Royal Bank of Canada

TSX:RY

Earnings Call Analysis

RBC Reports Strong Fiscal 2023 Results

RBC announced Q4 earnings of $4.1 billion with a 2% dividend increase, ending fiscal year 2023 robustly despite a challenging macro environment. Revenue rose 4% year-over-year, highlighting a solid performance across diverse segments like Canadian Banking and Wealth Management. A core focus on expense control saw core expenses grow only 5%, with a significant part being severance costs. Credit conditions toughened, prompting a $194 million provision for credit losses (PCL) on performing loans, yet the fiscal year closed with the firm meeting all medium-term objectives, reporting nearly $15 billion in earnings, and a strong CET1 ratio of 14.5%. RBC maintains a strong outlook, expecting moderated Canadian mortgage growth, continuing commercial lending strength, and believing central banks will pivot to rate cuts in 2024. Investment in technology and AI positions RBC for value creation amidst economic headwinds, anticipating a recovery in M&A and equity markets, and aiming for a return to normalized income levels by 2025.

Leadership's Review and Dividend Increase

The leadership team, including Dave McKay as CEO, Nadine Ahn as CFO, and others, provided an overview of the quarter's performance. The bank announced a modest dividend increase by $0.03 or 2% as part of its regular policy of increasing dividends every other quarter.

Revenue Growth Amidst Cost Control

Revenues increased by 4% compared to last year due to a diversified business model, market share gains in Investment Banking and Global Markets, and higher wealth management fees. Despite reported expense growth of 13%, the core expense growth was contained to 5% year-over-year highlighting focus on expense control, which included higher severance costs due to restructuring efforts.

Sturdy Annual Performance with Strategic Refocusing

The bank delivered a strong financial year with nearly $15 billion in earnings during a tough operating environment, achieving all medium-term objectives. A strategic simplification move was made by exiting the Investor Services franchise in Europe. With a robust CET1 ratio of 14.5%, the bank also generated a strong return on equity (ROE) of 14%, and anticipates future ROEs over 16%.

Balance Sheet Diversification and Strategic Forecast

With a diversified balance sheet, the bank holds a strong position to weather economic fluctuations, which includes a track record of consistent book value per share growth. There's an anticipation of economic slowdown due to aggressive interest rate hikes, though a rate cut pivot is expected in 2024. The bank's strategic investments, especially its technological advancements in AI, have positioned it to capitalize on these economic changes and maintain resilient revenue streams.

Earnings Per Share and Focus on Balance Sheet Strength

Earnings per share of $2.90 this quarter were reported, reflecting a balance between higher rates and volume growth against the backdrop of higher expenses and provisions for credit losses (PCL). The bank's strong capital ratios and net interest income underscore a hefty and well-managed balance sheet, suggesting sustainable performance. Expectations are set for a steady CET1 ratio even after the HSBC Canada transaction and potential reintroduction of share buybacks in late 2024.

Segment Performance: Banking and Wealth Management

Personal & Commercial Banking reported robust earnings with highlights on Canadian Banking's volume growth and net interest income. However, Wealth Management faced challenges with evident declines due to impairments and legal provisions, although the underlying advisory and asset management businesses showed resilience and profitability, despite adverse conditions in the mutual fund industry.

Credit Quality, Provisions, and Implications of Economic Conditions

As the economy slows and unemployment softens due to higher interest rates, the bank is witnessing credit normalization with delinquency rates and impairments at or above pre-pandemic levels. Clients impacted by rate hikes are showing stress signs, particularly in the unsecured credit segment. The bank has added provisions for 6 consecutive quarters, beefing up its allowance for performing loans by 33%. For the coming year, credit losses are expected to align more with historical rates, signaling cautious preparation for potentially tougher credit conditions.

Earnings Call Transcript 2023-Q4

[Operator]

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

[Asim Imran, executive]

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Nadine Ahn, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your question, 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.

With that, I'll turn it over to Dave.

[David McKay, executive]

Thank you, Asim, and good morning, everyone. Thank you for joining us. Today, we reported fourth quarter earnings of $4.1 billion. We also announced a $0.03 or 2% increase in our quarterly dividend, continuing our policy of increasing dividends every other quarter. Our revenues were up 4% from last year, reflecting the strength of our diversified business model, including market share gains in both Investment Banking and Global Markets. Solid volume growth in Canadian Banking and higher fee-based revenue from wealth management.

Reported expense growth of 13% year-over-year was impacted by several factors, which Nadine will speak to later. Importantly, core expense growth declined to 5% year-over-year or about 2% sequentially. This is a trend that underscores our heightened focus on expense control includes higher-than-normal severance costs. Our results were also impacted by higher PCL impaired loans. We added a further $194 million of PCL on performing loans this quarter in recognition of the evolving macro environment and more challenging credit conditions.

Our allowance for credit losses now covers 3x the Stage 3 PCL that we incurred over the last 12 months. Looking back at the 2023 fiscal year, RBC delivered earnings of nearly $15 billion in a very challenging operating and macro environment. We met all our medium-term objectives while investing to further strengthen our core businesses. As part of our regular strategic review, we also simplified our business model by exiting our Investor Services franchise in Europe.

We ended the year with a strong CET1 ratio of 14.5%, nearly 200 basis points higher than last year. Furthermore, we generated an ROE of 14% this year or 16% when we consider the capital we are holding ahead of closing the proposed acquisition of HSBC Canada. We remain confident in our ability to continue meeting our medium-term objectives, including delivering a premium ROE of over 16%.

Our balance sheet is diversified by both industry and geography underpinning our all-weather franchise. The strong balance sheet, combined with our premium ROE, enables RBC to create value for our clients and shareholders through the cycle. This includes growing book value per share by 10% CAGR and the recovery following the global financial crisis from 2012 to 2019 and by a similar rate from 2019 to 2022 during the uncertainty of the pandemic.

Before I discuss the strategic initiatives that will drive our next leg of value creation, I will provide my perspective on the macro environment where a slowdown in economic activity is already being observed. The rapid nature, size and accumulation of interest rate hikes is raining in elevated inflation. Higher interest rates are having a more immediate impact on the cost of living in Canada relative to the U.S. partly due to the stark difference in the duration of mortgage terms.

Consequently, discretionary consumer spending in Canada is down with October marking the largest monthly decline in 6 months. Higher interest rates are also cooling housing markets across the country, with sales to new listings ratio falling to 49% in October.

Furthermore, we are seeing signs of slowing labor markets as evidenced by rising unemployment, slowing wage growth and lower job postings. We're also seeing declines in global trade even before the recent escalation of geopolitical risk.

Following recent peaks in September and October, we are seeing declines in both yields and oil prices, further signs of an economic slowdown. Given the easing pricing pressures, we believe central banks have reached the end of the tightening cycle and will pivot to rate cuts in 2024, albeit rates are expected to remain higher than pre-pandemic levels.

With this context, we expect Canadian mortgage growth will continue to moderate to the low to mid-single digits as immigration-driven demand more than offset the impact of higher interest rates on the cost of capital. In our commercial portfolio, 80% of the year-over-year growth was driven by our strategic focus on doing more with our best existing clients. We expect relative strength in Canadian commercial lending to continue particularly in the agriculture, auto and supply chain sectors.

Our growing Canadian deposit franchises should continue to provide a foundation to drive premium loan growth while also providing a latent benefit from the recent trend of rising interest rates. Given market uncertainty, there is a significant amount of cash that can be deployed by our retail and institutional clients and central banks provide further clarity on the path to lower interest rates. This, in turn, should stimulate a broad-based recovery in equity and fixed income markets.

Our market-sensitive businesses are positioned to benefit from this change in sentiment. Increased conviction in equity markets would also be conducive to a rebound in M&A deal activity where we maintain a healthy pipeline and strong client engagement.

We are confident that our leading wealth and asset management franchises are well positioned to capture money in motion back towards investment products, resulting from a shift in risk sentiment. Importantly, we remain committed to prudent cost and underwriting discipline in this uncertain environment while continuing to invest in our leading client franchises to drive growth.

Our strategic investments in technology and the client experience for the past several years, meaning we are well positioned to continue creating value. For the second year in a row, RBC ranked in the top 3 for artificial intelligence maturity among 50 global financial institutions, and the evident AI index. While we cannot control the market environment, we have positioned ourselves to succeed. We remain focused on creating diverse, resilient and high ROE revenue streams while adding to our leading deposit base.

I'll start with our leading Canadian Banking business. We had a record new RBC account acquisition this year, including through our newcomer strategy, an important client acquisition funnel. Our partnership with ICICI Bank Canada has created an attractive banking experience for newcomers, attracting 30,000 new clients this year alone. These clients come with new deposits, which provide a stable source of funding, are also an important factor in clients consolidating their relationship with RBC at a rate that is 50% higher than average.

We will continue to strategically invest in our proprietary sales force, innovation, distribution channels and privileged assets to deliver a sustainable competitive advantage. We also remain focused on the proposed acquisition of HSBC Canada and are well positioned to meet these clients' needs including through multicurrency accounts and trade finance. We'll continue to enhance the client experience with RBC's market-leading value proposition.

Turning to our Wealth Management business. Adviser recruiting remains a key source of growth. Our leading Canadian Wealth Management business hired 40% more competitive recruits than last year, resulting in a record year for recruited assets. Our U.S. Wealth Management platform, the sixth largest wealth adviser in the U.S. play assets under administration recruited 94 advisers this year, driving over $20 billion of expected AUA growth.

Our U.S. Wealth Advisory business become the destination of choice for top talent in the industry because of our strong culture, entrepreneurial environment, innovation and competitive products. In the U.K., the integration of RBC Brewin Dolphin is progressing well with milestone objectives being met. This acquisition provides us with deeper scale in what we see as our third home market.

Furthermore, we continue to add deposits and lending products to support client needs across our increasingly global wealth management franchise. We recognize City National operating well below its full potential this year as it absorbs higher commercial PCL, continued investments in operational infrastructure and a sector-wide increase in funding costs. Looking forward, our focus is on enhancing City National's profitability following outsized volume growth over the years building on the relative stability of deposits and retention of clients and advisers through 2023.

Accordingly, this quarter, we enhanced the yield of City National Securities portfolio, recognized impairments on certain assets and implemented a cost program resulting in higher-than-normal severance. We've also added the strength of the management team, which will increase the focus on several strategic initiatives, including expense management and enhancing the deposit base. Normalizing for the potential recognition of the FDIC special assessment costs, we anticipate a return to profitability next quarter with a stepping stone towards a return to more normalized levels of net income in 2025.

Furthermore, as it relates to our broader U.S. footprint, we are focused on improving the connectivity of our 3 platforms. And in this regard, we recently enhanced the mandate of Derek Neldner, our Group Head of Capital Markets to include accountability for the integrated strategy and performance of all our businesses operating in the United States.

Moving to Corporate Investment Banking, where RBC Capital Markets, it's ninth in the global league tables. We continue to focus on shifting revenue streams towards higher ROE advisory and origination activities. We're also building on our investments in people across verticals and geographies to expand our client coverage.

In Global Markets, we are looking to build on recent market share gains. The changes we have made to our organizational structure are increasingly producing results. We're also currently investing in technology to further modernize our infrastructure including the FX trading arm of our macro business. We're excited about the opportunity to attract client deposits due to pending launch of our U.S. Cash Management business given our existing corporate banking client relationships and leading credit ratings.

Turning to the insurance segment, which continues to generate high ROE earnings and provides diversification against credit and interest rate risk. We remain focused on sustaining and growing our market leadership in key segments, including increasing, harnessing the power of RBC.

In conclusion, we are well positioned entering into fiscal 2024. Our balance sheet remains strong. We are growing our deposit base by attracting new clients and deepening existing client relationships. We have diversified revenue streams across our segments and geographies. Following a record year of client acquisition, we are focused on welcoming even more clients onto our platforms.

We'll continue to deliver on our strategic ambitions while staying true to our purpose of helping clients thrive and communities prosper. Our success is built on the strength of our employees and their commitment to serving as the trusted advisers for retail, commercial and institutional clients. I want to personally thank our 94,000 colleagues and 17 million-plus clients.

Nadine, over to you.

[Nadine Ahn, executive]

Thank you, Dave, and good morning, everyone. Starting on Slide 11. We reported earnings per share of $2.90 this quarter. Adjusted diluted earnings per share of $2.78 was flat from last year as the benefits of higher rates, solid volume growth, strong market-related revenue and a lower tax rate were largely offset by higher expenses and increases in PCL from low levels a year ago. I will first highlight the continued strength of our balance sheet before focusing on more detailed drivers of our earnings.

Starting with our strong capital ratios on Slide 12. Our CET1 ratio improved to 14.5% up 40 basis points from last quarter, mainly reflecting internal capital generation net of dividends and benefits of share issuances under the DRIP. This was partly offset by unrealized losses on OCI securities. RWA growth, excluding FX, was largely flat this quarter.

Business growth in Canadian Banking and Capital Markets as well as an unfavorable wholesale credit migration was offset by lower loans in City National and RWA optimization initiatives driven by improvements in data quality and collateral management. We expect that our CET1 ratio will remain comfortably above 12% following the close of the planned HSBC Canada transaction pending remaining regulatory approvals.

We do not expect a material impact from the implementation of IFRS 17 or FRTB next quarter. Furthermore, based on our initial estimates, we do not expect RWA floors to be binding in 2024. We will look to revisit the DRIP and reintroduction of share buybacks in the second half of the year.

Moving to Slide 13. All-bank net interest income was up 4% year-over-year or up 5%, excluding trading revenue. These results reflect the benefit from both higher interest rates and higher volumes. On a sequential basis, all-bank NIM, excluding trading, was up 12 basis points, reflecting margin expansion in Canadian Banking and City National.

Other benefits to all-bank NIM were largely offset in noninterest income. On to Slide 14. We will walk through this quarter's key drivers of Canadian Banking NIM, which was up another 3 basis points from last quarter. Our low-beta core deposits generated wider retail deposit spreads as the latent benefit of recent interest rate hikes continues to flow through.

A favorable shift in asset mix driven by strong growth in credit card balances was partly offset by a shift in deposit mix. Margins continue to be impacted by the intense competition for mortgages in addition to increasing competition for term deposits. Going forward, we continue to expect to see the structural benefits of our ladder deposit portfolio come through as we benefit from continued reinvestment at higher rates.

There are a number of factors which can alter the magnitude or trajectory of the structural benefit such as the shape of the yield curve or changes in balance sheet mix. However, we do not believe NIM has peaked in Canadian Banking.

Turning to City National. NIM was up 29 basis points from last quarter. The increase reflected the full quarter benefit of Fed rate hikes on City National's asset-sensitive balance sheet, an 11 basis point benefit from the intercompany sale of certain City National debt securities as well as lower levels of FHLB funding.

Looking to next quarter, we expect NIM to continue moving higher as we realize the full quarter benefit of structural balance sheet improvements made last quarter. Moving to Slide 15. Noninterest expenses were up 13% from last year. Approximately 6% of this growth was driven by acquisition and integration-related costs as well as by macro-driven factors such as FX and share-based compensation.

Legal provisions and impairment of other intangibles and U.S. Wealth Management, including City National, also contributed. Excluding these factors, core expense growth decelerated to 5% from 13% last quarter, in line with the guidance we provided in Q3.

The largest contributors to core year-over-year expense growth were higher base salaries and severance costs as well as ongoing investments in technology and continued investments in City National's operational infrastructure.

We made progress on our cost reduction strategy, incurring bank-wide severance of $157 million and delivering on our commitment to reduce all-bank FTE by 1% to 2%. With the majority of the reductions having taken place towards the end of the quarter, we anticipate full run rate savings of $235 million to be realized starting next quarter. We expect all-bank core expense growth to come in the low to mid-single-digit range in 2024.

Excluded from this guidance is the cost of the FDIC special assessment which we estimate at approximately USD 120 million. Results this year benefited from a lower effective tax rate reflecting favorable changes in earnings mix and certain deferred tax adjustments which were partially offset by the impact of the Canada recovery dividend and a 1.5% increase in the Canadian corporate tax rate.

Looking forward, we expect the non-TV effective tax rate to be in the 19% to 21% range in 2024.

Moving to our segment performance beginning on Slide 16. Personal & Commercial Banking reported earnings of $2.1 billion. Canadian Banking pre-provision pretax earnings were up 4% year-over-year. Canadian Banking net interest income was up 6% from last year due to higher spreads and solid volume growth of 7%. Noninterest income was up 2% year-over-year as higher client activity contributed to increased service revenue and credit fees.

Operating leverage was flat for the year, including severance taken in the quarter. Looking forward, we expect Canadian Banking operating leverage for 2024 to come in within our historical 1% to 2% target.

Turning to Slide 17. Wealth Management earnings were down 74% from last year, largely reflecting the impact of $380 million of impairments and legal provisions in U.S. Wealth Management, including City National. The segment was also impacted by severance costs and the partial sale of RBC Investor Services operations.

We believe the underlying performance of our Wealth Management Advisory and Asset Management business was solid including strong pretax margins and return on equity. Canadian and U.S. Wealth Management as well as RBC Global Asset Management benefited from higher fee-based client assets reflecting the benefits of market appreciation.

Solid net sales in our Wealth Management Advisory businesses were in contrast to retail net outflows at RBC GAM in a period where the Canadian mutual fund industry has experienced approximately $90 billion in net outflows over the last 2 years. U.S. Wealth Management was impacted by lower sweep deposit revenue and higher provisions for credit losses at City National.

Turning to Slide 18. Capital Markets generated pre-provision pretax earnings of $886 million bringing total PPPT for the year to $4.5 billion. This was in line with our expectations of $1.1 billion of PPPT earnings per quarter in a normalized environment. Results this quarter reflected record fourth quarter revenue underpinned by market share gains across Investment Banking and Global Markets.

Corporate and Investment Banking revenue was up 9% from last year, reflecting higher loan syndication activity and debt originations in the U.S. Global Markets revenue was down 5% from last year, reflecting lower equity and FX trading revenue partly offset by improved fixed income client flow.

Activity slowed near the end of the quarter, reflecting unfavorable market conditions, which largely recovered in November.

Turning to Insurance on Slide 19. Net income increased to $289 million, up 8% from a year ago, mainly due to improved claims experience and business growth across most products, partly offset by lower investment-related experience. We expect the upcoming implementation of the IFRS 17 accounting regime to result in a change in the timing of earnings recognition.

While earnings will remain neutral over the life of a given insurance contract, reported earnings and earnings volatility are expected to be lower in the near term. We will provide further updates next quarter.

To conclude, despite a number of headwinds, we generated an ROE of 15% this quarter, underpinned by the strength of our leading Canadian deposit franchise, our strong balance sheet and the diversification benefits of our various revenue streams. We made good progress on our commitment to rationalize expenses, and we will remain diligent in containing costs through 2024.

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

[Graeme Hepworth, executive]

Thank you, Nadine, and good morning, everyone. Starting on Slide 21, I'll discuss our allowances in the context of the macroeconomic environment. As Dave noted earlier, higher interest rates are causing growth to slow and unemployment rates to soften. And markets now believe the rate hiking cycle has concluded. Interest rates have been elevated for over a year and credit outcomes have normalized from pandemic lows.

Delinquency rates and impairments are at or above 2019 levels and insolvencies have been steadily climbing. In our retail portfolio, higher interest rates and rising unemployment are now the primary drivers of credit outcomes. Clients who have yet to be impacted by our higher rates such as fixed rate mortgage borrowers, continue to perform well with stable delinquency rates and elevated levels of savings.

However, clients who have experienced a material increase in their mortgage payments are more likely to be showing signs of stress with increasing delinquency rates and decreasing savings levels. To date, less than 1/3 of mortgage clients have seen their payments impacted by higher rates. The majority of mortgage renewals still over a year away.

As we detailed on Slide 34, over half of our Canadian Banking residential mortgage balances were renewed in 2025 or 2026. The fixed-rate borrowers in those cohorts currently paying an average rate of 3.1% and 3.5%, respectively.

As more people renew at higher rates and more of their income is used to service mortgage debt, we expect delinquencies and losses to increase in the retail portfolio. Our mortgage exposure benefits from the strong credit quality of our clients, significant borrower equity and our clients' capacity to make higher payments. As such, higher rates and rising unemployment are expected to have the largest impact on credit cards and unsecured lines of credit, consistent with the traditional credit cycle.

In our wholesale portfolio, higher interest rates have not been the main driver of credit deterioration. However, higher rates have exacerbated headwinds stemming from rising costs and changing consumer spending and behavioral patterns. This quarter, in our wholesale portfolio, we continue to see a growing number of credit downgrades, increasing watchlist exposure and more accounts being transferred to our special loans team.

With this backdrop, we added $194 million of provisions on performing loans this quarter. Provisions were predominantly on commercial real estate loans in the wholesale portfolio and on credit card and personal loans in the retail portfolio. We have now added provisions on performing loans for 6 consecutive quarters, increasing our allowance on performing loans by 33% over that period. We are prudently provisioned. And as Dave noted earlier, our total allowance for credit losses on loans of $5.3 billion is now almost 3x our 2023 PCL on impaired loans.

Moving to Slide 22. Provisions on impaired loans were up $40 million or 2 basis points relative to last quarter, consistent with our expectations. In our retail portfolio, provisions on impaired loans were higher across most products, led by credit cards and personal loans. Our retail Stage 3 PCL ratio of 21 basis points remains well below our average historical loss rate of 30 basis points as the portfolio continues to benefit from relatively low unemployment rates and strong client savings.

As I noted earlier, we expect credit outcomes to deteriorate as more clients become impacted by higher interest rates over time as unemployment rates continue to increase. In our wholesale portfolio, provisions on impaired loans were up $17 million or 2 basis points quarter-over-quarter. During the quarter, 25% of our wholesale provisions were in commercial real estate, taken on previously impaired loans. This quarter, there was only one newly impaired commercial real estate loan, and we expect to be fully repaid on the loan with losses absorbed by equity and subordinated debt holders.

More broadly, recoveries on impaired loans are being negatively impacted by depressed valuations due to the level of uncertainty of interest rates as well as higher credit conditions, particularly in the U.S. Outside of commercial real estate, the remaining 75% of wholesale provisions were taken across several sectors. Some of the provisions were a result of idiosyncratic events like the rider actor strike in California, while other provisions were a function of changing consumer behaviors post-pandemic.

Regionally, approximately 2/3 of wholesale provisions this quarter were in the U.S. and our wholesale Stage 3 PCL ratio in the U.S. is almost 3x higher than in Canada. This reflects a number of structural challenges in the U.S. market as well as the speed at which distressed loans in the U.S. are restructured. It also reflects the strength of the Canadian Banking commercial portfolio where loans often benefit from recourse or guarantees from sponsors. Our allowances appropriately reflect the structural differences. For example, in commercial real estate, our ACL ratio on performing loans is approximately 4x higher in the U.S. than in Canada.

Moving to Slide 23. Gross impaired loans were up $420 million or 4 basis points this quarter with increases across all of our major lending businesses. We have now seen 5 consecutive quarterly increases in gross impaired loans and our GIL ratio of 42 basis points is approaching 2019 pre-pandemic levels. Compared to last quarter, new formations were higher across most wholesale sectors and retail products with the exception of commercial real estate, which I noted earlier.

As we head further into the credit cycle, we expect [ information ] and gross impaired loan balances to continue to increase.

To conclude, despite the challenging macroeconomic environment, we continue to be pleased with the ongoing performance of our portfolios. For the year, our PCL on impaired loans of 21 basis points remains well below our historical loss rates, was at the low end of the guidance I provided last fall of 20 to 25 basis points.

Our strong credit performance reflects our diversified business model, our prudent underwriting practices and the quality of our clients. We also added $660 million of provisions on performing loans this year, and we feel well prepared for more uncertain and challenging credit conditions going forward.

In 2024, we are forecasting credit losses more in line with historical loss rates. For the year, we expect provisions on impaired loans between 30 to 35 basis points, with peak loss rates in late 2024 and into 2025. We expect to continue building reserves on performing loans for the first 2 or 3 quarters of the year, until our projected peak losses are inside our provisioning window.

This guidance is predicated on our current macroeconomic forecast. Our actual losses will be largely dependent on the magnitude of change in unemployment rates, the direction and magnitude of changes in interest rates, in residential and commercial real estate prices. As always, we continue to proactively manage risk through the cycle and remain well capitalized to withstand plausible at more severe macroeconomic outcomes.

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

[Operator]

[Operator Instructions]

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

[Gabriel Dechaine, analyst]

I have a question about overdrafts to [ use and I've ] covered that off in the U.S. quite a bit over the past few years, but it's percolating in Canada, clearly. Have you -- or are you willing to quantify what percentage of your Canadian revenues are generated from overdraft fees? I mean, I'm asking you only because your core deposit business is so large.

[Neil McLaughlin, executive]

Yes. Thanks, Gabe. It's Neil. I'll take the question. Maybe a little bit of context. In Canada, the conversations we're having around that direction are really focused on NSF fees as well as a direction of making sure that low and no-cost deposit accounts are made available to Canadians. So on those 2 fronts, which are really the focus of the conversations, we actually provide the NSF charge as part of our core main -- the deposit account we mostly taken our go-to-market strategies.

We also have, I'd say, quite generous go -- pay, no-pay processes where we will actually do analytics to understand if the client has that type of liquidity that we expect to come, and we'll cover that to avoid the NSF charges. We also have the lowest NSF fee in the country. So we'll work with the government to make sure that, that policy direction is taken forward.

In terms of -- we don't expect to be very clear, any material reduction in other income on the retail bank as a result of this. And the last portion of that question around low and no-cost accounts, we already do provide this product. It is a regulatory requirement and the focus from the government is really making sure that some of the larger FIs also participate in making sure that low and no-cost accounts are made available. So those are -- that's really the core of it.

[Gabriel Dechaine, analyst]

So you don't expect anything material from the sounds of it?

[Neil McLaughlin, executive]

No, we don't.

[Gabriel Dechaine, analyst]

Okay. And am I allowed a second question? I forgot now.

[Neil McLaughlin, executive]

Yes, fire away.

[Gabriel Dechaine, analyst]

Okay. Just looking at the deposit mix trends in Canadian Banking, again, we've seen the term deposit GIC growth slow but if I look at an industry level, GICs and term deposits, whatever as a percentage of total deposits in Canada are still pretty low relative to historical standard. I'm wondering if -- how does that inform our view on margins? Is there still a pretty big natural uplift to these term deposits? And should that be viewed as an ongoing NIM headwind here that's not going to go away for a while? Maybe talk about that for a bit, please?

[Neil McLaughlin, executive]

Yes. Sure, Gabe. It's Neil again. So we have seen from midyear slowing in the rotation into term deposits, quite slow, it dropped quite a bit in Q3, picked up a little bit in Q4. Overall, this is the consumer looking for yield, where that's coming from is multiple sources on our book. So a good portion of that is actually coming external to the bank. So we're welcoming new clients taking on incremental volumes.

The other flows coming from our mutual fund business where clients are just looking for that risk-free or next to risk-free yield, but the GIC product has been benefiting from inflows from all types of deposit products. So that's really kind of, as we look at like the direction of the flow of funds, where things have moved, checking is down marginally year-over-year. Savings is down a little bit more year-over-year representing those flows.

But overall, the Canadian consumer still has a material buffer in overall deposits pre-pandemic. So some of that has started to erode. You heard Graeme's comments where people put that liquidity towards paying increased mortgage payments, we're seeing some of that. But overall, we'd say the consumer still has some good healthy buffers.

[Operator]

The next question is from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

I wanted to follow up on commentary you made about revisiting the DRIP buyback issue in the second half of the year. I'm just wondering, first of all, if the DC buffer goes up by 50 basis points, did that change your guidance on this issue? And also wondering about the expectations for rates that's built into that comment, that outlook.

[Nadine Ahn, executive]

Sure, Meny. Thank you. So in terms of where we've had a healthy capital build this quarter, which, as I mentioned in my remarks, when we look at the pending closure of HSBC, pending the approval -- regulatory approvals, we expect to be healthy over the 12% which if you look at where OSFI is currently from a DSP standpoint, that will put us well over a 50 basis point buffer against the current regulatory minimum. So when we're thinking about where we expect to land post-HSBC, barring any other changes from the economic environment, we think that we still would be comfortably able to revisit the DRIP post that into the second half of the year.

[Meny Grauman, analyst]

Is there any update in terms of the timing of the HSBC deal?

[David McKay, executive]

Maybe I can answer that. It's Dave here. We certainly feel very good about the overall process, and we have to respect the overall process in all steps. We have a strong approval from the Competition Bureau who recognizes that there remains a very strong competition in the Canadian marketplace and in all the markets where HSBC operated. This provides enormous benefit to Canadians as far as increased taxes, increased dividends in the country is very significant.

You can see upwards of $300 million, $400 million, $500 million of increased dividends in Canada that were flowing out of the country under HSBC Global before. It's good for clients as far as offering HSBC clients an enormous amount of opportunity with our product set and our capabilities across Wealth and Capital Markets and credit cards and other areas where we're really strong.

And conversely, that technology that we're bringing to our -- to bear on our 17 million clients, particularly in my speech, around trade finance and multicurrency accounts and cross-border trading. So I think from that perspective, when you look at the process we've gone through, you look at the benefits to Canada, you look at the fact that HSBC has made the decision to exit this country, and we have to respect that. It would be a very bad signal to the foreign investors to not move forward with this as we have to attract capital into this country.

And therefore, for all those reasons, we are confident in the overall outcome of this transaction. So we're waiting for approval and we have to respect that process. But we feel good about the transaction. We're well on our way to coding the technology side of this with our HSBC partners, where we're allowed to prior to approval. And we are very, very excited about what this can do for Canada and what it can do for HSBC clients and communities like British Columbia, where we'll invest significantly in the BC economy. So for all those reasons, this is good for Canada. And therefore, we expect we're close.

[Operator]

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

[Ebrahim Poonawala, analyst]

I guess maybe first question, Graeme, for you in terms of the credit outlook, you talked about peak losses towards the end of the year into '25. When you look at -- when you think about the economy today in Canada and the consumer, do you have enough confidence in the visibility if rates are down going higher? How much downside there is or how much pain there is for the consumer and how that translates into credit losses be it unsecured business? Or -- like how would you rate the level of uncertainty around the macro and what that means and how credit performs over the coming quarters?

[Graeme Hepworth, executive]

Yes. Thanks, Ebrahim. It's a good question. You noted -- I mean, there's still -- there's a lot of uncertainty on how credit plays out over 2024. And certainly, as we look beyond that, it's going to be hugely dependent on how unemployment plays out over that time, how incomes for consumers play out over that time, what happens in the interest rate environment, where house price is going, these are all very critical factors into how -- the impacts will really flow through our books.

We certainly captured that in a number of different ways. One, certainly in our baseline, I think Dave commented on some of the big macro factors there.

We are assuming in the baseline that interest rates -- the short end of the interest rates start to pull back in the latter half of next year. We assume housing prices are fairly stable going forward, but not accreting terribly fast. But unemployment, we do see picking up and starting to peak out in kind of the midyear of next year.

Now we recognize there's a lot of uncertainty all of that, and that's where kind of our downside scenarios play a big role for us. When we look at the downside scenarios, the pessimistic scenario, we referred to, give you some consideration on that. That assumes that house prices could come off 15% kind of stay down that level for an extended period.

We assume a rate environment where rates persist higher than they are now for a longer period and we consider a world where unemployment could get up into the mid-7s. And so that kind of gives you a context for how we think about that downside scenario. So that all kind of comes into play, and we weigh that up against our portfolio in terms of how we think about what 2024 is looking like, but where we start to kind of at least get early indications of where we think this will peak out. But again, where and when it peaks out is going to be highly dependent on the path going forward.

[Ebrahim Poonawala, analyst]

That's good color. Thank you, Graeme. And maybe just one of, Nadine, on the low to mid-single-digit expense growth guidance. Dave just talked about HSBC. How does the timing of HSBC and HSBC impact achievement of incremental savings given the close to convert there? Like would that meaningfully impact this if the deal for whatever reason got pushed out by a few months as far as the closing date is concerned?

[Nadine Ahn, executive]

No. In terms of -- so the number that I gave in terms of guidance, Ebrahim, just to be clear, excluded anything related to HSBC coming onboard. It does include costs related to the integration that we do adjust for. So that guidance is excluding the specified items.

So in terms of our work that we're doing is integrating HSBC, that wouldn't change anything materially as it relates to the guidance that I provided going into 2024 and that mid to -- low to mid-single digits. The guidance of the HSBC still would hold in terms of our synergies, which we're still very confident in, in terms of the 2-year outlook but most of it coming into the second year.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul Holden, analyst]

I want to go back to you, Graeme, to start. You gave us a number of the factors that obviously matter for provisioning. I guess what I want to ask is how sensitive are your credit models to interest rates versus unemployment? I guess, the reason I ask is with the wall of mortgage renewals coming up in 2025, let's say, we go through a situation where unemployment hold up okay, but rates remain high, the -- how bad a scenario is that versus the opposite way where you may see higher unemployment, but lower interest rates?

[Graeme Hepworth, executive]

Right. Yes. It's a good question, Paul. Thank you. Certainly, I would start by saying it's not like we rely on one set of models here to give us all the answers. We certainly look at these a number of different ways. We obviously have a high degree of detail on our client base that really allows us to kind of examine the impact that we'll have on them. All this is backstop by a starting point that at origination, all these clients went through kind of a consideration on this so-called stress test to make sure there was a good resiliency to higher interest rates. That's why we provided some of the disclosure we did this quarter to give you some sense for kind of -- what that kind of starting rate looks like and kind of what the impact could be on them.

But when we go through that, I would say, yes, high rates are going to be impactful, but it really is -- got to be looked at it in conjunction with what kind of plays out with house prices.

There's a lot of equity clients have in their houses. And so when they have good equity, that gives them a lot of options, they have options to potentially extend amortization, to offset the payments, to potentially kind of consider like changes on upgrade or downgrade their houses. There's going to be [indiscernible] on income generation that happens over that period. So I think there's just a lot of factors that come into it, of which certainly interest rates is part of it, but I wouldn't say interest rates by itself will tell us the whole story.

[Paul Holden, analyst]

Okay. Got it. And my second question is related to City National. So Dave, you provided some pretty clear and useful expectations around return to profitability starting next quarter and improving through '25. I guess, what I want to understand is to what extent does that impact the all-bank results, i.e., is the improvement in profitability next quarter simply a result of that intracompany transaction?

Or are there action plans that are actually going to impact the bottom-line earnings as well?

[David McKay, executive]

Paul, thank you for that question. So as we think about the rapid growth we've gone through in City National, the return to profitability has a couple of factors. One, the absence of the write-down of the non-core assets, obviously, has a significant benefit. Two, we executed a reduction of over 5% of employee layoffs in Q4, and you'll start to see the cost run rate of that 5% reduction in those severance costs, which are absorbed within the businesses, we don't call them out there.

So I think from that perspective, that provides a tailwind. Continued expense management, we still have a very high expense ratio for a business of this size compared to peers. So with the new management team under Greg Carmichael, they have a clear focus on how to drive competitive for a $70 billion to $100 billion bank productivity ratio.

So that's very much in our focus to do that as we look at streamlining the organization and the benefits of some of the technology investments we've made. Then I would say, over -- that's in '24. And then so we expect to exit the year with a more normalized run rate and then into '25 kind of run it where we're hoping to be this year at the end of the day.

We still face kind of overall challenges from funding costs, as you can imagine, but that will start to alleviate as you see rates start to come down in the U.S. maybe sooner than most people thought they would, that provides benefit on funding, but also puts a little bit of pressure on our revenue line, and we'll watch that carefully.

But as you saw in our capital markets franchise, 7 or 8 years ago after a period of very rapid balance sheet growth, we ended up with a lot of single-service lending clients. And I would say the Capital Markets business over the last 5 years has done a fantastic job of leveraging existing balance sheet in RWA until multiproduct relationships, higher ROEs have come from that.

And this is part of a growth process in a franchise that's growing quickly. And you'll see that in City National as well. As Greg and Howard and Chris and the team, along with Kelly Coffey, continue to focus on clients with deposit relationships, with FX relationships, with cross-sell.

On the commercial and private bank side, you'll see us start to enhance our overall profitability and ROEs from that. So it's a journey in the United States, but you can see we'll return to profitability. And then we will get back to more normalized towards the end of the year and into '25 and start to realize the benefits of this very strong franchise at the end of the day. It's been a difficult year. It came at us really quickly in March. And I think we've done a good job pivoting and have a number of levers to do that.

[Operator]

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

[Doug Young, analyst]

Maybe, Dave, if staying with City National Bank, I guess I'm more curious, what's gone wrong since all the different things that have kind of played out since you bought the business? And I'm more curious, I kind of understand a bit of the macro side of it. Is there things that you would have done differently? Or is there other things within your control that you can kind of talk a little bit about? Or was this just all -- most of the macro side just kind of went against you?

[David McKay, executive]

I think it's the latter. I mean, since we bought it, we've had 7 good years at the end of the day, and we had a plan this year to have a record year for City National. So I would say, we've been very happy with the franchise, and it's carried the organization in growth. And I think given the tough year we've had, it will provide a bit of a tailwind for us into '24, obviously, as we can perform better and then again into '25.

So I would first challenge, it hasn't been a strong performer for us. And we thought coming into the year pre the financial -- the banking crisis in March that we would have our strongest year. And -- but it was the macro environment. It was the rapid move in deposit costs kind of the volatility of the customer franchise as far as money movement, not only within the U.S. banking center, but increasingly outside the U.S. banking sector led to much higher betas than we had ever seen in this franchise. This franchise has operated in this client segment for 60 years, and we have not seen this type of volatility in the overall business.

So it came at us really quickly. We didn't plan for it. I think we pivoted well. I think to your question, what could we have done better? I think we could have focused on growing with more multiproduct clients quicker. I think the focus on -- deposits came in so quickly and so easily to this franchise over the last 5, 6 years, we were along with $35 billion of deposits in midway through the financial crisis. We focused on a lot of single service lending. And I think if we had really focused on leveraging into multiproduct relationships, we'd see a different profitability model now.

And just to pivot from -- don't forget, this was a community bank when we bought it, and we've grown it now into a midsized regional and we are replatforming this thing for the next decade. So going from a community bank to a regional bank is not an easy journey, and we're well into that now. And therefore, we will have a platform that's more profitable and able to grow multicurrency relationships, including U.S. cash management into the mid-corporate sector in the coming year.

So I think from that perspective, overall, and any journey, it takes a long time to build these franchises. And I think any journey, you're going to hit a few bumps. I would say, it's mostly macro. We think the client franchise and the long-term potential is very, very strong in this franchise.

[Doug Young, analyst]

I appreciate the color. It was just the question I get asked, so I do appreciate it.

[David McKay, executive]

Glad you asked it. Thank you.

[Doug Young, analyst]

Yes. And then, Nadine, just on the NIMs and [indiscernible], the comment that not -- it's not peaking yet. And I understand the tractors and how that unfolds. Can you dig maybe a little bit more into that? Or maybe that's just everything that's behind the story? And then can you kind of bring that up to the all-bank level in terms of what you're thinking in terms of the evolution of the all-bank then excluding trading over the coming year?

[Nadine Ahn, executive]

Sure, absolutely. So when you think about our -- if I start with Canadian Banking, and I mentioned that the benefit we continue to get from the deposit tractors, and if you look at it, that's really going to leg over for quite a period of time, even if rates start to come off and you look at our interest rate sensitivity, that shock is for an immediate 100 basis point, but we're continuing to leg into those higher rates, and that will continue to benefit. There are offsets to that, as I mentioned.

And one of the things that we saw earlier in the year was really around the deposit mix shift, that has, as Neil mentioned, abated quite significantly. And if rates start to come off, that is something that probably will start to see that even shift-back maybe from the bank standpoint into mutual funds, which is the benefit for us as well.

The challenge also was then around kind of the business mix as it relates to on the asset side and mortgages of the increased competition there pushes margins down. So that -- we do expect that based on our deposit franchise, we will continue to see NIM accretion, how much that gets pulled back a bit related to some of those other factors.

At the all-bank level then, when you think about the 3 primary components that we highlighted there between Canadian Banking, City National and you have within corporate support, what's really sitting there is you have from an internal asset liability management, we pushed through all of the impacts associated with the margins into the business, and you're seeing offsets there where you will have an internal flow that gets put in NII and you will have the hedge that sits in other income.

And so that's why we tell you to really net the 2 of those. The reason that, that's gone so large is primarily because of the floating leg that you'll see there. And so that's the differential between either the funding side or the derivative side, and that's where you're seeing the increase on the corporate support side within the DCOM for all-bank NIM.

[Doug Young, analyst]

So not about that, do you expect the all-bank NIM to kind of go in a similar direction as the Canadian bank has?

[Nadine Ahn, executive]

Excluding trading, yes, both contributable. We commented on City National and Canadian Banking, excluding that noise, yes.

[Operator]

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

[Sohrab Movahedi, analyst]

Hopefully, 2 quick questions. One for Derek. I mean, I think there was mention of some sort of record-breaking quarter for some parts of your business. Can you just give us some -- the sense of how you see the business developing over the next 2 to 4 quarters maybe?

[Derek Neldner, executive]

Sure. Thanks, Sohrab. Yes, for Q4, just to touch on it, it was a record revenue quarter for Q4 and was a record revenue year for '23 overall. So obviously, we're very pleased with the results, I think, reflects headway we've been making on a number of the strategic initiatives we've undertaken. As we look forward to 2024, right now, I would say we're cautiously optimistic on the outlook.

Obviously, there still is a fair bit of uncertainty on the economy and rates and implications that may have on markets and client activity.

But overall, I think we feel quite constructive in terms of the macro and then obviously, some of the specific things we're driving to grow the business. So if I just step through that a little bit, Global Markets has obviously had a pretty constructive environment in the last 2 years given some of the volatility. We think as the economy and markets stabilize a little bit, that may normalize a bit.

But overall, I think we expect a reasonably constructive environment for the sales and trading business next year. Investment Banking has obviously had a difficult 2 years with fee pools down 30% plus, each of 2022 and 2023. I think, again, as we see a little greater confidence in the outlook over the next few years, we're starting to see corporate and sponsor activity pick up. That's reflected in obviously a good quarter you saw in Q4 and improving visibility on our backlog.

So I think we feel good about the outlook for the Investment Banking franchise next year. And then demand for credit among our corporate clients continues to be quite steady. And so we envision, I think, a good solid year next year for our lending franchises. One headwind has obviously been an elevated cost of funding with rates potentially peaking, spreads peaking, we would be hopeful that, that pressure has abated through '24 and more into '25, we maybe start to see that settle down a bit.

So that gives you a bit of an overview, reasonably constructive overall in the businesses. And importantly, we feel confident in our strategy and a number of the investments we've been making to underpin that. You've seen that evidenced in market share gains this year across both our markets business and Investment Banking. And we feel good we can continue that momentum into next year.

[Sohrab Movahedi, analyst]

Okay. That's very helpful. And then just a quick one for Neil. They've got a target of 1% to 2% positive operating leverage for you next year. Do you think that's going to be more on the revenue side or on the expense side?

Or which one do you think will make it more challenging for you, the revenues or the expenses to deliver on that?

[Neil McLaughlin, executive]

Thanks for the question. I mean, I think there's -- obviously, we can control the expense. We have more volatility in the revenue line. So you've seen us take the expenses on a downward trajectory. That will definitely continue. But that's one of the reasons that we really focus on operating leverage because there is that type of uncertainty. So we'll manage the operating leverage through the year, and we've made some wholesome levers, particularly around FTE. You heard Dave's comments earlier in the year, and that type of focus will continue.

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

First for Graeme, in your opening comments, you said something about performing loan provisions in the first few -- first 3 quarters of '24, but I didn't quite follow what were you suggesting there?

[Graeme Hepworth, executive]

Well, I'm just suggesting the range we gave -- the range I guided to is 30 to 35 basis points on Stage 3. Stage 1 and 2 is harder to guide on because we're effectively trying to give a best estimate of what our future expectations are. But just given the forward trajectory and our view that Stage 3 probably doesn't start to really kind of peak out toward the end of next year and into 2025, we do expect that we'll continue to build Stage 1 and 2 through the first 2 or 3 quarters as well.

[Mario Mendonca, analyst]

Is that like -- are you talking the normal course, the 5 to, I don't know, maybe 4 to 8 basis points, are you applying something more than that?

[Graeme Hepworth, executive]

No, I mean, I don't think we can assert an amount at this point, Mario. But right now, I think we've been building in a range for the last few quarters. And I would say that kind of is a reasonable expectation right now, but subject to all the kind of different considerations around house prices and interest rates and unemployment, et cetera.

[Mario Mendonca, analyst]

That's fair. Probably for Dave next, the -- you've seen some of your peers take meaningful restructuring charges this quarter. And clearly, Royal is doing what it does to manage expenses, but we're not seeing any sort of large restructuring initiatives, at least in Canada. That's my impression. So let me ask the question this way. Have there been any meaningful headcount reductions in Canada buried in these severance charges? Or is Canada been left out of the mix for now?

[David McKay, executive]

No. We -- I think Nadine referenced it in her comments that we are just under 2% reduction in Canada. You see Neil's FG is down. That's where the focus was. That's where the overhiring was, as we talked about last year, we had a couple of thousand frontline people when attrition slowed down. So yes, that's where the run -- a big part of the run rate is coming out of Canada. The $200-plus million or I think $240 million the run rate coming out of Canada. In addition to a fair bit of heavy lifting in City National as well as 5% of that workforce around 300 people there as well.

So I think between the 2, though, but Canada is definitely down and will continue to be fit for the future. As is our practice, we absorb those into our overall run rate and we will continue to manage our platform in conjunction with the macro environment and revenues and target that operating leverage. So we don't call it out as specifically as our peers do, but we -- the cost of doing business and you should hold them to that end of the day. And therefore, that's how we operate.

[Mario Mendonca, analyst]

Just a quick follow-up on HSBC. It's become somewhat politicized, I mean that's sort of unfortunate. But the nature of the question I want to ask is this, is there -- and I know you can't take us into the boardroom and relay your discussions with the people that matter here, but is this just a matter of Royal now having to make some kind of concessions around people and processes for 2024 to get this over the finish line?

[David McKay, executive]

I can't give you that type of detail. We -- this transaction has enormous benefits for Canada. And I would say, all parties in the approval process understand the benefits to the country, of tax revenue increases, of dividend increases, of investment in Canada and incremental investment in Canada, the benefits to employees and to clients. Everybody understands that. Everybody understands that HSBC is leaving -- has made a choice to leave, and it would look horrible on Canada if you didn't allow the free flow of capital, everybody understands that.

And that gives us confidence overall that the benefits of this structure is the diligence that the Competition Bureau put into this, and they put enormous diligence through an extended process with tens of thousands of documents. We have to respect the process. And therefore, I remain confident given that everybody at all levels, understand the benefits and why this is good for Canada and why not doing it is very bad for Canada.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

I just want to continue along that line of questioning, but I want to approach it a little bit differently. So would it be fair to suggest that based on where you sit today, the accretion and synergies estimates associated with the HSBC deal, should be expected -- we should expect that to hold so there aren't any additional concessions that could impact the economics of the deal together over the finish line. Is that a fair statement?

[David McKay, executive]

Yes. We love this transaction. We love this bank. We're confident in our cost takeout. We're working through, and we'll talk to you about where we see revenue synergies going forward post close. And therefore, yes, we are very excited about this because it's good for Canada. It's good for RBC and its shareholders, and we don't expect any material delay in the realization of the benefits with the protracted approval process.

[Lemar Persaud, analyst]

I appreciate that. That's very clear. And then just on the outlook for Canadian Banking margins. I hear -- I understand that you guys are expecting that to move higher. This quarter, it was really driven by mix because competition really offset the benefits of rates. Is this similar dynamic expected to play out moving forward that is mix is going to be the real driver for higher Canadian Banking margins? Is that fair?

[Nadine Ahn, executive]

I would say that there is the latent benefit associated really with the strong deposit franchise. That's where interest rate sensitivity comes from. That's what's driving a lot of the margin expansion. I would position it a bit differently. So the question really is, is the competition around certain products and the mix associated with where our balance sheet is trending, going to be offsetting that. I think the baked-in structural advantage is what we're thinking is going to create the lift.

[Operator]

The next question is from Nigel D'Souza from Veritas Investment Research.

[Nigel D'Souza, analyst]

I wanted to follow up on City National, but more so on your strategic outlook long term. You put -- purchased that bank for $5 billion to put more capital in and even with the measures taken. As for the profitability is going to fall sort of what you initially expected with that business. So how has that changed your appetite if there is another opportunity to purchase the U.S. retail or commercial banking franchise? Would you still allocate capital? Or would you prefer focusing the capital domestically or with your Capital Markets and Wealth Management business?

[David McKay, executive]

Thank you for that question. Our second home market continues to be the U.S. We continue to look to deploy capital into United States organically and -- or inorganically over time. I think the first thing that's required is a stabilization of all the rules and all the policies and all the regulatory environment in the United States and understand liquidity rules and capital rules that are under debate right now. And therefore, you'll have to work through that.

You have to move into a different interest rate environment because you've got accounting marks on everybody's balance sheet that makes it very problematic to do M&A right now. So all of that has to kind of clear the way.

And then we have to complete our integration of our technology build so that if we were to bring another bank onto our platform, we could do cost takeout from that, and we're not at that point yet. So I think from all those perspectives, it's going to -- we're watching, we're -- it could be in any one of those lines of businesses, but between Wealth and Commercial and other spaces that we've talked about. But yes, over the medium to longer term, we are very much interested in growing our U.S. franchise.

And one of the reasons we asked Derek to take over the overall integration of those 3 businesses is to simplify our business model in the United States, simplify our technology infrastructure and reduce duplication and make us more profitable and amenable to a strategic move forward like that. So all of this is laying the groundwork to a long-term multiyear investment in the United States.

[Operator]

Thank you. There are no further questions registered at this time. I will turn the call back to Asim Imran. Back to you.

[David McKay, executive]

Yes. I'll just take the call from here, this is Dave. So thanks very much for all your questions, very good questions, as always. Just to summarize kind of my takeaways from the messages through your Q&A today and what I'd like you to focus on, enormous balance sheet strength and liquidity strength with capital at 14.5%. You can see the clear path towards being able to absorb HSBC continue to build capital and allocate capital for growth and to start returning capital to shareholders in the near future.

So that strength of capital build and organic growth is core to one of our investment themes, as you know, and the return on that capital.

You've heard us and you've asked a lot of questions about cost control. You've seen us move core expenses down to that 5% mark and the commitment to continue to move it down next year in 2024. We feel very good about that, a number of initiatives that we've already executed and more that we'll make to continue to manage that.

I hope you noticed a very strong client volume performance, whether it's Investment Banking, Global Markets, Canadian Retail Deposits, Canadian Retail Lending, Canadian Business Lending, Asset Management and into Wealth Management, U.S. Wealth Management, a very strong core client compete and that's going to continue to flow through and good revenue growth for us and cross-selling off those clients, particularly new clients to the bank is very, very strong.

And then our PCL with all that growth, our PCL looks to relatively outperform as well. So net-net, we feel very good about how we've turned the corner. We wrote off some non-core assets. They were a little noisy. We don't do that very often, but we did it this quarter.

Really poised to take advantage of whichever way the macro environment goes. In '24, we're poised to do well in that environment. So thank you very much. Have a great year-end and a good holiday season, and we'll see you in Q1.

[Operator]

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