Royal Bank of Canada (RY) Earnings Call Transcript & Summary

Welcome back. With me now is the President and CEO of RBC, Mr. Dave McKay. Dave, good to see you.

Hi, Meny. It's great to be here.

We have 25 minutes. I'm going to jump right in. When I speak to investors, there was a lot of debate about which bank can outperform in the short to medium term. There seems to be a lot more agreement among the investor base about RBC's edge in terms of the long-term outlook. So I'm wondering if you could talk about your competitive advantage as you see it both over the next 12 months, but then also if we could focus on the long term as well and then how you see that.

Well, thanks, Meny, for that question. I can take that and run with it for the next 25 minutes. So I appreciate the opening and you get a coffee and I'll see you at 09:15. But in all seriousness, it's great to be here and have a chance to talk about our franchise and the strength of it. And to your question, I think certainly over the long term, when you think about the strength of our franchise and how it goes through cycles is really important, but also in the short-term momentum, an opportunity to grow. We feel very strong about where we are. When you're looking at a long-term franchise that outperforms, ours certainly has the strength of the depth and breadth of our customer franchise. When you think about the depth of relationships powered by our unique capabilities to cross-sell. We have cross-sell ratios much higher, particularly in the retail bank, but when you cross-sell across wealth to retail, capital markets, commercial, the synergies we're seeing in the U.S. between commercial and capital markets, that cross-sellability drives a number of outcomes that are really beneficial for investors, one, higher ROEs and premium growth. But also a lower risk volatility from that. You get to know your clients. You have deeper, broader relationships. Those relationships lead to better conversations, lead to ability to work out situations and you get to choose your credit book as you build it versus from acquisitions. So when you think about the breadth and depth of relationship powered by the capabilities of cross-sell, of scale, of unique capabilities such as RBC Rewards, which allows us to have the richest reciprocity formula with customers in the country, that franchise and the moat around that franchise allows us to outperform in the short term, medium term and long term and is powering the significant growth and then is the platform under our investor thesis of premium growth, premium ROE and lower volatility. That's how we built our franchise. That's how we seek out geographies, customer segments to compete in, how we build capabilities to deliver through an economic cycle and over the long term. In the short term, all of that is enhanced by a significant embedded profitability in our existing book of business. We talk about it consistently, whether it's future drawdowns on authorized credits, in our revolving credit book, in our term lending books. There's significant opportunity when -- as we see business confidence return, we're seeing it return sequentially, we're seeing more and more business confidence, greater drawdowns, a greater business activity, whether it's interest rate changes that eventually will come, have a significant opportunity and client acquisition from all of the investments we've made in customer value, in new channels and acquiring RBC Ventures, a big part of that not only new client acquisition, but potentially new revenue pools from new activities and new services to our client franchise. So in the long term, being able to manage through cycles with lower volatility, leverage those unique capabilities, build deep and broad relationships drives a higher ROE, lower risk. And our scale, our operating and data scale are significant, and that's the game globally in every industry. We generate 10% to 20% more in the retail bank operating margin per dollar of revenue than our competitors. That can be reinvestment business. Some of that goes to investors, and you get in a flywheel where you're able to continue, through your scale of operations and data, invest in the business at a faster cadence, creating more value. RBC Vantage is a great example of that, and I know you want to talk about that. So those are the dimensions, breadth and depth of relationship, operating scale. And the third one I'd add is the opportunity we have in the United States. We have a unique franchise, one through City National, U.S. wealth and our U.S. capital markets operation, not just the synergies between them across institutional corporate, high-net-worth and commercial customers, but the organic growth opportunity within each of those spaces is very significant to us. So CNB, obviously in commercial, but extending into the mid-corporate space, which is a significant space. The revenue pool in mid-corporate is approaching $60 billion to $70 billion in the United States, which we're competing for. That's lending and transaction, where we want to compete. We aspire to acquire a significant number of new clients through those channels. And therefore, it's an opportunity. We aspire in the U.S. site to extend and cross-sell our ability around -- from commercial into high net worth, but also acquire more high-net-worth customers directly through our preferred and private banking capabilities. So these are all growth vectors for us in a very large but competitive profit pool. And it all starts with the acquisition we made with City National that provides that glue and that foundation to grow. So banks like that don't exist anymore in the marketplace, and we're very fortunate to have that platform. So those are the 3 platforms, I think, over the short and medium and long term, allow us to outperform.

I asked a broad question, and I got a lot there. So I got what I asked for, but I was hoping we could dig in a little more specifically, first off, just on new client acquisition and retention. And you talk a lot about that. And I just wanted to delve into that and specifically talk about your customer acquisition strategy and how it differs from peers. And it definitely sounds like it does. So if you could just address that specifically. It looks like you kind of took the foot off the pedal a little bit early in the pandemic, but now after the Q3 call, it seems like very much back in full focus for you.

Yes, absolutely, whether it's in Canada, in particular, in the retail bank, we did -- it wasn't the right time. Clients weren't in the mood to switch banks. They weren't looking for new services. So we stood it down for the better part of 14 months. And as you saw through the Olympic campaign in the latter part of the summer, through their RBC Vantage launch, is a significant new capability and customer value proposition. We're really amping up our customer acquisition. So on the consumer side, RBC Vantage and our credit card capabilities through Avion and WestJet will be primary customer acquisition capabilities for us. But increasingly, as we think about small business, and traditionally, we'd have acquired small business when accounts were opened and small businesses walked into our branches. Now increasingly, Ownr and Ventures is driving a significant proportion of our small business acquisition. In an earnings call, in Q3, we talked about 40,000 in the last year alone. We think that can grow to 100,000 new clients coming alone just through Ownr. So I think from that perspective, building the funnel that we talked about to connecting with customers sooner is going to provide enhanced customer acquisition campaigns supported by value propositions like Vantage and others, WestJet, Avion that allow us to compete and provide exceptional value. And then our cross-sell capabilities, which are proven over time, we're decades now, to perform extremely well. And one of the reasons we cross-sell so well is we're cross-selling the #1 product or advisory capability in the market. So you feel good in front of a customer saying, well, if you're looking for the #1 credit card, you got Avion. If you're looking for the top mortgage capability, if you're looking for the top asset management capability, we have it. So part of our cross-sell capability's not only the excellence of our people and the software we use and the support but also the value that we're offering our customer through our capabilities allows us to be successful. So when I think about acquisition, I think about it as cross-sell but also new customers coming in through traditional channels and through our new channels, which are unique to RBC.

Dave, you talked about RBC Vantage. Is that primarily a new customer acquisition tool? Or is it retention or both? So how do you view the value proposition there? Or what really is Vantage trying to do in terms of your client base?

First and foremost, it's customer acquisition. We don't have a retention issue. We have #1 customer service by J.D. Power. We have #1 digital capability with the most number of our branches. We've got great advisory capability. So we don't have any problem retaining customers and cross-selling, as we just talked about. So primarily, this is a customer acquisition. We're putting more value on the table, backed up by #1 service, #1 technology capability. Try us, you'll love us is really an in. So that value proposition of offering rewards, having your back, having our AI capability, kind of help you manage your accounts, all of those capabilities, we think, are premium performers in the marketplace. So this is a customer acquisition tool and our results so far prove that out. Right now, we don't have a lot of new immigrants in the marketplace, so we're comparing a bit of apples and oranges to past campaigns. But when you look at our acquisition trends in the early parts of this campaign, they're very, very strong. We're just at the start here. This is a program that's going to be around for a significant amount of time. So it is -- we're very excited about what we've built. We've been impatient to launch it because Canadians weren't ready for it. But now it's go. It's go time, and we've got the foot down on the accelerator.

You mentioned RBC Ventures, you've been talking about that for a while. And it's a simple question. Just is that strategy working? If I go back to your 2018 Investor Day, you talked about 5 million RBC Venture users by 2023, and you were talking about converting 10% of those, so 0.5 million, into new RBC banking customers. So how are you tracking to those goals that you set?

Important question. So in the new connections to Canadians, out of that 5 million, we're at 4 million. But one thing we've learned, not every synapse or connection is equal. A connection to a small business owner who registers their company through Ownr is much more significant than a synapse you might create in some of our other applications like Rocketman or DRIVE. But we do have connectivity, we do have channels to communicate with those 4 million. The value of an Ownr client coming through and signing up their bank relationship with us is 3 or 4x what it would be a normal consumer. So you look at the different value of it, the synapses and we've invested in converting those Ventures connections and relationships and users where we see the most significant value creation for the customer. So Ownr through to business relationship through accounting partnerships has been a significant opportunity. When we look at OJO and moving up the funnel into the home searchability and understanding what customers' needs are much earlier in the home financing process is an important part of that. When we had Ampli, we stood down Ampli for the better part of a year because merchants weren't marketing, for the most part, to consumers, but we have hundreds of thousands of users in our Ampli program. So when you think about the conversions, we stood down for 1.5 years. So prepandemic, we did roughly 150,000 of the 500,000. But you can see if we take Ampli from its current 40,000 to we expect 100,000, we can get there just on -- sorry, Ownr, we can get there in Ownr alone. So we really do believe that when our -- continue to curate our small business, value chain through Ownr, when we look at the ecosystem we're building around home and OJO being an important one. When we look at newcomers with Arrive and families with Mydoh, a new launch, I'm very excited about the early traction. And we have Dr. Bill, which is really focused on helping medical professionals in their billing, again, creating a service for a customer segment that we have relationships with that we want to deepen. It's a great customer acquisition channel. So as you can see through medical, small business, homeownership, everyday shopping, we are very active. And therefore, we're well on our way as we start to amp up our marketing campaigns and our conversion campaigns. We've learned a lot over the last 3 years. It was hard to build. And that's good because if it's hard to build, it's really hard to replicate, at the end of the day.

So in terms of -- where does the Venture strategy go from here? Like what's the next logical step in terms of the Venture strategy? It sounds like it's an unqualified success from your perspective. But are there more verticals to add? Or is it just about, as you mentioned, just marketing and just getting the word out and just funneling more people through that value chain?

It's the latter. It's a great question. So we are competing in the value chains that are really important to our franchise. This is about building national scale in those key ventures, 4 or 5 of them that we think will make a difference to RBC and to our customers. And therefore, those ones I articulated, we are about scaling and putting marketing dollars and conversion dollars into that. So a lot of effort's gone into understanding how to do that. It's not simple in all cases. It really is a true fintech start-up at the end of the day. Most of these are built in-house. A couple were built in-house then we acquired capabilities to enhance them. These value chains are a really exciting part of our growth future and create value for customers. And we think that's the game. We have to create more and more value for your customers. So to your point, this is about scaling for acquisition now and conversion.

I wanted to talk about the linkages between your wealth business and your Canadian banking business, and you highlighted that as a key strength. In terms of -- we've seen such a huge growth in deposits. You've seen such a huge growth in deposits. How important is it to take those deposits and to convert them into AUM? Is that a clear strategy that you've sort of directed the bank to implement?

No. No, because it has to be right for the customer at the end of the day. So it's only important if it's important to the customer, at the end of the day. Given the nature of the franchise and the types of customers we have, they've had a propensity to invest some of their surplus liquidity into markets. And we've met that need through discovery, through being there at the moment of truth and having a great asset management franchise to invest in. But it starts with the customer. We're not pushing anything at the customers that they don't want. So from that perspective, there has been strong demand from consumers to invest excess liquidity. We're seeing continued strong long-term fund sales coming from that. But there still remains a very significant component of liquidity on the sidelines right now. And some of that may move its way into long-term funds, some of it will go into growing the economy and some will probably stay as liquidity buffer. So that's going to be the big shift to see how fast the economy grows, how fast wealth management grows. But the numbers that we put forward in our Q3 slides, those were all flow numbers. That wasn't any market appreciation. So when we said 25% of our flow, our retail deposit flow's gone into mutual funds. That's all -- that's flow. That has no market appreciation in that number. So it gives you an idea how much change in delta there's been in consumer aptitude and psyche towards investing in markets.

All right. On the Q3 call, you talked about the trend you're seeing into higher ROE, lower-risk products, mortgages on both sides of the border and really, the importance of risk-adjusted margins. And I'm just wondering, when you look at those trends, as we move through the recovery period, is this all going to reverse? Or do you have a strategy to keep those gains that you've made even through a recovery, where we might see other more higher-risk, lower-ROE products start to come back again as the economy moves forward?

The products that we're focusing on have been higher ROE because that's where customer needs have been. Obviously, our mortgage capabilities have been really helpful in accelerating and driving premium growth. But that's, first and foremost, driven by customer need and responding to customer need. We do expect some of the more capital-intensive but still higher-ROE products like credit cards to gain. That's going to be, I think, a benefit to ROEs when we start to see drawdowns in our credit card portfolio and revolving -- we're down $4 billion almost in our revolving balances yet, economic activity is back or above where it was prepandemic. So we're still kind of waiting to see the drawdowns that will happen over time. Again, commercial, very strong ROEs in our commercial draws. So there are some more capital-intensive services that meet customer needs that are growing. But I see them while enhancing ROEs and enhancing our NIM over time. So I don't see that as dilutive to NIM. I see that as enhancements, particularly the credit card business.

I want to turn to your U.S. wealth business and City National in particular. And basically a straightforward question, and it's really -- do you believe that The Street is underappreciating the value of the franchise that you've built in the U.S.? I know if you look at certain U.S. peers, they're trading at 20x multiples. So what's your view in terms of is The Street looking at this franchise that you've built out of the border properly?

Well, some of our peers we benchmark ourselves against are trading at 30x multiple. I'd love to say yes to that answer. Obviously, we'd love to get a 30x turn on those earnings. But over time, you have to prove the growth and sustainability of that. We feel very good about the growth potential, as I talked about in my opening statement, about our U.S. franchise. Again, it's a unique capability to generate assets in the United States. You're seeing so many franchises that are seeing shrinking lending books, and we have differentiated our ability to meet customers' borrowing needs, particularly in our commercial but increasingly now in our high-net-worth and affluent customer space. Our residential mortgage, jumbo mortgage capability is a great customer acquisition channel, but our commercial business has been really driving a lot of our asset growth. And even earning through some of the PPP loan paydowns, we've seen a significant paydown of PPP loans as expected as they were drawn through the pandemic and are paying down with the government payments coming through. So I think from that perspective, the asset growth is even more impressive. And that's a unique capability. It's built on understanding, having deep vertical industry expertise in entertainment, in technology and obviously real estate, in food and beverage, amongst others, but those are really the ones that we're focused on. And we're focusing, again, like we are in Canada, in building ancillary services, whether it's in entertainment, in health care, in technology, trying to build our value proposition to those customers. But we have a deep understanding, we've grown significantly on the asset side within our risk appetite and a very low risk appetite. Again, this is really strong from a credit perspective customer base, and we're very happy with the overall credit and market risk performance with this premium growth. So I think that, Meny, is really a differentiating capability. Everyone is growing their deposit base right now with surplus deposits. Very few are growing their asset base, and we've done that, and therefore, we're looking to do that in the right way and with the right risk controls, the right operating controls, but very excited about the opportunity with that unique capability. As I said, through mid-corporate lending now, accelerating our acquisition of private banking and preferred banking clients is a really big part of the growth story in the United States. Again, hiring more teams in those businesses but also in our U.S. wealth management franchise, very successful in lifting out teams. They've come to us because of our new technology capabilities, because of our culture, because of our franchise and capital markets. We can't forget this huge strength in our U.S. capital markets business. We brought in new leads of our technology team, very excited. They will be starting with us soon. Our health care capabilities have grown. Areas that we missed business in, in the last 2 or 3 years, particularly health care and technology, we have enhanced teams that are ready to help us grow. So I think we're very excited about capital markets, in general, but also our U.S. capital markets franchise. So that is a differentiating growth vector for RBC.

Yes. I think you talked about being able to speak for 25 minutes in terms of your long-term growth. I think the U.S. wealth management business, we could talk for a long, long time on it. As the time ticks to an end, I wanted to touch on capital deployment. And what I'm very interested in is getting your perspective on capital deployment and technology specifically. And I think I asked you this question last time, but I wanted to check in 1 year later just in terms of huge amounts of excess capital at Royal Bank, almost $13 billion according to my calculation. What's your view in terms of -- or your appetite in terms of significant capital deployment in technology, a fintech, for example? I'm talking about a billion-dollar-plus kind of acquisition. And I'm just thinking something like Morgan Stanley bought Solium Capital for about $1 billion. So are you looking in the what we call the fintech space? Is that a place where you're hunting, where you're ready to write a big check obviously for the right kind of platform, the right kind of fit?

Strategically, the answer is absolutely, we're looking in that space. We made acquisitions in the $50-million to $100-million range in entertainment, whether that's FilmTrack and specifically our Exactuals, and we're really excited about those. We've looked at acquisitions in the health care vertical space, trying to attract more medical professionals to our franchise. We bid and we didn't win. But they were in the sub-$500-million range. But again, the amount of capital is really not the issue. It's what can it do for your franchise. You don't necessarily spend a lot of money to create something that can be accretive to your franchise and customer acquisition. To the hypothetical question, would I spend $1 billion on a fintech? Yes, if it drove an appropriate amount of shareholder value, at the end of the day, and I was confident of that shareholder value, I could stand in front of you and all our investors and say, "We made this acquisition, these are the synergies, we will execute this and we will create the shareholder value doing that," then the answer is yes.

I guess part of what I'm asking, if you look across the large-cap Canadian financial landscape, the largest Canadian financial that made a fintech acquisition was actually an insurer. And so the question, when I see all of this excess capital at the banks is are banks kind of going to miss an opportunity with so much excess capital to really move ahead in the tech space? And just curious your perspective on that. Are capital rules maybe part of the issue that make the math on such an acquisition just very difficult for a bank? What do you think, Dave?

Well, given that there's no asset and it's a 100% goodwill in the price, and they're often losing money when you acquire them, yes, it's expensive and it's dilutive. And therefore, you have to be really confident of your synergies and your business plan. What we found, through Ventures, is that we can build it ourselves because we've got a lot of smart people and we've got money. And therefore, it's a lot cheaper to fund these ventures. You have to be patient. And that's why I started 5 years ago because we've built 30 ventures. We've curated 10 of them, and we're scaling them. That's no different than what a fintech started at. So we saw the game, we said, let's start it ourselves. We are adding on where we can opportunistically and, as I said, anywhere from $10 million to $100 million. And you can play that game as long as you give yourself time to do it. That's why we started 5 years ago. When you're looking at making the bigger acquisitions, yes, they're dilutive because you're paying someone for all the work that we did on our ventures at the end of the day. So you have to -- it's a harder hill to climb. When we looked at something in the health care space, it was losing money at the end of the day. And you had to look at the sticker price and say what type of synergies do I have and what does my shareholder get versus the seller. And too much of the benefit often goes to the seller. You're better off executing it yourself. So everything we do is, at the end, starts with what customer value are we creating and what shareholder value are we creating at the end of the day. We've given ourselves optionality because we started Ventures 5 years ago. And so we're not sitting here with nothing in our portfolio. We've got a really healthy portfolio that we're trying to add to. We have great strategic optionality.

Well, with that, we're out of time, unfortunately, but I want to really thank you, Dave, for being with us again and looking forward to speaking to you next year in person, hopefully. So thanks very much.

Yes, absolutely. Thanks so much for the invitation.

Thanks again, Dave.