investor services franchise in Europe. We ended the with a strong CT1 ratio of 14.5%, nearly 200 basis points higher than last year. Furthermore, we generated an ROE of 14% this year, or 16% when we consider the capital we are holding ahead of closing the proposed acquisition of HSBC Canada. We remain confident in our ability to continue meeting our medium-term objectives, including delivering a premium ROE of over 16%. Our balance sheet is diversified by both industry and geography, underpinning our all-weather franchise. The strong balance sheet combined with our premium ROE enables RBC to create value for our clients and shareholders through the cycle. This includes growing book value per share by 10% CAGR in the recovery following the global financial crisis from 2012 to 2019, and by a similar rate from 2019 to 2022 during the uncertainty of the pandemic. Before I discuss the strategic initiatives that will drive our next leg of value creation, I will provide my perspective on the macro environment where a slowdown in economic activity is already being observed. The rapid nature, size, and accumulation of interest rate hikes is reigning in elevated inflation. Higher interest rates are having a more immediate impact on the cost of living in Canada relative to the U.S., partly due to the stark difference in the duration of mortgage terms. Consequently, discretionary consumer spending in Canada is down, with October marking the largest monthly decline in six months. Higher interest rates are also cooling housing markets across the country, with sales to new listings ratio falling to 49% in October. Furthermore, we are seeing signs of slowing labor markets, as evidenced by rising unemployment, slowing wage growth, and lower job postings. We're also seeing declines in global trade even before the recent escalation of geopolitical risk. Following recent peaks in September and October, we are seeing declines in both yields and oil prices, further signs of an economic slowdown. Given easing pricing pressures, we believe central banks have reached the end of the tightening cycle and will pivot to rate cuts in 2024, albeit rates are expected to remain higher than pre-pandemic levels. With this context, we expect Canadian mortgage growth will continue to moderate to the low to mid-single digits as immigration-driven demand more than offsets the impact of higher interest rates on the cost of capital. In our commercial portfolio, 80% of the year-over-year growth was driven by our strategic focus on doing more with our best existing clients. We expect relative strength in Canadian commercial lending to continue, particularly in the agriculture, auto, and supply chain sectors. Our growing Canadian deposit franchises should continue to provide a foundation to drive premium loan growth while also providing a latent benefit from the recent trend of rising interest rates. Given market uncertainty, there is a significant amount of cash that can be deployed by your retail and institutional clients when central banks provide further clarity on the path to lower interest rates. This, in turn, should stimulate a broad-based recovery in equity and fixed income markets. Our market-sensitive businesses are positioned to benefit from this change in sentiment. Increased conviction in equity markets would also be conducive to a rebound in M&A deal activity where we maintain a healthy pipeline and strong client engagement. We are confident that our leading wealth and asset management franchises are well-positioned to capture money in motion back towards investment products, resulting from a shift in risk sentiment. Importantly, we remain committed to prudent costs and underwriting discipline in this uncertain environment while continuing to invest in our leading client franchises to drive growth. Our strategic investments in technology and the client experience for the past several years mean we're well-positioned to continue creating value. For the second year in a row, RBC ranked in the top three for artificial intelligence maturity among 50 global financial institutions in the Evident AI Index. While we cannot control the market environment, we have positioned ourselves to succeed. We remain focused on creating diverse, resilient, and high ROE revenue streams while adding to our leading deposit base. I will start with our leading Canadian banking business. We had record new to RBC account acquisition this year, including through our newcomer strategy, an important client acquisition funnel. Our partnership with ICI Bank Canada has created an attractive banking experience for newcomers by tracking 30,000 new clients this year alone. These clients come with new deposits, which provide a stable source of funding. They're also an important factor in clients consolidating their relationship with RBC at a rate that is 50% higher than average. We will continue to strategically invest in our proprietary sales force, innovation, distribution channels, and privileged assets to deliver a sustainable competitive advantage. We also remain focused on the proposed acquisition of HSBC Canada and are well positioned to meet these clients' needs, including through multi-currency accounts and trade finance. We'll continue to enhance the client experience with RBC's market-leading value proposition. Turning to a wealth management business, advisor recruiting remains a key source of growth. Our leading Canadian wealth management business hired 40% more competitive recruits than last year, resulting in a record year for recruited assets. Our U.S. wealth management platform, the sixth largest wealth advisor in the U.S. by assets under administration, recruited 94 advisors this year, driving over $20 billion of expected AUA growth. Our U.S. wealth advisory business has become the destination of choice for top talent in the industry because of our strong culture, entrepreneurial environment, innovation, and competitive products. In the UK, the integration of RBC Brew and Dolphin is progressing well, with milestone objectives being met. This acquisition provides us with deeper scale in what we see as our third home market. Furthermore, we continue to add deposits and lending products to support client needs across our increasingly global wealth management franchise. We recognize Citi National operated well below its full potential this year. as it absorbs higher commercial PCL, continued investments into operational infrastructure, and a sector-wide increase in funding costs. Looking forward, our focus is on enhancing City National's profitability following outsized volume growth over the years, building on the relative stability of deposits and retention of clients and advisors through 2023. Accordingly, this quarter, we enhanced the yield of City National's securities portfolio, recognized impairments on certain assets, and implemented a cost program resulting in higher than normal severance. We've also added the strength of the management team, which will increase the focus on several strategic initiatives, including expense management and enhancing the deposit base. Normalizing for the potential recognition of the FDIC special assessment costs, we anticipate a return to profitability next quarter, a stepping stone towards a return to more normalized levels of net income in 2025. Furthermore, As it relates to our broader U.S. footprint, we are focused on improving the connectivity of our three platforms. And in this regard, we recently enhanced the mandate of Derek Neltner, our group head of capital markets, to include accountability for the integrated strategy and performance of all our businesses operating in the United States. Moving to corporate investment banking, where RBC Capital Markets sits ninth in the global league tables. we continue to focus on shifting revenue streams towards higher ROE advisory and origination activities. We're also building on our investments in people across verticals and geographies to expand our client coverage. In global markets, we're looking to build on recent market share gains. The changes we've made to our organizational structure are increasingly producing results. We're also currently investing in technology to further modernize our infrastructure, including the FX trading arm of our macro business. We're excited about the opportunity to attract client deposits that are pending launch of our U.S. cash management business, given our existing corporate banking client relationships and leading credit ratings. Turning to the insurance segment, which continues to generate high ROE earnings and provide diversification against credit and interest rate risk, we remain focused on sustaining and growing our market leadership in key segments, including increasing and harnessing the power of our receipts. In conclusion, we are well positioned entering into fiscal 2024. Our balance sheet remains strong. We are growing our deposit base by attracting new clients and deepening existing client relationships. We have diversified revenue streams across our segments and geographies. Following a record year of client acquisition, we are focused on welcoming even more clients onto our platforms. We will continue to deliver on our strategic ambitions while staying true to our purpose of helping clients thrive and communities prosper. Our success is built on the strength of our employees and their commitment to serving as trusted advisors for our retail, commercial, and institutional clients. I want to personally thank our 94,000 colleagues and 17 million-plus clients. Nadine, over to you.