Royal Bank of Canada

TSX:RY

Earnings Call Analysis

RBC Reports Strong Earnings Growth Amid Acquisition Benefits and Cautious Outlook

RBC's fourth quarter earnings reached $4.2 billion, aided by the HSBC Canada acquisition, marking an 18% year-over-year increase. Adjusted earnings per share rose to $3.07, up 16%. The bank's return on equity was robust at 14.4%, with expectations of exceeding 16% moving forward. RBC anticipates net interest income to grow in the mid- to high single-digit range in 2025. Strong client acquisition led to a 19% increase in deposits. However, concerns exist regarding rising mortgage impairments as clients refinance at higher rates, although the bank remains cautiously optimistic about overall market conditions.

Strong Fourth Quarter Performance

RBC reported a robust fourth quarter earnings of $4.2 billion, including $265 million from the acquisition of HSBC Canada. Adjusted earnings hit $4.4 billion, marking an 18% increase year-over-year. This performance was driven by strong market appreciation and active client engagement across major segments, showcasing an operating leverage of 7% or 4% on an adjusted basis.

Annual Financial Highlights

For the fiscal year 2024, RBC achieved adjusted earnings of over $17 billion. The common equity Tier 1 (CET1) ratio stood at 13.2%, providing $5 billion of excess capital above the minimum required 12.5%. This excess capital fosters a strong foundation for ongoing growth and stability.

Client Growth and Acquisition Success

RBC successfully added over 600,000 clients to its Canadian banking business, indicative of its strong distribution network and innovative client services. The bank's acquisition of HSBC Canada is expected to yield significant benefits, with anticipated cost synergies of $740 million, predominantly captured in Personal Banking.

Net Interest Income and Margins

In Q4, net interest income rose by 17% year-over-year, driven by HSBC’s contribution and increased volumes in Personal and Commercial Banking. The all-bank net interest margin, excluding trading revenue, improved by 6 basis points. Looking forward, RBC expects net interest income, excluding trading revenue, to grow in the mid- to high single-digit range in 2025.

Cost Management and Efficiency Strategy

Noninterest expenses rose by 12% year-over-year. The bank expects core expense growth to be in the high single-digit range for the first half of 2025. RBC aims for 1% to 2% operating leverage, driven by disciplined cost management strategies in a challenging macroeconomic environment.

Personal and Commercial Banking Outlook

Personal Banking Canada reported a 17% increase in net income, underscoring healthy organic net interest income growth of 9%. Commercial Banking's net income rose by 16%, benefiting from double-digit volume growth. The bank is focused on maintaining a disciplined approach to mortgage growth amidst ongoing competitive pressures.

Wealth Management and Capital Markets Highlights

RBC's Wealth Management segment saw significant momentum, reflected in net new asset growth of over $15 billion. Capital Markets also performed strongly, with pre-provision pretax earnings reaching $1 billion in Q4, benefiting from increased lending and a robust client pipeline.

Strategic Focus and Future Guidance

Looking ahead, RBC remains cautiously optimistic despite macroeconomic uncertainties. The bank is committed to maintaining a return on equity (ROE) of over 16% and will pursue organic growth while strategically returning capital to shareholders, including a recent 4% increase in dividends.

Macroeconomic Challenges and Risk Outlook

The economic landscape presents challenges, such as increased unemployment and potential rate uncertainties. RBC expects credit loss provisions to remain stable at approximately 26 basis points, with management proactively adjusting provisions amid a dynamic housing market.

Closing Thoughts: Confidence in Growth Strategy

RBC’s leadership emphasized a strong commitment to growth, tapping into opportunities across its diversified business lines, while equipped with a healthy balance sheet to navigate future uncertainties. As RBC moves into 2025, it remains focused on leveraging the successful integration of HSBC Canada to enhance market share and profitability.

Earnings Call Transcript 2024-Q4

[Operator]

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

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

[Asim Imran, executive]

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Katherine Gibson, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Erica Nielsen, Group Head, Personal Banking; Sean Amato-Gauci, Group Head, Commercial Banking; Neil McLaughlin, Group Head, Wealth Management; Derek Neldner, Group Head, Capital Markets; and Jennifer Publicover, Group Head, Insurance.

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. [Operator Instructions]

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

[David McKay, executive]

Thank you, Asim. Good morning, everyone. Thank you for joining us.

Today, we reported fourth quarter earnings of $4.2 billion, including $265 million of earnings from the acquisition of HSBC Canada. Adjusted earnings of $4.4 billion were up 18% year-over-year or 9% excluding adjusted earnings of $318 million from HSBC Canada. This quarter, we benefited from market appreciation and strong client activity across our largest segments.

Importantly, we generated all bank operating leverage of 7% or 4% on an adjusted basis. Provisions for credit loss on impaired loans remained largely stable quarter-over-quarter at 26 basis points.

Looking back at our 2024 fiscal year. RBC delivered earnings of $16.2 billion of adjusted -- excuse me, adjusted earnings of over $17 billion. We ended the year with a common equity Tier 1 ratio of 13.2%, resulting in $5 billion of excess capital above a 12.5% level.

We continue to expand our funding capacity and profile this year, including through strong client-driven deposit growth. We added over 600,000 clients in the combined Canadian banking business this year as we benefited from our leading distribution, strategic partnerships and differentiated products, services and innovative client value propositions.

This included RBC becoming the official financial services and ticket access partner of Taylor Swift, The Eras Tour in Canada. Furthermore, we are proud that RBC ranked the highest in the 2024 J.D. Power Canada Retail Banking Satisfaction Study, the fourth time in 5 years.

In the U.S., we are seeing increasing client interest in RBC Clear, our cash management business, with rising inflows of deposits and a robust pipeline. Client feedback has been positive as we look to build the next phase of our holistic multiyear initiative. And City National's 83% loan-to-deposit ratio was largely underpinned by a base of core deposits.

We maintained our prudent risk appetite. ACL on loans and acceptance has increased to 64 basis points. We had no days of trading losses this year, and the operational risk multiplier remained flat at a ratio of 0.8.

We ended the fiscal 2024 with a strong ROE of 14.4% or an adjusted ROE of 15.5% during a year in which we closed our largest-ever acquisition. Our premium ROE drove internal capital generation of over 280 basis points this year. Excluding specified items, this in turn drove strong book value growth of 9%.

I will now provide my perspective on the macro environment. In Canada, inflation has declined towards targeted levels, amidst weaker consumer spending and a K-shaped economy, subdued business conditions and rising unemployment, which is up 80 basis points from last year. Further headwinds include a more constrained immigration policy and the threat of rising protectionism.

Partly offsetting these risks are rising consumer income levels, solid savings rates and 125 basis points of Bank of Canada interest rate cuts. These factors in combination could begin to firm up demand and moderate increases in credit losses in a rate-sensitive Canadian economy.

In contrast, the economic backdrop in the U.S. has been far more resilient where consumer spending and business expectations are rising. While the potential of an expansive U.S. fiscal policy could create uncertainty around the size and timing of monetary policy actions, we expect rate cuts by the Federal Reserve to support constructive client appetite and activity levels across senior markets.

In this environment, we are maintaining our medium-term objectives, including delivering on an ROE of over 16%, which we expect will be underpinned by earnings growth and accretive capital deployment.

We consider many factors when allocating capital. Disciplined client-driven RWA growth is always a priority, and we expect to take advantage of increased opportunities to support our commercial banking and capital markets client financing needs.

As it relates to returning capital to our shareholders, this morning, we announced a $0.06 or 4% increase in our quarterly dividend. We have been cautious in buying back stock this quarter given our higher degree of volatility around election outcomes and monetary policy. Going forward, we will look to use buybacks as a lever to deploy capital and we'll tactically increase the cadence when opportunities arise.

With this context, I will now provide an update on our multipronged client-focused growth strategy, starting with our acquisition of HSBC Canada, which positions RBC as the bank of choice for newcomers and commercial clients with international needs.

HSBC Canada's adjusted earnings included realized run rate savings of over $400 million or approximately 55% of the stated target on an annualized basis. We remain confident that we will achieve our expense synergy goal of $740 million, majority captured in Personal Banking. We will look to disclose the anticipated financial benefits of revenue synergies in the coming quarters.

The key initiatives driving our initial successes include cross-selling of RBC Personal Banking products to clients acquired through the acquisition of HSBC Canada as well as our investments in new capabilities such as foreign currency accounts.

The acquisition has added increased scale to all our businesses, particularly commercial banking. We also expect revenue synergies from trade finance and global cash management capabilities.

Moving to Personal Banking, where we remain focused on client acquisition, deepening client relationships and improving productivity. The following comments relate to Personal Banking Canada. We reported strong deposit growth of 19% or 8% excluding HSBC Canada. These deposits are a core relationship product.

This quarter, we saw growth in all 3 of core banking, term deposits and investment accounts as we continue to capture the money in motion shift given the evolving interest rate and market outlook. Our One RBC client-first approach is also reflected in the multiple awards and record Net Promoter Scores achieved by our private bank.

Turning to mortgages, where we plan to maintain our disciplined growth strategy amidst intense competition. And as part of this strategy, we have invested in technology to improve our end-to-end digital renewal processes ahead of upcoming mortgage renewals.

Furthermore, we are leveraging investments in technology and artificial intelligence to create client value while improving productivity. For the third year in a row, RBC ranked in the top 3 global financial institutions for artificial intelligence maturity and the evident AI index.

Turning to our leading Commercial Banking franchise, where we remain focused on prudent growth and leveraging our strong Canadian cash management and transaction banking offerings. Loans and deposits in Q4 were up 37% or 19% year-over-year, respectively. Excluding HSBC Canada, loans and deposits were up 12% and 8%, respectively, largely with our existing clients.

We significantly invested in frontline capabilities and coverage teams over the past few years and more recently further expanded our coverage and bench strength with talent joining from the HSBC Canada acquisition. We expect growth to remain solid across our diversified set of sectors.

Turning to Capital Markets, our business where we aspire to move even further up the league tables across key categories. Inclusive of record fourth quarter revenue, pre-provision pretax earnings were $5 billion for the year, above our guidance of $1.1 billion per quarter. Lending and other revenue were up 14% from last year, benefiting from higher lending volumes and spreads.

In Investment Banking, we gained 20 basis points of market share over the last 12 months, notably in equity origination and M&A advisory, which are key areas of focus. We have a robust pipeline that continues to build as we progressed through 2024 with active dialogue across client segments.

There are also signs that private equity activities picking up as sponsors look to deploy their significant levels of uninvested funds. We will continue to work towards increasing banker productivity, including a focus on winning multiproduct mandates as well as strategic senior hiring in key industry verticals.

Global Markets reported $1.3 billion in revenue this quarter, reflecting a constructive backdrop in fixed income products. We plan to continue investing in talent and technology to gain market share in this business.

Moving to our Wealth Management segment, where we look to leverage our diversified product shelf and holistic solutions, improve our technology and grow our adviser base in distribution channels. This quarter, revenue was up 20% year-over-year, benefiting from higher markets, asset gathering and client-driven transactional revenue.

RBC's Global Asset Management's assets under management increased $139 billion or 26% from last year. GAM generated Canadian retail mutual fund net sales of $3 billion in 2024 compared to industry flows that were in a net redemption state. In this volatile environment, our clients chose us as a trusted adviser, in part due to our performance and expertise. Nearly 80% of AUM outperformed the benchmark on a 1-, 3- and 5-year blended basis.

This was a milestone quarter for our Global Wealth Advisory businesses, which reached $2 trillion of assets under administration for the first time. Canadian Wealth management assets under administration increased 26% or nearly $180 billion from last year.

AUA in U.S. Wealth Management, including CNB, was up 23% or USD 125 billion. We recruited over 100 advisers this year. Furthermore, loans and deposits in our U.S. Wealth Advisory business reported strong growth this quarter, and we -- as we add banking products to support client needs.

On a full year basis, City National reported net income of USD 144 million. After adjusting for specified items and other items impacting results, earnings were USD 391 million, as CNB continues to improve its earnings profile. While a relatively small contributor to all bank earnings, CNB remains an important element of our growth strategy in the United States.

Turning to our Insurance segment, which continues to generate high ROE earnings. We remain focused on harnessing the power of One RBC to deepen client relationships and provide a comprehensive suite of advice and solutions to both individuals and businesses. The year-over-year increase in contractual service margin, which represents the future profit on our long-term products, was underpinned by growth in segregated funds and individual life and health products, creating a foundation for future revenue growth.

In conclusion, we are well positioned entering fiscal 2025. Our balance sheet provides a strong foundation to keep growing our client base across our diversified lines of business in a prudent and efficient manner.

I want to thank our more than 98,000 employees who live our purpose and create value for 18 million-plus retail, commercial and institutional clients everyday. This commitment to excellence is reflected in the power of our brand. I'm proud that RBC maintained its #1 position in the Kantar BrandZ Most Valuable Canadian Brands in 2024 ranking, outperforming financial peers in key areas, including consumer trust and corporate reputation.

With that, Katherine, over to you.

[Katherine Gibson, executive]

Thanks, Dave, and good morning, everyone.

Starting on Slide 11, we reported diluted earnings per share of $2.91 this quarter. Adjusted diluted earnings per share was $3.07, up 16% from last year, benefiting from the acquisition of HSBC Canada. Each of our businesses exhibited strong double-digit revenue growth this quarter, which underpinned robust adjusted all-bank operating leverage of 4.3%.

Turning to capital on Slide 12. Our CET1 ratio improved to 13.2%, up 20 basis points from last quarter, mainly reflecting internal capital generation, net of dividends. This was partly offset by business growth and net credit migration mainly in the wholesale portfolios.

We also repurchased approximately 408,000 shares this quarter or $67 million. We will continue to prioritize capital allocation towards client-driven organic growth and dividend increases in line with earnings. In addition, we will be opportunistic in our use of buybacks.

Moving to Slide 13. All bank net interest income was up 17% year-over-year or up 15% excluding trading revenue. These results were largely driven by the addition of HSBC Canada as well as higher volumes and spreads in both Personal Banking and Commercial Banking.

The all-bank net interest margin, excluding trading revenue, was up 6 basis points from last quarter, largely due to a favorable funding cost adjustment and improved lending spreads in capital markets. Favorable tailwinds in Canadian Banking also contributed to the increase.

Canadian Banking NIM was up 2 basis points from last quarter as the benefits from our tractor deposit strategy and changes in product mix were partly offset by ongoing competition for term deposits, which we expect to persist throughout the year, as well as the dilutive impact of the BA core of migration.

We hedge our low-cost nonmaturity deposits in a laddered strategy of 3- and 5-year duration. Going forward, with 5-year swap rates up approximately 140 basis points from 5 years ago, our core deposit portfolio is well positioned to provide an offset to the impact of lower short-term interest rates.

In the past, we have highlighted that there are many variables that impact NIM, including changes in client and competitive behavior and the forward curve, which are difficult to predict in the current dynamic environment. Looking forward to 2025, we are providing new guidance with net interest income ex trading revenue expected to grow in the mid- to high single-digit range.

Moving to Slide 14. Noninterest expenses were up 12% from last year on both a reported and adjusted basis. The bulk of the year-over-year core expense growth was driven by higher variable compensation to measure it with higher revenue. Higher volume driven costs, investments in technology and discretionary costs also contributed to the growth.

Looking forward, given the uncertain macro environment, we will continue upholding a disciplined approach to cost management. We expect all-bank core expense growth, including run rate HSBC Canada costs to be in the mid-single-digit range for 2025, off a base of reported 2024 expenses.

Core expense growth in the first half of the year is expected to be in the high single-digit range, reflecting the inclusion of HSBC Canada results and, to a lesser extent, investments for our next phase of growth. While we anticipate volatility within our guidance range to be largely driven by movements in variable compensation, we ultimately expect to drive positive operating leverage throughout the course of the year.

As a reminder, core expense growth excludes the impact of FX and share-based compensation, which are largely driven by macro factors. Reflected in this guidance is the expectation of 1% to 2% operating leverage for the combined Canadian banking businesses.

Turning to taxes. The non-cash effective tax rate was 19% this quarter or 19.5% on an adjusted basis. As we look to 2025, we expect the adjusted non-TEB effective tax rate to be in the 20% to 22% range, reflecting the impact of Pillar 2 income taxes, which arise in jurisdictions where our operations have an effective tax rate below 15%.

Turning to our Q4 segment results, beginning on Slide 15. Personal Banking reported earnings of $1.6 billion. Focusing on Personal Banking Canada, net income was up 17% year-over-year. Excluding $86 million of NIAT from HSBC Canada, Personal Banking Canada net income rose a strong 10% year-over-year, benefiting from 5% operating leverage.

Organic net interest income was up 9% from last year, reflecting higher spreads and robust volume growth. Organic noninterest income was up 11% year-over-year, underpinned by higher mutual fund distribution fees, including positive branch net sales. Additionally, higher service fee revenue was driven by client acquisition and volume-related growth.

Turning to Slide 16. Commercial Banking net income of $774 million rose 16% from a year ago, including $139 million from HSBC Canada. Pre-provision pretax earnings were up 36% or 10% year-over-year, excluding HSBC Canada, reflecting double-digit volume growth and higher spreads. Commercial Banking's efficiency ratio was 34% this year.

Turning to Wealth Management on Slide 17. NIAT was $969 million, with prior year results impacted by legal provisions and impairment losses with respect to our interest in an associated company. We added over $15 billion in net new assets across our North American wealth advisory and Global Asset Management businesses as momentum builds in long-term retail mutual fund net sales, driven by both fixed income and equity mandates. Higher revenue was partly offset by higher variable compensation.

City National generated USD 91 million, and adjusted earnings this quarter were $102 million, excluding the impact of lease exit costs. This quarter's lease exit cost coupled with the noncore losses taken over the past 12 months are consistent with our efforts to realign City National's path forward and drive improved profitability of the business.

Turning to our Capital Markets results on Slide 18. Pre-provision pretax earnings of $1 billion increased 14% from last year, benefiting from record fourth quarter revenue in both Global Markets and Corporate Investment Banking. This was partly offset by legal provisions of $93 million taken in the quarter.

Corporate and Investment Banking revenue was up 9% from last year, reflecting higher debt origination across all regions and higher volumes in lending and securitization financing.

Global Markets revenue was up 12% from last year, driven by robust client activity in FX trading and debt origination as well as more favorable spreads in repo financing.

Our equities trading business continues to be impacted by legislative changes to the dividends received deduction. Core results were driven by strong derivative trading and agency commission volumes.

Turning to Slide 19. Insurance net income of $162 million was up 67% from last year, mainly due to higher insurance service results, primarily driven by business growth across the majority of our products. This was partially offset by less favorable claims experience. It's important to note that the results in the prior year period are not fully comparable as we were not managing our asset and liability portfolios under IFRS 17.

To conclude, we are pleased with the strong performance across our core businesses this year, which underpinned a full year adjusted ROE of 15.5% on a robust CET1 base of 13.2%. Looking forward, we expect the strong operating momentum to carry into 2025, driving continued improvement in profitability.

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

[Graeme Hepworth, executive]

Thank you, Katherine, and good morning, everyone.

Starting on Slide 21, I will discuss our allowances in the context of the macroeconomic environment. Over the course of 2024, actions taken by central banks to curve inflation have largely been successful. However, the economic impacts of a higher interest rate environment have varied across the core geographies in which we operate.

As Dave mentioned earlier, in Canada, economy has been underperforming, and we expect relatively slower growth and weaker labor market to result in the Bank of Canada continuing to cut interest rates more aggressively than the U.S. Federal Reserve.

In the U.S., GDP growth remained strong, but labor markets have started to show signs of softening, prompting the Federal Reserve to start cutting rates with focus shifting from managing inflation to managing strength in the labor markets. Legislative cuts are certainly constructive for credit outcomes. It takes time for the benefits of rate cuts to flow through the economy, and interest rates remain elevated relative to the low rates following the pandemic.

Our clients continue to feel the effects of prolonged higher interest rate environment, and we continue to see net credit downgrades, moderate increase in delinquency rates and watch list exposure and drawdowns in savings and deposits for clients impacted by higher rates.

These outcomes are in line with our expectations for where we are in the credit cycle, and we continue to build allowances that provide strong coverage relative to current and anticipated PCL on impaired loans.

For the quarter, we took a total of $208 million of provisions on performing loans across our portfolios, reflecting unfavorable changes to credit quality, including the downgrade of a large exposure to a previously investment-grade rated company in the other services sector. This was partially offset by a favorable change to our macroeconomic forecast, driven by lower interest rates, better-than-expected house prices and the continued strength of the U.S. economy. This marks the 10th consecutive quarter where we added reserves on performing loans, resulting in a total ACL of $6.4 billion.

Moving to Slide 22. Gross impaired loans of $5.9 billion were up $182 million or 1 basis point this quarter. Higher impaired loan balances in Commercial Banking and Personal Banking were partially offset by lower gross impaired loans in Capital Markets and Wealth Management. In Commercial Banking and Personal Banking, new formations remain elevated, reflecting the weaker economic conditions in Canada compared to the U.S. that I noted earlier.

Turning to Slide 23. You can see provisions on impaired loans of 26 basis points were relatively stable, with higher provisions in our Canadian portfolios offset by lower provisions in Capital Markets.

In Capital Markets, losses decreased for the third consecutive quarter, with the current quarter's provisioning -- provisions benefiting from recoveries on previously impaired loans. While this trend is encouraging, we don't expect losses to remain this low.

In Personal Banking, we saw a modest increase in PCL, mainly in our unsecured portfolios. Our sound underwriting standards and rising personal incomes have helped mitigate losses in this segment.

In our Commercial Banking portfolio, provisions were up $55 million this quarter, principally from borrowers and economically sensitive sectors. We took additional provisions on previously impaired loans in the automotive and core product sectors and new provisions in the consumer discretionary and industrial product sectors.

Given the resegmentation, we provided some additional details on our Commercial Banking portfolio on Slide 24. This is a well-secured and highly diversified portfolio that represents a wide spectrum of borrowers across Canada, ranging from small businesses to the large commercial real estate developers and public sector agencies.

Over the last year, the portfolio has grown 36%, largely driven by the HSBC Canada acquisition, but also through a focused effort on the upper end of the commercial market. After a prolonged period of loan losses, the segment is now exhibiting some weakness with increased impairments that reflect the macroeconomic challenges in Canada I referenced earlier.

As shown on the slide, consumer discretionary, the office segment of commercial real estate, forest products and the supply chain sectors such as automotive, transportation and industrial products have been the main drivers of loan losses in 2024.

Overall, the portfolio continues to operate in line with our risk appetite. The addition of HSBC Canada has added to the quality and diversification of the portfolio that will further support strong through-the-cycle performance.

To conclude, we are pleased with the ongoing performance of our portfolios. For the year, our PCL on impaired loans ratio of 28 basis points remained below our historical loss rate and slightly outperformed the guidance I provided last fall of 30 to 35 basis points. Our strong credit performance reflects our diversified business model, our prudent underwriting practices and the quality of our clients.

We continue to see strong resilience in our retail mortgage and commercial real estate portfolios, with some payment relief expected from anticipated interest rate cuts in Canada. And this year, we added a total of $627 million of provisions on performing loans, leaving us well prepared for the risk on the horizon, whether they be -- whether they may be geopolitical risks, uncertain outcomes for the recent U.S. election or surprises to our interest rate and inflation rate forecast.

In 2025, we expect the Canadian economy to continue softening, with GDP and population growth slowing and unemployment rates peaking in the first half of the year, the lag impact from monetary policy decisions, and that we expect unemployment rates to remain elevated through the middle of 2026. Therefore, in basis points, we are forecasting 2025 credit losses to be in the mid-30s, with peak loss rates coming in the second half of the year.

Moving forward, credit outcomes will continue to be dependent on the magnitude of change in unemployment rates, the direction and magnitude of changes in interest rates, in commercial and residential real estate prices.

As always, we continue to proactively manage risk through the cycle, and we remain well capitalized to withstand plausible yet more severe macroeconomic outcomes.

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

[Operator]

[Operator Instructions] We will take the first question from Ebrahim Poonawala, Bank of America.

[Ebrahim Poonawala, analyst]

I guess, maybe just to start with Dave. I think you talked about the ROE and you laid out on Slide 6. Now this in a context where Royal has one of the best ROEs among global banks period.

But how should we think about that 16% plus R&D in the context of where the capital requirements are today? Is that 16% plus aspirational? Or as a shareholder, do I expect Royal to be delivering a 16% ROE year in and year out on a consistent basis as we look forward?

[David McKay, executive]

Yes. Thanks, Ebrahim, for that question because this is obviously the important piece of our investor thesis, and we are committed to delivering that, and we are confident of delivering that.

And I would say it's not aspirational at all. It's very tactical right now. We've got a number of initiatives that we've laid out that we think we can get there without further capital deployment, whether that's HSBC or improving profitability at City National quite significantly as we've talked about.

So when we look through the headwinds we have, but also all the initiatives that we have in the pipeline, we feel we can balance that to long-term and medium-term delivery of 16-plus percent ROE.

It's the scale we have as well to deploy across our client scale, brand scale, balance sheet scale, all that allows us. So we are confident it's a big part of our plan. We've tactical plans to get there as well. So very much, we wouldn't state it as confidently as we did, unless we thought we were going to deliver it.

[Ebrahim Poonawala, analyst]

Got it. And the other side of that, Dave, is capital is at 13.2%, CET1 stocks at 2x price to book. Not sure what your appetite is to buy back stock.

Just give us a sense, organically, can you deploy this capital? And if not, in the past, you've talked about wealth M&A, North America, global, what does that opportunity set look like as we think about capital deployment over the next year?

[David McKay, executive]

So I do view returning capital to shareholders as an important part of the overall investment thesis and part of this -- of the tactical tool set to maintain and drive a 16-plus percent ROE. So it's part of an overall set of initiatives.

But our first priority, and we see really good opportunity with building pipelines in commercial and building pipelines in capital markets to deploy that organically into RWA growth and loan growth.

So I think, first and foremost, we can deploy it at a very good ROE and hurdle ROE into those growth areas. So I think that would be our choice first and foremost, but buying back shares and returning capital, you'll see us continue to manage a cadence of doing that as well.

We have significant capital building above 12.5% as we -- we measure that for $5-plus billion of capital. We're good stewards of capital, and we will steward that capital with the goal of a 16-plus percent ROE and premium EPS growth.

And we'll find the right mix, and the strength of our franchise allows us many different ways to achieve that organically through share buybacks, returning capital, dividends. And if it makes sense, we are always on a lookout for a strategic nonorganic -- inorganic opportunity to create value in our U.S. Wealth franchise, our U.S. Commercial Banking franchise over time.

We'll do that. So certainly, all those tools remain, and the strong capital generation ability gives us that strategic optionality.

[Operator]

Next question is from John Aiken, Jefferies.

[John Aiken, analyst]

Graeme, I understand your commentary on the macro completely on side with that. But one of the things that's standing out this quarter is the ongoing uptick in terms of residential mortgage impairments.

I was hoping we could get underneath the hood on that a little bit, particularly with -- when we take a look at what's been going on in terms of the mortgage. The past due has seen a steady incline over the last couple of quarters, where we've seen a bit of a more mixed approach with some of the other consumer lending products.

Can you give us a sense in terms of what you're seeing in terms of residential mortgage market? What's causing the increase in impairments? And hopefully, some sort of outlook in terms of what you expect through 2025 on residential mortgage in terms of credit quality.

[Graeme Hepworth, executive]

Yes. Sure, John. Thanks for that question. I think for exactly that reason, we provided a slide there, an update that kind of speaks to the period we're heading into right now, which is 2025 and into 2026 is really this peak renewal period.

And I think that's really the fundamental driver here as we see more of our now fixed rate clients. We saw earlier the wave of variable rate clients being hit by the higher rates, and that kind of impact was a bit more instantaneous. We're now seeing that wave really begin, where our fixed rate clients that many of those certainly that put the original mortgage in place back at the low rates of the cycle are now going through that refinancing and being impacted by higher rates. So that is going to drive delinquencies, and we expect that to kind of trend up in the coming quarters and overall this year.

Having said that, with rates now starting to come down a little bit, I think we certainly feel better about that risk and the tail risk there than maybe a year ago when we were at peak levels. But overall, I think our clients are very well positioned to kind of manage through that.

And so despite the fact that we're seeing impairments tick up, we're not really seeing that translate through right now to material write-offs. The reason why our PCL was so low this quarter is that we really assessed our -- what we call our coverage ratio, which is really the provisioning we put in place for newly impaired mortgage loans, and we kind of reassessed that annually.

And last year, as we were taking a very prudent approach, expecting a softer housing market going into this refinancing period. But what we're seeing is that's what we highlight in that slide. Most of these clients have a lot of good equity in their home, and so they have a lot of options.

And so the workouts have proved quite strong. And so we readjusted our coverage ratios there. I think we're still taking a prudent approach, and we'll continue to work and support with our clients on that.

So overall, I think we'll expect impairments to tick up. There will be some PCL that comes with that, but we certainly don't see that to be, let's say, as big a driver into 2025 as the unsecured products, which is, again, I think what we've been calling out for some time.

[John Aiken, analyst]

So Graeme, the reversal of stage 3 provisions that we saw in the quarter on residential mortgages, obviously not expected to continue moving forward. We should see some level of more normal PCLs for 2025.

[Graeme Hepworth, executive]

Yes, right. This quarter, there was kind of a onetime hit as we reset our coverage ratio. So that released some of the provisions that we previously put in place, so we don't think we need that level on the back book like we did.

And then going forward, that new rate will be applied to this kind of new impaired level. So I think if you back that out, you're probably back into something a bit more reflective of where we'll be in the near term.

[Operator]

Next question is from Doug Young from Desjardins Capital Markets.

[Doug Young, analyst]

Just wanted to go back to the ROE discussion because by my math, it's really difficult to get the cash ROE to breach 16% plus without bringing the CET1 ratio down to 12.5% or lower. But it sounds like you would disagree with this.

I guess, I'd like to hear more about like what are 2 to 3 drivers that would help push you towards that target if you are going to sit at a 13% CET1 ratio. Just trying to get a little bit more detail.

[David McKay, executive]

Yes. Fair question. And as we go through all our levers, certainly, as we think about the remaining cost takeouts from HSBC and the opportunity to improve profitability there towards our targeted levels, we've only taken up $4 million out of $750 million of cost. We haven't even talked about revenue synergies, and a lot of that might not require capital to deploy to do it if it's on the wealth side and the cross-sell into wealth.

If you look at the CNB and the opportunities to be much more efficient, there are a lot of the charges we're taking in CNB are to simplify the business and improve operations, which requires a simpler risk regime, a simpler operation regime, an oversight mechanism, that's fair, that's easier to manage over time and more flexible.

So as we significantly streamline City National and look to improve horizontally across the business and leverage RBC to a greater degree, there's real opportunities for us there on the cost base without even deploying. Then there is growth opportunities in City National that we're waiting to get to. We have to certainly build a better operational infrastructure, and we're well on our way to doing that.

And we've -- we're in -- we peaked in our expenses there, and their expenses will start to come down in 2025 and well into '26 as we do that. So those 2 very large areas. We've got the net movement and flows as you started to see in Q4 from deposits and GICs into our Wealth franchise. And therefore, we've seen expansion of NIMs without the use of capital to do that.

And therefore, that secular trend is very accretive when we're great at capturing those flows, and we highlighted that in our comments -- in the prepared comments.

So those are 3 areas that -- and we have great capital accretion that we're going to continue to drive. And therefore, we will have capital to deploy into share buybacks as well as a fourth tool. And when you look at all that, our plans don't require us to go down to 12.5% if we can do that.

It's a mix of tools. And if we execute on that, we have enormous flexibility, an enormous ways of getting to 16-plus percent. And that -- there lies our confidence.

[Doug Young, analyst]

Okay. And then just going back to the second question. Just I think last quarter, you talked about potentially providing revenue synergies from HSBC Canada in a few months. I know you didn't mention that you were going to provide it, that maybe you'd provide it in the foreseeable future.

But can you provide any details today? Because it seems like that's obviously an important part of even the ROE expansion as you just mentioned. Any further details that you can provide on that front?

[David McKay, executive]

We are preparing a more fulsome disclosure for you with targets and time lines. But from a qualitative perspective, maybe I'll go to Sean and Erica to talk about the qualitative aspects. But we are very close to giving you targets and time lines, but not today.

[Erica Nielsen, executive]

Great. Thanks, Dave, and I appreciate the question. A couple of things I would say as it relates to our HSBC synergies in the Personal Bank. I think we continue to feel confident in the underlying levers of growth.

And so what are the key things we're looking at? One, I'm looking and tracking how we're performing on clients and our client retention rates. And I think we feel very confident. They're performing better than we expected. And when we dissect that down and look at our mass affluent and affluent clients in that base to drive the majority of the profitability, retention rates are exceptionally strong for us.

The second thing we look at is the productivity of our sales advisers to drive growth in the franchise of those clients. And post the cutover weekend, we saw our advisers continue strength in coming up to the productivity levels that we expect.

So now we look at those new advisers, sales folks have joined us as being equally as productive as our RBC advisers, which give us confidence that underlying strength will be there when we think about revenue synergies.

And then we look at how are we retaining the balances in volume in the business. And I think we continue to feel good about retention. We would see that there is some co-mingling of the HSBC balances into our RBC balances. So what does that mean? A client walks into a branch to renew a GIC or renew a mortgage. If that branch is an existing RBC branch, then those volumes get co-mingled into the RBC volumes.

And so when we look at the client level, we look at our retention of clients and the balances that we are keeping, we feel confident that our revenue synergies are well on track.

[David McKay, executive]

Sean?

[Sean Amato-Gauci, executive]

Sure. Thanks, and thanks for the question, Doug. On the commercial side, relatively consistent messages. I'd say, first and foremost, our priority has been on adviser and client retention. And so far, we are -- our retention is above our expectations, which is very positive.

Another piece of context with respect to the commercial portfolio is that we're also in the final stages of completing a TSA that we had in place for the larger and more complex integrations. And so that's been the focus of our team, kind of stabilization, retention and completing that TSA migration.

Directionally, on the revenue synergies, we're looking at 3 primary drivers. In addition to better-than-planned retention, we're starting to see very robust pipelines build. So that team has been focusing on their existing client base, and that client base now and the team is really leveraging the benefit and the strength of the RBC franchise, particularly our balance sheet really supportive of the client growth. And so those pipelines are really starting to pick up.

Given the portfolio does skew to larger commercial and corporate clients, this is a longer sales cycle, so we're starting to see some of that pipeline materialize in the balance sheet in the late stages of Q4 of this year. And so we're excited about that going forward as well.

The second area would be cross-sell to existing RBC clients. As you know, we've made pretty considerable investments in new products that were important to HSBC clients like global cash management capabilities, liquidity solutions, trade products, et cetera. We're going to start to cross-sell those to our existing client base next year.

And the third is when you combine the kind of the value propositions of both organizations, we see strong opportunities for client acquisition. In fact, to date, we've acquired about 3,500 new small business accounts well above our expectations, where those clients have been less impacted by the TSA.

[Operator]

The next question is from Meny Grauman, Scotia Bank.

[Meny Grauman, analyst]

I'm trying to assess the outlook for next year, specifically for your Canadian P&C business and putting all the pieces together. As you're talking, the impression that I'm getting is pretty negative, and I just wanted to check if I'm missing anything, especially on the more constructive side.

You're talking about rising unemployment, population growth slowing, potential for tariffs, competitive dynamics, and you've talked about that for a while. They're tough, maybe getting tougher. So trying to understand as you think about next year, more big picture, it sounds pretty negative. So I wanted to give you a chance to respond to see if there's anything there on the plus side that I'm missing.

[David McKay, executive]

Well, that certainly was not our intent today. So I think the tone you're hearing maybe on the credit side is we are cautious, but optimistic, right? So we're trying -- we don't see anything idiosyncratic with RBC. We're just trying to make a systemic call that's -- we're just a little uncertain as to how we're going to land this thing, whether it's in the first half or second half of the year or early into '26.

But it's nothing that we're seeing idiosyncratic with RBC. I think based on the conversations that we -- questions we just answered that we're really bullish on the business. We're seeing growth that we just talked about that we can invest in the commercial, capital markets and consumer side. So we're going to use our capital to invest in RWA and growth -- loan growth.

So I think that's really positive. We're not holding back. We see great opportunities. We're really excited about our Wealth franchise and ability to capture money in motion and increase margin and increase profitability. We had 26% growth in Canada in Wealth and AUA and 23% growth in the United States, and we're continuing to -- some of that was obviously market growth, but we're seeing the flows are just starting to build again.

So we feel really good about the Wealth side as well, and the consumer bank benefits from that flow as well in there. So maybe you're hearing a bit of a cautious forecast, but we're not changing our forecast. We're still 30 to 35 basis points from this year. We're just going to kind of wait things out, but we're investing for growth is the message that we're trying to deliver.

So maybe, we didn't do as well in getting that. But I don't think you should take that away at all that we feel negative about the economy or the business.

[Meny Grauman, analyst]

Okay. I just wanted to check. And then maybe just as a follow-up, Dave, just in terms of tariffs. Obviously, a big question mark. It has macro implications.

But does that question mark change how you manage the bank in any way in terms of capital allocation, in terms of underwriting? Does it have any implications right now?

[David McKay, executive]

No, no. I think it's important not to overreact. I think it's an important message that this was a strong message that we have to improve certain aspects of our operations in Canada around our borders. And there are other ways of solving that without hurting both economies, the Canadian economy and U.S. economy, and I expect our political leaders to find a better path to do that.

And therefore, the key is not to overreact right now. And therefore, no, we're not making any major changes on our business plans, our credit strategy because we expect this to get resolved in an appropriate way.

[Operator]

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

[Sohrab Movahedi, analyst]

Okay. I wanted to go to maybe Derek. Derek, the risk capital with your business is grinding higher. And I think, Dave, in his opening remarks, talked about, I think, lending-related type opportunities for your bank -- or for your segment of the business.

Can you just talk a little bit about where you think -- how much capital you think you need for the type of target they have on your back and whether or not that is going to be overall accretive to the ROE of the bank or neutral?

[Derek Neldner, executive]

Sure. Thanks, Sohrab. Let me just break that down into 2 parts. I think, one, just your question around the increase in our risk capital, I would just flag, part of the increase in the capital you're seeing this year was the change in capital attribution we implemented, reflecting a balance of RWA and leverage. So that did put more capital into the business.

From a risk perspective, though, we actually feel our risk appetite is unchanged. And if anything, if you look at our RWA to leverage risk density over the last number of years that we've been executing on the strategy, it's actually come down.

So we're very pleased that we've been able to drive the growth in earnings and the improvement in ROE in Capital Markets without in any way compromising or stretching on the risk side, and that continues to be how we are approaching the business.

In terms of your question on sort of how much capital do we need, obviously, the strategy in cap markets that we've been focused on has really been driving accelerated growth in our nonlending or fee-based businesses, but still supporting clients with, obviously, the capital they need to execute on their strategies.

And we've -- over cycle, we've indicated, we're targeting sort of 4% to 5% growth in the balance sheet businesses. And when we look back, we're very pleased with how that strategy has unfolded because it's allowed us to not only meet our growth targets, but it has allowed us to notably improve the ROE in Capital Markets, which continues to be an important focus, given the comments Dave has been through on a 16%-plus objective for the bank.

Last year, we saw a little more muted credit growth, just given market dynamics. And so we grew our balances, excluding the HSBC component that came into Capital Markets below that 4% to 5% rate. As a result, and as we see client activity picking up, we do see capacity for us to probably grow a little more than that 4% to 5% as we look forward to next year.

But we're going to be very focused on: one, not compromising our risk to do that; and two, making sure we continue to be on track to support a very robust ROE for the business.

[Sohrab Movahedi, analyst]

And just if I can just sneak one more in for Graeme and Katherine as the -- as I guess, Graeme's outlook on PCLs, does that -- should we be expecting the RWA to asset type density for the bank to grind higher from here? Do you have any guidance as to what sort of an RWA growth relative to asset growth we should be kind of factoring into our thinking?

[Graeme Hepworth, executive]

Maybe just from a general credit quality perspective there, there will be some degree of pressure as we continue to see credit migration. That will affect our Stage 1 and 2 on -- in our overall RWA in a very similar manner.

I think what you saw this quarter actually was very much tied to the kind of same driver there. And so I think as we start to kind of find that peak and credit quality starts to either improve or at least the flat note, then you'll see that abate on that impact.

But I don't think we're really forecasting a huge impact or change in the overall kind of density factor there. I think the core client strategies and credit strategies continue to be consistent. And so that won't, really on the origination side, shift us one way or another materially.

[Operator]

Next question is from Paul Holden from CIBC.

[Paul Holden, analyst]

So I've heard the message on building pipeline for Commercial and in Capital Markets. Wondering what you're seeing on Canadian residential mortgages. Have heard a few others comment that they're seeing higher application rates and are expecting better volumes in '25. So just maybe you can provide an outlook there.

[Erica Nielsen, executive]

Yes. Thanks, Paul, for the question. It's Erica. I think as we look to the next year, we would see some more activity in the residential mortgage market. As we came through the last part of this cycle, a lot of buyers have been sitting on the sidelines, just given the affordability impact to them of thinking about a new house purchase.

And so as we see prices come down for the consumer, we expect to see more of those thinking about home purchases. So that should increase activity inside the market a little bit over next year.

The other side for us as an organization, and Graeme and Dave mentioned it, would just be that we would expect to see a lot of renewal activity inside that. There's obviously an opportunity for us to gather switch business from our competitors and likewise to shore up our own business. So we would expect strength or growing mortgage volume over this past year as we go into 2025.

[Paul Holden, analyst]

I'm going to sneak in a second one as well. Just as we think about tariff risk and, I guess, more broadly sort of geopolitical risk, is there in any way something that makes HSBC business more susceptible to U.S.-China relations just because of the history of that business? Or is it now mostly a domestic business?

Just kind of maybe want to understand a little bit better the customer profile of that and if there is any still some strong link -- linkages back to that part of the world.

[David McKay, executive]

Yes. Maybe I'll start, and Sean or Erica can jump in. But certainly, there was an East-West connectivity, and it continues to be an East-West connectivity, but the majority of the clients are operated out of Canada and a strong domestic businesses.

They may have contacts. They may move money back and forth between the 2. Therefore, none of our plans -- whether it's obviously cost take-up, but none of our growth and revenue plans are contingent upon significant increased connectivity or anything beyond that we have today.

So no, we thought about that certainly when we made the acquisition. But these clients are embedded in Canada and are strong Canadian clients, both on the commercial and consumer side. And they are very large significant clients with the global operations, not just back to Hong Kong with strong connectivity in the United States, strong connectivity in Southeast Asia as well in India. And that's the beauty of the franchise is diversification.

But with that, Sean or Erica, did you want to add anything?

[Sean Amato-Gauci, executive]

Sure. The only thing I would add is, I just emphasize that they all have a Canadian access to your point. The -- what we've talked about the international component of the client base, those are -- tend to be clients Canadian parents with international operations, international subsidiaries, international supply chains and/or subsidiaries of corporations that have in Canada.

But these are some of the clients that you would recognize in name brands from globally with a strong component of that in the U.S. and the euro markets as well.

[Operator]

Next question is from Gabriel Dechaine, National Bank Financial.

[Gabriel Dechaine, analyst]

Asset yields were down less than funding costs. Fell this quarter. Is that a trend continuing -- is that trend continuing part of your NII outlook for mid- to high single-digit growth in '25?

And then as far as credit, that guidance, I'm just wanting to confirm. Your -- you have unemployment peaking in the first half and then PCLs peaking in the second half, unless I'm mistaken. Are you factoring in any impact from a possible trade war with the U.S.?

I know there's a lot of debate on how it may take shape or not take shape, but it's certainly a risk out there if certain industries are hit from not being able to sell to their biggest customer.

[Katherine Gibson, executive]

Gabe, it's Katherine. I'll start with your first question around the NIM outlook. And what we did this year, as you would have heard in my comments, is that we've changed our guidance to focus on net interest income excluding trade.

If you can see, there are so many moving parts that are quite difficult to forecast for the moment relating to NIM. But if it's helpful, I would say, looking at the underlying components that support our NII ex trading guidance, we're really looking to expected volume growth going forward.

As called out in Dave's comments, we're also expecting to see the tractor benefits continue to offset the lower interest rate environment as forecasted for the year ahead. We -- I guess, part of the unknown though that is also captured in there is around client and competitor behavior.

As I noted in my remarks, we are seeing ongoing competitive pressures on mortgage pricing as well as on the term deposits. But on the client side, with the lower rates, you would have seen as well in the comments that -- so term deposit growth are positive flows for GAM. And so as rates continue to drop, we're likely expecting to see that we'll have those flows come out of term deposits.

For RBC, though, we expect it, though, to be flat to revenue, that maybe it is down on net interest income, but we'll see that roll into our other income to being flat overall. So stepping back, those are kind of the key components that we're looking at that underpins that guidance of mid- to high single digits.

[Graeme Hepworth, executive]

Gabe, it's Graeme. I'll just take your second question there. I guess, it's a 2-parter. The first part, as your assumptions were correct there that we see unemployment kind of peaking in the first half and then that, along with the other factors here playing through to peak PCL, it's more in the center in the second half of the year. Certainly, a lot of uncertainty around that on the exact timing, but that's the general trajectory that you outlined.

And then to your question on trade war, again, as Dave pointed out, I mean, we're -- this is still early days on this. There's certainly no conclusions. We're obviously monitoring for that. But also, with outcome versus kind of some of the statements that have been made, we expect that, that will kind of transform significantly as our leaders negotiate and conclude on this.

Having said that, I would just remind you that uncertainty is something we constantly think about and face, and that's why we do run multiple scenarios in our provisioning. And some of those adverse scenarios absolutely kind of capture the kind of consequences that could play out if tariffs come into play.

And so, again, I think we feel quite comfortable that we're well provisioned for the kind of the uncertainty we're facing, but we'll continue to monitor and track that and reflect that in our forecast going forward.

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Katherine, you provided some pretty good guidance at a detailed level. I want to take one big step back and ask. Does the 7% plus medium-term EPS growth guidance, does that apply to '25? Or is there something special about '25 that you would steer us away from the 7%?

[Katherine Gibson, executive]

Mario, thank you for the question. And I would say the guidance that we provided, it gave you a clear direction on the net interest income, excluding trading. We've provided guidance on NIE.

So stepping back, what I would guide you to is that we're still focusing on positive outlook as we're moving forward. We're also expecting to have -- I guess, an item that we didn't give guidance to is on the other income. But in Dave's comments, we're expecting positive Capital Markets and Wealth Management as we look going forward.

And then on, I guess, the tax and the PCL, we've covered that off. So adding that all up together, I would say that, as we said, we're committed to our MTOs of that EPS. So nothing to change. I guess, a long-winded answer, but nothing to change, Mario, for what we've put out there.

[Mario Mendonca, analyst]

Yes. The reason I ask is with PCLs moving higher and the tax rate, obviously, moving a little higher, it does seem like it would be a challenging year to hit the 7% plus. And -- but I think what I'm interpreting from your answer is that you're not moving off the 7%.

[Katherine Gibson, executive]

Yes. No, no, no. Yes, just very clear, we are not merely moving off of the MTO. I know we signaled that higher taxes in PCL, but we fully intend to earn through both of those items and hit our MTOs.

[Mario Mendonca, analyst]

Helpful. Maybe for Dave on this. I'm not sure you can really address this one, but I'll try anyway. It would appear loan growth has been soft now in Canada for some time. We're probably heading toward a further slowdown, as you say, as unemployment peaks.

What I'd like you to think about is, are the conditions in place for a reduction in the DSP, it's been elevated now for -- the domestic stability buffer, it's been elevated for some time now, and it hasn't really moved.

Do you think that the conditions are in place to ease in that respect to allow for a little more room for lending from Canada's largest banks? Is that plausible? Can you address that?

[David McKay, executive]

The constant -- interesting question. The construct where they might consider that are a couple of things. One, and we would advocate for this, is to ensure that there is a level playing field globally. And there's a lot of discussion about where the U.S. is going to go with Basel IV or not go with Basel IV at all. And therefore, there's a construct to think about how we apply capital in Canada and where we go.

And we were early adopters of Basel IV in Canada with the floors and whatnot. So I think from that perspective, I think, appropriately, everything is being reevaluated in the context of where the global commitment is to do that, particularly what's coming out of the U.S. as we compete in both marketplaces.

As far as the timing of when DSPs go up and down, I'll leave that to Superintendent. To do that, I really don't have a strong view right now what's the appropriate timing. We're more focused on our ACL in Stage 1 and 2 and when that could be released. But I haven't put a lot of thought, honestly, into should the DSP buffer go down.

It put a lot of thought into the global competitiveness of the DSP buffer, and where we are on overall capital ratio is very important to me. So that's the best I can do right now. And I haven't put a lot of thought into it, so I'll caution my remarks there.

[Operator]

The next question is from Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

Maybe one for Derek here. C&IB activity seems like it's kind of still in the early stages, especially compared to the U.S. Can you maybe just talk about what you're hearing right now in terms of feedback from clients or general trends that maybe get you more excited about the business in '25 and how quickly we can start to see activity start to pick up?

[Derek Neldner, executive]

Sure. Thanks, Matthew. Obviously, after a slower investment banking fee environment in 2022 and 2023, we did start to see some very good signs of recovery this year. We've seen that in industry fee pools and, obviously, in the results that we've been able to deliver.

I think on the back of the outlook for 2025, a very constructive market environment. Some of the secular tailwinds that Dave alluded to, both in terms of corporate strategic activity, but also dry powder with our sponsor clients, we certainly feel quite optimistic about the outlook for 2025, continuing to show that pace of recovery.

We've seen that in terms of overall market activity levels. We feel very good about our pipeline heading into the year. And so absent any surprises on the horizon, we anticipate a fairly healthy environment as we move into 2025.

And then obviously, we're very focused on more RBC-specific initiatives on the hiring front as we build out our sector teams and our various product teams to continue to capture share against that hopefully rising fee pool environment.

[Operator]

Our last question is from Lemar Persaud, Cormark Securities.

[Lemar Persaud, analyst]

I appreciate the new disclosure on Slide 37 with mortgage renewals. But I want to come out from a different perspective than the credit question. If we think about these payment increases in the, I guess, high teens to low 20s for 2025 and 2026, what does that mean for the earnings outlook on the Personal Banking or Wealth businesses?

Should we expect some slowdown there as these borrowers refi it to higher rates, perhaps some of that flow of deposits and GICs off the sidelines won't go into Wealth Management and instead to debt servicing? Is that something that could be meaningful in your view because that's an awfully large amount of mortgages renewing?

[Erica Nielsen, executive]

Great. Thanks for the question. As we look at the mortgage renewals, obviously, it is, as you indicated, a large strip. But I think we feel very confident that we have the measures in place as a personal bank to manage that degree of renewals.

Dave alluded to in his earlier comments related to some of the digitization that we've done as well as making sure that we have advisers well placed across our network branches and advice center to manage that. And so from the renewal side, we would expect to continue to perform strongly.

But I would also say that this is a disproportionate opportunity for us to then win business competitively where we have shown continued strength in our mortgage business to do that over the last number of years. And so we see this as an opportunity for us to continue to grow from a business perspective.

And so I think that gives, on that side of the balance sheet, strength in the side of the personal bank. And then as it relates to volumes in the deposit side, I think that we are continuing -- we have, in this past cycle, gathered deposits at a rate that's been higher than our competitors, and we continue to stay focused on the deposit franchise.

And so feel and expect that we'll continue to show strength in the marketplace as it relates to that side of the balance sheet as well.

[Sean Amato-Gauci, executive]

I'll just build on that question in terms of what does it mean for Wealth Management. We've seen -- you've heard in some of the previous comments just the acceleration of -- with equity markets trending up and rates coming off, we're seeing assets continue to grow. And Dave spoke to the trend of net sales, and we're quite pleased with the acceleration we saw, particularly at the back end of 2024.

If we add to that, there's an awful lot of the ultra-high net worth clients where we're seeing disproportionate amount of asset growth. They're not carrying the mortgages that Erica would be talking about. And we see that both in Canada and the U.S.

And so when we look at that increased investor confidence and just our ability to continue to recruit investment advisers, I think all that really builds into the confidence heading into next year for the Wealth business.

[David McKay, executive]

Great. So thank you for the questions, everyone. I think we're going to bring this to a close and maybe just a few summary comments.

So we're very proud of the quarter and proud of the year, a year in which we made our largest acquisition and went through a very complex transition. I think you can see HSBC is well on track to deliver on the bottom line impact of $1.4 billion and with upside from the revenue that we'll get from cross-sell that we'll disclose more fully in the beginning of the year.

So HSBC is a big part of the overall theme. But an important theme is that we did not lose momentum. We gained momentum in all our core businesses. The Wealth growth was outstanding. The Capital Markets building pipelines had very strong performance this year. And the business has exited the year in Q4 with momentum, the client volume play. And there's a couple of businesses that can improve as well on that, which we talked about, certainly, as we look to do a bit better in the mortgage business, if the market allows that as far as a profitability perspective.

So very strong client volumes, prudent risk management. You heard of maybe a bit of a cautious outlook. It's just a macro call. It's hard to make a macro call right now with so many variables, but we're cautiously optimistic, and we think that's the prudent way to do things. And we haven't changed our forecast. And we could be wrong. It could accelerate it. It could be on the schedule. We said whatever it is, we will adjust to that, and that will play out as it does.

And certainly, you think about our commitment to being good stewards of capital, we've got enormous strategic optionality. We know 16-plus percent is a very important investment thesis. We have a very strong tactical plan with a number of levers. We can do more of this, less of this in the short and medium and long term. And therefore, we're confident that we can deliver on our EPS and ROE commitments and drive premium TSR performance as we did over the last year, plus.

So thank you very much for your questions. I wish you all a great holiday season. We look forward to seeing you at the RBC Capital Markets Conference in January. Have a great break, and thank you for all your attention.

[Operator]

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