Royal Bank of Canada

TSX:RY

Earnings Call Analysis

Strong Q3 with Notable Growth Across Segments and Strategic Focus

In Q3, RBC delivered $4.5 billion in earnings, bolstered by a 15% jump in fee-based assets and robust Canadian Banking performance, which saw an 11% increase in net interest income. The acquisition of HSBC Canada added $292 million in adjusted earnings, underscoring successful integration. Capital Markets and Wealth Management revenues were significant, with Wealth Management up by 30% year-over-year. RBC's strong ROE of 16.4% and prudent expense management position it for continued capital deployment and shareholder returns. Looking ahead, RBC expects its effective tax rate to remain between 19% and 21% for fiscal 2025.

A Strong Quarter Fueled by Diversified Growth

RBC reported robust third-quarter earnings of $4.5 billion, with adjusted earnings hitting $4.7 billion. This performance was driven by significant contributions from various sectors including Canadian Banking, which saw an 11% rise in net interest income excluding the impact of HSBC Bank Canada. Furthermore, Asset Management and Wealth Management revenues grew due to a 15% increase in fee-based assets.

Capital Markets and a Healthy ROE

Capital Markets generated $3 billion in revenue and pre-tax, pre-provision earnings of $1.2 billion, thanks to market share gains in key products. The bank reported a return on equity (ROE) of 15.5%, with an adjusted ROE at 16.4%. This performance underscores RBC's ability to generate substantial capital.

Impact of HSBC Canada Acquisition

The recent acquisition of HSBC Canada added $239 million in earnings, or $292 million excluding specified items. The bank realized $90 million in cost synergies and $156 million in underlying earnings from HSBC Canada. This acquisition is expected to continue contributing positively as further synergies are achieved.

Personal & Commercial Banking Growth

The Personal & Commercial Banking segment reported earnings of $2.5 billion, with Canadian Banking alone seeing a 17% year-over-year earnings increase. Net interest income rose by 11% due to higher spreads and strong volume growth, while noninterest income increased by 5%.

Wealth Management Success

Wealth Management earnings were up 30% year-over-year, driven by market appreciation and strong net sales. The segment continues to perform well despite higher variable compensation costs.

Capital Markets Resilience

Capital Markets reported pre-provision, pre-tax earnings growth of 18% year-over-year. While Corporate and Investment Banking revenues increased by 23%, Global Markets revenue saw a slight decrease of 1% due to mixed performance across various trading activities.

Insurance Performance

Insurance net income was down 21% from the previous year, largely due to lower investment results. However, core business performance remained strong with improved claims experience and business growth across most products.

Future Guidance and Tax Outlook

Looking ahead, RBC expects the adjusted tax rate for the next quarter to be towards the higher end of the 19% to 21% range. For fiscal 2025, the effective tax rate is projected to remain similar as new international tax rules come into play.

Asset Quality and Economic Outlook

The bank has been proactive in managing credit quality amidst a softening economic backdrop in Canada and the U.S. RBC saw net credit downgrades and elevated watch list and delinquency rates this quarter. The bank added $42 million in provisions for performing loans, reflecting prudent risk management.

Operational Efficiency and Strategic Focus

RBC continues to focus on improving operational efficiency. Noninterest expenses were up 11% year-over-year, with core expense growth being driven mainly by higher variable compensation. The bank aims to keep core expense growth within the mid-single-digit range.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the RBC 2024 Third Quarter Results Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Asim Imran. Please go ahead.

[Asim Imran, executive]

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Katherine Gibson, Interim 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 re-queue.

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 third quarter earnings of $4.5 billion or adjusted earnings of $4.7 billion, underpinned by strength across our largest businesses. Canadian Banking net interest income was up 26% year-over-year or 11% excluding the impact of HSBC Bank Canada, which I will speak to shortly.

These results were driven by higher interest rates and strong volume growth. Asset Management and Wealth Management revenue growth was underpinned by over 15% growth in fee-based assets over the prior year as well as higher transactional revenue. Capital Markets reported revenue of $3 billion while generating pre-tax, pre-provision earnings of $1.2 billion as we continue to win market share in key products amidst rising fee pools. Our continued focus on improving productivity drove all bank operating leverage of 2%. Pre-provision pretax earnings growth was 16% year-over-year, or 8% excluding HSBC and adjusting for specified items. Credit quality remains strong. We reported a return on equity of 15.5% or adjusted ROE of 16.4% on the foundation of common equity Tier 1 ratio of 13%.

Strong earnings generated a significant 70 basis points of capital this quarter or 26 basis points net of dividends and RWA growth. This is more than what we earned in the first half of the year, underscoring the capital-generating power of our diversified business model. Our premium ROE positions us to continue deploying our growing capital base towards client-driven RWA growth and returning capital to shareholders, while maintaining appropriate capital buffers. As always, we look at the intrinsic value of our business when determining the level of buybacks as we remain well positioned to compound growth in book value per share, which was up 11% year-over-year, we expect an increasing level of buybacks over the coming quarters to continue providing long-term value to our shareholders.

I will now provide an update on the recent acquisition of HSBC Canada, which contributed earnings of $239 million or adjusted earnings of $292 million, excluding specified items. Results this quarter benefited from the accretion of purchase accounting marks, $90 million of cost synergies achieved and $156 million of underlying earnings, including higher-than-expected Stage 3 PCL. Having realized annualized run rate savings to date of approximately 50% of our stated target, we are confident we will achieve our expense synergy goal of $740 million per year.

We also remain impressed by HSBC Canada's fundamentals, including the strength of the franchise and the balance sheet we acquired. Employee and client engagement is high, our combined sales force continues to rebuild lending origination pipelines, which had narrowed ahead of our extended close. While still early, we see encouraging client activity and opportunities for revenue synergies across the enterprise. HSBC Canada retail clients are being referred to our Canadian wealth management business and are now benefiting from our deep investment management and planning capabilities.

Existing RBC retail clients are also benefiting from new product and service capabilities, including foreign currency accounts. Our combined commercial banking clients are poised to benefit from the upcoming expansion of our trade finance and global cash management offerings. Before discussing our business results in greater detail, I will provide my perspective on the macro environment where the U.S. has outperformed a softening Canadian macro backdrop. In Canada, higher interest rates and rising unemployment are impacting consumer spending and business investment. This in turn has led to a moderating non-shelter inflation and lower GDP per capita.

Contrast, U.S. inflation remains above the targeted range. However, there are signs that the restrictive interest rate policy is stabilizing super core inflation measures. While the U.S. labor market remains resilient, declining job openings and rates of attrition point to some weakening. The short-term divergence of monetary policy between the Bank of Canada and the U.S. Federal Reserve is expected to narrow ahead of expected and accelerating U.S. interest rate cuts, with positive implications for yield curves. While there's a higher degree of geopolitical uncertainty and volatility, our diversified businesses are well positioned for the macro-driven shifts in the operating environment. We expect to see the benefits of lower short-term interest rates and capital markets activity, constructive equity markets, availability of credit, improved debt serviceability and the flow of money from deposits into investments as we continue to provide our clients with valued advice and solutions amidst a complex backdrop.

We're also delivering on our strategic priorities across our largest businesses and geographies, including expanding our funding and transaction banking capabilities.

Starting with Canadian Banking, where core deposit growth remains central to our client acquisition strategy. While one quarter doesn't make a trend, total banking account deposits grew faster than GICs on a sequential basis. Furthermore, we are beginning to see retail clients augment their portfolios with diversified investments such as mutual funds. We remain well positioned to retain and capture this money in motion following the ongoing shift in the interest rate outlook and client sentiment. Within Personal Banking, total deposits were up 21% from last year or up 8% excluding HSBC Canada. We're having our strongest year-to-date acquisition volume with new to bank checking acquisition up over 20% year-over-year, driven by value propositions such as RBC Vantage, strong client acquisition in the newcomer segment and partnership referrals.

Our leading digital channels continue to deliver award-winning experiences to our clients, a key indicator of client satisfaction, which in turn is important to the health of our franchise. We're proud that RBC ranked #1 in customer satisfaction in both the J.D. Power 2024 Canada banking app mobile satisfaction study and the Canada online banking satisfaction study as well. Our proprietary loyalty program also won multiple awards this quarter at the Loyalty360 Awards, including the Platinum Award for brand-to-brand partnerships, a foundational element of Avion Rewards.

Credit card balances were up 13% year-over-year or 11% excluding HSBC Canada. While Canadians are spending less, our total client spend was up 7% from last year, including higher airline spend. Mortgage growth was up 12% or a modest 3% excluding HSBC Canada. We remain disciplined in our approach as we look to strike a balance between consistent through-the-cycle growth and spreads amidst intense competition. Houseful and RBCx Venture provides a differentiated growth channel as we look to move up the client acquisition funnel in our clients' home buying journey.

In our leading commercial banking franchise, deposits were up 25% year-over-year or 12% excluding HSBC Canada. Business loans were up 43% from last year or 14% excluding HSBC Canada, largely from increased activity from our existing clients. We are seeing gains in market share across all segments and priority industries, their clients benefit from the recent investments in our frontline capabilities and coverage teams.

Turning to capital markets, where we reported pre-provision pretax earnings of $1.2 billion this quarter or $4 billion year-to-date, above our annualized guidance of $1.1 billion per quarter. We generated $3 billion in revenue this quarter, with half of this coming from the U.S., our second home market and an important element of our growth strategy. Investment banking revenue was up 36% from last year, benefiting from a recovery in global fee pools and a more than 40 basis point gain in market share, notably in M&A.

We are seeing also early signs of success and client wins in our recently launched U.S. cash management platform, where we will look to add further capabilities. RBC Clear was awarded the best overall bank for Cash Management, United States from the Global Finance Magazine 2024 awards. Global Markets reported $1.4 billion in revenue this quarter, down 1% from last year as our equities business was impacted by legislative changes to the dividends received deduction under Canadian federal measures.

Looking forward, we have a robust M&A pipeline as our continued investments in people, product capabilities and client coverage, combined with an increasingly constructive environment is driving more active client dialogues amidst secular trends. However, market volatility could slow the velocity for moving deals from announcement to close. In contrast, this market volatility can continue to act as a constructive tailwind for our sales and trading businesses a demonstration of the strength of our diversified platform.

Moving to our Wealth Management segment. Assets under administration and Canadian Wealth Management were up 20% or nearly $100 billion from last year, increasing to a record level of over $650 billion. RBC Dominion Securities as part of our Canadian Wealth Management franchise was named the highest ranked bank-owned investment brokerage in Canada in 2024 Investment Executive Brokerage Report Card. This is the 18th year in a row that RBC has won this prestigious honor. Assets under administration and our U.S. wealth management platform also reached a record up nearly $74 billion or 13% year-over-year to a record AUA of nearly USD 650 billion.

Furthermore, loans and deposits in our U.S. Wealth Management franchises reported strong year-over-year growth this quarter. Our U.S. Wealth Management Advisory business are the second largest contributor to U.S. dollar results. RBC Global Asset Management assets under management increased $100 billion or 18% from last year to an all-time high as well, benefiting from robust equity markets, increasing inflows to higher-yielding fixed income funds as interest rates begin to decline.

RBC GAM also gained market share in retail mutual funds as it generated positive net sales in a quarter where it appears the industry is tracking to net redemptions.

In conclusion, we continue to execute against our stated strategies to generate premium ROE and growth. As part of the journey, we recently announced a few key executive appointments. First of all, I would like to thank Doug Guzman for his leadership and for the pivotal role he's played leading RBC Wealth Management from strength to strength and insurance over the years. In addition, we look forward to welcoming Erica Nielsen, Jennifer Publicover and Sean Amato-Gauci to the next quarterly call as group heads of Personal Banking, RBC Insurance and Commercial Banking, respectively. We will also continue to invest to drive diversified growth across client segments and sources of funding while maintaining our focus on efficient capital allocation, prudent risk management and improved productivity.

Furthermore, as it relates to our broader U.S. footprint, we are focused on improving the connectivity across our 3 platforms.

Katherine, over to you.

[Katherine Gibson, executive]

Thank you, Dave, and good morning, everyone. Starting on Slide 8, we reported diluted earnings per share of $3.09 this quarter. Adjusted diluted earnings per share was a record $3.26, up 15% from last year. These adjusted results included net earnings from HSBC Canada of $292 million.

Turning to capital on Slide 9. Our CET1 ratio was strong at 13%, up 20 basis points from last quarter, mainly reflecting internal capital generation net of dividends. This was partly offset by net credit migration in wholesale portfolios and strong growth across our Canadian Banking and capital markets portfolios. We also initiated share repurchases this quarter, by an approximately 480,000 shares for $73 million.

Moving to Slide 10. All bank net interest income was up 17% year-over-year or up 19% excluding trading revenue. These results were largely driven by the addition of HSBC Canada as well as higher spreads and average volume growth in Canadian Banking. All bank NIM, excluding trading revenue, was up 1 basis point from last quarter, mainly driven by tailwinds in Canadian Banking. This was partly offset by changes in asset mix and capital markets nontrading portfolios as well as lower earnings on residual capital, reflecting the close of the HSBC Canada acquisition. Canadian Banking NIM was up 8 basis points from last quarter. HSBC Canada drove 4 basis points in NIM expansion this quarter. mainly reflecting the full quarter benefit from the accretion of purchase accounting fair value adjustments.

Core Canadian banking NIM was up 4 basis points sequentially. NIM benefited from improvements in product mix, including strong growth in core deposits. This quarter also included a favorable benefit from treasury-related activities. In addition, the benefits from our tractored core personal banking deposit portfolio continued to flow through. However, these benefits were partly offset by competition for deposits and mortgages as well as the dilutive impact of the BA CORRA migration.

Looking forward, we expect fourth quarter Canadian Banking NIM to be down a couple of basis points sequentially, reflecting the continuation of headwinds noted this quarter. This is in line with our prior guidance for higher NIM in the second half of the year.

Moving to Slide 11. Noninterest expenses were up 11% from last year, excluding HSBC Canada integration costs and the impact of the amortization of intangibles, adjusted expense growth was 9%. Further, excluding HSBC Canada run rate expenses and other macro-driven factors such as FX and share-based compensation, core expense growth decelerated to 5% year-over-year. The bulk of core expense growth was driven by higher variable compensation, reflecting strong results in capital markets and wealth management.

Looking forward, we continue to expect all bank core expense growth in addition to HSBC Canada run rate expenses to be at the top of the mid-single-digit range for the fiscal year with volatility within the range, largely driven by movements in variable compensation. Given the uncertain macro environment, we remain vigilant in controlling costs and running the bank efficiently.

Turning to taxes. The non-TEB effective tax rate was 16.5% this quarter or an adjusted tax rate of 20% on a taxable equivalent basis. Going forward, we expect next quarter's adjusted tax rate to be towards the higher end of our full year guidance of 19% to 21% on a taxable equivalent basis.

Broadly, our guidance for fiscal 2025 effective tax rate is similar to that of the fourth quarter, as Pillar 2 income taxes may arise in relation to jurisdictions where our operations have an effective tax rate below 15%.

Turning now to our Q3 segment results beginning on Slide 12. Personal & Commercial Banking reported earnings of $2.5 billion. Canadian Banking net income was up 17% year-over-year. My following comments will now exclude any impact to Canadian Banking from HSBC Canada. Canadian Banking's earnings were up a strong 8% year-over-year. Net interest income was up 11% from last year, reflecting higher spreads and robust volume growth. Noninterest income was up 5% year-over-year reflecting the benefits of market appreciation and increased client activity, which together drove higher mutual fund distribution fees as well as higher service revenue and FX revenue.

Year-over-year growth was also impacted by the prior year's $66 million retrospective HST on payment card clearing services. Expenses were up 5% from last year helping to drive a 4.9% operating leverage and underpinning a leading 39% efficiency ratio.

Turning to Slide 13. Wealth Management's earnings were up 30% from last year as market appreciation and net sales continue to drive strong performance in our wealth management advisory and asset management businesses. These factors were partly offset by higher variable compensation. In light of emerging industry development around pricing dynamics for advisory suite deposits. We note our total U.S. wealth management cash sweep is approximately USD 30 billion, of which the majority is in non-advisory accounts. Since the beginning of the rate hiking cycle, our pricing has been well above industry averages, particularly as it pertains to our largest wealth management relationship. As such, we do not anticipate making any material changes to our pricing of advisory suite deposits.

City National generated USD 77 million in adjusted earnings this quarter or USD 115 million, excluding the impact of losses on noncore investments. The noncore losses taken this quarter are consistent with our efforts to realign City National's path forward.

Turning to our Capital Markets results on Slide 14. Pre-provision, pretax earnings of $1.2 billion increased 18% from last year. Corporate and Investment Banking revenue was up 23% from last year, reflecting strong municipal banking activity as well as continued market share gains across most major products, amidst a recovering fee pool and the impact of FX translation.

Global Markets revenue was down 1% from last year as headwinds in credit trading and equity derivatives trading were partially offset by higher debt underwriting and stronger results for rates, foreign exchange and commodities trading as well as the impact of FX translation. While business momentum remains strong, we note that the second half of the year, and in particular, the fourth quarter tends to be a seasonally slower period for capital markets.

Turning to Slide 15. Insurance net income of $170 million was down 21% from last year driven by lower insurance investment results. It is important to note that the results in the prior year period are not fully comparable as we were not managing our asset and liability portfolios under IFRS 17. Importantly, our core business performance was strong, reflecting improved claims experience and business growth across the majority of our products.

To conclude, our strong business performance drove a 16.4% adjusted ROE this quarter. Looking forward, we expect to maintain our medium-term objectives, including an ROE of 16% plus and diluted EPS growth of 7% plus while maintaining strong capital ratios.

With that, I'll now turn it over to Graeme.

[Graeme Hepworth, executive]

Thank you, Katherine, and good morning, everyone. Starting on Slide 17, I will discuss our allowances in the context of the macroeconomic environment. During the quarter, the economies of Canada and the U.S. both softened. In Canada, relatively weaker consumer demand, higher employment rates and the impact of elevated interest rates are continuing to weigh on consumers and businesses. In response to the softening economic backdrop and with the expectation that inflation rates will continue to edge lower, the Bank of Canada cut the overnight rate for 2 consecutive months this quarter. This marks the first set of reductions in rates since the current rate hiking cycle began in early 2022.

In the U.S., slowing inflation and uptick in the unemployment rate means the risk of interest rates remaining at current levels is also beginning to ease. Across these 2 economies, macroeconomic uncertainty has overall reduced. With this backdrop, we saw credit quality continue to weaken this quarter with net credit downgrades and elevated watch list and delinquency rates. These outcomes are in line with our expectations for where we are in the credit cycle. And consistent with last quarter, we added reserves on performing loans, reflecting weaker credit quality and portfolio growth, partially offset by more favorable scenario weights as we gain more confidence in our base case scenario.

Across our portfolio, we took a total of $42 million of provisions on performing loans this quarter. This marks the ninth consecutive quarter where we added reserves and performing loans, resulting in a total ACL of $6.1 billion.

Moving to Slide 18. Gross impaired loans were up $353 million or 3 basis points this quarter, primarily due to increases in Canadian Banking. Commercial new formations were driven by relatively large impairments in each of the real estate related and forest product sectors. In Capital Markets, a decrease of $354 million this quarter is mainly due to lower impaired loans in the real estate-related sector. Reduction reflects $442 million in foreclosed properties related to real estate loans that are now accounted for as investments.

Despite higher formations of gross impaired loans this quarter, turning to Slide 19, you can see provisions on impaired loans were down $49 million relative to last quarter. Higher provisions in Canadian Banking were more than offset by lower provisions in Capital Markets and Wealth Management, with Capital Markets provisions down $65 million compared to last quarter. In our Canadian Banking portfolio, provisions were up $32 million, driven by higher provisions in commercial banking, residential mortgages and other personal lending. All quoted figures thus far have included the HSBC Canada portfolio.

On its own, the portfolio contributed $81 million to provisions on impaired loans, mostly due to the 2 larger commercial formations noted earlier. Despite the elevated impairments in PCL this quarter, we remain confident in the overall credit quality of the loans we acquired from HSBC Canada. The HSBC Canada portfolio reflects credit characteristics that are in line with or better than the associated RBC portfolios and drive scale and diversification benefits.

On Slide 20, we provided some additional details on our overall commercial real estate exposure. The sector has generally been performing well, but pockets of weakness have surface based on property type with office properties being more sensitive to post-pandemic impacts. With respect to the larger commercial real estate impairment referenced earlier, our forward owned interest in and operated a number of properties in the office property sector. This is the first meaningful office-related default in our Canadian portfolio. The more elevated exposure that arose from the combination of HSBC's and RBC's portfolios last quarter. Overall, our exposure to Canadian office commercial real estate loans represent less than 1% of our total loans and acceptances and most of our loans are typically benefit from amortization and additional recourse outside of the properties held as collateral.

As I noted in previous quarter, impairments and losses have been consistent with our expectations and are well within our risk appetite. We continue to be prudently provisioned for our exposures -- for exposure to this sector with our downside provision scenarios, reflecting a reduction in commercial real estate prices of 25% to 40%.

To conclude, while we are pleased with the lower provisions on impaired loans this quarter, we still expect provisions remain elevated and continue to increase going into and throughout 2025. We continue to prudently build reserves on performing loans, reflecting the credit outcomes of the softer macroeconomic environment we are currently experiencing.

Moving forward, credit outcomes will continue to be dependent on the magnitude of changes in unemployment rates, the direction and magnitude of changes in interest rates and residential and commercial real estate prices. And as always, we continue to proactively manage risk through the cycle and we remain well capitalized with stand plausible at more severe macroeconomic events.

With that, operator, let's open the lines for Q&A.

[Operator]

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

[Ebrahim Poonawala, analyst]

I guess maybe a question for you, Dave. I think I heard you say we should expect a pickup in buybacks given how you view the intrinsic value of the stock. So I guess the question is on capital allocation. One, correct me if I'm wrong, but not sure unless something macro-wise goes wrong, why Royal should be earning a lower ROE relative to the 60% you reported this quarter. And if the stock continues to perform well, maybe trading north of 2x price to book, we've seen this with the likes of JPMorgan in the U.S., where would you rather accumulate dry powder to fund organic growth next year, leave some room for M&A? Just how are you thinking about capital allocation given the capital that the bank is accreting and the possible use and your patience to allow capital to build in the near-term?

[David McKay, executive]

Thanks, Ebrahim. A very important question. And I think the answer to your question is yes to the points you made that we are of such significant capital generation -- organic capital generation capabilities, as I referenced, the 70 basis points this quarter in building that we'll have the luxury of doing both.

So I do believe in the strategy that there is no half-life to capital, you can only misspend it. So accreting capital in our balance sheet for future strategic optionality is part of the plan, and you should expect that it could run up as we prepare for the next leg of growth. At the same time, it offers us the luxury of buying back shares. So we will return capital through buybacks because we look at our intrinsic value. We look at the opportunities these franchise have to continue to build on the momentum that you see now. And we're very excited about that, and you saw that in our results this quarter.

So the plan is to do both. The plan is to continue to buy back shares to return capital to drive a premium TSR, which is very important in the short-term and medium-term as well as provide an opportunity to build on the balance sheet to deploy capital into the right target. But we're going to be patient like we were with HSBC. We're going to look for the right thing. And we won't make a mistake. And I hope we've earned your trust that that's how we deploy capital and we'll do it smartly, all with the goal of outperforming on total shareholder return.

[Operator]

A following question is from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

Question for Graham, just on the impaired PCL ratio, 26 basis points this quarter, below the average historical loss rate. So I'm just wondering, can you -- in your view, has this ratio peaked and -- or are we still likely to head back above the historical loss rates, the average historical loss rate as you look forward?

[Graeme Hepworth, executive]

Yes, Meny thanks. It's a good question, an important one. Certainly, I think we're very pleased with the credit outcome this quarter. I think when we go back to kind of where I guided at the beginning of last year that we were looking at kind of 30 to 35 basis points for the year. I would say, through the first half of this year, we were certainly trending in line with that. And I would still say, I think that is still a fair range to be kind of thinking about. We've outperformed at this range. I would say that outperformance this quarter is certainly attributable to wholesale.

Both Capital Markets and City National came in kind of lower than previous quarters in our expectations. Again, that's positive, but on wholesale, it is more volatile quarter-to-quarter. And so I wouldn't read that into a definitive indication that we've now turned the corner. In aggregate, when we look going forward, the trends on retail are still negative. We're still seeing that increase across most -- almost all products. Overall, I would say though, the timing of that has kind of been more prolonged than we had originally anticipated. So we do see it kind of growing through 2025. And I think the peak is probably less acute than maybe we were thinking about kind of at the beginning of this year. But there are still significant headwinds there. Unemployment is still on the rise.

We think we're getting closer to peak unemployment now, but it is still on the rise. And we still see a consumer who faces a lot of headwinds with the current rate environment. Yes, rates have come down. But many of these consumers still haven't faced the full impact of kind of the repricing of their mortgages and the associated payment impact that comes with that. And so those are all factors that leave us feel quite cautious through the end of this year and going into next year. But nonetheless, kind of very pleased with the performance we saw this quarter.

[Meny Grauman, analyst]

And just as a follow-up, you talked about the peak on the retail side being lower than what you originally expected. Is that just a commentary on rate cuts? Or is there something else?

[Graeme Hepworth, executive]

Again, on the retail side, unemployment is the #1 factor always, right? And the unemployment has just -- it's played out in a slower manner than we had originally anticipated that's allowed clients to I think also clients there have been more resilient with their cash and the liquidity they had coming into this provided more of a buffer than we had maybe appreciated. But I think the trends are still -- they're still significant there, particularly on the unsecured products that we see will really drive that in 2025.

[Operator]

Our following question is from John Aiken from Jefferies.

[John Aiken, analyst]

I was hoping you could give us a little bit of insight in terms of the integration going on with HSBC. I mean, obviously, we're seeing the financial benefits. But are you able to talk about some of the metrics like cross-selling to HSBC clients or customer attrition. I mean I'd love to hear it on an absolute level, but basically, I'm assuming against what you had planned for would probably be a little more reasonable.

[Neil McLaughlin, executive]

Yes, John. Thanks for the question. It's Neil. You heard in Dave's comments, I mean, we've been really pleased with the fundamentals of the business. We're seeing these clients come in, get really engaged with our branch network -- we're seeing good mobile adoption. We're seeing appointments really pick up and renewals, I'd say, come in the way we'd really hoped.

What I can say about client attrition is it's well within the estimates when we had put the transaction together, a lot of work to make sure we're reaching out to these clients. Obviously, not to say that there's no attrition, but it's something we're feeling quite comfortable with from what we're seeing right now. They got a positive sign. We're seeing a lot of these clients come into existing RBC branches to renew these products. So these 2 portfolios are starting to really commingle quite quickly, and we view that as a real positive for the client. It's just increased convenience overall.

For the question on cost synergies, I'd say there's 3 buckets we would really look at in terms -- sorry, in terms of the revenue synergies. There'll be 3 buckets. One would be to what you spoke of, which is cross-selling RBC products to HSBC clients. I think we're feeling we're off to a good start. But right now, we are really spending time getting to know these clients anchoring the relationships. But I'd say early green shoots. We're seeing very strong flows early on into Dominion Securities into wealth management. We've already seen over $100 million of AUM come in from these clients. So I think it's a good example there. But we would see opportunities to cross-sell things like credit cards where we have a real strength, small business was something they weren't I'd say really focused on where we're a market leader.

The second category would be where we're seeing our ability to sell some of the new products we built for HSBC into our legacy portfolio. And I think a couple would jump out. I think trade finance will be an example, some of the sophisticated cash management products to the upper end of our corporates and the foreign currency accounts Dave mentioned, and there's a good example there. We've already sold 7,000 of those to our RBC customers. So you're starting to see those new products come into the legacy portfolio.

And then maybe the last bucket we would look at in terms of revenue synergies would just be new clients acquired from the previous HSBC salesforce. They -- we would say there wasn't as much growth preclose as we would have hoped. But they are holding back some of these transactions, and we're starting to see these pipelines build quite well. I'll leave it there.

[Operator]

The following question is from Paul Holden from CIBC.

[Paul Holden, analyst]

Since we've entered the rate cutting cycle, certainly in Canada and probably soon in the U.S. Just wondering if there's anything you can point to or how you're thinking about sort of the NII and earnings sensitivity to rate cutting sort of beyond the simple disclosed NII sensitivity, like is there any nuances why this cycle maybe could be different than past cycles because of some of the funding mix shifts we've changed, et cetera? Some additional thoughts would be helpful.

[Katherine Gibson, executive]

Paul, it's Katherine. So a great question and a lot of moving parts in connection with that. So I'll actually step back and give a bit of a holistic view of the items that we're thinking about that would have potential impact on NIM covering off both Canada and the U.S. So let's start with the interest rates on the Canadian side, we're expecting to see strong tractor benefits continue to flow through, and this is really showing the advantages of our structural low-cost beta core personal banking deposits. We're seeing swap rates will long roll off about 200 basis points if you look at where swap rates were 3 to 5 years ago.

Rate impacts to a cut would mostly impact the non-tractor portion of our low beta deposits. And this is roughly about 1/3 of the CBNII sensitivity type of movement in that short end of the curve. The other item that you would have seen in our commentary for the last few quarters now impacting NIM would be around intense competition around pricing for deposits as well as mortgages. And we expect to see that continue as we go forward.

Neil might want to add to that after. And then we're also client-driven mix shift and keeping an eye on that as interest rates move, we've seen with interest rates increasing the shift into GICs, the [ new credit ] portion moved in. And so as that rates come down. The expectation is that we will see a flow out of GIC. Stepping back, though, on that, we would expect that Canadian Banking with the lower GICs, we would see a negative impact to net interest income. But tying into Dave's comments, the diversification of our business really stands strong here. The expectations with those flows, given the strength of our wealth management business, we would be seeing those flows move into wealth management. So net-net, really looking at that as flat across the organization in that environment.

And then you referenced the U.S., so just a quick call out on City National. It has been an asset-sensitive business. And in connection with that, we have been putting on forward hedges to protect us in the down rate environment. And so that is expected to take volatility out of the number as we go forward.

[Paul Holden, analyst]

Okay. That's helpful. I mean there's a number of things you gave us to think about in Canada. My read based on the answers you provided, I think, maybe less NII sensitivity from rate cuts than we might see based on the disclosed numbers? Is that a fair takeaway then.

[Katherine Gibson, executive]

Yes, that's a fair takeaway.

[Operator]

The following question is from Doug Young from Desjardin Capital Markets.

[Doug Young, analyst]

Just on City National Bank. Just hoping to get a little bit of color, you talked about the back of the adjustment, earnings $115 million. Can you quantify the performing loan allowance release the noncore losses, maybe a little more detail. And I guess what I'm trying to get at, is this kind of a reasonable jump on spot. Like have you turned the corner? It seems like the progress in the last 2 quarters is moving in the right direction. Just to hope to get some color on that.

[David McKay, executive]

Katherine will start, and then I'll make a comment.

[Katherine Gibson, executive]

Yes. Yes. Thank you. I'll start by answering your question on the specifics on the noncore impairment charges that I talked to. These are related to steps that City National has been taking to simplify the business, and it's really to focus on the areas that have that higher return. So it's really tied into our comments that we've made previously around City National focusing on that normalized path to higher profitability. So with that, I'll turn it over to Dave.

[David McKay, executive]

Maybe I'll just step up a bit. So we are working on a number of initiatives, including simplifying the business and that meant exiting some of the ventures we had, exiting some of the ancillary businesses that we don't view to be core to the long-term franchise. And really important to simplify this franchise and focus on customer segments.

So we took 2 charges this quarter to do that. That will have a positive accretion to earnings. Over the coming quarters and years. In addition, we're down almost like 500 FTEs. So there's been a significant cost takeout. We're not -- we have an opportunity to continue to reduce cost in a franchise, and we're focused on that. But a big part of this is the cost that we've allocated -- significant costs have allocated to kind of building out our operational infrastructure, our risk infrastructure, remediating the public consent order. All of that is embedded into our current run rate, and that will start to come off as we achieve our milestones in '25 and to '26.

So it's a very significant and heavy cost absorption to move this bank to heightened standards, and we're well on that path. So that's embedded in the current run rate. We've also seen a bit of runoff in the balance sheet. We've done that intentionally. We're continuing to raise deposits. We're looking at moving off low-yielding assets. There's a significant number of still low-yielding assets on the balance sheet. We're trying to replace them with higher-yielding assets and more importantly, with deeper relationship clients. We have a lot of single service clients on the balance sheet with low yields, and the team has done a very good job of moving some of those non-growth assets off and then going after clients.

So the pipeline is building to do that. So all that points to an ability to build on kind of where we are going forward.

[Doug Young, analyst]

Maybe just. Sorry, go ahead.

[Graeme Hepworth, executive]

It's great. I thought I'd jump in too because I think embedded in your question there was just a bit of understanding on their PCLs and the dynamics there. Maybe just to decompose that into 2 parts. So there was a release on their kind of performing PCL. That was a bit of a couple of things there. One, certainly, in our overall forecast, we have accelerated some of the rate cut expectations in the U.S. And so that's had a positive impact and kind of how we kind of think about the projection of future losses. That did offset some softer assumptions we had in the U.S. around unemployment and GDP. And additionally, the weight scenario change, weighting that we talked about earlier also benefited kind of how we're thinking about City National's loan losses going forward.

Additionally, this quarter, City National kind of, again, came in lower than some of the previous quarters in their actual impaired losses. Overall, again, I think the portfolio there is performing well. But as I said, other portfolios, wholesale is a bit more volatile quarter-to-quarter, and we continue to remain cautious there. I think overall, the performance this year has been a bit better than we expected. I think coming out of last year with the regional bank issues, it was a concern there. And the client portfolio there has been more resilient than expected, but we're still in a cautious situation there.

[Doug Young, analyst]

Okay. And then just second, there's been a steady decline in market risk RWA over the last, call it, 3 quarters. Is that intentional? Or are you taking down risk in capital markets? Just hoping if you can elaborate maybe a bit on that.

[Graeme Hepworth, executive]

Derek, do you want to add.

[Derek Neldner, executive]

Sure. Yes. Thanks, Doug. The short answer is, no, there hasn't been any material shift in our risk appetite or purposely taking risk off. Obviously, there's various points in time we are in the trading business. We're mindful of volatility or different economic or geopolitical events. But broadly, our risk appetite has remained fairly similar. As always, we're looking at our business and finding different ways to optimize around capital as we focus on continuing to support and improve our ROE. So there's a number of different initiatives that have helped to address that tactically. But overall, no meaningful shift in our risk appetite approach.

[Operator]

Following question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, analyst]

Okay. I think the question will probably be directed at Dave, Graham and maybe Derek. I think the cautious tone I heard, Dave, around the macroeconomic environment. And I think Graham basically suggest that we will have some sort of elevated perhaps PCL outlook. But -- but I'm just trying to kind of better understand if that's just being uber conservative, given the comments that -- but you still plan to also do some buybacks and whether or not if a declining rate environment, even if it's coming at us at the pace that it is, is actually going to be its steepening yield curve, like I think that's going to be really additive to Derek's business as well here.

So can I just better understand the degree of conservatism, I think that Graham is placing in the PCL commentary and Derek's outlook for pretax pre-provision, especially in the capital markets and that dovetails with buybacks and pace of buybacks and your view of intrinsic value, please?

[David McKay, executive]

Yes. So great question. So yes, we have done a very good job of putting caution into our statements today across the board, I think not just risk. But to your point, the momentum in our franchise is very strong. The opportunities to continue to deliver strong growth are there. So one, to your point, if you look at ROAs and you look at the opportunity, we've seen secular low margins -- historic low margins in some of our largest businesses like mortgages. And that business is earning 1/3 of what it used to. Part of that is the rising rate environment and the difficulty of managing a mortgage business in a rising rate environment. Historically, margins have been much stronger and a declining to stable rate environment as we can fund and hedge that business and that customer pipeline much more effectively. And given some of the dynamics around funding in the industry, maybe better discipline comes back into the overall competitive environment. All that would be quite accretive, as you can imagine, to our overall profitability and ROE.

So there are some secular opportunities as we look at our business in a lower rate environment as spend could increase as capital -- consumer spend could increase as we release more disposable cash flow from debt service into consumption in the economy that can benefit a number of errors from savings to your credit card business. To your point, capital markets activity, as I called out in my prepared comments with a lower short-term rate environment, you can see more M&A activity, you can see more capital investments, both in the corporate lending book and the commercial lending book.

So all that can stimulate a nice rebound in the economy and a soft landing. We're still calling for a soft-landing in the economy. And I think that is the backstop both in Canada and the U.S., we're calling for positive growth. We're not calling for a recession. We're calling for lower interest rates and a flatter yield curve. And therefore, they all -- with the hedging that Katherine talked about, which is very important to reduce the downside impact of rates on our overall balance sheet, we are in a position to absorb this volatility and continue to perform strongly going forward.

So I think we are just trying to express, and I was going to leave this to my closing comments, but your question is so important. We are trying to express it's uncertain, and it's volatile and the consumer has not repriced their mortgages to Graham's point. So there are some unknowns out there that we're trying to manage, but we feel we can manage them quite well. But we want to make sure you're cognizant of -- we haven't landed this plane on the economy yet, and we still have to do that, but we want to express that in our caution. Hopefully, that helps.

[Sohrab Movahedi, analyst]

It's super helpful. Graeme, if you had to probability weight if you're going to be increasing the weighting to the base case higher or lower in your IFRS 9 modeling in 2025, knowing what you know today, what would it be, do you think?

[Graeme Hepworth, executive]

I won't handicap that -- that's an assessment we do each and every quarter based on all the facts we know at that time. And so I really struggle always getting into this, what do I expect my future expectations to be? Like in each quarter, we try and do the full assessment of the risk and uncertainty out there, and we take the appropriate actions and embed those into our assumptions and allowances accordingly. And so I think this quarter, the shift in the allowance weights is really reflective of the fact that as we've seen with the Bank of Canada cutting rates, it's just -- there's more certainty that inflation has been brought within control and the uncertainty associated with that higher rate, higher inflation environment is now kind of less likely out there. And so that was kind of really driving our wage shift this quarter. But as to how that kind of reflects in future quarters, we'll assess that at the time.

[Operator]

Our following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Two quick things I wanted to clarify that I didn't quite follow on the call. First, Katherine, you talked about -- I think it was you talked about the sweep accounts in the U.S. bank feeling -- not feeling a need to adjust rates there. Could you just maybe speak on that first.

[Katherine Gibson, executive]

Sure. We just wanted to be really clear to -- the Street that our pricing on these suites, which is about $31 billion and -- $30 billion in the U.S. that from a competitive perspective, we feel that we're very well placed. And in relation to any questions about pricing changes, given that competitive positioning, we're not expecting to see anything materially going forward.

[Mario Mendonca, analyst]

Helpful. And then Graeme, 1 other thing that I want to clarify on Page 18, you referred to $452 million reduction as some -- certain loans were converted to investments. Did I read that -- did I listen to that correctly?

[Graeme Hepworth, executive]

Yes, that's correct. I mean we -- there's a series of commercial real estate loans that we had impaired a number of quarters ago as part of our work out there. We foreclosed on those and effectively taken ownership of that. And so we just wanted to highlight that, that moves out of the impaired loan category into an investment category. I just wanted to be very transparent about that, but all consistent with our workout thesis and recovery thesis there.

[Mario Mendonca, analyst]

So those get mark-to-market going forward then?

[Graeme Hepworth, executive]

Not mark-to-market per se to get held as investments and accounted for consistent with that. Katherine might have more to add on that accounting treatment.

[Katherine Gibson, executive]

I can just add on quickly. Graeme nailed it. And think about it as those have just come on to our books now and they're sitting there as assets versus loans. So think about it as commercial properties that's sitting on our books.

[Douglas Guzman, executive]

Just on the suite -- Doug, back on the suites. From a business perspective, I think it's important to understand what's behind our position today, which as Katherine points out, is a very different one than those are feeling some pressure is that we made a judgment some number of quarters ago that with rising rates, the right balance was to allocate some of that rising rate to our customers. So we have come into this period of discussion on this topic with rates that our clients are experiencing that are higher than our competition. And so that leads to us obviously paying attention to this because it's getting a lot of attention. But to Katherine's point, we don't feel like we need to make a big adjustment because we had already made that adjustment in our customers' favor some number of quarters ago.

[Mario Mendonca, analyst]

Okay. And then a more broad question for Dave. Canadian investors are probably too polite to say it, but they've kind of lost patience with large U.S. deals that do nothing but destroy value. And I'm not suggesting that City National was one of those, it wasn't large enough, I think, in the context of Royal to do much damage. But clearly, the U.S. deals in the last little while have not been good for Canadian shareholders. So in your response to Ebrahim and you were talking about capital allocation, what I'm getting at here is -- would the bank consider a large transformative transaction in the U.S. or when you think about allocating capital to the U.S., is it all about fixing City National maybe buying something small that might enhance value there. What's your thinking about allocating capital to the U.S. going forward?

[David McKay, executive]

It's a great question. It's a very large marketplace. It's a highly and intensely competitive marketplace for the profit pool shift. And to your point, generally, banks and all the industries have been quite unsuccessful in making them work. So we are highly cautious at the end of the day. So there could be tuck-in opportunities as far as a large transformational I think we've learned a lot through the City National Venture is to how to run a bank in the new changing environment. I would say it's a very high bar to clear. At the end of the day, to get everything right and a very complex bar, you have to be incredibly sure footed about your synergies. When we first moved on City National, we didn't have anything in the United States, right? It was our first step into the market and therefore, our synergies were growth. And the market changed on us as far as the regulatory environment and the whole construct that we've had to adjust to that.

So you need a stable market and a stable set of rules to invest in and we don't have that yet in the U.S. We're very conscious of the dilutive impact. And therefore, the bar for us to do anything inorganic in the U.S. is very high. You just saw us allocate $13.5 billion of capital to Canada through HSBC, pretty strong signal that we were incredibly sure footed on that acquisition and it drove very significant shareholder value. And we have opportunities in a highly fragmented kind of U.K. wealth space to build on Brewin Dolphin as well against small tuck-ins. So to your point, I guess, I'm trying to guide you, we don't feel we need to bet the organization on U.S. acquisition.

We didn't do that with City National. That was a very conscious part of the strategy. We decided to go with low financial risk, higher operational risk strategy to reenter the U.S. commercial and banking space. Obviously, to your point, it's low financial risk, but the operational risk has been challenging, but we're getting a handle on it. We're going to drive, as we've talked about, a strong return for our shareholders over time. We don't need to do a transformational acquisition. But if one lined up to a very, very high bar, I can't say never, but the bar is incredibly high, and we don't see anything on the horizon.

[Operator]

Our following question is from Gabriel Dechaine from National Bank Financial.

[Gabriel Dechaine, analyst]

A couple of questions here. First, for Derek, can you talk about the credit performance in your U.S. leveraged finance portfolio. I think it's around $20 billion, the stuff you keep on balance sheet and how those credits are behaving in this higher rate environment?

And then on HSBC Canada for Neil, last quarter, you showed the balances at closed versus where they were when the deal was announced, showed some deterioration, and we don't have that disclosure anymore. And I'm just wondering if that decline has stabilized and maybe we had a bit of growth legacy HSBC, if you will.

And then City National, what's the outlook for loan growth there? The balance has been pretty flat for a few quarters. I know there's some macro challenges and all that. But what's your timing expectation of when that loan book can start growing again?

[Derek Neldner, executive]

Sure, Gabriel. It's Derek. I'll start with your question just on the leverage lending portfolio. You're correct. Our -- that's around $20 billion, and the majority of it is in the U.S. Overall, we're very comfortable with it. A few things behind that. First, we've been very focused historically on managing the size of that. So it's modest in the overall size of our balance sheet. But importantly, our holds by single name, we've generally kept quite modest. They are approximately $35 million each at the more risky rating categories. And so over a cycle like we've just gone through, where you've had economic weakness impacting different industries, and you've got higher rates that have obviously impacted the interest burden that some of these companies face where we've run into any kind of PCL, it's very modest given the small hold size we have.

As well, it's a very diversified group. Borrower group. About half of it is corporate, half of it is sponsor-backed and within that, very diversified across sectors. And so I think as you've seen over the last 18 to 24 months as we've gone through a more challenging cycle. We've taken some PCL related to that, but I think it's all been within expectations and quite manageable. And so we're overall very comfortable with how it's performed as well as the outlook as we look out to 2025.

[David McKay, executive]

As far as City National growth overall, the industry growth has been very, very low over the last number of quarters in the year. And that's just -- the higher rate environment is suppressed overall investment and demand among the sector as you would expect. And as rates start to come down, you would expect that growth to restart again. So for us, it was, again, more focused on moving and not renewing lower-yielding assets to reinvest those deposits and that capital into higher growth higher-return assets. We're building out teams to do that, and we're pretty excited about the opportunity under Howard and Greg to really build out a stronger commercial franchise, mid-corporate franchise in the United States. And our deposit-raising strategies, whether it's from RBC Clear to our cash management ability at City National are a really important part of that.

So I would say we remain focused on growth and manage growth. I think we could add profitability while doing that.

[Neil McLaughlin, executive]

Dave, it's Neil. I'll just maybe add a couple of comments, your questions about the HSBC volumes. Probably the biggest movement we saw and we commented on this last quarter was some nonrevenue-generating business deposits. Part of that related to some intercompany deposits. They were holding to settle up with Mastercard, another bucket was nonrevenue-generating deposits for the CBA account, they were holding for the government, which I made a comment, both on the mortgage book and the GIC book, we are seeing this co-mingling of the portfolio. So keeping these clients from going to other channels going to branches into other transits. It is getting more complicated already.

So we have seen some of that move in. But I think the important thing to take away is both in terms of the client numbers, whether it's the consumer or the commercial or the volumes, these are -- we're both tracking these well within the estimates when we put the original $1.4 billion fully synergized number to the market.

[Operator]

Our following question is from Jill Shea from UBS.

[Jill Glaser Shea, analyst]

I just wanted to touch on capital markets with the pretax, pre-provision coming in at the $1.2 billion and above that guidance range of the $1.1 billion, realizing you noted the seasonality into 4Q, but just wondering if you could touch on the overall backdrop and deal flow as well as any color on the momentum in your market share gains and how that might play into the earnings power of the business over the medium-term?

[Derek Neldner, executive]

Sure. Thanks, Jill. So in terms of the environment, I would echo some of Dave's comments that if I set aside very short-term, which I'll come back to, but I look forward to 2025, I think the environment overall feels very constructive. Obviously, with interest rates coming down, access to capital being strong, CEO executive confidence in the economic outlook improving. A number of fundamentals are in place that we have been seeing driving increased activity, and we expect that to continue into 2025.

A part of that as well that has been commonly spoken to is just the amount of dry powder available among private equity firms as well as after a slower period the last couple of years, desire to monetize some existing portfolio companies, so all of which speak to increased activity. And then from a trading business perspective, there's a healthy amount of change in volatility, both economically and geopolitically that we think is going to continue to drive very good activity among asset manager clients.

So as we look out to 2025, we think the strength we've seen this year continues, and we have a fairly constructive backdrop. My only caveat, as you mentioned, is there is seasonality to this business. Q4 tends to be seasonally a softer quarter, in particular given the month of August, which tends to be one of the slower months of the year, just with clients away and activity a little bit more muted. This year, we'll see. We've obviously got the U.S. election and some other events that we'll see what impact that has on activity. So we would just temper the enthusiasm a little bit as we go through the fall period. But overall, for 2025, we think the fundamentals remain very strong.

Your other comment, I think, was just on market share. Again, we've been very pleased that the investments and strategy we've been driving over the last number of years. This doesn't happen overnight, have been translating into market share gains across both our investment banking and global markets business. We feel good about that momentum and fully anticipate we can continue that as we look into next year.

[Operator]

The following question is from Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

So cost management this quarter was really good across pretty much every business. And maybe when we consider the HSBC synergies and some pretty good trends in the market-related businesses that you've outlined. Is there any reason why all bank positive operating leverage shouldn't be sustainable over the medium-term?

And then maybe as a follow-on, are there any particular areas of investment that can maybe weigh on operating costs when we think about 2025 against '24?

[David McKay, executive]

Maybe I'll start. It's Dave, and then I'll hand it to Katherine for some more detailed comments. But we are very much focused on overall all bank operating leverage. I think we have a real opportunity to continue to reduce costs. I think we've come off a period where our costs were elevated. We put a lot of effort into HSBC. And now we're very focused on the overall cost structure to run this business. I would say there are secular technology opportunities to reduce costs, particularly when you look at generative AI and how we're going to start deploying that more at scale in the organization.

So I think as you look at hedges we've done from a macro perspective in a declining rate environment, our focus on costs, the momentum we have -- it is an important part of not only business level leverage -- operating leverage, but trying to maintain that for those reasons at the top of the house. Katherine, do you want to add any comments?

[Katherine Gibson, executive]

Just a couple of things that I would add on, just more reemphasizing that we are constantly looking to optimize our structural efficiencies to support that strategy of creating long-term value. And many of those actions are already reflected in our run rate from a cost efficiency as well as the investment necessary to drive those efficiencies -- so really just going back to reinforce the guidance that was included in my speech for our expected NIE growth as we finish out fiscal 2024. And then to your question about kind of looking broader, I would just hold off at this point in time. Obviously, we've got the drivers that suggest the momentum we have will continue going forward and look in Q4 to give a bit more prescriptive guidance on the expected NIE growth as we move into 2025.

[Operator]

We have time for one more question. Our last question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

My question is for Graham. I'm wondering if you could talk through the comments you made on the timing of peak retail credit losses. I think you mentioned you see it growing through 2025. I would have thought that maybe it suggests that we could see the peak in the next kind of quarter or 2 as we see the benefits of rate cuts playing out, but it sounds like you're thinking the peak is sometime beyond 2025. Can you clarify that? And then also, is it because of your view on unemployment continuing to move higher despite the benefit of rate cuts? And I'm just wondering if you could provide some color on that.

[Graeme Hepworth, executive]

Just a couple of pieces to tie together there. Yes, I think you kind of got to the answer there a little bit yourself, which is certainly unemployment is a big driver of that. And we're seeing unemployment kind of peak out in the latter half of this year and kind of early next year. And then there's kind of a lag effect as we see that translate through to ultimately to impaired loans and PCL. So that's certainly a factor that kind of is driving the direction of retail as we see it. And then certainly, the rates piece, I think everyone again focuses on yes, we've had some rate cuts and those have been beneficial, but that doesn't mitigate kind of rates as a headwind for many of these consumers that when they go to reprice for mortgages, yes, it's maybe not as acute in terms of the payment shock as they were facing when we saw rates where they were last quarter or 2 quarters ago.

But it still is a payment shock that many of these consumers will face. And the big repricing schedule there really goes from '25, '26 and into '27. So there's going to be -- that will contribute to the overall kind of profile as well.

[Operator]

That concludes the Q&A session. I would now like to turn the meeting back over to Mr. McKay.

[David McKay, executive]

Well, thank you for all those great questions. I'd like to sum it up by kind of circling back on 3 points and points that came up in your conversation. First, just to reiterate, for us, momentum across all of our core franchise -- customer franchise is very strong from retail to commercial to capital markets to U.S. wealth to Canadian Wealth. We're seeing CNB on its path to create more shareholder value and getting back to a positive growth contributor to the organization.

So the core of the business performed very well, as you saw, add to that strong execution against HSBC. We're on our cost trajectory. We're confident of that. We've got revenue synergies to add to that, that we'll be able to articulate more clearly over the coming months to you. And therefore, we feel very good about how we're executing through 2023 and to Neil's point, we inherited a fantastic franchise, but one that was hampered by a very long-dated regulatory close. And therefore, the momentum had really slowed in the overall HSBC business.

We've got over 2,000 frontline facing employees that we're turning on now to whether it's private banking employees, commercial, strong commercial business, retail are getting back into building pipelines and building client flow that they normally do, and we'll start to benefit from that. So we feel very good about how the customer franchises are performing. The reason I highlight all these awards is that we're investing in creating value, continuing to deliver premium value to our clients and executing. And that's why I spend so much time on talking about awards to you.

Second thing is you've heard some very cautious comments from us. I think Sohrab asked a great question and tried to bring that. It's just a little uncertain out there, and we're trying to express that, that we are operating with confidence in an uncertain environment, and we're moving forward. It's hard to see exactly how fast rates come down and it impacts consumers, but we wanted to be just a little bit cautious there. We've moved through some -- over the last year, we've moved some capital markets PCL, but it's mitigated -- you always see Capital Markets PCL in early part of an economic cycle and the reach in the back half. And I think the story lines are playing out largely there as well. You've seen us take some proactive hedging to help perform well through a downrate cycle. You've heard us talk about the benefits of a lower rate cycle to our -- to the flows in our business.

So overall, while cautious in our overall macro perspective and the impact on the business, we may retain confidence in our overall operating position within that.

The third thing to Mario's question on investing capital. We are highly aware of the challenges in the marketplace of investing in the U.S. marketplace. It's for that reason we've really chosen to focus on the core customer segments that we're focusing on. It's by design, whether it's corporate and institutional, where we've served for many, many decades, and we're growing capital markets franchise, whether it's the high-net-worth and ultra-high-net-worth franchises we're serving in the wealth franchise that we can build on there, which is kind of lower PCL and lower volatility in the City National franchise, which is high-net-worth kind of private banking clients and then very strong entrepreneurial commercial clients that have performed very well over multiple cycles from a PCL, all that strategy is designed to produce higher ROE -- relative higher ROE, not as high as Canada, obviously, but lower volatility on the credit side through a cycle. And we don't see any change to that.

So when it comes to the important question of deploying capital, I think I probably should have said first, we have no change to our customer strategy. We are not going to pursue mass consumer in the United States for all the reasons I've talked about for the last decade and we continue to view that. So do not fear that we would allocate capital to something that's not core to what we do today. That for that limits the number of opportunities very significantly going forward to focus on the core customer segments we do today. We're very aware of the challenges of driving long-term shareholder value from M&A.

We are highly opportunistic in Canada. It's working out fantastic. We had to see City National for long-term growth, and we'll continue to execute on our mission there and deploy capital. And we will look to tuck things in, but I don't want to leave any impression that we think we need to deploy significant amounts of capital to transform the organization. We really feel we can execute organically going forward across all our businesses to drive the strongest total shareholder return with the lowest volatility, which is core to our investment thesis.

So there are really, really great questions, and thank you for your time today, and we'll see you next quarter.

[Operator]

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