Q3 2024 Earnings Summary
- RBC's Capital Markets segment is experiencing strong performance, with pre-tax pre-provision earnings exceeding guidance at $1.2 billion, and management expects continued strength into 2025 due to a constructive environment, increased CEO confidence, and continued market share gains in investment banking and global markets.
- The integration of HSBC Canada is progressing better than expected, with client attrition within estimates, strong client engagement, and early success in cross-selling RBC products to HSBC clients, including over $100 million of assets under management added to RBC Dominion Securities. This indicates potential for revenue synergies beyond initial estimates.
- RBC is focused on cost management and sees opportunities to reduce costs through technological innovations, including the deployment of generative AI, which is expected to drive sustained positive operating leverage over the medium-term, enhancing profitability and shareholder value.
- Royal Bank's subsidiary, City National Bank, is undergoing significant restructuring, including exiting non-core businesses and addressing heavy costs related to building out operational and risk infrastructure, as well as remediating a public consent order. These substantial costs will persist into 2025 and 2026, potentially weighing on RBC's earnings.
- RBC foreclosed on $452 million of impaired commercial real estate loans, converting them into owned properties. Holding these commercial properties on the balance sheet may expose RBC to further risks if real estate values decline.
- The bank remains cautious about its wholesale and unsecured lending portfolios, which are experiencing increased volatility and may lead to higher provisions for credit losses, especially going into 2025.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
All-Bank Core Expense Growth | FY 2024 | Top of mid-single-digit range | Top of mid-single-digit range | no change |
Impaired PCL Ratio | FY 2024 | 30–35 bps | 30–35 bps | no change |
Canadian Banking NIM | Q4 2024 | No prior guidance | Decline by a couple of bps sequentially | no prior guidance |
Effective Tax Rate | Q4 2024 | No prior guidance | Higher end of 19%–21% | no prior guidance |
Effective Tax Rate | FY 2025 | No prior guidance | Similar to Q4 2024; potential Pillar 2 impact | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
HSBC Canada Acquisition & Cross-Selling Synergies | Q1 2024: Expected ~$740M expense synergies, strong cross-selling potential. • Q2 2024: Acquisition completed, $1.4B fully synergized adjusted earnings target. | Contributed $239M in earnings, $90M cost synergies achieved, and strong cross-sell results (e.g., over $100M AUM inflows). | Consistent topic across all periods, increasingly positive sentiment with higher realized cost and revenue synergies. |
City National Bank Restructuring & Profitability | Q1 2024: Profitability focus by 2025, restructuring for better ROE. • Q2 2024: $73M adjusted earnings, heavy remediation, simplifying business. | $77M adjusted earnings with ongoing restructuring, focusing on higher-return segments and cost takeouts. | Recurring theme, sentiment remains cautious but improving, viewed as having large impact on future profitability. |
Capital Markets Segment Performance | Q1 2024: $1.3B pre-provision profit, strong M&A pipeline. • Q2 2024: Record $3.2B revenue, +24% pre-provision profit YoY. | $1.2B pre-provision profit, +18% YoY, with +36% in IB revenue. | Consistent strength, sentiment positive but acknowledges some trading headwinds. |
Generative AI & Technological Innovations | Q1 2024: No specific mention. • Q2 2024: AI used in retail, wealth, and trading (Aiden) to improve efficiency. | CEO emphasized generative AI for cost reduction at scale. | Newer emphasis in Q2 and Q3, sentiment positive about potential future impact in cost management. |
Commercial Real Estate Exposure & Foreclosures | Q1 2024: <10% of loans, 25–40% downside modeled, impairments in line with expectations. • Q2 2024: $8.3B in U.S. multifamily (<1%), two large impairments in rent-controlled SF. | Office sector weaker, <1% RBC exposure, foreclosures reclassified as investments. | Consistent across periods, sentiment cautious with targeted provisioning and foreclosures. |
Wholesale & Unsecured Lending Volatility | Q1 2024: Elevated PCL from specific names; unsecured credit stress rising. • Q2 2024: Retail credit up in Canada, higher wholesale PCL expected. | Wholesale lending volatile but outperformed expectations; unsecured lending to drive challenges into 2025. | Recurring theme, sentiment remains bearish on unsecured lending outlook. |
U.S. Cash Management Platform (RBC Clear) | Q1 2024: Recently launched, more details expected later. • Q2 2024: Cloud-native platform, positive initial response. | Named Best Overall Bank for Cash Management in the U.S., early client wins, growth plans. | Growing momentum, sentiment positive, viewed as a strategic growth initiative in the U.S. |
Interest Rate Environment & Impact on Margins | Q1 2024: Slight NIM improvement; Canada may cut earlier, deposit competition a headwind. • Q2 2024: +4 bps NIM in Canadian Banking, expecting 100 bps cuts in Canada by end of 2024. | NIM up 8 bps partly from HSBC Canada, but competitive deposit and mortgage pricing pressures continue. | Consistent topic, sentiment is mixed; rate cuts could compress margins, though offset by wealth flows. |
Funding Cost Pressures & Deposit Mix | Q1 2024: GIC growth putting pressure on margins; shift from non-interest to term. • Q2 2024: Competitive deposit environment; shift to higher-cost term deposits. | Competition remains intense; GIC outflows possible if rates drop, but offsets via wealth management business. | Ongoing pressure, deposit mix shifting back and forth, sentiment cautious but expecting a net-neutral impact. |
Lower CET1 Ratio Target | Q1 2024: Ratio to drop ~250 bps post-HSBC deal, ~12.5% expected. • Q2 2024: CET1 at 12.8%, down 210 bps from prior quarter, no new guidance. | No mention for Q3 2024. | No longer discussed, sentiment stable; no further details on target post-HSBC acquisition. |
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Capital Allocation and Share Buybacks
Q: How will you allocate capital—buybacks or growth opportunities?
A: Dave McKay explained that due to strong capital generation—70 basis points this quarter , RBC has the luxury to both prepare for growth and buy back shares. They plan to return capital through buybacks, seeing their intrinsic value as attractive, while also building capital for future strategic opportunities. They will be patient and disciplined in deploying capital, aiming to outperform on total shareholder return. -
Credit Quality Outlook and Impaired PCL Ratio
Q: Has the impaired PCL ratio peaked, or will it rise further?
A: Graeme Hepworth noted that the impaired PCL ratio at 26 basis points is below the average historical loss rate. While they are pleased with this quarter's outcome, they anticipate that PCLs may increase, particularly on the retail side. Unemployment is still rising, and consumers have yet to face the full impact of mortgage repricing. They remain cautious through the end of this year and into next year. -
NII Sensitivity to Rate Cuts
Q: How will rate cuts affect NII and earnings?
A: Katherine Gibson stated that several factors affect NIM, including interest rates, competition, and client mix shifts. They expect strong tractor benefits to continue flowing through, with the impact of rate cuts mostly affecting non-tractor low beta deposits (about one-third of Canadian Banking NII sensitivity). Overall, the NII sensitivity to rate cuts may be less than disclosed figures suggest. -
City National Bank Performance and Outlook
Q: Has City National Bank turned the corner on earnings?
A: Dave McKay acknowledged charges taken to simplify City National's business, exiting non-core areas. They have significantly reduced FTEs and are focused on cost reduction. While growth has been intentionally slowed, pipelines are building, and they remain focused on managed growth and profitability. -
Integration of HSBC Acquisition
Q: How is the HSBC integration progressing regarding synergies and attrition?
A: Neil McLaughlin reported that client attrition is within estimates, and they are seeing HSBC clients engaging with RBC's branch network. Early signs include strong flows into wealth management and opportunities to cross-sell RBC products. They are also introducing HSBC's products to RBC's client base. -
Management's Cautious Economic Outlook
Q: Why is management cautious despite strong momentum?
A: Dave McKay emphasized uncertainty and volatility in the economy. While they retain confidence, they highlight unknowns like the full impact of mortgage repricing on consumers. They believe they can manage these uncertainties but want to be transparent about potential headwinds. -
Capital Allocation Strategy Regarding U.S. M&A
Q: Will you pursue large U.S. acquisitions despite past challenges?
A: Dave McKay indicated that the bar for large transformational U.S. acquisitions is very high. They prefer focusing on core customer segments and may consider small tuck-in opportunities. They don't feel the need to bet the organization on a U.S. acquisition and are cautious about the challenges in the U.S. market. -
Credit Performance in U.S. Leveraged Finance
Q: How is your U.S. leveraged finance portfolio performing?
A: Derek Neldner stated that the $20 billion portfolio is diversified and performing well. They have modest holds per single name (approximately $35 million in riskier categories). While they've taken some PCLs, it's within expectations, and they remain comfortable with the outlook. -
Capital Markets Performance and Outlook
Q: What is the outlook for capital markets and deal flow?
A: Derek Neldner reported a constructive environment for 2025, with fundamentals in place for increased activity. Interest rates coming down and strong access to capital are positive signs. While Q4 may have seasonal softness, they expect continued strength and market share gains. -
Cost Management and Operating Leverage
Q: Can positive operating leverage be sustained?
A: Dave McKay emphasized a focus on cost reduction and operating leverage. There are opportunities to reduce costs, particularly through technology like generative AI. They aim to maintain all-bank positive operating leverage over the medium term. -
Timing of Peak Retail Credit Losses
Q: When will retail credit losses peak?
A: Graeme Hepworth expects retail credit losses to grow through 2025. Unemployment is a key factor, and while rate cuts help, consumers still face payment shocks from mortgage repricing. The peak is expected in the latter half of this year into next. -
Loans Converted to Investments
Q: What about loans converted to investments?
A: Graeme Hepworth explained that certain impaired loans were foreclosed and converted to investments. These are commercial properties now on the books as assets rather than loans. -
Market Risk RWA Decline
Q: Is the decline in market risk RWA intentional?
A: Derek Neldner stated there hasn't been a material shift in risk appetite. They are optimizing capital but have not purposely taken risk off the table. Their risk approach remains consistent. -
Clarity on Sweep Accounts in U.S. Bank
Q: Any need to adjust rates on U.S. sweep accounts?
A: Katherine Gibson mentioned they are competitively positioned and do not anticipate material changes to pricing on sweep accounts (about $31 billion). They feel well-placed relative to competitors. -
Loan Growth at City National Bank
Q: What's the loan growth outlook for City National Bank?
A: Dave McKay noted that industry growth has been low due to higher rates. They are focused on moving off low-yielding assets and investing in higher-yielding ones. They see opportunities and are building pipelines, remaining focused on managed growth. -
Probability Weighting in PCL Modeling
Q: Will you adjust base case weighting in PCL models next year?
A: Graeme Hepworth won't speculate on future weighting changes. They assess risk and uncertainty each quarter and adjust allowances accordingly.