Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q4 2022
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the RBC's Conference Call for the Fourth Quarter 2022 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, sir.
Asim Imran, Head of Investor Relations
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Nadine Ahn, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions are Neil McLaughlin, Group Head of Personal & Commercial Banking; Doug Guzman, Group Head of Wealth Management, Insurance and I&TS; and Derek Neldner, Group Head of Capital Markets. As noted on Slide 1, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then requeue. With that, I'll turn it over to Dave.
Dave McKay, President and CEO
Thanks, Asim, and good morning, everyone. Thank you for joining us. Today, we reported fourth quarter earnings of $3.9 billion. Net interest income increased over 20% from last year, underpinned by higher interest rates and client demand. Higher net interest income was partly offset by headwinds in our market-related Capital Markets and Wealth Management businesses as macro and geopolitical uncertainty pushed our clients towards a risk-off stance. Our results were also impacted by higher PCL on performing loans and an end-of-year true-up in Capital Markets variable compensation. Looking back at the 2022 fiscal year, RBC delivered earnings of nearly $16 billion and revenue of nearly $49 billion. Both are the second highest on record as we supported our clients' financing needs. We met all of our medium-term objectives as we generated ROE of 16.4%, while ending the year with a strong CET1 ratio of 12.6%. As part of our commitment to delivering long-term value to our shareholders, we ended the year with an 80% total payout ratio, including paying out nearly $7 billion of common share dividends while buying back over $5 billion of stock. And this morning, we announced a $0.04 or 3% increase in our quarterly dividend. Before I discuss the strategic initiatives that will drive our growth over the coming years, I will provide my perspective on the macro environment. Elevated uncertainty continues to affect asset valuations and market volatility, which in turn is impacting investor sentiment and client activity in both public and private markets. While strong labor markets paint a favorable picture and inflation appears to have peaked, we maintain our cautious stance on the outlook for economic growth. This caution stems from elevated housing and energy prices, political and geopolitical instability, a pressured manufacturing sector and an aggressive monetary policy stance by central banks. Although higher interest rates are needed to preserve long-term economic stability, the lagging impact of monetary policy, combined with strong employment and significant liquidity in the system, has likely delayed what may end up being a brief and moderate recession. With this context, I will now expand on RBC's many organic growth vectors that position us to succeed in all credit cycles. We believe our competitive advantages are underpinned by our strong balance sheet and continued investments to enhance the client value proposition. I will start with our Canadian Banking business. Our clients are at the center of everything we do, and we are proud to note that RBC was yet again ranked #1 in overall customer satisfaction among the big 5 retail banks by J.D. Power, while also being recognized with the J.D. Power Canada award for Best in Customer Satisfaction for a mobile banking application. We added a record 400,000 clients this year, more than the last two years combined. Given the value-added initiatives that we have in place, we are well-positioned to attract even more clients next year. Our partnership with ICICI Bank Canada to create a seamless banking experience for newcomers to Canada is expected to attract approximately 50,000 clients as immigration levels reach record highs. Continuing on the theme of international connectivity, RBC recently launched Swift Go, a new solution that enables Canadian businesses to send cross-border payments of up to $10,000 in foreign currencies. Our deposit and payments franchise, which we have built over two decades, is one of the crown jewels of the bank. It is a source of low-cost funding to grow Canadian mortgages, credit cards and business lending. And we believe our largely deposit-funded balance sheet will be a key driver of profitability in a rising rate environment, a topic Nadine will discuss further. Deposits, our core relationship product and a foundational reason why clients have consolidated their relationship with RBC at a rate that is 50% higher than the peer average. This success is partly built on the broader money and continuum, helping our clients make the best decision between savings and investments in a volatile interest rate and market environment. RBC Vantage further incentivizes this consolidation of our strong client relationships. Over 1.5 million Canadians have adopted this expanded continuum of offerings. We also remain a leader in residential mortgages, growing this anchor product by over $30 billion this year. Our focus is to deliver a better home journey experience for clients while building an advanced end-to-end process to take out costs. While mortgage origination volumes have declined from recent peaks, given rising interest rates and supply-demand imbalance, they remain in line with pre-pandemic levels. We expect mortgage growth to be in the mid-single digits next year. The near-term outlook for commercial lending appears to be more constructive. We are confident growth will continue over the next couple of quarters given post-pandemic client recovery plans and investments. We expect to see particular strength in the agriculture and consumer discretionary sectors. Regionally, commercial growth is expected to continue primarily in the Greater Toronto area and the Atlantic provinces. We're also looking to build on our position as the largest of the big 5 Canadian banks in Quebec, where we are honored to team up with the Montreal Canadiens highlighting our commitment to the province. RBC's new loyalty collaboration with METRO will launch with a co-branded credit card for Quebec consumers in 2023, adding to our national partnerships with Petro-Canada, Rexall and WestJet. We also continue to expand and move up the acquisition funnel. Earlier this year, we announced an expansion of our healthcare strategy with the acquisition of Mdbilling.ca, a cloud-based platform that simplifies medical billing for Canadian physicians, joining our investment in Dr. Bill. This is in addition to Ownr, an RBCx venture, which has helped launch over 30,000 new Canadian businesses in 2022 alone, of which half opened an RBC small business account. Additionally, we continue to invest in talent and digital capabilities. We added nearly 1,800 employees in Canadian Banking this year, including client-facing roles such as mortgage specialists and commercial account managers. Turning to our Wealth Management business, our diverse set of wealth and banking capabilities are well positioned to deliver customized client value propositions. This is now truly a global platform with scale in Canada, the U.S. and the UK. Despite market volatility, Canadian Wealth Management added $20 billion of net new assets this year, highlighting the strength of client relationships, trusted advice, digital capabilities and a wide range of solutions. RBC Dominion Securities was ranked #1 amongst bank-owned advisory firms in the most recent Investment Executive Brokerage Report Card. We hired more than 25 experienced investment advisors last year, and are looking to hire at least a similar level next year. Our U.S. Wealth Management business supports over US$510 billion of assets under administration, positioning RBC as the sixth largest full-service wealth advisory firm in the U.S. Advisor recruiting is a key source of growth having recruited more than 100 advisors, driving more than $18 billion of expected AUA growth. Similar to our Canadian strategy, we've been adding banking products to support the needs of our U.S. clients. Our lending portfolio now represents US$9 billion. Our broader U.S. strategy is further supported by sweep deposit balances. We also welcome Brewin Dolphin, one of the largest discretionary wealth managers in the UK and Ireland, adding yet another secular growth platform in an attractive market. We will look to replace our North American strategy and extend tailored banking capabilities in the future. Net interest income was up from last year across our global Wealth Management businesses, more than offsetting lower fee-based revenues. Testament to the strength of the platform, RBC Global Asset Management was yet again recognized for its outstanding investment performance at the 2022 Canada Lipper Fund Awards. While AUM has declined amidst a tough backdrop, RBC GAM is a significant profit generator with a pre-tax margin of over 50%. City National is now approaching almost $100 billion in assets. Given its outsized growth over the years, our focus is increasingly on improving both the profitability and technology infrastructure and framework of the bank. Nonetheless, we expect higher net interest income to more than offset expense growth in the coming year. Turning to our Insurance segment which continues to generate high ROE earnings and provides diversification against credit and interest rate risk, RBC Insurance is the largest bank-owned insurer in Canada, serving 5 million clients and holds a leadership position in individual disability. Moving on to our Investor & Treasury Services platform. Earlier this year, we announced the signing of a Memorandum of Understanding with a view for CACEIS to acquire our European asset servicing activities and its associated Malaysian Center of Excellence. This transaction will allow us to increasingly focus on our Canadian asset services franchise in our home market where we're investing to develop new capabilities and optimize our operations. Capital Markets generated $3.6 billion in pre-provision pre-tax earnings in 2022, not far off our expectations of generating $1 billion of pre-provision pre-tax earnings per quarter in a more normalized environment. Starting with our Global Markets platform, we are focusing on delivering our full product suite while at the same time investing in solutions, execution and capabilities to better support our clients with aspirations to move up the league table. We recently launched Aiden Arrival, the next algorithm on our AI-based electronic trading platform, which has continued to gain traction, supporting our clients during these volatile times. Shifting now to Corporate & Investment Banking, RBC Capital Markets has moved up to ninth in the global league tables from 11th last year. Our focus continues to be shifting revenue streams towards higher ROE advisory and activities while deepening client relationships. We also benefit from having broad-based strong relationships with both public market corporates and private capital sponsors. Our success is also built on our investments in people. We will look to add to the 50 Managing Directors we have hired over the last two years, particularly in the technology and healthcare sectors. Looking forward, our pipeline is healthy but we expect some challenges in converting on deals as clients opt for a more cautious approach in response to the challenging market conditions, including rising financing costs and access to markets. Across our businesses, a key pillar of our climate strategy is to play a role in a just, orderly and inclusive transition to net zero, including helping clients execute on their own sustainability strategies. We remain committed to providing $500 billion in sustainable financing by 2025 and continue to build towards this goal. In accordance with our NZBA commitment to achieve net zero in our lending by 2050, we recently published our interim emissions reduction targets for three key high-emitting sectors, namely, oil and gas, power generation, and automotive. In conclusion, we made significant strides in our organic growth story. You also would have heard of our excitement in welcoming our colleagues from Brewin Dolphin; and yesterday, we announced the acquisition of HSBC Canada, with an implied consideration of approximately $12.5 billion, net of the locked box agreement, or less than 9x fully synergized 2024 earnings. Given expense synergies and potential revenue opportunities, this transaction is financially compelling. It also offers the opportunity to add a client base in the market we know best. It also positions us as a bank of choice for commercial clients and international needs, newcomers to Canada and affluent clients who need global banking and Wealth Management capabilities. Nadine, over to you.
Nadine Ahn, Chief Financial Officer
Thanks, Dave, and good morning, everyone. I will start on Slide 11. We reported earnings per share of $2.74 this quarter. Adjusted diluted earnings per share of $2.78 was up 3% from last year. Total revenue was up 2% year-over-year or up 10% net of PBCAE. Accelerating growth in net interest income more than offset challenging market conditions, which impacted fee-based revenue in our Asset Management and Investment Banking businesses. Pre-provision pre-tax earnings were up 10% from last year as strong revenue growth more than offset elevated expense growth, which I will discuss shortly. Starting with our strong capital ratios on Slide 12. Our CET1 ratio declined 50 basis points from last quarter, largely due to the completion of the Brewin Dolphin acquisition, which more than offset strong capital generation of 35 basis points net of $1.8 billion of dividends to our common shareholders. Our balanced capital return strategy also included $1 billion of share buybacks this quarter. We continued our multipronged organic growth strategy driven by strong growth in both commercial and personal lending. However, RWA business growth was lower than prior quarters, largely due to a reduction in loan underwriting commitments given the slowdown in market activity. Looking ahead into fiscal 2023, we will continue to support client-driven organic RWA growth. Furthermore, we expect the benefit from the implementation of the Basel III reforms in early 2023 to offset the combined impact of the Brewin Dolphin acquisition and the expected 20 basis point impact of the Canada recovery dividend. However, in light of the uncertain macroeconomic environment, we are activating a 2% discount to be applied to our dividend reinvestment plan. Furthermore, we will defer further share repurchases until the anticipated close of the HSBC Canada acquisition. Moving to Slide 13. All-bank net interest income was up 24% year-over-year or up 30% excluding trading revenue. These results highlight both the earnings sensitivity to higher interest rates, as well as the benefit from higher volume. All-bank net interest margin was up 4 basis points from last quarter due to higher margins in Canadian Banking and Wealth Management. Higher segment margins were partly offset by the cost of funding certain I&TS transactions, which are recorded in interest expense while the related gains are recorded in other revenue. City National's asset-sensitive NIM was up 30 basis points quarter-over-quarter due to higher yields on its largely floating rate commercial loans. We expect margin expansion at City National to moderate in the coming quarters due to higher funding costs driven by rising rates. On to Slide 14, with a deep dive on Canadian Banking NIM, which was up 10 basis points from last quarter. There are two ratios which are foundational to our sensitivity to rising interest rates as they demonstrate our ability to profitably fund the majority of our loan growth through a low-cost deposit base. One is our largely matched funded balance sheet with a loan-to-deposit ratio of approximately 100%. The second is our zero to low cost deposit base, which represents 40% of segment deposits. Turning to this quarter's drivers of NIM, starting with deposit margins. While higher interest rates are driving up deposit costs, these low beta deposits are a key driver of higher deposit margins, partly reflecting the spread relative to medium-term swap rates invested over a period of time. This strategy helps smooth the impact of changes in interest rates, while also providing a latent benefit from past rate hikes. As the illustrative example on the bottom right highlights, these deposit margins should continue to expand as maturing ladders of deposits from the past low rate environment are reinvested at higher yield. Although we are seeing clients move out of checking accounts into higher-yielding GICs, the shift in deposit mix has yet to have a significant impact on margins. On the contrary, given the worsening spread between GICs and credit spreads, it's increasingly advantageous to use GICs to fund similar term assets. Offsetting these positives are lower loan spreads due to intense mortgage competition which have declined despite an offset of rising credit card revolve rates and commercial utilization levels. Furthermore, the compression of the spread between lagged prime rate increases and higher short-term rate in anticipation of Bank of Canada announcements had a short-term negative impact, which we expect to reverse over time. Looking forward, we expect a lower sensitivity to rising Canadian interest rates, largely reflecting strategic hedging activities. As Canadian rates may be closer to peaking, we are looking to protect against the downside while still benefiting from implied rate increases. Our current expectation based on the current rate outlook is for Canadian Banking NIM to increase 10 basis points to 15 basis points through next year, with most of the increase coming in the first quarter. Moving to Slide 15. Noninterest expenses were up 9.5% from last year with full expenses up 3%. The inclusion of Brewin Dolphin added 1% to expense growth this quarter. The biggest driver of expense growth, which represented half of the NI increase in the quarter, was the year-end true-up of variable compensation in Capital Markets, updating our best estimate accrual for the first nine months of the year. While we have volatility on a year-over-year basis for the quarter, on a full year basis, capital market expense growth was in the low single digits as we look to maintain a competitive level of compensation to attract and retain top talent to build on our premier Capital Markets franchise. Excluding variable and stock-based compensation, quarterly expenses were up 8.5% year-over-year or 6.5% for fiscal 2022. Salaries were up significantly, largely due to our strategic investments in sales capacity to support our multiple growth vectors, as well as base salary increases over the past year. Inflationary pressures combined with costs to support client acquisition and relationships resulted in higher marketing and travel costs. Technology and related costs were higher as we continue to add capabilities to support and expand our client value proposition. At a segment level, the increase in U.S. Wealth Management expenses included investments to improve City National's operational infrastructure as part of our focus to improve its longer-term profitability. And in Canadian Banking, we expect mid-single-digit operating leverage for 2023, well above our historical 1% to 2% range, driving the full-year efficiency ratio below 40% for 2023. At an all-bank level, we expect operating leverage to be positive next year, driven by rising interest rates, a partial recovery in market-related revenue, and productivity benefits from our zero-based budgeting plan. We expect these to more than offset the impact of growth-related investments and higher salaries. I will now add color to segment trends beginning on Slide 16. Personal & Commercial Banking reported earnings of $2.1 billion this quarter, with Canadian Banking pre-provision pre-tax earnings up 25% year-over-year. Net interest income was up 23% from last year due to higher spreads and strong growth in our lending portfolios and term deposits. While credit card balances have largely recovered to pre-pandemic levels, revolve balances remain well below those seen in 2019. Similarly, commercial utilization levels remain low, but should continue to tick higher towards 2019 levels, supporting near-term growth. Noninterest income was up 6% from last year due to higher credit card purchase volumes and foreign exchange revenue. Turning to Slide 17. Wealth Management earnings were up 47% from last year. Revenues were up 15% year-over-year as very strong net interest income growth offset weaker fee-based revenue. Global Asset Management revenue decreased primarily due to lower fee-based client assets. Challenging market conditions in both equity and bond markets have disrupted traditional asset class correlation. Canadian long-term retail net redemptions were $3 billion this quarter, mainly in balanced mandates. Net redemptions were lower than elevated levels seen last quarter across the industry. Turning to Insurance on Slide 18. Net income remained relatively flat to last year, largely reflecting the impact of offsetting items between revenue and PBCAE, which also included the impact of favorable annual actuarial assumption updates. Turning to I&TS on Slide 19. Net income remained relatively flat year-over-year as the benefit from improved client deposit margins was largely offset by lower funding and liquidity revenue and lower revenue from our Asset Services businesses. Turning to Slide 20. Capital Markets earnings were down 33% year-over-year, while revenues were up 1% from last year, pre-provision pre-tax earnings were down 39% largely due to the end of year true-up in variable compensation. Investment banking revenue was down 24% from last year due to the challenging credit market environment and muted client activity. However, results outperformed a more significant decline in global fee pools, record share gains across most products. Record lending revenue was on the strength of higher U.S. loan balances. Our macro businesses within global markets continued to perform well, supporting increased client activity in an environment of elevated volatility in rates, FX, and commodities markets. This offset a more challenging environment for credit trading. Our equities business performed well despite challenging market conditions, which impacted origination activity. To conclude, our results this quarter were largely underpinned by our structural sensitivity to higher interest rates. Looking forward, we will continue to deploy our strong balance sheet to drive client-driven growth and deliver sustainable value to our shareholders. With that, I'll turn it over to Graeme.
Graeme Hepworth, Chief Risk Officer
Thank you, Nadine, and good morning, everyone. Starting on Slide 22, I'll discuss our allowances in the context of the macroeconomic environment. Over the course of 2022, as the recovery from the COVID-19 pandemic continued, we saw robust economic strength. This is being driven by record low unemployment rates, pent-up consumer demand, peak housing prices, and elevated savings and deposit levels. The strength of the recovery allowed us to release the majority of our COVID-19-related reserves in the first half of the year. However, as the year progressed, we saw signs that the economy was overheating, with persistent elevated inflation causing central banks to enact aggressive rate hikes not seen for 40 years. This in turn has created market volatility, downward pressure on asset prices, and the prospect of a recession as we head into 2023. Last quarter, we began increasing our allowances on performing loans reflecting deterioration in the macroeconomic outlook. This quarter, we started to see those headwinds manifest, and credit outcomes have started to normalize towards pre-pandemic levels. With this backdrop, we continue to prudently build our reserves. Provisions on performing loans this quarter reflect changes to our base case scenario. This is incorporated with earlier and modestly more severe recessions than previously expected, increases in delinquency rates and credit downgrades and ongoing portfolio growth. In total, our allowance for credit losses on loans increased by $170 million this quarter to $4.2 billion. Moving to Slides 23 and 24, gross impaired loans were up $140 million or 1 basis point this quarter, noting new formations of impaired loans increased for the third consecutive quarter. Provisions on impaired loans were up $84 million or 4 basis points compared to last quarter, with increases in each of our major lending businesses. The increases in impaired loans and provisions were anticipated to reflect the normalization of credit outcomes I noted earlier. I do want to emphasize that both impaired loans and provisions remain well below pre-pandemic levels. For context, our PCL on impaired loans ratio of 12 basis points remains less than half of 2019 levels. I'll now briefly discuss the credit outcomes in our major businesses. In Canadian Banking, delinquency rates, new formations of impaired loans, and provisions on impaired loans were modestly higher across all retail products as well as in the commercial portfolio. Credit outcomes in the commercial portfolio remain relatively benign as our clients continue to benefit from strong consumer demand, and many of these businesses are able to increase prices to pass through the impacts of rising costs. Across our retail lending products, delinquency rates are now back to more historic norms or trending to those levels. Even as delinquency rates increase, our portfolio remains resilient, supported by elevated deposit levels, low insolvency rates, and low unemployment rates. Collectively, these forces have helped maintain our PCL on impaired loans well below pre-pandemic levels. Shifting focus to our home equity finance portfolio, rapid rise in interest rates and softness in housing demand and prices continue to act as headwinds. As a result of higher rates, more of our clients will experience an increase in payments as they cross their trigger rate threshold. As I discussed in detail last quarter, our mortgage portfolio and mortgage client base remain exceptionally strong. Our internal payment analysis indicates a majority of our clients will be able to absorb these anticipated payment increases. Additionally, our enduring standards have been designed to ensure resilience to an economic cycle, and we believe we are adequately provisioned to withstand economic stress as our ACL ratio on performing mortgages is well above pre-pandemic levels. Moving to our Capital Markets business. During the quarter, gross impaired loans increased by $74 million and PCL impaired loans were $11 million, primarily driven by loans in the other services sector. Inflation and higher rates have yet to materially impact credit outcomes in Capital Markets. Elevated market volatility has impacted our market-sensitive businesses. Our loan underwriting business continues to be impacted by challenging market conditions. Throughout the quarter, we continued to reduce exposure and shift to higher-rated credits. Mark-to-market impacts in Q4 were largely offset by the underwriting fees on associated transactions. Our Global Markets business has been well positioned for a rising rate environment. Our trading value risk remains stable and notwithstanding substantial volatility, we only saw 2 days of net trading losses during the quarter. Market volatility also increased our counterparty credit risk exposures, and we saw a higher volume of margin and collateral calls this quarter. Our counterparties remain strong, and no negative outcomes have been observed to date. Finally, moving to our Wealth Management business, in Q4, gross impaired loans increased by $56 million from last quarter, and we took $11 million of PCL on impaired loans. The new impairments and provisions were concentrated at City National in the consumer discretionary sector, primarily in the franchise restaurant space, where rising input costs challenged our clients' ability to maintain margins. Our portfolio here is focused on larger franchise operators and performed consistently through economic downturns. To conclude, we continue to be pleased with the ongoing performance of our portfolios, with provisions and impairments remaining well below pre-pandemic levels. However, we are starting to see the normalization of delinquencies, credit downgrades, impairments, and provisions that we have been anticipating for a number of quarters. We expect this normalization to continue through 2023, with PCL on impaired loans forecasted at 20 basis points to 25 basis points. Total PCL in 2023 is expected to be 25 basis points to 30 basis points as a return to more normal levels of credit downgrades and continued portfolio growth increase provisions on performing loans. As I noted last quarter, the timing and magnitude of increased credit costs will all depend on the central bank's success in improving inflation while creating a soft landing to the economy. We continue to proactively manage risk through the cycle, and we remain well capitalized to withstand a plausibly more severe macroeconomic outcome. With that, operator, let's open the lines for question and answer.
Operator, Operator
The first question is from Ebrahim Poonawala from Bank of America.
Ebrahim Poonawala, Analyst
Nadine, thanks for the details on the NIM and how you're thinking about it. Just a question off of that. I think, one, your comments on NIM outlook I assume relative to the fourth quarter in terms of the expansion next year versus 4Q '22. But I guess the real question is, as we think about the balance sheet is still asset sensitive based on your disclosure. Just talk to us how you're thinking about locking in asset sensitivity, as I think Dave and you mentioned are nearing the end of sort of rate hikes potentially in the first half of next year. And then just your comfort around the lower bound on the NIM if a year from now Bank of Canada, the Fed are in an interest rate cut mode late '23 into '24?
Nadine Ahn, Chief Financial Officer
Thank you, Ebrahim. In relation to interest rate sensitivity, to address your first question, yes, we did see an increase in NIM compared to Q4. Regarding the interest rate sensitivity we disclosed, we have been gradually reducing it to capture the rate increases observed so far. This sensitivity is primarily influenced by our robust low-cost client deposit base. As we invest more into longer-term investments, we aim to stabilize the rate environment and extend the duration of some investments. This approach stabilizes NIM while allowing us to benefit from higher rates as the lower rates diminish. Consequently, we are looking at maintaining stability while also promoting upward momentum in NIM moving forward.
Ebrahim Poonawala, Analyst
And just in terms of downside protection from Central Bank rate cuts maybe over the next 12 to 24 months.
Nadine Ahn, Chief Financial Officer
Yes, so similarly then, what you've essentially done is you've slowed down the repricing, if you will, of that deposit base by extending out duration and also reducing the sensitivity of the portion of your deposit base, if you want to think about that that's invested in short rate. So as rates start to come off, you're not as exposed because you've got a smaller proportion that would be essentially repricing or reinvested at short-term rates. That's why we've been dropping the sensitivity, and you'll notice that in our disclosure to a down rate shock.
Ebrahim Poonawala, Analyst
And should we expect that you could become liability sensitive in the next quarter or two where you actually benefit from rate cuts or no?
Nadine Ahn, Chief Financial Officer
That would require us taking a very significant interest rate position against our structural balance sheet because we naturally benefit from a rising rate environment.
Doug Young, Analyst
City National was mentioned several times in the comments. Looking at the results, adjusted earnings decreased by 32% from the previous quarter and 42% compared to the same period last year. Although there has been strong net interest margin expansion, it hasn’t translated into improved average earnings on the bottom line. I'm curious if this is entirely due to provision for credit losses or a continuation of investments. It's difficult to gauge this based on the current disclosure. More importantly, when can we expect to see a shift in the bottom line?
Nadine Ahn, Chief Financial Officer
So in terms of we've been commenting over the last couple of quarters on our continued investment in this business given the strength of growth we've had in terms of tripling the size of the bank, so we have seen very favorable NIM expansion over the year as interest rates have been rising given the asset sensitivity of City National's balance sheet. We have been similar to what I explained to Ebrahim in Canada, we have also been reducing some interest rate sensitivity in the City National as well to protect us from further downside to the extent that interest rates start to come off in the U.S. From what we're seeing from an operating leverage standpoint, for City National, we do have the benefit of not only the very strong volume growth that we've seen this year. We expect it to moderate going into 2023. We do see that NIM expansion continue to drive the revenue top line. But the expense growth that we've been investing in has persisted and will persist into next year as we continue to invest in the infrastructure. So realistically, that's just probably going to be a journey over the next year or two. Maybe Graeme can speak to just the credit quality in the book and what we're seeing there.
Graeme Hepworth, Chief Risk Officer
Yes, the credit quality this quarter, City National continues to perform very strongly. We increased the Stage 1 and 2 allowances for City National this quarter. I would say that reflects kind of three parts for City National, one of the strong growth that was referenced there. So the Stage 1 and 2 reserves will go with that. Two is a weaker economic forecast that contributed to that. And thirdly, there were some downgrades there that pushed. Both will have an impact just in terms of the quality side of it as well as the staging side of it. But I would say it was a mix between those three. But overall, the credit performance of City National continues to be very, very strong.
Doug Young, Analyst
And if I could just sneak in a quick numbers one on HSBC, which should be quick. But just Nadine, yesterday, you talked about the gross credit mark of $400 million pre-tax, but you didn't mention a day 2 allowance that you plan to set up. I assume there is a day 2 allowance that you would be setting up. Can you quantify that?
Nadine Ahn, Chief Financial Officer
In terms of what we shared towards the end of the presentation, regarding the purchase accounting accretion mark, there is the gross credit mark along with the interest rate mark. I don't believe we have separated those figures, but I can provide those numbers for you later. Perhaps we can discuss it privately.
Paul Holden, Analyst
I want to go back to the guidance on NIM, Nadine, because you provided some very detailed outlook on the segmented basis, which is helpful. But I just want to go back to the all-bank basis to make sure I understand correctly. So it sounds like you're expecting more NIM expansion in Q1, mostly coming from Canadian P&C, maybe sort of flat-lining possibly declining marginally for the rest of 2023. Is that a correct interpretation?
Nadine Ahn, Chief Financial Officer
No. So I said my guidance was the 10 basis points to 15 basis points. Most of that will be coming in the first half, but we will continue to see NIM expansion through the full year.
Paul Holden, Analyst
Despite the increase in hedging, okay, okay, got it.
Nadine Ahn, Chief Financial Officer
Yes.
Paul Holden, Analyst
I have a follow-up question regarding expense growth. It seems that part of it relates to the discretionary investments you're making in the business. I'm interested in understanding how inflationary pressures are affecting expense growth and whether managing expenses is becoming more challenging. With inflation possibly peaking, is the labor market easing at all? I'd like to get your thoughts on this.
Nadine Ahn, Chief Financial Officer
Yes, so salary costs were the big driver of the NIE growth. I would say if I was to break that down, it was roughly half and half between FTE growth. As we commented earlier, a lot of investment in not only our sales capacity but also investment in the business overall. So that was about half of it. And then to your earlier point, another half of it relates to the inflationary pressures. So that's going to continue to persist into 2023, just given the salary increases that we've had. I think though from the opportunity that we're seeing to continue to be front-footed on investing in the business in terms of that FTE add, that's how we're looking to manage it going forward as we continue to see the strength of our revenue growth as we continue to grow the business. But the inflationary has kind of been a bit of a step-up if you saw the big increase as it related to salaries. But that's about half of it. The large driver also is just our FTE growth, which we obviously manage as we start to see how the economic environment is playing out. Another portion of that, though, just to give you some context, was also related to just volume-driven growth. So about 2% of the increase as it relates to the non-stock-based comp growth was just around volume growth type of expenses. So that is something that will scale back as well depending upon our future outlook. But a large portion of it also was just continuing to invest in the business around our application development, our technology costs and providing for our clients. So structurally, I would say of the total growth in salaries, about half of that would have related to inflationary type components. The rest of it is really driven off of growth and scaling the business.
Mario Mendonca, Analyst
Can we go to Slide 14 to review margins again? I appreciate the way you presented this, particularly the information in the middle and at the bottom. You can derive a deposit beta from this disclosure, specifically for personal checking and savings. It appears to be about a 30% to 33% beta based on the change in the blended Bank of Canada and U.S. fund rate and the increase in deposit yields. I am curious about your thoughts on what the cumulative deposit beta will be over time once rates stabilize. Do you anticipate it will be in the 50% to 60% range as we have observed with some U.S. banks, or do you think it will differ?
Nadine Ahn, Chief Financial Officer
No, it would be probably closer to the 40% range, Mario, historical rate once we expect rates to peak out.
Mario Mendonca, Analyst
Is it based on your own experience that personal checking and savings accounts typically amount to around 40%?
Nadine Ahn, Chief Financial Officer
Yes, I can. Maybe Neil would like to add something as well.
Neil McLaughlin, Group Head of Personal & Commercial Banking
Yes, thanks, Mario. Nadine has provided a lot of commentary regarding the core deposits, which has been a significant focus for us. As rates have increased and our high-interest savings account has adjusted, we have made pricing decisions accordingly. When we consider everything, we are slightly below the 40% mark, but we believe that 40% is the appropriate figure to keep in mind.
Mario Mendonca, Analyst
And then another important slide, I think, is Slide 27, that was helpful as well. It's clear from looking at this slide that Royal's repo and securities lending business, you can see an abrupt improvement in that yield as rates have increased and also a pretty big improvement in the securities yield as rates have increased. So it seems clear to me that part of Royal's advantage is having these excess deposits, which are invested in securities or this big repo and securities lending book. What I'd be correct in saying that those yields will be the first to flat line after rates stop rising because they are so abrupt in their adjustment?
Nadine Ahn, Chief Financial Officer
I think we're still off, Mario, I would say, on the repo book. In particular, we're still off margin differential between what you're seeing there on the reverse repo side and the funding associated with it. And the margin expansion that you start to see there really is if you have a differential from a liquidity standpoint between what you're funding in the short end and what you're able to invest in, in a bit further out the curve in terms of the short like 3 months or so. So that's really going to benefit from two things. One is that having a bit of an upward sloping yield curve and also a reduction in liquidity. So what you've seen is there's been a bit of an opportunity to put on some balance sheet, Mario, but part of it's volume, and part of it's margin as well. So margins have been improving. But we are sitting at a bit lower in terms of volumes as well from our match book just given the surplus liquidity still sitting in the market.
Mario Mendonca, Analyst
Okay. So to summarize, would I be right in saying that Royal's all-bank margin is likely to peak in either Q1 or Q2, and after that, it will either level off or fluctuate somewhat depending on the rate environment? Would you agree that’s a reasonable way to describe it?
Nadine Ahn, Chief Financial Officer
No, I believe there are a few important points I mentioned earlier. One is the ongoing benefit we will experience from margin expansion, particularly regarding our deposit base in Canadian Banking. We will continue to see this benefit as rising rates are factored in and will provide ongoing advantages. Additionally, as we focus on growing certain higher-margin products, including credit cards, this will also play a role. Therefore, I would not suggest that our margins are expected to remain flat at this stage. We will certainly continue to experience expansion.
Operator, Operator
Thank you. The next question is from Scott Chan from Canaccord Genuity.
Scott Chan, Analyst
Nadine, appreciate the trajectory on the Canadian P&C side on the margin. I'm just curious on the City National Bank side. You commented that margin should moderate in the coming quarters due to higher funding costs. Does that suggest that margins could peak in the second half of the year? And kind of looking at the back half in 2024 based on the forward curve in the U.S. side, that margins might actually decline from that point as it's very asset sensitive on the commercial floating side?
Nadine Ahn, Chief Financial Officer
We still expect to see margin expansion throughout the year at City National. It may be somewhat stable overall, but there could be a slight bias toward the second half. However, we are experiencing increasing funding costs primarily due to a combination of factors at City National. One notable change is that we have improved our liquidity position, resulting in an increased funding requirement. This was reflected in our call reports on FHLB, which affected our overall net interest margin and will fully take effect in Q1 of next year. Additionally, we are funded through a low beta deposit base, which is starting to decrease as clients seek alternative investment opportunities for their cash. We are also utilizing the sweep balances of U.S. Wealth Management, which are more sensitive to interest rates and represent a higher beta deposit base, putting pressure on the net interest margin. We expect to manage the interest rate sensitivity for this business actively, similar to our approach in Canadian Banking. As you noted, it is quite asset sensitive due to the floating rate loan portfolio, but we are working to mitigate the impact to avoid a significant decline if rates start to decrease in late 2023.
Operator, Operator
The next question is from Gabriel Dechaine from National Bank Financial.
Gabriel Dechaine, Analyst
I'm going to think about the NIM stuff. Firstly, Nadine, if you can flesh out a bit more on the comment you made earlier? We're also seeing other than the higher betas, we're seeing the increase in the consumption of GIC products. You said that's not necessarily a bad thing because I guess the dynamic between GIC spreads and credit spreads is still favorable. Can you expand a bit on that? And then in your Canadian Banking guidance, are you including any assumption of revolver balances increasing in the card business? Is that's a big, big driver potentially? And Neil too, if you want to chip in, sorry.
Nadine Ahn, Chief Financial Officer
If you would like to start?
Neil McLaughlin, Group Head of Personal & Commercial Banking
Sure. Thanks for the question, Gabriel. Yes. I mean, maybe start in reverse order on the credit card book. So maybe you made a comment, we're close to back to where we were in total balances pre-COVID. We started to see the acceleration I would say in the last sort of about four months in terms of revolver balances finally starting to move. So quarter-over-quarter on the credit card book, that's where disproportionately we've seen the growth is in the revolver balances. You're going to get a step up in the yield coming out of the almost $20 billion in the credit card book. That's been a long time coming. Maybe just in terms of it little bit of context on the GIC question. Yes, I mean, we have seen a very, very strong shift out of both the core deposit accounts, savings accounts, but also retail investors coming out of mutual funds, just given market uncertainty into GIC. So it has been kind of that safe haven for the retail investor. And we would say, over time compared to where we were a year ago and definitely two years ago, margins in the GIC book are quite favorable.
Nadine Ahn, Chief Financial Officer
Yes, in terms of what we've included, there's a bit of a mix shift benefit. We are seeing some deposits move from demand accounts into GICs, but we're also benefiting from growth in mutual funds, which Neil mentioned. This is not only a low-cost funding source compared to wholesale funding, but as I noted in my speech, given our connection with clients, we're seeing many balances coming in from mutual funds into GICs, which enhances our net interest margin overall.
Neil McLaughlin, Group Head of Personal & Commercial Banking
Just a bit of quantum, and I should have added this, we've seen the GIC book grow $25 billion in the last two quarters. And so just the scale of moving into the product is probably something to call out.
Operator, Operator
The next question is from Sohrab Movahedi from BMO Capital Markets.
Sohrab Movahedi, Analyst
Two quick questions. You didn't disclose the comp-to-revenue ratio in the Capital Markets segment this quarter. Is there a reason for that?
Nadine Ahn, Chief Financial Officer
I'll answer that, Sohrab. Just in terms of disclosure, we benchmark consistently across our peer group when we look at our disclosures. And so we determine that we're the only Canadian bank to be disclosing comp ratios. So we thought there's consistency when we look at our peer benchmarking. I would also just comment that it is a bit of a challenge to actually compare because there's differences around deferrals, etc. So while it's just a straight math calculation that you see, it doesn't necessarily always lead for comparability against even U.S. banks.
Sohrab Movahedi, Analyst
Just so that we can compare it to your own history, what was it this quarter, Nadine?
Nadine Ahn, Chief Financial Officer
I'll follow up with you on that, Sohrab. It's not just a simple number; it's mathematical. It's not necessarily how we evaluated and managed it internally.
Neil McLaughlin, Group Head of Personal & Commercial Banking
Yes, I would like to expand on what Nadine mentioned. We have maintained a strong focus in this area for several years as we work to remain competitive in the market while also ensuring we achieve a sustainable level of profitability and adhere to industry norms.
Sohrab Movahedi, Analyst
Can I just talk maybe a little bit on the asset yield side, maybe specific to the mortgages where you guys are obviously a sizable clear? What's happening with mortgage spreads? What sort of kind of competitive dynamics do you see with you taking out HSBC, I suppose as a competitor? And just how that's impacting the NIM dynamics of your business segment in particular.
Neil McLaughlin, Group Head of Personal & Commercial Banking
This aligns with what we discussed yesterday. The mortgage market is extremely efficient. We monitor competitor prices through mystery shopping to ensure we remain competitive. While there are various approaches to the market, the rates offered to end clients are very similar throughout the industry. Additionally, as Nadine mentioned regarding the variable side, there is some compression in the spreads that will adjust as rates increase. The fixed rate segment is also highly competitive, making it challenging. However, we consider mortgages to be a significant product. It represents a key moment in our clients' relationship with us, and we prioritize maintaining that relationship.
Sohrab Movahedi, Analyst
So to put maybe some historical bearings on it, would you say the mortgage spreads are as tight as you've ever seen them, let's say, compared to the last 5 years? How would you quantify it? How would you kind of contextualize it, I guess?
Neil McLaughlin, Group Head of Personal & Commercial Banking
Yes. I mean mortgage spreads, the spreads are definitely tighter than we've seen over the last five years. That would be fair to say.
Sohrab Movahedi, Analyst
Are they negative?
Operator, Operator
The next question is from Meny Grauman from Scotiabank.
Meny Grauman, Analyst
I just wanted to ask on the discounted DRIP. When you provided the 11.5% guidance target on your capital ratio for the deal close of HSBC Canada, would you factor in this DRIP?
Nadine Ahn, Chief Financial Officer
Not for the 11.5% number, Meny, but as when I commented, should be above. So we expect the DRIP to add about $2 billion in capital, just to give us some further cushion.
Meny Grauman, Analyst
I'm trying to understand the caution regarding capital that the announcement indicates. Dave, you mentioned a brief and moderate recession, so I don’t think it relates much to your macro outlook. I’m curious how much of this is connected to your perspective on the regulatory environment. Specifically, I wonder if you anticipate minimum capital ratios will increase in Canada. This seems to reflect a view that this could happen. We're seeing capital ratios rise from regulators in other regions, so I would like your thoughts on this.
Dave McKay, President and CEO
I would look at it from our perspective, and I can't comment on regulatory intent. But I would look at it that you heard of the expansion in NIE expense expansion, we're being front-footed as far as our expectation to your point, of a relatively mild recession. We're adding frontline customer-facing employees. We're growing our portfolio, but you still face a fairly significant geopolitical instability and uncertainty of the ongoing war in Russia and Ukraine. You've got enormous uncertainty still around manufacturing. There's the uncertainty of using such aggressive monetary policy at the end of the day. So while we have a mean expectation and we're growing towards that, there's a higher level of uncertainty, and therefore, you kind of have higher tail risk right now. It could be a low probability but still higher tail risk. So from that perspective, it's consistent with how we've managed the bank. Over the long term, we're being conservative. And therefore, we're building a little bit of a capital buffer for uncertainty. Capital has no half-life. It can only be used which we're very proud of how we've used it over the last 24 hours. But we're just being conservative in building a buffer against the uncertainty out there that we all face, and we all acknowledge that we have mean expectations, but there's greater volatility around that.
Lemar Persaud, Analyst
I want to go back to HSBC, and I'm wondering if you guys could talk about the reasoning behind the Lockbox Agreement on the deal. Just a bit unusual in nature. Like couldn't you guys just reduce the purchase price by the expected earnings up close that are going to accrue to Royal, or should I be really thinking of it as just a sweetener offer by Royal to get the deal done since essentially you're just paying upfront for future earnings? Is there kind of some other underlying reason?
Dave McKay, President and CEO
There is always a process that needs agreement as you navigate a potentially lengthy approval and transition period. You have to decide whether to allow the seller to distribute dividends or retain a certain amount of capital at the end of the transaction. It’s important to consider how effective dividend distribution of earnings will be during this specified time frame, or alternatively, you could establish a lock box arrangement where you finalize this aspect upfront, resulting in a smoother transition later on. I see this as a highly effective method to manage these situations. Consequently, the earnings we acquire will remain on the balance sheet, and should therefore be considered as part of the overall purchase price of 13.5. This approach is an efficient way to facilitate the transition at closing.
Lemar Persaud, Analyst
And then if I could squeeze in another really quick one for Nadine. Can you just add some additional color on what drove the under-provisioning for variable comp throughout 2022? Like what I’m trying to understand is, is it plausible we could see this again going forward? Or should we just think about this as strictly one-time in nature?
Nadine Ahn, Chief Financial Officer
I think there's two dynamics, and maybe I'll let Derek weigh in given his perspective on how he manages his business, but just from an accounting perspective, like we plan for a comp ratio of the business plans for that, and then we work through the year. And obviously, given Capital Markets, I would say two things. If you look at the last two years, there's been quite a bit of volatility through the year in terms of how the markets have performed, which makes it very difficult unlike the rest of the bank to kind of give a standard accrual on that. I think the last two years have been a bit exacerbated in that regard. So the objective is obviously to accrue it evenly through the year. But given changes, especially in a market-sensitive business, that can make that challenging. But I'll turn it over to Derek and how we think of that comp overall.
Derek Neldner, Group Head of Capital Markets
Building on Nadine's points, it’s clear that many banks, including ours, use the fourth quarter to adjust year-end variable compensation. Recently, the past few years have been more volatile compared to previous ones. We experienced strong performance in 2020 and 2021, followed by unexpected challenges in the macro environment that affected 2022. As a result, the adjustments we've seen in Q4 over the last few years have been larger than what we would typically expect in more stable times. It’s important to note that the year-over-year changes in the true-up aren't solely due to this year; they reflect two key factors. Last year was strong for us, leading to a significant accrual, which we partly released in Q4 of 2021. This year, due to certain headwinds, we've increased the accrual. Overall, there's about a $307 million change year-over-year, with approximately half from last year's release and half from this year's additional accrual. When we account for this, the net interest expense for the quarter would have increased by 12%, and compensation would have risen by 8%, aligning closely with the 7% growth in full-time equivalents. As Dave mentioned, this reflects the opportunities we see for continued growth in strategic areas, which is in line with our strategic plan. Despite the challenging environment, we are seeing positive results, including market share gains in several key areas. This situation truly highlights a timing difference, which has been magnified by the volatile environment of the last couple of years, and I wouldn’t anticipate such significant variances under more stable conditions.
Nadine Ahn, Chief Financial Officer
I would like to address the earlier question regarding the day 2 impact of the provisioning for the HSBC Canada acquisition, which is $300 million. I apologize for the interruption.
Dave McKay, President and CEO
I think we'll continue to run over for about 10 minutes. I think we have a couple of questions in the queue and try to get to them.
Operator, Operator
The next question is from Mike Rizvanovic from KBW Research.
Mike Rizvanovic, Analyst
A question on business lending. So maybe for Neil or for Derek, I know it's impacting both segments. But if you sort of look at the drivers there, I'm just wondering about the acceleration. It doesn't look normal given where rates have moved, given the macroeconomic headwinds, and it's just gotten better. So I'm guessing you'll probably say that it's just normal course. Your customers are growing, they're growing their businesses. But can you talk about other elements? And the two that sort of come to mind for me are what is the element of maybe some of your clients using facilities because they are concerned about the macro picture? And then secondly, is there some sort of new market share coming into the banking space that's been driving part of this over the last few quarters where maybe nonbank lenders are pulling out and the Canadian banks have been able to sort of step in here? If you could talk to that, I think it would just help sort of frame how quickly this could potentially decelerate into next year.
Derek Neldner, Group Head of Capital Markets
It's Derek. Just to start. Just to clarify your question, I think we're late broadly to overall growth in lending activity?
Mike Rizvanovic, Analyst
On the business lending side, yes.
Derek Neldner, Group Head of Capital Markets
Yes, yes, so I'll start from the corporate or wholesale side and then Neil may want to chime in on the commercial side. So I think as we saw a couple of years ago right after the pandemic, when you get into periods of market disruption, you'll often see clients pivot more to the bank lines as opposed to going to the Capital Markets. And so as we saw some dislocation in debt and equity markets over the course of 2022, we have seen that happen. And so we have seen both an increase in utilization rates on existing authorized facilities. And then we've also seen additional requests for new facilities, either expansions to revolvers or term loans that are really being used as a bridge to Capital Markets takeouts once markets stabilize or normalize to some extent. I do think that that's obviously driven very robust growth this year. We are starting to see that taper off. And I think as we see Capital Markets normalize, an increase in DCM and ECM activity, which we are in the early days of starting to see, we will see growth normalize to more moderate levels consistent with our plan.
Neil McLaughlin, Group Head of Personal & Commercial Banking
It's Neil. Regarding the retail and commercial sectors, like Derek mentioned, we initially observed a decline in the utilization of revolvers among commercial clients. However, we have since seen an increase of about 400 basis points year-over-year, though we're still not back to pre-pandemic levels of using those operating facilities. There are also differences by sector. We are witnessing some improvement in supply chains, with disruptions beginning to ease. Looking ahead, we've experienced accelerating growth over the past few quarters, driven by two main factors. First, many clients are stating that they need to proceed with delayed investments in capital equipment to expand their businesses. Second, we have made significant investments in hiring, as Nadine mentioned, targeting larger commercial clients across the country and various sectors.
Mike Rizvanovic, Analyst
So it sounds like the rate environment really isn’t impacting this. And is it fair to say that we could see this elevated for the foreseeable future?
Neil McLaughlin, Group Head of Personal & Commercial Banking
On the commercial side of the business, we do see really strong growth continuing into 2023 for sure.
Dave McKay, President and CEO
This will be our last question. One more question, sorry.
Operator, Operator
This is the last question from Joo Ho Kim from Credit Suisse.
Joo Ho Kim, Analyst
Just wanted to go back to Canadian Banking. And in one of the slides, you mentioned 400,000 in net new clients in that segment. Just wondering how much success you had in cross-selling into these new clients. And I asked this in the context of the HSBC acquisition. It seems like revenue synergies could be significant if cross-selling can be realized there as well.
Neil McLaughlin, Group Head of Personal & Commercial Banking
Yes, listen, we'll go right back to our Investor Day presentation where we laid out part of our strategy was just to grow the franchise and add 2.5 million net new clients. And we got off to a good start. We need to obviously pause that during COVID. And what you're seeing now is that real step-up Dave mentioned in his comments. So 2022, very strong overall net client growth of 400,000. We'll continue to see that accelerate into next year. The cross-sell rates, and we laid some of those out in the slides yesterday around the four different retail categories and our penetration there. The new cohorts we're bringing on, you heard Dave talk about the Vantage program. That mechanism of giving the client an incentive to consolidate their business with us is pulling extremely strong. So we're very, very happy with what we're seeing in terms of those cross-sell rates and cross-sell rates in credit cards and savings accounts are actually up. So I'd say we're feeling really bullish about new client acquisition.
Dave McKay, President and CEO
I want to thank everyone for your questions. We anticipated many inquiries about our net interest margin today, as it highlights the strength of our business, particularly our excellent deposit franchise and our effective cash management capabilities. It's essential to recognize the implications of our expanding net interest margin, although the pace of growth has slowed due to interest rate increases. However, as Nadine addressed, we continue to see growth in net interest margin in Canadian Banking and in CNB, even with slightly higher expected deposits. This underscores the strength of our franchise, further supported by the influx of 400,000 new clients contributing to low beta deposit growth. Our strategy over the past two decades is evident in our overall franchise strength. We discussed our proactive approach to growth, especially in Capital Markets, through hiring managing directors and enhancing our advisory and investment banking capabilities as well as our Commercial Banking and mortgage services to accommodate these new clients, and we're aiming to achieve similar growth next year or more. Additionally, we're proud of our capital position, with our earnings power allowing us to maintain capital ratios just under 12%, even after our largest acquisition in history, enabling us to remain flexible for future growth. Once again, thank you for your inquiries. Your questions highlighted the strengths of our franchise. I wish you all a wonderful holiday season, and we look forward to connecting in the new year. Thank you, operator. That concludes our call.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.