Royal Bank of Canada ($RY)

All right. I'd like to welcome to the stage, Erica Nielsen, Group Head, RBC's Personal Banking division. And a job you've had for just under 2 years now. So thanks for coming to Montreal, Erica. I really appreciate it. And I look forward to this discussion.

Thank you.

And one thing I want to start -- kick off with is HSBC Canada. And the reason for that is when it was acquired and subsequent, a lot of the -- I think the words the crown jewel is the commercial business, right? I think that -- hopefully, I'm not misquoting anybody. So it kind of made us overlook a little bit of the personal banking business that was acquired. We looked at the mortgage business, maybe that one is going to get shrunk because HSBC was a price leader in that. And in short, overlooking the personal banking business of HSBC, which is probably not a good thing. So maybe you can highlight some of the assets you picked up some of the new capabilities and something get excited about with that acquisition on the personal side.

Yes, thanks. Yes, we've been really pleased with the acquisition of HSBC for the personal bank. And I know as has the commercial bank. I know we set out to really dramatically change the cost profile of the bank. So if you think about the scale play that, that is for the personal bank, material change in cost profile when we brought that business in. And I think RBC writ large has met and is on pace to exceed the cost expectations that we had for that acquisition. And likewise, on the revenue synergy side, we'd say we are on track for the $300 million that we've committed in revenue synergies. But a lot of those revenue synergies are associated with the personal bank and what we do in the personal bank. So to your point on we talked about crown jewel of commercial, like what does that mean for the personal bank. So a couple of things to highlight related to HSBC. Like it's a very strong client franchise in Canada. The quality of those customers in their personal bank is exceptionally strong quality. And in fact, in pockets of their credit is a stronger quality credit than what RBC had on its books, and we feel very confident about our own quality of our book. But those customers were also had broader relationships than just single serve. So you talk about the mortgage portfolio, and I know there's a lot of conversation about the price sensitivity of the mortgage portfolio for HSBC. And yet over 90% of those customers were embedded with core checking accounts. And so these weren't sort of fly-by-night customers who may have just been price shopping. They had entrenched relationships with HSBC. Now that said, there is a substantial opportunity for us related to depth of relationship and cross-sell. And you say, well, [indiscernible] you just told me they had a good relationship. They did.

That's a good follow-up question, actually.

Right. They did, but they don't have the level of depth of relationship that RBC enjoys with its own customer base. And so there is a lot of activity happening now with that customer base. And as we start to recognize financial needs with those consumers, then getting those consumers more engaged with more RBC products. And that's one of the core levers that we have. And that matures over time, right? So if you think about that as a synergy, it doesn't just manifest -- it's not the same as a cost takeout, like I either took the cost out or I didn't. When we talk about cross-sell and depth of relationship, that has to occur when a client has a need. And so as we are listening to the HSBC customers, as we're identifying the needs of those customers, we're then able to come in with a secondary or third or fourth product behind that's going to meet their needs. And so I've been really pleased. We're meeting our expectations, both on retaining those customers inside the franchise and growing those customers inside the franchise. And then the other part of the synergies that are available for the personal bank was that there were a number of capabilities that we built in order to meet the needs of the HSBC customer, things that they were accustomed to, foreign currency accounts, money movement items that they were accustomed to at HSBC that wasn't part of our product lineup. But they are in demand from the RBC pool of customers. And so now that I've built these capabilities, I'm able to then cross-sell those into RBC's customer base as part of the synergies of the transaction. And so all of that told, I feel -- we feel good about the franchise that we bought, the growth inside the franchise, our ability to hit those synergy targets in the personal bank.

Okay. Great. The deposit business is something that's obviously been in focus for a number of years now, and there's been a big cycle of big influx post COVID, then there was a big price war on term deposits. And today, we're in a phase where deposit growth is, in some cases, stagnating or shrinking. We see that headline number, and we get the general description of all that's term deposits, old term deposits maturing and the core deposits still growing. Can you maybe flesh that out a little bit more so that we can appreciate what's going on in the deposit book and whether it's good?

Yes. So a number of dynamics happening inside the deposit book when you peel back the onion. When we were in that deposit gathering when we talked about sort of GICs and sort of the resurgence of that as a category again, we always talked about the notion that for some of that money, it was sitting in a GIC product partly because of the rate that was available, partly because of uncertainty related to the consumer, but those were dollars that historically would have found themselves into markets, right? But at that period of time, consumer is uncomfortable with the volatility that they've been seeing inside the market, so uncomfortable to place that. So -- and with the pricing in GIC is a really good place for that to stay. And so our commitment all along through this sort of oscillation of cycles, and I'll talk about what the other half of that cycle looks like now is to actually make sure that we're meeting the need of the customer and that the product that they're getting and the placement of that investment funds is sitting in the right product relative to what they need for their long-term health. And so when we look at what's happening now and the drawdown of some of those GIC portfolios, I have a lot of confidence and conviction into where those flows are going. So we see material increases on a year-over-year basis into our markets-based business, so into Dominion Securities into direct investing as those GIC dollars find natural homes inside the market. And so I think what that means is when you look at the headline numbers, you could see some retraction or holding steady of the absolute level of deposits. But what I see underneath is a material outflow of those deposits into our wealth businesses, which is exactly what we need for the client, right? At the end of the day, the question is, is RBC well serving the need of the client. And for many customers, planning for retirement means they need to be in the markets, whether that's the equity market or the bond market, they need to be in the markets. And so we need to get those customers placed there. We also reduced our retention events when we're into placement into the market. So we feel really good that, that flow is actually happening. And then you say, well, what's actually happening then underlying inside your deposit accounts and are you comfortable? We continue to grow our account-based business in a material way. Those deposits of existing customers and new customers are building in the way that we would see. And so the net-net of that is we're in a part of the cycle where we'd see this natural rotation into some of those equities businesses for the consumer, and that's what they need for their long term, but the strength of all of those products underneath is healthy.

I guess, I don't know if it's dots I can connect. But when we go back in time and look at the big fluctuations in the deposit business over the past few years, there may have been strategic decisions made during the time with how you manage that book and invested the liquidity and how the margins are performing today because we're seeing quite a bit of margin divergence between some banks. And I'm wondering what your -- yours has been relatively flatter. Revenue growth is a different thing, of course, but people do focus on margins. So what's your view on why some banks like yours, the margin performance a bit flatter, whereas some have been kind of shocking.

Yes. So I think I think how each of the different banks think about their -- how they track their book of business is different across the institution. So I think really important for us to go back and think about like in -- post the rate increase cycle, where have your margins performed. And if you look at our -- the NIM expansion for us, we've had very healthy near top of the stack NIM expansion through that period. And then even over the last 12 months, I'd say our NIM is second best inside the marketplace. So I think more important because some of these things are structural to look at longer periods of time because each of the banks treat those things -- treat them differently from a structure perspective. And then the other part would be like as I think about sort of the quarter-on-quarter -- as we've talked about, for us, at least, we are rolling down the PPA, which has a NIM drag for us. We talked about 2 basis points in the first quarter, 4 basis points as we go into next quarter. So my intention is to grow through that and maintain, right, as I think about where our NIM performance is. And so that's -- I think about that rotation as some of the key aspects on -- as you think about comparative NIM performance.

Yes. I mean we do -- I say we -- some of us focus on the quarter-to-quarter as opposed to the 5-year kind of trend. So that plays into it. What about the mortgage books impact on your margin? Because there's -- we've heard that spreads are quite good from some banks and maybe I think it's from some other banks comments a little bit more neutral and how that plays into your margin outlook because the mortgage book itself might not grow, which is in and of itself a good thing for margin. But then the repricing on mortgages retained is actually coming at higher spreads. Is that something we can look forward to?

Yes. I think we always talked about -- for us, we always talked about the back half of '26, getting into a period of -- if you reflect back on when that business went on to the books, it was -- there was a lot of levity in the mortgage market at that time. There was a lot of deals to be done, but there was also a lot of price competition. And that's really when we started to see in this period. We're in this period of when did we start to see margins inside that business really retract. And so that business is now coming up for maturity. And so I think as we look at the second half, if you're just to play out retention, one would say that there's opportunity for mortgage expansion from a margin perspective because the mortgages that were -- are coming off our books and renewing are at very thin spreads. But I put a big caveat on that because this is a very intense mortgage market from a pricing perspective as we think about the available to acquire share that's inside the market. We're not seeing a healthy purchase market right now, which means that the activity for switch is intense. And the necessity of each of the institutions to retain their back book is very important, right? That's part of how we're going to compete is to make sure that, that back book of mortgages stays with each of us. And obviously, as a fierce competitor, I want to go out and switch in as much of my competitors' business as possible to grow my book of business. So there is opportunity for margin expansion as we go through this year, but I think we'll have to also be very aware of where the price competition sits in the marketplace at that period of time. If I could wave my magic wand and say it's great, I'd say retention rates stay amazing and price competition stays neutral and we have a good period on margins, but I don't control all those aspects. And so what's really important for us is that we ensure that our back book is well protected. So our retention activities across the organization and the depth of those activities are happening as we see each month of cohort coming in so that we are performing as well as possible from a retention perspective and then out there fighting for every switch piece of business that we can do.

All right. Great. More of a risk type question, but if I look at mortgages and HELOCs, not the same product, I believe you disclosed HELOCs as the non-amortizing balances. Mortgage growth has actually been surprisingly strong, whereas the HELOC growth has been flatter. And I think one thing that comes to mind is the demand or people just not drawing on equity to pay for renovation or whatever. But is there also an element are banks and Royal specifically doing anything to maybe limit people's abilities to -- or maybe that's the wrong word, just not push that product because the home market is not very strong right now. You don't want to increase your exposure to that.

It's a really interesting question. So I would say there is no change in the way that we sell the mortgage product. So for example, we would never have conversations with our salespeople about different mortgage products being more on sale and less on sale. It's just not part of our psyche. The most important thing that we do in this period is to like have a robust conversation with the customer about the options that are available and to then ascertain what their degree of comfort level is across all the different types of products. And so I think what you're seeing reflected is that in these periods of uncertainty, clients are looking for more certainty and the HELOC business is a little bit more managed versus if I know that I'm going to have a fixed rate mortgage and I know that this is my payment and I know that then this is my amortization of the mortgage, like they're looking for more certainty. So I actually think what you see reflected in the volume is reflective of how Canadians are thinking about what mortgage product and the way in which they construct their mortgage is going to best meet their needs as opposed to like our HELOCs not on sale at RBC, that would be completely false. For certain customers, the home equity line of credit is absolutely the right product. And so we do see -- we still see volume in that business. It's just not growing in the same way that it is. And then to the question about it's a non-amortizing product, it is, but there are LTV, 65% loan-to-value caps that are placed inside that product, right? So it's not -- a home loan is not a product for somebody who is like high loan to value, right? They have to have 65%. They need 35% down in their home to be able to be in that mortgage construct because it is non-amortizing.

Got it. And then the credit card book, is -- are the payment rates still too high by that? I mean, is it still -- because for a number of years, the credit card book has actually been -- and Royal and others, surprisingly, people are still paying off a high percentage of their monthly balance. So they're not revolving as much, which is good from a risk standpoint, but from a revenue standpoint or hasn't been as positive for the top line. What's the dynamic right now?

Yes, we still see the characteristics sort of getting us back to where they were pre-COVID, which I think as in this part of the cycle, I think some people would say that's surprising from the amount of payment to -- that notion of paying to revolving. And so that sort of maybe it speaks to the resiliency of the Canadian consumer in this part of the cycle and that there still is resilience inside that consumer as we look at those payment rates.

And then I guess the credit question more specifically, we have seen delinquency rates rising. Like what's your your statement on that trend, where it's going, especially now when I maybe got caught up in a moment of higher rates maybe later this year. Like is that -- or should we be concerned about this trend, I guess?

Yes. So I would say both -- when we look at delinquency and in particular, maybe specific both to the credit card question you just asked me, Gabe, but also to inside our mortgage portfolio, I would say that we are seeing delinquency rates in line with what our expectations would have been. So I feel really confident about the business that we have on our books, the quality of that business, the way it's performing and sort of the rate of delinquency that we're seeing is more driven by the macro factors than feeling like we have any type of vulnerability inside our own credit book. And a lot of those are those factors that we've talked about. It's employment, right? Without employment, it's difficult for Canadians to make their debt payments, mortgages, credit cards. And so that's where we've been talking a lot about some of the vulnerabilities that we've seen inside Ontario, GTA, the surrounding areas around Toronto, in particular, inside BC, but we also see elevated unemployment inside those communities. And so that's where we have -- we've seen more stress in those areas than we see in other provinces across the country. So it's really not -- it's not necessarily a general Canadian story. It's more about how each of the different provinces are reacting and the employment in each of those different provinces.

You touched upon the competitive dynamic of the market earlier when we were talking about mortgages. And then another facet of the competitive discussion is the new entrant risk and OSFI is making it easier for fintechs to operate in Canada or plans to anyway. How credible is the threat? And I ask that because over the years, I've heard about the fintech threat multiple times, multiple iterations and nothing really happens other than the way I respond to it, banks are investing it causes their expenses to go up essentially. That's the real threat because the player doesn't actually amount to much, but to build up your moats, you got to spend more. Is there anything -- any different angle that might be applicable this time?

Yes. I mean I'd certainly say that we -- like we're looking at all of the competitive disruption and the fintech entrants in a very material way. I think what's really important to understand when we look at where those entrants are, they are often looking and taking parts of a client experience where you'd say, historically, maybe the bank was suboptimal in the way that they delivered value into those very specific niche parts of our offering. And so then there's obviously a competitive response, right? So what that means is that as we see the validity of those competitors coming and we understand the products, then we're going to respond. And you can be rest assured that RBC is going to take very seriously any of those competitors, understand what they're offering customers, make an assessment of should we be offering that service to customers manifested in that way and then determining what's our path from there. So you talk about does it increase your expense base. I mean it depends on whether I feel like we have to differentially invest or whether I can move pockets of money around to invest if we believe that we need to make any changes. What I'd say is that like it's incumbent on an organization like RBC to have value propositions and digital experiences and human experiences for our customers that clearly meet their needs. And those customer expectations are changing rapidly. So if you went back 10 years ago and you said, okay, well, what's RBC's appetite for like an experience change from a digital perspective. Many times, we found we were trying to lead customers in places that they weren't probably ready to go yet. And now I would say, I'd say the consumer is maybe more ready than the banks have the speed to get out there. And so my challenge to our team is we need to get moving that the customer is telling us that their appetite for the way in which they want to experience RBC in a more convenient way needs to increase. And therefore, we are increasing the pace at which we are digitizing things that customers expect to be digitized. But in doing so, we're doing 2 things. One, I'm better meeting the needs of consumers and what they're asking for us, but we're also better shoring up against the disruptors who are trying to take pieces of our experience and say, "Hey, RBC, you're suboptimal here." And so it's a win-win strategy on both fronts to help me create a moat, but also helps me better win with the consumer.

Any anecdotes or examples you can share because it's quite interesting that, like, when you identify something happening and then, oh, what's your response?

Right. I think like -- I think we would look at like the continued evolution of the things that we're doing in payments, right, that like I want to be able to do payments. I want to be able to do it easier from my couch. I want to be able to not have to come and see you for those payments. And so as we evolve where we go in payments, we better meet client expectations, also an area where there's lots of competitive fintech activity, right? There's a lot of fintechs seeing payment flows and deciding that's a place for them to compete. And so that's not an area that I want to seed and I want to better meet my consumers' expectations.

I don't want to be able to pay for stuff quicker from my couch. But I'm not your typical customer.

Well, there's a difference between doing your banking versus purchasing.

Yes. Okay. The operating leverage, it's been phenomenal in your business. Like what's -- I think high single digits. What's the -- are we going to take a sharp correction there back to a more normalized rate? Or what's your expectation in the near to medium term?

Yes. So I would say -- so a couple of things. I'd say the strength of that operating leverage really driven by the money in franchise at RBC and a lot of the expansion in margins that we saw on that side. And so I said as that starts to normalize, i.e., be in the margin of the year prior and the year prior to that, you'll start -- you should start to see that retrench back to our guidance on the 1% to 2% operating leverage is where I'd expect that will sort of will start to land. I think that's normal based on where we're seeing the market to the whole conversation where we started, Gabe, on what are you seeing on deposits and how is that franchise moving? I think that's in line with how we see what's normalizing on that side of the business.

Okay. And then just to wrap up on the topic of AI. I wrote the question, like do you see more upside from revenues or cost reduction? We can talk about that. But I just -- things happen so fast, how -- when you make an investment today, how do you know you're going to get the benefit from it in the future because it could easily be disrupted within months theoretically.

Yes, it's a really great question. And I think to your comment, like where were you a year ago to where are you now? And how do you feel about the places where you're making investments? I think we are very much learning. And I think that's exciting because I could sit here today with more confidence about the places where AI is really going to differentially change our business and have more assurance that I see what those outcomes are going to be because they're being revealed in the work that we're doing. And so one of the things I would guide to would be the places where you can clearly create differentiation competitively. So places where I can use my scale, the scale of the breadth of the RBC client base that we have, the depth of those relationships with us, where I can use that to create models, I can materially outperform those who do not have that scale. And you'd say, well, why do you feel that way? So well, I can actually see it as we're now doing the modeling. So if RBC had a client base that was 50% of the size, what's the outcome of that modeling? If RBC has 75% of what we have, what's the outcome? And you can start to see how those large models actually perform very differently, which a year ago, we had hypotheses about this, but now we can actually see model performance very different. And in places where I can't go to market to buy that kind of data, right? So if you don't have that breadth of client base, you will struggle to have the same performance that somebody with our scale would have inside the marketplace. That gets me very excited. On the opposite side of that question, there's probably places where could there be providers who are going to provide AI tools to us to help us scale faster in places that become less of a competitive advantage? Yes, but necessary for us as we think about cost takeout, et cetera, right? And so now the question is, I think the question we're asking ourselves very clearly is how do I ensure that my finite resources inside RBC, who are exceptional in Borealis are then placed on those things that are going to create competitive differentiation, and I go to market to purchase AI tools from others where I don't -- where that benefit is not existing. So why do I want to do that? Because it allows me to increase my pace. Then I can take advantage of my own resources on the things that are going to be most important to drive our business and while looking at and using others to help me scale faster in places that there will be less competitive differentiation.

Got it. Okay. Well, we are into the overtime a little bit. And I'd like to thank you again for taking the time out of your day to chat with us and nice to meet you as well or get the...

Thanks, Gabe.