Royal Bank of Canada

TSX:RY

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to RBC's Conference Call for the Fourth Quarter 2020 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.

[Nadine Ahn]

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Then we'll open the call for questions. Also joining us today are Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management, Insurance and I&TS; and Derek Neldner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then requeue. With that, I'll turn it over to Dave.

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

Thanks, Nadine, and good morning, everyone, and thank you for joining us today. I'll start with some context on the fourth quarter, and then provide my thoughts on the macro backdrop and how we are positioned heading into 2021. Today, we reported fourth quarter earnings of $3.2 billion, driven by continued strength in our leading Canadian banking, Capital Markets and Wealth Management businesses. Despite the significant impact from near 0 interest rates and a challenging operating environment brought on by the COVID-19 pandemic, earnings per share were up 2% year-over-year. We benefited from strength in trading and underwriting revenue in capital markets, strong fee-based revenue growth in our Wealth Management businesses and double digit volume growth in both Canadian Banking and City National. Our results this quarter also benefited from our continued focus on risk management and cost control. Now for a few thoughts on the macro environment heading into 2021. The economy has rebounded well to date. But given the emergence of the second wave of COVID-19 in our core markets, we expect economic growth to slip over the next couple of quarters and project Canadian economic growth to end 2020, down over 5%. However, we project GDP growth to rebound 4% to 5% in 2021. The pace of economic recovery still remains contingent on the uncertain trajectory of the pandemic. While we've received positive news on the development of a series of vaccines, much uncertainty remains on the timing and execution of the rollout of a vaccination program. As a result, we will need to continue to focus on bridging and mitigating the impact of the pandemic on our citizens. We applaud the significant support government programs have provided to our clients to date. We're pleased to see key programs extended. Measures to curb the spread of the disease must put the health and safety of people first and foremost, but also remain flexible and dynamic to manage the damage done to the economy and particularly to small businesses. For RBC's part, we will continue to work with our clients to support them through this difficult time. Since the start of the pandemic, we provided significant support to our clients, including deferrals on more than $90 billion of loans. While the majority of clients have returned to making payments on their loans, some will experience further difficulties with the effects of the second wave, and Graeme will speak to this later. Therefore, while long-term interest rates have started to move higher, we are operating with a belief that low short-term interest rates will persist for an extended period. Low interest rates combined with elevated levels of monetary and fiscal stimulus, provide both a buffer for individuals and businesses to manage the uncertain year ahead. It also provides a catalyst for growth once the health risks have been minimized. Throughout the uncertainty and volatility of the past year, the strength and liquidity of our balance sheet has remained a constant. We ended the year with a record CET1 ratio of 12.5% with Common Equity Tier 1 up nearly $6 billion over the past year. This provides a $19 billion buffer against the current regulatory minimum of 9%. In addition, we increased our allowance for credit loss to over $6 billion, up nearly $3 billion from last year, and this represents over 4.5x coverage of our last 12-month write-offs, and nearly 90 basis points coverage of loans and acceptances. Our strong balance sheet gives us flexibility to not only manage the uncertainty ahead, but also allows us to continue supporting our clients spur growth in the economy and drive shareholder returns. This year, we paid over $6 billion in dividends to our common shareholders, up slightly from 2019. Despite the significant increases in capital levels, we delivered a premium ROE of 16% in the fourth quarter and continue to create value for our shareholders, growing tangible book value per share 5% in a stressed year. Heading into 2021, we are maintaining our 3- and 5-year medium-term objectives. However, we recognize that meeting these targets in the near-term will be challenging or be challenged by the ongoing impacts of COVID-19, the prolonged low interest rate environment and capital deployment restrictions. One path to higher ROE and EPS growth will be through our continued emphasis on prudent cost control. Our past investments in digital capabilities, data and cyber and risk management systems have underpinned our ability to support our clients and manage the last 9 months with operational resilience. While we continue to invest in our core businesses and strategies, we remain committed to running our bank more efficiently with an emphasis on continuing expenses and driving productivity. I now want to speak to the full year performance of our businesses. All our core businesses reported strong client volumes, driven by our investments in technology, our advice-led sales force capability, award-winning client experience and simpler, easier-to-use products matched with resilient customer needs. Canadian Banking reported net income of over $5 billion for the year, underpinned by strong volume growth. We have added over 60 basis points of market share in core checking accounts over the last 2 years alone. We view this as a core relationship product, and our goal remains to add more clients by expanding our digital capabilities and reach and leveraging our scale to add more relationship value. Our Canadian banking and Wealth Management teams continue to partner to provide a continuum of offerings to our retail and wealth clients, covering the full spectrum of client segments and needs. From our InvestEase robo adviser and direct investing brokerage platforms up to our full-service discretionary wealth management. We have seen significant expansion of client relationships through this closer collaboration with over 65% of Canadian Wealth Management clients now having a Canadian banking product and with further cross-sell initiatives in progress. We are proud of the success we've had in our advisory role with clients. MyAdviser, where clients can meet virtually with digital financial specialists, surpassed 2 million clients on-boarded with a personalized plan since its launch in 2017. Turning to the mortgage business. We recorded very strong residential mortgage growth of 11% year-over-year. The Canadian housing market has been exceptionally strong, as work-from-home arrangements have driven an increased desire for more space, including in suburban areas and smaller markets. A limited supply of detached homes and pent-up demand have also contributed to housing activity. We continue to gain market share through our 750 strong mortgage specialists, driving more new originations and an overall focus on client loyalty, where we're seeing retention rates at nearly 92%. While low interest rates will continue to support buyers, we expect mortgage growth to slow going forward as pent-up housing demand begins to cool. In credit cards, our partnerships and engaged membership base drove nearly $120 billion of purchase volumes this year despite the reduction in travel. With RBC Ventures, we continue to advance our strategy to differentiate the bank by creating value beyond banking. Ownr, for example, which provides digital and corporation services has now supported 13,000 new business starts in 2020 alone. Of those we incorporated, we've been able to convert 57% to RBC business banking. In addition, Ownr recently acquired Founded, adding both scale and new product offerings, including higher margin subscription services to our existing book. Turning to Wealth Management where we generated over $2.1 billion in earnings in 2020. In these volatile times, we are seeing an increased demand for our Holistic Wealth Management and Active Asset Management solutions. RBC Global Asset Management, retail funds captured over 40% of Canadian net sales this year, consistently outpacing industry trends and added to our leading 16% market share in Canadian retail AUM. The strong performance in net sales was driven by our expanded advice and planning capabilities, along with very strong investment performance in our funds, with 70% of AUM outperforming the benchmark on a 3-year basis. Broadly, the RBC iShare continues to be a strong partnership, capturing a significant 20% of year-to-date industry flows as of September. In our Canadian Wealth Management Advisory business, we continue to hire experienced investment advisers, while also seeing very limited attrition rates. Our industry-leading recruiting efforts have added nearly $15 billion in AUA over the last 2 years, and our over 1,850 investment advisers drive revenue per adviser that is nearly 30% higher than the Canadian average. We saw yet another strong year of organic franchise growth in our U.S. Wealth Management and City National franchises. We brought in over $60 billion of AUA since 2018 through hiring experienced financial advisers in our U.S. Private Client Group. We continue to organically scale up the platform, which is the seventh largest Wealth Advisory in the U.S. by adviser count. We also continue to see strong volume growth at City National, with loans up 25% and deposits up 31% from last year, with broad-based growth across all business lines. City National grew its client relationships by nearly 14% over the last 2 years, and we will drive targeted efforts to deepen these relationships. We also continue to add private bankers to accelerate our strategy to provide complete financial solutions to high net worth and ultra-high net worth clients. Turning to our Insurance segment, which generated net income of $831 million in 2020. This segment continues to generate high ROE earnings and provides a good source of diversification against credit and interest rate risk. Our diverse insurance client base is building relationships with our other Canadian retail franchises, and have added over 800,000 clients since 2018. Capital markets had an exceptional year, generating near record earnings of $2.8 billion and a strong ROE of 11.7%, while absorbing total PCL of $1.2 billion. The strong results speak to a diversified business and a geographic mix, balance sheet optimization and a well-managed risk profile, which together results in lower-than-average earnings volatility relative to global peers. Our Global Markets businesses reported very strong results this year as they benefited from robust client activity and successfully navigated a volatile market environment. Looking ahead, we expect trading activity to moderate in the year ahead. Client engagement was exceptionally strong in our fixed income and equity desks and to further value the clients, RBC Capital Markets launched Aiden, an AI-based electronic trading platform, which has already traded over 2.5 billion shares and $65 billion of notional volumes over the last 12 months. We also supported our corporate and investment banking clients financing needs through various stages of the pandemic. As liquidity concerns moderated, our clients continue to take advantage of low interest rates and constructive equity markets to raise capital, thereby boosting our underwriting revenue. Looking into 2021, we do not see this elevated pace of underwriting activity continuing. Although M&A activity was on pause through most of 2020, we have led some very significant transactions. For example, recently, RBC Capital Markets acted as financial adviser to Cenovus as part of their $24 billion merger of equals with Husky. In the very active technology sector, RBC acted as active joint bookrunner on Nuvei's IPO and as exclusive financial adviser to Lightspeed on the acquisition of ShopKeep. Looking ahead, we're more engaged with our well capitalized clients on strategic advisory mandates and are seeing the M&A pipeline start to build again. Also, we are deepening client relationships in the U.S., and we'll also look to strengthen senior coverage teams in key sectors. So in conclusion, our performance in 2020 speaks to the scale, strength and resilience of our diversified business model, the significant investments we've made in technology and our people for a number of years. Despite the significant impact of COVID-19, we seamlessly mobilized to support our clients, strengthened our balance sheet, invested in our core franchises, supported communities and paid dividends to our shareholders. We enter 2021 with strong momentum, strength, stability and operational resilience to support our clients and continue creating value for them. And to our shareholders, we are grateful for your support, and we remain focused on executing our strategy to deliver long-term value. I also want to take this opportunity to thank our more than 86,000 colleagues across the bank for their relentless dedication in supporting our clients, communities and each other in such an extraordinary year. I'll now turn it over to Rod.

[Rod Bolger, Chief Financial Officer]

Thanks, Dave, and good morning, everyone. Starting on Slide 10, we reported quarterly earnings of $3.2 billion. Earnings per share of $2.23 was up 2% from a year ago. Pre-provision pretax earnings of $4.6 billion were up 4% from last year despite absorbing the impact of lower interest rates, which I'll speak to shortly. Before I turn to segment results, I will spend some time on 4 key topics: expenses, capital, net interest margins and noninterest income. Starting with expenses, which were down 4% year-over-year or down 2% when excluding the impact of severance and related costs within I&TS last year. This quarter highlighted our continued commitment to prudent cost management with the vast majority of expenses either relatively flat or down from last year. Variable compensation in the quarter was down significantly from last year, largely in capital markets. We also continued to benefit from further reductions in marketing and travel costs, which were down approximately $80 million from a year ago and more than offset incremental COVID-related costs. Offsetting cost increases on discretionary items was an increase in technology and related costs as we continued our investment in digital solutions to enhance our clients' experience. As Dave mentioned, we will balance investments in key growth areas while also being laser-focused on costs, including balancing project prioritization. We also have a number of cost containment programs already in place across our businesses. Looking ahead to 2021, we expect expense growth to remain well controlled in line with our pre-pandemic commitment to slowing expense growth. Moving to Slide 11. Our CET1 ratio increased 50 basis points quarter-over-quarter to a strong 12.5%. Our capital build was yet again, underpinned by strong capital generation, which added 31 basis points to our ratio this quarter. I will now discuss RWA movements on Slide 12. Negative risk migration was partly offset by continued paydown of corporate credit facilities to levels closer to those before the onset of the pandemic. Now last quarter, we guided to credit migration in our commercial portfolios over the coming quarters and we saw that expected trend crystallize this quarter. 70% of the lending-related net credit ground grades this quarter were driven by migration in Canadian commercial lending, largely related to vulnerable sectors. We've reviewed a large majority of our Canadian commercial portfolios and absent a material adverse event, we don't expect further significant migration going forward. And as a reminder, next quarter will include a reduction in OSFI's transitional capital modifications, which is expected to impact our CET1 by an increase of approximately 10 basis points. Now moving to Slide 13. Net interest income declined 2% year-over-year as strong volume growth was more than offset by the impact of lower interest rates. All bank NIM increased 3 basis points from last quarter, benefiting from slightly lower, albeit still elevated enterprise-wide liquidity. At a segment level, Canadian banking NIM declined 2 basis points quarter-over-quarter as the impact of lower interest rates and asset mix more than offset the benefit from strong personal and business deposit growth. City National NIM was down 7 basis points relative to last quarter, given the more asset sensitive nature of the balance sheet, lower interest rates continue to negatively impact loan and investment yields. This was partially offset by lower funding costs. Looking forward, we expect NIM to continue to decline modestly in both Canadian Banking and City National. However, we would expect positive net interest income growth year-over-year in both segments by Q3 next year, as we expect the impact of lower interest rates to be more than offset by our strong volume growth. We also expect to see elevated liquidity levels continue to decline to more normal levels through balance sheet optimization and as the Bank of Canada programs begin to roll off in the coming quarters. Turning to Slide 14. Noninterest income was down 3% year-over-year or up 3% net of insurance fair value change and the prior year gain on the sale of BlueBay's private debt business. Our results this year show the benefits of a diversified business model with our noninterest income representing over 50% of total revenue providing an offset to the impact of lower interest rates. The strong performance of market-related revenue also highlights the countercyclical nature of some of our noninterest revenue streams. Strong capital markets and Wealth Management noninterest income offset lower fee-based revenue in Canadian Banking, which was affected by the impact of COVID-19. Moving to our business segment performance, beginning on Slide 15, personal Commercial banking reported earnings of over $1.5 billion. Canadian Banking quarterly net income was $1.5 billion, down 5% from last year as the impact of lower interest rates and card service revenue more than offset lower provisions for credit losses and strong volume growth. Core checking account growth was up over 20% from last year. In addition, personal GIC balances were up mid-single digits. We are also seeing strong growth in our direct investing balances, and business deposit growth was up a robust 25%. This strength extended to mortgages with double-digit growth driving total loan growth of 5% year-over-year. Commercial Banking loan growth declined to 2% year-over-year. However, with commercial utilization rates remaining below levels noted in March, there is potential upside with sustained economic growth. The sequential decline in card service revenue was largely related to $35 million of one-off items, with underlying spending volumes also lower from last year. However, we did see an uptick in credit card balances as the economy slowly opened up in the summer. Turning to Slide 16. Wealth Management reported quarterly earnings of $546 million, down 25% from last year. Excluding the impact of the BlueBay gain last year, net income was down 8% year-over-year, largely due to the impact of interest rates and higher expenses, primarily in our U.S. Wealth Management business. Canadian Wealth Management benefited from higher fee-based client assets. This was partially offset by the impact of lower interest rates. Global Asset Management revenue decreased 15% year-over-year, but excluding last year's gain, revenue was up 8%. AUM increased by over $50 billion year-over-year with over 2/3 coming from total net sales and the rest from constructive markets. Net sales were broad-based, with 2/3 of the long-term sales driven by international institutional mandates. Very strong volume growth at City National was more than offset by lower interest rates. Retail loan balances increased 15% year-over-year, underpinned by our focus on jumbo mortgages. Commercial loan growth was up 26% or up 13%, excluding the impact of BBB loans. We also saw solid growth in our U.S. Private Client group with AUA up USD 27 billion from last year, benefiting from both higher market returns and net sales.Now turning to Slide 17, we discuss Insurance results, net income of $254 million. This quarter decreased 10% from a year ago, primarily due to unfavorable annual actuarial assumption updates, mainly related to mortality experience.Turning to Slide 18. Investor & Treasury Services net income of $91 million, increased $46 million from a year ago as the prior year included severance and related costs associated repositioning the business. Excluding this, earnings were down 29% year-over-year. And given revenue headwinds in this challenging environment, we will continue to assess and act on strategic cost management initiatives in this business.Turning to Slide 19. Capital markets reported record fourth quarter earnings of $840 million. This was the fourth quarter in a row with revenue over $2 billion and pre-provision pretax earnings in excess of $1 billion, reflecting the continued strength of our Premium Capital Markets franchise.Corporate Investment Banking reported yet another quarter with revenue over $1 billion, up 16% year-over-year as we continue to deepen client relationships and support financing needs. Our clients continue to pay down previously drawn credit facilities to more normalized levels and instead took advantage of lower financing costs to access debt capital markets, which contributed to strong debt origination fees.Our equity underwriting business also benefited from the shift in financing trends as equity markets also remain constructive. While the M&A pipeline is recovering and our advisory revenue remains muted, we gained market share in what is an area of focus. Global markets had yet another strong quarter with revenue up 22% from last year to $1.3 billion, wrapping up a strong year where business generated revenue over $6 billion.Equities traded remained strong, benefiting from elevated volatility and strong client flow in equity derivatives. We continue to see strong credit trading benefited from narrowing credit spreads and secondary trading activity. Rates trading continues to be robust, and higher fees and commodities were offset by a decline in FX trading.Now turning to Slide 20, a final thought on our 3- and 5-year medium-term objectives. We met 3 out of the 4 of our stated financial objectives while falling short on EPS growth, given significantly lower interest rates and a record level of PCL recorded under IFRS 9 this year. Despite current headwinds, we remain committed to our medium-term objectives. However, we are suspending our 2021 targets highlighted at our 2018 Investor Day. The current macroeconomic forecast around the forward interest curve and GDP growth on a cumulative basis are materially lower than where they were in June 2018 expectations. But as Dave and I mentioned earlier, we remain committed to improving productivity, attracting new clients through our differentiated products and services and increasing our market share consistently over time.And with that, I'll turn it over to Graeme.

[Graeme Hepworth, Chief Risk Officer]

Thank you, Rod, and good morning, everyone. Starting on Slide 22. Gross impaired loans of $3.2 billion or 47 basis points were down $662 million or 10 basis points from last quarter, mainly due to fewer impairments across all business segments with capital markets accounting for nearly 2/3 of the decrease.Turning to Slide 23. PCL and impaired loans of $251 million or 15 basis points was down $147 million or 8 basis points from last quarter due to lower provisions across all business segments. In Canadian Banking, PCL on impaired loans of $169 million was down $95 million or 9 basis points from last quarter, as the impact of payment deferrals and government support programs, kept delinquencies and impairments muted.In Capital Markets, PCL impaired loans of $68 million was relatively flat to last quarter. In Wealth Management, we had no net PCL on impaired loans this quarter, and the provisions required for new impairments were offset by recoveries on previously impaired loans.Turning to Slide 24. We maintained our allowance for credit losses at a strong $6.1 billion or 0.89% of loans and acceptances, consistent with the prior quarter. This resulted in PCL on performing loans of $147 million this quarter, which is down by $133 million from last quarter, mainly in our Canadian banking retail portfolios and in capital markets.While this quarter, there were favorable changes to our forecast for house prices as well as the near-term Canadian and U.S. GDP growth, equities, and U.S. bond yields, we elected to increase the weights to our downside scenarios by 10% given the resurgence of containment measures due to the rise of COVID-19 cases in many of the regions where we operate.Let me now comment on Canadian banking relief programs, starting on Slide 25. At the end of October, nearly 90% of retail deferrals offered as part of our client relief program have expired. Only 2% of those deferrals have become delinquent, of which 1/3 were delinquent prior to the deferral being put in place. This has resulted in a slight uptick in early-stage delinquencies from the Q3 lows. Of the remaining $6.3 billion in active deferrals, which represents less than 2% of our Canadian banking retail portfolio, over 75% are expected to roll off by December with the balance mostly rolling off by March 2021. Nearly all of the active deferrals are from our residential mortgage portfolio, which includes HELOCs.Of these active deferrals, less than 2% of the balances are uninsured with a current LTV greater than 80%. And the majority of those balances are in Alberta, which has seen a decline in home prices over the last few years. While we do anticipate retail delinquencies to rise over the coming quarters as all deferrals roll off, at present, delinquencies remain lower than our normal run rate.Turning to Slide 26. Nearly 90% of commercial and small visit deferrals have also expired. Nearly all of our clients who had a payment due after the expiration of the deferral period have returned to performing in line with the general credit performance of those portfolios.For clients who took deferrals and have a business deposit account with us, deposit balances at the end of October averaged over 14x our monthly debt service obligations, up from an average of 11x last year. The increase in debt service coverage is due to rising average deposit balances and declining utilization for borrowers who have taken deferrals. 35% of active deferrals and 41% of the active -- the expired deferral population operate in a vulnerable sector. And through our client outreach program, we have proactively contacted almost all of our retail and commercial clients who requested a deferral to see how we can best support them. And while the majority of clients have indicated that they don't require further assistance, we are working with those who do to help them navigate these challenging times. Turning to Slide 27. Certain sectors have been negatively impacted by containment measures put in effect to curb the spread of COVID-19, while others have benefited. This exposure represents 5% of our total loans and acceptances outstanding, down from 6% last quarter as utilization trends continue to decline.Let me discuss the sectors that represent the majority of our vulnerable exposures, starting with commercial real estate on Slide 28. Nearly 30% of our vulnerable exposure is to retail-related commercial real estate, which continues to be impacted by business closures and physical distancing measures, making rent collections more challenging. Only a small portion of this exposure is to smaller independent retailers and noninvestment-grade enclosed malls, which have seen rent collections trend down again as COVID-19 restrictions have returned in certain regions. Most of this exposure has a high debt service coverage ratio and a low LTV.Nearly 30% of our vulnerable exposure is in the consumer discretionary sector. Retailers with limited to no online presence, hotels that continue to see low occupancy rates and recreational companies that have been forced to temporarily shut down to meet COVID-19 restrictions continue to be the most impacted segments of this sector. Overall, a large portion of this exposure is secured. Casual dining restaurants with no drive through or take out options have also been impacted, but the majority of our restaurant exposure is in the quick service segment.20% of our vulnerable exposure is in the oil and gas sector, which continues to be impacted by low commodity prices, due in part by the reduction in demand from COVID-19, limited access to capital and a weaker market for asset sales.A large majority of exploration and production exposure benefits from a borrowing-based loan structure. Thus far, all borrowing base redeterminations have been relatively benign, supported by higher commodity prices compared to the spring. And most of our remaining vulnerable exposure is in portions of the transportation and other services sectors. While each sector is unique, we believe that the support programs in place will continue to help mitigate potential loan losses.Overall, the macroeconomic environment has proven more supportive than originally forecasted at the onset of the pandemic, due in part to the extend of government support programs, which resulted in better-than-anticipated credit performance this year. More recently, though, the emergence of a second wave of the pandemic has led to the reintroduction of restrictions, which will negatively impact the economic recovery. We believe the economic impact of this second wave will be less severe than the first wave given the narrower and more targeted restrictions that have been introduced, a better understanding of the virus, which has led to stronger consumer and business sentiment, and continuing government support.However, there is considerable uncertainty around the speed of the economic recovery and the availability of a vaccine, as well as renewed pressure on vulnerable sectors due to the newly imposed restrictions. These are all factors which resulted in us putting greater weight on our downside scenarios, as I noted earlier. For context, our primary pessimistic scenario has a Canadian unemployment rate at above 9% until March 2023, and house prices declining by 8% and remaining depressed until late 2023. If such a scenario were to play out, we could see our ACL on performing loans increase by approximately 18%.As we look forward into 2021, we expect to see an increase in delinquencies and impairments over the coming quarters, particularly in our vulnerable sectors, but we believe that we are adequately reserved at this time.To conclude, we are satisfied with the resiliency of our high-quality, diversified portfolio, which has benefited from our strong risk-aware culture and disciplined approach to underwriting, which remains focused on effective lending structures and solid risk return profiles. And as we have done since the onset of this pandemic, we will work with our clients to help them continue to navigate through these uncharted times.With that, operator, let's open the lines for Q&A.

[Operator]

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

[Ebrahim Huseini Poonawala, Director]

I guess a question for you, Graeme, 2 parts: One, as we think about the outlook for PCLs. It sounds like you and your peers listening to the banks yesterday have accounted for the migration we expect to see next year. So when we think about the PCL outlook, is it fair to assume that we go back in 2021 to the 25, 30 bps PCLs that we were used to pre-COVID? And if you can speak to just in terms of what your expectations are around the shift to impaired versus performing? And how soon could we see reserve releases actually begin?

[Graeme Hepworth, Chief Risk Officer]

Sure. Thanks, Ebrahim, for the question. I'd maybe break that out into the 2 parts, kind of the latter part of your question and talk a bit about the impaired piece and then what that means overall. I tried to allude this in my remarks. But I think as we're looking into 2021, certainly, on one hand, we're trying to work our way through recovery. But as we see kind of short-term headwinds, like the -- certainly, the second wave that we're facing now, that will have an impact and it will have an impact on our vulnerable sectors. As well, we see deferrals rolling off and delinquency starting to increase on the back end of that. And government support will over time normalize. And as those things come together, we do see a world where delinquencies and thus impairments will start to increase through 2021. And particularly it's getting to higher levels at the back end of 2021. And so that's kind of how we see it flowing through this year.When you think about performing PCL and ACL there, certainly, we have built our provisions up through 2020, kind of very mindful of the pandemic, and quite frankly, the uncertainties associated with that. And so while there are pieces like the vaccine news coming out are positive in that regard, there are a number of factors that will go into kind of how we think about our Stage 1 and 2 allowances. First and foremost, the incurrence of Stage 3, the incurrence of impaired loans will be the biggest factor in driving how we think about Stage 1 and 2. Stage 1 and 2 is really there to address what we expect in the future and as that future actually manifests we would expect that to kind of drive our considerations under Stage 1 and 2.But the other considerations that will go in there that will drive it is whether our forecast change materially from where we're thinking about the world right now. To date, we have largely, I think, trended with -- consistent with the macro projections we put forward. Housing has been the one area that I would say has been materially better than what we had kind of started out with. But as we've worked through the vulnerable sectors and considered some of the kind of key risks there, particularly in those commercial books, those are the areas that we worry about. And so we'll be balancing all those things as we think through 2021. But there's such a high degree of uncertainty as to how that plays out. I think we're somewhat reluctant to put a real pit on the number there.

[Operator]

Our next question is from John Aiken with Barclays.

[John Aiken, Director & Senior Analyst]

Dave or Rod, I wanted to talk about the capital ratio at 12.5% and not asking the usual, what are the uses for capital because I think we all know that. But I mean, if we're going to look at coming out of 2021, hopefully, when we're in a more normalized environment, although I think we've been saying that for a long time now. What is your philosophy in terms of where the capital sits today? And where do you think it might be able to migrate? Is it going to go up? Is it going to go down? And what would you be comfortable with when everything is all said and done?

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

I'll start, John, and then I'll let Rod chime in. Certainly, as we think of a more normalized world where the buffers are restored to where our regulators want them. And we are able to start to leverage this capital, as you said, into shareholder value accretion, whether it's buybacks or growth or whatever -- adds to shareholder value. So as we think through kind of where that normalized level, as we go back to where we were kind of largely pre-pandemic, 10%, 7%, 5%, 11%, roughly, if things don't change from a regulatory perspective, we would view that as kind of where we'd like to run the bank. And therefore, the capital at surplus to that in a more normalized world, we'd like to create shareholder value with.

[Rod Bolger, Chief Financial Officer]

And the other element I would chime on is, obviously, we're restricted from increased dividend and share buybacks, and that makes sense given the pandemic. But as I was listening to Graeme talk about the outlook for PCL. Just recall, a year ago, we had gross impaired loans of about $3 billion. And total allowances of about $3.5 billion. Now we have gross impaired loans of $3.2 billion in reserves, including acceptances, $6.3 billion. So think about our excess capital of $18 billion plus that $6.3 billion as strength and a fortress balance sheet. And as we've seen the losses come through in this pandemic, we're well positioned to support our organic growth and our strategic initiatives going forward.

[Operator]

Our next question is from Gabriel Dechaine with National Bank Financial.

[Gabriel Dechaine, Analyst]

A couple of questions for Graeme. This might not be a fair one. But I look at the 14 basis points loss rate in Canadian Banking, lowest it's ever been. Like what would that be, if not for all these support programs? And then relatedly, you added $147 million to your performing provision. Is there a debate at all? Like if you were just going by your models as you set them. Would you be releasing reserves at this point? Or do you see that as a scenario that's worth considering?

[Graeme Hepworth, Chief Risk Officer]

Thanks, Gabriel. Maybe to start on the Canadian Banking. Certainly, we see the level of provisions, the Stage 3 level provisions this quarter being very muted, as I said, in a huge part due to the deferral programs that we put in place to support our clients. And certainly the byproduct of the strong government support that's been out in the marketplace supporting those clients. And you really see that as a consequence of really the decline in new impaired loan formations this quarter that's really driving that. So this is not about the recoveries or reversals in that form. So that's driving that. And you're asking what it would have otherwise been elsewise. I mean I would more look at through a lens as kind of what is our normalized Stage 3 PCL. And that would be the context you could kind of consider it in, if you will, because we haven't really seen the impact of the pandemic flow through to this point.Additionally, I think it really is reflective of, I think, a very strong client base we drive at Canadian banking. We very much focus on our prime and super prime client base there. And so we do have a high-quality client base, which isn't to say that, that client base won't be impacted at all in the pandemic, but it does, I think, position us in a very strong place to go through this. And then your other question around the thinking around Stage 1 and 2. I mean, again, I kind of go back to my earlier comments here. This quarter, again, we had improvements in our forecast around HPI, some modest improvements in other areas. So that would be a positive from an ACL perspective. We did get more concerned about the kind of the likelihood of a second wave, and we're certainly seeing that manifest itself. And so those were kind of competing impacts that would kind of offset each other. And then management's discretion comes in here and view comes in here as well, and we go through an analysis looking at kind of the forward forecast, how we think government support will eventually roll off. And those all come into play post the spot where we took a slight increase in our overall performing ACL. We really took the bulk of that back in Q2 when we built up our balances. And really, what we've seen in Q3 and Q4 are some adjustments to that as we kind of work through with new information, but haven't really had us change our view materially. Certainly, things like the vaccine is important new information out there that's come to light over the last couple of weeks. As David alluded to in that, there's still a lot of unknown information there as to how that's going to impact the economic recovery, and that will be something we'll be thinking through carefully in Q1. Hopefully, we'll all have a better line of sight as to what that means. But those are all kind of factors that kind of led us into our thinking for Q4 this year.

[Gabriel Dechaine, Analyst]

Yes. I guess, we're just all trying to figure out what these ratios look like when all the support programs roll off and it sounds like everybody is struggling with that.

[Operator]

Our next question is from Meny Grauman with Scotia Bank.

[Meny Grauman]

Just turning back to the buybacks. I understand I also would want to be cautious. But do you believe there is a good case to be made for allowing buybacks now, is that something that is -- is there a valid argument for that in your view?

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

I think, Meny, if you listened to all our commentary around kind of the uncertainty of the next 6 to 9 months and the timing of this and the impact on our clients, notwithstanding there is extended government support. So we're trying to evaluate all of that. And I think we've -- as you see, we focused on growth in client areas where we're sure footed, particularly mortgage growth and where we really understand that client base very well, and it's largely a growth through an existing client. So if we were sitting here today saying, would you take back capital, if you could. I think it's a little premature. I think we want to see a more stable recovery. We want to see a more stable unemployment rate. And I think caution still should rule the day. So I wouldn't push the regulator right now. But as things progress, as we start to see more stability and clarity in a normalized world, then it would be appropriate. So I think that's the way you have to look at it. There's still uncertainty out there, and we're going to be prudent in how we manage the bank.

[Meny Grauman]

And just a follow-up on that. We're hearing from other management teams, and I think maybe it's a consensus that the second wave is less damaging. This current lockdown is going to be less damaging from an economic point of view than the first wave. People are getting used to it and they have workaround. You sound cautious, but sort of would you share that view? or how would you look at the risk here in terms of the second round of lockdowns?

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

Absolutely. I think we've learned a lot, and it was in Graeme's comments around how the second wave will play, and we're not going into the same sense of lockdown. We've recovered 2.4 million out of the 3 million jobs lost. There's still 600,000 unemployed. So that's a big step forward. Many of the remaining 600,000 are in kind of a narrower segment, a service industry. So absolutely, the second wave, in addition, bolstered by extended government support will have less impact than the first wave. We're just taking a cautious approach.Having said that, you've seen very significant volume growth and client growth across all our businesses from Capital Markets to the Wealth franchise to the Canadian Banking franchise, that's really strong growth that you're seeing at lending products and deposit products. So we're operating very effectively, still with a conservative risk profile. And you can see that manifest itself in our Stage 3 losses. As I think the previous analyst commented, those are very low loan losses, yet we're continuing to grow our balance sheet and our franchise, and it talks to our client base and our risk posture that we're good at this. So I think net-net, we're finding a way to grow this franchise to create long-term value while managing in an uncertain environment.

[Operator]

Our next question is from Scott Chan with Canaccord Genuity.

[Scott Chan]

Rod, I wanted to go back to your comments, and I just want to make sure I got it right. I think you talked about that you believe or you're targeting that the bank could get back to NII growth in fiscal Q3 '21 on the Canadian and U.S. line. I guess, one, is that -- did I hear that correctly? And maybe kind of talk about how that intertwines with your comments on kind of margin compression near term versus the volume trends?

[Rod Bolger, Chief Financial Officer]

Sure. Sure. Thanks, Scott, for that. So the largest player here on the net interest income and the NIM is when the interest rate decreases took place, which was, think about it into the middle of March. So you're talking about halfway through our second fiscal quarter in 2020. So as we're in Q1 of '21, the year-over-year comparison has the higher interest rates from the prior year for the full quarter. In our second quarter, in 2021, you're going to have it for half the quarter last year. So those are going to be tough comparables. So on a year-over-year basis, the NIM compression is severe. On a sequential basis, it's muted just like it was this quarter. And so as we roll into Q3 next year, the year-over-year decline is going to be much lower than what we've seen for the previous 4 quarters at that point. And so therefore, our volume growth, which has been very strong, will more than offset that. And so you'll be able to see net interest income growth on a year-over-year basis, starting in Q3 for both of those businesses, which are interest rate sensitive.

[Scott Chan]

That makes sense. And if I could sneak in one more for you, Rod. Just on the costs, came in well this quarter, and if I look at fiscal 2020, costs were up 2.5% at the all bank level. Is that a good kind of metric to use next year, kind of in that low single-digit range?

[Rod Bolger, Chief Financial Officer]

Yes. We're striving for lower than that next year. Obviously, we'll see how Capital Markets and Wealth Management play out because there's a higher variable comp element based on market-driven forces. But all other expenses, we're actually targeting lower than that 2.5% this year.

[Operator]

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

[Doug Young, Diversified Financials and Insurance Analyst]

Just Rod, sticking with you. On the NIM side, if I look at the all bank NIMs, excluding trading 162, it's down 45 basis points year-over-year, and I get kind of the different moving pieces. But what I'd like to focus in on is the impact that has come through because of the amount of liquidity that you're holding. And just wondering, as you think forward -- so maybe the 2-part question, like what has been the impact on your all bank NIM, excluding trading, from the excess liquidity? And how do you see that unfolding over the next 2 years as some of that liquidity comes out? Should we anticipate some of that being backed out?

[Rod Bolger, Chief Financial Officer]

Yes. So there's always a lot of noise on the all bank NIM. Obviously, the excess cash and liquidity that we have right now is just playing a part in that. There's a part on mix depending on the types of assets that you have on the balance sheet. So there's a little bit of nuance there and how you're growing certain levels in certain businesses as well. But I would look at us a few things, right? As some of the government programs are rolling off as we get into the second and third quarters next year. So some of those programs are going to be winding down, and we're going to be repaying some of that money back, which is going to strip down some of the excess liquidity. The other element is that we would expect our loan growth to outpace our deposit growth, which wasn't the case this year. So going into 2021 as that happens, that will also use up some of that excess liquidity.And then also, we are going to be doing some term funding to comply with TLAC, but it's going to be lower and has been lower this year, and we expect it to be lower next year than it was in previous years. So that's also going to help. So all of those are going to be putting a little bit of upward pressure on it, but let's not get over overly exuberant on that because the interest rates are low, yes, the longer rates have come up a bit, but there's not going to be a whole lot of upward momentum from a double-digit basis point perspective.

[Doug Young, Diversified Financials and Insurance Analyst]

And just a follow-up...

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

Just try to let everyone get in here. We do plan on going over for a few minutes. I know our speeches were longer at the end of the year. So we will run over and try to clear the queue here. So let's move on, and please requeue for a second question.

[Operator]

Our next question is from Mario Mendonca with TD Securities.

[Mario Mendonca, MD & Research Analyst]

Rod, probably for you. It's fairly detailed, but when I look at your other income, there has been significant volatility in that other line. And I wouldn't really be so focused on...[Technical Difficulty]

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

Maybe, operator, we'll go to the next question.

[Operator]

We got connected this time, Mr. Mendonca.

[Mario Mendonca, MD & Research Analyst]

Sorry about that. Rod, I want to do sort of a nitpicky question here, on income. There's a fairly significant -- there's a lot of volatility in that other income line this year, a lot more than we had in the past. Normally, I wouldn't care so much, but the number is fairly large, and it can have a pretty significant swing in other income quarter-to-quarter. Could you talk a little bit about what's caused all the volatility in that other line this year? And maybe specifically this quarter?

[Rod Bolger, Chief Financial Officer]

Yes, sure. And a lot of this, unfortunately, is accounting, and maybe we should put some information in to kind of help find the key to that. Because well, one thing is year-over-year, you had the BlueBay gain in there last year, which was $151 million, right? So that was a onetime event in Q4 '19. But then on a recurring basis, you have 3 real drivers. You have the wealth accumulation program in U.S. Wealth Management, where that expense moves up and down as what our employees have invested in, moves up and down, but we hedge that. So on the one side, the expenses move up and down, but on the other side, the hedge is in revenue, and that revenue comes through this line item. So that's typically a large driver of that volatility, but it has no impact on the bottom line typically.The other element is a lot of our securitization hedging. Also in Capital Markets goes through this line item on the one side and trading on the other side. And then the third element is some of the funding that we do across currencies and globally through our I&TS funding and liquidity platform. Again, you're getting some revenue here and an offset in net interest income, trading revenue or vice versa. So I can assure you that the year-over-year decrease of 296% is about 95% to 100% covered by those 3 items, which are accounting items with the exception of the onetime gain. And on a quarter-over-quarter basis, it's also the case. So we can probably provide a little bit better clue of how that goes back and forth, but there's really no economic decrease that you saw on that line item.

[Mario Mendonca, MD & Research Analyst]

Yes. So maybe just a little bit of help there and understanding the offsets would probably get me all the way there.

[Operator]

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

[Sohrab Movahedi, Analyst]

Question for Neil. Obviously, good mortgage volume growth. Neil, can you give us a sense of how the mortgage spreads are on the new business versus the old business that's rolling off. My understanding is mortgage spreads are higher. So I'm just trying to kind of circle the square on why you continue to feel this margin pressure in Canadian Banking?

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

Yes. Thanks for the question. I think Rod touched on, overall, the biggest driver is really around interest rates that Rod touched on. Business mix plays, I think, a very small part of this. In terms of specifically the mortgage business, business mix in terms of really strong mortgage originations driving that growth would definitely contribute to that. And we are pleased with our performance in 2020 despite kind of the extreme slowdown as the pandemic hit, we did really slingshot out of that and compete well. I would say, earlier in the year, the spreads were tighter. There has been some relief there. But it's still, I'd say, a very competitive market.

[Sohrab Movahedi, Analyst]

So can you comment on what the new business coming on, how the spreads on that compares with the business that is rolling off, if you will, or getting renewed?

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

It will change month-to-month, but it's relatively even.

[Operator]

Our next question is from Lemar Persaud with Cormark Securities.

[Lemar Persaud, Research Analyst]

Just continuing on Scott's question on expenses. It seems like there could be a lot of puts and takes into 2021. So presumably, some of the COVID-related expense growth could become a tailwind. And if we're heading in the right direction towards a more normal operating environment than some of the travel and business investment related costs could come back. So on all in, I guess, could you talk about what are the bigger puts and takes that go into your expense outlook for 2021? And then finally, do you think positive operating leverage would be somewhat attainable for 2021?

[Rod Bolger, Chief Financial Officer]

Thanks, Lemar, It's Rod. I'll take that. So on the expenses, there will be a natural uptick for us on a few items. As we've mentioned, we've been investing in technology, and we've been growing that spend over the last few years. The accounting requires you to capitalize and amortize that. So the spend that we've been building over the last few years continues to have a little bit of a headwind there as you amortize that, that's cash that was spent in recent years, but that will impact us going forward. I think overall, some compensation items for a lot of folks came down this year because of the lower earnings, and so therefore, as we reset that and hopefully have better performance next year, that might be a headwind.We also added some FTE, mostly on the front line this year. And as those headcount are with us for the full year, there's some natural uptakes there. So you do have some natural inflation there, but you also have our efficiency programs that we've been working through, which is why I was able to guide to an overall increase, absent some of the variable compensation nuances below that 2.5% growth rate this year in the low single digits. And so that's what we're aiming for.And in terms of positive operating leverage, again, it's important to look at it by business because business mix was such a big part of it because the margins are so different. But again, it's going to be the second half of the year. It's going to be tale of 2 halves of the year. Second half of the year, you're going to see better operating leverage. First half of the year is going to be a tougher operating leverage environment because of interest rates.

[Operator]

Our next question is from Mike Rizvanovic with Crédit Suisse.

[Mehmed Rizvanovic, Research Analyst]

A question for Neil. I wanted to go back to your mortgage growth, and specifically the market share gains you've been seeing, which clearly have been very strong for quite some time now. So what I'm wondering is what's your outlook going forward? And have you reached the point where maybe you've picked some of the low-hanging fruit? And does it get tougher from here to sustain that growth relative to your peers? I'm not sure how much pricing goes into that as a driver into that mix. But if you can comment on what you sort of foresee going forward? That will be helpful.

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

Sure. Thanks for the question. I definitely wouldn't say any of the business we're winning is low-hanging fruit. I mean our regional leaders will tell you it's exceptionally competitive out there. I'd say earlier in the year, we -- there was one competitor that I don't think had the sort of the distribution scale. Obviously, that we expect all of our competitors to come back hard at us. We've consistently, I guess, really sort of 2 factors. One, we've consistently grown our distribution capability. So we're looking for quality mortgage specialists. We set a really high bar. We don't sort of staff up and then staff down. We're sort of always kind of growing that sales force. And we have over 1,700 mortgage specialists that are out connecting with clients. So that's, I think, the first piece.The second piece in terms of really driving the growth and the market share is we talked about this a couple of times over the last year. We've really gone through and felt we've optimized each part of that business. So from lead generation, lead conversion, how we get through adjudication, right through the fulfillment, we feel we started the year really firing on all cylinders, and I think we're really well positioned to come out of the pandemic and compete well. So that and then I think good representation with our sales capability in the markets that are really growing in Ontario, BC and Québec, where you're seeing the largest growth. So that's what I really think is the sort of the fundamentals of our success.I wouldn't say we're going to continue to see this growth rate. Rod had mentioned -- or sorry, I think David mentioned, we do see growth rates starting to come off, but coming off a very high level.

[Mehmed Rizvanovic, Research Analyst]

And just real quick. So is pricing a major contributor to your recent gains?

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

No. I mean, we would say we do not lead with price. We consistent -- I would say price is something when we found ourselves be uncompetitive, it was because we were a few basis points outside the competition. And we take a lot of work to make sure we're constantly triangulating what the market price is, and it's become very fragmented, product by product, region by region, but we do not lead with price. We -- our target is to be off our competitive price with better advice and better reach.

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

And you heard the previous question that margins have been stable, which is the best mark on that.

[Operator]

Our next question is from Paul Holden with CIBC.

[Paul David Holden]

So I heard your message loud and clear on being conservative for the next 6, 9 months or so and continue to focus on lower risk opportunities. Wondering how you think about the pivot in a post-pandemic world, which eventually we will see, do you think you need to pivot to different areas of growth when that happens? And what might be those areas of growth you could pivot to?

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

Well, if you look at the solid growth that we've exhibited across all our businesses and market share gains in wealth management, market share gains in capital markets and in the retail bank. I think we're doing a good job of continuing to grow the franchise and serving our customers. So it's not like we've gone into a risk defensive position and aren't putting any business on the books. We're serving our customers very well. I think we -- our investment in technology has allowed us to cross-sell and retain clients to a greater rate, and I think that's driving our growth. So when you see mortgage retention rates at the historically high levels they are, it's from reengineering the processes and focusing on that.So I don't want people thinking that we're on a risk-off position, our growth would indicate otherwise, I think the posture. So as we come out of this, you're going to see some of the contributions to our net income growth from businesses that have had a hard time this year. Our credit card business, payments, balances are down, as you can see, almost $2 billion. Card activity has been pretty stable, but our clients aren't revolving and aren't using the product the same way. That business can rebound, you've seen the significant impact interest rates have had on our wealth franchise in the United States, significant impact, we've earned through that. That's going to be a contributor to growth as we come back through that. As we look at client activity levels, really drives our volume growth. So we don't change our risk appetite. We don't change our risk posture significantly through a cycle. Therefore, we're not going to go into a big risk on position. We manage through cycles. It's really how our clients interact with us and what their needs are. And we certainly will see our business clients and our commercial clients and capital markets clients go on to the front foot more, and that should drive M&A mandates that should drive underwriting activity, DCM, ECM, and so those activity levels, we're really well positioned for. We've invested in this franchise. As you can see, as Rod referenced, our front-line numbers have gone up. We're positioning ourselves to emerge with an accelerated momentum at the end of the year by investing in capabilities, investing in staff. So that's how we're signaling shifting to the front foot, getting ready for more client demand, investing in client value and technology.So we feel very good about where we are today on momentum and our relative position to capture further growth coming out of this.

[Operator]

Our next question is from Ebrahim Poonawala with the Bank of America.

[Ebrahim Huseini Poonawala, Director]

Just a follow-up, Dave, on capital allocation. Completely get that you want to be a bit more cautious in the near term. But as we look out, I mean, I think, you have a stock, which is probably one of the best valued bank stocks trading close to 2x price to book. Give us a sense of how you think about buybacks versus M&A? And again, I get you kind of ruled out brick-and-mortar type franchises in terms of M&A. But is it fair for shareholders to expect you to be a little bit more creative when it comes to capital allocation and looking beyond buybacks if and when we get to that stage?

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

We're always looking for opportunity to grow shareholder value. We've kind of signaled to you the parameters that we're looking at, if we would make an acquisition and the shareholder returns and the timing of those shareholder returns. First and foremost, to my previous answer, I won't go through it again, but we see significant organic growth opportunity. You're seeing double-digit growth across our businesses. And that's from the investments we've made. So we're going to use capital, and that's the highest ROE. You've seen us deliver 16% ROE in Q4 at a 12.5% CET1 ratio. It tells you the focus we have on driving shareholder value. But absolutely, we are looking to scale in the United States. And we've got a significant franchise momentum there, and we continue to look for opportunities. It has to have a cultural fit. It has to drive the right synergies. We have to be confident in that synergy journey. But it's not like we're sitting back and not doing anything. We're looking, we're thinking. So if there's an opportunity that presents itself that checks the boxes, we will absolutely use that surplus capital to execute a growth trajectory.We're just very conscious of the trade-offs that we have, organic growth first. And we expect to continue to meet our organic growth plans and generate surplus capital. So I think from that perspective, looking forward, we have significant strategic flexibility, and we're going to use it smartly to create value for you. So absolutely, we're looking at all 3 mechanisms. And Rod, did you want to jump in?

[Rod Bolger, Chief Financial Officer]

Yes. I'll just provide 2 data points, Ebrahim, that might help. One is we're trading at a 25 basis point discount right now to our 10-year historical price-to-book value. So that's something to keep in mind. The other element is even into this pandemic, over the last 5 years, we have grown our book value per share, which is a key driver of shareholder value at almost 7% annually on a CAGR basis. So you're able to drive that sort of growth, and all of that largely has come organically as Dave cited, those are other considerations that you should factor in.

[Operator]

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

[Sohrab Movahedi, Analyst]

Neil, back to you. Just want to get a sense of given the margin outlook that you have for this segment, and I know there's been a good amount of discussion around total banking expenses. But do you see a way forward for you where the segment efficiency ratio can improve without the net interest margin turning around?

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

Well, I think, Rod touched on our outlook for NIM, as we signaled, is a basis point or 2 per quarter into 2021. Operating leverage, just sort of picking up on Rod's comments, is really going to be a back half of the year or midyear story. A couple of other things specific to our business that just building on beyond rates that Rod talked about. Things like the interchange impact, as we get into the second half of next year in that card services other income line, that would be fully into our run rate. Things right now in terms of -- we waive certain fees. We've provided interest rate relief on credit cards that are still -- will take us into 2021 that will be fully rolled off the business in the back half of 2021. So -- and then COVID cost. We don't see the same type of occupancy costs. We need to invest in things like Plexiglass and those sorts of things. So the back half of next year, we do see the opportunity for positive operating leverage, and that's when you'll start to see the efficiency gains start to come.

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

Okay. I think we've answered all the questions in the queue. So I just want to thank everybody for attending today. And maybe just to summarize what we would like you to take away from the Q&A and our speeches and the themes today: Number one, significant client momentum across all our businesses. You look at the market share gains in the retail bank, really strong capital markets, trading, investment banking performance, outstanding flows in the wealth franchise and AUM growth and AUA growth. And when you look at that client momentum, as we exit into a more normalized year, that will continue to grow. So we feel very good. At the same time, you look at almost record low Stage 3 losses. We're growing our franchise. We're growing our balance sheet. We're managing risk exceptionally well. It positions us very well in a normalized world to continue to put our balance sheet to work. So I'd say our Risk Management capability, the quality of our client franchise at Graham works. So I think you should take comfort. We're growing this franchise at a premium level. We're delivering a premium ROE. We're managing our risk in a premium fashion. We've got a premium CET1 ratio. It gives us enormous strategic flexibility to accelerate out of this. And I feel very good. In addition to technology investments, you heard Rod talk about our focus on cost control and keeping low single digits. Those are all levers with momentum that create shareholder value at a premium ROE. So I think we feel very good.I think that's the story that we wanted to tell today, and thank you for your questions. Have a great holiday season, and we'll certainly talk to you in the New Year.

[Operator]

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