Release Date: August 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Royal Bank of Canada (RY, Financial) reported strong third-quarter earnings of $4.5 billion, with adjusted earnings of $4.7 billion.
- Canadian banking net interest income increased by 26% year over year, driven by higher interest rates and strong volume growth.
- Asset management and wealth management revenue grew by over 15%, supported by higher transactional revenue.
- Capital markets reported revenue of $3 billion, with pre-tax, pre-provision earnings of $1.2 billion, indicating strong market share gains.
- The acquisition of HSBC Canada contributed $239 million in earnings, with $292 million in adjusted earnings, and achieved significant cost synergies.
Negative Points
- Higher interest rates and rising unemployment in Canada are impacting consumer spending and business investment.
- Non-interest expenses increased by 11% year over year, driven by higher variable compensation and integration costs related to HSBC Canada.
- Credit quality showed signs of weakening, with net credit downgrades and elevated watch lists and delinquency rates.
- Provisions on impaired loans were up, particularly in the Canadian banking portfolio, driven by higher provisions in commercial banking and residential mortgages.
- The macroeconomic environment remains uncertain, with potential impacts from geopolitical volatility and fluctuating interest rates.
Q & A Highlights
Q: I think I heard you say we should expect a pick-up in buybacks given how you view the intrinsic value of the stock. How are you thinking about capital allocation given the capital that the bank is accreting and the possible use and your patience to allow capital to build in the near term?
A: (David McKay, President, Chief Executive Officer, Director) We are of such significant capital generation capabilities that we'll have the luxury of doing both. We will return capital through buybacks because we look at our intrinsic value and the opportunities our franchise has to continue to build on the momentum. At the same time, we will accrete capital in our balance sheet for future strategic optionality.
Q: On the impaired PCL ratio, 26 basis points this quarter, below the average historical loss rate. Has this ratio peaked, or are we still likely to head back above the historical loss rates as you look forward?
A: (Graeme Hepworth, Chief Risk Officer) We are very pleased with the credit outcome this quarter. While we outperformed this range, the outperformance is attributable to wholesale. Retail trends are still negative, and we see it growing through 2025. The peak is probably less acute than we were thinking about at the beginning of this year, but there are still significant headwinds.
Q: Can you give us a little bit of insight into the integration with HSBC? Are you able to talk about metrics like cross-selling to HSBC clients or customer attrition?
A: (Neil McLaughlin, Group Head - Personal, Commercial Banking and RBC Ventures) We are seeing good mobile adoption and appointments picking up. Client attrition is well within estimates. We are seeing early green shoots in cross-selling, particularly strong flows into Dominion Securities and wealth management. We also see opportunities to cross-sell products like credit cards and small business services.
Q: Since we've entered the rate-cutting cycle, how are you thinking about the NII and earnings sensitivity to rate cutting beyond the simple disclosed NII sensitivity?
A: (Katherine Gibson, Interim Chief Financial Officer) On the Canadian side, we expect strong structural benefits to continue. Rate impacts would mostly affect the non-chartered portion of our low beta deposits. We also expect competition around pricing for deposits and mortgages to continue. In the US, City National has been putting on forward hedges to protect us in a down rate environment.
Q: Can you provide more color on City National Bank's performance and outlook for loan growth?
A: (David McKay, President, Chief Executive Officer, Director) We are working on simplifying the business and focusing on higher-return areas. We have taken charges to exit non-core ventures and reduce costs. We are also focused on moving off low-yielding assets and replacing them with higher-yielding assets and deeper relationship clients. The pipeline is building to support this growth.
Q: Can you talk about the credit performance in your US leveraged finance portfolio?
A: (Derek Neldner, Group Head and Chief Executive Officer - RBC Capital Markets) Our US leveraged finance portfolio is around $20 billion, and we are very comfortable with it. We have kept our holds by single name quite modest, and it is a very diversified group. The portfolio has performed well through the cycle, and we expect it to continue to do so.
Q: Can you provide an update on the performance and outlook for HSBC Canada?
A: (Neil McLaughlin, Group Head - Personal, Commercial Banking and RBC Ventures) We are seeing good engagement with our branch network and mobile adoption. Client attrition is within estimates. We are seeing early success in cross-selling RBC products to HSBC clients and new product sales to our legacy portfolio. We are also seeing new client acquisition from the previous HSBC salesforce.
Q: Can you talk about the overall backdrop and deal flow in capital markets, as well as the momentum in your market share gains?
A: (Derek Neldner, Group Head and Chief Executive Officer - RBC Capital Markets) The environment for 2025 feels very constructive with interest rates coming down and CEO confidence improving. We expect increased activity in M&A and capital markets. We have been gaining market share across both our investment banking and global markets businesses, and we expect this momentum to continue.
Q: Can you talk about the timing of peak retail credit losses and the impact of rate cuts?
A: (Graeme Hepworth, Chief Risk Officer) Unemployment is a big driver, and we see it peaking in the latter half of this year and early next year. There is a lag effect as this translates to impaired loans and PCL. Rate cuts are beneficial, but many consumers will still face payment shocks when repricing their mortgages. The repricing schedule extends into 2025, 2026, and 2027.
Q: Can you provide more details on the $452 million reduction in loans converted to investments?
A: (Graeme Hepworth, Chief Risk Officer) We foreclosed on a series of commercial real estate loans and took ownership of the properties, moving them out of the impaired loan category into an investment category. This is consistent with our workout and recovery thesis.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
