Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q1 2025
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the RBC's 2025 First Quarter Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Senior Vice President, Investor Relations. Please go ahead, sir.
Asim Imran, Senior Vice President, Investor Relations
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Katherine Gibson, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions are Erica Nielsen, Group Head, Personal Banking; Sean Amato-Gauci, Group Head, Commercial Banking; Neil McLaughlin, Group Head, Wealth Management; Derek Neldner, Group Head, Capital Markets; and Jennifer Publicover, Group Head, Insurance. As noted on Slide 1, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then re-queue. With that, I'll turn it over to Dave.
Dave McKay, President and Chief Executive Officer
Thanks, Asim. Good morning, everyone, and thank you for joining us. Before we begin, I want to mention our thoughts are with the families that have been impacted by the devastating fires in Southern California. RBC, together with City National Bank, has donated $3 million to support victims in the impacted areas. Today, we reported first quarter earnings of $5.1 billion, a record result that reflects RBC's financial and strategic strength amidst an evolving operating environment to start the fiscal year. Adjusted earnings of $5.3 billion were up 29% year-over-year or up 23% excluding adjusted earnings of $267 million from the acquisition of HSBC Canada. We reported a return on equity of 16.8% on the foundation of a strong common equity tier 1 ratio of 13.2%. Our premium ROE continues to create value for shareholders, with gross internal capital generation of 76 basis points underpinning robust book value growth of 13% year-over-year. Strong revenue growth was driven by a well-diversified base, comprised of a balanced mix of net interest income and fee-based revenue. Net interest income was up 26% this quarter; results benefited from strong deposit growth in Personal Banking, strong loan growth in Commercial Banking, and higher spreads. We also saw robust fee-based revenue growth with strong results across Wealth Management, Global Markets, and Investment Banking as we benefited from constructive markets and strong client activity. This quarter, we generated operating leverage of 13% or 8% on an adjusted basis as we saw the benefits of our scale and the realization of cost synergies related to the acquisition of HSBC Canada. We remain well positioned to achieve the full cost synergies of $740 million by early 2026, having achieved an annualized run rate savings of over $500 million or approximately 70% of our stated target. We expect to drive further efficiencies as our clients benefit from the investments we continue to make in our digital capabilities. Earlier this year, we made the mortgage renewal process easier and faster for clients through our streamlined option in the RBC mobile app, which has nearly 8 million active users. Clients who choose to renew through this option will be able to secure mortgage terms and virtually sign documents in a matter of minutes. RBC Direct Investing is now the only bank-owned brokerage in Canada to offer self-directed investors online international trading through leading global exchanges. While our PCL and impaired loans increased this quarter, they were largely within expectations given the point of the economic cycle. Going forward, we are maintaining our PCL guidance for the year, which Graeme will speak to shortly. Turning to the macro environment, we started the year operating amidst the backdrop of constructive markets and affirming Canadian economic data, including moderating headline inflation levels and improving employment trends. Furthermore, we expect the Bank of Canada to continue to take a more dovish stance, which should help consumer sentiment and growth. The widening gap between US and Canadian interest rates has resulted in a weaker Canadian dollar, which could partly buffer any tariff shock for American users of Canadian goods and services. As Canada's largest financial institution, we have an important role to play in delivering advice, insights, and value to our clients amidst the uncertainty, while also supporting our communities. Many of our clients continue to come to us for deeper advice in navigating the evolving environment, which has contributed to strong deposit flows and increased transactional activity in our market-related businesses. Having said that, rising uncertainty around trade policy and geopolitics, combined with immigration restrictions, may already be moderating client activity in certain parts of the Canadian economy. We are seeing signs of lower business confidence, with some of our Commercial Banking clients opting to delay certain investment decisions. Furthermore, Canadian housing activity remains modest despite tailwinds from lower interest rates and changing mortgage rules. Moving forward, while we hope this uncertainty is short-term in nature, we are focused on preparedness rather than predictions. We have run several scenarios with respect to the depth, breadth, and duration of potential tariffs. We believe we are in a strong position to navigate the uncertainty due to the strength of our capital, our diversified funding, our brand, and our diversified business and geographic model. Similarly, Canada has a strong foundation. We have the natural and human resources that the world is looking for. We have the capability to improve our access to major markets. The existing CUSMA trade agreement is a solid foundation. While it can always be improved, we are encouraged by the ongoing dialogue and believe there is a path forward that can drive prosperity for all these economies. Importantly, this is a chance for Canada to make structural improvements to the country's economic productivity and competitiveness, including removing inter-provincial trade barriers and approving high-impact energy and infrastructure projects. This can drive future growth opportunities with significant benefits to Canadians. Amidst this uncertainty, ensuring we continue to operate with sufficient buffers takes on increased importance. Our stress testing suggests that even under a more severe scenario of lower revenue and higher credit losses, our capital levels would remain above regulatory minimums. We are deeply committed to supporting our clients' growing financial needs through our award-winning advice and value propositions. We have also been repurchasing our stock this quarter and continue to see buybacks as a tactical lever to generate shareholder value. With this context, I will now speak to our key growth drivers, starting with our acquisition of HSBC Canada. Since the close-and-convert acquisition almost a year ago, we have generated cumulative adjusted pre-provision pre-tax earnings of over $950 million on a standalone basis, excluding the benefits of the cost synergies highlighting the earnings generating power of this acquisition. Moving to Personal Banking, we continue to leverage our client value proposition and foundational distribution advantage across our physical and digital channels. This quarter, we saw outsized growth in our core banking accounts, which underpinned 18% deposit growth or 8% excluding the acquisition of HSBC. The acquisition of core deposits remains a focus as they provide us with data insights that allow us to better understand client needs while also improving our risk management capabilities. Furthermore, they are an important source of lower-cost funding to support our clients' financing needs. As client needs shift amidst an uncertain environment, we expect flows to shift between RBC savings and investment offerings. Mortgage growth remained modest, as we maintained our pricing discipline with respect to originations while remaining focused on retaining client relationships as mortgages renew over the coming quarters. In contrast, credit card balances grew due to the increased purchase volumes and seasonally higher revolve rates following the holidays. Turning to our Commercial Banking franchise, we have leading market positions across small business and commercial clients. Loans and acceptances were up 35% year-over-year or up 10% excluding HSBC Canada. The majority of our growth has been with clients where we have long relationships. Deposit growth also remained strong, up 19% year-over-year or 8% excluding HSBC Canada. In the near term, Commercial Banking loan growth may moderate as clients hold back plans and investments amidst the tariff-driven uncertainty. However, absent more severe and sustained tariffs, we expect loan growth in the high-single-digit range through this year, including the benefits from our expanded client and specialist coverage related to HSBC Canada’s acquisition. Turning to Capital Markets, which reported very strong results this quarter, generating record pre-provision pre-tax earnings of $1.7 billion. Global Markets reported over $2 billion in revenue this quarter, driven by strong performance in both equities and foreign exchange trading revenue, benefiting from increased client activity amidst an uncertain macroeconomic environment. Corporate Investment Banking was up 24% from last year, with our Investment Banking business benefiting from constructive market conditions and expanded scale across client and product verticals and supported by solid growth in Corporate Banking. Going forward, the uncertainty around trade policy could impact deal activity in the near term; however, the resulting levels of volatility could be beneficial to our sales and trading businesses. Furthermore, we have robust client dialogue and strong client engagement and remain well positioned to support our clients and take advantage of market opportunities as policy uncertainty moderates. Moving to our Wealth Management segment, we look to leverage our growing advisor base, holistic advisory and banking solutions, and technology investments to serve client needs and enhance advisor productivity. Wealth Management revenue surpassed $5.5 billion for the first time, while generating nearly $1 billion in net income for the quarter. Assets under administration in US Wealth Management, including City National, increased to nearly US$700 billion. US net new assets represented an annualized 3% of opening AUA, excluding the reinvestment of interest and dividend income. In addition to the uptick in client assets, we saw an increase in sweep deposits and securities-based lending as we look to enhance our offerings for US clients. In Canadian Wealth Management, where we have sector-leading advisor productivity, assets under administration increased 22% from last year, benefiting from higher markets and net new assets. And RBC Global Asset Management's assets under management increased 23% from last year, surpassing $700 billion for the first time. RBC GAM generated net sales of $11 billion this quarter, including nearly $4 billion of Canadian retail net sales as our clients continue to choose us as their trusted advisor amidst a volatile environment. To close, we've had a strong start to fiscal 2025 amidst an evolving operating environment. While change is constant, so is our commitment to our clients and communities. Our strategies also continue to deliver leading risk-adjusted returns and long-term value to our shareholders. We look forward to our upcoming Investor Day on March 27, where we will discuss key strategic initiatives designed to accelerate our ambitions across our businesses and core geographies. With that, Katherine, over to you.
Katherine Gibson, Chief Financial Officer
Thanks, Dave, and good morning, everyone. Starting on Slide 8, we reported record results this quarter, with diluted earnings per share coming in at $3.54. Adjusted diluted earnings per share was $3.62, up 27% from last year, benefiting in part from the acquisition of HSBC Canada and FX translation impacts. Our record results were underpinned by double-digit revenue and earnings growth across each of our segments and reflected robust adjusted all-bank operating leverage of 7.7%. Turning to capital on Slide 9, our CET1 ratio remained strong at 13.2%, stable to last quarter. The solid growth in internal capital generation, net of dividends, was mostly deployed into organic businesses, particularly in Capital Markets and Personal Banking, and easily allowed the bank to earn through the net credit migration in the quarter. As part of our capital deployment strategy, we also repurchased approximately 1.9 million shares this quarter for $338 million. Despite the macro uncertainty, our strategy of prioritizing capital allocation towards client-driven organic growth and increasing dividends in line with earnings remains unchanged. We will also continue to be opportunistic in our use of buybacks while operating with a strong CET1 ratio above 12.5%. Should downside scenarios associated with rising trade tensions materialize, our experience during the pandemic serves as a good reminder of the benefit of our strong recurring and diversified earnings streams, which will continue to act as the primary absorber of any deterioration. Furthermore, our capital buffer, which sits well above the regulatory minimum, provides a strong second line of defense. Moving to Slide 10, all-bank net interest income was up 26% year-over-year, or up 27% excluding trading revenue. These results benefited from the addition of HSBC Canada, solid volume growth in both Personal Banking and Commercial Banking, as well as higher spreads in Personal Banking and the impact of foreign exchange translation. All-bank net interest margin, excluding trading revenue, was down 1 basis point from last quarter as the impact of higher securities balances in Capital Markets was mostly offset by favorable product mix in Personal Banking and Commercial Banking. Canadian Banking NIM was up 7 basis points from last quarter, mainly driven by strong growth in non-maturity deposits, which were up approximately 3% quarter-over-quarter. Underpinning this strong growth has been positive flows from GICs and external sources into non-maturity deposits. NIM also continued to benefit from our tactically driven deposit strategy. These benefits were partly offset by ongoing competition for term deposits, which we expect to persist throughout the year. Looking forward, we are increasing our 2025 all-bank net interest income growth guidance. We expect high-single-digit to low-double-digit net interest income excluding trading revenue growth in 2025, up from the mid- to high-single-digit range guidance provided last quarter. The increase in our guidance reflects stronger-than-expected growth in non-maturity deposits this quarter, as well as better-than-expected spreads on both mortgages and GICs. While our guidance has increased, the wide range reflects the evolving operating environment. Moving to Slide 11, reported non-interest expenses were up 11% from last year. Core expense growth as guided to last quarter was elevated, coming in at 13% year-over-year, impacted in part by the contribution of run rate expenses associated with the acquisition of HSBC Canada. The main driver of growth, however, was higher variable compensation, which was commensurate with strong results in Wealth Management and Capital Markets. Other staff-related costs associated with increased FTE and severance also contributed to the increase. Looking ahead, we will remain diligent in managing our cost base. We expect all-bank core expense growth, which is off a base of reported 2024 expenses, to be at the upper end of our mid-single-digit guidance range for 2025. We continue to expect positive operating leverage for the year. The move to the upper end of our core expense growth guidance reflects higher-than-expected variable compensation in the quarter. As indicated last quarter, we expect a faster pace of core expense growth in the first half of the year, reflecting the inclusion of HSBC Canada results and, to a lesser extent, investments for our next phase of growth. As a reminder, core expense growth includes run rate costs associated with the HSBC Canada acquisition but excludes the impact of foreign exchange and share-based compensation. Turning to taxes, the adjusted non-TEB effective tax rate was 20.4% this quarter, up from 19.5% last quarter. The increase reflects the impact of Pillar II tax legislation, which was embedded in our guidance provided last quarter, as well as changes in earnings mix. Turning to our Q1 segment results that begin on Slide 12, Personal Banking reported earnings of $1.7 billion. Focusing on Personal Banking Canada, net income was up 26% year-over-year. Excluding $91 million of net income attributed to HSBC Canada, Personal Banking Canada net income rose a strong 19% year-over-year, benefiting from close to 4% operating leverage. Organic net interest income was up 15% from last year, reflecting higher spreads and a robust 8% growth in deposits. Organic non-interest income was up 7% year-over-year, underpinned by higher mutual fund distribution fees, mainly from capital appreciation and the benefit of branch net sales. Turning to Slide 13, Commercial Banking net income after tax of $777 million rose 20% from a year ago, including $73 million from HSBC Canada. Net income growth was impacted in part by higher credit provisions across a few sectors, which Graeme will touch on shortly. On a pre-provision pre-tax basis, earnings were up 32%, or 9% year-over-year, excluding HSBC Canada, driven by solid volume growth and higher service charges. Loan and deposit growth were solid at 10% and 8% year-over-year, respectively. Importantly, the loan book we acquired through the acquisition of HSBC Canada is starting to show momentum and is up over recent months in line with the growth of the Commercial Banking back book. Commercial Banking's efficiency ratio improved to 33%, reflecting positive operating leverage of 1%. Turning to Wealth Management, net income after tax of $980 million rose 48% from a year ago, reflecting strong growth in fee-based client assets across our businesses. We added over $20 billion in net new assets across our North American Wealth Advisory and Global Asset Management businesses as momentum built in long-term retail mutual fund net sales. Higher revenue was partly offset by higher variable compensation. City National generated US$60 million in adjusted earnings this quarter, impacted in part by US$31 million taken on performing loans related to the California wildfires. We are seeing good momentum in enhancing City National's profitability, and we remain committed to these efforts. Turning to Capital Markets results, record net income of $1.4 billion increased 24% from last year, benefiting from broad-based revenue growth and foreign exchange translation impacts. Pre-tax pre-provision earnings surpassed $1.7 billion in the quarter, up 31% from last year. Corporate and Investment Banking revenue was up 24% from last year. Excluding the impact of loan underwriting markdowns in the prior year, revenue was up 18%, reflecting higher loan syndication revenue in North America, the impact of increased lending balances and spreads, as well as higher debt origination, primarily in the US. Global Markets revenue was up 24% as robust client engagement and a constructive market backdrop drove higher equity trading across most regions and increased FX trading in Canada. The first quarter is Capital Markets' seasonally strongest quarter. While we expect business momentum to remain strong, we anticipate typical seasonal declines in pre-tax pre-provision earnings through the remainder of the year. Turning to Insurance, net income was $272 million, up 24% from last year, mainly due to higher insurance service results, driven by the $65 million impact of reinsurance contract recaptures and improved claims experience across the majority of our products. This was partially offset by lower insurance investment results, primarily reflecting higher favorable investment-related experience in the prior period on the transition to IFRS 17. To conclude, we are very pleased with the strong momentum across our core businesses to start the year, which underpinned a robust adjusted return on equity of 17.2% on a strong CET1 base of 13.2%. Looking ahead, our financial and strategic strength, including our diversified businesses and revenue streams, positions us well to navigate uncertainty in the macroeconomic environment. With that, I will turn it over to Graeme.
Graeme Hepworth, Chief Risk Officer
Thank you, Katherine, and good morning, everyone. I'll now discuss our allowances in the context of the current macroeconomic environment and the path ahead as we navigate uncertainty from the evolving geopolitical risks that Dave noted earlier. The underlying performance of the US and Canadian economies has been largely positive over the quarter, although the Canadian economy is still underperforming. We expect the Bank of Canada to continue gradually cutting rates into the middle of 2025, providing further relief for borrowers, while the US Federal Reserve is now expected to hold rates steady throughout 2025. Notwithstanding these factors, it remains highly uncertain how the prospect of tariffs will impact the broader economy. The impact will vary based on the extent and duration of tariffs, retaliatory measures, progress in removing barriers to domestic trade, and the availability of fiscal support measures. To provide some context on how the tariff uncertainties reflected in our provisions, recall that under IFRS 9, our performing allowances reflect not only our baseline expectations but the potential for weaker economic conditions reflected through a series of pessimistic scenarios. These scenarios have been highlighted on Slide 36. While broad and sustained tariffs could create recessionary conditions, the range of outcomes is well within the pessimistic scenarios we currently consider. And despite the positive US and Canadian economic signs noted earlier, we kept our downside risk weights at an elevated level this quarter to account for this new uncertainty. Going forward, as the tariff situation evolves, we will continue to reflect known outcomes through our baseline scenario and any of the ongoing uncertainty through potentially new or amended downside scenarios. Turning to Slide 18, we took a total of $68 million of provisions on performing loans this quarter, mainly reflecting unfavorable changes in portfolio composition, including a $45 million provision related to the California wildfires. This was partially offset by a favorable impact from our macroeconomic forecast and the migration of one large Capital Markets account in the other services sector from performing to impaired. I'll expand upon this in a moment. Excluding the impact of the wildfires and the transfer of this one Capital Markets account, provisions on performing loans are similar to recent history. Many of our Commercial Banking clients were directly impacted by the California wildfires. RBC's related credit exposure consists primarily of residential mortgages and loans in the fire zone that amount to just under $1 billion. The absolute nature of the client base, low loan-to-value ratios, and effective insurance coverage substantially mitigate the credit risk of this tragic event. Additionally, we have established a prudent allowance that provides coverage for residual uncertainty, reflecting the potential for lengthy recovery efforts and the possible depreciation of land values. This marks the 11th consecutive quarter where we added reserves on performing loans, resulting in a total allowance for credit losses of $6.9 billion. We remain confident these allowances provide strong coverage relative to current and anticipated provisions for impaired loans. Moving to Slide 19, gross impaired loans of $7.9 billion were up $2 billion or 19 basis points this quarter, primarily driven by Capital Markets and Commercial Banking. As a reminder, last quarter, we highlighted that our strong credit performance in our Capital Markets portfolio over the last two quarters was unlikely to continue. Outcomes this quarter are reflective of the ongoing challenges in the current credit environment and the uneven timing of losses that can occur within our wholesale portfolio. In Capital Markets, a $1.5 billion new formation relates to the impairment of the previously mentioned account in the other services sector. This former investment-grade utility borrower was originated with a strong capital structure and has operated in a heavily regulated environment. Most recently, the borrower has been impacted by changes to regulatory and environmental expectations that require significant investment to address. We have been provisioning for this outcome, and relative to the size of the exposure, losses are expected to be manageable. In Commercial Banking, new formations remain elevated driven by a few large impairments in the real estate-related, consumer discretionary, and agricultural sectors. However, several of the largest new formations in the real estate and related sector have recently returned to performing status. Turning to Slide 20, provisions for credit losses on impaired loans of 39 basis points were up 13 basis points quarter-over-quarter or $345 million, with provisions higher across all segments. In Personal Banking, provisions were up $66 million, with our unsecured portfolios continuing to be the main drivers of losses. In our mortgage portfolio, impairments and provisions are increasing in line with our expectations. Clients are showing resilience as they face higher refinancing costs, supported by stable home prices and lower rates. In our Commercial Banking portfolio, provisions came in higher this quarter. These outcomes are not unexpected given where we are in the economic cycle. Most notably this quarter, we took additional provisions on previously impaired loans in the forest products and automotive sectors, and new provisions in the consumer discretionary and industrial product sectors. With respect to the performance of the Commercial Banking portfolio acquired from HSBC Canada, it is driving a disproportionate share of Commercial Banking provisions for impaired loans, predominantly driven by a few larger accounts in economically sensitive sectors, an area where HSBC was more concentrated. Given the HSBC portfolio also indexes to larger client sizes, provisions can be uneven. Since the legal day one, two HSBC names accounted for 54% of the cumulative impaired loans on the HSBC portfolio. Given the mix of the HSBC portfolio, we do expect provisions for credit losses for this portfolio to remain elevated for the next few quarters, but not at the levels we experienced in Q1. With nearly a full year of experience with the HSBC portfolio, we have conducted our standard credit reviews for the majority of HSBC borrowers. On that basis, we remain confident in the overall credit quality of the loans we acquired and believe the combined portfolio will continue to benefit from greater diversification that will support strong through-the-cycle performance. In Capital Markets, provisions were up $191 million, mainly due to the large account noted earlier in the other services sector. To conclude, despite being impacted by several unique factors and areas of weakness this quarter, we are seeing offsetting strength in other segments of the portfolio. All this reflects the breadth, scale and diversification of our combined franchise. We still expect full year 2025 provisions on impaired loans to remain within the guidance previously provided. We remain prudent in building reserves on performing loans as we navigate uncertainties across multiple fronts. Moving forward, while we remain confident in our Stage 3 provisions for credit losses guidance for 2025, the uncertainty in the policy environment, specifically related to tariffs, could impact the likelihood and timing of allowance releases and peak provisions for impaired loans. Credit outcomes will continue to be dependent on the magnitude of change in unemployment rates, and the direction of changes in interest rates and commercial and residential real estate prices. As always, we continue to proactively manage risk through the cycle, and we remain well capitalized to withstand possible yet more severe macroeconomic and geopolitical outcomes. With that, operator, let's open the lines for Q&A.
Operator, Operator
Thank you. We will now take questions from the telephone line. We have the first question from John Aiken from Jefferies. Please go ahead. Your line is open.
John Aiken, Analyst
Good morning. I was hoping that you could expand upon the performance of City National in the quarter. If we take into account the incremental provisions that you indicated for the California wildfires, performance seems to be quite solid. Can you talk to where you stand in terms of the ongoing operational improvement and profitability increases that you've been looking for? And what we may be able to expect for the rest of the year?
Dave McKay, President and Chief Executive Officer
Yeah. Thanks, John, for that question. We continue, to your point, to make very good progress in our City National franchise. I was actually out there last week with the team, and remain really encouraged about the client franchise and the momentum that we're starting to build across a number of fronts. It's still a heavy lift on the overall re-platforming from a number of fronts, but we'll get a lot of that work done this year. So, I think from that perspective, we continue to work through it on the schedule that we've told you. When you look at volume growth, we continue to run off single-service clients in the commercial space, bringing on multi-product clients. I had a chance to meet with a number of clients last week, and the ability to cross-sell, I think, more importantly, is critical. The group, as we'll show you in the Investor Day, continues to build out platforms to sell into the Wealth Management space, and we're launching that as we speak. So, we feel good. Commercial loan growth, as you probably noted, is a little muted given the run-off/run-on, but the pipelines are building really nicely. And as the runoff starts to slow as we de-market, you'll start to see better growth there. And again, we have to finish the job on the re-platforming and the regulatory remediation, and we're doing well on that front also. So, net-net, we feel good about the franchise, and you'll hear more about it in a few weeks.
John Aiken, Analyst
Great. Thanks for the color, Dave. I appreciate it.
Operator, Operator
Thank you. The next question is from Mario Mendonca, TD Securities. Please go ahead.
Mario Mendonca, Analyst
Good morning. Initially, the significant rise in formations appears concerning, but upon closer examination, particularly on Page 22, it's clear that a large portion of this is tied to that one credit in other services. Could you help me understand what occurred during the quarter? It seemed like you anticipated an issue with this credit since you had established a substantial performance reserve. What specifically happened this quarter that led to the impairment? Additionally, how can you assure us that the collateral is sound enough that you don't need to allocate more provisions against this?
Graeme Hepworth, Chief Risk Officer
Hi, Mario, it's Graeme. Thanks for that question. You obviously noted right that this quarter, a significant tick-up in gross impaired loans was hugely driven by this one account in the utility sector. That accounted for about $1.5 billion of the new formations. And if you set that aside, I would say, new formations have kind of largely been in-line with where we've been traveling for the last few quarters. This account, we've seen it facing some headwinds and some struggles for the past year, and we've been downgrading that along the way. That's why those downgrades and some of the kind of management overlays we take on top of that have been the drivers for why we built up the Stage 2 loan loss reserves against that in prior quarters. But as many of these accounts go, it progressed to a more formal situation in its restructuring, and that kind of triggered us moving it into impaired status this quarter. And with the information that we gleaned through that restructuring process is then how we firm up our reserves to where we are. There still is a degree of uncertainty around this account, but I think the range of scenarios we've considered in that workout process, our teams are very close to the restructuring that's going on there. I think we feel pretty good about that we're pretty meaningfully in the range of where we think this lands in the coming quarters.
Mario Mendonca, Analyst
And Graeme, is it typical for Royal to have a $1.5 billion hold on a single credit? My impression is that seems quite high to me. However, perhaps that's normal, and maybe Royal is large enough to handle that kind of situation.
Graeme Hepworth, Chief Risk Officer
I think that's also a very good question, Mario. Let me just start with a couple of comments, but then I'll turn to Derek on that too to give you a bit of context for the client situation here. But you are right, this is an investment-grade utility, so, naturally, we will have higher holds for those types of situations. But this is certainly beyond what I would say is a natural hold size for us on the larger end. When we get into larger holds, it's typically associated with a transactional situation where it might be more temporal in nature. Unfortunately, things have deteriorated during that period. So maybe Derek can provide a little bit more context on the background here.
Derek Neldner, Group Head, Capital Markets
Sure. Thanks for the question, Mario. Building on what Graeme said, I think he's bang-on that, traditionally, if you look at an investment-grade name, we would have meaningful holds, but this would certainly be a larger exposure than what we would have across the rest of the book. This specific client has been a very long-standing client of the firm, going back multiple decades. We would typically support them through a revolver hold. There would be meaningful size, but much smaller than the exposure we had here. As Graeme said, at various points in time over that historical relationship, we've had different transactions or just moments in time where the client needed a shorter-term or more temporal increase. That was the situation here where we had some bilateral exposure for a period of time. And unfortunately, given the way the situation deteriorated following our origination of that, we ended up with an outsized exposure, obviously, at a time when it went into a more difficult scenario in restructuring.
Mario Mendonca, Analyst
One quick thing on US margin. I was a little surprised to see that come down considering what we've seen from the US regionals in their Q4 and all the chatter about better deposit dynamics, rates higher for longer. The US regionals were talking of margins in a big way. We didn't see it at Royal. Can you speak to that?
Katherine Gibson, Chief Financial Officer
Yes, Mario, it's Katherine. I'll take your question. So, City National, as we've talked about before, is asset sensitive. And so, what you're seeing as it flows through the book is basically the straight impact of the reduction in the Fed rate. And so that's what you would have seen on the deposit side as well as the loan side. We've got hedging in place. So, we have secured through that downside environment in the rate. And so, as we go forward, we actually expect to see stability in that margin slightly increase as we go forward.
Dave McKay, President and Chief Executive Officer
I would just add, it's Dave. We have slightly higher beta clients, obviously, with affluent, high-net-worth clients, interest-bearing accounts. So, whereas the regionals would have, like we do in Canada, a greater share in non-interest-bearing accounts.
Mario Mendonca, Analyst
Makes sense. Thank you.
Operator, Operator
Thank you. The next question is from Ebrahim Poonawala, Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Good morning. I guess maybe just sticking with the margin, Katherine, if I heard you right, you talked about when you gave your NII guidance that mortgage and GIC spreads were better. Just talk to us in terms of, is that margin expansion in Canada driven by just balance sheet dynamics, hedging, et cetera, or is there also a reflection that the competitive environment is well-behaved at the moment?
Katherine Gibson, Chief Financial Officer
Thank you for the question, Ebrahim. So, speaking to the margins that you would have seen play out this quarter for Canadian Banking, you're bang on, basically, the dynamics that we saw at play with increasing spreads in mortgages. And on the GIC front, it came in better than what we expected, and that's why it's a driver in increasing our guidance. For the product mix shift, again, you would have heard me in my comments, we're seeing a positive shift with GICs basically being largely flat quarter-over-quarter, but the non-maturity deposits being up 3% quarter-over-quarter. With that shift, it's definitely accretive to our margins. On the competitive front, I think that is still something that's definitely at play. And as I noted in my comments, we're seeing the competitive pressure, but not to the same degree as what we had forecasted.
Erica Nielsen, Group Head, Personal Banking
Yes, I would like to share a few thoughts on the competitive landscape. In both markets, competition remains strong. We are focused on meeting the needs of our Canadian and RBC customers and finding ways to succeed. In this last quarter, we've effectively managed pricing while capturing the market volume we desire. We anticipate this competitive intensity to continue. As we approach the spring market in the mortgage sector, we recognize that its dynamics differ from other times of the year, and we are prepared for this ongoing intensity.
Ebrahim Poonawala, Analyst
Got it. Dave, a quick question for you. How do you manage the business right now? Is the direction for the team to focus on offense, defense, or are there different strategies based on the market? Just give us a sense, even during the call, there were new headlines on tariffs. I'm curious about how you are running the bank right now regarding growth versus preparing for a potential downside scenario. Thanks.
Dave McKay, President and Chief Executive Officer
It's a great question. We view the markets positively and recognize the potential scenarios ahead, but we remain hopeful for solutions that don’t harm either economy. We are still assisting our clients in their growth; while some are being cautious, many continue to move forward with confidence, as their business models are not impacted by the current situation. Given the significant damage from tariffs, we hope for a better resolution that allows us to address these issues without severely impacting both economies, particularly the US economy. Our clients are understandably more cautious, and we will take their cues, but we see strong opportunities in several areas as well. We are maintaining a balanced approach, and if conditions worsen, we'll reassess. For now, we have considerable momentum and will continue to support our clients as needed.
Ebrahim Poonawala, Analyst
Thank you.
Operator, Operator
Thank you. Next question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi, good morning. Dave, as we think through the worst-case scenario for tariffs, I'm just curious your perspective in terms of what's a bigger challenge, tariffs or COVID, both from the overall economic perspective and RBC specifically?
Dave McKay, President and Chief Executive Officer
I believe it depends on the situation. The beginning of COVID was particularly challenging due to the significant uncertainty we faced at that time. When we entered the pandemic in March and started shutting down the economy, we had little understanding of the support programs or how individuals would cope, which created a lot of stress. If we experience widespread tariffs, we could face a similar challenge of figuring out the impacts, understanding the nature of any support programs, and assessing their duration. All of this was uncertain during the pandemic, and we hope to reduce that uncertainty this time around. Managing uncertainty is core to our operations, and we prepare for various scenarios. I can't definitively say one situation is more difficult than the other since both have their similarities and varying impacts. As mentioned before, the time frame and nature of the tariffs, whether they are broad or specific, will dictate a period of uncertainty that we will navigate. However, the world isn't going to fall apart overnight, and this situation should ultimately be more manageable. Unlike during COVID, we are not shutting down the entire economy now, so whatever the outcome, I anticipate it will be easier to handle.
Meny Grauman, Analyst
Got it. So, you're saying it will take longer for this tariffs situation to unfold.
Dave McKay, President and Chief Executive Officer
Yeah.
Operator, Operator
Thank you. The next question is from Gabriel Dechaine, National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Good morning. I have a couple of questions about the performing provision. The actual performing piece was low, but that was due to the release of some Stage 2 to book into Stage 3 for one loan. Could you provide the number of Stage 2 releases related to that account? Additionally, you mentioned on Slide 36 about the economic scenarios regarding underperforming or performing ACL. If I look at the pessimistic scenario with a 7% GDP contraction and 10% unemployment, it seems to align with the worst-case scenario considering a more severe tariff situation. Can you tell me what the increase in performing ACL would be if that scenario became your base case, since it's not your current base case?
Graeme Hepworth, Chief Risk Officer
Thank you for the questions, Gabe. Regarding the utility account we discussed, we had accumulated about $110 million in allowances over previous quarters, mainly in Q4. That amount was released from performing loans. We then added $165 million in Stage 3. So, overall, from a profit and loss standpoint, that results in $55 million, but it decreased performing loans to $110 million. This is why we noted that without this adjustment, we would have been building reserves in a similar range to what we have in past quarters. As for the scenarios, we’ve examined a variety of them, starting from very severe tariffs that would have a global impact to the different scenarios presented by the Bank of Canada, as well as more targeted scenarios affecting industries like steel and aluminum. The range of potential outcomes is quite extensive. We included this slide to emphasize that none of the scenarios we've considered fall outside of our existing IFRS 9 provisioning. To give some context, we've never shared this particular detail before, but we currently assign about a 35% weight to those three pessimistic scenarios within our IFRS 9 framework. We do give considerable weight to these negative outcomes. Regarding tariffs, they might serve as a potential trigger for these scenarios. For your other question, the most pessimistic scenario we consider, which we assign the highest weight to, is somewhere in the middle of the three. It aligns with the upper end of the tariff discussions we are observing. If we were to fully shift to that scenario, you would estimate an increase in performing ACL of about 30%. This provides a high-end estimate of what might occur. In response to the earlier question about comparisons to COVID, I don't foresee any immediate impacts like those we experienced with COVID. As Dave mentioned, that was a complete economic shutdown, whereas this situation is much more targeted. This is under the assumption it plays out as the worst-case scenario, without considering potential government interventions. I hope this gives you some context, Gabe, and serves as a useful marker.
Gabriel Dechaine, Analyst
No, that's great. Very, very clear. I mean, I have to re-read the Graeme Hepworth section within the transcript again, but very helpful.
Operator, Operator
Thank you. Next question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
Thank you. Good morning. Just to be very clear, sorry, just to follow up on that topic, Graeme, just to be very clear, you didn't increase performing provisions for potential tariff risk because you believe your pessimistic scenario is adequate, the way you've put towards those pessimistic scenarios are already adequate enough?
Graeme Hepworth, Chief Risk Officer
Well, for where we're at, yes. I would say, I mean, again, other factors came into play this quarter. If we set tariffs aside and we look at kind of everything else that's playing, as Dave commented, we've seen some better-than-expected strength in Canada this past quarter. The inflation situation seems to be now contained. All of that probably would have led us to a spot that we would have reduced our weights on the pessimistic this quarter. Because of the tariffs, we did not do that. So, in that sense, we didn't build for it, but we certainly kind of held back on some releases. I think likewise, as we looked at it, our baseline expectations are certainly on the more conservative end of the spectrum of what you see in the market. The key going forward, we'll continue to monitor this and as we learn more, we'll impound that in our base case. We'll continue to reflect on the uncertainty and whether we think we need to build more for that or again, likewise, push off potential releases, but we'll continue to evaluate that as we learn more through the quarter.
Paul Holden, Analyst
Okay. That's helpful. And that kind of leads to my second question. So, no change in the impaired provisions guidance for the year despite obviously a high start to the year, you've highlighted why. Your previous guidance, I think, incorporated an expectation that impaired provisions would peak in the second half of the year. So, maybe let's attribute that to Canadian retail. Is that still your expectation or maybe that has improved or changed just because of the point you highlighted, Canadian economy ex-tariffs has actually started to do better than previously expected?
Graeme Hepworth, Chief Risk Officer
That's a good question. And maybe just to break down the guidance a little bit. In terms of where we're going to peak for the year, well, given what transpired in Q1, primarily driven by that one account, we don't expect the rest of the year to be above that. But if we normalize for the kind of the utility account that added about 7 basis points to Stage 3 this quarter, we still feel good about the trajectory for the rest of the year, and that's why we're holding the overall forecast we guided to in Q4 in the same. The component parts there, I would say retail is still consistent with where we were in Q4. We continue to expect both unsecured and secured products to accrete up throughout the year. We would anticipate we'll peak out towards the end of the year. Wholesale, again, harder to trend quarter-to-quarter, but we continue to expect wholesale to be at elevated levels. It differs business by business. CMB is probably seeing a more balanced scorecard, Capital Markets the same; Commercial being impacted more by the conditions in Canada. Overall, that is neutral throughout the rest of the year. When we put all that together, I think we still feel good about the range we're in and it's somewhat supported by the strength of the economy to date. How do tariffs play into all that? I wouldn't expect the tariffs to have a huge impact on Stage 3 in 2025. I think the impact of that really will play its way through into 2026. I think 2025 will be more what we do with our Stage 1 and 2 in terms of tariffs.
Paul Holden, Analyst
That's great. I'll leave it there for the interest of time. Thank you.
Operator, Operator
Thank you. The last question is from Lemar Persaud, Cormark Securities. Please go ahead.
Lemar Persaud, Analyst
Thank you. Katherine, could you elaborate on what gives you the confidence to raise the NII guidance? Considering the uncertain outlook regarding the impact of tariffs on volume growth, increased macroeconomic uncertainty, and potential implications for competition that could affect mortgage spreads, are there any revenue synergies with HSBC or perhaps FX benefits that you didn't mention? Or is it primarily due to the advantages of non-maturity deposits and the strong spreads in mortgages and GICs?
Katherine Gibson, Chief Financial Officer
Hi, Lemar, thank you for the question. You basically hit all the key parts for driving our guidance up for the quarter. The one item that I would add is FX that did serve as a positive tailwind for us. So, just going back to the key drivers, it was the positive results we saw in Q1 from the spreads as well as the product mix, the FX. And to your question, HSBC has always been included in our guidance. So, no change in our assumption there going forward.
Lemar Persaud, Analyst
But you're not adding in like revenue synergies expectations on HSBC that you haven't quantified yet. Is that part of it? Is that a piece of it or no?
Katherine Gibson, Chief Financial Officer
That's not part of why we changed. Back to the reasons that I articulated, it is what we're seeing in our results for Q1, and we felt it was appropriate to take up our guidance given the strong results.
Operator, Operator
Thank you. There are no further questions at this time. I would now like to turn the meeting over to Dave McKay.
Dave McKay, President and Chief Executive Officer
I want to thank everybody for their questions. Great questions. Obviously, we understand the focus on the credit side. But I do want to bring the messaging back to just Canadian economy performed through most of the quarter better than we thought. Client activity was strong across all our businesses. I think you saw the benefit of that, whether it's Capital Markets, Wealth Management, Consumer Bank had an outstanding quarter, Commercial Bank. Lots of client activity. Our compete level was very high. We gained market share. That drove really strong revenue performance across the board with some margin expansion. Margin expansion was really benefited from our strategic focus on deposits. You've heard us talk about deposits for a decade, but it's consumer deposits, commercial deposits, continue to build out RBC Clear, as you'll hear more about at the end of March. There is uncertainty, obviously. A lot of your questions are around the uncertainty. We face that uncertainty knowing that we have plans. We have stability; we're working with our clients. We're hoping for the best, preparing for the worst. We're really in a great position to help our clients. Volatility does help the business, a number of the businesses as well, and we've capitalized that on the Capital Markets side. So, feeling very good about how we started the year. You heard from Graeme, the great questions around where we came on the credit side, a few lumpy issues there. Overall, we feel good about our book and how it's going to perform and continue to build the business and drive really strong shareholder returns. So, thank you for your questions, and we 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.