Royal Bank of Canada

NYSE:RY

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to RBC's conference call for the Fourth Quarter 2019 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. Then we'll open the call for questions. To give everyone a chance to ask a question, we ask that you limit your questions and then requeue. We also have with us in the room Neil McLaughlin, Group Head Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management, Insurance and Investor & Treasury Services; and Doug McGregor, Chairman, Capital Markets. Derek Neldner, our Group Head, Capital Markets is also with us today. 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 would 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. Adjusted results reflect the items identified on Slide 30. With that, I'll turn it over to Dave.

[David I. McKay, President, CEO & Director]

Thanks, Nadine, and good morning, everyone. Thank you for joining us. Today, we reported fourth quarter earnings of over $3.2 billion, largely driven by continued strength in our Canadian Banking, Wealth Management and Insurance businesses. I'm pleased with our results, particularly given the challenging operating environment, including low interest rates and continued trade tensions. Canadian Banking recorded strong volume growth as we continue to leverage our scale to take an outsized share of industry volumes and generate strong operating leverage and earnings growth. Our wealth management businesses continue to extend their #1 position in Canada, benefiting from constructive markets and strong net sales, also driven by a growing adviser base and our leading asset management platform, which continues to outperform the industry. Investor & Treasury Services had another challenging quarter, impacted by secular industry trends in difficult market conditions. In this quarter, we took a number of steps to reposition the business, which I will speak to shortly. In Capital Markets, solid fixed income results were offset by the impact of declining global fee pools on investment banking revenue. Stepping back and looking at 2019, overall, our diversified business model and disciplined approach to cost and risk management, enabled us to deliver record earnings of close to $13 billion. Our leading ROE of 16.8% allowed us to generate 60 basis points of capital this year, ending 2019 with a strong CET1 ratio of just over 12%. Our profitability and balance sheet strength enabled us to keep investing in our leading franchises and navigate an uncertain macro environment, while also returning over half of our 2019 earnings to our shareholders through dividends and buybacks.Let me now provide some highlights on our business segment performance. Canadian Banking generated record earnings of over $6 billion in 2019, nearly half of our total earnings. We continue to leverage our scale and unique client value proposition to achieve strong client-driven volumes. We added approximately 300,000 net new Canadian Banking clients this year in addition to the 300,000 acquired in 2018. With the momentum we are building, we are on the way to meeting our client growth target of adding 2.5 million clients by 2023 set at our 2018 Investor Day. We also delivered an all-time low efficiency ratio of 41.8%, while continuing to invest in our future, reflecting cost discipline. Overall, I'm extremely pleased with the segment's continued momentum and the fact that we're earning market-leading client loyalty scores. This year, we added an additional $50 billion of volumes to our market-leading franchises, reaping the benefits of our significant multiyear investments in both sales power and innovative digital capabilities. We added over 200 investment advisers and mortgage specialists in Canadian Banking over the last year. However, our strategy is more than just adding capacity. It's also about having the right talent and capabilities to deliver differentiated advice, products and experiences across our channels, backed by the #1 brand in Canada. One example of this is MyAdvisor, our digital platform for clients to activate their personalized financial plans, which now has nearly 1.4 million clients online, 14% of which are new to RBC. Our digital channel has now over 7 million active users, and our mobile banking user base is up 16% year-over-year to nearly 4.5 million. Across all key product categories, we continue to be a market leader with either a #1 or #2 market share in Canada. Our credit card business saw growth across both spend and lend revenue streams with card balances and purchase volumes up 6% and 7% year-over-year, respectively. Our relationship with Petro-Canada continues to drive new clients to RBC, while also delivering fuel savings for RBC cardholders at any of Petro-Canada's 1,500 retail locations nationwide. With RBC Ventures, we continue to move beyond banking with a focus on engaging clients in new and innovative ways. To date, we have accumulated 3.2 million connections with Canadians across our portfolio of ventures, including those we both built and acquired. We now have 17 ventures in market and another 14 under development. One of these is MoveSnap, a digital concierge to help clients move from home to home, providing homebuyers with compelling insights and support as they make the significant investment in their future. Client feedback has been very positive, and our mortgage specialists saw this is an important addition to RBC's existing competitive advantage. We plan to scale this venture nationally in 2020. Ampli, our new loyalty program, which launched in July of this year, already has active participation from over 40 leading brands, and we are seeing good early signs of client engagement. We're excited about the possibilities and we'll be scaling up this venture as well in 2020. In Business Banking, our strong results are driven by a focus on high-return sectors that align with our risk framework. They also reflect the benefit of multiyear investments we've made in talent and cash management solutions and increasingly in unique digital capabilities. For example, with the launch of RBC Insight Edge an industry first, our Canadian business clients can now leverage aggregated data to gain relevant insights into their industry customers and markets to enable them to make more informed business decisions. Turning to wealth management, where we also reported record earnings this year, even after adjusting for a gain this quarter. With over 80% of our assets under management outperforming the benchmark on a 3-year basis, RBC GAM continued to build on its leading market share in Canada, adding $8 billion of retail net sales this year alone. In these uncertain times, our clients are trusting us with more of their business, following our advice, service and capabilities. Illustrating this, RBC GAM was recognized for investment excellence in the 2019 Canada Lipper Fund Awards, winning 7 Individual Fund awards with PH&N winning 2 Group awards. Our Canadian Wealth Management business remains an industry leader in both revenue and fee-based assets per adviser. Their clients continue to benefit from the insights distribution and digital capabilities we offer through our team of nearly 1,900 advisers in Canada. Our U.S. Wealth Management business generated pretax earnings of $1 billion this year. Our U.S. private client group is the sixth largest in the U.S. by AUA and had a record year for adviser recruitment, attracting a number of experienced advisers from large wire-houses across the industry. Our momentum also continued at City National, with double-digit growth in both commercial lending and jumbo mortgages, offsetting some of the industry-wide margin pressure. This year, City National expanded further into our core markets of Los Angeles, New York, San Francisco and Washington, D.C. We are upgrading our treasury management systems and technology to streamline the onboarding of new clients. This, along with the recent acquisitions of Exactuals and FilmTrack are important steps in continuing to grow our U.S. deposit base. Our insurance business had a strong year with earnings of over $800 million, our second highest year on record. We continue to develop innovative solutions to serve our 5 million insurance clients including a digital tool to simplify the application process for our term life insurance offering. This segment continues to generate a high ROE, while serving a diverse client base, including being a market leader in an individual disability insurance.Moving to Investor & Treasury Services. As we've highlighted in our prior quarters, it's been a challenging environment, and this quarter, we took steps to reposition the business. This journey is not easy. As part of this process, this quarter, we made a difficult decision to reduce roles in Europe and reduce our footprint in Australia. Looking ahead, we remain focused on key markets where we can provide the most value to our clients where returns are most attractive. This includes Canada, which continues to provide a diversified source of deposits. Turning to Capital Markets. Against a challenging market backdrop, we generated over $2.6 billion of earnings this year. Corporate Investment Banking was impacted by an industry-wide decline in fee pools as some clients stayed on the sidelines given ongoing economic uncertainty. Our results were further impacted by delays in the completion of deals in our pipeline. Within this context, I'm proud of our team's continued -- continue to be awarded some significant mandates, including as lead financial adviser to Blackstone on its recently announced $6 billion cross-border acquisition of Dream Global. This and other recently announced deals highlight the strength of our franchise and add to a healthy pipeline heading into 2020. In Global Markets, our client-centric model drove robust results in our fixed income business and our fixed income business performed well despite an unfavorable market environment. Before moving to the outlook. I want to touch on the macro environment. In North America, our core markets continue to be supported by a healthy U.S. consumer and their spending and a resilient Canadian household sector, both backed by strong labor markets and low interest rates. The Canadian housing market has also stabilized and business investment intentions remain healthy in Canada, including spending to expand the workforce and update technology to support higher demand. As we look out to 2020, while we still see strength in our core markets, there's no question it's expected to be a challenging macro environment. Uncertainty is weighing on both global growth and trade and with a key factor in the recent Fed rate cuts. Bank of Canada is balancing solid economic growth against elevated external risks, leaving the door open for an interest rate cut in 2020. Based on what we're seeing today, the next couple of years are likely to be challenging given interest rate trends, uncertainty around global growth, trade tensions and normalized credit conditions, amongst other factors. With this backdrop, we are maintaining our medium-term objectives, recognizing that our performance relative to these objectives will be largely dependent on the macro environment. We believe we are well positioned to meet our medium-term objectives around ROE, capital strength and dividend payouts. While meeting our 7% plus diluted EPS growth objective, may be challenging in the near term, we are focused on beating this target in the medium term, as we've done in recent years. Within this context, we remain well positioned to continue driving strong market share gains in our leading client franchises, and the power of our leading scale, balance sheet strength and diverse revenue streams will allow us to continue investing in technology and sales capacity. This period of secular change, we will maintain a disciplined approach to balancing near-term operating leverage with creating long-term sustainable value for our clients and shareholders. We also maintain a consistent and prudent approach to risk management through the cycle. So to sum up, we entered 2020 with strong momentum in all our Canadian retail franchises, driven by multiyear investments in our people, products and technology. We believe our focused growth strategy positions us well to continue to deliver an exceptional client experience, gain market share and return capital to our shareholders. To close, I'm proud of what we've achieved this year, I want to take this opportunity to thank all 85,000 colleagues across the bank. It's our talented and engaged employees who give back to communities and deliver leading advice and service to our clients. And with that, I'll turn the call over to Rod.

[Rod Bolger, Chief Financial Officer]

Thanks, Dave, and good morning, everyone. Starting on Slide 7, against the challenging macroeconomic backdrop, we delivered solid fourth quarter earnings of $3.2 billion, down 1% year-over-year. Diluted EPS of $2.18 was down 1% as well. Over the last 2 quarters, I've given an update on our cost management progress, and I'll do so again this quarter. We are focused on driving efficiencies so that we can continue to invest in future growth during this prolonged low interest rate environment. This quarter, expense growth was 7.4% year-over-year or 4.4% on an adjusted basis. Over 40% of the increase was in client-facing roles as well as technology and digital initiatives as we invested in serving clients and continued business growth. Indicative of our expense discipline, expense growth in the second half of 2019 slowed to 3.4% on an adjusted basis as compared to 6.6% in the first half of the year. In other words, the growth rate was cut nearly in half. Looking forward to 2020, we expect to continue to slow expense growth by leveraging our scale while continuing to strategically grow our client base and deepen client relationships. Turning to Slide 8, our CET1 ratio of 12.1% was up 20 basis points quarter-over-quarter. Strong internal capital generation was partly offset by organic RWA growth and share buybacks. This quarter, we bought back 4.5 million shares for a total of $474 million. That puts us at 10.3 million shares repurchased for the year or $1 billion. Moving to our business segments on Slide 9. Personal & Commercial Banking reported earnings of $1.6 billion this quarter, up 5% year-over-year. Canadian Banking net income of $1.6 billion was up 6% year-over-year. We continue to see strong volume growth of 8% year-over-year across our core products this quarter. Residential mortgages grew up more than 7% year-over-year, driven by strong double-digit mortgage origination volume growth and strong retention results. Business loan growth was up nearly 10% year-over-year, slightly lower than the growth achieved over the last 9 quarters. Deposit growth was strong across both personal and business deposits. In particular, we continue to see strong growth of 14% in personal GICs as clients continue to shift towards deposits in response to macroeconomic uncertainty. Our net interest margin of 2.76% was down 4 basis points from last quarter due to the impact of competitive pricing pressures. Looking forward to 2020, we expect NIM to drop approximately 4 to 6 basis points for the year, given current competitive mortgage pricing. Expense growth was nominal for the quarter due to strong cost management and our ability to leverage scale as a driver of efficiency. Operating leverage in Canadian Banking was 4.3% for the quarter and 2% for the year, within our previous guidance of 2% to 3% range for the year. Looking forward to 2020, we expect operating leverage to be 1% to 2%, given the impact of interchange and expectations for sustained low interest rate environment. Our historical operating leverage trends can be seen on Slide 22. Turning to Slide 10. Wealth Management reported earnings of $729 million, which were up 32% year-over-year. Adjusting for the gain on sale of BlueBay's private debt business, earnings were up 8% year-over-year. Global Asset Management revenues were up 39% year-over-year. And excluding the GAM revenues were up 10%. This was largely due to higher fee-based revenue on higher AUM, driven by market appreciation and net sales. In Canada, Global Asset Management increased its retail mutual fund industry market share by 70 basis points year-over-year to 15.8% as of September. Canadian Wealth Management revenues were up 3% year-over-year, driven by higher fee-based assets on market appreciation and net sales. Over the course of the year, including in Q4, we continue to add investment advisers to deliver more advice and insights to our clients. Our non-U.S. wealth management efficiency ratio was 60.8%. Adjusting for the gain, our efficiency ratio was 66.5%, which improved 220 basis points year-over-year. U.S. wealth management revenues were up 14% year-over-year in U.S. dollars, driven by 19% loan growth at City National and record fee-based asset growth at our U.S. private client group. Despite the declining interest rate environment in the U.S. in the latter part of 2019, City National continued to generate solid growth in net interest income, up 8% year-over-year. Deposit growth in Q4 was up 14% year-over-year, reflecting funding benefits from higher sweep deposits as well as accelerating growth in business deposits. This quarter, we saw a net interest margin decline 29 basis points quarter-over-quarter to 3.14%. Excluding the 8 basis point gain on recoveries from legacy loans last quarter, NIM was down 21 basis points. Looking forward to 2020, we expect NIM to decline in the first quarter, albeit at a slower rate, reflecting the full quarter impact of the September and October U.S. rate cuts as well as the impact from the implementation of IFRS 16. Absent any further U.S. rate cuts in 2020 and increasing competitive pressure on deposit pricing, we expect margins to tick lower before stabilizing in the latter half of 2020.Moving to insurance on Slide 11. Net income of $282 million was down 11% from last year. Primarily due to lower favorable reinsurance contract renegotiations and less favorable annual actuarial assumption updates. Higher claims costs and lower favorable investment-related experience also contributed to the decrease. These factors were partially offset by the impact of new longevity reinsurance contracts. From 2016 to 2018, approximately 60% of insurance earnings were recorded in the second half of the year. In 2019, the percentage earned in the second half of the year was also 60%, but with a higher proportion earned in Q3. Moving to Investor & Treasury Services on Slide 12, net income was $45 million. As Dave mentioned earlier, we are committed to improving the profitability of I&TS and as such, recognized $83 million after-tax repositioning costs in Q4 associated with repositioning the business. Excluding this charge, net income was $128 million, down 17% year-over-year. I&TS was impacted by lower funding and liquidity revenue primarily driven by the short-term interest rate environment and lower gains from the disposition of certain securities. We also saw lower asset services revenue due to reduced client activity and lower client deposit revenue largely driven by margin compression. On Slide 13, Capital Markets earnings of $584 million were down 12% year-over-year. Corporate Investment Banking revenues were down 14%, primarily due to lower M&A activity across all regions. This quarter saw investment banking fee pools decrease 13% year-over-year across most products, with M&A down 21% year-over-year. Despite a challenging quarter across the industry, we rose to 10th in the Global League Tables for fiscal 2019, up from 11th in the prior year. Global Markets revenues were up 6%. Despite the challenging market environment, we saw solid fixed income trading, which was partially offset by lower equity trading revenues. Overall, our trading businesses performed well against our peers on a year-to-date basis, given our diversified geographic and product mix. Looking ahead to 2020, our investment banking pipeline remains strong, with the timing of several large deals expected to close in the first quarter 2020. In conclusion, we are pleased with the resiliency of our franchise to manage through the challenging environment. Our core retail franchises continued to grow in Q4, offsetting market and wholesale industry challenges and macroeconomic headwinds. Our results reflect the strength of our diversified business model and commitment to long-term value creation for our stakeholders. And with that, I'll turn it over to Graeme.

[Graeme Hepworth, Chief Risk Officer]

Thank you, Rod, and good morning, everyone. Starting on Slide 16. This quarter, we had provisions on impaired loans of $434 million, which equated to 27 basis points. Additionally, we had -- we established provisions on performing loans of $71 million or 5 basis points for a total of $505 million or 32 basis points. Provisions on performing loans increased by $41 million or 3 basis points from last quarter. Unfavorable changes in our overall portfolio mix, including seasonal factors related to our cards portfolio and credit migrations contributed to the quarter-over-quarter increase. These factors were partially offset by a more favorable macroeconomic forecast in areas such as Canadian housing and the impact of model changes for a few of our retail portfolios. Provisions on impaired loans increased by $35 million or 2 basis points from last quarter, mainly due to higher provisions in Canadian Banking and City National, which were partly offset by lower provisions in Caribbean Banking. For fiscal year 2019, PCL and loans totaled 31 basis points, up 8 basis points from last year. Provisions on impaired loans totaled 27 basis points, up 7 basis points from last year, which represented a shift from the cyclical loans of 2017 and 2018 to more normalized levels this year. Let me now provide some additional detail on 3 of our businesses. In Canadian Banking, PCL on loans of $400 million increased by 5 basis points from last quarter. About half of the increase was due to provisions on performing loans related to the factors already noted. The remaining increase is a result of higher provisions on impaired loans, primarily attributable to our cards and personal lending portfolios. In Wealth Management, PCL on loans of $34 million increased by $7 million from last quarter, mainly due to a new impaired loan in the consumer discretionary sector in the U.S. This sector has been the largest source of losses -- loan losses for City National Bank in 2019, largely in relation to the quick-serve restaurant industry, where clients are being impacted by rising labor and capital costs. Notwithstanding higher provisions at our City National portfolio in fiscal 2019, it continues to perform ahead of our expectations. In Capital Markets, PCL on loans of $78 million increased by $22 million from last quarter, mostly due to higher provisions on performing loans, reflecting downgrades in our oil and gas portfolio. Provisions on impaired loans were up $7 million from last quarter. This reflects ongoing weakness in the oil and gas sector as well as provisions in a few other sectors. Turning to Slide 17. Gross impaired loans of $3 billion were relatively stable from last quarter as higher new impairments in Canadian Banking were mainly offset by higher repayments in Caribbean Banking as well as repayments and loan sales in Capital Markets. Overall, we saw a decrease in new formations in our Capital Markets portfolios, even though we continue to see heightened levels of formations in the oil and gas sector this quarter. We remain comfortable with our exposure to the oil and gas sector, which represents about 1% of our total loans. This portfolio is governed by borrowing basis and size of the proven reserves of the borrowers, which provides good protection against credit losses. Looking at our retail portfolio on Slide 19. We saw an increase in insolvencies, primarily in the form of consumer proposals in our personal lending and cards portfolios. Prior year's interest rate increases have impacted some of our clients by raising debt servicing costs notwithstanding the overall strong labor markets and income growth this past year. We also saw an increase in delinquencies and insolvencies in our cards portfolio in Québec. This increase follows the implementation of a new rule on minimum credit card payments, which took effect in the part of last August. Lease factors contributed to a moderate increase in PCL this quarter in our unsecured retail portfolios. The overall credit profile of our retail clients remained strong with stable levels of delinquencies, high FICO scores and low LTVs. Looking to fiscal 2020, we would expect provisions on impaired loans to be in the range of 25 to 30 basis points and provisions on performing loans to be in the range of 3 to 5 basis points, should credit conditions continue to normalize. As we've cautioned in past years, there will be inherent volatility from 1 quarter to the next, particularly for our wholesale portfolios, where provisions tend to be more concentrated. We also expect some degree of volatility in our provisions on performing loans based on volume growth, changes in macroeconomic variables and portfolio mix. To conclude, we maintain our prudent risk management approach and are closely monitoring the macroeconomic environment. We are confident that our credit performance will remain resilient throughout the credit cycle given the strength of our underwriting standards, the diversification of our portfolio and the quality of our client base. With that, operator, let's open the lines for Q&A.

[Operator]

[Operator Instructions] The first question is from Ebrahim Poonawala with Bank of America.

[Ebrahim Huseini Poonawala, Director]

I had just a 2-part question on expenses. I guess Rod, you mentioned expenses should taper off relative to the 3.5% growth we saw in the back half of '19. I guess does that imply something like a 2% to 3% expense growth expectation for 2020, all else equal. And just taking a step back and just listening to Dave in terms of his cautious outlook on the revenue environment. Is there anything bigger that the bank needs to do in terms of flexing the expense lever more as we think about 2020 and beyond?

[Rod Bolger, Chief Financial Officer]

Thanks, Ebrahim. Yes, on the expenses, recall that we have a large Wealth Management business and Capital Markets business. So as revenue ramps up or down, we have a natural hedge on expenses. So if the first quarter ends up being strong for Capital Markets and/or wealth management, you might see expense growth pick up a little bit or if it's weaker as it did in the second half of the year, as it came down a little bit versus the growth in the first half of the year, expenses will be a little bit lower. So it does moderate. We're taking the core rate of expenses down in terms of the growth rate. And we took -- and you'll see that in a number of line items if you look in our supplement, our marketing costs and travel costs, things like that. We have taken the rate of growth of that down. And our technology investment, we have been growing that over the last 5 years significantly. And over the last year or so, and we expect to continue to take that rate of growth down. And so given the macroeconomic environment, largely the interest rate environment now, which had been providing us tailwinds for 2-plus years, enabling us to invest in future growth, invest in continued market share. Now we have a lot of the pieces in place, both from a technology standpoint and a talent standpoint and distribution standpoint to continue to grow revenue despite those macroeconomic uncertainties and expenses toggle down a little bit with it. So the guidance that I gave that we expect to continue to see it to moderate would hold, and we'd expect to see low single digits.

[Ebrahim Huseini Poonawala, Director]

And we shouldn't be expecting any bigger actions on expenses, like the restructuring you did? I know it was specific to the investor treasury business. But anything much larger is something that should investors anticipate something like that over the course of the next year or so?

[David I. McKay, President, CEO & Director]

Ebrahim, it's Dave. And what I'd like to reinforce is we continue to look at our cost structure, and we're managing it the same way across the organization we have over the last 5 or 6 years, which is try to get ahead of our cost structure, invest in technology, manage through various levers over time and bring our base down. So we don't forecast, I mean, to take an aggressive short-term repositioning because we are trying to get ahead of things. We have a number of programs across the organizations. We saw this coming. So I think you can expect from us generally a continued management of costs programmatically across the organization. So that's how we see the world right now. Having said that, we did take a short-term repositioning of Investor Services because we had to make a quick pivot, a quick pivot from Europe into Asia in a number of roles in there and adjust our cost base more quickly, given the things that we're trying to do in the business. So that came at us quite quickly. And I'd say that was more out of the ordinary for how we manage our cost structure than typical of what you've seen us do in the past. So the core message is continue to expect us to manage our base down programmatically across the organization, the way we've done in the past.

[Operator]

And the next question is from Gabriel Dechaine with National Bank Financial.

[Gabriel Dechaine, Analyst]

I want to ask Graeme about your outlook for 2020 on the PCL loss range. I don't -- I didn't come across it in your materials, but you were smidge above your target range this year. I know there were some idiosyncratic losses early in the year. But on the other hand, maybe some seasoning effect in the card portfolio, Capital Market seems to be in an upswing there for PCL balance of factors, where do you see the ratio lining up in 2020?

[Graeme Hepworth, Chief Risk Officer]

Yes, I think as I made in my comments, we're forecasting the ratio in that stage 3 to be 25 to 30 basis points. It's in the stage 3 side of it sort of additional 3 to 5 basis points in stage 1 and 2. I think some of your observations, in the comments I made all factor into that. As you referenced, certainly, in the first half of the year, we saw some more idiosyncratic events in our wholesale portfolio, particularly in both Capital Markets and in commercial and Canadian Banking. In the latter half of the year, I would say, it's been a bit more broad-based, but a bit more what we would view as more normal. And so when you look at longer-term trends in retail at around 34 basis points and in wholesale around 31 basis points, we still feel we're certainly coming off 2 very strong years from a PCL perspective in 2017 and '18, where like in the wholesale, I would say they were abnormally low. But we're still, I would say, below the long-term averages, but at acceptable levels and levels that don't concern us.

[Gabriel Dechaine, Analyst]

You also mentioned in the cards and personal loans as drivers, the seasonality. And I always thought about it as more of a Q4 thing. And then the Québec regulatory change there for making minimum payments, and that's like a 5-year phase in. So I'm a bit surprised to hear that's already having an impact. We are seeing insolvency data moving higher across Canada. And just wondering, is that where you see the most pressure coming in next year in terms of normalization or seasoning in that portfolio?

[Graeme Hepworth, Chief Risk Officer]

Well, I would say, normalization is not specific to retail. Again, as I highlighted, in wholesale, 2017 and '18 were quite exceptional years. They would be more abnormal than what 2019 was. And so in wholesale, again, I think we continue to expect to see a continuation of what we saw in the latter half of '19. Retail is continuing at very low levels. We expect to see that pick up moderately. But overall, there'll be some puts and takes there that give us comfort to that overall 25 to 30 basis point range. Retail, more specifically, yes, we've seen some factors. I don't want to overstate the factors that we've seen in cards. I was just trying to highlight what we are seeing there. Cards overall this year was up 12% year-on-year, about half of that is related to growth. There's a portion I would attribute to weakness in Alberta and then the insolvency factors that I highlighted. But overall, in retail outside those factors, we're continuing to see very stable delinquency profiles. Origination quality continues to be very strong. So again, we feel quite comfortable with the profile there, but do reflect the fact that we're probably coming off some very strong years, and we'll see it normalize to some degree.

[Operator]

The next question is from John Aiken with Barclays.

[John Aiken, Director & Senior Analyst]

Taking a look at your objective for U.S. wealth management, given the challenging year that we've had as well as the margin compression that we've seen in those operations, what's the level of confidence in achieving the stated objective for 2020 as we sit here today?

[David I. McKay, President, CEO & Director]

I think if you look at the progress we've made in City National, the real strength is we've doubled the size of the core franchise over the past 4, 5 years from a balance sheet perspective. We continue to maintain double-digit lending growth numbers throughout the cycle. We dipped a bit on deposits, but you'll see our deposit strength came back nicely in Q4 to I think roughly 14%. So our primary focus is to continue to invest in that core franchise, expand geographically, grow our mortgage and our commercial business and continue to expand our private banking business. So from that perspective, from a balance sheet growth perspective, a client growth perspective, we're at or a little bit ahead of our overall targets. What we can control in our forecast that we gave you when we did the presentation in 2016 was the level of interest rates. So we've made that forecast of where earnings were. We had rates coming back and holding a bit longer than they've held, and we didn't forecast the quick reduction in rates and Fed rate cuts that you've seen over the past year. So if rates continue to hold where they are and go lower, it's going to be tough for us to generate enough margin of balance sheet growth, which has exceeded our expectations to meet those targets. So we are looking at slowing cost growth. We're looking, as I've talked about in a recent investor conference, we've significantly ramped up our cost structure beyond where we thought we'd be to try to meet the growth opportunities we saw in the marketplace. The U.S. economy doesn't perform where it has its potential, you could see us pull back on some of that cost structure and deliver some earnings there. So we've got a number of levers, but I think you should focus on the core franchise customer balance sheet growth has been significant, it's double. It's ahead of where we thought it was. The margins are a bit off, and we can't control that, but the core franchise has performed exceptionally well.

[John Aiken, Director & Senior Analyst]

As a bit of a follow-on, given what we're seeing on margins. Now I understand the overall profitability of the platform remains quite strong. But as margins are under compression. Is there any discussion about slowing the growth that we've seen over the past year?

[David I. McKay, President, CEO & Director]

Yes. I just referenced that as we've talked about, I'm heading out to L.A. tomorrow. Absolutely. We've accelerated our growth. We've opened in Hudson Yards. We are opening other stores in New York. We're opening in Washington. We can slow some of the staffing of those stores, but we can certainly slow our back-office growth, which ramped up for a significant growth. And if the growth doesn't materialize. But even having said that, I think we've kind of run up our back-office growth quite aggressively, and there's an opportunity to reduce it through technology investment, but also just through kind of managing that cost structure down in a slower growth environment. So we do foresee the ability to grow our earnings by managing our cost structure, as another lever that we haven't pulled to date. We've allowed that cost structure to move ahead to grow because we have not made an acquisition. And therefore, we've invested in organic growth where we get the highest returns. So I think the answer is absolutely. That's something that I'm focused on and Kelly Coffey, our CEO of City National is focused on. So thanks for your question. I think we'll take the next question.

[Operator]

The next question is from Meny Grauman with Cormark Securities.

[Meny Grauman, MD & Head of Institutional Equity Research]

Rod, in your commentary in Canada, you talked about -- I think it was 4 to 6 basis points of additional margin pressure, given competitive dynamics. Just a clarification, I assume that doesn't include any Bank of Canada rate cuts, but I just wanted to see how that would change your outlook?

[Rod Bolger, Chief Financial Officer]

Yes, thanks, Meny. That's correct. I mean the market is not forecasting with -- a high likelihood of a rate cut until potentially the end of next year, so it wouldn't really have an impact, certainly, in the first 3 quarters and maybe marginally on the fourth quarter, if it happens. So a lot of that is really the stock and flow of the growth in the book. And so I think it's important to step back and look at the strong volume growth, 8% in Q4. The strong net interest income growth, which was 5.6% in Q4 and over 7% for the year. And so part of this is mix. And the mortgage market has come back, and there's the continued reports on that. We continue to grow share in that space. Those products tend to have a lower spread than other unsecured products. And so as we grow that book as the market grows at a higher level, you're going to just see some mix issues cause that NIM to come down. And overall, with good volumes, it's still a positive, and it's still a positive revenue story. So part of this is a little bit of math. When you look at the underlying rates versus 5 years ago, so a lot of our deposit, the tractoring and the internal transfer pricing on that. It is positive interest rates. The 5-year rate actually despite the low rate environment today is still higher than it was 5 years ago. So structurally, on the deposit side, we're okay. The mortgage is a competitive pricing element. So there's nothing that is actually ominous in this outlook. It's just a factor of what's the market is bringing us and our continued market share growth. So I wouldn't look at that as a negative per se. I think the business is quite strong.

[Meny Grauman, MD & Head of Institutional Equity Research]

And just as a follow-up on that. You highlight improved mortgage growth. And I'm just wondering your perspective on what's driving that. And is there an element there that is concerning in terms of that reacceleration?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

It's Neil. I'll handle that one. No, definitely nothing concerning. We would look at strong mortgage performance in 2019 directly as a result of a review we did around some internal processes and just making sure that we were following up on better lead management. Following up on leads more quickly, getting back to customers more quickly as well as some changes in our adjudication process that made sure that once we had a transaction in front of us, we didn't lose that customer. So Graeme spoke to the underwriting, which continues to be very strong, and we would look at both house prices and home sales across the country being quite balanced and starting to stabilize after B20. We have seen the fall, have more activity and sort of the buying season a little bit elongated. But as we look at it all around, we would feel very comfortable with the performance of the mortgage business.

[Operator]

The next question is from Steve Theriault with Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

If I can just start with a quick follow-up. Rod, last quarter, you talked about 40 basis points of NIM or thereabouts over 5 quarters, given rate cut expectations. Maybe does that still hold? And if so, should we be thinking of the Q4 impact of 29 basis points or the 21 basis points you mentioned on a more adjusted basis?

[Rod Bolger, Chief Financial Officer]

Steve, I assume you're talking about City National.

[Stephen Gordon Theriault, Principal & Head of Research]

Yes, sorry, City National, yes.

[Rod Bolger, Chief Financial Officer]

Yes. So yes, I would think of it in terms of the 21, that 8 was a one-time gain, and we tried to call that out last quarter as well as this quarter, not to build that in. Yes. So we ended at kind of 3.14%. I spoke to last quarter that if the Fed was cutting, which the Fed ended up doing both in September and October, that basically, the Fed funds rate was going to be back to levels that you'd seen in 2017-ish, which were -- which is when City National had spreads in the high 2s, the 2.85% to 2.9% range. And absence a big tick up in the 5-year rate, which would help with some of the asset pricing and the tractors on the deposits. You'd expect the margins to come in to similar levels as what it was. So on an adjusted basis, you were at 3.35% in Q3, 40 basis points would take you down to the 2.95% range. I think you're within that range. As I mentioned, I think on my messages, we expect the continued downturn in Q1, given the 2 Fed cuts. But then we see it leveling off, and we see modest spread compression from there. And that's what the markets are saying right now based on their expectations for Fed activity. But we'll see what happens with the trade discussions and tariffs and future fed activity one way or the other, that would change the outlook for us.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay, that's helpful. And then just lastly, a question on Investor & Treasury services, post the restructuring and repositioning. Can you talk about the -- what can you offer up in terms of the earnings power going forward? What type of bottom-line benefit we'll see from that $83 million of restructuring this quarter?

[Douglas A. Guzman]

Yes, it's Doug. A couple of things. One is the charge that we just took, that is going to -- the effect of that, as Rod said in his statements, is really going to be seen kind of leaking into the P&L in terms of reduced expenses over the course of the year. So as you get towards the back end of the year, you'll see, I think more improvement on the expense side. In terms of the revenue side, we have been struggling with a flattening yield curve at the short end and some margin compression. We've changed how the trading reports. We've put on some more term and the accrual book is producing more regularly right now. And so we're just going to try to manage that. And so on the revenue side, we'll see what the market will give us. On the Investor Services side, we're just working away in terms of trying to do more business with customers, and we'll see how it plays out.

[Operator]

The next question is from Robert Sedran with CIBC Capital Markets.

[Robert Sedran, MD & Head of Research]

Just want to follow-up with Neil on the mortgage question. Everything we hear is that mortgage spreads are at historic lows. But when the market leader is growing at market-leading rates, it would suggest that this is something you're doing rather than something that is happening to you in terms of the competitive pressure. So I understand all the process issues you talked about. But I presume you're also not shying away from the price competition as well. So is this just part of a client acquisition strategy? Or are you comfortable with the mortgage as a stand-alone strategy that you can continue to grow at these rates as profitably as you'd like to?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

Yes, thanks for the question. I mean our strategy is not, obviously, to lead the market down in terms of price. I think we're leading with advice, and we're leading with distribution. So Dave mentioned in his commentary, we added mortgage specialists. And my comments were more about the productivity of those mortgage specialists in terms of making sure they got back to customers more quickly, making sure they got better leads and they can action those leads. So reality is, we do participate in the market. We don't have as much influence as I think some feel in terms of setting the price. That said, we are not going to have other customers come in and put a mortgage into our customers' hands when we feel it should be with us. So we're going to remain competitive on price. Absolutely agree with your comments in terms of the level of competitiveness and spreads. And I think there's just a lot of competition out there, especially in the last half of this year.

[Robert Sedran, MD & Head of Research]

So given all that, above-average market growth is still what you'd expect?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

Yes. We're maintaining kind of that -- we're mid-single digits, and that's still really our target range.

[Operator]

The next question is from Sumit Malhotra with Scotia Capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

For Dave. We've spoken many times about how the stars really aligned for the bank and the timing of the purchase of City National. Well, a lot of questions on this call about the interest rate environment and the growth of that business, if it's affecting your franchise, it's obviously affecting your competitors as well, especially with your capital ratio, one of the stronger aspects of the quarter sitting something like 11.8%, 11.9% on a pro forma basis. Does the acquisition or external capital deployment supplementing that business become more attractive, given what's happening to some of your competitors in this rate backdrop than it has been in the last few years? Or are you content to hold capital and continue to buy back a larger amount of stock?

[David I. McKay, President, CEO & Director]

It's a great question. I would say, certainly, leading towards the latter than the former, and that's we're going to continue to grow organically. You've seen the double digit, mid-14%, 15%, 16% loan growth, 14% deposit growth. We're investing in new branches, investing in expanded sales force capability, launching new products, building our brand in the U.S. So the organic build, we've invested heavily with, and we continue to focus on that because that drives the highest ROEs for our shareholders. Being patient and waiting has paid off already, and I think it's going to pay off even more to continue to be patient and watch the U.S. marketplace as we watch the economy, and we watch valuation of banks, and we're being very careful. We're -- we would only look at something that drove a strong shareholder return, grew our franchise geographically or grow our product capability and enhance the existing strong growth rate that we have right now. And doesn't overly distract management with something that's too small. So I think those are the same parameters we've talked about, organic growth first. And with our strong CET 1 ratios, that gives us an opportunity to return capital to shareholders, while meeting all our organic growth objectives across all our businesses. So we sit in a very strong position to continue to create relative total shareholder return for our investors.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

That's very clear. And then lastly, for Rod Bolger, we've talked a lot this year on these calls about the declining trend in the tax rate in the Capital Markets segment. And it took another significant step down this quarter. Is there anything -- I know there's some competitive factors at play here, Rod. So I'd appreciate any insight you could give us as to what exactly has driven the tax rate down to something like 3% this quarter? And are there any risk to the bank in terms of impact on revenue or normalization in this line in 2020 for how we think about earnings for that unit?

[Rod Bolger, Chief Financial Officer]

Yes, thanks for that Sumit, I wouldn't call it a risk to the bank. I would expect it to normalize a bit and be back into double digits in 2020. You saw some updated guidance out of the U.S. even this week on the BEAT tax, for example, and I think they're coming out with more guidance, so there's a natural upward bias on the tax rate, I think globally as countries try to capture more of a tax base, especially, and banks fall into that even when they're going after technology companies. But also, there's an ebb and flow to this as the earnings were a bit off in Q4 in Capital Markets. The geographic mix ends up being favorable oftentimes from a tax perspective, and so as earnings normalize going forward and increase, as we highlighted with the strong backlog and strong pipeline. I would expect that the geographic mix would be less favorable from a tax perspective than it was this quarter. So as a result, all indications are that we would be back towards a more normalized double-digit tax rate in this business in 2020.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And Doug McGregor. I think this is your final call. Thanks for your help over the years.

[A. Douglas McGregor, Chairman of Capital Markets]

Thank you.

[Operator]

The next question is from Doug Young with Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Most of my questions have been asked and answered, but one I wanted to go back to because I think you addressed the adding 2.5 million new clients by fiscal '23 for Canadian Banking. But I think at the Investor Day, you also threw out a target for RBC Ventures of adding 5 million active users and converting 10% to Royal Bank clients. And hoping just to get a bit of color how that transition is going because I think you added -- I think you mentioned 3.2 million connections. But looking at that conversion to Canadian bank clients. Just wanted some color on that?

[David I. McKay, President, CEO & Director]

Thanks, Doug, for your question. I'll start with the overall ventures targets, and Neil will talk about the bigger impact of 2.5 million net new clients, of which we said 500,000 conversions would come from venture. So we're a couple of years into this now, and we've really focused on building those 5 million new connections that we would have had to buy in a social media or digital channel before. Now we have a connection to a new Canadian potential client that we've never had before, and they've come through those 17 ventures. So we've really made that the primary focus. And we actually haven't tried to convert them to RBC product holders as yet. We're trying to build deeper relationships, trying to get to know them and that's going to pay off over the long term. Having said that, 2020 is a big scaling year, where we are going to start the conversion process through a number of these ventures. I gave the example of MoveSnap, which we embedded into our overall mortgage process, our mortgage sales force of over 1,600 specialists, that it was one of the biggest tools they had to help close mortgages in a price-competitive marketplace as you referenced. I would say, though, that RBC did try -- we did increase our mortgage rates over the past year, given the volatility I think twice, right, Neil?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

Yes.

[David I. McKay, President, CEO & Director]

You can comment on that further. But having said that, we're competing primarily on creating value for our customers and MoveSnap came into that fray. We have another 5 or 6 ventures in the mortgage space that's creating value that we're ready to scale nationally. So I think we've focused on 3.2 million. We're already 60 -- what 65% towards our 5 million target after 1.5 years to 2 years. So we feel that we'll likely exceed the $5 million, but the conversion proof's going to come over the coming quarters. We're very much focused on scaling Ampli. I think when you can add 40 retailers over a 2-year period and it looks -- if you look at what it took Air Miles or Aimia to add retailers over a decade, the fact that we have a team now of high-profile brands, creating value for Canadians, you're going to see us scale that aggressively in 2020 and convert off of that. So I think we're really positioned well to start to show you some numbers on the bank conversion side, which is still not insignificant. I think we've done over 50,000 conversions just in pilot phase without any real marketing spend behind it. We already factored marketing budgets in to scale these things nationally. So I think that is a little more color on ventures. I'll turn it to Neil to talk about the overall client acquisition and how we're building on the $300,000 over the past -- each year over the past 2 years.

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

Yes. So thanks for the question. I think the ventures, we'd say is where we -- is on plan. It's where we wanted it to be. Dave talked about the first play we needed to make is to actually get the client engagement. And so that's the first -- sort of the first milestone is to engage customers that we didn't have a relationship before, have them coming back to these digital experiences. And we're also being very cautious about managing what we referred to as kind of the load factor. How many times do we want to put the RBC brand or an RBC value proposition in front of them, is something we're really testing. We don't want to limit that engagement we're having. And you've seen this in other digital business models. I think in terms of -- we have seen some of the ventures, for example, Ownr, which is focused at -- is a venture focused at new small business originations. We're seeing a very good conversion rate there. Small business owners can go into the app, they can register their small business, they're immediately offered a small Business Banking package, and we're seeing upwards of a 40% conversion rate on that venture. Things like the DRIVE venture. We've actually integrated that into our mobile app. They've talked about the number of customers we have logging into the mobile app multiple times a month, so we're able to give exposure to the value proposition there. MoveSnap was one of the offers we put out to our customers this summer. It proved to be actually adds are more valuable than some of the more traditional offers, like, for example, just the cash incentives. So we're feeling that 3 good examples already providing value. In terms of Ampli, Dave mentioned the relationship with the merchants. We really look at this as a key part of it to have the quality of the merchants. So right now, in the Ampli app, we have merchants like Home Depot and Rexel, WestJet, The Keg, Indigo. And so the key there is that we've got these relationships with merchants. They're willing to put value on the table for our clients. And again, it's that virtuous circle of providing -- getting the engagement, providing the value and then us testing into how we drive the conversion. So that's really how we're thinking about it.

[David I. McKay, President, CEO & Director]

We have -- I know we're almost out of time, but we'll try to get a couple more in.

[Operator]

The next question is from Sohrab Movahedi with BMO Capital Markets.

[Sohrab Movahedi, Analyst]

I just want to kind of go back to that new client stuff, Neil. 300,000, you say, I think you've added this year, 300,000 last year. The 2.5 million target, can you just -- I know we're short on time, but can you give us a sense of how that is translating into your segment's results and whether or not you are actually having to still provide incentives, whether it's iPads or cash to pick up some of these customers?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

Yes, sure. Thanks for the question. So the new client acquisition, those are both step-ups from where we'd be running with net new client acquisition in the previous 3 years. So we're feeling that we're on the trajectory we set out. To your point, incentives still are part of the strategy. We were out again with the iPad campaign as we do the analytics, those are well-performing solid returning investments. You will see us on a go-forward basis, there will be a mix. There will be some new value propositions that we feel can really start to drive an increase in the trajectory, and we'll look for that in the back half of the year. But right now, we're pleased with our new client results, and we're also seeing in terms of just the core checking account service fees, we are actually one of the drivers of other income. So we are seeing it pull-through in that light.

[David I. McKay, President, CEO & Director]

Thanks, Sohrab. We'll take one more.

[Operator]

The last question will be from Scott Chan with Canaccord Genuity.

[Scott Chan]

Just quickly on the oil and gas portfolio. Maybe just a 2-part question. Just on the credit you cited, was that U.S. or Canada? And the second part, just in terms of the strong growth, I know it's a modest part of your portfolio, but I think it was up 34% year-over-year. Is that kind of like a comfortable growth trajectory with that book going forward?

[Graeme Hepworth, Chief Risk Officer]

Sure. Thanks for the question. This is Graeme. I'll provide a little bit more commentary on oil and gas. Our oil and gas portfolio is about 70% Canada and 30% other if you will. The other being mostly the U.S. of that portfolio, about 3/4 of the exploration production. The mix between investment grade and noninvestment grade would be roughly, I think 23% investment grade, remaining noninvestment grade. In terms of the growth that's happened there, just how that kind of includes this credit quality. The growth over the last year that we've seen, I would say, has been more balanced between investment grade, noninvestment grade, roughly about 50-50 there. So we've actually seen the portfolio quality skew up a little bit over the last year. The noninvestment-grade piece, as I mentioned in my remarks, is certainly -- the credit risk, we really mitigate through a really high-quality structure, the borrowing base structure, so that even though we see impairments in that sector as our clients struggle with some of the headwinds there. You know the loan losses that ultimately accrue to us have been relatively broader. I think our loan loss over the last 5 years, there have been around just over 100 basis points despite the real difficulty that sector is facing. So that would be just kind of the quick summary on the credit profile there. I don't know if Doug or Derek wanted to comment on what's driving the growth?

[Derek Neldner, CEO & Group Head of RBC Capital Markets]

It's Derek. I'll maybe comment just briefly. I think as Graeme said, I think the growth, we feel quite comfortable with. It's been an even balance between investment-grade names and some borrowing base names that would all be conforming. Part of the growth was driven by a couple of larger investment-grade, M&A-related transactions that came onto the books. And so we think, overall, it's quite a comfortable risk profile.

[David I. McKay, President, CEO & Director]

Thanks, Scott. And before I end the call, I would like to recognize 2 of our leaders who are retiring shortly. Jennifer Tory who's our current Chief Administrative Officer; for her illustrious 42-year career at RBC, which includes roles, as you know, as Group Head of P&CB. And as I said, most recently, as our Chief Administrative Officer, we like to sincerely thank her for her contribution over her career, and we'll certainly miss her. And as I've already acknowledged on the call, Doug McGregor for his incredible 37-year career at the bank, including the past 11 years as Group Head of Capital Markets. Doug, Sincere thank you for everything you've done. Thanks for everyone on the call. Thanks for the team for their leadership and for 85,000 employees for their dedication to our clients, communities, employees and shareholders. Thanks. We'll close off the call and have a good end to the year.

[Operator]

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