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

We think there's more productivity opportunity in the branch. We have a number of programs. This is where LLMs could really help. So you take specialists and generalists with an LLM, you can create more capacity to do mortgages and to do advice through LLMs in the branch. And therefore, we have a strategy to enhance the channel. It's very important to new Canadians to have a personal connection when they come to the country. It's very hard for someone who's new to our financial system that doesn't understand our system, to sit down in their mobile phone. So when we see a lot of our new account openings still coming through the branch, it's predominantly new Canadians looking for advice and looking to learn about the system. And as a country that's going to continue to bring new immigrants in to help us grow and innovate, it's really important to have that physical connection. It might morph into more digital face-to-face if you can call it that or we call it kind of a bionic capability. But overall, those channels have been super important in attracting new clients into the organization, particularly on the core banking side. And therefore, we're focused more on increasing the efficiency and the productivity of those units than closing them right now. We think we can continue to build distribution and convenience advantage by reinventing them to be lower cost operation, but more productive, more flow-through through those markets. And therefore, we think we can lower that 35% given the mix and the cost mix of our commission and non-commission channels, there's a better hybrid for the customer and a better hybrid for the shareholder there that involves the branch as well. So I think we're looking at it from that lens more than let's just close them because they have great potential to be part of an overall channel mix.

Got it. Got it. Switching over to commercial banking. And I guess if there's one sort of area where you might need to do a bit more work. I think you have a target of an 18% ROE by 2027. You're trending somewhere around 14% year-to-date. Maybe talk about the pathway of getting to that 18%, and if you're still confident that you'll be able to achieve that by 2027.

Yes. We're very confident in achieving it. I think we reinforced that in the last call. And you look at where we've come from over the past year, one of the reasons -- the largest reason we're not at 18% now is the heightened PCL credit charges within the business. And we -- the areas where we were strong, the areas where HSBC was strong was predominantly in supply chain and supply chain in Ontario. And therefore, we're running the business right now at a 60 basis point PCL ratio the last couple of quarters when our historic average has been 35 to 40. So we're running a 50% higher PCL ratio, some of that coming from HSBC. On supply chain, transportation, manufacturing, moving goods in our society, a lot of those are showing weakness right now, and we've taken kind of a disproportionate loss. That will rectify. That will normalize, that will strengthen over time, where some of the weaker players in those industries are being weeded out given the slower demand. And as we come through that, we feel we're coming through that pretty well, and we'll stabilize that when that turns down to more historic averages because we haven't taken, we feel more risk in the book. It's just a disproportionate share of supply chain, which should be an integral part of your economy, and it has been so strong for decades has turned sour, particularly in Ontario. And we've just taken a few losses there disappointingly. When that works itself through alone, that's a significant enhancement to our ROEs. We still have a lot of opportunity to deploy AI into the business. We have just enormous scale. And then we have the cross-sell from HSBC, which is just starting to materialize. So cross-selling treasury management capabilities, FX services, multicurrency accounts, all that connectivity and all that amazing capability that came in from HSBC. We're just starting to get after that $300 million of cross-sell, a lot of that within the commercial bank as well. We hit our year 1 numbers. So we're excited. We have a much bigger target for year 2 in 2026, and we're on track to do that. And that will enhance ROEs as well along with having all those HSBC commercial account managers, they've been in defensive mode for 3 years, 1.5 years before close, massive conversion effort over the past year that we just finished in the spring. So all those commercial account managers in HSBC were on defense, just protecting their client base, helping them convert the complexity of conversion to the RBC tech stack. For the first time, they built their pipelines, and now they're out there selling and the pipelines are filling really nicely. So we're -- we got the whole team energized now, as I said, off the top on just running the bank really well for our customers.

Awesome. Awesome. Maybe switching over to City National. I do recall a few years back, ahead of rate hikes, there was a lot of excitement about the rate sensitivity on City National. And obviously, the rate environment kind of surprised everybody in terms of how quickly rates rose. You've taken some actions to sort of right the ship and position City National for growth again. Maybe talk about that dynamic. And then in the context of the size of City National, does it need more scale? Do you sort of plan on scaling it over time just through organic means, maybe a bit of capital infusion, or is it potentially some M&A tuck-ins there as well?

There's enormous organic capability. And Greg Carmichael and the entire team he's built around himself has transformed the organization in the last 18 months. For those of you who don't know Greg, he was prominent at our Investor Day. He was CEO and -- the Chair and CEO of Fifth Third for a decade and did an amazing job at Fifth Third, which is one of the largest regionals. And we needed a leader like Greg, who knows how to build a regional bank, a large regional bank, and he's brought capabilities to -- and talent to City National that's allowing them to pursue a very different growth agenda. So to be more specific, we struggled to build a jumbo mortgage capability, to serve our affluent private banking and wealth clients within the U.S. wealth franchise. Greg has been able to build that, and we'll start for the first time to really truly cross-sell jumbo mortgages into both bases. We're building a transaction banking capability for the private bank, but also for the wealth franchise in Neil's business in the U.S., and Greg is leading that. We're taking our higher-end RBC Clear corporate treasury management capability into mid-corporate and into commercial, and Greg will benefit from that. So as you think about the capability expansion, it's very significant, doing mortgages and syndicating them selling more credit cards, opening transaction accounts and getting the transaction banking with that 450,000 wealth clients is significant, competing in mid-corporate. So we've got product capability expansion and then we have the geographic expansion at the same time. So we're expanding into the South East and probably into the South, potentially looking at Texas again, getting back into Texas. He's done a great job in California, New York and a number of other markets. So we've got product capability, we've got geographic expansion, we're bringing teams in. He's seeding all of that growth. And we're back on our front foot in our core businesses, really looking at growing with all those capabilities, and he's built the team to do that. It took 1.5 years to bring the talent in. So when you think about the organic capability in front of us and the momentum he's built in the business, as we come through, and we continue to finish the remediation of the bank and to build a large regional infrastructure that can continue to grow prudently is a big focus. We've achieved so much, and we're very excited about the future. So that can stand alone, and that doesn't require us to buy anything to make that happen. We can -- we've built all that ourselves. We're just going to continue to run that playbook. Having said that, growth -- if we could bring another organization in and put it on top of our tech stack like we did with HSBC and create cost synergies to do that, we'd be open to looking at that. But I'd say there's a lot of buyers and very few sellers out there. And you got to expect that the premiums on any type of M&A are going to get bid up so high that it's going to stress your playbook. That's going to stress your synergy story. And I can tell you, we're very much focused on creating shareholder value and accretion because we don't need to do M&A for capability reasons. We can continue to grow, and that's the best way to drive a premium ROE. And therefore, the growth scale in U.S. wealth in City National and in Capital Markets, which we haven't talked about, is very significant. We don't want to distract the team like we chose to do with HSBC unless it's a meaningful opportunity to create premium shareholder value. So it's got to check all those boxes. And I would expect the transaction is going to get tough to check all those boxes because there's a lot of buyers out there with excess capital, and they're going to bid everything up. And while there's some attractive properties out there, can you be the successful acquirer and achieve the creation of premium shareholder value. And I think that's going to be a challenging formula, honestly. It doesn't mean you don't look and you don't try. But I can tell you, we are super disciplined about creating premium ROE and not diluting the shareholder unnecessarily unless it has a great story to it. But mostly, we do not want to dilute, and we want to create accretion. And it's going to be tough, I think, to execute something like that. So we're just focused on organic right now, and we'll keep our eyes open. And we're not going to miss anything, but we'll be disciplined. I know every CEO tells you that, but we've been through it. And I think we've -- hopefully, we've earned your trust that we will not spend capital unless we really do drive premium shareholder value for it. That's really our commitment to you.

Got it. Maybe looking at another nondomestic opportunity for growth, the wealth business with Brewin Dolphin. Obviously, you've got scale there in the European market. Maybe talk a little bit about what the longer-term play is there as you think about capital allocation.

We operate in a highly fragmented distribution environment where no one has more than 3% or 4% market share at max. I think we're the #4 player in the market place right now with the acquisition of Brewin Dolphin. I still think we're in our maturation process with Brewin Dolphin, and that, we achieved our cost synergies quite well. And on time, we achieved some revenue synergies, but we haven't achieved the majority of our revenue synergies yet, partly -- largely because it required new product capabilities that it's taken us longer to build than we expected when we made the acquisition. We had a tech deficit that we fixed that we knew about. But then getting the new product capabilities built on top of that tech stack has taken us about 1.5 years to 2 years longer than we hoped. So we're just getting to the process of starting to offer those services to clients. And it will take us a little bit of time, quarters, a year to see that. And those assumptions would be important in any further acquisition you made. You'll have some modest cost takeout in these wealth businesses. You're really trying to get after growth synergies, cross-sell of the same services we cross-sell into our U.S. consumer. We're going to cross-sell into our U.K. high net worth, and we're going to cross-sell secured lending. We're going to cross-sell the advisory side. We're going to look at transaction banking. We're going to look at mortgage. All those cross-sells, we're in the process of offering to the Brewin Dolphin client, and we're going to have to make assumptions of how you would cross-sell into any further acquisition. So I wish we are further along in proving our hypothesis to give us a huge confidence of doing that. But we've seen a lot, and we've learned a lot. And I wouldn't rule out the ability to continue to add on smaller U.S. wealth distribution companies that are similar to Brewin Dolphin where we can continue to push that playbook forward, and we'll have to make assumptions. But again, we'll only run an accretive playbook for you, and we'll look at those capabilities. We've learned a lot with Brewin, but I have to say we haven't hit our numbers yet, and we're continuing to close that gap.

Okay. I have to ask a question on cap markets. It's just been such a great story for all the Canadian banks this year. Obviously, there's going to be an expectation for client activity to moderate if volatility comes down in the market, that should be expected. But maybe talk about Royal, and how are you doing in market share in Canada to the extent that you measure it across your business lines? And then maybe talk a little bit about the U.S. opportunity, which is a big part of the revenue driver for cap markets? And how do you compare those 2 markets, and how you sort of position in those 2?

We really focus on global market share. We're a global business. We're 11th in the world. So overall, we're -- I focus a lot more on our global share of fees and revenue across our markets business and across our advisory and investment banking and corporate lending business. So I know those figures more. We're kind of stable at around 2% of global fees, slightly down a few basis points from a couple of years ago. I think we were as high as 9th. We're 11th. We bounced around against a number of competitors in that range. The market has grown. So I think our revenues have grown very nicely in that space as we continue to invest in more MD capability. I mean a big part of it is to continue to hire managing directors to cover your bigger sectors like health care and a number of others. We're strong in FIG, and we're strong in tech, but we need bigger teams and more people to cover the sector. So we continue to hire into a very aggressive marketplace where there's a lot of hiring activity going on from the top 10 and then the bottom kind of 20 continue to look to grow their capabilities. So it's very competitive on the talent side. So I think from that perspective, we are continuing to grow our business very well in line with the market largely right now. I think you've seen a significant improvement in our markets business. As I mentioned before, we lagged in equities. We've really closed that gap. We used to lag in FX. I think we're closing that gap very nicely now. We have strong credit business that ran against us in Q1 and Q2. We have a very good credit trading performance in Q3 and the macro has obviously been super competitive. And the strategy, to your question then is to lever our scale in the United States to outperform our Canadian peers. So the Canadian market is, for us, 1/3 to 1/5 half the size of our U.S. business right now. Our U.S. capital markets business is well over half our revenues. And therefore, it's that U.S. scale and that U.S. differentiated capability that's important for us to lever to outperform our Canadian peer group is where we compete for capital with investors. And I think that story has -- can and we expect to have greater differentiation going forward. And that story has lagged a little bit. If there's anywhere where competitors have kept up and maybe outperformed us, it's in the markets business, and they've closed the gap on some of the performance differentiation in consumer and commercial banking and wealth. And you're seeing us get after that now. And Q3 is a demonstration when you get after that business and you start to serve and seeing all that amazing outcomes in the markets business, and how truly we can differentiate when all 4 of our major businesses are outperforming. So I'm excited. I think Q3 really showed you when you start to close those gaps, you start to see that what ROI can do when everything is performing, and we're just focused on continuing to do that going forward, heads down serving our clients and trying to get every business to outperform organically. So -- and that came through in Q3 quite loudly, and we expect that to continue pushing that.

All right. Any final sort of key messages for investors?

No, I think you're seeing the diversification, the strength of this franchise, and now the focus of the management team on running it. We've had a lot of stuff we've had to deal with. And when you start to execute the way we did with focus and continue to do that as a team, we're incredibly excited. You saw that in our Investor Day targets. At the end of the day, we're well on track. We'll give you an update in Q4 and all those metrics that we put out there, how we're doing. And we're feeling really good about things, and it's fun. So we're going to go get it.

Awesome. Thank you very much, Dave, for the insights. Thank you very [indiscernible] today. Appreciate it.

Thank you.