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

Awesome. Maybe we could start with the quarter just because it was a bit of an outsized result once again, basically...

It's a good thing.

I mean you beat expectations. Your ROE now sits at north of 18%. Just maybe start with the ROE actually. Are you somewhat surprised with how much it's gone in terms of the positive traction that you've seen?

No. I mean you saw us 2 years ago set a 17-plus percent ROE target, but we kept saying plus-plus because we knew the significant opportunities we had to drive the market-leading ROE in the country and improve upon that. You look at the drivers of that, it is very much kind of revenue efficiency and cost efficiency. We added 100 basis points in '24 from 15.5% to 16.5%. Then in '25, 16.5% to 17.5%, and now you see us moving through 2026, close to 18% with a number of tailwinds to that ROE and a few headwinds, but a number of tailwinds, like the cost efficiencies from the articulation that we had in Investor Day of our AI benefits of $1 billion after cost are just starting to kick in now. So we're driving an 18% ROE on a 13.5% CET1 ratio, still waiting for those benefits to really kick in on the revenue side and the cost side. And you will see us continue to -- I'm sure we'll talk more about AI up our ambition around AI. But even with that first series of opportunities are still starting to kick on the revenue expense side. We have growth tailwinds that we've seen in a number of areas. We've got cost opportunities that we can talk about. So when we look at where we are today and where we think we can take our business, we fully plan on continuing to expand that ROE into the plus, plus, plus area. And you'll see us either in an Investor Day next year, or in Q4 kind of articulate what our next ambition is around those ROE targets. So no, we're not surprised. In fact, we think we can continue to improve upon it at a 13.5% CET1 ratio. And then as you know, once we get through the uncertainty of the trade friction that we're having and the economic uncertainty and the growth footing starts to reemerge in Canada, we can start to pull that 13.5% back. And therefore, that's ROE enhancing as well. So when I look at all those tailwinds on revenue, cost, efficiency, CET1, returning capital to shareholders, that plus, plus, plus is going to kick in even more. So very excited about the story of capital efficiency, returning capital. And we create -- generate the most amount of capital of any bank in Canada by a wide margin. So I think from that perspective, to create that capital, generate the highest return on it and be efficient, I think, is a big part of our thesis. And we're super excited about what we can continue to do.

And the excess capital, a nice problem to have for sure. When you think about it in terms of capital deployment, how does that current valuation dynamic impact how you sort of see the buybacks? I know in some cases, you might want to be strategic, but obviously, the market seems to be happy with buybacks even at these levels. And then secondly, just in terms of M&A, obviously, it would make it a lot easier to do larger M&A. Where is your mindset on that?

When you're issuing your shares or using your shares in exchange, it does when your currency is strong. So when we look at -- obviously, when we look at doing share buybacks, we're very aware of the intrinsic value of our stock, and we know what our plans are and what our ability to continue to drive our pretax, pre-provision and our NIAT growth forward. So we continue to buy back shares at a 2% level because we have a good understanding that we feel the intrinsic value of the firm is higher than the current valuation. So that's obviously a core metric in our decision-making of do we buy back. So we're continuing to buy back at healthy levels at that 2% level of these valuations, as you saw in the last quarter from our numbers and you see in the month-to-month share numbers. Second thing is we also know that book value per share growth is also very important in the overall as another valuation metric. So there's a balance between accelerating your buybacks even beyond that, but continuing to grow book value per share. And we grew book value per share at 10% in the last trailing 4 quarters. It would have been 12% have we bought back those shares. So we're always looking to make sure that we hit our book value per share growth targets as well. And we continue to do that by growing our bottom line profit growth, which we've done quite significantly. So we look at both those metrics, but intrinsic value, obviously, is really super important. And then when we turn to organic growth. We have very significant organic growth opportunities in our RWA growth. You saw that in capital markets growth. And you'll see that in the United States and our commercial banking growth in City National there. And then when it comes to acquisitions, look, we're not looking to do a transformational acquisition where I need to use our shares even though they're strong currency. We would do a tuck-in acquisition in wealth or in the United States, or tuck in the U.K., or a tuck-in acquisition in commercial banking in the United States where we're going to use that surplus capital and it will be very accretive to the shareholder. The opportunity in front of our organization is the transformation of the business using artificial intelligence. That is going to drive by far the greatest shareholder return and the focus of the management team. And that is where the focus of the organization is right now. It is fundamental, and it has a huge opportunity to drive those ROEs higher, to drive a significantly higher growth rate in the bottom line. And that's where the focus is. And the priority is not making an acquisition. Acquisition would distract us right now. And therefore, that is where the focus of the organization is. So that's how we go through capital. That's how we think about acquisitions. So we're super focused on driving those core valuation metrics that have propelled our stock forward in the last 10 years.

Thanks for that, Dave. Maybe switching over to credit. Obviously, a lot of uncertainty in the market right now with respect to CUSMA, Middle East tensions, geopolitical risks seem to be elevated right now. How does that sort of inform you on your outlook on credit, what you're hearing from clients? Do you think we're in the later innings of this credit cycle? Where do you sort of see all that shaping out right now? And then maybe touch on your reserves post the build that you had last year, are you still comfortable with your level of reserves?

I think there's significant uncertainty in a number of those tariff impacted sectors, obviously. So we're keeping our CET1 ratio a little higher for that uncertainty or running at 13.5% instead of moving it down and eating into some of that buffer. We've grown significantly, but our growth on our balance sheet has been more investment grade than noninvestment grade. We've been selective in our growth in the commercial bank in Canada for that reason. Our credit -- I would say, our credit challenges have not evolved from tariff-impacted sectors. In fact, I just saw a report where we've seen accelerated paydowns in a number of those sectors as those clients kind of retrench and are very conservative in managing their debt. Our losses, as we've talked about publicly have been more in the supply chain, transportation, logistics sector in Canada because we still are in a good recession in our economy and therefore, the infrastructure built during the pandemic, the flow of goods has not been sufficient to fund all of that debt that was taken on during the pandemic. So we've seen logistics sector and transportation sector losses. We've had some challenges in the HSBC portfolio that we work through. Logistics sector as well and a little bit of retail sector. We work through those. That's been a historic driver. We've had some real estate challenges in the United States that you saw in the last quarter. We're kind of working through those and then in one specific utility in Europe that we keep talking about that. We can't wait to get through that situation. So those have been the drivers of some of the elevated PCL still within what we forecast. And with the tariff uncertainty, it might bump along sideways. I was hoping to say, yes, I think we're at the peak in coming down. We're certainly seeing that in the commercial book. We see -- we had a very good quarter in the commercial book other than one credit. So we're seeing that come off. Capital markets you can always have a surprise here and there, but should be normalizing. So I'm a little cautious because of the escalation of the trade war right now. But what we're seeing outside of that consumer, commercial, U.S. commercial is getting better.

Great. Thanks for that. Maybe switching over to some of your operating segments. Starting with Personal Banking. That's an area where I got a lot of questions post quarter just in terms of the volume picking up. Is there any -- on the loan side, anything to suggest that maybe you're being a bit more aggressive now, whether on the pricing, trying to get more client acquisitions? What's happening in the personal banking business right now from a volume perspective?

We are definitely on our front foot of growth. I mean I think that is one of the messages you should take out of the first quarter. We did really well on growth across all our businesses. Our balance sheet growth in capital markets, our balance sheet growth in the consumer bank, both on the lending side, deposit growth in the commercial bank. And you look at the volume growth, we put on over $80 billion of lending growth across our consumer, commercial and corporate bank. So the sustainability of what we've done is very strong. It's less based on equity finance and some of the more transient things that are going on in the markets business. We had very strong core growth. And we acquired customers in the credit card business, which you haven't seen that growth yet. We acquired a lot of new commercial banking customers, a lot of treasury management customers. So yes, we put on a growth spurt, and we're throwing our weight around. But I hear that how did we use price? And when I look at the roll-on/roll-off in the mortgage business, they're the same as they were 4 years ago, 5 years ago. So it tells me that we're not using price any differently than we had before and our competitors are using that price. We gained all this business and drove an 18% ROE. So there's nothing wrong with that. And that's because we have a structural funding advantage with our deposit business, and we have a structural cost advantage. We run the consumer commercial bank at a 35% efficiency ratio. Our competitors are at 45%. We put $0.10 of every dollar of revenue to the bottom line they don't have. That's a fundamental advantage to go in the market and drive a higher ROE and win business. And yes, we're throwing our weight around and we're going to continue to do that. And you saw the volume production ratio. So we're very happy in the past couple of years, but particularly in the quarter, the client wins on long term assets in our wealth business on credit cards, mortgages, corporate banking, commercial banking deposits. City National, 8% led kind of its peer group in the U.S. you're seeing really stable long-term growth metrics coming out of the bank, and that's how you build a bank in a sustainable growth trajectory that you expect of us.

So Dave, in terms of that volume coming into that business line, I'm guessing some of it's sort of monoline initially you want to cross-sell to these clients. How does that dynamic work at Royal? What's like a reasonable time line of when those customers become more fulsome customers of the bank.

Well, each business is different. We certainly have a focus when we bring a mortgage client on or a core banking client on to cross-sell within the first 2 weeks, at the end of the day or 3 weeks. Mortgages can take a little bit longer. So you've got a really short cross-sell cycle and capture that moment in truth with the consumer client. We bundle products more upfront. So you see more of that in the first 6 months on the consumer side, the commercial banking side, it takes a little bit longer to bring the cash management business and the treasury management business, and so a longer sales cycle there. And similarly, on deploying our balance sheet into the investment-grade space sponsors in the energy sector and the hyperscaler sector in the AI infrastructure sector. 80% of that growth in the capital markets balance sheet was investment grade in a very different client strategy than you saw us in the last 10 years, which was a lot of sponsor-based business, but a great cross-sell into advisory and M&A on that side. So that cycle around energy infrastructure, around AI and infrastructure, around IPOs could take a bit longer. So each one of those balance sheet deployments have a different realization cycle. But we've proven over time over the last decade that we execute very well on that across. So in that RBC One strategy, we lead the market, particularly in the consumer commercial bank by 30% and our cross-sell ratio. So it's proven that it's a differentiated capability, which is why we invest so much upfront. And this is just why you saw the consumer banking cost ratio increase, it had negative operating leverage which was fine because we acquired more core banking accounts that we have in the last 4 years. During the quarter, we acquired more credit cards. We pay for that business, knowing that we have a great cross-sell cycle that has worked over a decade. We have great products. So part of that elevated run rate is, yes, we went out in one business which will continue to return. And we did it in the quarter at 18% with the cross-sell to come, again, enhancing that future ROE. So that's kind of the tale of the tape. We're really, really excited about the customer volumes that we won, as you can tell.

So that elevated expenses was primarily just winning customers, the pricing dynamic and, I guess, short-term pain for long-term gain?

Exactly.

Okay. Just in terms of the RESL business, so real estate secured lending, it's a big part of your book in terms of its profitability and how it contributes to the bottom line. So if you have a market in Canada where real estate secured lending is just not growing as robustly and it kind of lingers to that low single-digit percentage range where it's been for a while now. If that continues, let's say, over the next few years, like what sort of impact does that have on your ability to grow that pretax pre-provision earning line credit aside?

Yes, great question. So it's our largest balance sheet item, right, with over $400 billion in mortgages. There's a couple of things. One, I do think we'll get back to immigration growth in the country. We've cooled it down. It's not going to be this low, I think, forever. So immigration growth is really important in driving demand for your housing stock. I think we have suppressed demand from the existing population and that we will get back with more confidence in a world where we reduce the uncertainty around economic growth because of the trade agreement. So you will see demand manifest itself. So I'm hopeful of that. As I said, our roll-on/roll-off spreads haven't changed much, and I don't know what the competition, whether they will change that much. So then where do you go from there, you have to take out cost out of the business. I think with the ability to use artificial intelligence to increase our efficiency ratio, not just on the operations side, but on the distribution side. This is a very expensive distribution business, right? You pay a significant -- most banks use broker. We don't use broker, but we have an in-house commission sales team that we think through artificial intelligence, we can have a significant improvement in the return on that sales force. And therefore, we have to optimize both back office and front office cost structure to get the ROEs up in this business, and to grow the bottom line even though the number of unit sales. It's one of our highest focus in our AI use cases is getting after our mortgage business. Not just on back office, but that front office distribution cost is really expensive, and we have to bring that margin back to our bottom line. So I'm very excited about that. So that's how I think about maybe a low-growth mortgage business, but I can drive the bottom line faster than the top line.

Okay. Thanks for that. Maybe switching over to commercial banking. And I do recall last year, we sat here and we talked about how the ROE was running at sub-15%. And I think year-to-date, you're close to 18% now. So that's a pretty sizable jump in only a year. Maybe just walk investors through what's changed? How have you driven that? Obviously, the volumes coming back to life are, I'm sure a big part of that. But what do you -- what is RBC done specifically to drive that ROE so much higher?