Earnings Call Transcript - RY Q1 2023

Operator, Operator

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

Asim Imran, 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, Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; and Derek Neldner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. With that, I'll turn it over to Dave.

Dave McKay, President and CEO

Thank you, Asim, and good morning, everyone. Thank you for joining us. Today, we reported first quarter earnings of $3.2 billion or $4.3 billion adjusting for the Canada recovery dividend and other items. Our results are a testament to our diversified business model underpinned by momentum from client-driven growth across our largest segments as well as the benefit from higher interest rates. Our performance this quarter also reflected record capital markets revenue driven by strong Global Markets results as well as market share gains in Investment Banking. Reported expense growth was elevated to 17% year-over-year. However, as Nadine will speak to shortly, expense growth included a number of notable drivers this quarter. Expense growth over the last 12 months has reflected strategic investments in client-facing roles and technology to enhance our value proposition and infrastructure, including artificial intelligence capabilities. A credit to these investments, RBC was recently ranked number two amongst global banks in a recent benchmark of AI maturity in business. While we're seeing the benefits of our strategic investments in talent and technology, the entire leadership team is committed to moderating expense growth from these elevated levels and driving efficiencies across the bank. Our results were also impacted by higher PCL this quarter, although PCL on impaired loans remained well below historical averages. Given strong employment and consumer balance sheets, we expect them to continue increasing from cyclical lows. Correspondingly, we have added to our Stage 1 and 2 reserves this quarter, an important pillar and holistic strength of RBC's balance sheet, which includes strong capital and liquidity metrics, including our low-cost Canadian deposit base. We ended the quarter with a CET1 ratio of 12.7% and expect to maintain a CET1 ratio of at least 12% up to and following the close of our proposed acquisition of HSBC Canada. Our outlook includes a regular cadence of twice-a-year dividend increases while also deploying capital to support further organic growth. We continue to be well positioned to deliver a premium return on equity and compounding strong book value growth. This is underpinned by prudent growth in our many high ROE businesses, including Canadian Personal Banking, Global Wealth and Asset Management, and Investment Banking. Before I provide context on our performance and growth strategies, I will speak to what remains a complex and fluctuating macro and market environment. While central banks have successfully reined in peak core inflation, strong services demand, labor shortages, and the reopening of China's economy still present a challenge to getting firm control within stated target ranges. While interest rates may be peaking, they may remain higher for longer as tight labor markets and other supply imbalances keep inflation high and constrain economic and market activity. The difficulty for central banks is forecasting a lagging impact that higher rates have on the economy while also trying to assess the impact of further rate increases to control inflation. Furthermore, the global economy remains susceptible to geopolitical shocks and regional political deadlocks. Overall, evaluating all the moving parts, we do forecast a softer landing characterized by a modest recession, largely underpinned by the impact of rising debt service costs on the consumer. This phenomenon has already been felt in the Canadian housing market, where home resales and prices have corrected since their peak last year. Regardless of where we are in the cycle, RBC remains well positioned to support our clients while executing on our diversified growth trajectory. Starting on Slide 5, I will speak to these growth trends across our largest segments. I will then spend time focusing on our Canadian retail and global full-service wealth advisory businesses, which provide higher operating earnings through the cycle and diversified revenue streams. Turning to our Canadian Banking business, where we earned record revenue of $5.3 billion this quarter, with strong volume growth highlighting the strength of our client franchise. We added $28 billion of mortgages over the last 12 months, up 8% from last year. While mortgage origination activity has slowed from recent highs, it remained in line with pre-pandemic levels, offsetting a slowdown in activity. Our retention rates are approximately 90%, and midterm attrition rates are at 5-year lows. Looking forward, we continue to expect annual mortgage growth to slow to the mid-single digits given deteriorating affordability. In contrast, credit card balances were up 13% year-over-year, largely due to higher client spending, particularly in restaurants and travel, while balances have now surpassed pre-pandemic levels, partly due to lower payment rates; revolving balances will remain below Q4 2019 levels. Business loans were up over 15% from last year. While utilization rates on revolving facilities remain below pre-pandemic levels, term lending for capital expenditures has been strong. We're seeing broad-based growth across sectors, including consumer services, manufacturing, and auto finance. Our Global Wealth Management franchise generated record revenues of $4.6 billion this quarter, partly due to the success of our full-service advisory businesses, which I will speak to. RBC Global Asset Management AUM increased over $25 billion from last quarter as equity markets picked up from the beginning of the fiscal year. Despite increased market volatility, RBC GAM remains an important high ROE profit generator for the bank. Loan growth at City National remained both diversified and robust, up 20%, excluding the impact from PPP loans. Going forward, we expect loan growth to moderate from these heightened levels, particularly in the jumbo mortgage space, where refinancing activity has pulled back. Capital Markets also generated record revenue, surpassing $3 billion for the first time. Pre-provision pretax earnings of $1.4 billion highlight the increasingly diversified nature of our revenue streams. The strong performance was underpinned by record results in Global Markets across most regions, driven by excellent execution on robust client activity through volatile market conditions. Looking forward, we continue to identify growth opportunities in Global Markets, including an area of strength for HSBC Canada as well. Corporate Investment Banking results were down 11% from last year, amidst challenging markets. Meanwhile, Investment Banking revenues were down 39% from very strong results last year, but they outperformed global fee pools, which were down 55%. Consequently, RBC Capital Markets ranked seventh in Global League Tables this quarter, moving up 1 spot to ninth looking at the last 12 months. Looking to the future, we continue to focus on diversifying revenue streams across higher ROE advisory and origination activities. We've been actively hiring managing directors across industry verticals and geographies while also expanding our client coverage. These have been factors in our move-up in global league tables. With that said, an uncertain macro and geopolitical backdrop, volatility across asset classes, and higher financing costs remain the biggest challenges to M&A activity. I will now focus on our differentiated and award-winning Canadian retail franchise, where we welcomed a further 130,000 clients this quarter on top of the 400,000 clients added throughout fiscal 2022. We continue to benefit from a number of strategic partnerships with partners such as ICICI Bank Canada while also leveraging investments made in our distribution network, including digital channels. Nearly 60% of credit cards and almost 40% of core checking accounts are now opened digitally. Our success is underpinned by a clear focus on doing what is right for the client. It's why we do not have a minimum balance requirement on our core checking account. Our continuum of offerings, combined with our insights and advice, allows us to help our personal banking clients make the best decision based on the prevailing macro backdrop. In 2021, the continued low interest rate environment made it attractive for clients to shift liquidity into investment products such as mutual funds. In contrast, the significant increase in interest rates over the last 12 months has resulted in a shift of our core checking and savings into GICs and other high-yielding products. Personal balances are up over $40 billion from last year, with nearly $15 billion this quarter alone. While we recognize the trade-off to near-term margins, we attach greater long-term value to retention, deepening relationships, and keeping our clients within the RBC value proposition. For example, clients enrolled in our highly successful vantage product are twice as likely to cross-sell into credit cards and three times more likely to stay at RBC. Furthermore, the profitability of our mortgage clients is twice as high when retained for the second term. The execution of our client-focused strategy is reflected in strong revenue growth. Despite clients moving to lower spread GICs, revenues in our Personal Banking Investments business were higher than last quarter. Turning to Slide 7. I will now speak to the strength of our global full-service wealth advisory platform, where we now have market scale in three of the world's largest asset pools. We are seeing the benefits of our diversified revenue strategy with recent rate hikes driving strong growth in net interest income in both Canadian Wealth Management and U.S. Wealth Management. This offsets the impact of unfavorable markets on fee-based advisory revenues and transactional revenues this quarter. We are looking to expand our relationships with RBC Brewin Dolphin clients by offering core private banking, lending, and payments products and services. This would leverage learnings from our successful U.S. wealth strategy, which is seeing growth in securities lending. We expect this to accelerate revenue growth in our businesses, adding to our fee-based revenue streams, which I will now discuss. RBC Dominion Securities continued to strengthen its number one position in Canada, adding net new assets this quarter with Canadian AUA up over $20 billion quarter-over-quarter. Our position of strength is driven by a set of self-reinforcing competitive advantages, underpinned by winning advice, digital capabilities, and a holistic suite of solutions for a growing base of Canadian wealth planning professionals. Canadian Wealth Management remains a highly profitable business, leveraging its scale to generate pretax margins in the mid- to high 20s. It’s also important to have scale in the U.S., one of the largest fee pools globally. Our U.S. business added over $20 billion of AUA this quarter, adding to its position as the sixth largest full-service wealth advisory firm in the United States. Since early 2022, we've recruited 110 advisers, which we expect will drive nearly $20 billion of assets under administration. This recruiting will remain a key source of growth. We will also look to continue leveraging increasing RBC brand recognition in the U.S. to drive organic client growth. RBC Brewin Dolphin is one of the largest discretionary wealth managers in the U.K. and Ireland, offering services in a market with significant structural changes, including moving from defined benefits to defined contribution plans. This market is expected to increase from approximately GBP 3 trillion today to GBP 4 trillion by 2026. In conclusion, we look to continue executing on our through-the-cycle organic growth story while maintaining a strong balance sheet across capital, credit, and liquidity ratios. Furthermore, we look to deepen existing client relationships and attract new clients as we anticipate welcoming HSBC Canada's colleagues into RBC. Nadine, I'll now hand it over to you.

Nadine Ahn, Chief Financial Officer

Thank you, Dave, and good morning, everyone. Starting on Slide 9, we reported earnings per share of $2.29 this quarter. Excluding the $1.1 billion impact of the Canada recovery dividend and other smaller items of note, adjusted diluted earnings per share was $3.10, up 8% from last year. Total revenue was up 16% year-over-year or up 7% net of PBCAE. Pre-provision pretax earnings were up 7% from last year as strong client-driven revenue growth more than offset elevated expense growth, which I will discuss shortly. The impact of higher provisions for credit losses was partially offset by a lower adjusted effective tax rate, resulting in adjusted net income growth of 5% year-over-year. Before I discuss our segment results, I will spend some time on three key topics: capital, the outlook for net interest income and our related funding advantage; and finally, our expense outlook. Starting with our strong capital ratios on Slide 10, our CET1 ratio rose 10 basis points from last quarter, reflecting strong net internal capital generation of 39 basis points, net of $1.8 billion of dividends to our common shareholders. This was partially offset by the 20 basis point impact of the Canada recovery dividend and other tax-related adjustments. Next quarter, we expect Basel III regulatory reforms to drive a 70 to 80 basis point benefit, largely reflecting the removal of the sector-wide credit risk RWA scaling factor under the new IRB framework. Furthermore, we expect to see RWA reductions reflective of our well-diversified portfolios and the conservatism of our wholesale risk parameters relative to the prescribed parameters under the new framework. Moving to Slide 11. All-bank net interest income was up 18% year-over-year or up 29%, excluding trading revenue. These results reflect our earnings sensitivity to higher interest rates as well as the benefit from higher volumes. As a reminder, the cost of funding of certain transactions, particularly in Capital Markets, is recorded in interest expense while related revenue is recorded in noninterest income. All-bank net interest margin, excluding trading net interest income, was up 1 basis point from last quarter, largely reflecting trends in our Personal & Commercial Banking franchises. On to Slide 12, where we walk through this quarter's key drivers of Canadian Banking net interest margin, which was up 3 basis points from last quarter and follows a significant 25 basis points expansion in the second half of last year. This quarter reaffirmed the benefits of our structural low-beta core deposit franchise, which drove a 10 basis point benefit to net interest margin in the quarter. We also saw benefits from higher credit card revolve rates, which were offset by continued competitive mortgage pricing. Deposit growth outpaced loan growth this quarter, further improving our industry loan-to-deposit ratio of 103%, which points to a fully funded segment balance sheet. However, this was partially offset by rising deposit betas and a larger-than-anticipated shift in deposit mix, out of checking and savings accounts as clients sought higher-yielding GICs. Notably, we gained market share in GIC this quarter, which we view as an advantageous source of low-cost funding relative to wholesale sources. Turning to City National. Net interest margin was down 5 basis points from last quarter, mainly reflecting higher FHLB borrowings to support additional liquidity requirements at the end of the calendar year. This more than offset the significant benefits of Fed rate hikes on our asset-sensitive balance sheet. Going forward, we expect to continue to fund much of our loan growth through our core and sweep deposits, while supplementing these by accessing both broker deposits and FHLB funding. Looking out to next quarter, uncertainty around implied rates and client activity impacting deposit mix are expected to put pressure on margins. Nonetheless, we expect margin expansion through 2023 for both Canadian Banking and City National. Our focus remains on growing net interest income. We anticipate mid-teen growth in Canadian Banking net interest income for fiscal 2023, and we expect even stronger growth for City National. Moving to Slide 13. Noninterest expenses were up 17% from last year, with a few notable factors adding to expense growth this quarter. This includes the contribution from RBC Brewin Dolphin, which added 3% to the growth rate, as well as a prior year legal provision release, which added another 1%. Further to that, there was a 2% contribution from FX translation. Beyond these factors, the biggest driver of expense growth was staff-related costs, which were inflated in part due to the U.S. Wealth Management wealth accumulation plan expense. As a reminder, this line is largely offset in other noninterest income using economic hedges, thus making the impact net neutral to pre-provision pretax earnings. The remaining contributors to expense growth were related to continued investment in our franchises through technology and business development costs, as well as those driven off higher revenue, including trading execution costs. For the remainder of the year, we expect noninterest expense growth, excluding variable and stock-based compensation, to decelerate, reflecting the distancing from lower COVID comparatives. We also expect a slowdown in FTE growth following a period of heightened investment in sales capacity. Strong client-driven revenue growth and a focus on cost control underpin our commitment to deliver positive all-bank operating leverage in fiscal 2023. In Canadian Banking, we continue to expect operating leverage for fiscal 2023 to be in the mid-single digits, driving the full-year efficiency ratio below 40%. Before adding color on segment trends, a reminder that this quarter, we announced a realignment of our business segment. Beginning on Slide 14, Personal & Commercial Banking reported earnings of $2.1 billion this quarter, with Canadian Banking pre-provision pretax earnings up 18% year-over-year. Net interest income was up a record 23% from last year, due to higher spreads and strong growth in loans and deposits, which Dave spoke to earlier. Noninterest income was down 2% from last year as challenging market conditions weighed on average mutual fund balances, driving lower distribution fees. This was partially offset by higher service charges and foreign exchange revenue driven by higher client activity. Strong revenue growth underpinned operating leverage of 5% and an efficiency ratio of 39%. Turning to Slide 15. Wealth Management earnings were up 3% from last year. Revenues were up 14% year-over-year, aided by robust net interest income growth of 44%, reflecting the benefit of higher rates in both Canadian Wealth Management and U.S. Wealth Management. Global Asset Management revenue decreased, primarily due to lower fee-based client assets on the back of a challenging market condition and ongoing industry-wide pressures on net redemptions. Turning to Slide 16. Capital Markets earnings were up 9% year-over-year, reflecting record revenue and the benefits of a lower tax rate. Record Global Markets revenue was up 17% from last year, reflecting a record quarter for macro products with strong results across all product lines underpinned by robust client activity across rates and effects. We also saw strength in muni products and investment-grade credit sales and trading. Investment banking revenue was down 39% from record levels achieved last year. Importantly, results outperformed a more significant decline in global fee pools. Lending and other revenue was up 23% from last year, reflecting strong results in transaction banking underpinned by margin expansion and higher lending revenue driven by volume growth. Turning to Insurance on Slide 17. Net income decreased by $49 million or 25% from a year ago, primarily due to higher capital funding costs, which impacted NIE by approximately $50 million. This was partially offset by improved claims experience. To conclude, our leading franchise positions us well to continue seeing the benefits of higher rates while also funding strong client-driven growth. We also remain disciplined in balancing our investments and capital deployment to continue delivering value for our shareholders and clients. With that, I'll turn it over to Graeme.

Graeme Hepworth, Chief Risk Officer

Thank you, Nadine, and good morning, everyone. Starting on Slide 19, I'll discuss our allowances in the context of the macroeconomic environment that Dave referenced earlier. While markets have already started to recover, the real economic impact of inflation and higher interest rates is just starting to influence credit outcomes. On the whole, we believe the probability of a more severe inflation and interest rate environment has started to reduce. However, as Dave noted, we continue to expect a moderate recession in 2023. With this backdrop, we built reserves on performing loans for the third consecutive quarter. Provisions on performing loans this quarter were driven by three factors: First, from a macroeconomic perspective, we move closer to our forecast recession, bringing more of the associated expected credit losses into the IFRS 9 provisioning window. This was partially offset by a modest shift in our scenario weights, reflecting the lower probability of more adverse inflation and rate scenarios that I just noted. Second, the credit quality of our portfolio continued to trend back to more normal levels with sustained increases in delinquencies and credit downgrades. Finally, we added reserves for ongoing portfolio growth. In total, our allowance for credit losses on loans increased by $268 million this quarter to $4.4 billion. Moving to Slide 20. Gross impaired loans were up $400 million or 5 basis points this quarter with higher impaired loan balances across each of our major lending businesses. This was driven by an increase in new formations, which are returning to pre-pandemic levels. In our wholesale portfolio, new formations were up $220 million compared to last quarter, with the largest increases in the real estate-related and consumer staple sectors. We do not expect to incur losses on a large majority of the new formations in the real estate-related sector. These formations related to loans that are well collateralized and current on their payments but have a financial sponsor in distress. In our retail portfolio, new formations were up $61 million or 18% quarter-over-quarter, with increases across all of our lending products. Notably, new formations on residential mortgages more than doubled this quarter to $64 million, primarily due to variable-rate borrowers who have seen payments increase after hitting their trigger rate. As you'd expect, delinquency rates on triggered variable-rate mortgages increased during the quarter. However, delinquency rates for the entire Canadian Banking mortgage portfolio were stable at 16 basis points. We remain very comfortable with our residential mortgage exposure. Clients continue to have excess savings and liquidity with deposit levels remaining elevated compared to pre-pandemic levels. High-risk loans, which we consider uninsured loans with a FICO score below 680 and a current loan-to-value over 80%, account for less than 1% of uninsured balances. We have prudently provisioned for the expected increase in losses, noting that we have increased reserves on performing mortgages by over 30% since Q2 of last year. Moving to Slide 21. Provisions on impaired loans were up $103 million or 5 basis points compared to last quarter. Our PCL ratio of 17 basis points remains below pre-pandemic and historic averages. In our wholesale portfolios, higher provisions in Capital Markets and Wealth Management were more a function of reducing credit events and systemic issues, while provisions for our Canadian Banking commercial portfolio were lower this quarter. In the Canadian Banking retail portfolio, higher provisions were primarily driven by personal lending and credit cards, which is consistent with our expectations as higher interest rates start to impact clients. In light of the higher interest rate environment, and turning to Slide 22, I'll now provide some details on our exposure to commercial real estate. Our standing loan exposure to this sector represents 9% of our total loans and acceptances. The portfolio is well diversified and has been originated to our sound underwriting standards that stress-test loans for more adverse capitalization rates and operating income. Additionally, exposure is well-rated and benefits from strong collateral, noting that the on-balance sheet RWA density of our commercial real estate exposure is approximately 20% lower than the rest of our wholesale portfolio. That said, we do expect commercial real estate to be negatively impacted by higher interest rates. Higher rates will negatively impact property values and debt service coverage. Additionally, certain asset classes like office properties are being affected by changing fundamentals as companies have adopted hybrid working models post-pandemic. As a result, we expect to incur some losses in the commercial real estate sector moving forward. We've been proactive in provisioning for these expected losses. For example, our IFRS 9 downside scenarios reflected a decline in commercial property values ranging from 15% to 40%. As such, our ACL ratio on performing commercial real estate loans has increased 40% since Q2 of last year and has more than doubled relative to pre-pandemic levels. To conclude, we continue to be pleased with the ongoing performance of our portfolios. Our PCL ratio on impaired loans remains below pre-pandemic levels, but we have seen the normalization of delinquencies and impairments as higher interest rates start to impact credit outcomes. We expect PCL and impaired loans to increase through 2023 as we head into a forecast recession. Ultimately, the timing and magnitude of increased credit cost continue to depend on the Central Bank's success in curbing inflation while creating a soft landing for the economy. We continue to proactively manage risk through the cycle and we remain well capitalized with plausible yet more severe macroeconomic outcomes. With that, operator, let's open the lines for Q&A.

Operator, Operator

And we will take the first question from Meny Grauman at Scotiabank. Please go ahead.

Meny Grauman, Analyst

Dave, for a number of quarters now from the outside looking in, it sounds like you're focused on getting expenses more under control. And then we have a quarter like this one where it still looks like that's not mission accomplished yet. I'm wondering, are you frustrated by that? How do we interpret that in terms of are we just seeing more of a persistency of inflation coming through what's really the challenge in terms of what seems to be like a key focus for you for quite a while now?

Dave McKay, President and CEO

I guess you could hear that in my prepared comments. There are a couple of factors at play. First, there is persistent inflation that doesn't come through only on the salary and benefit line as all companies across the world increase base pay and compensation to match the inflationary environment. It also comes through our third-party strategic sourcing line of all our partners, all the companies that we work with from technology to advisory to consultants. All those inflationary costs come through other lines of business. So we are in a hyperinflation environment. The second area that all companies are struggling with is productivity from a hybrid workforce. We have had many discussions around how efficiently we are working as an economy, and I think we're working through that uncertainty as well. I think Nadine did a good job in kind of walking back some of the headline numbers to a more reasonable number. But that volatility has caused us to have to refocus on different areas of our cost opportunity. We do see opportunity. We invested significantly in growth. If we aren't going to see that growth, we will have to reposition some of our capacity, but we are still forecasting a relatively mild recession and a softer landing with opportunities to continue to access good growth. So I think we're on it. It's a volatile market with a lot of things going on. We're repositioning the bank for a very different world going forward as far as technology capabilities across the board. It's a complex operating environment. Having said that, we must do better, and we will do better.

Meny Grauman, Analyst

As a follow-up, I know you've been very vocal, Royal. You've been very cautious about taking restructuring charges historically. But is the environment different now, and again, given the persistence of this issue, does it change your view on that tool?

Dave McKay, President and CEO

No. We think we have the tools with doubling down in different areas to manage this in the normal course right now as we normally do. You'll see our expenses get under control.

Ebrahim Poonawala, Analyst

I have a question for Graeme. You mentioned that higher interest rates are affecting credit or the normalization of credit. At what point do we need to start worrying that credit normalization could lead to a more significant decline that resembles a recession? What are the indicators to look out for? Is it primarily related to jobs and the job market? Also, can you give us an idea of which customer segments, commercial or consumer, are experiencing the most significant challenges due to the higher interest rates?

Graeme Hepworth, Chief Risk Officer

Yes. Thanks, Ebrahim. Maybe just to provide a little bit more color on how we're thinking about the environment. As we've guided earlier, we certainly continue to expect that negative credit outcomes will rise through the year as we progress towards more historic norms, expecting that to start to peak out towards the end of this year and into the first half of next year. As you said, there are different aspects we look at, which factor into our models in IFRS 9. These are the things that factor into why we forecast GDP the way we do and why we're forecasting unemployment to increase over the course of this year. The unemployment rate currently is exceedingly low, but we expect it to gradually rise up to around 6.5% to 7% towards the end of this year before coming back to more historic norms. These are the factors that determine our overall loan losses. Having said that, we continue to see in the near term significant outperformance, particularly on job space. We have continually been surprised by the strength of the job market in Canada and the U.S. This is what always keeps pushing back the timing of this normalization a little further than we'd anticipated. But yes, jobs are a big factor here.

Ebrahim Poonawala, Analyst

For Graeme, you mentioned a higher rate impact on credit and I believe on commercial real estate, where C&I borrowers are seeing their cost of capital go up. Is there material pain there?

Graeme Hepworth, Chief Risk Officer

Commercial real estate is a portfolio we are most focused on for sure. The underwriting standards have been very strong, and we are doing a deep dive review of our Canadian commercial portfolio right now. We are focusing on top-tier clients. These are clients that are seasoned and capable of weathering through cycle challenges. Our mortgage portfolio on this side has guarantees or partial guarantees on 95% of those commercial mortgages. Right now, these are still forward expectations; we're not seeing a lot of real negative outcomes in that portfolio at this point in time.

Doug Young, Analyst

Just on the CET1 specifically on RWA movements. It looked like market risk RWA was down 8% quarter-over-quarter. Counterparty RWA down 11%. Just hoping to get a little bit of color on what drove this? Should there be a reversion down the road? And Nadine, the Basel is going to be 70, 80 basis points positive come Q2. I think further changes are coming from a regulatory perspective, specifically around the trading book and maybe next year. Can you talk a bit about what the offset would be, or is there any other negative items that are coming down the pipe on the CET1 ratio side?

Derek Neldner, Group Head, Capital Markets

Thanks for the question, Doug. I’ll start addressing your RWA question from a business perspective, and Graeme can chime in and Nadine may want to add as well. In terms of the trading businesses, we saw very strong levels of client activity in the quarter. It was a robust environment, and against that, we were able to drive good velocity and turnover in our trading book inventories and also bring down some of those inventories in particular in our credit trading businesses. Our inventory levels went up a little bit last year, but we were able to bring those down due to the strong trading environment in Q1.

Graeme Hepworth, Chief Risk Officer

On that part, Derek absolutely captured it right. This is a quarter with good liquidity. It allowed us to be much more active on the trading side.

Nadine Ahn, Chief Financial Officer

Yes. Just as it relates to the horizon, we will be implementing the remaining components of Basel IV that are coming into effect next year. We don't expect those to have material impacts overall, Doug, in terms of our CET1 ratio.

Mario Mendonca, Analyst

Could we first go to the margin? I was a little surprised by the margin, but it clearly relates to that dynamic you described where the expense was reported in NII, but the income in noninterest income. Is there any way you can help us understand what effect that had on the all-bank margin in the quarter? It would be helpful to understand what that margin might have looked like, was it up 5 basis points sequentially if that dynamic hasn't played out? Is that something you can quantify, Nadine?

Nadine Ahn, Chief Financial Officer

Sure, Mario. So if I just start from the total bank NIM of down 9 basis points, as you commented, a lot of that relates to the Capital Markets business, where we have the cost of funding which has obviously gone up with interest rates, showing up in the NII line and then their offsets in other income. So when I break out the two main drivers of that primarily attributed to the repo business as well as some of our equities derivatives businesses, that takes the number down to what you’re getting from a capital markets perspective. From a total bank level, that takes that number down, which is roughly 12 basis points down to 1 or 2, which is mainly on the loan book as margin impacted by higher funding costs.

Mario Mendonca, Analyst

Okay. So Nadine, I may have misunderstood. The 1 basis point increase in the margin for the entire bank already takes into account the effect you mentioned, the effect of expensing in one area of revenue in another. Is that correct?

Nadine Ahn, Chief Financial Officer

That is correct. You’re looking at the increase of 1 basis point. We expect the margin expansion to continue through the latter half of 2023, Mario.

Scott Chan, Analyst

Nadine, just a follow-up to that line of questioning. You talked about the Canadian Personal & Commercial, but I think you offered comments on the U.S. side as well on the National Bank being better in 2023. Just wondering the factors in context relative to the declining deposit base.

Nadine Ahn, Chief Financial Officer

Sure. For City National, we commented previously at the end of the quarter; we had increased our liquidity position related to some changes around parameters. That was funded through FHLB. The impact of that fully in Q1 is what you're seeing in terms of a lot of the decrease from the 5 basis points. As we look forward for City National, we did comment that we expect to continue to see benefits from our loan growth through the funding of both our deposit sweeps and our low-cost deposits. However, we will potentially need to supplement that for FHLB, which would put some further pressure on margins, into next quarter, similar to what you saw this quarter. However, we do expect expansion as we stabilize deposit levels through the latter half of 2023.

Sohrab Movahedi, Analyst

I wanted to ask Neil. I appreciate the additional detail you provided around customer behavior when it comes to savings accounts, deposits, GICs, and the like. Can you also talk about what's happening on the loan side when it comes to mortgages, variable mortgages, what sort of behaviors you’re seeing?

Neil McLaughlin, Group Head, Personal & Commercial Banking

Sure. On the variable rate mortgages, we're seeing a percentage of originations really drop to about 15% of originations. Keep in mind that the entire portfolio is about 1/3 variable rate. Originations are down materially, about 40% in terms of transactions. The HPI decrease further takes it down in terms of the actual dollars hitting the balance sheet. Our outlook for the mortgage business for the full year would be mid-single digits, is where we see it getting to, but there isn’t anything that suggests negative growth in the quarter would be something we'd expect. In terms of credit quality, we're seeing delinquency rise, but we started from a position of strength. Clients continue to have excess savings and liquidity levels remaining elevated compared to pre-pandemic levels. This is key for our overall credit performance.

Sohrab Movahedi, Analyst

Quickly, for Nadine, you didn't mention any impact of the DRIP discount on the CET1 ratio. Was the uptake not what you expected?

Nadine Ahn, Chief Financial Officer

Yes, our uptake in the DRIP has been what we expected, and we're expecting about 10 basis points a quarter as it relates to that.

Operator, Operator

The next question is from Joo Ho Kim, Credit Suisse. Please go ahead.

Joo Ho Kim, Analyst

Just one on Capital Markets. There was commentary that the bank outperformed the global fee pool from Corporate and Investment Banking side. I’m curious if that outperformance was the same on the Global Markets side as you have some commentary there?

Derek Neldner, Group Head, Capital Markets

From a market share perspective, as you noted, we did have a very strong quarter in what was a tough environment. We gained share and moved up in our rankings. In terms of our performance this quarter, it reflected a benefit from some of our business mix. We have a larger credit business, which performed very well across a range of markets. That said, I would caveat that we are in a cyclical business, and this very much depends on the market.

Mehmed Rizvanovic, Analyst

Derek, if I could just follow up on the trading line. Obviously, a great quarter for you guys. Did you just get paid better for your transactions on the trading side, given some of the numbers that we track? How do you see volume coming into the market overall?

Derek Neldner, Group Head, Capital Markets

Overall, I would say it was a very strong quarter for our trading businesses, and I would describe it as a very clean quarter with no notable one-time items. Instead, it was good client volume in a constructive market. This year, we saw strong client activity as many were repositioning their portfolios. Given the trading structure, we need to be more active in the moving business rather than storage this time.

Neil McLaughlin, Group Head, Personal & Commercial Banking

One last note on the residential mortgage lending in Canada: we are navigating a lower home sales environment but remain optimistic about long-term growth, leveraging our strong client relationships.

Dave McKay, President and CEO

So maybe I know we've run over there. Operator, I'll cut it off here. Given that we've gone a fair bit over, I'll summarize some of the thematic that came out in the questions and the deltas that happened over the quarter. The first takeaway is our franchise built on putting the customer first. That helps us create high ROEs and sustainable growth over time. The second thematic is certainly on cost. We've invested significantly in technology to adapt to a rapidly changing world, whether it's AI, back office, or front office. Even if we see headwinds from the economic downturn, we can pull back on discretionary expenses. You have my commitment and management’s commitment that we can do better on the cost side, and we will do better. Thank you for your questions. We appreciate your insights and look forward to seeing you next quarter.

Operator, Operator

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