Royal Bank of Canada

TSX:RY

Earnings Call Transcript 2021-Q1

[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 INTS; 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. [Operator Instructions] With that, I'll turn it over to Dave.

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

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 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 USD 2.5 billion in revenue and over USD 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 lockdown 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. Against this macro backdrop, we will continue our unwavering support for our clients as global economies pivot to recovery.I now want to speak to the strong volume growth and increased momentum across our largest businesses. Part of our competitive advantage is how we leverage our scale, investments in technology and our talented teams to deliver differentiated value and experiences to our clients. Our premier global capital markets platform crossed a record $1 billion in quarterly net income, driven by very strong performance in global markets, underpinned by robust equity trading and continued strength in credit trading. Corporate Investment Banking surpassed $1 billion in revenue for a third straight quarter, benefiting from a constructive environment for new issuance and mergers and acquisitions. And we continue to be awarded significant mandates by some of the largest global clients, including serving as M&A adviser to Blackstone and providing fully committed financing for the recently announced $6 billion acquisition of Signature Aviation. Canadian Banking recorded strong volume growth year-over-year, adding over $100 billion of average volumes across lending and deposit products. While expanded central bank balance sheets, government support and reduced spending have added significant liquidity to the system and increase the savings rate of Canadians, we have also seen market share gains of over 50 basis points in personal core deposits over the last 2 years, which is a reflection of our technology investments, client support and distribution strength.We have similarly added 100 basis points of market share in residential mortgages over the last 2 years. Our strong mortgage growth has been partly underpinned by the reengineering of the entire end-to-end process over a number of years from adjudication to fulfillment to retention, which reached an all-time high of 94% this quarter. We've also seen elevated activity in our wealth management businesses, which have remained resilient over the turbulence of the last 12 months.Our diversified RBC global asset management -- assets under management or AUM grew by $60 billion from last year to a new high of $540 billion as more clients chose RBC as a trusted steward for their investments.Our retail funds captured over 25% of industry-wide Canadian net sales over the last 12 months, adding to our leading 32% market share amongst bank-owned fund companies. Along with market appreciation, our recent growth has been the result of investment out-performance with over 80% of AUM outperforming the benchmark on a 3-year basis. Assets under administration, or AUA, in Canadian Wealth Management crossed $450 billion for the first time. Strong net sales and industry-leading recruiting efforts added to our #1 high net worth and ultra-high net worth market share in Canada, which is built on the trust of our clients. Similarly, U.S. Wealth Management, the seventh largest wealth advisory firm in the U.S., surpassed USD 460 billion in AUA for the first time, benefiting from a proven ability to bring both -- in both net sales and attract experienced advisers to meet the needs of our clients. City National continued to report double-digit loan and deposit growth as we continue to execute on our organic plus growth strategy. Our expanded jumbo mortgage platform is yielding results growing over 15% year-over-year. Our market share gains across our businesses are not only a reflection of our scale, but also our continued investments in technology and client-facing colleagues. We have seen an acceleration of digital trends as Canadians are increasingly reaching for their phone to fulfill their banking needs. Our active mobile user base increased 12% year-over-year to over $5 million this quarter as mobile sessions crossed $100 million for the first time. New clients to RBC can now complete a full end-to-end account open in minutes on the RBC mobile app. And now over 50% of personal deposit counts are opened through our mobile browser. Since the launch of NOMI in 2017, our mobile clients have benefited from actively reading more than 1.5 billion financial insights using as predictive analytics to help manage their finances. Over the years, we've also made significant investments beyond digital functionalities and into digital businesses. MyAdvisor, our digital platform for clients to activate their personalized financial plans, was launched in 2017 and now has 2.3 million clients online. And AUM at InvestEase, our robo-advisor, has continued to trend higher. Our success in Commercial banking has also been underpinned by multiyear investments in cash management solutions and technology, where we expect insight edge fueled by our data analytic capabilities to be a key differentiator. Aiden, our AI-based electronic trading platform in capital markets, continue to gain traction during these volatile times. The number of shares and notional volumes traded in this platform are up over 45% and 75% year-over-year, respectively. Investments in sales power have also been a key driver in the growth of our personal and commercial franchises with our mortgage specialists, advisers and commercial account managers benefiting from the investments that we've made in technology. And similarly, we've made investments in the bench strength of managing directors and capital markets, which helps us deepen client relationships and win key mandates. Despite the significant increase in capital ratios, we delivered a premium ROE of over 18% this quarter. We are focused on the continued creation of long-term shareholder value.Going forward, our priorities have not changed with respect to deploying capital. We remain focused on building on our momentum and driving accretive organic growth. Capital markets, we will continue to deepen client relationships and further diversify our revenue stream towards less capital-intensive investment banking and advisory revenue. We will also look to further strengthen senior coverage teams in key sectors.In Canadian Banking, we expect continued high single-digit mortgage growth and significant pent-up demand to drive a consumer-led recovery. And with commercial utilization rates below pre-pandemic levels, higher Canadian commercial volumes could further support the acceleration of economic activity. Continuing our innovative approach to loyalty link partnerships with leading Canadian partners such as Petro-Canada, RBC and Rexall recently announced a new strategic partnership that will allow our clients to earn and receive even more value in savings while accessing Rexall's health and wellness resources. And as we see increased online shopping, RBC has launched PayPlan, offering Canadians yet another solution for purchases at participating retailers and merchants throughout Canada. In our U.S. Wealth Management platform, we expect to see further benefits from our recent expansion into new geographies, investments in our treasury management platform and the hiring of experienced private bankers and financial advisers. We are also expanding and deepening our existing client relationships through the inter-connectiveness of our businesses. Over 65% of Canadian Wealth Management clients now have a Canadian Banking product, and we expect this to continue to grow over time as we expand the continuum of offerings to our retail and wealth clients. Also, 19% of our Canadian Banking clients have all 4 transaction account -- all 4 of transaction accounts, credit cards, investments and boring products with RBC.We're also looking to increase the collaboration between our capital markets and wealth management franchises to provide a broader set of capabilities to both sets of clients, including acting as book runners for debt and equity issuances.City National has seen almost $2 billion of mortgage flow through our U.S. Wealth Management channels, benefiting from our team of bankers covering RBC Wealth Management offices in key markets. Looking forward, City National is looking to make a focused push into mid-market lending in the U.S. Not only am I proud of what we delivered, but also how we continue to deliver on our purpose of helping clients thrive and communities prosper. In wealth management, alongside our existing RBC vision, ESG funds, the RBC iShares brand has launched new ESG-focused ETFs. And RBC Capital Markets is playing a leading role in helping clients meet their goals and objectives, serving as exclusive financial adviser to both ENI SpA and to Greencoat UK Wind on acquisitions of offshore wind farms, a demonstration of our growing role in Europe related to renewable power.RBC Capital Markets also acted as joint book runner on Ambridge's $1 billion sustainably linked revolving credit facility, the first such issuance by an energy borrower in the North American market.Also, I'm proud to share RBC has received this year's global Catalyst Award, an honor recognizing businesses dedicated to increasing the representation of women in leadership and promoting equal access to career opportunities. RBC is also recognized as an ESG leader by third-party rating agencies with a high 86th percentile ranking on priority ESG indices. And as a reminder, today, we're kicking off our first-ever RBC Capital Markets Global ESG conference.So to sum up, our scale, innovation and talent are our competitive advantage as we create even more value for our clients. We continue to execute on our strategy with purpose, to prudently invest in sustainable growth and strong returns for shareholders. I'll now turn it over to Rod.

[Rod Bolger, Chief Financial Officer]

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 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: first, strong client-driven volume growth in Canadian Banking and City National. Second, elevated client-driven trading, derivatives and underwriting activity in capital markets. Third, approximately $3 billion of transitional methodology changes to our securitization framework and an additional $2 billion from maturities of existing securitization notes. Fourth, these factors were partially offset by a modest $1 billion benefit from net credit upgrades. This partially offsets the cumulative $13 billion impact from net credit downgrades over the last 3 quarters of 2020.Our CET1 ratio was also impacted by a partial reversal of OSFI's transitional capital modification, primarily driven by the reduction of the scaler rate from 70% to 50%. The remaining 19 basis point cumulative benefit should reverse over time given further reductions in scalers and migration to PCL on impaired loans. We expect to continue generating significant capital as the economy recovers. Our strategy for capital allocation has not changed. We will invest additional capital to support accelerated and prudent organic growth in order to further expand our market share in key businesses.Now moving on to Slide 11. All bank net interest income declined 4% year-over-year as strong volume growth in Canadian Banking and City National were more than offset by the impact of lower interest rates and the impact of fiscal and monetary stimulus, which continues to drive excess liquidity into the financial system. However, after adjusting for trading results, net interest income has been steadily increasing after bottoming out in Q3 2020, up 3% on the back of strong volume growth. All bank NIM declined 2 basis points from last quarter, primarily due to changes in asset mix, including towards lower-yielding securities. At the segment level, Canadian Banking NIM declined 2 basis points quarter-over-quarter as the impact of low interest rates and asset mix more than offset the benefit from strong deposit growth. Looking forward, we expect Canadian Banking NIM to continue to decline modestly throughout 2021. City National's NIM was down 12 basis points relative to last quarter, largely due to the influx of deposits being invested in low-yielding short-term securities. However, City National net interest income increased for the second consecutive quarter. Recall that City National has a more asset-sensitive balance sheet with approximately 50% of its loans being floating rate commercial loans. Also, approximately 50% of deposits are noninterest-bearing. We expect the narrowing of City National's NIM in Q1 to largely reverse in Q2, given expectations for accelerated paycheck protection program loan forgiveness as well as an improved balance sheet mix as we redeploy our strong deposit growth into higher loan balances. Following this benefit in Q2, we expect City National's NIM to return back to current levels in the second half of the year. More importantly, we expect strong volume growth at Canadian Banking and City National to completely offset the headwinds of lower interest rates by Q3. And as a reminder, our results get impacted by fewer days in Q2, particularly Canadian Banking. While we don't expect short-term rates to increase in the near term, the steepening yield curve serves as a good reminder of the value of our low data core deposits, including substantial noninterest-bearing checking accounts.Now turning to Slide 12, non-interest income, which represented 60% of revenue, was up 4% year-over-year, providing an important countercyclical offset to the impact from low interest rates. Our diversified business model is performing as it should in times of stress, with strong trading results across our businesses, and our wealth management businesses continue to provide a growing revenue stream. Furthermore, we expect upside from our M&A advisory business as the economy strengthens.In contrast, we continue to see certain fee-based revenue streams in Canadian Banking being impacted by COVID-19, particularly those affected by lockdown measures and restrictions on travel. Targeted lockdowns have also lowered wholesale loan demand, which in turn decreased credit fees. Looking forward, we would expect to see some of these revenue streams begin to pick up as economies open.Now on to Slide 13. Expenses were up 2.6% year-over-year, largely commensurate with strong performance. Excluding variable and stock-based compensation, expenses were down 1% from last year. This follows on a similar year-over-year decline last quarter after adjusting for severance and related costs associated with the repositioning by NPS in Q4 '19.We also continue to benefit from reductions in discretionary costs, such as marketing, travel, stationary and printing, which are down approximately $80 million from last year. However, we are cognizant that some of these costs could start to increase as economies begin to open back up. We will continue to balance investments in key growth areas such as technology and innovation with project prioritization in other areas. We already have a number of cost containment programs in place across our businesses, and we expect to generate efficiencies from the accelerated digital adoption that Dave spoke to earlier. Looking ahead, we expect full year expense growth, excluding variable and stock-based compensation to remain well controlled in the very low single digits.Moving on to our business segment performance, beginning on Slide 14, personal and commercial banking reported earnings of over $1.7 billion. Canadian Banking quarterly net income was up 8% from last year, as the impact of lower interest rates and service charges was more than offset by strong volume growth, elevated market-related client activity and reserve releases, largely in our retail portfolios.Loan growth of 6% was largely driven by continued double-digit mortgage growth, which was a function of both the strong retention rate as well as new originations, which were up over 40% from last year. Commercial and credit card growth continues to be constrained by the impact of COVID-19. Growth in business deposits remained robust at 25% and growth in core personal checking accounts was also very strong, up over 30% year-over-year. And RBC Direct Investing also saw a material increase in client activity by individual investors with average trading volumes up nearly 200% year-over-year.Turning to Slide 15. Wealth Management reported quarterly earnings of $649 million, up 4% from last year. Canadian Wealth Management revenue was up 7% year-over-year, benefiting from higher average fee-based flying assets with AUA and AUM of 7% and 12%, respectively.Global Asset management revenue increased 17% year-over-year, primarily due to higher average fee-based client assets. Results also benefited from higher performance fees as a result of strong investment performance. These are generally earned in Q1, if at all. Favorable changes in the fair value of seed capital investments also contributed to the increase. GAM AUM increased by 13% or over $60 billion year-over-year, with nearly 60% of the increase coming from total net sales. Net sales were $7 billion for the quarter. Canadian long-term retail net sales remained strong at over $5 billion in Q1, particularly into fixed income and balanced products. Long-term institutional net sales largely from BlueBay partly offset money market outflows. Very strong volume growth at City National continues to be more than offset by lower interest rates. Deposit growth remains exceptionally strong at 36%, outpacing double-digit retail and wholesale loan growth. We also saw solid growth in U.S. Wealth Management with AUA up nearly USD 50 billion from last year.Turning to insurance results on Slide 16. Net income of $201 million increased 11% from last year, primarily due to improved claims experience and higher favorable investment related experience. These factors were partially offset by the impact of lower new longevity reinsurance contracts and lower international light volumes.Turning to Slide 17. Investor & Treasury Services net income of $123 million decreased 14% from a year ago. Earnings were up 35% quarter-over-quarter, partially due to seasonality. Both funding and liquidity and client deposit revenue declined year-over-year as they were negatively impacted by the current interest rate environment and elevated enterprise liquidity. This was partially offset by higher gains from the disposition of securities.Turning to Slide 18. Capital markets reported quarterly earnings of over $1 billion. This was the fifth quarter in a row with pre-provision, pretax earnings in excess of $1 billion. Corporate and Investment Banking reported yet another strong quarter. M&A advisory fees generated this quarter were the second highest after the record fees reported in Q1 from a year ago. We continue to see strong equity origination fees underpinned by increased confidence and constructive markets. While debt underwriting has come down from elevated levels in 2020, they remain strong this quarter given the low interest rate and narrow credit spread environment.Looking further into 2021, we remain actively engaged with our corporate investment banking clients across all regions with respect to their strategic objectives. Our ECM and M&A pipelines are strong. Global markets had yet another strong quarter with revenue up 12% from last year to $1.6 billion, benefiting from favorable market conditions across multiple asset classes as well as from an increase in primary activity. FIC Trading remained strong as credit trading benefited from tightening spreads. Interest rates, FX and commodity trading all saw increased client activity and market volatility. Client activity was also strong in equity trading. Looking ahead, we expect trading activity to moderate over the coming quarters.In conclusion, we remain committed to improving productivity, attracting new clients through our differentiated products and services and continuing to increase our market share over time. 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 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 was 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 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 and 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 exceptional 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 faring 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 vaccination 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 rollouts 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]

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

[Ebrahim Huseini Poonawala, Director]

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 I. McKay, President, CEO & Director]

Yes. Thanks for that question. 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, Ebrahim, 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 in 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 the 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 Huseini Poonawala, Director]

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

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

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, then 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, Director & Senior Analyst]

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. Now 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, Chief Financial Officer]

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 to 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 David 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 the banks broadly around the steepening of the yield curve. And I'm just wondering if there is -- beyond that deposit benefit you highlighted, if there is any treasury opportunities or other opportunities within NIM today given that curve steepening.

[Rod Bolger, Chief Financial Officer]

Yes, sure. Thanks, 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 we have this 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 David 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, Chief Financial Officer]

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, Group Head of Personal & Commercial Banking]

It's Neil. Thanks for the question. 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 higher 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 bouncing out a little more? What quarter? When do you think that will happen?

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

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 to 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, Analyst]

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 in 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, Group Head of Personal & Commercial Banking]

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, Analyst]

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, Group Head of Personal & Commercial Banking]

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

[Gabriel Dechaine, Analyst]

Yes.

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

Yes. 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, back part of the year is probably a fair bet.

[Operator]

The next question is from Sohrab Movahedi from BMO.

[Sohrab Movahedi, Analyst]

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 an 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 I. McKay, President, CEO & Director]

Sohrab, thanks for that. 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, 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 most 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, Chief Risk Officer]

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 the 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 where we were standing at the end of Q4.

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

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

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

Graeme, 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, Chief Risk Officer]

Yes. Thanks, Mario. 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 impairment 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 does 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 that's really difficult to forecast at this point in time.

[Mario Mendonca, MD & Research Analyst]

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, Chief Financial Officer]

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, Research Analyst]

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, Chief Financial Officer]

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, Research Analyst]

So then where -- what areas are you expecting expenses to grow in your low single-digit expense outlook then?

[Rod Bolger, Chief Financial Officer]

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 I. McKay, President, CEO & Director]

And to Rod's point -- this is Dave. Neil's added private bankers. Kelly Coffey and 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 it not going to continue.

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

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 Antony 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 at the client base.

[Operator]

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

[Mehmed Rizvanovic, Research Analyst]

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, Group Head of Personal & Commercial Banking]

Yes, thanks for the question. 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 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.

[Mehmed Rizvanovic, Research Analyst]

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, Group Head of Personal & Commercial Banking]

I mean the metrics are essentially as we look -- we break it down into 4 categories: the transaction account, investment count, boring accounting and card. And we have the highest cross-sell rate, both in terms of third-party benchmarking studies. And like I said, the -- across each of those 4 product categories, we've seen consistent cross-sell rates over time. So that's probably the best way to describe it.

[Operator]

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

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

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 NII 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 the 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 stands 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]

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