Royal Bank Of Canada

Good morning, ladies and gentlemen. Welcome to the RBC's 2026 first quarter results conference call. Please be advised that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the meeting over to Asim Imran. Please go ahead.

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Catherine Gibson, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions, Erica Nielsen, Group Head Personal Banking, Shana Matagauji, Group Head Commercial Banking, Neil McLaughlin, Group Head Wealth Management, Derek Nelner, Group Head Capital Markets, and Jennifer Publicover, Group Head, Insurance. As noted on slide two, 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. Good morning, everyone, and thank you for joining us. Today, we reported record earnings of $5.8 billion and adjusted earnings of $5.9 billion. Pre-provision, pre-tax earnings were nearly $8.5 billion and were up 14% from last year. These strong results were underpinned by record revenue of nearly $18 billion and a 5% operating leverage. Both wealth management and capital markets reported record revenue and pre-provisioned pre-tax earnings, benefiting from a constructive environment for our market-related businesses. Personal banking and commercial banking reported record results underpinned by growth in money and balances, higher margins, and strong operating leverage as well. This was achieved even as housing conditions and uncertainty around trade policies continued to temper loan growth in Canada. Our return on assets increased to nearly 90 basis points, and we bought back over 4 million shares this quarter for approximately $1 billion. Our performance delivered a return on equity of 17.6% on a foundation of a robust 13.7% common equity tier one ratio. This powerful combination drove 9% growth in retained earnings. Before covering client activity and business results, I'll briefly discuss the macro environment shaping our revenue drivers. The Canadian economy remained resilient through the elevated uncertainty from persistent and evolving geopolitical and trade tensions. GDP and job growth continued despite lower immigration levels, and household balance sheets are improving. That said, the impact from tariffs on the economy varies depending on the clients or sectors. We are seeing strong profitability and improving productivity for many of our corporate clients. While commercial clients in tariff-impacted sectors and geographies are facing headwinds, and the impact of the K-shaped economy continues to bifurcate Canadians. Going forward, we expect increased fiscal stimulus and the diversification of new trading relationships to create a multiplier effect of supporting economic growth and client activity over the near to medium term. With this context, I will now speak briefly to key trends we are seeing across our businesses as seen on slide five. In personal banking, mortgage growth remained modest as housing demand remained soft in key regions. This was due to the affordability challenges, economic uncertainty, and a pullback in immigration levels. Looking forward, given weaker demand, we reiterate our low-to-mid single-digit mortgage growth guidance for the year. This growth will be supported by Propriety Mortgage Specialist Salesforce, capturing switch opportunities and driving strong retention through increased investments in channel capacity. Further, our recently announced strategic partnership with Realtor.ca will create new top-of-funnel opportunities. The strength of our money in franchise was on display again this quarter. We saw growth across demand deposits and mutual funds, as many of our clients sought higher returns amidst term deposit renewals. The aggregate flows to personal and savings accounts, GICs, and mutual funds increased almost 50% from last quarter, driving strong revenue growth. Commercial banking loans were up 4%, with strength in health care and agriculture. growth was moderated by a tariff-related slowdown in supply chain sectors and demand-driven headwinds in commercial real estate, which represents approximately 40% of the portfolio. On a provincial level, Ontario continues to experience tariff-related headwinds, while we are seeing resilience in the prairies. Even though larger clients are cautiously returning to growth mode, we expect commercial loan growth to stay closer to the lower end of our mid- to high-single-digit range for the year, the longer we go without clarity on the KUSMA trade negotiations. Deposit growth was stronger, up 5% year-over-year, reflecting broad-based expansion across nearly all sectors amidst a competitive landscape. To build on this momentum, we continued to invest across our Salesforce capacity and enhance digital and AI-driven underwriting capabilities while elevating our transaction banking offerings. Our wealth management segment had a very strong quarter, generating over $6 billion in revenue, $1.7 billion in pre-provision, pre-tax earnings, and $1.3 billion in net income. Growth in fee-based assets benefited from market appreciation as North American equity markets rose double digits year over year, and bond indices also moved higher. In addition, we recorded strong net new assets over the last 12 months, benefiting from clients moving back into the markets, as well as continued advisor recruitment. Assets under administration were up 13% year-over-year in Canadian wealth management, surpassing $1 trillion for the first time. U.S. wealth management AUA was up 12% to U.S. $777 billion. And RBC GAM assets under management were up 11% to $796 billion. Furthermore, Citi Nationals earnings continued to grow with both pre-provisioned pre-tax earnings and net income more than doubling year-over-year. This quarter, wealth management announced the expansion of RBC Echelon, our premier platform for a growing base of ultra-high net worth U.S. clients. We are also addressing the needs of new and aspiring self-directed investors by launching GoSmart, an intuitive mobile-first platform integrated within the RBC mobile app. Capital markets also had a record quarter, with revenue of $4 billion, pre-provisioned pre-tax earnings of $1.9 billion, and net income of $1.5 billion. Global markets generated record revenue of $2.2 billion with robust client activity amidst a constructive environment. We benefited from notable performance in equities where we've made strategic investments to bolster our equity derivatives and financing capabilities. Corporate investment banking benefited from higher debt and equity origination activity, higher M&A activity, and higher North American lending revenue with average loans up 8% from last year. We continue to have a healthy M&A and origination pipeline as a macro and regulatory environment is expected to support growing fee pools. I now want to talk about our focus on compounding long-term shareholder value. Our philosophy has remained consistent. As noted last quarter, we constantly evaluate opportunities to optimize shareholder value, not just maximize ROE. We concurrently want to enhance client-driven profitable growth while upholding our disciplined risk appetite, and we've done both. This requires both the deployment of capital as well as leveraging our structural advantages in funding and on interest expenses, along with our leading franchises, distribution, and technology. On dividends, we look to progressive increases underpinned by sustainable earnings growth as we strive towards the midpoint of our 40% to 50% medium-term objectives. When it comes to the level of share buybacks during times of uncertainty and volatility, we are aware of our book value multiples and intend to maintain capital levels near the higher end of our targeted range. Similarly, we have a high bar when it comes to acquisitions, and we will continue to be patient for the right opportunities to accelerate growth instead of solving capability gaps. Our priority continues to be investing to organically grow our businesses. At the top of slide six, on the top left side of slide six, highlights the organic RWA deployed to support our clients' financing needs and growth aspirations discussed earlier. We have increased the level of client-driven growth given an expanding suite of opportunities. Organic RWA growth this quarter was greater than the quarterly average of each of the last three years. Our diversified business model allows us to strategically grow RWA through a changing macro environment. We took advantage of constructive opportunities to utilize our resources to grow access across our capital markets businesses over the past year and reduced client demand and lowered growth in commercial banking. The bottom left charts on page six illustrate growth by ROE bands across our segments and sub-lines of business. When it comes to allocating capital to drive client growth, we don't just allocate capital to grow the highest ROE businesses, We also look to strengthen market share, invest in new technologies, and lay the foundation for new growth verticals to enhance future value and diversification across 1RBC. These create a flywheel multiplier effect for driving durable ancillary revenue streams. An important point to make is that some of our largest businesses are inherently capital light and do not need a lot of capital to grow. These are mostly funded by non-interest expenses. Growth in less capital-intensive, higher ROE businesses is a key driver of our revenue mix and growth. A relatively equal weighting between capital light fee-based revenue and more capital-intensive net interest income provides us with an attractive business mix as well as a lower credit risk profile. While some of our capital-intensive businesses generated returns below our expectations in fiscal 2025, this was partly due to several headwinds, which we expect to reverse over time. These include elevated PCL and performing loans, higher wholesale PCL, elevated spend in the US, and lower mortgage spreads due to increased competition. Furthermore, we look to offset any dilution from growing businesses with a lower standalone ROE by deepening client relationships to drive improved revenue productivity while also becoming more efficient. We also won't grow for the sake of growth as evidenced by our discipline on mortgage growth and pricing amidst intense competition. We target profitable revenue growth that drives future value. Looking forward, we see momentum and significant opportunities to organically deploy capital across our diversified business model to accelerate profitable revenue growth. We are growing capital markets corporate loans, which would initially generate a lower standalone ROE. However, this growth creates opportunities to add on higher ROE revenue, such as transaction banking and investment banking fees. Additionally, we will continue to support client activities by deploying RWA into our financing businesses, which can further monetize sales and trading intermediation activities. Combination of growth and deepening relationships drives a higher segment and client relationship ROE. Another strategic initiative is to align transaction banking with our growing city national bank commercial loan book, as we build out teams while launching U.S. mortgage and credit card products to increase penetration within a high net worth client segment in U.S. wealth management. We also expect meaningful opportunities in commercial banking when we have certainty around KUSMA and when we start seeing the execution of large-scale infrastructure projects highlighted in the Canadian federal budget. The segment's ROE of over 16% this quarter highlights the power of the franchise when PCL is normalized. We are applying similar approaches across our strategic initiatives, some of which are listed on the right-hand side of slide six. We are not trying to just acquire loans. We are building relationships, and there are a lot of opportunities to grow without diluting our ROE. To close, we are focused on creating sustainable shareholder value by accelerating our ambitions to drive both profitable growth and a premium ROE underpinned by our investor day targets, including improving revenue productivity and cost efficiencies. We also remain committed to using our strong internal capital generation to return capital to shareholders through both dividends and buybacks. Our future success will include opportunities to turn our highest potential AI use cases into solutions that bring value to clients. To do that, we recently announced that our Group Head Technology and Operations, Bruce Ross, will lead our newly created AI group to accelerate our AI ambitions. Moving into the Group Head Technology and Operations role is Naeem Kazmi. a transformational leader who has held multiple leadership roles as most recently the technology lead for the successful close and convert integration of HSBC Canada. We look forward to their continued success. And with that, Catherine, over to you.

Thanks, Dave, and good morning, everyone. Starting with slide eight, this quarter we reported strong results with diluted earnings per share of $4.03. Adjusted diluted earnings per share of $4.08 was up 13% from last year, reflecting solid revenue growth and adjusted all bank operating leverage of 4.3%. Turning to capital on slide 9, the CT1 ratio of 13.7% was up 20 basis points from last quarter, reflecting strong internal capital generation of 79 basis points. underpinned by our 17.6% ROE. A modest benefit from changes in regulatory updates and market-driven OCI gains also contributed to the increase. This was partly offset by higher dividends as announced last quarter and higher RWA from the strong client-driven business growth that Dave just spoke to. Share buybacks of 4.2 million shares for approximately $1 billion largely in line with last quarter's pace, also had an impact. Moving to slide 10, all bank net interest income was up 8% from last year, or up 7% excluding trading revenue, reflecting strong growth in personal banking and solid results in commercial banking and capital markets. All bank net interest margin was down 7 basis points from last quarter, largely due to seasonally higher financing activities in capital markets. All bank NIM, excluding trading revenue, was up one basis point from last quarter, largely due to higher net interest income on certain transactions in capital markets, which were offset in non-interest income. Canadian banking NIM was flat relative to last quarter, largely reflecting favorable product mix, driven by growth in non-maturity deposits. Continued benefits from our structural tractor hedging strategy also contributed, due to a combination of beneficial five-year swap spread roll-on trends and continued growth in notional balances. This was offset by pricing competition and lower purchase price accounting accretion benefits related to the acquisition of HSBC Bank Canada, which we guided to last quarter. Excluding the PPA accretion roll-off impact, Canadian banking's NIM would have been up two basis points. Moving to slide 11, reported non-interest expense was up 2%, and adjusted non-interest expense was up 3% from last year. Adjusted expense growth was largely driven by higher variable compensation, consistent with higher revenues in wealth management and capital markets. Higher salaries and pension and benefits-related costs also contributed to the increase, largely driven by a net increase in headcounts. This was offset by the impact of FX translation and lower share-based compensation, which was driven by changes in equity markets and our own share price. Our expense growth also reflected the realization of cost synergies from the acquisition of HSBC Bank Canada and Higher Severance last year. Excluding these impacts, our expense growth would have been in the mid single-digit range. On taxes, The adjusted non-TEB effective tax rate of 21.9% was up approximately 1.5 percentage points from last quarter, reflecting changes in earnings mix. I'll now turn to our Q1 segment results, beginning on slide 12. Personal banking reported record results of approximately $2 billion this quarter. Focusing on personal banking Canada, Net income was up 18% from last year, and the segment generated operating leverage of 9%. Revenue growth was 9%, with net interest income up 10%, reflecting higher margins and volume growth. Non-interest income was up 8% from last year, largely reflecting higher mutual fund revenue. Loan growth of 4% was driven by growth across all portfolios. Deposit growth was flat as growth in lower cost demand deposits was offset by a decline in term deposits concurrent with lower interest rates. However, this quarter we generated over $2 billion in retail mutual fund net sales compared to the $5 billion we generated in all of fiscal 2025, reflecting the strength of our money in franchise. We expect this momentum to continue next quarter including benefits from the seasonally active retirement contribution period. Turning to slide 13, commercial banking reported record net income of $863 million, up 11% from last year. Pre-provisioned pre-tax earnings was up 5% from last year, driven by revenue growth from higher volumes and well-managed expenses. Deposits increased 5% from last year, or 2% sequentially, driven by growth in non-maturity deposits, partly offset by a decline in term deposits. Loan growth continued to moderate to 4% year-over-year or 1% sequentially, with tariff-related uncertainty impacting demand in key sectors and geographies. Turning to wealth management on slide 14, net income of $1.3 billion was up 32% from last year, reflecting record revenue. Non-interest income was up 11%, reflecting higher fee-based client assets driven by market appreciation as well as net new assets. Strong retail mutual fund net sales over the last 12 months, including this quarter, were partly offset by outflows in short-term institutional mandates, which can be lumpy in nature. Transactional revenue driven by client activity in U.S. wealth management also contributed. Net interest income was up 4% from last year, driven by higher deposit growth in Canadian wealth management, as well as higher spreads and loan growth in U.S. wealth management, including Citi National Bank. Citi National's net income increased to U.S. $143 million. Record revenue this quarter is partly offset by higher expenses, including higher variable compensation and staff costs, including advisor recruitment. Turning to our capital markets results on slide 15, net income of $1.5 billion increased 3% from last year. Record pre-provision, pre-tax earnings of $1.9 billion were up 11% from last year. partly offset by higher variable compensation. Global markets revenue was up 7% from last year, reflecting record equity trading as well as strength and repo products, partly offset by softer credit trading results. Corporate and investment banking revenue was flat year-over-year. Investment banking revenue was down 6% from last year, offsetting lending and transaction banking revenue that was up 6%. Turning to slide 16, insurance net income of $213 million was down 22% from last year, reflecting a $65 million reinsurance recapture gain in the prior year. Return on equity for the business was 24.9%, reflecting the increase in attributed capital for insurance, as guided to in our fourth quarter call. We continue to target a mid to high 20% medium-term ROE. The U.S. region net income of $716 million U.S. was up 2% from last year, driven by pickup and client activity in both capital markets and wealth management, including city-national, as well as the benefits of strong markets and improved operational efficiency. This was partly offset by higher PCL. I'll now spend a few minutes updating our outlook for 2026. Consistent with last quarter, we expect annual all-bank net interest income growth, excluding trading, to be in the mid-single-digit range. This includes the majority of the remaining $80 million PPA accretion roll-off next quarter, which translates to approximately a four-basis point impact to Canadian banking NIM. Non-interest income is expected to benefit from robust client activity in market-related businesses. That said, capital markets is seasonally stronger in the first quarter, particularly in certain trading businesses, consistent with increased client activity. As a reminder, starting next quarter, we'll also begin to see the modest impact of reduced fees in personal banking in line with regulations set out in last year's federal budget. Also recall, the second quarter has fewer days than the other quarters. We continue to expect all bank expense growth to be in the mid single-digit range for the year due to the realization of previously committed costs and ongoing investments. This includes the growth initiatives that Dave spoke to earlier. Investments in technology and safety and soundness framework of the bank continue to be a priority given emerging opportunities and risks where we spend approximately $1 billion annually. Nonetheless, we continue to expect positive all-bank operating leverage for the year, including 1% to 2% for Canadian banking as we continue to focus on efficiencies across the bank, including AI-related benefits. We expect the adjusted non-TEB effective tax rate to move towards the higher end of our 21% to 23% previously guided range over the next 12 months. In contrast, We expect corporate support segment losses to now trend closer to the lower end of the $100 to $150 million range per quarter. On capital, we expect a modest 10 basis point negative impact to our CT1 ratio next quarter, reflecting changes to retail capital parameters. To conclude, we remain focused on continuing to drive sustainable shareholder value through capital allocation centered on client-driven organic growth within our risk appetite, along with returning capital to shareholders. With that, I'll now turn it over to Graham.

Thank you, Catherine, and good morning, everyone. Starting on slide 17, I'll discuss our allowances in the context of the macroeconomic environment and ongoing trade uncertainty. We remain cautiously optimistic on the outlook for the Canadian economy. We expect to see mild growth and continued stabilization in the economy, supported by prior rate cuts, ongoing trade diversification initiatives, and targeted fiscal measures. Looking ahead, while we believe the Canadian economy has demonstrated resilience, factors such as US trade policy, the upcoming KUSMA joint review, and geopolitical tensions add ongoing uncertainty to our outlook. Against this backdrop, we have maintained a prudent approach with our allowances. While our base outlook assumes that current KUSMA exemptions and tariffs are maintained going forward, To reflect the uncertainty of outcomes, we have retained elevated weightings toward downside scenarios consistent with the last three quarters. As a reminder, in the second quarter of 2025, we introduced a trade disruption scenario into our IFRS 9 framework. This scenario captures the risk of Canada facing significantly higher tariffs across all exports, but also reflects the potential for a severe North American recession driven by escalating global trade wars. When certain trade conditions have widened the range of possible outcomes, we feel the potential downside risk of a KUSMA withdrawal has been appropriately captured in our allowances, supporting our financial resilience through the cycle. Turning to slide 18, we took a total of $28 million or one basis point of provisions on performing loans this quarter, reflecting unfavorable changes in credit quality and portfolio growth, partially offset by a favorable impact from our macroeconomic forecasts. Moving to slide 19, PCL on impaired loans of 40 basis points was up two basis points, or $84 million relative to last quarter, with higher provisions in capital markets and personal banking partially offset by lower provisions in commercial banking. In capital markets, provisions on impaired loans were up $130 million from the prior quarter. Most notably, we incurred a large provision related to a borrower in the consumer discretionary sector, as well as to a previously impaired borrower in the financial services sector. We also continue to see provisions in the commercial real estate sector consistent with ongoing headwinds in that space. In our commercial banking portfolio, TCL on impaired loans was down $73 million compared to last quarter, reflecting lower provisions on larger borrowers. While we saw better performance in Q1, we expect losses to remain elevated in the coming quarters, giving the ongoing soft economic conditions, particularly in cyclical industries. As a reminder, impairments and recognized losses in our wholesale portfolios are inherently more difficult to predict and can be more episodic quarter to quarter. In personal banking, PCL and impaired loans increased by $27 million, driven by higher provisions in residential mortgages and credit cards, partially offset by lower provisions in personal lending. We continue to see a more localized impact in our retail portfolios, with higher provisions driven by softness in Ontario and the greater Toronto region. Residential mortgage provisions are increasing as expected due to these regional factors and pressures from higher payments at mortgage renewal. We expect these pressures to abate as we exit 2026 with average payment increases at renewal decreasing substantially in 2027. We remain confident in the quality of our mortgage portfolio, underwriting and collateral. Moving to slide 20, gross impaired loans of $9.2 billion were up by $485 million or three basis points from last quarter, largely driven by three segments. In personal banking, growth-impaired loans increased by $294 million quarter-by-quarter, largely driven by new formations in the Canadian residential mortgage portfolio. In wealth management, growth-impaired loans increased by $90 million, driven by CNB, with newly impaired loans in the commercial real estate and consumer staples sectors. In commercial banking, growth-impaired loans increased by $88 million quarter-by-quarter, largely formations in the quarter related to borrowers in the transportation and industrial product sectors. To conclude, despite higher episodic losses in capital markets this quarter, we remain confident in the overall quality, diversification, and resilience of our portfolios. We still expect full-year 2026 provisions on impaired loans to remain within the guidance previously provided. Credit outcomes will continue to depend on the extent and duration of tariffs, the performance of labor markets, interest rates, and real estate prices, factors we are actively monitoring as the trade and geopolitical landscape evolves. As always, we continue to proactively manage risk through the cycle and evaluate multiple scenarios across our credit and stress testing frameworks. We remain well provisioned and capitalized to withstand a wide range of macroeconomic and geopolitical outcomes. With that operator, let's open the lines for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from the line of Abraham Poonawalla with Bank of America. Please go ahead.

Can you hear me there?

Hi, can you hear me? Hello? Yeah, so I wanted to go back. The slide six is extremely helpful, so thanks for laying it out that way. But there's something you said around that slide, around profitable growth at a premium ROE. From an investment standpoint, it comes down to a relative game. So when we look at that slide six, maybe just talk to us about there are lots of tailwinds in capital markets today that the industry is benefiting from. As we think about the advantage that Royal has because of scale, because of market leadership position in many businesses, What are things that Royal can do that some of your peers may not be able to do or may not be able to do as profitably that we as investors should think about?

That's fair. Maybe I'll ask Derek to start because you referred specifically to capital markets and then myself, Sean or Erica will maybe answer that question in the context of Canadian banking. So Derek, maybe the scale advantage that you have in capital markets.

Sure. Thanks for the question, Abraham. So as you know, we've obviously been investing in the capital markets business now for many decades and have established very much a global footprint with today about 70% of our revenue coming from outside of Canada. I think those investments over multiple decades have really put us in a position where we do bring advantages in terms of our global footprint the diversification of our business, both across client segments, sectors, and products, and then obviously the scale that that brings, not just the scale within capital markets, but the scale of RBC that we can more broadly leverage. So what does that allow us to do from a competitive advantage perspective? I think first, You've really seen that come through in the sustainability of our results. That breadth across geographies and products and client segments has allowed us to deliver, we believe, very sustainable results at lower volatility than some of our industry peers. Importantly, from a client perspective, the cross-border platform we have allows us to serve our clients across multiple markets, whether that be in financing or advisory or sales and trading intermediation. which is very important as our clients get bigger and scale themselves and are looking for partners that can serve them across all their needs. And it allows us to pursue and support them in larger transactions, which again, scale is a theme we're seeing across industries and our clients are looking for partners that can support them. And then finally, I would just say, very importantly, the scale advantages that we have and the sustainability and diversification of our business allows us to continue to invest very consistently over the cycle. And we're not going to chase certain themes at a certain point in a market cycle, but allows us to pursue a very consistent strategy, make the investments in talent, technology with our balance sheet resources to really build long-term, durable client franchises. And then finally, it allows us to do that without stretching on risk. So we've got lots of different avenues where we can invest organically, continue to build the business. We want to be thoughtful, particularly at this point in the cycle. And so we feel we can do that without compromising our risk appetite in any way.

Thanks, Derek. You know, when we think about scale, we think about in the context of operating scale, brand scale, data scale, etc. among a number of dimensions. And when you think about the operating scale of the Canadian bank, consumer and commercial banking operating at a combined productivity ratio of, I think, 35-36%, it allows us to compete for business and drive a higher ROE at the same price, same risk level. It allows us to price more flexibly. When you have a 30% advantage over your competitors who are in the mid-40s, it allows us enormous flexibility within our risk appetite. to earn a higher ROE on the same piece of business or price more aggressively if we want to serve that client. So on the operating scale side, it's clear the advantages it gives us and it drives that consistent premium ROE, operating ROE that we've driven. Maybe I'll turn it to Erica because it's such an important question. We're going to spend a little more time on it. It's a great question. Maybe about data scale and brand scale. Erica, in your business.

Thanks, Dave. So maybe just a comment on the data scale. One of the most important things that we see going forward as we serve more Canadians in the Canadian marketplace is our ability to understand what those consumer needs are, understand the everyday financial of those consumer needs, and then use that information to build models that allow us to further grow our business, further penetrate that business. When we look at the ability... of our models, particularly those AI-based models that we're looking at now, we can see very different outcomes based on the scale of consumers that we see in the Canadian marketplace. And so we look at that as a significant opportunity for us to grow our businesses differentially based on the data scale and the activity scale that we see in our client franchise.

Thanks. So that's a big part of our investor day thesis. I think we probably have a long queue. We should move on, but appreciate that question. Operating data, balance sheet, brand scale are a big part of how we drive a consistent premium growth in ROE. So maybe we'll move to the next question. And please, operator, next question.

Thank you.

Your next question comes from the line of John Aiken with Jefferies. Please go ahead.

John, are you there?

Sorry about that. My apologies. I was hoping to drill down a little bit on City National. I think Catherine mentioned in her commentary that there were a bit of headwinds in terms of provisions. I wanted to discuss the outlook for 26-27 and how much work is left to be done or have we finished with most of the heavy lifting?

I think you heard incorrectly. There's a tailwind from provisions. Not a headwind. We're having great credit experience in City of Nashville. We serve a premium, affluent, and entrepreneurial commercial customer. Any other clarity on that, Catherine?

No. I would just say in my comments, I was just calling out the strength of their earnings this quarter. Right. In addition to the clean credit book, we're also seeing really strong loan growth, deposit growth, profitable growth, and we're really pleased with the results that we've seen now on a continuous basis over a few quarters. So as we go forward, really seeing them deliver against the targets that they had set out almost a year ago with that profitable top line growth driving the efficiencies, and it's really materializing with more to come.

We are well on our way to meeting and exceeding our investor day targets in City National. We are very excited about that. being on a growth front footing right now with that business, profitability-wise and customer growth-wise. So don't foresee the credit headwinds that you mentioned.

Great. Thanks for the call, Aaron. Sorry about my confusion.

That's fine. Your next question comes from the line of Gabriel Deschain with National Bank Financial. Please go ahead.

Catherine, can you repeat what you said about the Canadian banking them and the impact of HSBC, that accretion runoff and stuff in Q2?

Yeah, good morning, Gabe. Happy to. So what we saw as an impact this quarter was the PPA rolling off related to HSBC. And so it's starting to roll off this quarter, which was the two basis points impact and we're going to see it largely kind of fully roll off. There's a little bit that will last throughout the rest of the year, but it'll be a four basis points impact. Having said all that, we're still seeing like a positive momentum from our tractor strategy. We're seeing positive impact from the deposit mix shift as we're seeing those flows move into non-term. We're also, as I said in my comment, seeing really positive flows into mutual funds So I know that doesn't necessarily show up in YIM, but it's showing up in overall revenue growth. And then you would have seen in the charts that we've included, there is still competitive pressure that is a bit of an unknown going forward, but we're seeing that on GICs, and we're also seeing it in the commercial books, and a little bit still on the mortgages as well.

So margin down for this point in the next quarter.

Yeah, the impact will be four basis points, and we don't give specific guidance out on NIM. We kind of push towards the guidance on the NII excluding trading. But I would say you could look to kind of track to a stable expectation on NIM as we go forward.

Got it. And for Dave, just, you know, we hear this comment every now and then, like pressure to deploy capital. which I don't think that applies to Royal. You've got a lot of capital, but you're going to nearly an 18% ROE. I didn't see a huge boost from capital markets. It helped, but it wasn't like outsized this quarter. So are you willing to sit on excess capital and wait for the organic growth to come, and then we'll see like a leg up then, that type of thing?

That's a great question as we are – put our third quarter consecutively of 17 plus percent ROE. It's driven from the strength of the business, not largely from buybacks. We haven't seen the benefit of our AI benefits that we discussed, the $700 to $1 billion benefits as we've invested that money and are still on track to deliver that for investors. So we're excited about that. We do, to your point, have significant capital to buy back shares and We're certainly looking to continue to do that and grow into that. So we will be able to improve that ROE through some share buybacks. And then from an organic perspective, we want to spend more time talking about it. We do see more growth coming from a significant number of projects that are going to get built in this country, whether it's deployment of our defense industry spend, the energy infrastructure we need to be, the Arctic infrastructure, the minerals infrastructure, all these multiple use capabilities that the Prime Minister and the government have talked about. It's going to require a significant amount of domestic and foreign capital. One of the reasons we're looking to intermediate that capital from places like the Middle East as well into the country. So I think from that perspective, we see an acceleration of growth opportunities coming at us on the organic side. that we're trying to anticipate the timing on that. It's hard to predict some of these larger projects, but again, we anticipate good growth coming. And the third thing I'd say, we continue to be on the lookout for the right acquisition. It's not that we're avoiding them, just none have met our hurdles at the end of the day, and the hurdles that we promised you to drive accretion. At the end of the day, they are all significantly dilutive, and that's not acceptable to us. We don't grow for the sake of growth. We're here to create shareholder values. So It's not that we're not looking, that we understand the businesses we want to grow. They're all in the businesses that we talked about, what's global wealth, U.S. wealth, commercial banking. Those are the types of acquisitions we would look at, and nothing's met our hurdle rate. So we continue to be active on all fronts in creating shareholder value, and I think that you should get comforted by the number of levers we have to pull to enhance ROEs and create growth at the same time.

All right. Thanks for that.

Your next question comes from the line of Paul Holden with CIBC. Please go ahead.

Yeah, thank you. Good morning. Question for Graham. So Dave talked about loan growth being near the bottom end of the guidance range for the year due to sort of softer economic conditions in Canada persisting. What does that imply for the PCL guidance? I know you restated PCL guidance. Does that mean... should be assuming something at the upper end of the range, would you assume? And then sort of tied to that, I'm really curious to provide a good slide on, I think it's slide 34, where you show the mortgage portfolio, sort of the component of the higher risk where LTVs over 80 and credit bureaus score below 685. And we saw some change in that number quarter over quarter. So maybe just, I guess, my question is, Talk to us about Canadian consumer risk and what that might mean for PCLs.

Thanks, Paul. Good morning. I think the comments they've made around softness on the growth side is quite consistent with the guidance we've given in Q4 and we're persisting into Q1. We continue to see the Canadian economy in particular not certainly weakening into a recessionary standpoint, but struggling with pretty modest growth and You know, there's certainly regional effects, particularly when we talk about the consumer side of our portfolio. We particularly see weakness in Ontario consistent with kind of the elevated levels of employment we see in the region. You know, and I think when we talked about in our guidance previously and that persists into Q1 is that we really kind of saw 2026 being a year where we were going to kind of be in this plateau of relatively elevated credit losses and as things are really kind of trending sideways. There's some near-term headwinds that haven't changed that are still playing out. Those are headwinds like the increasing payments that many of our mortgage clients are going through. We've got the kind of ongoing kind of trade and tariff uncertainty. And again, that's impacting many sectors that we've talked about in the commercial side, but that does play through into the consumer side as well. And again, a lot of that is centered in the GTA in Ontario as well. So overall, I wouldn't say I think our view on the consumer has changed a lot in Q1 versus Q4. We're seeing a lot of the things we talked about then persist into Q1. You know, when we look at the different products, I would say we see, you know, some indicators of stability and kind of early delinquencies in products like our mortgage product, products like our unsecured lending products, areas like indirect auto where we're we'd see maybe some recent trends and impairments that we're improving, but the earlier delinquencies there are showing a bit of a softening. And so there's some pluses and minuses there, and we pull that together. That's what's kind of leading to us persisting kind of our view that the forecasting guidance we provided in Q4 still holds now. You know, that's kind of the rough view of the consumer side. I'd say the wholesale side is where we see more volatility, right? And I think we kind of called that out in Q4, and we're seeing that play out very much in Q1. Wholesale by nature is going to be more volatile quarter to quarter. Interesting in our portfolio, you're seeing kind of that play out in both directions. I think in capital markets, we obviously saw elevated levels of impairments and risk playing through in the quarter. When we kind of compare that against a lot of the forward-looking metrics we look at in the wholesale book, things like our watch list and kind of movement into our special home group, ratings migration, Those are all stable, but improving, and so we don't see this as some new indicator that capital markets is resetting at a higher level. Likewise, commercial banking had a much improved quarter this quarter, but that's a business where, likewise, the indicators are still high and risk is still elevated. And so when you put wholesale together, we still think we're going to be in an elevated environment for the year, but it's going to be pluses and minuses as we work our way through each quarter. Overall, very consistent, I would say, with Q4, but a few pluses and minuses as we look throughout the portfolio.

I understand. That's helpful. Thank you.

Your next question comes from the line of Saurabh Mulvahedi with BMO Capital Markets. Please go ahead.

Okay. Thank you. I just wanted to go back to slide six and ask a question of Derek in particular and maybe Graham. Kirk, you're kind of listed a couple of times as both capital intensive and moderate capital intensive use of, I guess, resources here. So when you go to grow your corporate lending, for example, before some of the benefits come through, should we be expecting a bit of a, I don't know, moderation or mellowing in your segment ROE before it picks up and As you do more corporate banking, Graham, do we need to think about Royals through the cycle, average PCL with a greater volatility around it, even if it comes in around the same? So if you could just provide some color as to what the outlook may look like, not necessarily over the next 12 months, but over the next 24, 36 and beyond.

Sure. Thanks, Saurabh. It's Derek. I'll start and then Graham can obviously chime in on the second part of your question. Just a few things I would highlight. So on that slide six, as you know, capital markets, you know, has a broad portfolio of businesses. Some are more capital intensive, such as the corporate banking loan books. Some are moderate, being parts of our global markets business. But I would also highlight we have some very low capital intensity businesses, such as investment banking and transaction banking that are key growth areas for us as well. And so when we look at how we might deploy organic capital, it's really across a all of these areas. For the more capital or moderate capital intensity, it's through direct capital employment through financing and lending. And then through the less capital intensive areas, it's really through NIE as we invest in talent and technology. To your specific question on what should you expect from the ROE, we would not They expect a deterioration in our ROE. We think we can deploy capital while at the same time do that across the portfolio to continue on the trajectory of moving our ROE target higher, you know, consistent with what we articulated at Investor Day. And you've obviously seen that in the last two quarters as our ROE has continued to trend upward. So it's a balance between ROE and growth. We think we can invest across the portfolio more. drive accelerated growth while continuing to migrate our ROE higher.

Maybe just sort of to add on the kind of risk element to that question, you know, just kind of say a few things on that. I think, you know, while capital markets has been growing and there are plans to grow, if you kind of pull up and look at what's happened over the last three to five years, and you use kind of a metric like RWA as an indicator, we've actually seen the RWA footprint of capital markets kind of abate or kind of remain a stable proportion of RBC's overall risk profile. And so, no, I don't expect it will kind of dramatically change kind of the volatility of our credit book, per se. Look where the growth is happening, say, on the loan book or off the markets business on the financing side. It tends to be kind of higher-grade corporate relationships that we're driving more of, and so... wouldn't expect it to be kind of driving volatility in a really distinct or unique way there. So as it stands, again, the plan, we have kind of a very well-articulated risk appetite. I don't think anything that we're laying out here has us changing our risk appetite. That's consistent with what we messaged at Investor Day. So no change in approach on that at this point.

Okay. Thank you very much.

I think we have one more question. Good morning.

Your next question comes from the line of Mario Mendonca with TD Securities. Please go ahead.

Good morning. Dave, perhaps just a quick question. I was intrigued by a comment you made in your prepared remarks. You said, and it was in the context of returning capital in the form of buybacks, you said something to the effect of, and we acknowledge where the price of the book is. I may have misheard you, but what message were you trying to convey if I did not hear you correctly?

Oh, just as we came out of Q4 into Q1 and saw, you know, the significant run-up in the share price, we looked at the volatility in the marketplace, and I think we tempered, you know, some of our buyback activity through Q1. As you saw, we maintained a kind of consistent level as we had in previous quarters between $800 a billion. It was probably most attributable to the uncertainty in the marketplace. and we exited the quarter thinking we'd be buying back shares at a certain level and ended up having a target much higher. So it's just a combination of events. I wouldn't attribute anything specific to the share price because we continued to buy back at $225, $230, $235 a share throughout the quarter. So we maintained an even cadence to the quarter versus an acceleration through the quarter. So I wouldn't attribute anything. It's more the of the geopolitical situation that caused us to hedge a little bit through the quarter.

I see. And then when you made reference to wanting to be at the high end of your target capital range, just remind me, is 13.5 the high end?

Yes.

Or would you think that's the high end?

Okay. We let it run up a little bit. We had a significant quarter where we earned a great return and we're very capital efficient and it moved up to 13.7. It just gives us more flexibility to deploy that into buybacks and growth in the coming quarter.

And this just made me think of one other thing. When you think about your US franchise, I think CNB went through a rough patch. It's clearly out the other end. Things are looking much better than they were a couple of years ago. Does that give you the confidence, and maybe this is the right way to ask it, is does the institution have the stomach for another meaningful US banking transaction?

Does it have a stomach? Absolutely. It creates creative shareholder value, and the synergies lead to that shareholder value. It's all about your business case, and can you extract synergies versus the price and the competition? We expect to have significant competition for any commercial property that we'd be looking at or wealth management property, and therefore, does your synergy stock compete, and can you earn a return on it? So we spent all our time building hypothetical scenarios synergy cases for each of these opportunities and we talk about them what would we do with this franchise differently than the current management team does how do you put a valuation on that and that leads us to be disciplined in any approach so we know we have capital strength we know our currency is strong and therefore we want to grow but we're going to grow and create shareholder value at the same time got it thank you

Your next question comes from the line of Abraham Punawalla with Bank of America. Please go ahead.

Hey, thank you. Just a quick follow-up maybe for Erica and Sean. As we think about the margin outlook for the Canadian banking business, maybe just talk to what you're seeing on deposit pricing, on-term deposits versus acquiring new households. trying to get a sense of what the competitive dynamics look on both fronts and the implications that may have as we think about just margins over the next year or two. Thank you.

Yeah, thanks, Ibrahim, for the question. It's Erica. Maybe just a couple of reflections. As it relates to the pricing and the competition that we're seeing on our deposit franchise, particularly with GICs, I would say that it still continues to be a competitive market. And, you know, that is coming from a group of clients who are in, you know, largely in one-year term deposits, and they're looking now to make the determination of is it time for equities or is it time to remain in the GIC portfolio. And so we are watching that portfolio and trying to guide clients appropriately. So we want to make sure that, A, first and foremost is we retain the dollars at RBC to grow our money in franchise. And then we follow what the client need is based on should they remain in the GIC portfolio or should they largely move into the mutual fund portfolio. We see increasing, as Catherine talked about in her remarks, increasing rotation into mutual funds. But at the end of the day, our core metric is that we keep the dollars in the RBC franchise. And then as it relates to client acquisition, as you can imagine, client acquisition is challenged for all of us in this market at this point, given the rollback in immigration in Canada. And so we are competing aggressively in that marketplace to switch Canadians across the different institutions and win. And we have had good success in our business at attracting with our value propositions, RBC Vantage, the Avion portfolio, at acquiring clients into our into our core checking and savings businesses so that we can continue to grow that franchise. But that is, you know, remains competitive across all of our peer set.

Hi, Rahim and Sean. So on the commercial side, we are seeing continued product mix shift from term to into demand as kind of the clients perceive the opportunity cost of holding excess liquidity to be low and are giving up some yield to maintain flexibility in this current environment. Just to give you some context there, we saw term obviously peak in 2023 or so at peak levels of rate increases at approximately 20% of the portfolio. The trough was about 8% to 9%. In the early stages of COVID, we're in the close to the 14% range now. So while there's potential tailwind opportunity, we think that will continue to abate over the coming quarters. But we do see customers being more liquid, and especially at the upper end of the portfolio, keeping sort of powder dry as possible. we see investment activity starting to pick up on the lending side by the same clients who are being much more active than sort of the core commercial and smaller base.

Thanks, Sean. I think that's our last question. I know you need to jump to another call, so maybe I'll wrap up here. So strong quarter for RBC across all our businesses. Client-driven growth, as you heard Catherine say, we earned through some margin headwinds from the PPA. We earned through some tax increases. We earned through some PCL increases. So it just talks to the earnings power of the organization and what were headwinds will become tailwinds. You saw the very strong capital efficiency well on our way to, as one of you referred to, 18%, with tailwinds as well, as I highlighted around. We haven't seen the AI benefits yet, which are coming and are on track and we're confident of. We haven't really bought back shares that are utilizing the technology the capital, surplus capital that we have that creates opportunities there and the growth that's coming to deploy that organically as well. And I'm going to finish where we started with Ibrahim's question on scale. I mean, when you're looking at these lower capital intensive businesses that are so important in driving our business, whether it's wealth or the transaction banking opportunity, the operating scale we have allows us to invest in this type of growth and get ahead of the curve. When you deploy half a billion dollars into businesses your transaction banking platform, because it's essential to your competitors, excuse me, your competitors in the future, but also the profitability that's going to come from that platform in the future, I think is very significant. We've absorbed all that into our current run rates. So as you think about the ability to invest our NIE organically into growth, you know, Neil's Go Smart initiative, which we didn't have a chance to talk about today, creating higher ROE, lower capital, growth, largely comes from your NIE efficiency and your NIE scale. And I think that is a characteristic of our platform, and that's the benefits you see in getting ahead of these and creating revenue growth and profit growth from that. So thanks for your questions. I know you have another call. Appreciate your interest and questions, and we'll see you next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.