Royal Bank of Canada

TSX:RY

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to RBC's 2019 Third Quarter Results Conference Call. Please be advised that this call is being recorded.I would 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. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Then we'll open the call for questions. [Operator Instructions] We also have with us in the room Neil McLaughlin, Group Head of Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management & Insurance; and Doug McGregor, Group Head, Capital Markets and Investor & Treasury Services.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.With that, I'll turn it over to Dave.

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

Thanks, Nadine, and good morning, everyone. Thank you for joining us this morning. Today, we reported record quarterly earnings of $3.3 billion, largely driven by strong results in our retail and wealth management businesses. Our market-related businesses also performed well considering challenging market conditions during the quarter. We continue to maintain a premium ROE of 16.7%, and have very strong capital ratio of 11.9%, giving us flexibility to fund strong organic growth and return capital to shareholders. I'm also pleased to announce a $0.03 increase to our dividend, bringing our quarterly dividend to $1.05 per share.Before moving to our results, I want to touch on the macro environment. Rising geopolitical risk and trade tensions are having an impact on both business and market sentiment worldwide. This uncertainty is manifesting itself in downward trends in global interest rate. While there are risks to the outlook, current economic conditions in our core North American geographies remain solid, unemployment near multi-decade lows and a continued resilience in the Canadian manufacturing sector.Also, a recent report finds that Canada admits the largest number of skilled immigrants in the OECD, a contributing factor to both economic growth and household formation. On Canadian housing, we are seeing more balanced supply-demand conditions as policyholders appear to have engineered a soft landing. We're seeing positive developments in key markets, including a return to growth in Toronto and a healthy Montréal market.As the largest of the big 5 Canadian banks in Québec, we are participating in the resilient growth of the economy, leveraged by the collaboration of our employees across the province in all our business segments. Furthermore, Canada has become an attractive technology hub, attracting top talents and investment dollars, including demand for office space. We are seeing large corporations opening their global AI headquarters in Canadian cities. And our recent study ranked 4 Canadian cities in the top 20 for tech talent in North America. So against this backdrop, I want to update you on our business segment performance. Canadian Banking reported record earnings this quarter, underpinned by strong client-driven volume and revenue growth. At our Investor Day last year, we shared our story of how does the market leader grow. For RBC, invest to create greater value for our clients. Not only have we grown, but we accelerated our growth. We're leveraging our scale to grow our market share and thrive in this period of secular change. Over the last few years, we've made significant investments in our digital capabilities, including MyAdvisor and NOMI.Our active mobile user base increased 17% year-over-year to 4.3 million this quarter, and we added over 1 million active mobile users over the past 2 years. We also continue to build out our sales capacity, adding over 300 client-facing experts in our retail bank over the last year, including mortgage specialists and investment advisers. Our consistent volume growth reflects Canadian Banking's franchise strength. Since the end of 2016, we have added combined loan and deposit account balances of over $100 billion.With RBC Ventures, we continued to move beyond banking. As part of its strategy, we recently acquired Smart Reno, a platform to enhance the home renovation experience of Canadian. We now have 17 ventures in market in areas ranging from home search to supporting newcomers to Canada.We also recently launched Ampli, a new loyalty platform with over 20 partner brands. And while early days, we expect this and other ventures to further differentiate RBC, strengthen partner relationships and drive further client acquisition for the bank. We've seen strong growth in the number of registered RBC Ventures users. And similar to last year, we will provide an update to our Investor Day targets in our upcoming Q4 disclosures.Our growth in credit cards remains strong and above the industry average. This is a testament to the value our clients get from our unique offerings. We're also seeing increased momentum in our mortgage portfolio, benefiting from additional sales capacity and new digital tools. We remain prudent on our new mortgage underwriting with FICO scores in line with our existing portfolio.In Business Banking, our strong performance has been driven by a focus on high-growth, high-return sectors and regions while operating with a consistent risk framework. Our success has been underpinned by multi-year investments and top talent, cash management solutions and technology. We're excited by the potential of new capabilities for our commercial clients, including RBC Go Digital. This new initiative with Microsoft provides a suite of turnkey technology in financing solutions to accelerate our clients' digital transformation.Another part of our capital deployment strategy has been our journey to expand our portfolio of digitally enabled capabilities to reimagine the role we play in our clients' lives. This quarter, we acquired WayPay a fintech start-up to help our Business Banking clients save time and money with secure and simple solution for their accounts payable processes.Turning to Wealth Management, where we also reported record earnings this quarter. We generated over $3 billion of revenue for the first time in this segment, reflecting both market appreciation and net sales. Our clients continue to choose our broad range of products and advisory services in this challenging market environment. Our leading distribution network and strong performance versus industry benchmark has resulted in 50 basis points of Canadian retail market share gains over the last 12 months. This is a significant accomplishment in an industry with $1.6 trillion in AUM. In fact, RBC Global Asset Management has added over $10 billion in long-term Canadian retail net sales since the end of 2017. The rest of the industry experienced aggregate net redemptions over the same time period. We have also continued to invest in our industry-leading Canadian Wealth Management platform, and we expect to continue to outgrow the market having added close to 30 new competitive hires this year alone.Our U.S. Wealth Management business also generated record earnings this quarter as we continued to invest in both our U.S. private client group and City National businesses. We have scaled our core businesses organically with both U.S. wealth AUM and CNB loan growth up double-digits from last year, and we expect strong growth to continue as we add client-facing talent, including seasoned financial advisers and sales colleagues.As part of this, we expanded our commitment to serving the financial needs of our City National clients by adding to our sales teams across geographies. We also recently enhanced our services to entertainment clients with the acquisition of FilmTrack, a leader in intellectual property rights management. This builds upon our acquisition of Exactuals.Our Insurance business delivered strong results, highlighting the importance of our diversified business model. This segment continues to generate high ROE earnings with a strong and diverse client base and has developed long-term relationships with our other retail franchises.Investor & Treasury Services had a challenging quarter impacted by difficult market conditions. Despite secular industry headwinds, we are increasingly focused on markets and products where we can provide the most value to our clients. We will continue to find opportunities to drive efficiencies in this segment.Onto Capital Markets. This segment generated solid earnings of $653 million, despite a challenging market backdrop that saw lower client activity in global equities. Also, a reduction in global fee pools impacted investment banking fees. In contrast, fixed income trading revenue was solid across all regions, and we are also driving increased collaboration across our Capital Markets businesses.For example, RBC Capital Markets acted as M&A adviser and provided committed debt funding to Sinclair Broadcast Group in support of its announced $10 billion acquisition of the Fox Regional Sports Network. Overall, we delivered a solid quarter. And I'm proud of the scale and momentum we have built in our core retail businesses of Canadian Banking, Wealth Management and Insurance. We are well positioned to continue providing value-added advice and service to our existing clients while attracting new clients with our market-leading capabilities across our segments. We are committed to balancing our investments to continue creating value for our clients and shareholders, yet we will not lose sight of our focus on disciplined cost management and prudent growth.Before I end my remarks, I'd like to recognize Doug McGregor as we announced this morning that Doug has decided to retire next year after 37 years at the bank. There will be more opportunities to recognize Doug, but I wanted to take this moment today to sincerely thank him for his immense contribution to RBC. As our investors know very well, Doug has played a pivotal role in growing RBC Capital Markets from being the Canadian market leader to also being a top 10 global investment bank. And under his leadership, our client relationships are strengthened, our competitive positioning has improved and we attract and retain some of the best talent in the industry. And most importantly, Doug has led with strong judgment and integrity.I'm pleased that Derek Neldner will assume the role of Group Head Capital Markets on November 1, and he will join our group executive. Derek is currently Global Head of Investment Banking. He's been with RBC Capital Markets for over 20 years. He brings a deep experience and a strong commitment to our clients, which positions him well to lead this important business.In addition, Mike Bowick has been appointed President of RBC Capital Markets effective November 1. Mike will report to Derek Neldner, and he will continue to lead the Global Markets business and Treasury Market Services operations.I'm also pleased that Doug Guzman, Group Head Wealth Management and Insurance, will assume leadership for Investor and Treasury Services effective November 1. Francis Jackson, CEO of Investor Services, will report to Doug.With that, I'll now turn the call over to Rod.

[Rod Bolger, Chief Financial Officer]

Thanks, Dave, and good morning, everyone. Starting on Slide 5, we had strong third quarter earnings of $3.3 billion, up 5% from last year. Diluted EPS of $2.22 was up 6% year-over-year.Before I walk you through the segment results, I want to update you on our progress relative to the cost management guidance we provided last quarter. Given lower interest rates and the expectation of interest rate cuts, we are prudently focused on driving efficiencies and managing costs. This quarter, expense growth slowed to 2.3% year-over-year compared to 6.6% in the first half of the year. About 3/4 of our expense growth was from investments in transformation as well as front-office and sales force staff, so we remain well positioned to continue to increase market share. We continue to drive efficiencies, which create opportunities to invest in growth. We reaffirm our guidance from last quarter and expect low expense growth in the second half of the year.Now turning to Slide 6. Our CET1 ratio improved 10 basis points to 11.9% as internal capital generation was partly offset by organic RWA growth, the unfavorable impact of pension and other post-employment benefit obligations and share buybacks. In addition to our dividend increase, we bought back 1.9 million shares this quarter for a total capital return of $1.7 billion or nearly 50% of earnings.Going forward, we expect that combined impact of IFRS 16 adoption, securitization and counterparty credit risk will impact our CET1 ratio by approximately 25 to 30 basis points in Q1 2020, which we expect to fully absorb through capital generation. And we remain well capitalized to absorb the incremental domestic stability buffer increase of 25 basis points, which comes to effect -- into effect October 31, 2019.Now moving to our business segments on Slide 7. Personal & Commercial Banking reported earnings of $1.7 billion. Canadian Banking net income of $1.6 billion, was up 8% from a year ago. This quarter, we saw strong volume growth across many of our products. Residential mortgages grew 6% year-over-year as we continue to gain market share through increased originations and client retention. Business loan growth was up 10% year-over-year. Growth has been across most segments and sectors with notable momentum in small- and mid-market commercial businesses. And as Dave spoke to earlier, deposit growth was also strong this quarter, up 10% across both business and personal accounts. In particular, we saw an increase of 16% in personal GICs and deposit business growth of 9%, as clients shifted towards deposits in response to macroeconomic uncertainty.Our net interest margin of 2.80% was flat to last quarter. Going forward, we expect NIM to potentially drop as much as 4 to 5 basis points over the next year, if the current interest rate outlook and market pricing holds. Expenses were up 5% year-over-year due to higher staff-related costs as we added client-facing employees and increased our investment in technology.Operating leverage in Canadian Banking was 1.7% this quarter and 1.1% year-to-date. Adjusting for last year's gain related to the reorganization of Interac, year-to-date operating leverage for Canadian Banking was 1.4%.Turning to Slide 8. Wealth Management reported record earnings of $639 million, up 11% year-over-year. Global Asset Management revenues were up 12% year-over-year. This was due to higher fee-based revenue on higher AUM, driven by market appreciation and net sales. Excluding the prior year's loss on an investment in an international asset management joint venture, revenues were up 6%. Canadian Wealth Management revenue was up 8% year-over-year as a result of higher fee-based revenue, driven by higher fee-based assets from solid net sales from referrals, strategic hiring and market growth.Our non-U.S. Wealth Management efficiency ratio of 66.3% was down from 68.5% in Q3 2018, improving 220 basis points or 90 basis points if you exclude the previously mentioned impact of the prior year's loss on investment in GAM.In U.S. Wealth Management, revenue was up 6% year-over-year in U.S. dollars, driven by strong 15% loan growth at City National and higher fee-based revenue in our U.S. private client group. City National continue to generate strong growth in net interest income, up 14% year-over-year with pre-provision pretax earnings up 15% excluding last year's gain related to the sale of a mutual fund product and its associated team.Deposits were up 6% year-over-year, and we're confident that our wide range of deposit initiatives will enable us to support the strong and prudent loan growth at City National.Last quarter, we stated that we expected NIM to be range-bound adjusting for an 8 basis point gain from recoveries on legacy loans this quarter. Given that U.S. 10-year bond yields declined a material 95 basis points since our last call and the Fed's recent 25 basis point cut, City National NIM is likely to tick lower. However, we expect to continue to drive strong net interest income, driven by double-digit loan growth.Moving on to Insurance on Slide 9. Net income of $204 million was up 29% from last year, reflecting increased favorable investment-related experience and new longevity reinsurance contracts. This was partially offset by higher disability and life retrocession claims costs and favorable reinsurance contract renegotiations in the prior year.Moving on to Investment & Treasury Services on Slide 10. Earnings of $118 million in this segment were down 24% year-over-year. I&TS was impacted by lower client deposit margins, driven by spread tightening. We saw reduced client activity in our asset services business and lower funding and liquidity revenue, driven by lower realized gains from the sale of security compared to the prior year as well as declining rates.We continue to actively manage our cost base. As a result of these efforts, cost decreased 1% year-over-year, and we will continue to assess and act on efficiency opportunities.On Slide 11. Capital Markets earnings of $653 million were down 6% year-over-year as industry-wide headwinds and lower client activity impacted revenues. Corporate investment banking revenues were down primarily due to lower loan syndication activity and M&A across the industry. Despite headwinds of a declining fee pool, RBC rose to 10th in the global lead tables for the fiscal year-to-date.Global Markets revenue was down 4% year-over-year, amidst a challenging market backdrop for both equities and fixed income trading. As you may recall in Q3 last year, equities had a strong quarter, in particular, with one outsized trade. On the other hand, credit trading was higher this quarter on positive mark-to-market on investment grade as well as credit spread tightening. Looking ahead, our investment banking pipeline remains strong for the remainder of the year.In conclusion, we are pleased with our strong results this quarter, driven by growth in our retail businesses and our market-dependent businesses despite industry headwinds.And with that, I will turn the call over to Graeme.

[Graeme Hepworth, Group Chief Risk Officer]

Thank you, Rod, and good morning, everyone. Starting on Slide 13, our total PCL on loans was $429 million this quarter, equivalent to 27 basis points and was comprised of $399 million in provisions on impaired loans and $30 million in provisions on performing loans. PCL on impaired loans decreased by $36 million or 4 basis points from last quarter, mainly due to lower provisions in Canadian Banking. PCL on performing loans was $30 million this quarter, driven mainly by portfolio growth in retail, offset by seasonal credit quality improvements in the cards portfolio.We did not materially change our macroeconomic forecast this quarter, so while there was some modest impact to the segment level, overall this had a neutral impact on our allowances. On a quarter-over-quarter basis, PCL on performing loans increased by $24 million from last quarter.I'd now like to provide a bit more detail on 3 of our businesses. In Canadian Banking, PCL on loans of $329 million decreased by 8 basis points from last quarter, largely due to the higher provisions we experienced in Q2 in our commercial lending portfolio. In Wealth Management, PCL on loans decreased by $3 million from last quarter, reflecting relatively stable credit trends at City National. In Capital Markets, PCL on loans increased by $29 million from last quarter, mostly due to provisions on performing loans of $3 million this quarter compared to a release of provisions of $21 million last quarter, reflecting the change in macroeconomic forecast noted earlier.Provisions on impaired loans were largely related to one previously impaired account in the industrial product sector. Initially, impaired loans in the oil and gas sector contributed to provisions this quarter.Turning to Slide 14. Gross impaired loans of $3 billion decreased by 2 basis points from last quarter, largely due to high repayments in Caribbean Banking and higher write-offs in Canadian Banking. Relative to Q2, new impaired loan formations declined in our retail portfolio and more notably, in our wholesale portfolio. We continue to see new formations in the oil and gas sector as oil and gas prices remained under pressure this quarter and as expected, the trend is moderating.Overall, we remain comfortable with our exposure to the sector. It represents only 1% of RBC's loan book. It's governed by borrowing basis and size of the proven reserves of the borrowers and provides good protection against credit losses. The remaining new impaired loan formations in our wholesale portfolio were spread broadly across sectors and geographic regions.Turning to Slide 15. Our Canadian retail portfolios were generally stable both in terms of provisions and new formations this quarter, notwithstanding the solid growth Dave noted earlier. This not only reflects strong economic fundamentals, but also the strength of our underwriting standards, which gives us confidence that our portfolio will be resilient throughout the credit cycle.In closing, we are pleased with our overall performance this quarter, which remains in line with our previous guidance as we continue to benefit from the diversification of our portfolios, both in terms of geographies and industry as well as our prudent approach to risk management.With that, operator, let's open the lines for Q&A.

[Operator]

[Operator Instructions] And the first question is from Ebrahim Poonawala from Bank of America Merrill Lynch.

[Ebrahim Huseini Poonawala, Director]

I just had first question on credits. So I heard Dave, your prepared remarks and then just in terms of the credit commentary. But when I look at credit and tell us if this is not the right way to think about it, but wholesale loan growth over the last 2 years has been 26%. Gross impaired loans over that 2-year period have gone up 14%, but the actual allowance for these losses has gone down to 458 from 509. So just talk to us in terms of why you feel good about this wholesale credit in Canada and within sort of wholesale banking relative to U.S.? And why these metrics are okay? Or should we -- is it a fair pushback that why reserves are not much more higher for this portfolio? So I'll stop with that.

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

I'll make a couple of macro comments and I'll ask Graeme to go through the reserving exercise and why we're comfortable. From a strategic perspective, as we've talked about, our loan book and our wholesale loan book is diversified across geographies globally. Our whole levels are smaller particularly in the riskier leverage finance, often senior positions in the capital structure. So we've managed this book very prudently over time with great single line diversification, disciplined whole levels, disciplined structure and then we've seen this book perform well.You referenced the drawn loan growth versus RWA loan growth and authorization growth, which has been significantly slower in the last couple of years. So yes, while the draws have given some of the bridge facilities we put on that we've disclosed, and Doug or Graeme can give you more color, if you like on that, but certainly, we've been, I think, prudently managing our risk-weighted asset growth and our authorized exposure growth in the business. So yes, we remain confident in our business model and how we've managed it going into what looks like to be somewhere near the end of the cycle. As far as the appropriateness of our reserves, I'll ask Graeme to make a few comments.

[Graeme Hepworth, Group Chief Risk Officer]

Yes. I mean, on reserves in general, I mean, let me start with a couple of points. Certainly, we look at service Stage 3. In 2017, we certainly saw very low levels of new formations and recoveries in those periods. So we certainly would say that's more of a cyclical low. And I think what we've seen in 2019 is a bit of a reemergence of credit in that space. And so the impairments we saw in the first half of the year although moderated now, well, I think, all reflect some more normalization in our Stage 3 allowances. Stage 1 and 2 is certainly driven by our macroeconomic forecasts in the wholesale space, that can be more volatile. Factors like equity markets and oil prices, interest rates all play -- are all of the factors into that. And as I said in my speech, we didn't change our macroeconomic forecast this quarter. So we didn't make a material change in wholesale.On the Capital Markets side, we saw fairly neutral growth in the loan portfolio there, so that was an additive. Whereas in City National in commercial, we did see growth there and our baseline reserves would grow with that. And so I think each quarter, I would just continue to reiterate from the guidance I provided previously is that the baseline here is that our reserves -- Stage 1 and 2 reserves will grow in line with the growth of the loan portfolios and that will be adjusted for both credit quality and our macroeconomic forecast. And more recently, as we've seen interest rates come off, that has near-term benefits to the Stage 1 and 2 and near-term expected allowances, although I wouldn't say that's the signal of healthy kind of a medium-term macroeconomic environment. So we're really balancing all those factors and we're establishing our reserves and overall this quarter, as I said, we grew our reserves largely in line with the growth of our portfolio overall.

[Ebrahim Huseini Poonawala, Director]

And just on that very quickly, Graeme...

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

Can I ask you to requeue because we've got half an hour and probably lots of questions, so can you requeue to the call?

[Ebrahim Huseini Poonawala, Director]

Sounds good.

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

Thank you.

[Operator]

The next question is from Meny Grauman from Cormark Securities.

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

Just a question on that Stage 1 and 2 reserving, that's new for all of us. Just understanding the fact that macro factors positively impacted Canadian Banking this quarter and acknowledging that GDP actually came in better than expected in Canada, but we have all of these uncertainties that have really bubbled up over the last few months, trade uncertainties driving a lot of negative sentiment. I'm wondering does that ever come into play in terms of determining those Stage 1 and 2 provisions? Or is that not -- or these are not issues that feed into that calculation?

[Graeme Hepworth, Group Chief Risk Officer]

No, absolutely, the macroeconomic forecast in those kind of uncertainties absolutely play into our reserves. I think as we've outlined, we consider 5 different scenarios in our reserving process that look at positive economic environment to much more severe and negative economic environments and we weigh those accordingly. And you kind of referenced the trade uncertainty. The trade uncertainty is kind of not a new story in my mind here. It's something that we've been reflecting in our forecast and our reserves for since we initiated IFRS 9 effectively and [ FSB ]. The news headlines change there week to week on that front, but concern starting last year around USMCA and now more recently as we focus more on the kind of China-U.S. trade tensions, all these stories have been factoring into our considerations and our forecast and how we kind of weigh those scenarios, and ultimately, establish our reserves. So absolutely, it does play a significant role in how we consider our loan loss reserves.

[Operator]

The next question is from John Aiken from Barclays.

[John Aiken, Director & Senior Analyst]

I was hoping you might dive into the rationale for having Investor & Treasury Services now roll up into Doug Guzman. Are we looking for incremental synergies between now his combined operations? Or is it more just -- more of an administrative change that you felt was appropriate?

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

Well, I think we look at certainly opportunities to put a different lens and a different set of eyes on the business, which is always helpful, as a different perspective. So yes, we're looking for Doug to -- to build on the work that Doug McGregor has done and the team has done and take this business and look at strategic context of it and try to, as we've talked about, improve on the performance based on a number of challenging market conditions, right? We've got secular change around the impact on our asset management clients. We've got changing rate environment. We've got changing client preferences around FX and others. So there's a number of secular wins coming across this business, that I thought given Derek coming into a big role, it was opportunity for us to ask Doug Guzman to step up and take on a challenging business right now.

[Operator]

The next question is from Steve Theriault from Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

Rod, I'm interested in your comments around margins. You said that you could see 4 to 5 basis points of NIM downside over the next year. Can you flush that out a bit more in terms of how many rate cuts that envisions, if any? I assume it does. Does it assume a steeper curve if we do get cuts at the short end? And I'd love -- I don't know how doable this is, but I'd love to get some color and you talked about City National ticking lower. Maybe this ticking lower is that sort of an immaterial tick lower? And I think most importantly, if given your rate expectations, an outlook on the all-in margin would be super helpful to the extent that's possible.

[Rod Bolger, Chief Financial Officer]

Okay. Great. Thanks, Steve. I'll take those in order. And on the Canadian Banking margin, I've hedged a little bit because I said we could potentially drop as much as 4 to 5 basis points, and part of that is the violent swings we're seeing in the interest rate forward markets. And Canada, I mentioned, how much the U.S. is down versus our last call Canada and just on the 5 years down 50 basis points -- on the 5-year versus 3 months ago when we were on this call. And so that's going to change between now and the end of next year. And certainly, what the forward curves are saying right now is 2.17 rate cuts by the end of our next fiscal year and a Canadian rate of 1 20. Whether that's going to come to pass, we'll see. So we factor all that in. There's pricing, but we do have -- a large portion of our Canadian Banking book is 5-year fixed-rate mortgages. So we tend to be slower when rates are going up in terms of NIM expansion and then slower on the way down when rates are cut and that provides a nice hedge for us from a revenue perspective.And you also typically see -- as rates come down, you see deposit growth sometime accelerate as we saw this quarter, and we would expect that to continue and give us more favorable funding as well. So there's a lot of puts and takes and then better pricing can accelerate or decelerate depending on how volumes are and whatnot. And lately, volumes have been strong and we've seen very strong volumes on a year-to-date basis and in Q3. So that's why the impact is somewhat muted in Canada for our Canadian Banking business.In City National, the rate changes have been even more violent, if you will. I mentioned the 95 basis points on the 10-year. You look at what the forward markets are saying, 4.2 cuts by the end of next year down to a Fed funds with effective rate of 1.08%. We certainly don't run our businesses if that's given, but we do manage the business if that comes to pass. And again, it's the same dynamics. That's a very strong deposit book. We had good growth this quarter. We have a lot of opportunities there. We made strategic investments in technology with -- within our entertainment business, multiple acquisitions so that we can, again, get that payments business and keep those core deposit accounts and that helps us from a funding mechanism. So if you -- but if you look back when was the last time Fed funds was at those levels, that was kind of the end of 2017 and NIM in City National was substantially lower than it was now from a net interest margin percentage level. Now we also benefit from having double-digit loan growth, and we expect that to continue. So that is going to give us the benefit of having an upward trajectory to our revenue targets and numbers despite a falling rate environment. So we think we're well hedged for that.On the enterprise issue, a lot of that is mix. And so if you look year-over-year, yes, we're down, but across most businesses we're up and so it is a mix issue. And so we have seen our repo business grow at a faster rate than our core lending businesses in City National or Canadian Banking. And so that puts downward pressure on the NIM at the top of the house, although the individual businesses are up. And that's how we prefer to look at it individually because the product issues have very different risk return profiles.

[Operator]

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

[Doug Young, Diversified Financials and Insurance Analyst]

Just, I guess, I was a little surprised by just the level of deposit growth you have shown in Canada, just given your market share. And so -- and I know you gave what the growth was in GIC. So I'm hoping you can just unpack what demand and notice deposit was. And just maybe unpack a little bit about what drove that. And I know you've given some targets around ventures and 5 million active users converted to Royal Bank clients over a period of time. It sounds like you're going to give us an update to that target, but maybe you can kind of weave in how successful you've been in terms of capturing those clients as well.

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

Yes. Thanks for the question. It's Neil. So I guess, there's a number of factors. One, we've talked in the past about clients looking for security and yield and that really driving swap out of some long-term fund volumes into the GIC, so that's part of it. On the savings accounts, as the mass retail savings customer, those are about mid-single digit in both registered and nonregistered.And then to your point on new client acquisition that we've referenced in the past, we have seen good year-over-year gains over the last couple of years in terms of our ability to acquire that core deposit customer. And those balances are about the same range sort of that mid-single digit. So that's really on the personal side.On the business side, similar type of trend. We're seeing strong double digit on the GIC portfolio, basically for the same reason, and then fairly equal growth as we look at interest-bearing and noninterest-bearing. A lot of good things going on in the portfolio right now for the small business customer, which is really sort of that profile for the noninterest-bearing deposit balances within our business account franchise. And then you have, Rod had mentioned, some of our commercial clients are just keeping some of that capital out there ready, trying to steer through some of this uncertainty. So I think that would be kind of just a walk-through of the different categories.

[Doug Young, Diversified Financials and Insurance Analyst]

Anything on the venture side that you can -- in terms of how you're tracking, in terms of converting clients over into deposit accounts?

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

Yes. So in terms of ventures, I mean, obviously, we're in the early innings on the strategy. We're feeling that we've got some good green shoots in terms of the connectivity with clients across the ventures portfolio. The ultimate end goal is to convert these into -- the best case would be core deposit account holders. One of the early successes has been in the small business space, however, in our venture called Ownr. And we've seen thousands of customers as they register that new business throughout quite a streamlined digital process take up our deposit account for business customers, so that's probably our best example.

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

And as we mentioned in my speech, we'll give you a more fulsome update in Q4 around the waterfall and our new acquisitions on how the ventures are performing, but we're pretty excited about the strategy.

[Operator]

The next question is from Sumit Malhotra from Scotiabank.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I want to start with Investor & Treasury Services, please. So we've certainly seen the earnings contribution, the revenue contribution move lower for the past number of quarters. When I look back at some of the reasons that you folks have highlighted, spreads on some of your high-quality liquid assets, securities dispositions, deposit margins declining, all of this in some form or another does speak to the impact of lower rates, which, as you pointed out a couple of times in this call, has only gotten worse in the last little while. So when you think about this run rate that we're at right now or this quarter's earnings of $120 million, is there any reason to believe that given some of the -- these factors, this number isn't going to face continued pressure in the near term? Should that be the expectation here? Or are there a few factors that you think are more transitory?

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

No. I think when you look at the performance of the business this quarter, about 2/3 of the underperformance is around the factors that you just mentioned. It's around the -- what we call, the Treasury Services side of the business, which is investing deposits and our HQLA. And as a result of lower rates, flat yield curve, et cetera, it's become more challenging. So I expect that's going to continue in the near term, although, I guess, we've had a little bit of relief from that over the last several days. I think the other side of the business, the Investor Services side of the business, some of the challenges have been around just customers internalizing FX flow or using less of our securities lending businesses and actually grinding on core fees. That part of the business we're managing, those challenging we're managing by repositioning to a different client base, more private equity in Europe and we're going to reposition our cost base as well. So we're working on that real time. So I would say on the core Investor Services side of the business, I'm less concerned about that. On the Treasury Services, we have some headwinds that we're just working through.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And the Treasury Piece, Rod's given some context on this call for what the new rate environment means for Canadian Banking and City National, but Doug, taking your comments into account, I'm hearing that the Treasury piece is going to reflect this rate environment perhaps further so based on where long bonds have moved?

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

Not so much long bonds, it's short rates. I mean, this portfolio has a duration of less than 2 years. And so things can change a little more quickly depending on where rates go. We're repositioning the book and we'll try to manage through it.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And maybe I can ask one on City National or requeue?

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

Yes, requeue, please.

[Rod Bolger, Chief Financial Officer]

Yes, requeue.

[Operator]

The next question is from Robert Sedran from CIBC.

[Robert Sedran, MD & Head of Research]

Dave, in your prepared remarks, you made a few comments about acquisitions that, I guess, are really to support organic growth, some of the smaller things you've been doing. But the last time you talked about M&A, at the bank level, it was more about how valuations were frothy and perhaps not very interesting. I'm curious with valuations having come off and your CET1 ratio now all the way up to 11.9%, if the idea behind bank M&A may be something that's more interesting today? Or if you still think there's plenty of organic runway and you'd rather focus on buybacks and organic growth?

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

Yes, it's certainly the latter. As we expected valuations have come off. Not only valuations have come off, but I think with the large merger that we advised on expectation between BB&T and SunTrust, expectations of premiums have also come off. So relative valuations are better. Having said that, expectations and uncertainty around the future interest rate environment and economic growth have increased in line with that. Or as you've seen the strong organic growth that we have in Canadian Banking and City National in the U.S. and U.S. Wealth Management that's executing on their credit strategy -- secured credit strategy, executing on their advisory platform strategy is driving AUA and AUM. We're really happy with the organic growth, our market expansion. So it still is -- first and foremost, we've invested for growth in the United States, and we're expecting to see that growth and produce that growth with the elevated NIE base that we have. So I think that's first and foremost, and we're still going to be very cautious. I think relative valuations will continue to come off and -- in the U.S. And therefore, we are thinking about the right strategic opportunity. I've talked about some of the challenges that U.S. mid-sized banks face around funding growth and around technology platforms. You must think those issues through and solve for those issues at the same time. So there's a number of moving parts that are continuing to drive us to focus on organic growth with a return of capital to shareholders and driving a premium ROE and premium TSR from that strategy first and foremost.

[Robert Sedran, MD & Head of Research]

And so something in that 50% total shareholder return payout ratio is kind of what we should expect?

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

No. I think returning capital be it share buybacks obviously with our CET1 ratio is important. And given that we're towards the end of the cycle, we're being very conservative about our payout ratio around 45%. And I wouldn't expect you in the short term to see that creep up given the cycle that we're in. So no, I think largely through share buybacks would be our primary choice at this point.

[Operator]

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

[Sohrab Movahedi, Analyst]

A bit of a detailed question. I'm just looking into, maybe for Graeme, I don't know, but when you provide the subsector for industry breakdowns of your wholesale book, 3 categories kind of stand out to me that have been driving the year-over-year growth, actually quite a bit of the growth going back to probably the last 3 years. They are what you referred to as financial services, financing products and investments. Financing products are doubled from last year. Financial services are now second largest to real estate. Investments up $5 billion or $6 billion. Can you just talk a little bit about what sort of business would this be? Which one of your business segments would it be in support of, maybe a little bit around the geography, the type of RWA that it attracts and, ultimately, the types of returns that these types of businesses are generating? I mean, I think the 3 of them collectively are up about $50 billion year-over-year and now account for about 20%, 21% of the wholesale loan book. And I think of them as really -- at least based on the qualitative description, these are leveraged industries. So are you lending to the shadow market? Is that how I should be thinking about it?

[Graeme Hepworth, Group Chief Risk Officer]

This is Graeme. I'll maybe start on that but I'll maybe turn to some of my business partners here and they can provide a bit more thought to the growth. And if you look at something like financial services, so this would be a lot of our activity that we do with funds for example, so that could be anything from a private equity fund to mutual funds to other kind of fund providers like that. The balance of that -- and a lot of that growth over the last few years has been in, what we call, capital call loans and that, in terms of business attribution, we see that across actually 3 of our businesses. CNB, City National, has a fund client base that they support. Capital Markets has likewise and I&TS. So obviously, their fund-servicing platform has strong relationships with funds. And capital call loans is a product that all of those businesses have been actively using over the last few years and growing. It's kind of -- the quality of that asset base is -- client base is very high quality. It typically is an investment grade credit quality. It is a well-structured product for us. So it's a product that we're quite comfortable with the credit quality there and growth is -- has been nice from a risk perspective.The financing products would typically be related to our securitization business, and so that would be more of a Capital Markets construct and investments likewise would also be a Capital Markets construct typically. And so that's kind of where those businesses tie in. As I said, within that capital call loans, it's probably been a product that's most notably driving growth within those. But from a risk perspective, it's been a product that I think we've been quite comfortable with. I'd like to turn over to Doug to comment on some of the business drivers, his perspective there.

[A. Douglas McGregor]

Yes. I would say, in terms of the capital call loans, I mean, some of the customers were -- that we're funding and really funding commitments from private equity investors or sponsors. And a recent example where we've been putting more on would be Blackstone in Europe, as an example. And as Graeme pointed out, the funding is low leverage and high quality, and so we're fine there. In terms of the rest of loan book growth in the investment bank, our real estate book continues to grow and, similarly, we have a very diversified portfolio across Canada, the U.S. and Europe and it's largely 2 larger investors like Brookfield and Blackstone and other large financial sponsors, and that book is in quite good shape. I don't know what else to add, Graeme.

[Graeme Hepworth, Group Chief Risk Officer]

Yes. I think you can bring up like that, it's just not to confuse. I think sometimes there's some confusion that the financial services piece and the capital call loans that we make through the private equity sponsors that Doug is referring to is somehow leveraged lending. That's not what this is. This is providing loans to the actual funds themselves, not to the levered companies that they might be purchasing. And as I said, these are loans that are secured by the capital calls that they have on their LPs and these are high-quality investors that these funds have, and we really look through that and that security to secure our position here. So I just did want to clarify that because I think we've had a few questions coming on that before.

[Sohrab Movahedi, Analyst]

And geographically, this would be broad-based? Or would it be mostly -- most of the growth would be coming outside of Canada?

[Graeme Hepworth, Group Chief Risk Officer]

Mostly, I would say, the U.S. would be far and away the largest source of growth in the portfolio there and a more modest portion would be out of Europe -- very little of that would be Europe.

[Operator]

Your next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

Real quickly just on, sort of, similar type of question, but more on U.S. commercial real estate. Is there something you're seeing in the horizon that would cause that to decline substantially from quarter-to-quarter because I think it's down like 8%? Or is that mostly currency?

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

Yes, that book hasn't been declining on the actual secured property mortgages. We have been taking some loans off against some REITs that where we made loans into revolvers years ago and we haven't seen the kind of fee performance that we expected to see, so we have been demarketing a bit around some of the REIT book. But on the real estate mortgage book for large customers, we continue to grow out. I mean, the whole Capital Markets loan book growth that we're managing into a sort of low- to mid-single-digit number, and some of that growth is occurring in real estate in the U.S.

[Mario Mendonca, MD & Research Analyst]

So you're not sending any -- there is no message here on credit in U.S. commercial real estate?

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

No, I'm not particularly fond of small and closed shopping centers, but away from that, we're just fine and the performance of that book is really good.

[Mario Mendonca, MD & Research Analyst]

Okay. And just a real quick question, Dave, if I could go to you for a moment and I know there's a lot of moving parts here and the environment has changed in the last 3 months substantially. Are you able to provide an outlook for total bank earnings growth as you -- you'd normally do it in Q4. I'm asking in Q3 because there's been so many changes. Are you prepared to talk through that?

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

There are a lot of moving pieces that we talked about in our prepared speeches and have come up in the Q&A this morning. Now we start with significant momentum in the business and I don't think that should be lost on anyone. The market share gains across our core retail franchises are significant, volume growth is significant, the revenue growth is significant and these tend to be momentum businesses. Our core economy, despite all the questions around the volatility in trade agreements and Brexit, still remains strong, employment remains strong. So we have good momentum, but we have headwinds coming into that momentum as all banks face. We have a couple of businesses, particularly in Investor Services and Treasury Services that are underperforming that we're going to try to turn around, but we're carrying good momentum into these headwinds. Having said that, it's going to -- we always talk about medium-term objectives and meeting medium-term objectives. For us, we'll talk a little bit more in Q4 how we see that balance coming out, but things are slowing, as you can see, across a couple of dimensions, but combining the organic growth with ability to return capital to shareholders, we are pushing around our medium-term objectives and that's -- I think that is kind of where we sit right now. We feel good about the performance of our core businesses, and with good pipeline in Capital Markets, as we talked about, we're building solid client franchise with long-term clients. I think that's our objective and we feel good about our momentum.

[Operator]

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

[Gabriel Dechaine, Analyst]

Just a clarification on City National. Excluding the equitable yield, it looks like margins are down 13 basis points quarter-over-quarter, and I just want to clarify what you mean by the margin will be range-bound from that level, I assume? And then on I&TS, just to circle back to that business, how -- you gave a good explanation of what 2 factors are weighing on that. How big is the negative carry, if you will, in the Treasury business relative to the -- just the customer slowdown in the Investor Services business? And how big is that liquidity portfolio? Last, I thought was...

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

Yes, 2 questions. So Rod quickly on NIM and then we will give the I&TS answer and then we'll try to take another couple of questions.

[Rod Bolger, Chief Financial Officer]

Yes. I mean, just quickly on NIM. I mean, we ended 2017 in the high 2s at 2.96%, ended 2018 at 3.41%, hit as high as 3.56%, as you rightly adjusted for those -- for the FDIC loans. We're down to about 3.35% now. So I think I said range-bound last quarter when rates were 95 basis points higher. This quarter, I would -- I tried to highlight that we expected it to shift down. And then I would just suggest that if you believe that the forward curve for the Fed is going back down to the levels that we saw in '17, we could see it slip below 3% at the end of next year, if that comes to happen. As Dave highlighted, the U.S. GDP has been strong. And so I do believe that the Fed is going to cut 4 or 5 more times between now and next October. It's hard to say exactly where that NIM is going, but the trajectory is lower and it does move much more aggressively than our Canadian Banking NIM. On I&TS, I'll turn it to Doug real quick.

[A. Douglas McGregor]

That HQLA portfolio is about $50 billion. It's invested in the U.S. and Europe and Canada. What else?

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

Is there a negative carry?

[A. Douglas McGregor]

No, there is not -- well, there is not a negative carry, but we're not seeing much spread between our cost of funds and the return on the HQLA, which is the challenge.

[Operator]

The next question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

Just going back to Canadian PNC, the overall portfolio growth is pretty solid, but if I look at to personal HELOCs, other personal, which I assume is mostly auto, it has been pretty flattish for a while. So perhaps maybe give us an update on kind of what you're thinking on those portfolios and the outlook going forward?

[Graeme Hepworth, Group Chief Risk Officer]

Yes, thanks. It's Neil. Yes, we've talked about the HELOC. There has been a trend of customers rolling out of the HELOC, looking to fix in -- lock into the mortgage segment, that continues. In terms of the other personal, it's a combination of what we originate through our branches in lines of credit and unsecured installment loans and then our auto segment. About 2/3 were direct through our branches and about 1/3 in auto. We've actually seen the return to positive growth in the branch-originated credit through some work we've done in our sales force and underlying credit strategies. Auto would be -- we made some changes to the strategies there, just making sure we liked all the credit segments we are picking up, we had a bit of a push to get some growth and we're seeing that flatten out, coming off of about 2% last quarter down to about 1%. So those would be the 2 segments.

[Operator]

And the next question is from Mike Rizvanovic from Crédit Suisse.

[Mehmed Rizvanovic, Research Analyst]

I have a question for Doug McGregor on the U.S. Cap Markets business. Clearly a challenging quarter, but I'm just looking at the longer-term trajectory in revenue in U.S. dollars. It hasn't really moved much in the past couple of years and I realized you made some changes in the business with respect to where you're allocating capital. So just maybe a 2-part question. First, are there more changes underway in terms of where you're competing? And second, do you have a time line in mind for when you might start to see revenue growing again? Or is this something -- should we be, maybe, thinking about the cost side to grow the bottom line?

[A. Douglas McGregor]

No. I mean, the revenue pool globally, at least according to Dealogic, is down 16%. Leverage lending is down double that, which is a decent business for us. I think in the context of the other global investment banks, we've actually performed pretty nicely here. And as Dave said, actually the backlog in the investment bank, which has really been the challenge, is the investment banking fees for this year, both really globally, I mean, in Europe, U.S. and Canada, it's been slow, and the backlog actually is really quite good. So in terms of just large deals that are going to transact over the next 2 quarters, we're in better -- much better shape than we were coming into this quarter or coming into the calendar year. So I would say depending on how the trading environment goes, I think, we'll be probably doing better going forward.

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

We'd like to thank everyone for attending today's call and for your questions. The themes are this is a record quarter for RBC at $3.3 billion, driven by really strong client volumes, revenue from our retail businesses, Canadian Banking, Caribbean Wealth Management, Canada Wealth Management, U.S. Insurance. We had a couple of challenging outcomes in Investor & Treasury Services, but overall, we feel good about the momentum, the client-driven momentum, and feel ready to challenge some of the headwinds that are coming at us. Thank you for your questions and look forward to speaking again in Q4. Thanks.

[Operator]

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