Title

Presentation

Royal Bank of Canada beats earnings expectations. Reported EPS is $2.99, expectations were $2.81.

Operator: Good morning, ladies and gentlemen. Welcome to the RBC’s 2026 First Quarter Results Conference Call. Please be advised that this call is being recorded [Operator Instructions] I would now like to turn the meeting over to Asim Imran. Please go ahead.

Asim Imran: 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 2, 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: Thank you, Asim. Good morning, everyone, and thank you for joining us. Today, we reported record earnings of $5.8 billion and adjusted earnings of $5.9 billion. Pre-provision pretax earnings were nearly $8.5 billion and were up 14% from last year. These strong results were underpinned by record revenue of nearly $18 billion and a 5% operating leverage. Both Wealth Management and Capital Markets reported record revenue and pre-provision pretax earnings benefiting from a constructive environment for our market-related businesses. Personal Banking and Commercial Banking reported record results underpinned by growth in [ money and balances ], higher margins and strong operating leverage as well. This was achieved even as housing conditions and uncertainty around trade policies continue to temper loan growth in Canada.

Our return on assets increased to nearly 90 basis points and we bought back over 4 million shares this quarter for approximately $1 billion. Our performance delivered a return on equity of 17.6% on the foundation of a robust 13.7% common equity Tier 1 ratio. This powerful combination drove 9% growth in retained earnings. Before covering client activity and business results, I’ll briefly discuss the macro environment shaping our revenue drivers. The Canadian economy remained resilient through the elevated uncertainty from persistent and evolving geopolitical and trade tensions. GDP and job growth continued despite lower immigration levels and household balance sheets are improving. That said, the impact from tariffs on the economy varies depending on the clients or sectors.

We are seeing strong profitability and improving productivity for many of our corporate clients, while commercial clients and tariff-impacted sectors and geographies are facing headwinds. And the impact of the K-shaped economy continues to bifurcate Canadian. Going forward, we expect increased fiscal [ stemness ] and the diversification of new trading relationships to create a multiplier effect of supporting economic growth and client activity over the near to medium term. With this context, I will now speak briefly to key trends we are seeing across our businesses as seen on Slide 5. In Personal Banking, mortgage growth remained modest as housing demand remained soft in key regions. This was due to the affordability challenges, economic uncertainty and a pullback in immigration levels.

Looking forward, given weaker demand, we reiterate our low to mid-single-digit mortgage growth guidance for the year. This growth will be supported by proprietary mortgage specialist sales force, capturing switch opportunities and driving strong retention through increased investments in channel capacity. Further, our recently announced strategic partnership with realtor.ca, will create new top-of-funnel opportunities. The strength of our money in franchise was on display again this quarter. We saw growth across demand deposits and mutual funds as many of our clients sought higher returns amidst term deposit renewals. The aggregate flows to personal savings accounts, GICs and mutual funds increased almost 50% from last quarter, driving strong revenue growth.

Commercial Banking loans were up 4% with strength in health care and agriculture. Growth was moderated by a tariff-related slowdown in supply chain sectors and demand-driven headwinds in commercial real estate, which represents approximately 40% of the portfolio. On a provincial level, Ontario continues to experience tariff-related headwinds, while we are seeing resilience in the Prairies. Even though larger clients are cautiously returning to growth mode, we expect commercial loan growth to stay closer to the lower end of our mid- to high single-digit range for the year, the longer we go without clarity on the CUSMA trade negotiations. Deposit growth was stronger, up 5% year-over-year, reflecting broad-based expansion across nearly all sectors amidst the competitive landscape.

To build on this momentum, we continue to invest across our sales force capacity and enhanced digital and AI-driven underwriting capabilities while elevating our transaction banking offerings. Our Wealth Management segment had a very strong quarter, generating over $6 billion in revenue, $1.7 billion in pre-provision pretax earnings and $1.3 billion in net income. Growth in fee-based assets benefited from market appreciation as North American equity markets rose double digits year-over-year and bond indices also moved higher. In addition, we recorded strong net new assets over the last 12 months, benefiting from clients moving back into the markets as well as continued adviser recruitment. Assets under administration were up 13% year-over-year in Canadian Wealth Management, surpassing $1 trillion for the first time.

U.S. Wealth Management AUA was up 12% to USD 777 billion and RBC GAM assets under management were up 11% to $796 billion. Furthermore, City National’s earnings continued to grow with both pre-provision pretax earnings and net income more than doubling year-over-year. This quarter, wealth management announced the expansion of RBC Echelon, our premier platform for a growing base of ultra-high net worth U.S. clients. We’re also addressing the needs of new and aspiring self-directed investors by launching GoSmart, an intuitive mobile-first platform integrated within the RBC mobile app. Capital Markets also had a record quarter with revenue of $4 billion, pre-provision pretax earnings of $1.9 billion and net income of $1.5 billion. Global Markets generated record revenue of $2.2 billion with robust client activity amidst a constructive environment.

We benefited from notable performance in equities, where we’ve made strategic investments to bolster our equity derivatives and financing capabilities. Corporate & Investment Banking benefited from higher debt and equity origination activity, higher M&A activity and higher North American lending revenue with average loans up 8% from last year. We continue to have a healthy M&A and origination pipeline as the macro and regulatory environment is expected to support growing fee pools. I now want to talk about our focus on compounding long-term shareholder value. Our philosophy has remained consistent. As noted last quarter, we constantly evaluate opportunities to optimize shareholder value, not to just maximize ROE. We concurrently want to enhance client-driven profitable growth while upholding our disciplined risk appetite and we have done both.

This requires both the deployment of capital as well as leveraging our structural advantages in funding and noninterest expenses, along with our leading franchises, distribution and technology. On dividends, we look to progressive increases underpinned by sustainable earnings growth as we strive towards the midpoint of our 40% to 50% medium-term objective. When it comes to the level of share buybacks during times of uncertainty and volatility, we are aware of our book value multiples and intend to maintain capital levels near the higher end of our targeted range. Similarly, we have a high bar when it comes to acquisitions and we’ll continue to be patient for the right opportunities to accelerate growth instead of solving capability gaps. Our priority continues to be investing to organically grow our businesses.

The on [ top left ] side of Slide 6 highlights the organic RWA deployed to support our clients’ financing needs and growth aspirations discussed earlier. We have increased the level of client-driven growth given an expanding suite of opportunities. Organic RWA growth this quarter was greater than the quarterly average of each of the last 3 years. Our diversified business model allows us to strategically grow RWA through a changing macro environment. We took advantage of constructive opportunities to utilize our resources to grow access across our capital markets businesses over the past year and reduced client demand and lower growth in commercial banking. The bottom left charts on Page 6 illustrates growth by ROE bands across our segments and sub lines of business.

When it comes to allocating capital to drive client growth, we don’t just allocate capital to grow the highest ROE businesses, we also look to strengthen market share and invest in new technologies and lay the foundation for new growth verticals to enhance future value and diversification across One RBC. These create a flywheel multiplier effect for driving durable ancillary revenue streams. Important point to make is that some of our largest businesses are inherently capital-light and do not need a lot of capital to grow. These are mostly funded by noninterest expenses, growth in less capital-intensive higher ROE businesses is a key driver of our revenue mix and growth. A relatively equal weighting between capital-light fee-based revenue and more capital-intensive net interest income provides us an attractive business mix as well as a lower credit risk profile.

While some of our capital-intensive businesses generated returns below our expectations in fiscal 2025, this was partly due to several headwinds, which we expect to reverse over time. These include elevated PCL on performing loans, higher wholesale PCL, elevated spend in the U.S. and lower mortgage spreads due to increased competition. Furthermore, we look to offset any dilution from growing businesses with a lower stand-alone ROE by deepening client relationships to drive improved revenue productivity while also becoming more efficient. We also won’t grow for the sake of growth, as evidenced by our discipline on mortgage growth and pricing amidst intense competition. We target profitable revenue growth that drives future value. Looking forward, we see momentum and significant opportunities to organically deploy capital across our diversified business model to accelerate profitable revenue growth.

We are growing capital markets, corporate loans, which would initially generate a lower stand-alone ROE. However, this growth creates opportunities to add on higher ROE revenue such as transaction banking and investment banking fees. Additionally, we will continue to support client activities by deploying RWA into our financing businesses, which can further monetize sales and trading intermediation activities. A combination of growth and deepening relationships drives a higher segment and client relationship ROE. Another strategic initiative is to align transaction banking with our growing City National Bank commercial loan book as we build out teams while launching U.S. mortgage and credit card products to increase penetration within a high net worth client segment in U.S. Wealth Management.

We also expect meaningful opportunities in commercial banking when we have certainty around CUSMA and when we start seeing the execution of large-scale infrastructure projects highlighted in the Canadian federal budget. The segment’s ROE of over 16% this quarter highlights the power of the franchise when PCLs normalize. We are applying similar approaches across our strategic initiatives, some of which are listed on the right-hand side of Slide 6. We’re not trying to just acquire loans, we are building relationships, and there are a lot of opportunities to grow without diluting our ROE. To close, we are focused on creating sustainable shareholder value by accelerating our ambitions to drive both profitable growth and a premium ROE underpinned by our Investor Day targets, including improving revenue productivity and cost efficiencies.

We also remain committed to using our strong internal capital generation to return capital to shareholders through both dividends and buybacks. Our future success will include opportunities to turn our highest potential AI use cases into solutions that bring value to clients. To do that, we recently announced that our group head, technology and operations, Bruce Ross, will lead our newly created AI group to accelerate our AI ambitions. Moving into the group head technology and operations role is Naim Kazmi, a transformational leader who has held multiple leadership roles as most recently, the technology lead for the successful close and convert integration of HSBC Canada. We look forward to their continued success. And with that, Katherine, over to you.

Katherine Gibson: Thanks, Dave, and good morning, everyone. Starting with Slide 8. This quarter, we reported strong results with diluted earnings per share of $4.03, adjusted diluted earnings per share of $4.08 was up 13% from last year, reflecting solid revenue growth and adjusted all bank operating leverage of 4.3%. Turning to capital on Slide 9. The CET1 ratio of 13.7% was up 20 basis points from last quarter, reflecting strong internal capital generation of 79 basis points underpinned by our 17.6% ROE. A modest benefit from changes in regulatory updates and market-driven OCI gains also contributed to the increase. This was partly offset by higher dividends as announced last quarter and higher RWA from the strong client-driven business growth that Dave just spoke to.

Share buybacks of 4.2 million shares for approximately $1 billion, largely in line with last quarter’s pace also had an impact. Moving to Slide 10. All bank net interest income was up 8% from last year or up 7%, excluding trading revenue, reflecting strong growth in Personal Banking and solid results in Commercial Banking and Capital Markets. All banks net interest margin was down 7 basis points from last quarter, largely due to seasonally higher financing activities in capital markets. All bank NIM, excluding trading revenue, was up 1 basis point from last quarter largely due to higher net interest income on certain transactions in capital markets, which were offset in noninterest income. Canadian Banking NIM was flat relative to last quarter largely reflecting favorable product mix, driven by growth in non-maturity deposits.

Continued benefits from our structural tractor hedging strategy also contributed due to a combination of beneficial 5-year swap [ spread rule on ] trends and continued growth in notional balances. This was offset by pricing competition and lower purchase price accounting accretion benefits related to the acquisition of HSBC Bank Canada, which we guided to last quarter. Excluding the PPA accretion roll-off impact, Canadian Banking NIM would have been up [ 2 ] basis points. Moving to Slide 11. Reported noninterest expense was up 2% and adjusted noninterest expense was up 3% from last year. Adjusted expense growth was largely driven by higher variable compensation consistent with higher revenues in Wealth Management and Capital Markets. Higher salaries and pension and benefits-related costs also contributed to the increase, largely driven by a net increase in headcount.

This was offset by the impact of FX translation and lower share-based compensation, which was driven by changes in equity markets and our own share price. Our expense growth also reflected the realization of cost synergies from the acquisition of HSBC Bank Canada and higher severance last year. Excluding these impacts, our expense growth would have been in the mid-single-digit range. On taxes, the adjusted non-TEB effective tax rate of 21.9% was up approximately 1.5 percentage points from last quarter, reflecting changes in earnings mix. I’ll now turn to our Q1 segment results beginning on Slide 12. Personal Banking reported record results of approximately $2 billion this quarter. Focusing on Personal Banking in Canada, net income was up 18% from last year, and the segment generated operating leverage of 9%.

Revenue growth was 9% with net interest income up 10% reflecting higher margins and volume growth. Noninterest income was up 8% from last year, largely reflecting higher mutual fund revenue. Loan growth of 4% was driven by growth across all portfolios. Deposit growth was flat as growth in lower cost demand deposits was offset by a decline in term deposits, concurrent with lower interest rates. However, this quarter, we generated over $2 billion in retail mutual fund net sales compared to the $5 billion we generated in all of fiscal 2025, reflecting the strength of our money in franchise. We expect this momentum to continue next quarter, including benefits from the seasonally active retirement contribution period. Turning to Slide 13. Commercial Banking reported record net income of $863 million, up 11% from last year.

Pre-provision pretax earnings was up 5% from last year, driven by revenue growth from higher volumes and well-managed expenses. Deposits increased 5% from last year or 2% sequentially, driven by growth in non-maturity deposits, partly offset by a decline in term deposits. Loan growth continued to moderate to 4% year-over-year or 1% sequentially with tariff-related uncertainties impacting demand in key sectors and geographies. Turning to Wealth Management on Slide 14. Net income of $1.3 billion was up 32% from last year, reflecting record revenue. Noninterest income was up 11% reflecting higher fee-based client assets driven by market appreciation as well as net new assets. Strong retail mutual fund net sales over the last 12 months, including this quarter, were partly offset by outflows in short-term institutional mandates, which can be lumpy in nature.

Transactional revenue, driven by client activity in U.S. Wealth Management also contributed. Net interest income was up 4% from last year, driven by higher deposit growth in Canadian Wealth Management as well as higher spreads and loan growth in U.S. Wealth Management, including City National Bank. City National’s net income increased to USD 143 million. Record revenue this quarter was partly offset by higher expenses, including higher variable compensation and staff costs, including adviser recruitment. Turning to our Capital Markets results on Slide 15. Net income of $1.5 billion increased 3% from last year. Record pre-provision pretax earnings of $1.9 billion were up 11% from last year, partly offset by higher variable compensation. Global Markets revenue was up 7% from last year, reflecting record equity trading as well as strength in repo products, partly offset by softer credit trading results.

Corporate and Investment Banking revenue was flat year-over-year. Investment banking revenue was down 6% from last year, offsetting lending and transaction banking revenue that was up 6%. Turning to Slide 16. Insurance net income of $213 million was down 22% from last year, reflecting a $65 million reinsurance recapture gain in the prior year. Return on equity for the business was 24.9%, reflecting the increase in attributed capital for insurance as guided to in our fourth quarter call. We continue to target a mid- to high 20% medium-term ROE. The U.S. region net income of USD 716 million was up 2% from last year, driven by a pickup in client activity in both capital markets and wealth management, including City National as well as some benefits of strong markets and improved operational efficiency.

This was partly offset by higher PCL. I’ll now spend a few minutes updating our outlook for 2026. Consistent with last quarter, we expect annual all bank net interest income growth, excluding trading, to be in the mid-single-digit range. This includes the majority of the remaining $80 million PPA accretion roll-off next quarter, which translates to approximately a 4 basis point impact to Canadian banking NIM. Noninterest income is expected to benefit from robust client activity in market-related businesses. That said, capital markets is seasonally stronger in the first quarter, particularly in certain trading businesses, consistent with increased client activity. As a reminder, starting next quarter, we’ll also begin to see the modest impact of reduced fees in personal banking in line with regulations set out in last year’s federal budget.

Also recall the second quarter has fewer days than the other quarters. We continue to expect all bank expense growth to be in the mid-single-digit range for the year due to the realization of previously committed costs and ongoing investments. This includes the growth initiatives that Dave spoke to earlier. Investments in technology and safety and soundness framework of the bank continue to be a priority, given emerging opportunities and risks where we spend approximately $1 billion annually. Nonetheless, we continue to expect positive all-bank operating leverage for the year, including 1% to 2% for Canadian Banking as we continue to focus on efficiencies across the bank, including AI-related benefits. We expect the adjusted non-test effective tax rate to move towards the higher end of our 21% to 23% previously guided range over the next 12 months.

In contrast, we expect corporate support segment losses to now trend closer to the lower end of the $100 million to $150 million range per quarter. On capital, we expect a modest 10 basis point negative impact to our CET1 ratio next quarter, reflecting changes to retail capital parameters. To conclude, we remain focused on continuing to drive sustainable shareholder value through capital allocation, centered on client-driven organic growth within our risk appetite, along with returning capital to shareholders. With that, I’ll now turn it over to Graeme.

Graeme Hepworth: Thank you, Katherine, and good morning, everyone. Starting on Slide 17, I’ll discuss our allowances in the context of the macroeconomic environment and ongoing trade uncertainty. We remain cautiously optimistic on the outlook for the Canadian economy. We expect to see mild growth and continued stabilization in the economy, supported by prior rate cuts, ongoing trade diversification initiatives and targeted fiscal measures. Looking ahead, while we believe the Canadian economy has demonstrated resilience, factors such as U.S. trade policy, the upcoming CUSMA joint review and geopolitical tensions add ongoing uncertainty to our outlook. Against this backdrop, we have maintained a prudent approach with our allowances.

While our base outlook assumes that current CUSMA exemptions and tariffs are maintained going forward, to reflect the uncertainty of outcomes, we have retained elevated [ weightings ] to our downside scenarios consistent with the last three quarters. As a reminder, in the second quarter of 2025, we introduced a trade disruption scenario into our IFRS 9 framework. This scenario captures the risk of Canada facing significantly higher tariffs across all exports but also reflects the potential for a severe North American recession driven by escalating global trade wars. When certain trade conditions have widened the range of possible outcomes, we feel the potential downside risk of a CUSMA [ trial ] been appropriately captured in our allowances supporting our financial resilience through the cycle.

Turning to Slide 18. We took a total of $28 million or 1 basis point of provisions on performing loans this quarter, reflecting unfavorable changes in credit quality and portfolio growth partially offset by a favorable impact from our macroeconomic forecast. Moving to Slide 19. PCL on impaired loans of 40 basis points was up 2 basis points or $84 million relative to last quarter with higher provisions in Capital Markets and Personal Banking, partially offset by lower provisions in Commercial Banking. In Capital Markets, provisions on impaired loans were up $130 million from the prior quarter. Most notably, we incurred a large provision related to a borrower in the consumer discretionary sector as well as to a previously impaired borrower in the financial services sector.

We also continue to see provisions in the commercial real estate sector consistent with ongoing headwinds in that space. In our commercial banking portfolio, PCL on impaired loans was down $73 million compared to last quarter, reflecting lower provisions on larger borrowers. While we saw a better performance in Q1, we expect losses to remain elevated in the coming quarters given the ongoing soft economic conditions, particularly in cyclical industries. As a reminder, impairments and recognized losses in our wholesale portfolios are inherently more difficult to predict and can be more episodic quarter-to-quarter. In Personal Banking, PCL on impaired loans increased by $27 million, driven by higher provisions in residential mortgages and credit cards partially offset by lower provisions in personal lending.

We continue to see a more localized impact in our retail portfolios with higher provisions driven by softness in Ontario and the Greater Toronto region. Residential mortgage provisions are increasing as expected due to these regional factors and pressures from higher payments at mortgage renewal. We expect these pressures to abate as they exit 2026 with average payment increases at renewal decreasing substantially in 2027. We remain confident in the quality of our mortgage portfolio, underwriting and collateral. Moving to Slide 20. Gross impaired loans of $9.2 billion were up by $485 million or 3 basis points from last quarter, largely driven by 3 segments. In Personal Banking, gross impaired loans increased by $294 million quarter-over-quarter, largely driven by new formations in the Canadian residential mortgage portfolio.

In Wealth Management, gross impaired loans increased by $90 million, driven by CNB with newly impaired loans in the commercial real estate and consumer staple sectors. In Commercial Banking, gross impaired loans increased by $88 million quarter-over-quarter, [ largely formations ] in the quarter related to borrowers in the transportation and industrial product sectors. To conclude, despite higher episodic losses in capital markets this quarter, we remain confident in the overall quality, diversification and resilience of our portfolios. We still expect full year 2026 provisions on impaired loans to remain within the guidance previously provided. Credit outcomes will continue to depend on the extent and duration of tariffs, the performance of labor markets, interest rates and real estate prices, factors we are actively monitoring as the trade and geopolitical landscape evolves.

As always, we continue to proactively manage risk through the cycle and evaluate multiple scenarios across our credit and stress testing frameworks. We remain well provisioned and capitalized to withstand a wide range of macroeconomic and geopolitical outcomes. With that, operator, let’s open the lines for Q&A.

Operator: [Operator Instructions] Your first question comes from the line of Ebrahim Poonawala with Bank of America.

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Ebrahim Poonawala: Yes. So I wanted to go back, the Slide 6 is extremely helpful. So thanks for laying it out that way. But there’s something you said like around that slide around profitable growth at a premium ROE. From an investment standpoint, it comes down to a relative game. So when we look at that Slide 6, maybe just talk to us about — there are lots of tailwinds in capital markets today that the industry is benefiting from. As we think about the advantage that Royal has because of scale, because of market leadership position in many businesses, what are things that Royal can do that some of your peers may not be able to do as [ profitably ] that we, as investors, should think about?

David McKay: That’s fair. Maybe I’ll ask Derek to start because you referred specifically to capital markets. And then myself, Sean or Erica will maybe answer that question in the context of Canadian Banking. So Derek, maybe the scale advantage that you have in capital markets.

Derek Neldner: Sure. Thanks for the question, Ebrahim. So as you know, we’ve obviously been investing in the capital markets business now for many decades and have established very much a global footprint with today, about 70% of our revenue coming from outside of Canada. I think those investments over multiple decades have really put us in a position where we do bring advantages in terms of our global footprint, the diversification of our business, both across client segments sectors and products. And then obviously, the scale that, that brings, not just the scale within capital markets, but the scale of RBC that we can more broadly leverage. So what does that allow us to do from a competitive advantage perspective? I think, first, you’ve really seen that come through in the sustainability of our results.

That breadth across geographies and products and client segments has allowed us to deliver. We believe, very sustainable results at lower volatility than some of our industry peers. Importantly, from a client perspective, the cross-border platform we have allows us to serve our clients across multiple markets, whether that be in financing or advisory or sales and trading intermediation which is very important as our clients get bigger and scale themselves and are looking for partners that can serve them across all their needs and allows us to pursue and support them in larger transactions, which again, scale is a theme we’re seeing across industries, and our clients are looking for partners that can support them. And then finally, I would just say, very importantly, the scale advantages that we have and the sustainability and diversification of our business allows us to continue to invest very consistently over the cycle.

And we’re not going to chase certain themes at a certain point in the market cycle but allows us to pursue a very consistent strategy, make the investments in talent, technology with our balance sheet resources to really build long-term durable client franchises. And then finally, it allows us to do that without stretching on risk. So we’ve got lots of different avenues where we can invest organically, continue to build the business. We want to be thoughtful, particularly at this point in the cycle. And so we feel we can do that without compromising our risk appetite in any way.

David McKay: Thanks, Derek. Ebrahim, when we think about scale, we think about in the context of operating scale, brand scale, data scale among a number of dimensions. And when you think about the operating scale of the Canadian Bank, Consumer and Commercial Banking operating at a combined productivity ratio, I think, 35%, 36%, it allows us to compete for business and drive a high ROE at the same price, same risk level allows us to price more flexibility. When you have a 30% advantage over your competitors are [ when they’re in the ] mid-40s, it allows us enormous flexibility within our risk appetite to earn a higher ROE on the same piece of business or price more aggressively if we want to serve that client. So on the operating scale side, it’s clear the advantages that gives us and it drives that consistent premium ROE — operating ROE that we’ve driven.

And maybe I’ll turn it to Erica because it’s such an important question, right, go on and spend a little more time on it. It’s a great question, maybe about data scale and brand scale, Erica, [ in your business ]?

Erica Nielsen: Thanks, Dave. So maybe just a comment on the data scale. One of the most important things that we see going forward as we serve more Canadians in the Canadian marketplace is our ability to understand and understand what those consumer needs are, understand the everyday financial of those consumer needs and then use that information to build models that allow us to further grow our business, further penetrate that business. When we look at the ability of our models, particularly those AI-based models that we’re looking at. Now we can see very different outcomes based on the scale of consumers that we see in the Canadian marketplace. And so we look at that as a significant opportunity for us to grow our businesses differentially based on the data scale and the activity scale that we see in our client franchise.

David McKay: Thanks. So that’s a big part of our Investor Day thesis. I think — we probably have a long queue, we should move on, but I appreciate that question. Operating data, balance sheet, brand scale are a big part of how we drive consistent premium growth in ROE.

Operator: Your next question comes from the line of John Aiken with Jefferies.

John Aiken: I was hoping to drill down a little bit on City National. I think Katherine mentioned in her commentary that there were a bit of headwinds in terms of provisions. I wanted to discuss the outlook for ’26, ’27 and how much work is left to be [indiscernible]? Or have we finished with most of the heavy lifting?

David McKay: I think you heard incorrectly, there’s a tailwind from [indiscernible], not a headwind. We’re having great credit experience in City National. We serve a premium, affluent and entrepreneurial commercial customer. Any other clarity on that, Katherine?

Katherine Gibson: No. I would just say in my comments, I was just calling out the strength of their earnings this quarter and In addition to the clean credit book growth, the really strong loan growth, deposit growth, profitable growth, and we’re really pleased with the results that we see now on a continued basis over a few quarters. So as we go forward, really seeing them deliver against the targets that they have set out almost a year ago with that profitable top line growth, driving the efficiencies and it’s really materializing with more to come.

David McKay: Yes. And we are well on our way to meeting and exceeding our Investor Day targets in City National. We are very excited about being on a growth front footing right now with that business, profitability-wise and customer growth-wise. So I don’t foresee the credit headwinds that you mentioned.

Operator: Your next question comes from the line of Gabriel Dechaine with National Bank Financial.

Gabriel Dechaine: Katherine, can you repeat what you said about the Canadian banking NIM and the impact of HSBC? That accretion runoff and stuff in Q2?

Katherine Gibson: Yes, happy to. So what we saw as an impact this quarter was the PPA rolling off related to HSBC and so it’s starting to roll off this quarter, which was the 2 basis points impact, and we’re going to see it largely kind of fully roll off. There’s a little bit that will last throughout the rest of the year, but it will be a 4 basis point impact. Having said all that, we’re still seeing like a positive momentum from our tractor strategy we’re seeing positive impact from the deposit mix shift as we’re seeing those flows move into non term. We’re also, as I said in my comments, seen really positive flows into mutual funds. So I know that doesn’t necessarily show up in NIM, but it’s showing up in overall revenue growth.

And then you would have seen in the charts that we’ve included, there is still competitive pressure that is a bit of an unknown going forward. But we’re seeing that on GICs and we’re also seeing in the commercial book and a little bit still on the mortgages as well.

Gabriel Dechaine: So margin down for the next quarter?

Katherine Gibson: Yes, not — the impact will be 4 basis points, and we don’t give specific guidance out on NIM. We kind of pushed towards the guidance on the NII, excluding trading. But I would say you could look to kind of track to a stable expectation on NIM as we go forward.

Gabriel Dechaine: Got it. And for Dave, just — we hear this comment every now and then like pressure to deploy capital, which — I don’t think that applies to Royal. You got a lot of capital but you’re going to nearly an 18% ROE. I didn’t see a huge boost from capital markets that helped, but it wasn’t like outsized this quarter. So are you just willing to sit on excess capital and wait for the organic growth to come, and then we’ll see like a leg up then that type of thing?

David McKay: That’s a great question as we are put our third quarter consecutively of 17-plus percent ROE. It’s driven from the strength of the business, not largely from buybacks. We haven’t seen the benefit of our AI benefits that we discussed the $700 million to $1 billion benefits as we’ve invested that money and are still on track to deliver that for investors. So we’re excited about that. We do, to your point, have significant capital to buy back shares. And we’re certainly looking to continue to do that and grow into that. So we will be able to improve that ROE through some share buybacks. And then from an organic perspective, we want to spend more time talking about it. We do see more growth coming from a significant number of projects that are going to get built in this country, whether it’s deployment of our defense industry spend, it’s the energy infrastructure we need to be, the Arctic infrastructure, the minerals infrastructure, all these multiple use capabilities that the Prime Minister and the government has talked about is going to require a significant amount of domestic and foreign capital.

One of the reasons we’re looking to intermediate that capital from places like the Middle East as well into the country. So I think from that perspective, we see an acceleration of growth opportunities coming at us on the organic side that we’re trying to anticipate the timing on that. It’s hard to predict some of these larger projects. But again, we anticipate good growth coming. And the third thing I’d say we continue to be on the lookout for the right acquisition. It’s not that we’re avoiding them. Just none have met our hurdles at the end of the day and the hurdles that we promised you to drive accretion. At the end of the day, they are all significantly dilutive, and that’s not acceptable to us. We don’t grow for the sake of growth. We’re here to create shareholder value.

So it’s not that we’re not looking, that we understand the business we want to grow. They’re all in the businesses that we talked about. What’s global wealth, U.S. wealth, commercial banking, those are the types of acquisitions we would look at and nothing’s met our hurdle rate. So we continue to be active in all fronts in creating shareholder value. And I think that you should get comforted by the number of levers we have to pull to enhance ROEs and create growth at the same time.

Operator: Your next question comes from the line of Paul Holden with CIBC.

Paul Holden: A question for Graeme. So Dave talked about loan growth being near the bottom end of the guidance range for the year due to sort of softer economic conditions in Canada persisting. What does that imply for the PCL guidance? I know you’ve restated the PCL guidance. Does that mean, should be assuming something at the upper end of the range, would you assume? And then sort of tied to that, I’m really curious by [ the good ] slide on — I think it’s Slide 34 where you show the mortgage portfolio, sort of the component of the higher risk where LTVs over [ 80 ] and credit bureau score below [ 6.85 ], and we saw some change in that number quarter-over-quarter. So maybe just on the question is talk to us about Canadian consumer risk and what that might mean for PCLs.

Graeme Hepworth: Thanks, Paul. I think the comments they made around kind of softness on the growth side is quite consistent with the guidance we’ve given in Q4, and we’re persisting into Q1. We continue to see the Canadian economy in particular not certainly weakening into a recessionary [ state of point ], but struggling with kind of pretty modest growth. And there’s certainly regional effects, particularly when we talk about the consumer side of our portfolio, we particularly see weakness in Ontario consistent with kind of the elevated levels of employment we see in the region. And I think when we talked about in our guidance previously and that persists into Q1 is that we really kind of saw 2026 being a year where we were going to kind of be in this plateau of relatively elevated credit losses.

And as things are really kind of trending sideways, there’s some near-term headwinds that haven’t changed that are still playing out. Those are headwinds like the increasing payments that many of our mortgage clients are going through. We’ve got the kind of ongoing kind of trade and tariff uncertainty. And again, that’s impacting many sectors that we’ve talked about in the commercial side, but that does play through into the consumer side as well. And again, a lot of that is centered in the GTA in Ontario as well. So overall, I wouldn’t say — I think our view on the consumer has changed a lot in Q1 versus Q4. We’re seeing a lot of the things we talked about then persist into Q1. When we look at the different products, I would say we see some indicators of stability and kind of early delinquencies in products like our mortgage product, [indiscernible] our unsecured lending products.

Areas like indirect auto where we’ve seen maybe some recent trends in impairments that were improving, but the earlier delinquencies there are showing a bit of a [ softening ]. And so there’s some pluses and minuses there, and we pull that together. That’s what’s kind of leading to us persisting kind of our view that the forecast and guidance we provided in Q4 still holds now. That’s kind of the rough view of the consumer side. I’d say. The wholesale side is where we see more volatility, right? And I think we kind of called that out in Q4, and we’re seeing that play out pretty much in Q1. Wholesale is by nature are just going to — is going to be more volatile quarter-to-quarter. Interesting in our portfolio, you’ve seen kind of that play out in both directions.

I think in capital markets, we obviously saw elevated levels of impairments and risk playing through in the quarter. Let me kind of compare that against a lot of the forward-looking metrics we look at in the wholesale book, things like our watch list and we’ve been into our special [ home group ] ratings migration. Those are all stable, if not improving. And so we don’t see this as a new indicator that capital markets is resetting at a higher level. Likewise, Commercial Banking had a much improved quarter this quarter. But that’s a business where, likewise, the indicators are still high and risk is still elevated. And so when you put wholesale together, we still think we’re going to be in an elevated environment for the year, but it’s going to be pluses and minuses as we work our way through each quarter.

So — and overall, very consistent, I would say, with Q4, but a few pluses and minuses as we look throughout the portfolio.

Operator: Your next question comes from the line of Sohrab Movahedi with BMO Capital Markets.

Sohrab Movahedi: Okay I just wanted to go back to Slide 6 and ask a question of there, in particular, [ maybe Graeme ]. You’re kind of listed a couple of times as both capital-intensive and moderate capital intensive use of, I guess, resources here. So when you go to grow your corporate lending, for example, before some of the benefits come through, should we be expecting a bit of a, I don’t know, moderation or mellowing in your segment ROE before it picks up. And as you do more corporate banking, Graeme, do we need to think about Royal’s through the cycle average PCL with a greater volatility around it, even if it comes in around the same. So if you could just provide some color as to what the outlook may look like, not necessarily over the next 12 months, but over the next 24, 36 and beyond.

Derek Neldner: Sure. Thanks, Sohrab. It’s Derek. I’ll start and then Graeme can obviously chime in on the second part of your question. Just a few things I would highlight. So on that Slide 6, as you know, Capital Markets has a broad portfolio of businesses. Some are more capital intensive, such as the corporate banking loan book. Some are moderate being parts of our Global Markets business. But I would also highlight, we have some very low capital intensity businesses, such as investment banking and transaction banking that are key growth areas for us as well. And so when we look at how we might deploy organic capital, it’s really across all of these areas. For the more capital or moderate capital intensity through direct capital employment through financing and lending.

And then through the less capital-intensive areas, it’s really through NIE as we invest in talent and technology. To your specific question on what should you expect from the ROE, we would not expect a deterioration in our ROE. We think we can deploy capital, while at the same time, do that across the portfolio to continue on the trajectory of moving our ROE target higher consistent with what we articulated at Investor Day, and you’ve obviously seen that in the last two quarters as our ROE has continued to trend upwards. So it’s a balance between ROE and growth we think we can invest across the portfolio, drive accelerated growth while continuing to migrate our ROE higher.

Graeme Hepworth: Maybe just sort of add on the kind of risk element to that question, just kind of say a few things on that. I think while capital markets has been growing and there are plans to grow, if you kind of pull up and look at what [ tapped ] over the last 3 to 5 years, and you use kind of a metric like RWA as an indicator. We’ve actually seen the RWA footprint of capital markets kind of abate or kind of remain a stable proportion of RBC’s overall risk profile. And so no, I don’t expect it will kind of dramatically change kind of the volatility of our credit book per se. [ Look ], where the growth is happening, say, on the loan book or off the markets business on the financing side, it tends to be kind of higher grade corporate relationships that we’re driving more of.

And so I wouldn’t expect it to be kind of driving volatility in a really distinct or unique way there. So as it stands, again, in the plan, we have a kind of a very well-articulated risk appetite. I don’t think anything that we’re laying out here has us changing our risk appetite. That’s consistent with what we messaged at Investor Day. So no change in approach on that at this point.

Operator: Your next question comes from the line of Mario Mendonca with TD Securities.

Mario Mendonca: Dave, perhaps just a quick question. I was intrigued by a comment you made in your prepared remarks. You said — and it was in the context of returning capital in the form of buybacks. You said something to be effect of, “And we acknowledge where the price of the book is.” And I may have misheard you, but what message were you trying to convey if I did, in fact, head you correctly?

David McKay: Just as we came out of Q4 into Q1 and saw the significant run-up in the share price, we looked at the volatility in the marketplace. And I think we tempered some of our buyback activity through Q1. As you saw, we maintained a kind of consistent level as we had in previous quarters between [ $800 billion ]. It was probably more most attributable to the uncertainty in the marketplace. And we exited the quarter thinking we’d be buying back shares at a certain level and ended up having a target much higher. So it’s just a combination of events. I wouldn’t attribute anything specific to the share price because we continue to buy back at $225, $230, $235 a share throughout the quarter. So we maintained an even cadence to the quarter versus an acceleration through the quarter. So I wouldn’t attribute anything. It’s more the uncertainty of the geopolitical situation that caused us to hedge a little bit through the quarter.

Mario Mendonca: And then when you made reference to wanting to be at the high end of your target capital range, just remind me is [indiscernible] the high end? Or would you take — that’s the high end?

David McKay: [ You ] let it run up a little bit. We had a significant quarter where we earned a great return, and we’re very capital efficient and it moved up to [ 13.7 ]. It just gives us more flexibility to deploy that into buybacks and growth in the coming quarter.

Mario Mendonca: And then just maybe I think one other thing. When you think about your U.S. franchise, I think CNB went through a rough patch. It’s clearly out the other end, things are looking much better than they were a couple of years ago. Does that give you the confidence? And maybe this is the right way to ask it, is does the institution have the stomach for another meaningful U.S. banking transaction?

David McKay: Does it have the stomach? Absolutely. Accretive shareholder value and the synergies lead to that shareholder value. It’s all about your business case. And can you extract synergies versus the price and the competition. I mean we expect to have significant competition for any commercial property that we’d be looking at or wealth management property. And therefore, does your synergy start compete and can you earn a return on it. So we spent all our time building hypothetical synergy cases for each of these opportunities, and we talk about them, what would we do with this franchise differently than the current management team does. How do you put a valuation on that, and that leads us to be disciplined in any approach. So we know we have capital strength. We know our currency is strong, and therefore, we want to grow, but we’re going to grow and create shareholder value at the same time.

Operator: Your next question comes from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala: Just a quick follow-up maybe for Erica and Sean, as we think about the margin outlook for the Canadian banking business, maybe just talk to what you’re seeing on deposit pricing on term deposits versus acquiring new households I’m just trying to get a sense of what the competitive dynamics look on both fronts and the implications that may have as we think about just margins over the next year or two?

Erica Nielsen: Yes. Thanks, Ebrahim, for the question. It’s Erica. Maybe just a couple of reflections. As it relates to the pricing and the competition that we’re seeing on our deposit franchise, particularly with GIC, I would say that it still continues to be a competitive market. And that is coming from a group of clients who are largely in 1-year term deposits, and they’re looking now to make the determination of is it time for equities or is it time to remain in the GIC portfolio. And so we are watching that portfolio and trying to guide clients appropriately. So we want to make sure that, a, first and foremost, as we retain the dollars at RBC to grow our money in franchise. And then we follow what the client need is based on, should they remain in the GIC portfolio or should they largely move into the mutual fund portfolio.

We see increasing, as Katherine talked about in her remarks, increasing rotation into mutual funds. But at the end of the day, our core metric is that we keep the dollars in the RBC franchise. And then as it relates to client acquisition, as you can imagine, there is — client acquisition is challenged for all of us in this market at this point given the rollback in immigration in Canada. And so we are competing aggressively in that marketplace to switch Canadians across the different institutions and win, and we have had good success in our business at attracting with our value propositions, RBC Vantage, the Avion portfolio, acquiring clients into our core checking and savings businesses so that we can continue to grow that franchise. But that is — remains competitive across all of our peer set.

Sean Amato-Gauci: It’s Sean. So on the commercial side, we are seeing continued mix — product mix shift from term into demand as kind of the clients perceive the opportunity cost of holding excess liquidity to be low and are giving up some yield to maintain flexibility in this current environment. Just to give you some context there, we saw term obviously peak in 2023 or so at peak levels of rate increases at approximately 20% of the portfolio. The trough was about 8% to 9% in the early stages of COVID. We’re in the close to the 14% range now. So while there’s potential tailwind opportunity, we think that will continue to abate over the coming quarters. But we do see customers being more liquid and especially at the upper end of the portfolio, keeping sort of powder dry as we see investment activity starting to pick up on the lending side by the same clients who are being much more active than sort of the core commercial and smaller base.

David McKay: Thanks, Sean. I think that’s our last question. And I know you need to jump to another call, so maybe I’ll wrap up here. So a strong quarter for RBC across all our businesses client-driven growth. As you heard Katherine say, we earned through some margin headwinds from the PPA. We earned through some tax increases. We earned through some PCL increases. So it just talks to the earnings power of the organization and what — where headwinds will become tailwinds. You saw the very strong capital efficiency well into — well on our way to, as one of you referred to at 18% with tailwinds as well, as I highlighted around, we haven’t seen the AI benefits yet, which are coming and are on track, or we’re confident of. We haven’t really bought back shares that are utilizing the capital surplus capital that we have that creates opportunities there and the growth that’s coming to deploy that organically as well.

And I’m going to finish where we started with Ebrahim’s question on scale. I mean when you’re looking at these lower capital-intensive businesses that are so important in driving our business, whether it’s wealth, or the transaction banking opportunity. The operating scale we have allows us to invest in this type of growth and get ahead of the curve. When you deploy $0.5 billion into your transaction banking platform because it’s essential to your [ competitors ] in the future, but also the profitability that’s going to come from that platform in the future. I think it’s very significant. We’ve absorbed all that into our current run rate. So as you think about the ability to invest our NIE organically into growth. Neil’s GoSmart initiative, which you didn’t have a chance to talk about today, creating higher ROE, lower capital growth largely comes from your NIE efficiency and your NIE scale.

And I think we — that is the characteristics of our platform, and that’s the benefits you see in getting ahead of these and creating revenue growth and [ profit and growth ] from that. So thank you for your questions. I know you have another call. Appreciate your interest and questions, and we’ll see you next quarter.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.

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