Royal Bank Of Canada

This conference is being recorded. Cette conférence est enregistrée. All participants, please stand by. Your meeting is ready to begin. Good morning, ladies and gentlemen, and welcome to RBC 2024 Second Quarter Financial Results Conference Call. 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, Katherine Gibson, Interim 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 re-queue. With that, I'll turn it over to Dave.

Thank you, Asim, and good morning, everyone. Thank you for joining us today. Today we reported second quarter earnings of $4 billion, or adjusted earnings of $4.2 billion. Return on equity, which is the key pillar of our shareholder value creation framework, increased to 14.5% this quarter. Adjusted ROE increased to 15.5% as we successfully executed our strategic priorities, including client-driven organic growth, expense discipline, maintaining a strong balance sheet, and accretive capital allocation, including the acquisition of HSBC Bank Canada. This quarter, we saw strong growth across diversified revenue streams. Capital markets reported record revenue of $3.2 billion as we gained market share in key areas of focus, such as advisory and origination. Canadian banking revenue growth was driven by strong volume growth and higher interest rates, reflecting benefits of our structurally advantaged balance sheets. Asset management and North American wealth management advisory revenue benefited from double-digit fee-based asset growth. Our increasing scale advantages and disciplined cost management helped drive all bank operating leverage of 1.4% or a strong 4.5% adjusting for specified items. Canadian banking reported a 39% efficiency ratio. While we focused on creating efficiencies, we continued to invest in improving the client experience. RBC was the first Canadian bank to be awarded the Digital CX Award for Excellence in Omni-Channel Customer Experiences by the Digital Banker, along with being awarded the Sellant Model Bank Award for Digital Onboarding. We're also actively investing in artificial intelligence beyond retail banking and risk management. In U.S. wealth management, we're using the power of AI to help financial advisors identify and act on new opportunities to provide even more value to clients. And in capital markets, we're seeing continued success with AIDEN, our well-established AI-powered trading platform. Our balance sheet remains strong, even after successfully closing the largest acquisition in our 155-year history. We reported common equity Tier 1 ratio of 12.8%. Our Canadian banking loan-to-deposit ratio improved to 98% as we continued to attract new clients to our client value propositions. Furthermore, we diversified our funding profile with the launch of our U.S. cash management business, which I will speak to shortly. And we continued to prudently add to our reserves with PCL on performing loans of $244 million. Our results continue to demonstrate our ability to generate long-term value. Our premium return on equity drove gross internal capital generation of over 70 basis points and book value growth of 8%. This morning we announced a $0.04 or 3% increase in our quarterly dividend. We also announced our intention to repurchase up to 30 million common shares under a normal course issuer bid as we look to offset the dilution from the shares issued under the dividend reinvestment plan. I will now speak to the acquisition of HSBC Canada, which we completed on March 28th. This was a pivotal milestone as we continue to focus on driving premium long-term ROE and growth. We are excited to welcome 780,000 clients from HSBC Canada, which added approximately $75 billion of both loans and relation-based deposits to our balance sheet. I would like to thank our employees who made an extremely complex close and convert integration possible, all within a single weekend. This smooth integration also demonstrates the power of the technology investments we've made in recent years. The level of employee engagement is high, and we're excited about the journey ahead. As a combined organization, we are well-positioned as the bank of choice for commercial clients with international needs, newcomers to Canada, and retail clients who need global capabilities. A significant percentage of the acquired retail accounts are affluent clients. Through HSBC Canada, we also acquired a well-established premier commercial bank with a leading trade finance value proposition and one which skews to a larger client segment than we have historically competed. We are pleased that the client-based and acquired loan portfolio, which can be seen on slide 28, is largely within levels forecasted when we announced the transaction 18 months ago. These loans continue to be supported by a high-quality, low-cost deposit franchise, which is largely within forecasted levels. This included the expected repayment of non-interest-bearing SEBA deposits. Similar to our own experience, net interest margins were impacted by a shift in deposit mix towards term products and more intense competition for mortgages and deposits than we'd initially assumed. Since the acquisition date, HSBC Canada reported a loss of $51 million, or a loss of $33 million, adjusting for amortization of intangibles. As you see on the bottom of slide 6, underlying HSBC Canada net income of $63 million represented approximately one month of earnings. This quarter's results further benefited from the accretion of purchase price accounting marks, which Catherine will speak to shortly. In addition, we realized $30 million of before-tax expense synergies this quarter, equating to an annualized run rate savings of $360 million, or approximately 50% of our stated targets. In contrast, results were negatively impacted this quarter by the recognition of day one PCL, which Graham will speak to shortly, as well as the cost of a short-term special welcome offer for qualifying HSBC Canada high-interest saving account clients. We continue to expect approximately $740 million of expense synergies within the two-year timeline we provided last quarter. Following the uncertainty of a long approval, which led to a slowdown in net new sales, The re-energized sales force is rebuilding pipelines with clients with whom they have long-standing relationships. They are also leveraging the added benefits that come with RBC's technology ecosystem and a AA balance sheet. Furthermore, we believe our combined product and service offerings should drive compelling cross-sell revenue synergies across retail and business banking, and while it's early, we are seeing positive signs. We continue to estimate the transaction will generate $1.4 billion of fully synergized adjusted earnings excluding the accretion of purchase price accounting marks. However, the initial lower-than-expected margins may push out the realization of our previously stated two-year target by a couple of quarters. Should we see mortgage and deposit spreads recover, we expect that realization timeline will accelerate. Before discussing the expanding client value proposition and our businesses, I will provide my perspective on the macro environment. The relative strength of the U.S. economy, including a tighter labor market and healthy consumer spending, has kept U.S. inflation persistently above the targeted range. In contrast, Canada continues to lag its peers in GDP growth per capita, so the impact of higher interest rates and rising unemployment begins to weigh on households, which Graham will speak to in his remarks. Canadian inflation metrics are now within the 1% to 3% target range. The bifurcation and trends suggest the Bank of Canada should move earlier than the Fed and start lowering interest rates over the coming months. The expectation of central bank rate cuts has led to strong equity market returns this year and should also have positive implications for loan growth and M&A deal flow, while also providing relief for Canadians. With this context, we are executing on our growth strategy across our largest franchises, starting with Canadian Banking. Deposits were up double digits from last year, or a strong 9%, excluding the benefit of the HSBC Canada acquisition. We welcomed a record number of newcomer clients this quarter, reflecting a 30% increase year over year. More broadly, new to RBC account acquisition was approximately 40% higher than last year due to our innovative client value propositions, which now include expansion of our partnership with Metro and its Mois Rewards program in Ontario, This partnership will continue to build on the successful launch of our co-brand credit card in Quebec. Additionally, RBC announced the launch of a new loyalty partnership with Paterson Food Group and its More Rewards loyalty program, which has more than 3.5 million household members in Western Canada. Furthermore, since launching our Avion Select tier for non-clients, we've registered nearly a half a million new members. We remain focused on attracting new primary client deposits which provide a foundation for profitable loan growth, credit insights, deepening relationships, and earning stability through the cycle. Commercial loans were up 25% or up 14% excluding HSBC Canada loans. Our growth strategy remains focused amongst a diversified set of existing clients we know well. Turning to our record results in capital markets. Investment banking revenue grew 45% from last year, Our market shares up 40 basis points over the last 12 months, reflecting gains across all major products. We continue to focus on multi-product mandates and improved sector diversification. While geopolitical risks and an evolving regulatory environment creates uncertainty, the market backdrop is creating opportunities for increased dialogue with clients and a healthy M&A pipeline that continues to build. Global markets reported $1.5 billion in revenue, largely due to higher debt and equity origination and higher fixed income trading revenue. We also recently launched RBC Clear, our cloud-native, next-generation U.S. cash management business with a digital end-to-end onboarding platform and ability to offer enriched insights to corporate treasurers. Our initial focus is to increasingly diversify our U.S. funding sources to reduce reliance on costlier wholesale funding and, in turn, improve ROE. Now moving to our wealth management segment. RBC Global Asset Management's AUM increased 11% from last year, particularly in Canadian strategies, benefiting both from higher markets and inflows from institutional mandates. An easing of monetary policy may also start a shift away from term deposits and cash ETFs towards fixed income opportunities, which is one of the core strengths of RBC Global Asset Management. In Europe, RBC Blue Bay has been recognized by Morningstar's Excellence Awards and the Lipper Awards for its fixed income strategies. RBC GAM was also named the Top Gun Investment Team of the Year in Canada for the ninth time in 11 years. Assets under administration and our leading Canadian wealth management business were up 15% or nearly $80 billion from last year, increasing to a record level of nearly $620 billion, benefiting from higher equity markets, and net sales of $16 billion over the last 12 months. Assets under administration in our U.S. wealth management platform, including the sixth largest wealth advisor in the U.S., also increased 12% year-over-year to $610 billion U.S. dollars, another record. One of our ongoing key strategic objectives for our wealth management businesses is to attract and retain top-performing financial advisors. To close, our premium ROE reflects efficient capital deployment, diversified funding, prudent risk management, disciplined expense control, and the execution of our client-focused strategies, including the acquisition of HSBC Canada. In turn, our strong internal capital generation through economic cycles allows us to invest in organic growth while also returning capital to shareholders. Now I'd like to turn it over to Catherine Gibson, our interim CFO, and welcome her to our first quarterly call. Catherine brings deep financial sector experience and knowledge of RBC. Catherine, over to you.