Royal Bank of Canada
Q1 2021 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good morning, ladies and gentlemen. Welcome to the RBC’s Conference Call for the First Quarter 2021 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.

[Nadine Ahn:]

Thank you, and good morning, everyone. Speaking today will be Dave Mckay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today to answer your questions, Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management, Insurance and I&TS; and Derek Neldner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I'd 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 requeue.

[David McKay:]

Thanks, Nadine, and good morning, everyone. Thanks for joining us today, and we hope you and your loved ones are keeping safe and well. Today, we reported very strong earnings of $3.8 billion, with earnings per share up 11% year-over-year. Our results are a testament to our diversified business model and revenue streams. We benefited from higher fee-based revenue in our capital markets and wealth management businesses and strong client-driven volume growth in both Canadian Banking and City National. Expenses remained well controlled and top of mind, even as we increasingly saw heightened client activity levels across the bank. We also saw a small release of reserves this quarter, which Graeme will speak to later. These factors partly offset the impact of the 150 basis points of rate cuts in March of last year which negatively impacted our earnings by approximately $400 million. Strong volume growth, elevated client activity and our diversified business model allowed us to earn through the significant headwind. Our strategy is also delivering results in the U.S., where we are capitalizing on our investments across capital markets and wealth management. This quarter, we reported record results in our U.S. operations, generating over US$2.5 billion in revenue and over US$650 million in earnings. Our robust capital ratio of 12.5% was flat quarter-over-quarter as record internal capital generation was effectively deployed to drive strong organic growth across our businesses, while also paying $1.5 billion in dividends. Our CET1 ratio provides a significant $19 billion surplus over the current OSFI minimum. Furthermore, our ACL on loans is over $2 billion higher than pre pandemic levels in Q1 2020. We remain well positioned to continue funding organic growth opportunities that create value for our clients. I will now speak to how we see the macro environment unfolding. As we approach a year into the global pandemic, we are encouraged by both the number and efficacy of vaccines. This, in addition to significant pent-up demand, rising prospects of further stimulus programs, expectations of a gradual easing of lock down measures and pledges of continued low interest rates to support a sustained economic recovery. Recent data shows CEO confidence of corporate America has reached a 17-year high. We are also seeing the benefits of increasing public-private partnerships in the U.S. as companies are engaging with governments to distribute vaccines effectively in a timely manner. Canadian housing activity also remains elevated. While rising permit issuances building up the new construction pipeline, we expect a lack of supply, low interest rates, elevated savings rates continuing work from home arrangements and the potential resumption of immigration to underpin continued demand. While the timing and path of vaccination programs has been uncertain and uneven so far, particularly in Canada, we expect an accelerated pace of vaccination distribution over the coming months to drive a strong economic recovery through 2021, resulting in GDP growth of 4% to 5% across North America.

[Rod Bolger:]

Thanks, Dave, and good morning, everyone. Starting on Slide 9. We reported quarterly earnings of $3.8 billion. Earnings per share of $2.66 was up 11% from last year. Despite operating in a near 0-interest-rate environment, we generated nearly $5 billion in pretax pre-provision earnings this quarter. Moving to Slide 10. We reported a robust CET1 ratio of 12.5%, unchanged from last quarter. We had record internal capital generation of 41 basis points this quarter, higher than our historic average of 30 basis points to 35 basis points. This was largely offset by higher risk-weighted assets. Outside of the impact of foreign exchange, RWA growth was underpinned by 4 key drivers

[Graeme Hepworth:]

Thank you, Rod, and good morning, everyone. Starting on Slide 20. Allowance for credit losses on loans of $5.9 billion was down $201 million compared to last quarter. This reflects PCL and impaired loans of $218 million or 13 basis points, which is down 2 basis points from last quarter as lower provisions in capital markets and wealth management were partially offset by higher provisions in Canadian Banking. It also reflects a $97 million release of reserves on performing loans. Notably, this is the first quarter since the onset of a pandemic, when we have released reserves in relation to our performing loans. For context though, this represents less than 4% of the reserves taken during 2020. Our lease balance is a more optimistic economic outlook, driven by the introduction and approval of vaccines in December of last year with concerns around the new variants and challenges with the rollout of vaccines. Turning to the credit performance of our key businesses, starting with capital markets. Compared to last quarter, gross impaired loans of $857 million decreased $348 million, and PCL on impaired loans of $18 million decreased $50 million. These decreases reflect limited new formations as clients continue to benefit from access to debt markets and substantial liquidity. As well, we saw a good resolution of previously impaired accounts, mainly in the oil and gas sector, as prices rebounded from the lows we saw in 2020. We also released $37 million of reserves on performing loans, following a $38 million release last quarter. This reflects continuing improvement in our credit outlook for this business. In Wealth Management, gross impaired loans of $289 million decreased $56 million from last quarter due to lower new formations at City National, mainly in the consumer discretionary and consumer staple sectors. Improvements in these same sectors also led to $27 million of recoveries on previously impaired loans. In Canadian Banking, gross impaired loans of $1.4 billion was up $95 million, primarily in the residential mortgage and personal lending portfolios. PCL impaired loans of $217 million was up $48 million from last quarter with increases across all portfolios with the exception of our cards portfolio. As expected, delinquencies and impairments have begun to increase from the exceptionally low levels that we experienced last year when clients benefited from our deferral programs. While delinquencies and impairments are increasing, they continue to be at or below historical levels as government support programs remain in place, benefiting many of our clients. We do expect delinquencies and impairments to increase through the remainder of 2021 as many government support programs are scheduled to conclude this summer. Additionally, this quarter, we released $63 million of reserves on performing loans in Canadian Banking. This release came primarily from our cards portfolio, reflecting lower outstanding balances and from our residential mortgage portfolio, reflecting very strong housing market conditions. Before concluding, let me touch on our overall credit outlook. As you recall, in Q2 last year, we materially increased our reserves against performing loans. At that time, our expectation for credit losses were guided by a rapid deterioration of economic indicators caused by the significant uncertainty around the pandemic. In particular, there was uncertainty around the speed and timing of an economic recovery, the degree of government support, the size and duration of additional waves of the virus and the availability and efficacy of a vaccine. To date, bank and government support programs have been robust and beneficial to our clients, resulting in better-than-expected credit performance. Additionally, the economy has outperformed our expectations since the onset of the pandemic with economic indicators, such as GDP and unemployment staring better than we originally expected. Although some sectors continue to be severely impacted by containment measures, other sectors are experiencing robust growth in this current environment. Despite these positive developments, concerns around the new variants of COVID-19, including the efficacy of the vaccines against these new variants, and current valuation delays could negatively impact the timing and pace of the economic recovery. Over the course of this year, we expect PCL on impaired loans to rise. The timing and level will be dependent on the success of the vaccine rollout and how and when government support programs come to an end. Concurrently, we would also expect our allowance on performing loans to decline as performing loans migrate to impaired. As well, our performing loan allowance could be positively impacted as uncertainties around vaccination rollout abate and the reopening of the economy supports more confident outlooks on unemployment rates and GDP growth. At 0.85% of loans and acceptances, our ACL continues to be well above our pre pandemic levels to reflect the noted uncertainty. Thus far, we have been very pleased with the resiliency of our portfolio, which reflects our disciplined approach to underwriting and the quality and diversity of our lending portfolios. As we've done since the start of the pandemic, we will continue to actively work with our clients to help them navigate through these uncertain times. And with that, operator, let's open the lines for Q&A.

[Operator:]

The first question is from Ebrahim Poonawala from Bank of America Securities.

[Ebrahim Poonawala:]

I guess, Dave, if I heard you correctly, you talked about making a push at City National, particularly on the mid-market side. I was wondering if you can elaborate on that relative to -- my sense was we had a little bit more of an emphasis on private banking recently. So just talk to us, if you don't mind, around both the middle market push that you're making, what it entails and how we, from the outside, should measure the success of that strategy?

[David McKay:]

Yes. Those are 2 important parts of our growth strategy in City National. We're very excited how we've grown the business over the last 5 years. As we look to the next phase of growth, I would say, the first point is really important that balancing the growth between private banking, jumbo mortgages and the commercial bank is a big priority of ours. And we've made significant progress on the mortgage strategy. 15% growth year-over-year, we originated $5 billion of jumbo mortgages last year in the U.S. And if you annualize the first quarter, it's up closer to $7.5 billion. So we're well underway with that strategy to grow the balance sheet and to balance the balance sheet off between private banking and commercial banking. And we're doing a good job cross-selling those customers into core banking. So the strategy, as we've talked about for the last 5 years, is really starting to play out and accelerate. We've built a strong back office to create a great client experience and that we're executing the way I hope we'd execute. That leaves us an ability to continue to grow our commercial franchise. And what we're thinking there is we have some really strategic advantages, we think, a couple of fronts. One, we have this fantastic capital markets business, global capital markets business with very strong industry verticals that create ancillary fee-based opportunities on the advisory side for clients that will bring in through the mid-market strategy. We're thinking in a range of between $500 million and $2 billion in revenue as a target market to give some guidance there, corporates. And we've also just reinvested in our treasury management capabilities. So when you think about using our balance sheet and then cross-selling into fee based products, which is our strategy across every business globally, this is very consistent with that. We put our balance sheet out to a new client, we come in with treasury management capabilities and great capital markets capabilities, and we drive to premium ROEs that we're looking to drive within our credit risk appetite. So this is certainly within our credit risk appetite and therefore, the ability to balance off private banking and mid-market allows us to grow and accelerate growth at our target ROEs.

[Ebrahim Poonawala:]

Got it. And just tied to that, Dave, is M&A a distraction or potential contributor to the strategy?

[David McKay:]

M&A would have to be meaningful enough to take management's attention away from the incredible opportunities we have to grow. And we were growing at double digits, pre these strategies really taking off. So we feel very good about our organic opportunities in the U.S. and the more M&A that happens with our competitors and they're distracted from their clients, the more organic opportunity we feel we've had. So we're we've been growing our NIE, growing our private banking sales force and commercial banking sales force, anticipating some disruption in the marketplace, but if something fits that accelerates growth along those paradigms commercial, private banks, and we'll look at it, but we've got significant organic opportunity to deploy capital in front of us.

[Operator:]

The next question is from John Aiken from Barclays.

[John Aiken:]

Rod, since I don't really have any significant complaints on the results, I was hoping that you might be able to walk me through the wealth accumulation plan in U.S. wealth management. I know the net impact is not over material, but it does drive some variability within the segment's metrics. Can you remind me what the purpose of the plan is and then also what the mechanics are that cause the variability in both revenue and expense lines?

[Rod Bolger:]

Yes, sure. Thanks, John. The purpose of the plan as part of our compensation model and pay for performance, and it allows our employees and our financial advisers to basically put some of their deferred income into the market and have it earn in the market since that's what their profession is, that makes perfect sense. And then as a company, what we do is we hedge that so if -- because the compensation expense will rise and fall as markets move up. And as they've been moving up recently, especially in the first quarter this year, our fiscal first quarter, our compensation expense would mark-to-market or mark up. And to hedge that, we basically buy a basket of securities to offset what is -- what our client -- our financial advisers and employees have put into the market. And you can see that on Page 10 of the sup, and we spell out the impact to revenue and expense there quite clearly. And you can see for the last 2 quarters, they've almost matched perfectly, but they won't match perfectly because the compensation expense amortizes in as it vests over the 3 years, whereas we have to buy the securities to hedge it immediately upfront. And you would have seen that dislocation in Q2 and Q3 last year, where there were about a $20 million difference. But year-over-year, you'll see a big increase in revenue and a big increase in expense for that. And that's why we adjusted out when I talk about noninterest expense growth year-over-year because it has no economic impact, except for the financial advisers, where it's a positive because it allows them to invest in the market as their salaries and compensation is deferred.

[Operator:]

The next question is from Paul Holden from CIBC.

[Paul Holden:]

Rod, you provided some very helpful commentary around the NIM outlook as well as some helpful perspective on the slide. There's -- but there is an increasingly bullish narrative for the banks broadly around the steepening of the yield curve. And I'm just wondering if there is -- on that deposit deposit benefit you highlighted, if there is any treasury opportunities or other opportunities within NIM today given that curve steeping.

[Rod Bolger:]

Yes, sure. Paul, as the yield curve steepens, it's important that you look at the 5-year, maybe even the 7-year swap rates, we don't play out at the 10- and 30-year end of the curve, except in our own pension plan and in our insurance business. But when you look at the benefits to the deposit book, it largely relates to the assets that we deploy those into. And those are largely 5-year fixed-rate mortgages in the retail book here in Canada, variable rate commercial product in the U.S., but also growing impact to the mortgage book in the U.S. And so -- and credit card balances also will benefit and that has hurt us from a mix standpoint as those balances have come down substantially, the spending down those yields are usually much higher. So that will help NIM as it goes up. For us to take treasury actions, we would have to be hedging basically at the 5-year swap rate these days or longer, if we want to take a long-term interest rate position, but we would rather put those deposits into client-facing assets, and we think the impact year-over-year of interest rates is really going to start moderating after the second quarter. Remember, the rates were cut by 150 basis points about halfway through our fiscal second quarter. So we'll see a little bit of year-over-year headwinds this year. This quarter, but starting in Q3, those headwinds are largely going to be behind us, and we're going to start to see more revenue growth from the strong balance and market share growth that we've been achieving. And I think that's going to be an important driver of our growth and important driver of our growth story going forward.

[Paul Holden:]

Right. If I hear you correctly, the NII story starting Q3 will be closely tied to revenue growth, but not necessarily tied to NIM expansion?

[Rod Bolger:]

Correct. Yes, NIM is going to start to level off. After dropping precipitously since Q2 of last year with the 150 basis points cut by both the U.S. and Bank of Canada. Now volume growth is going to translate better into revenue growth and more directly. So that will be a significant positive for us as we continue to grow that market share.

[Operator:]

The next question is from Meny Grauman from Scotiabank.

[Meny Grauman:]

It's another quarter of outsized growth in the mortgage book. And I'm just wondering, I understand why it's happening, but I'm wondering, is there a point where it's suboptimal to have that kind of, call it, lopsided growth in the Canadian banking business?

[Neil McLaughlin:]

It's Neil. We definitely don't look at it as a negative. A couple of reasons there. I mean, one, it's a really sticky product. We like the risk and there's high ROEs on mortgages. Our relationship -- our strategy is the only entire relationship of the customer, and the mortgage plays a huge part of that as one of the most profitable products that we can anchor with the client. So no, we still feel very strongly about the strategy, and we're really, I think, encouraged by market share gains and just the volume we're able to pick up in the last 3 quarters.

[Meny Grauman:]

And Neil, just a follow-up on that. At what point -- when you look out in your forecast, when do you see the business mix down to out a little more? What quarter? When do you think that will happen?

[Neil McLaughlin:]

Yes. Well, I think in terms of the -- in terms of the housing market, I mean, we feel good about the dynamics. So we expect, as Dave mentioned, still see strong growth throughout the rest of the year, high single digits. Immigration was dampened, and we expect to see that come back in Q4 and provide some more demand. In terms of other parts of the business, I mean, our credit card business Rod touched on in terms of the NIM impact. We were down $3 billion in balances there. So that's providing some real headwinds, not only in our NIM, but just in terms of revenue. Credit card spending will also we expect to bounce back. That will provide tailwinds of revenue there. And I think part of the unknown is, Dave mentioned utilization down in terms of commercial revolvers. Entrepreneurs need to have the confidence to invest and tap into those revolvers. So I think as the economy opens up, entrepreneurs gain confidence, you'll start to see commercial lending start to come back, hopefully in the back part of the year.

[Operator:]

The next question is from Gabriel Dechaine from the National Bank Financial.

[Gabriel Dechaine:]

Again, sticking with Neil, just looking at your deposit growth in banking has been phenomenal. I'm just wondering about that $70 billion-or-so increase in deposits over the past year. How should we look at that retail commercial in terms of inhibiting your loan growth, meaning it could push back consumer borrowing a few years because they're just going to tap into their savings before they start borrowing again. And I'm talking about everything, excluding mortgages, obviously, because that's growing? And if you can make a similar comment on commercial lending, just trying to figure out behavior, and how that affects your loan growth outlook?

[Neil McLaughlin:]

Yes, great question, Gabriel. I mean, we are seeing obviously that this liquidity build up. On the consumer side was somewhat attached to the comment I made about the credit card book. There just isn't a place for consumers to spend right now. Travel and dining and entertainment, travel is our biggest category. We're just not seeing the consumer spending there. So some clients in terms of credit cards are paying it down more quickly. We've had customers that used to revolve with us that don't have to revolve, they're able to pay in full. And we have seen a decrease in utilization of the retail credit lines as well. So they are paying down debt. In terms of mortgage, to your point, that hasn't dampened that at all. I think this will be -- it will release over time, I think, is probably the outlook. And in terms of the trajectory of that coming back, tied to liquidity, I think, is going to be tied to the economic recovery.

[Gabriel Dechaine:]

Does it change your outlook, though? I think last quarter, you said second half, you'll have positive revenue growth in Canadian Banking or something along in those lines? Could it be a couple of years before the non-mortgage categories start to grow again?

[Neil McLaughlin:]

No, no, no. I mean, in terms of just -- in terms of the consumer lending portfolio?

[Gabriel Dechaine:]

Yes.

[Neil McLaughlin:]

I mean there's still 2 categories within there. There's lending we do direct to consumers through our branches and then the -- our auto business. Auto last year was down dramatically. And if you look at -- you take an indicator from the commercial book, we were down over $1 billion, about 30% in terms of floor plan finance. So as that auto business starts to come back, you'll see that portion of consumer lending spiked back. And then just utilization of -- and consumer activity in terms of branch-based lending, yes, that part of the year is probably a fair bet.

[Operator:]

The next question is from Sohrab Movahedi from BMO.

[Sohrab Movahedi:]

Yes. Maybe a question for both Dave and Graeme. Back in December, I thought your tone was a lot more cautious just around the outlook, the operating environment and the like than it is today. And obviously, with -- I don't remember, I think -- I don't know if Graeme may have it at the top of this. I don't remember the last time total bank PCLs would have been low single digits or mid-single digits. What has changed? And Graeme, what should we be expecting? I understand it's incredibly difficult environment to prepare for. But what caught you off guard, or what was the pleasant surprise? And how are those, I guess, surprises going to manifest through the balance of the year, do you think?

[David McKay:]

Sohrab, I'll start with kind of the macro view of what we're seeing, and why we're certainly becoming more confident in the trajectory that we're seeing. First and foremost, to my points around the vaccines, the effectiveness of the number of vaccines, the plans coming together the progress Europe is making, particularly the U.K., a core market for us to progress that the United States is making and vaccinating its high-risk population and its ability to reopen its economy. And when -- even though Canada has been delayed, we're talking months here. We're not talking quarters. So we're growing in confidence in the trajectory of the vaccination of our population and the mitigation of risk. We're not there yet. So we're still waiting to see the execution of this, but we're getting more confident that the timing is starting to narrow around this when this will happen. So I think that certainly, there's no shock there. It's just an evolution of the process that we're going through in a very complex operational process, but it's coming together. And I think that allows us to see through to more normal economic activity, increased credit card spend in the fall, as Neil referenced, even that surplus cash, there's $200 billion of cash sitting on Canadian consumers accounts right now waiting for a place to use it. Some of it's gone into the market. Some of it's gone to pay down debt, as we just talked about, but a lot of it's poised to grow that service sector that's been shut down and mostly impacted by the variance in COVID rate now. So I think that's leading us to feel very good about where we are as an organization, where the economy is and how this should play out the rest of the year. Graeme, why don't you talk about your view on risk from that perspective?

[Graeme Hepworth:]

Sure. So a few comments. I would say what's different now versus Q4? Well, I would say, by far and away, the most notable event is when we sat here at the end of Q4, there was no known vaccines or approved vaccines. And so that is absolutely a huge game changer in terms of kind of putting a different lens on the uncertainty here. I think one of the biggest issues that we were facing in 2020 was just uncertainty around the time lines for this pandemic. And that was a huge factor in it. So with the introduction of vaccines in Q4, that certainly is a huge point of optimism. Now the flip side of that is we're obviously seeing challenges in getting vaccines rolled out. We're seeing variants come into play. And that still does leave a significant level of uncertainty and caution and play with us. But that is really, I would say, the biggest point that kind of toggles this quarter -- last quarter versus this quarter. As to how that translates through to provisioning, I mean, you quoted the total bank PCL. I would really kind of dissect that into the 2 components. What we're seeing in stage 3 and then kind of the dynamics of IFRS 9, and how we treat performing loan loss allowances. So certainly in stage 3, 13 basis points is a very low number. I think that would certainly be at kind of the bottom end of our historic range. And that's really a byproduct of, I would say, 2 significant things. We're certainly seeing the benefit and effects of the deferral programs that we put in place as well as certainly the positive implications of the support programs that were provided by governments across the board. As deferrals come to an end, we're starting to see those delinquencies pick back up. And so we do expect those stage 3 impairments and delinquencies to trend positive or trend upwards over the remainder of 2021. Government support is a big part of this. So -- and right now as it stands, government support is expected to conclude largely this summer. And that really is what will kind of influence our expectations going forward as to the degree that that's extended or it's morphed into new forms of support. That will really drive kind of the expectations and implications for our credit performance in the latter half of the year. When it comes to performing loan loss allowances, this is more about kind of the expectations as opposed to the actuals that we're experiencing as I said, so certainly, the vaccine is positive, and that's translated to a more positive macroeconomic forecast with a robust recovery really starting in the latter half of 2021, as Dave referenced, but still some degree caution on that at this point of uncertainty that I referenced. And so these are all the things that are in play. But when it comes to the Stage 1 and 2, that's why we did make a small release this quarter is because that ACL, that tool quantum of risk, we see has abated to some degree since we were standing at the end of Q4.

[David McKay:]

Just for posterity, our last time at this level is Q1 of 2005 at 12 basis points.

[Operator:]

Next question is from Mario Mendonca from TD Securities.

[Mario Mendonca:]

I want to put a -- maybe a slightly finer point on what you just went through. If we look at credit cards as a proxy for the Canadian consumer, credit card loss rates were like 150 -- 160 basis points this quarter, about half of what we saw before the pandemic even played out. When you think about credit card losses, and how they play out over the next, say, year or 2, how should we think of that? Should we think of the deferrals as the expiry of the deferrals and maybe the end of government support, causing those loss rates to go through 300 basis points and then migrate back down to normal? Or do you think of that as the upper bound that we're unlikely to even get through what we were before the pandemic. I guess what I'm trying to get at is, has this government support essentially negated that spike in PCLs that we were all sort of bracing for earlier on in 2020?

[Graeme Hepworth:]

Yes. Thanks, Marie. I think it's a really good question. I think this whole debate around the degree to which loan losses have been deferred or mitigated is a really great question right now, and it's part of the uncertainty that I think we're facing, so well, yes, right now, we are experiencing exceptionally low levels of loan losses and quite contrary to where you'd expect it to be at this point of the cycle. That is certainly a byproduct of the deferrals and the government support, as you've noted, putting the government support in aside for a second, credit cards was down for us this quarter, which is different than the other retail products, but that's a byproduct of the fact that credit cards have a 180-day impairments as opposed to a 90-day impairment. So we would expect the flow-through of deferrals to start to pick that up over the coming quarters. The implications of the government support part are the other very material part of this, right? And so as I indicated earlier, we do expect on the retail side, our delinquencies impairments across the board to increase throughout 2021. The level that gets to the degree that, that's deferred versus mitigated, I think, is really dependent on this bridge that the government has created and whether it's not just robust enough, but whether it really extends the other side and rather fully mitigate losses or whether these are really just deferred to kind of more elevated levels at the latter half of this year and early 2022, but that is a big point of the uncertainty, it's really difficult to forecast at this point in time.

[Mario Mendonca:]

Okay. Real quickly, then for Rod. Rod, help me think through what's going on with the non-loan earning assets. So think of all the liquid assets the bank has. It dropped last quarter, increased a little bit this quarter. What are the big drivers of that? Is it simple as saying, if loan growth reemerges in the second half, that loans will sort of crowd out some of this liquidity? Or is it really being driven by just client demand right now?

[Rod Bolger:]

I think it is -- it's a combination of both. I mean, if you look at City National, in particular, and we don't pool all the money because of different bank requirements and regulations, and -- the fact that we have legal vehicles and government requirements. So if you look at just City National over the last year, we've had $9 billion of loan growth, which is very strong. We've also had $18 billion of deposit growth. So that extra $9 billion has basically displaced wholesale funding. And we've done the same thing in Canadian banking. The numbers are slightly different, but we've displaced wholesale funding with that loan growth, but the deposit growth has been much higher. So as we kind of grow loans into that, that will be able to take lower-yielding securities down and replace those with higher earning client assets.

[Operator:]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud:]

Maybe for Rod. I think you had mentioned that some of the discretionary costs could be coming back as we begin to -- the economies begin to reopen. How much of that I think it was $80 million in discretionary costs. Are you baking back, coming back post pandemic in your expense outlook?

[Rod Bolger:]

A portion of it, some of that is certainly travel, which may not return to pre-pandemic levels, we will see. Some of that is marketing, which as the economy opens back up, as people venture out, there will be more opportunity to grow the client base. So some of that certainly will return, but I wouldn't expect all of it to return. So you can factor a portion of that coming back. But again, we're going to grow earnings and revenue faster than that expense growth is going to resume.

[Lemar Persaud:]

So then we -- what areas are you expecting expenses to grow in your low single-digit expense outlook then? So this is everything outside of variable comp and stock-based comp is that very low single digits. It's basically all other expenses. And that includes our continued investment in technology and digital capabilities. We still have to invest in new regulatory requirements, invest in people. So I'm not excluding people from that very low single digits, and we continue to add headcount so that we can continue to grow market share. So we've added over 1,500 people over the last year to respond to market growth.

[David McKay:]

And to Rod's point, this is Dave. Neil's added private bankers, Kelly, coughing the team have added private bankers writing commercial bankers. So we are growing our capacity to serve clients expecting the market to surge in client demand to surge yet again, and this is on top of the outstanding growth that we've got now. So we've been seeding growth, expecting the recovery, and it's playing well for us right now.

[Operator:]

The next question is from Scott Chan from Canaccord Genuity.

[Scott Chan:]

Dave, in your opening remarks, you talked a lot about wealth management, specifically on the U.S. side. And if I look at slide 4, you've on-boarded $40 billion plus with new advisers over the past few years, which is a significant amount maybe you can kind of talk about that onboarding process? Is it benefiting from new geographies and kind of looking out over the next 2 years, is not going to continue.

[David McKay:]

We've been doing that both in Canada and the U.S. is core strategy. So I'll talk to the U.S., and maybe Doug can talk to the Canadian process. But certainly, I think the value proposition, we've invested heavily in financial planning technology, our core margin lending capabilities. So the infrastructure that was lacking in the platform 5 years ago, we have a very strong adviser offering platform right now with a great culture, and we're attracting advisers from the big platforms. And that's been a consistent consolidated effort. Culture is a big part of it. We sell the culture that we have in Canada in the U.S. The capabilities we have, the teamwork we have, the cross-sell and referrals that we get through our banking partners on both north and south of the border. All that combines to be a very attractive offer to financial advisers and FAs IAs in Canada and the U.S. So that's been a core success of ours in Canada and in the U.S. for many years, and we see an opportunity to really accelerate that. So we've got plans to increase that growth, particularly in the United States over the coming years and are ramping up our branch manager and sales efforts to do that. So we're pretty excited about that opportunity. Doug, you've been executing this and your team, Dave Agnew for years. It's a well-proven formula for us.

[Douglas Guzman:]

Yes, it is. And it's the story for those of you who were at the Investor Day a few years ago, the flywheel that I put up is really working. And I'd add in the U.S. today's comments, a couple of things. One is the shift to fee-based in some cases, discretionary assets and the addition of a credit product has allowed our advisers to have more to serve for their clients. But in Canada, the story we told at Investor Day was an ability that exceeds our competitors to invest in highly skilled subject matter experts at the center, allowing our advisers to become much more than investment advisers, obviously, anchored in goals-based discovery and planning, but bringing in real expertise in insurance and philanthropy in trust and estate and giving advisers, frankly, more to sell than our competitors have or more to provide clients that our competitors have, which makes us a destination of choice for advisers. So we're seeing through the last number of quarters of disruption as or stronger than ever interest from other firms advisers to join our platform because we've got just more firepower for them just as the client base.

[Operator:]

The next question is from Mike Rizvanovic from Crédit Suisse Securities.

[Mike Rizvanovic:]

A quick one for Neil. Just wanted to go back to the gains that you've been making on the deposit, the retail deposit share in Canada. And it seems like it's a pretty competitive market, like with the incentives provided, whether it's like a $300 cash upfront or, I guess, over time for a new checking account. It just seems like a very competitive market. I'm wondering, given that you have to pay for that growth to some degree, how long does that typically translate into gains in other areas? Like we've clearly seen it in the mortgage side, but I haven't seen it in the other retail loan balances in terms of your share. So how is that trending? Is that just a lag, or do you expect that to maybe accelerate at some point in the near term?

[Neil McLaughlin:]

Yes, absolutely, it's competitive. We've had since Investor Day, we put out our goals in terms of new client acquisition. It's been a real focus. We were really pleased with the trajectory of acquiring new consumers and making RBC their home bank pre-COVID. Obviously, we needed to really sort of shut things down once that hit. We have opened things back up, really starting late Q3 and and have been really pleased about the rebound in terms of being able to go out and connect with consumers and have them join the franchise. In terms of the incentive costs and our ability to cross-sell, we track it literally by cohort and channel. So we're able to get down and understand what product the consumer came in on, what channel they came in on, what offer they came in on. And then we see the curves in terms of -- and we know over what period of time, what investment products, boring products, card products, or mortgage products, they're going to add. And at this point, we continue to invest because those cross-sell rates continue to hold really, really solid. And so our conviction around the strategy and ability to consolidate to be the core bank and earn that extra business is exactly where it was a couple of years ago. The other thing underpinning that strategy, to Doug's point, we talked about at Investor Day, unlike some of our competitors, we actually incent the client to consolidate their business. We don't have a minimum balance deposit product. And we would point to that as one of the reasons that we're able to cross-sell at a higher rate.

[Mike Rizvanovic:]

So you are seeing some good cross sell. I guess, we just don't see the numbers. Any metrics you could offer on that?

[Neil McLaughlin:]

I mean the metrics are essentially as we look -- we break it down into 4 categories

[Operator:]

That is all the time we have today for questions. I would now like to turn the meeting over back to Dave.

[David McKay:]

Thank you. Thanks, everyone, for your questions today. A few themes that we really wanted you to take away, first and foremost, the very strong client franchise growth that we saw across capital markets, wealth platforms, both North and south. In U.S. and Canada. And obviously, our retail bank with over $100 billion of client growth. That really allowed us to earn through very significant interest rate headwinds. And we talked about a $400 million impact to the interest rates on our U.S. and Canadian businesses. And we're very happy to have earned through that. And that positions us very well as Rod referenced, as those headwinds start to diminish through Q2 into Q3, that strong momentum that we have is going to be even further accelerated by a return to credit card business, return to the commercial businesses as we reopen the rest of the economy in the second half of the year. So we feel very good about where we are. Our ROEs of 18.6% stand out. So we're earning a premium on our -- the capital we're investing in the business because we're cross-selling because we've got multiproduct relationships and spans out in our fee based revenue, while NII was challenged, you saw a very strong fee-based growth, which I think was a proof point of the cross-sell off of our balance sheet activity. So all that, we feel very good. We're very proud of our quarter. Thank you for your questions, and we'll see you in 3 months.

[Operator:]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.