Royal Bank of Canada

TSX:RY

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to RBC's Conference Call for the Second Quarter 2023 Financial Results. Please be advised that this call is being recorded. I would like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.

[Asim Imran, executive]

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Nadine Ahn, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; 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 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. To give everyone a chance to ask questions, we ask that you limit your questions and then requeue. With that, I'll turn it over to Dave.

[David McKay, executive]

Thanks, Asim. Good morning, everyone, and thank you for joining us. Today, we reported second quarter earnings of $3.6 billion or adjusted earnings of $3.8 billion. Pre-provision pretax earnings of $5 billion, were up 1% from last year. We also announced a $0.03 or 2% increase in our quarterly dividend as part of our cadence of twice-a-year increases and commitment to returning capital to our shareholders. Net interest income was up 16% from last year, benefiting from solid client-driven growth in Canadian Banking and wealth management as well as higher interest rates.

Capital Markets had yet another strong quarter, reporting over $1.1 billion in pre-provision pretax earnings despite a challenging environment for global investment banking fee pools. The revenue contribution was equally split between Global Markets and Corporate Investment Banking, reflecting the segment's well-diversified business model. Our all bank performance this quarter reflected the strength and diversity of our leading client franchises and strong balance sheet. However, shifting client deposit preferences, expenses and provisions for credit losses point to an increased cost of doing business. Before I provide context on our key growth strategies and the expense trajectory, I will speak to what remains a complex environment.

Markets are facing structurally different circumstances following the end of an era of low inflation, low interest rates and increased globalization. This is in addition to absorbing game-changing challenges from technology and decarbonization as well as more near-term risks, including implications from U.S. debt ceiling negotiations. While recent stresses in the U.S. regional banking sector appear to have eased, the follow will likely include more liquidity and capital regulations and a subsequent tightening of lending capacity.

The financial -- Canadian financial system is already subject to many of these liquidity and capital requirements and performed exceptionally well through the recent U.S. regional banking liquidity crisis. It appears that the magnitude and steepness of Central Bank rate hikes has started to rein in headline inflation. Given signs of softening consumer demand for discretionary goods and rising debt service costs, we continue to forecast a mild recession, partly due to the lagging impact of higher interest rates on economic activity.

However, with labor markets remaining firm despite declining levels of attrition and job postings combined with higher jobless claims, we do not expect central banks to cut interest rates through 2023. It's important that inflation does not become anchored into the psyche of the economy. The importance of balance sheet strength comes to light in these challenging moments and is in this environment that we strengthened key ratios, including ending the quarter with a CET1 ratio of 13.7%.

Looking ahead, we continue to expect that our CET1 ratio will remain above 12% following the close of the planned HSBC Canada transaction, pending regulatory approval. We expect the transaction to close in the first calendar quarter of 2024. This mutually agreed upon time frame will help us ensure a smooth transition for clients. In addition, the purchase price is structured using a lock box mechanism. And accordingly, all of HSBC Canada's earnings from June 30, 2022, to close will accrue to RBC.

We remain comfortable with the synergy and accretion assumptions we made at the time of the acquisition. Another important pillar of RBC's balance sheet strength is the addition of a further $173 million of PCL on performing loans this quarter. We've now increased our ACL on performing loans by over 20% since last year. We also have a diversified funding and liquidity profile, which includes our leading deposit -- Canadian deposit franchise built on deep client relationships. Canadians appreciate the client value proposition that we offer including RBC Vantage, our partnerships and leading digital banking capabilities.

NOMI forecast was recently recognized for best use of AI for customer experience at the 2023 Digital Bank Rewards. Furthermore, we entered into a strategic partnership with Conquest Planning to leverage its artificial intelligence platform to identify financial strategies for clients. Our clients also value our continuum of alternative offerings. In the current environment of higher interest rates and increased uncertainty, our clients are looking for both safety and yield. We continue to see a shift in personal deposit mix towards term GIC products. In the quarter, personal term deposits saw $10 billion of inflows, of which 1/3 were from external sources.

GICs have seen nearly $50 billion of deposit flow over the last 12 months alone. We're also seeing a shift in mix for business deposits at the same time as we're seeing continued competition for assets. While there's been a significant trade-off to near-term margins, we have gained new clients to provide valuable advice to deepen relationships, which will become increasingly profitable over time. Furthermore, we expect to retain most of these balances and look to support our clients in reallocating their assets into our leading investment franchises at the right moment.

These deposits are also an added source of lower-cost retail term funding as we continue to support our clients' financing needs. Our Canadian banking loan-to-deposit ratio has remained relatively flat and near 100% over last year. While Nadine will get into the details, I want to provide my thoughts on the expense trajectory. Reported expense growth was 16% year-over-year. However, after excluding for acquisition and macro-related factors, expenses were up 8% from last year. The largest driver of expense growth this year has been higher head count to support client needs as well as base salary increases.

We are committed to actively reducing expenses and are using a number of different levers to do so. This includes deliberate actions that we've already initiated such as managing head count growth through attrition and slower hiring while also preparing for a complex transition with respect to the planned acquisition of HSBC Canada. The remainder of the core drivers of expense growth reflect inflationary pressure and importantly, strategic investments to enhance our value proposition and infrastructure to drive future operating leverage and client-driven growth, which I will speak to shortly.

In addition to driving strategic growth and accretive capital allocation, one of my top priorities is an increased discipline around costs. The entire leadership team is committed to actively executing on our efficiency playbook and we are focusing on curtailing expense growth and prioritizing investments without impacting our ability to serve our clients, our opportunities or opportunities to attract new clients. I will now speak to key growth drivers across our largest segments. Starting with Canadian Banking, mortgages grew 7% from last year, down from 8% growth year-over-year last quarter.

Origination activity is expected to continue moderating towards 2019 levels as limited supply and increased demand from immigration is muted by concerns around affordability. We expect annual mortgage growth to slow to the mid-single digits. Earlier this quarter, we announced the acquisition of OJO Canada, a fintech that supports Canadians at every stage in their home buying journey, including providing connections to real estate agents. We're also investing to enhance the efficiency of our mortgage lending platform. While credit card balances reached a record high of $20 billion with record new card openings, revolver levels remained below pre-pandemic levels.

We expect revolver balance levels to surpass pre-pandemic levels by early 2024, which would have positive implications for net interest margins. Business loans were up over 15% from last year as we continue to see improving utilization levels in operating facilities and CapEx investments. The growth was balanced for the majority non-CRE related. We expect business growth -- business lending growth will continue over the next few quarters.

Moving to Canadian Wealth Management. Assets under administration were up 4% from last year, hitting a record level of $540 billion. We also recently announced we will bring over all adviser teams from Gluskin Sheff, part of the agreement also includes distribution of Onex' alternative investment strategies and funds. And going forward, we will look to continue expanding our set of alternative asset strategies, which currently includes a partnership with QuadReal and our BlueBay family of funds.

Despite challenging market conditions, RBC Global Asset Management AUM increased from last quarter and last year while also generating positive net flows in the quarter. U.S. Wealth Management AUA were also up from comparative periods. Adviser recruiting will remain a key source of growth for Wealth Management USA, and we added over 20 new advisers this quarter. Since the beginning of fiscal 2022, we've recruited 135 advisers who are expected to drive over $20 billion of assets under administration.

We also look forward to future contributions from RBC Brewin Dolphin. In the midst of volatile backdrop in U.S. Regional Banking, City National deposits were down from last year as clients put their money to work, but most importantly, deposits remained stable sequentially, evidence of new client relationships and the strength of the RBC balance sheet. City National loan growth was up 14% year-over-year with our mid-market strategy based on a diverse foundation of over 200 relationships.

Going forward, we expect loan growth to slow as the focus increasingly shifts to improving business profitability while we continue to invest in enhancing City National's technology and governance infrastructure. Capital markets generated $1.1 billion of pre-provision pre-tax earnings despite declining global fee pools, which are down over 40% from last year due to the challenging economic environment. In Investment Banking, we continue to invest in talent in key verticals such as technology and healthcare as well as across important coverage areas, including M&A and equity capital markets.

These investments are increasingly reflected in new mandates as well as in our market share, which has improved to seventh place so far in 2023, up from tenth through 2022. We are looking to strategically add further hires in key positions. And we're also building out our U.S. cash management business, which we expect to provide a steady source of revenue and additional deposit funding capacity over time. We are excited about this opportunity and look forward to sharing more over the coming quarters as we look to launch it in the market.

We believe we can meaningfully compete in this space given our existing corporate banking client relationships and leading credit ratings. In Global Markets, we aspire to continue gaining market share over time. We are currently investing in technology to further modernize our client tools and infrastructure to drive scalable growth in the future. In closing, while we continue to operate in the challenging macro and operating environment, we have momentum and are seeking meaningful gains across our core client franchises. We are focused on enabling future growth, including through our intended acquisition of HSBC Canada and to moderating our expense growth to sustain our premium valuation.

Before I turn the call over to Nadine, I do want to express our support for Western Canada in light of the ongoing wildfires across the region. We have contributed to the Canadian Red Cross relief efforts and are supporting our communities, clients and employees in the impacted areas. Nadine, over to you.

[Nadine Ahn, executive]

Thanks, Dave. And good morning, everyone. Starting on Slide 8, we reported earnings per share of $2.58 this quarter, adjusted diluted earnings per share of $2.65, was down 11% from last year, largely driven by the impact of prior year releases of PCL on performing loans. Strong client-driven revenue growth of 20% year-over-year or up 10% net of PBCAE was largely offset by higher expenses, resulting in pre-provision pretax earnings growth of 1%. Before focusing on more detailed drivers of our earnings, I will highlight the strength of our balance sheet.

Starting with our strong capital ratios on Slide 9. Our CET1 ratio improved to 13.7%, up 100 basis points from last quarter. Consistent with the guidance we provided in Q1, this quarter's increase reflected a 79 basis point benefit from Basel III regulatory reform. Next, turning to Slide 10. It is important to emphasize the diversity, strength and stability of our funding and liquidity profile. This quarter, we prudently managed to a higher LCR of 135%, up 5 points from last quarter, which translates into a surplus of $102 billion.

Our liquidity levels remain robust and provide us with flexibility to execute our strategy. Turning to our $900 billion client deposit franchise. Canadian Banking accounts for approximately 70% of total client deposits. Our Canadian retail banking franchise is well diversified, serving approximately 13 million personal banking clients with the median checking account balance of $2,000. Furthermore, over 85% of our mortgage clients have a personal banking accounts, increasing the depth of the relationship.

In the U.S., as Dave noted, City National deposits remained stable quarter-over-quarter, and our U.S. Wealth Management franchise has over $30 billion of sweep deposits. Across our North American corporate and commercial deposit franchises, we have long-tenured relationship-based clients that we support with strong advice and a deep shelf of products and solutions. The combination of our strong deposit base and robust capital position as well to continue funding future loan growth and meeting the needs of clients.

Moving to Slide 11. All banks net interest income was up 16% year-over-year or up 19% excluding trading revenue. These results reflect our earnings sensitivity to higher interest rates as well as the benefit from higher volumes across many of our Canadian Banking and wealth management businesses. All bank net interest margin, excluding trading net interest income and assets was down 7 basis points from last quarter, largely reflecting deposit trends in our North American Personal and commercial banking franchises as well as higher enterprise liquidity levels.

On to Slide 12. We walked through this quarter's key drivers of Canadian Banking NIM, which was down 8 basis points from last quarter. The embedded advantages of our structural low-beta core deposit franchise continued to come through this quarter, reflecting the latent benefit of recent interest rate hikes. NIM also benefited from changes in asset mix including higher credit card revolving balances and strong commercial growth. While we have seen a slight widening of mortgage spreads from historically low levels, mortgage lending remains highly competitive. However, these benefits were more than offset by both the continued shift in deposit mix into term products, along with lower GIC spreads, reflecting increased competition for a non-wholesale term funding.

Going forward, we now expect low double-digit net interest income growth for 2023. However, there are a number of variables that drive this outlook. Embedded in our guidance are modeled expectations for client behavior, including solid volume growth, a slowing in the continued deposit mix shift towards GICs and a favorable asset mix shift towards higher spread commercial and credit card loans. With respect to spreads, we assume continued intense competition for deposits and mortgages and flat interest rates.

Any changes in the timing and extent of these spread and volume assumptions could have an impact on the trajectory of net interest income. Turning to City National. NIM was down 22 basis points from last quarter, mainly reflecting an adverse funding mix shift into interest-bearing deposits as well as a full quarter's impact of last quarter's higher FHLB borrowings. This more than offset the significant benefit of Fed rate hikes on City National's asset-sensitive balance sheet.

Moving to Slide 13. Noninterest expenses were up 16% from last year. Approximately half of this growth was driven by acquisition-related costs as well as by macro-driven factors such as FX and share-based compensation. Beyond these factors, the core drivers of organic expense growth were investments in people and technology. Salaries were up 20% from last year as investments in our people reflected FTE growth of 10% year-over-year as well as inflationary impacts of the higher base salaries announced last year.

This trend was most evident in Canadian Banking as elevated hiring to service increase client needs and to offset higher than average employee attrition rate, has led to FTE being 2,600 higher than last year. In Capital Markets, expense growth was underpinned by investments in upgrading our technology and building out product capabilities that Dave highlighted earlier as well as higher cost in support of increased activity including trade execution. At City National, we continue to make investments in people, processes and technology to enhance the operational infrastructure in support of the bank's next leg of growth. More broadly, business development costs such as marketing and travel expenses continued to grow off of COVID-related troughs.

We are increasingly focused on controlling expenses through various levers including actions to manage head count while also curtailing discretionary spend. We are also taking action to centralize certain operations, rationalize vendor relationships and prioritize certain application development spend. Looking ahead to the second half of the year, we expect adjusted all bank expense growth, excluding acquisition-related costs and share-based compensation to decelerate to the mid-single digits.

In Canadian Banking, we remain committed to leveraging our scale in achieving a sub-40% efficiency ratio. Moving to our segment performance, beginning on Slide 14. Personal & Commercial Banking reported earnings of $1.9 billion this quarter with Canadian Banking pre-provision pretax earnings up 11% year-over-year. Canadian Banking net interest income was up 16% from last year, due to higher spreads and solid average volume growth of 8%, reflecting balanced growth in loans and deposits.

Noninterest income was flat year-over-year as higher service charges and foreign exchange revenue driven by higher client activity was offset by lower mutual fund distribution fees, reflecting the challenging market conditions which weighed on average mutual fund balances.

Turning to Slide 15. Wealth Management earnings were down 8% from last year due to higher PCL on performing loans and elevated expense growth in U.S. Wealth Management.

In contrast, non-U.S. wealth management expenses were largely flat year-over-year, excluding the impact of RBC Brewin Dolphin. Revenues were up 11% year-over-year, aided by robust net interest income growth of 25%, reflecting the benefit of higher rates in both Canadian Wealth Management and U.S. Wealth Management. Global Asset Management revenue decreased primarily due to lower average fee-based client assets on the back of softness in global markets. Despite challenging market conditions, net sales encouragingly turned positive, driven by flows into institutional long-term and money market funds.

Turning to Slide 16. Capital Markets earnings were up 10% year-over-year, reflecting strong performance amidst volatile markets and the benefits of a lower tax rate. Investment banking revenue was up 4% from last year as a reversal of underwriting marks and increased client activities in municipal banking were partly offset by industry-wide declines in global fee pools amidst macro uncertainty. Global Markets revenue was down 3% from last year as lower equity trading revenues across regions was largely offset by broad-based strength in fixed income trading.

Lending and other revenue was up 17% from last year, reflecting strong results in transaction banking, underpinned by margin expansion and higher lending revenue driven by mid-teen loan growth.

Turning to Insurance, on Slide 17. Net income decreased $67 million or 33% from a year ago, primarily due to higher capital funding costs. To conclude, we are confident that the strength of our capital, credit and funding profile, combined with the strategic investments being made today will create long-term value for shareholders. And we are committed to driving towards our objective of positive operating leverage. Our full management team is focused on expense optimization and moderating our expense growth in light of the rapidly changing macro environment. With that, I'll turn it over to Graeme.

[Graeme Hepworth, executive]

Thank you, Nadine. And good morning, everyone. Starting on Slide 19, I'll discuss our allowances in the context of the macroeconomic environment. During the quarter, we saw elevated volatility stemming from issues in the U.S. regional banking sector. However, the trajectory of the overall macroeconomic environment was consistent with our expectations. Inflation continues to moderate and central banks appear to be nearing the end of their rate hiking cycle. Relative to this time last year, the probability of more severe inflation and interest rate outcomes has reduced.

That said, borrowers have been dealing with a higher rate environment for several months now. We are seeing insolvencies, impairments and losses increasing toward longer-term averages. The full impact of higher rates in the economy will take time to translate into credit losses. We are still in the early stages of the credit cycle we've been expecting for some time. As a result, we built reserves on performing loans for the fourth consecutive quarter. This quarter's provisions reflect the impacts of increasing levels of delinquencies and credit downgrades, lower forecasted housing and commercial real estate prices and portfolio growth.

In the retail portfolio, most of this quarter's provisions on performing loans were taken on credit cards and unsecured revolving loans. The credit losses have been the fastest to normalize, consistent with the traditional credit cycle. In the wholesale portfolio, the majority of our provisions on performing loans were taken in commercial real estate. As I discussed last quarter, risk in this sector continues to increase, driven by higher interest rates, weakening macroeconomic factors and behavioral trends.

Having said that, our commercial real estate portfolio is well diversified. It has been originated to sound underwriting standards in support of a strong client base. With additional reserves added this quarter, our ACL on performing commercial real estate loans has increased 77% from a year ago. Remain sufficiently provisioned building our IFRS 9 downside scenarios, reflected decline in commercial property values ranging from 15% to 40%. In total, our allowance for credit losses on loans increased by $328 million this quarter to $4.8 billion.

Moving to Slide 20. Provisions on impaired loans were up $84 million or 4 basis points relative to last quarter. I would note that our PCL ratio of 21 basis points remains below pre-pandemic at historical averages. In our wholesale portfolios, provisions were up $74 million compared to last quarter, with increases in capital markets and the Canadian Banking commercial portfolios.

So far this year, the majority of our losses in the wholesale portfolios has been from clients that had issues prior to or due to the pandemic. Late increases have subsequently acted as a catalyst for these borrowers to become impaired. As we move further into the credit cycle, we expect to see losses driven by more systemic factors arising from the anticipated economic slowdown. In our Canadian Banking retail portfolio, provisions increased by just $10 million quarter-over-quarter. This portfolio continues to benefit from persistently low unemployment rates and elevated client deposits.

Notably, provisions on impaired residential mortgages were lower this quarter as the rate environment stabilized and clients continue to prioritize payments on their mortgages. As expected, a large majority of the PCL impaired loans was driven by credit cards and unsecured lines of credit, which as I noted earlier, is consistent with expectations from a traditional credit cycle.

Moving to Slide 21. Gross impaired loans were up $294 million or 3 basis points this quarter, with the increase primarily driven by Capital Markets and Canadian Banking. This marks the third consecutive quarterly increase in gross impaired loans, our GIL ratio of 34 basis points remains below pre-pandemic levels. Additionally, new formations decreased compared to last quarter across all our major lending businesses. To conclude, we continue to be pleased with the ongoing performance of our portfolios. As expected, our PCL ratio on impaired loans continue to increase, remains below pre-pandemic levels at historical averages.

The impact of inflation and higher rates is expected to play out over a number of years, and we are still in the early stages of the current cycle. We expect PCL on impaired loans to continue to increase through the remainder of this year. Last fall, I guided toward a range of 20 to 25 basis points for PCL on impaired loans. We are expecting to come in at the higher end of that range for the year. Ultimately, the timing and magnitude of increased credit cost continues to depend on Central Bank success in curbing inflation while creating a soft landing for the economy.

We continue to proactively manage risk through the cycle and remain well capitalized to withstand plausibly yet more severe macroeconomic outcomes. And with that, operator, let's open the lines for Q&A.

[Operator]

[Operator Instructions] And the first question is from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

I just wanted to touch on expenses. Dave, you talked about some of the levers that you have at your disposal in order to slow expense growth. One thing you touched on was attrition. My understanding is that companies are seeing attrition rates come down very, very significantly, which makes sense in the current environment. I'm wondering what you're seeing and how significant attrition can really be in your goal of getting expenses down.

[David McKay, executive]

Fair question. And maybe I'll go back. It's such an important part of our overall construct of improving our premium performance. First, I think we have to acknowledge that we have a number of complex strategic programs underway. HSBC, which is front-loaded. But not all of HSBC's costs can be quantified within a separate project.

For example, Neil would be carrying more call center employees and maybe some more branch employees just to get ready for the conversion process. So there are some embedded costs in the business. There are -- the majority of the systems costs, obviously, we can isolate to do that. So there are some carry-on effects to getting ready and spending all that money upfront to get ready for an HSBC, a smooth HSBC conversion. We are still seeing attrition to your point, it is slowing.

Having said that, we've seen our numbers turn negative month over month. So I think there is a way to manage this down while balancing the significant strategic programs we have in front of us. Don't forget, we're also in the process of selling and detaching our investor services business in Isbank, which is a complex technology play. We've got Brewin Dolphin, so we have a number of strategic initiatives that blend in a little bit.

But having said that, we took Nadine's point on moving this down to mid-single digits or better. We feel confident in managing all aspects of our cost base, including hiring. And like some other banks in the U.S., you've heard over the last few quarters, that this is a very difficult transition from the volatility and supply/demand shortages in the market that we're very prevalent last year, we had to react strongly in the latter half of 2022 to staffing shortages given the technology firms, the tech firms are hiring so aggressively in the latter part of 2022, we had to respond to that with aggressive hiring and anticipating high turnover rates persisting into the first half of 2023.

Well, that was not the case almost overnight, the tech firms started laying off instead of hiring and therefore, attrition came off very rapidly. And honestly, we overshot -- we overshot by thousands of people. And some of those people are, as I said, are being -- are there to help us make the transition with HSBC and some will come off through attrition. So I think we are caught a little bit by how quickly the labor markets changed in Canada and in the U.S. but largely Canada. We're adjusting to that overhang right now.

And we feel we can manage this through all the levers that we have, but we have -- we're going to come at it aggressively. And if one method doesn't work, we have other plans and strategies to back that up to make sure that we address this. So thank you for that question. It's an important construct to some of the challenges we faced this quarter.

[Meny Grauman, analyst]

And just a follow-up, just to understand the timing in terms of what's realistic, given all the moving parts that you're talking about. What's the time line for saying mission accomplished here from your perspective?

[David McKay, executive]

We're definitely expecting to see more significant improvement in Q4, but Q3 will be a transition quarter. We still expect to have strong [ off-level ] overall in the latter half of this year. But we're going to execute a lot of this in Q3, and we expect a much better Q4. But Nadine, do you want to add to that?

[Nadine Ahn, executive]

Yes. No. Obviously, given the head count and coming off of Q1, we've been implementing into Q2, some of the cost reductions we already spoke about but that's going to take a couple of quarters to really start to impact. So that's why Meny, we're commenting that the mid-single-digit NIE growth will be for the second half, but staggered more towards Q4.

[Operator]

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

[Gabriel Dechaine, analyst]

I just want to ask about the deposit growth trends in the Canadian Bank. I'll use the word Chase, you might not, but it seems to me like Royal going out of its way to bring in more deposits to the bank. And then maybe you're not, but what is the motivation there? Is it market share? Do you want to -- you expect to convert some of these customers to core banking customers? Or is it a mix of factors, like the structure of your business.

You've got a bigger wealth franchise. You've got a bigger independent broker business, the biggest in Canada. So some of the flows from wealth type and broker money that might have a disproportionate effect on your deposit growth and it's good, but it's also bad.

[Neil McLaughlin, executive]

Yes. Thanks, Gabe, it's Neil. I'll speak to it. I mean, the first thing we'd say is you touched on it, which was new client acquisition. So that aligns to the Investor Day goal we put out to grow that core checking account franchise. We do count that as the low beta, stable funding. And that has been going exceptionally well. And it's part of our increased costs we've seen in the first couple of quarters because last year, we had pulled back on some of that marketing and biz dev, just didn't see the returns on it, whereas right now, we'd say we've had the best Q2 we've ever had in terms of new client acquisition.

So that would be the first pillar. The second pillar would be just to your point, on the franchise overall, we are -- we do have a very large financial planning business. We do benefit from GAM and a strong investment product manufacturing there. And so we are seeing this rotation that Nadine spoke of in terms of the GIC growth. Now when you look at the GIC growth, I think it's important to call out, about half of that growth has come from outside the company. So we're seeing a good portion of that being attracted through those advisory sales forces into the company. We're capturing that in the GIC product, which our full intention would be once we start to have an equity market that feel more normalized that we will then put those clients into long-term funds.

And then about half of it is coming from internally from mostly savings and then some core checking. So that would be as you sort of asked about the flow and the mix, but it would be a combination of new clients, external consolidation and then rotation internally.

[Gabriel Dechaine, analyst]

Okay. And then a quick one on expenses. Just the way you display at 16% growth, about half of that. I get calling out the HSBC acquisition, but why should I look at Brewin Dolphin in a distinct manner because it's in the revenue line as well.

[Nadine Ahn, executive]

Agreed, Gabe, but from an operating leverage standpoint, you're absolutely correct. We're just trying to explain the NIE growth trajectory since the comparative on a year-over-year basis sometimes get highlighted, that's all.

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Can we go to Slide 15 where you show the decline in your wealth deposits. That 15% sequential decline in deposits is noticeable. So it's a big number. Can you help me understand how you fund that kind of deposit attrition? Is it through selling securities and then about where these deposits are going, presumably, they're not leaving the bank entirely. Help me think that through.

[Nadine Ahn, executive]

Thanks. And it's Nadine. I'll take that one, Mario. So in terms of the -- a lot of it is related to the deposit mix in City National. And so we have seen attrition overall shift from noninterest-bearing into interest-bearing. So we've managed that through some of our broker CDs. The loan book trajectory has come off a bit. As you'll notice, though, when you look at it from our balance sheet when it comes to City National, we do have -- but we've increased from 73% to about 88% our loan-to-deposit ratio.

So what's happening there as it relates to the deposits coming off, you're seeing more of a shift into other forms of higher cost funding. So whether it be there's been increase in our FHLB that we noted primarily to increase our liquidity position overall. So it's not a case that we're actually having to reduce our asset base. It's more that we're actually increasing it from a higher cost of funding. And that's why you've noticed that you've seen the NIM drop on a quarter-over-quarter basis.

[Mario Mendonca, analyst]

That's that '22 or whatever, maybe not '22. That's a meaningful drop in CNB's margin is reflective of this deterioration in deposits that I referred to. You'd connect those 2 presumably.

[Nadine Ahn, executive]

Correct. And on a year-over-year, we also would have removed Investor Services on that as well given the -- given moving that as a deposit balance sheet base to available for sale. That would have been on a year-over-year basis.

[Mario Mendonca, analyst]

Okay. Then my follow-up -- my last question then relates to the LCR. That's, again, a meaningful increase of 5 points sequentially. Is there any way to size what that does to the all bank margin in a given quarter. When you take your LCR 5 points, are you able to provide some kind of estimate on what that means to the margin?

[Nadine Ahn, executive]

Yes. So overall, you're looking at moving from about $88 billion surplus to about $102 billion, and that's roughly at about a cost of -- you could think of Mario, around 55 basis points roughly. So from an all-bank margin perspective, it wouldn't be as material, maybe 1 basis point in the quarter.

[Douglas Guzman, executive]

Just back on the deposits, Mario. If you look in the footnote on that page, over half of that move is that IS change that Nadine mentioned.

[Mario Mendonca, analyst]

Investor Services?

[Douglas Guzman, executive]

Yes.

[Nadine Ahn, executive]

On a quarter-over-quarter basis, the City National deposits were flat, if you think about it from the mix shift from an FHLB funding increase.

[Operator]

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

[Doug Young, analyst]

Good morning. Maybe for Derek, Capital Markets seems to have bucked the trend here. Hoping you can maybe talk a bit about the drivers. I think there was some impact from mark reversals, if you can quantify that. And I know it's tough to kind of pull up the crystal ball, but I'll throw it out there.

You have a $1 billion pretax pre-provision earnings target quarterly that you kind of set. How do you feel relative to that, given the business pipeline and then maybe you can mention just you're building out a cash management strategy here. How does that impact that outlook as well?

[Derek Neldner, executive]

Sure. Thanks, Doug. I mean I'll start just with the macro drivers. I mean I think overall, where we feel we had a benefit this quarter was really, one, the diversified nature of our platform that while we've seen ebbing and flowing and activity across different products, the diversified nature of our business has helped us overall with strength in some of the areas that have been a little bit more active and then second, I think we continue to see benefits of some of the strategic changes and investments we've made over the last 3 years that are driving market share growth that's helping to offset at least some of the weaker fee activity.

So if I touched on specific areas, obviously, a very solid quarter in our Sales & Trading business. That was really driven by our macro business with the volatility we saw in interest rate and FX markets and then our credit business. And you may recall last year, we've got a sizable and very successful credit trading franchise. That was a headwind in 2022 as we saw credit spreads widening as we've seen a little more stabilization this year, that's a business that has obviously benefited us and done well.

I think within our corporate banking business, we've been very disciplined with a moderate growth strategy. So we have seen a moderate growth in that business. It's a little more pronounced year-over-year given the growth that we saw through 2022. And then with the addition of the transaction banking business into the Capital Markets segment this year, that's a business that has performed well against a higher interest rate environment and the spreads we're earning.

And then finally, on investment banking, as Dave touched on, we have been successful in continuing to gain market share year-over-year. We've moved up to seventh place. We've gained share across really all of the core products, and so that has helped offset a slower fee pool overall. And then one franchise we don't speak a lot about, but we have a very strong U.S. municipal finance franchise and activity was quite good in the muni market over the quarter. So that was a position of strength. So it wasn't really one item. I think across the board.

We had a number of businesses that gained share and performed well and the diversified nature of the business helped. To your question on the underwriting mark-to-market, obviously, again, last year, that was a headwind for us as we took some fairly significant marks as the market has improved, and we've been disciplined around our portfolio. We have captured some of that back, which has been useful. If you look at -- I don't think we want to disclose the absolute mark-to-market change.

But if you look at any quarter, there's always some sort of one-off items that mark-to-market benefited us. We had some other things that were one-offs that hurt us. Directionally, I would say maybe that's $50 million of revenue in aggregate that to the positive. So it certainly helped, but I don't think it was overly consequential in terms of the results. We're obviously pleased to hit the $1.1 billion target in terms of your final question, I think, on just the outlook. Overall, we feel quite good about the business. The trading businesses are normalizing a little bit, but continue to operate at quite a healthy run rate.

We continue to expect good demand for our corporate clients for credit. So the loan book revenue should continue to be quite steady. And then we are seeing some early signs of investment banking fee pools coming back. I don't think that, that's going to be a hockey stick recovery by any means, but we're certainly seeing DCM, ECM leverage finance activity start to improve post March.

We've got a very healthy M&A backlog. Deals are always a little harder to get done in a more uncertain environment, but we've got certainly a healthy backlog that as things stabilize, should translate into greater transaction activity. And then importantly, we have a number of strategic initiatives. You referenced cash management that we're obviously excited about, but a number of things underpinning the strategy that we're optimistic we'll continue to gain market share and drive growth away from just what happens with broader fee pools.

[Operator]

The next question is from Ebrahim Poonawala from Bank of America.

[Ebrahim Poonawala, analyst]

I guess maybe a big picture question, Dave, tying it back to the ROE outlook. You mentioned how quickly the environment changed over the last 6 months. If you are managing the bank today, you talked about attrition capital liquidity, just across all of these measures. What are you managing for? Are you managing for a mild recession, deep recession when you look out over the next year?

And is the outlook different for the U.S. versus Canada? Just talk through all of that. And within that framework, how do you think in terms of the resiliency of the ROE relative to where we are today?

[David McKay, executive]

Really important question. Thank you, Ebrahim. So we are still forecasting and managing to a mild recession, hence, a series of tools that we're using to manage our cost structure around attrition. We still see strong demand coming from businesses and investments in -- We see a strong employment in the economy, and therefore, the purchasing power of -- an active purchasing of our consumer clients is still strong, so we are managing to as I've mentioned in my comments, a milder shallower recession, given the high interest rates, the drag on debt servicing. And the need for us to get strong control over inflation and get it out of an anchoring into leadership and business psyche, so it's very important that we do that, and that is the priority of Central Banks, and we support that.

So in doing that, then we are very much -- you saw our strong capital ratios. Our strong capital ratios allow us to grow organically and to acquire HSBC Canada remain above 12%. So I think that's a real strength of our balance sheet. There was a previous question around deposits, while you get deposits or the lifeblood of a bank and they allow us to continue to lend. We're the only bank that are match funded in Canadian dollars in Canada on the retail side. And that's very important. It leads to better margins over time, as you've seen. The movement of clients into a higher cost deposits is a global trend, one that obviously, you've seen in both sides of the border with ourselves, but we're retaining the vast majority of deposits.

And I think a point that we have to stress around CNB, which is really important, is they were flat to slightly up throughout that crisis in the United States with highly affluent and commercial client base, they maintain their belief in the organization and in CNB, and we saw a number of new clients coming in, notwithstanding that client segment tends to put their money to work and see yield in the marketplace, and you've seen that as a global trend.

So we're managing that function as well as we think about margins and revenue profiles and adjusting our cost base to that. So we expect growth. We are expecting that margin impact has come from shifting depositor strategies. We have to adjust to that, it's come out as quickly along with the changes in volatility around hiring and cost structure there. Therefore, our strategy then is to continue to grow organically, we saw good growth. We saw from very strong growth in capital markets and relatively very strong performance in our U.S. wealth and Canadian wealth franchises.

We saw very good organic growth in our Canadian retail franchise that will all be funded by the strong capital performance that we have. We saw our business commercial bounce back. So from that perspective, strong organic growth, we have to execute on a number of complex strategic acquisitions.

HSBC is a complex acquisition and all the work happens upfront. And as we've talked about publicly, the conversion and the close are on the same day, and that will -- we expect to occur in early 2024, but all that work is happening now.

And therefore, we're bearing the cost of that, we're bearing the effort of doing that, the complexity of doing that. While divesting of Isbank, which is also a complex divestment, but good for our shareholders, good for CACEIS shareholders and obviously, moving Brewin Dolphin. And so those are all the moving parts, Ebrahim. Organic growth, we're very excited about the benefits that we've talked to the market about on the HSBC acquisition. We see the benefits there. We've affirmed those benefits as we've gone through a deeper level of integration work along that side.

And we think that creates significant shareholder value from an M&A perspective. So I think you're seeing a unique opportunity for organic growth with the capital and liquidity that we've had, and you're seeing a unique opportunity with ROI and bringing in a significant acquisition that will be very accretive to shareholders. So I think from that perspective, supports kind of a premium ROE opportunity for us.

[Ebrahim Poonawala, analyst]

And just on U.S. in terms of the market share opportunity, overall did a great job of post-GFC in the capital market side in the U.S. When you look at it right now, given what's happened with First Republic, SVB are the better opportunities in private bank, the regional bank turmoil, does that create some commercial opportunities? Like do you see those? And like is RBC ready to act on those.

[David McKay, executive]

Are you talking from an organic perspective. Yes, absolutely. We've run in a number of new relationships from both all those challenged banks and failed banks, as you've mentioned, and we'll continue to do so, whether it's through teams coming in or clients approaching us directly at CNB and taking them on. Those accounts are starting to fund now, so absolutely, there's a significant opportunity given the capital that we have to continue to grow organic.

And that's -- our primary focus is to serve clients and integrate the HSBC acquisition. All that while remaining above 12%. I think it's a unique opportunity to create premium shareholder value and ROE.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul Holden, analyst]

First question for Graeme. With your revised PCL guidance or pushing to the upper end of the range. How are you thinking about commercial/corporate versus consumer? And I guess the reason I ask is consumer looks like it's still really strong for many reasons you've already cited where we're seeing some pockets of weakness, I think, on the business side. So is there any clear differentiation between the 2?

[Graeme Hepworth, executive]

Paul, thanks for the question. And we're going to break those down. I would say on the retail side, I would certainly say retail has been trending consistent with our expectations overall. I would say this quarter that the -- some of the trends we were seeing there started to decelerate and we saw some improvements, obviously, in the delinquencies I quoted.

Having said that, we do expect retail to continue to increase as we go throughout the year because we're going to see a second leg of an effect here in terms of the employment, environment, right? And so in our kind of baseline forecast, we do expect unemployment to tick up from the exceedingly low levels we're at right now. We're in that kind of 5.1 range. We expect that to kind of get into the kind of mid-6 range as we trend through the end of the year and into 2024.

And so we had very strong performance there and so the recent trends have been good. We do expect that will continue to increase as we progress through 2023. The wholesale side, certainly, we saw a tick up this quarter. Wholesale is never quite as linear and quite as predictable. It will kind of move up and down from quarter-to-quarter as we see certain files come in and are impaired. We had a period through 2021 and 2022, where wholesale was exceedingly low, right?

We were at kind of near 0 levels for a very extended period. And so last quarter, this quarter, we are starting to see the implications flow through corporate a little more that I would say that's not unexpected. Although it just won't be quite as consistent and linear as we're seeing on the retail side. So again, on wholesale, similarly, again, we will continue to expect it to kind of trend back to -- to more kind of longer-term averages as we progress through the year. So the same economic factors will continue to play out in that space as we're seeing in retail, but it just won't be quite as kind of consistent path to get there.

[Paul Holden, analyst]

And then anything worrying some on the commercial side at all?

[Graeme Hepworth, executive]

Commercial in Canada, you're saying specifically?

[Paul Holden, analyst]

Commercial either side of the border are really -- I guess, both, right? Like obviously, there's been a lot of discussion on CRE, and you provided some additional details there. Are there other pockets of concern on the commercial side?

[Graeme Hepworth, executive]

Right. I mean I think you called out the biggest pocket of concern is certainly around commercial real estate. That's been an area of intense focus. We've been doing a lot of analysis and work there to make sure we -- we're taking all the right actions in our portfolio as I think I indicated in my comments, that has been -- that was one of the reasons we did increase our loan loss allowances or performing allowances this quarter is in anticipation of kind of more challenges and more headwinds in that sector.

It will take time to play out, and you will see kind of different markets and different spaces, play out in different ways. But to give you just a little context on kind of how we've kind of changed our perspective on CRE as a whole and maybe put some magnitude around that. If you look at the ACL ratios, we have around commercial real estate now versus the pandemic, they're about 2x where we were prepandemic, [ if you will. ] And so prepandemic gives you some sense for what we were thinking about loss rates in a more normal environment. The aggregate portfolio, now we kind of would expect more of a 2x run rate there.

And certainly, the U.S. probably more acute within that. I think as we look at our ratio of U.S. is about 2.5x higher than what we would see play out in Canada. That's the mix of the nature of our client base. We have more of an institutional mix in the U.S. than in Canada. But again, we've got, I think, very good client base. We've got good underwriting standards. Certainly in the commercial space as a whole as well as in CRE, we tend to get a lot of guarantees from our clients in Canada, that's about 95% plus of our portfolio is guaranteed.

So our clients are very invested in kind of working these situations out and working with us. So we do expect to see headwinds in commercial real estate for sure. But overall, we do expect the overall commercial portfolio will trend back to more normal levels as we progress through the year.

[Paul Holden, analyst]

Right. In the interest of time, I'll leave it there.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

This one is maybe for Dave, but the other group has -- might want to chime in as well. I think you referred to increased regulation in the U.S. from the follow that failed U.S. regional banks. I'm wondering if you can maybe offer your thoughts on how much of a magnitude these increased potential capital regulations, liquidity changes and tightening of lending capacity [ or impact to oils ] in U.S. operations.

Are you guys actively making changes with respect to how you operate in the U.S. and then it sounds like it's a net positive for City National, but then what about the capital markets business?

[David McKay, executive]

Maybe I'll start and I don't know if Graeme you want to jump in on that side. So yes, as we look at some of the root causes to the challenges the banks under question based in the narrative back and forth between the industry and leaders on the regulatory side, we do expect to see some type of -- whether the liquidity or capital rules or combined rules around positive concentration, overall liquidity levels, the nature of duration in your asset for all the things that we account for -- how you account for that in your balance sheet and charges to your equity base and AOCL. All those things that we do in Canada, we do expect to see -- we should all expect to see -- there's been a strong public narrative on it, some of those changes, and therefore, that will have some industry impact on margins.

And on profitability and a requirement for, we would think at a minimum, increased liquidity. That, to some degree, may also impact CNB. In addition, there's a recovery charge from the FDIC to the industry on the recovery costs of Signature Bank and obviously, SVB to start, and we haven't heard what that is for First Republic, yet and it's a fairly material recovery cost that you'll see.

We expect CNB would be part of that overrecovery charge, a very small part. So from that perspective, longer term, how does that impact the way we think, certainly want to make sure you watch your concentrations in your depositor side, doesn't really mean as much insured, uninsured, but overall, where do you have significant commercial or ultra-high net worth concentrations. We saw those to be quite stable to very stable, while they were unstable at many other banks, and we attributed that as do other observers to the strength of RBC combined with CNB. But we do have to anticipate that there could be some regulation around that, notwithstanding the enormous stability that we have that we'll have to absorb. So does that change your strategy?

Maybe at the margin, you're looking for, everyone is looking for more operating deposits, more treasury management deposits, lower beta deposits. The whole world is competing for that. So how strong is your customer value proposition, your customer profile. One of the reasons we're launching a U.S. corporate cash management capability is to compete in a space that we feel we have a strong right to play given our relationships with large corporates. We're senior in their syndicates or AA rating. So from that perspective, that will also help us maintain a growth profile in the United States and funding that growth.

So I think it's -- I don't think we can assume that we're going to be immune from it at the CNB level, but we have very strong ability, we think, to adjust for it, and we will continue to plan for a balanced deposit or profile over time. I hope that helps. It's an important concept that's evolving that we'll watch carefully.

[Graeme Hepworth, executive]

I would maybe just jump in with one extra comment there, Dave. You'd asked about impact potentially the capital markets. I mean I would just remind you that some of the standards that are being considered, the policy changes that Dave referenced, there are all standards in policies that RBC as a group is subject to inherently have to adhere to. And so in the U.S., likewise, our U.S. operations in aggregate has been treated as a large bank and subject to things like [ CCAR, ] et cetera.

And so Capital Markets has been kind of living in a part of that for a long time. And so we would certainly expect policy changes are uncertain at this point in time. As Dave indicated, there are impacts that the margin would be more in City National Bank and Capital Markets.

[David McKay, executive]

And we aggregate City National into RBC. And therefore, all of those positions are already aggregated into our balance sheet and our income statement. So it'd just be how they're distributed with it internally and wouldn't be a top-of-the-house impact.

[Lemar Persaud, analyst]

I'll limit myself to that just in the interest of time.

[David McKay, executive]

That's an important question. Thank you.

[Operator]

The next question is from Joo Ho Kim from Crédit Suisse.

[Joo Ho Kim, analyst]

Just a quick number ones for me. That NII growth target of low double digit, was that for all of 2023 or just the second half of the year?

[Nadine Ahn, executive]

That would be a full year 2023.

[Joo Ho Kim, analyst]

Okay. And just last one for me on your expense outlook for the remainder of the year. I'm just trying to get a sense of what the levers you have to [ drive ] this done, and I think you've done a good job of kind of talking about on the FTE side, but just wondering if capital markets expenses could play a big role here. I do see over the last few years, seasonal decline in capital markets expenses for the first half to the second half so I'm wondering if we could see a similar dynamic play out this year and then whether that's a big driver of your expense growth all of...

[Derek Neldner, executive]

Yes. Thank you. Good question. I mean I'll tackle that a few ways. I think I would be careful a little bit looking at the last few years because as we've discussed on a few of the prior calls, given the volatility we saw coming through the pandemic and post, we saw more intra-year movement in our compensation accrual, where in 2021, we had a sort of larger accruals through the first part of the year, and we were able to scale that back in the second half. And then last year, with a number of the environmental surprises and challenges we saw in the second half, it was the opposite. So we ended up having to increase our accruals through the second half.

So the last 2 years, I would say the compensation was less linear throughout the year as we would normally like, and we are very focused on being more consistent or linear, if you will, on how we're accruing throughout the year. So I would just maybe caution away from looking at that too much over the last few years. I think in terms of our expense profile overall, I think, first, we're actually -- there's more to do, but we're reasonably pleased with our expenses in the second quarter where you saw revenue was up 5%.

Our expenses were up 6%, so we did have negative operating leverage in Q2 but a number of initiatives that we've been implementing have kept NIE to a reasonable level, taking into account some of the strategic technology investments, cash management investments, other things we're doing. When you look at the second half of the year, given revenue environment was quite weak for capital markets in H2 last year, we do expect very strong positive operating leverage in the second half.

So I think we will continue to execute on some of our cost programs. But in a stronger revenue environment than last year, which we expect, that should contribute to a very positive operating leverage in the second half.

[David McKay, executive]

I think we have time for one more question.

[Operator]

And the last question will be from [ Mike Rizvanovic from KBW ] Research.

[Unknown Analyst]

This one is probably best for Neil. I just wanted to go into the deposit growth since prepandemic in Canada in a bit more detail. So one thing that I think is a bit surprising is Royal underperformed the peer group a little bit on the demand and notice side? And then on the fixed term side, you've had a lot better growth than anyone else. So what's driven that underperformance in the demand and notice category, in your view.

[Neil McLaughlin, executive]

We've actually been growing our checking market share. So our core checking business in the Canadian retail bank is actually up over the last year. And I would say, in the last while, if we look on a combined demand and term basis, the market share is also up. So I think we do have a lot of confidence just about the momentum we see in consumer deposits.

So that would be the take there. And I think part of that is also related to the new client acquisition we spoke of. I had mentioned earlier, we've had very aggressive targets in terms of new clients. And after the pause we put in place during the pandemic, we're back out playing offense, investing with that biz dev expense to drive that new client acquisition, and it's pulling well. So we feel quite bullish on consumer deposits.

[Unknown Analyst]

Got it. And just in terms of the mix shift. So if I look at your demand and notice as a percentage of your total Canadian deposits 63% as of March. This is just the OSFI data. You're about 5% lower than you were pre-pandemic. And this is the lowest level that I can see since 2012.

I'm wondering how this mix sort of -- what's the trajectory going forward, assuming rates drop later this year, early next year? I'm just trying to understand do you now have maybe for the foreseeable future, less of a benefit of having that bigger concentration in the demand and notice category than you maybe would typically see a benefit from? It looks like it's diminished a little bit. I'm wondering how that sort of moves from here.

[Neil McLaughlin, executive]

Yes. I mean I've spoken to the consumer side, and I would say just everything we would look at, we're seeing increased market share on both sides of that quarter-over-quarter, year-over-year. We have seen, I'd say, where we feel -- we don't feel satisfied is where we see the higher-end commercial deposits and particularly where we service cash management in some of the larger corporates.

So we have seen about 100% rotation on our commercial and corporate deposit balances into those term categories. So that would be one very strong trend there. And then we have seen our energy book, we've seen some large -- large deposits move out for capital expenses. We've seen a couple of public sector. Clients spread those deposits out -- but other than that, I would need to sort of really maybe take the question offline. Those will be the trends we're looking at.

[Unknown Analyst]

Okay. That's helpful. Maybe we can take it offline.

[David McKay, executive]

Okay. Well, thank you. It's Dave Here. Thank you for all the questions today. And I'll summarize kind of where we feel we came out over the first -- last quarter and the first 6 months of the year. And I think on the real strong positive story is our core client franchises, very strong performance across the board from Derek and the capital markets team and hitting our targets and good momentum and client momentum moving up to seventh overall in market share, talks to the strategy, really working.

Very strong performance, relative performance in our Canadian wealth asset management and U.S. wealth franchises continuing to execute organically, grow clients, growing AUA, AUM at high ROEs and really executing very well on our plan. Our funding continues to be a real advantage. And as Neil talked to, we continue to aim to match fund our portfolio. It's our real strength. We continue to gain overall market share in deposits as to the last question. We see more money in motion.

Clearly, it's a global phenomenon, including our own client base which tends to be an affluent client base in many parts of the organization. So strong volume growth. Couple of areas we can definitely do better that were pointed out on the volume side. But our client franchise is healthy. We're building it for the medium and long term, and we feel very good. We have very strong capital, I think, exceeded expectations, continue to build capital very well in a number of ways, as we've guided you to.

And that allows us to do both organic and inorganic execution the way we thought. Having said that, we were caught out on a couple of things which have hurt our results. One, I answered at length, too, we didn't foresee this environment 9 months ago. We didn't see the velocity of deposits moving out of core demand into higher yield at that rate, it started before the U.S. banking crisis.

It accelerated during the crisis. And that caused a real shot to our overall forecast and what the revenue was to be -- would be off our balance sheet. And the second way, we were caught, and we have to adjust to is on our cost structures. We knew we're going to have these big programs, are complex and expensive, but we did not forecast the rapid change in the hiring markets where we were hiring aggressively given attrition levels were 2x, 3x what they would normally be in the latter part of 2022, only to see that stopped almost overnight.

And we overshot. We overshot by thousands of people. It's a real drag in our cost structure. It's a big part, as you can see in our waterfall of the overall cost moving up 8%, and we're committed to getting that down. And as Nadine walked us through, we're -- we have a line of sight, it's mid-single digits and below. We're on that. We have a number of levers. But that's kind of the tale of the tape from my perspective, strong client franchise, great, great opportunity with HSBC, Brewin Dolphin.

We feel confident in executing against those benefits. But we got caught out on the magnitude of the revenue drop and the expense increase.

And we're going to manage that, and we're going to manage it like all good teams do, and we're going to get a hold of it, and we're going to drive shareholder value. So thank you very much for your attendance today and your questions, and we'll see you in another 3 months.

[Operator]

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