Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q2 2021
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the RBC’s Conference Call for the Second Quarter 2021 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.
Nadine Ahn, Head of Investor Relations
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management, Insurance and INTS; 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. To give everyone a chance to ask questions, we ask that you limit your questions and then requeue. With that, I'll turn it over to Dave.
David McKay, CEO
Thank you, Nadine. Good morning, everyone. Thank you for joining us in our Q2 call. Today we reported earnings of $4 billion, driven by strong client activity across our businesses. Our results reflect market share gains in Canadian Banking and Wealth Management as well as record investment banking and equities performance in capital markets. Even with heightened client activity, we leveraged our scale, cost investments, and disciplined approach to cost management to drive positive operating leverage. Pre-provision, pre-tax earnings increased 11% year-over-year despite absorbing approximately $450 million of headwinds related to lower interest rates and a stronger Canadian dollar. Although uncertainty remains, credit and market risk indicators are relatively benign when compared to the start of the pandemic. Our portfolios have performed exceptionally well through the cycle with very low provisions for credit losses on impaired loans. We are confident that a wide range of strategic initiatives will enable us to continue growing our balance sheet well within our current risk appetite. We remain very well capitalized with a CET1 ratio of 12.8%. In addition, next quarter, we expect the implementation of parameter updates net of other items to add 55 basis points to 70 basis points to our capital ratios, pushing our CET1 ratio to well above 13%. Even with these elevated capital levels, we generated a premium return on equity of 19% for the first half of 2021. We will continue to leverage the strength of our balance sheet and recurring internal capital generation to further accelerate organic growth across our businesses. In addition, when regulatory restrictions are lifted, we will look to accelerate capital return to our shareholders through a mix of share buybacks and higher dividends. Given our payout ratio is currently at the bottom end of our 40% to 50% range highlighting our organic value creation, our book value per share grew 8% from last year, with tangible book value per share up over 11%. I will now speak to how we see the macro environment unfold. While we're in the early stages of an economic recovery, there is still uncertainty about the risk posed by new variants and stresses in supply chains. The time horizon for how their recovery will evolve continues to be correlated with the success of the vaccination rollout. It remains uncertain when international quarters will fully reopen. Although there's still work to be done to open up all parts of the economy, we are encouraged by the progress so far. As vaccine distribution gains momentum, we anticipate an acceleration of economic activity alongside easing virus containment measures. So then, fiscal and monetary stimulus remains in place to bridge the gap and stimulate the recovery. However, the combination of these actions and supply shortages is increasing the risk of inflation in certain asset classes. Consequently, there is a higher likelihood of Central Banks raising their benchmark interest rates in the second half of 2022. With respect to Canadian housing, we continue to monitor supply demand imbalances across Canada, and we support recent actions taken by regulators to adjust mortgage stress tests to take some pressure off the demand side of the equation. While we encourage policymakers to also address the problems of limited supply, which are exacerbating house price inflation. As always, we manage risk through a cycle, and the credit metrics of our most recent mortgage originations remain strong and are consistent with our existing high quality portfolio. Next, I will speak to a number of drivers that position us for strong performance going forward, starting with two Canadian banking businesses that are poised to rebound. And then I will highlight the embedded profit growth in our core deposit in U.S. Wealth Management franchises, followed by a number of initiatives we have to accelerate organic growth. I will start by commenting on our credit card and commercial banking businesses, which have disproportionately impacted by suppressed economic activity. Over the last 12 months, total revenue associated with our credit card business was down approximately $400 million year-over-year, largely due to lower net interest income as utilization rates fell 300 basis points as a stimulative macro backdrop sets the stage for higher-yielding card balances and purchase volumes to recover alongside economic activity. This relationship is one that is highly correlated, and we are confident that it will hold coming out of the pandemic. As a result, we expect that our leading credit card franchise will see total revenue rebound towards pre-pandemic levels. Business lending activity has also been restrained even though we have added $60 billion of business deposits over the last two years. Commercial Banking utilization rates on operating lines have fallen below pre-pandemic levels. However, we do expect to see commercial activity resume over the coming quarters fueled by client investments, and inventory and receivable growth and rising utilization rates. In addition, we have two businesses which are better positioned than most to benefit from rising interest rates. Our strong growth in personal core deposits and Canadian banking has increased our sensitivity to higher interest rates and will drive outsized revenue growth in a rising rate environment. U.S. Wealth Management is also well positioned to benefit from rising interest rates, given the asset-sensitive nature of City National Bank's balance sheet combined with nearly $40 billion of sweep deposits. I will now speak to the second pillar of future performance. Our investment in technology goes well beyond just adding digital functionalities. These investments have helped create differentiated digital businesses and additional client touchpoints, accelerating cross-sell of existing clients and new client acquisition. We expect to see accelerated client growth through MyAdvisor, InvestEase, Insight Edge NOMI, RBC Ventures, and Aiden which have been in market for a number of years now. We made early and continuous investments in our distribution network, and client-facing talent, including mortgage specialists, commercial account managers, and investment advisors. The combination of these investments over a number of years is driving better outcomes for our clients, strong volume growth, deeper client relationships, and increasing scale and profitability. We are proud to note that RBC has yet again been ranked number one in overall customer satisfaction among the Big Five retail banks by J.D. Power. Specifically, Canadian banking added over $55 billion in mortgages, $45 billion in personal deposits, and increased assets under administration by over $50 billion over the last two years, leading to market share gains in these anchor products. Our long-term strategy to grow our core deposit business and provide exceptional service and advice is a core driver of our differentiated ability in building deeper relationships. The result is roughly 65% of our Canadian banking clients have more than just a transaction account with us, many of which also end up getting a credit card, a mutual fund, or a mortgage. Our mortgage relationships have higher retention rates for these multiproduct clients, with mortgage profitability up roughly two times higher when a client is retained for a second term. Moving forward, we're also excited about the potential of two new strategies to further accelerate client acquisition and growth in Canadian banking. We recently announced the national launch of RBC Vantage, a new everyday Canadian banking offering that brings together a comprehensive suite of powerful benefits for RBC clients, incentivizing even deeper client relationships. Our new offering gives clients the ability to use their debit cards to earn RBC rewards, save on monthly account fees, and earn more rewards and savings when they take advantage of partner offers. We also launched our exclusive multiyear strategic partnership with the Royal College of Physicians and Surgeons in Canada to support the unique needs of Canada's medical specialists. Furthermore, 45% of our Canadian high-net-worth retail client base has a relationship with both Canadian banking and Canadian wealth management, and we expect this ratio to increase over time as more of our clients shift surplus deposits into investment products, further accelerating the growth trajectory. Moving now to wealth management, where we've added to our leading scale by investing and hiring experienced investment advisors and technology capabilities to meet our clients' evolving needs. In this quarter, RBC Global Asset Management posted its strongest quarterly long-term mutual fund net sales performance ever, and has increased its assets under management by over $100 billion over the last two years. Canadian Wealth Management assets under administration have increased more than $80 billion over the last two years. We expect to similarly benefit from trends in U.S. wealth management, where our past investments have included strong advisor recruiting. This quarter alone, we added a further $4 billion of assets under administration by hiring more experienced advisor teams. This is on top of the $22 billion added over the prior eight quarters. These seasoned advisors are attracted by a client-first culture coupled with the capabilities and resources of a large bank, including an integrated technology platform. We also expect strong loan growth in City National to continue as the U.S. economy opens up, leveraging past investments to add private and commercial bankers and expanding to new markets, including our office in Hudson Yards in New York City. Growth will be further accelerated by the recent launch of City National’s new national corporate banking division, which specializes in meeting the complex needs of larger commercial and midsize companies across the United States. As you have seen in the last five quarters, we have benefited from the strong earnings provided by our capital markets business, which has delivered consecutive quarters of record results. Over half of RBC capital markets revenue is earned out of the United States and will continue to benefit from an improving economic outlook, instructive equity markets and structural trends and technology and ESG mandates that are creating further opportunities in the world's deepest and most active markets. To better leverage this opportunity, we've continued to strengthen and expand senior coverage teams in key sectors. We're already seeing strong results with a solid pipeline of mergers and acquisitions, advisory and equity underwriting revenue. We've also reorganized our global markets unit into newly created cross-platform groups, including the sales and relationship management group to further strengthen our client-centric approach. The digital solutions and client insights group will work to further scale RBC data science, artificial intelligence, and digital expertise across product lines. To sum up, we have strong momentum across our core franchises, and we will continue to focus on providing holistic solutions to grow and deepen client relationships with the goal of delivering long-term sustainable value. While we will continue to invest in new strategies, we remain committed to running our bank efficiently with an emphasis on driving productivity. We're also committed to delivering on our purpose of helping clients thrive, and communities prosper. This includes our commitment to play an active and accelerated role in addressing climate change. Supporting and financing our clients' efforts in the transition to net zero is central to our strategy. I'll now turn it over to Rod.
Rod Bolger, CFO
Thanks, Dave. And good morning, everyone. Starting on slide nine, we reported quarterly earnings per share of $2.76, up from $1 per share last year. Pre-provision, pretax earnings of $5.1 billion were up 11% year-over-year, despite significant headwinds from lower interest rates and a stronger Canadian dollar. Moving to slide 10, our CET1 ratio of 12.8% was up 30 basis points from last quarter, and we achieved a strong quarterly return on equity of over 19% along with a record internal capital generation of 43 basis points, even after paying out $1.5 billion in dividends to our common shareholders. This was partly offset by RWA growth largely due to robust volume growth in Canadian banking and City National and higher trading activities in capital markets. I'll now spend some time discussing the outlook for our CET1 ratio heading into the back half of 2021. We expect the implementation of model parameter updates to increase our CET1 ratio by approximately 70 basis points to 80 basis points next quarter. This benefit is expected to be modestly offset by an increase in SVaR multipliers effective next quarter, which is estimated to decrease our CET1 ratio by approximately 10 basis points to 15 basis points. Also, we have seen net credit upgrades of approximately $3 billion in the first half of 2021, only partially offsetting a cumulative $13 billion impact from net credit downgrades between Q2 and Q4 last year. For the second half of this year, net credit upgrades could continue at the same pace as in the first half contingent on the economic recovery. We expect to continue generating 15 basis points to 20 basis points of capital per quarter, net of dividends and RWA growth. Now moving on to slide 11, net interest income was down year-over-year largely due to the impact of lower interest rates, including lower repo and secured financing revenue in capital markets. More importantly, all bank net interest income continued its strong recovery after bottoming out in Q3 of last year, driven by strong volume growth in Canadian Banking and City National, and we expect core net interest income to continue to grow in 2022. Moving to segment level performance, Canadian Banking net interest margin increased one basis point quarter-over-quarter, but was down one basis point excluding the higher than average mortgage prepayment revenue. While lower interest rates and credit card balances lowered the Canadian banking net interest margin by 15 basis points year-over-year, higher card payment rates have been positive for credit quality. Looking forward, we expect strong Canadian banking volume growth to drive higher net interest income even as the net interest margin modestly contracts over the back half of 2021, partly due to a continued shift in asset mix. City National’s net interest margin was up four basis points relative to last quarter with the Paycheck Protection Program loans contributing most of the increase. Net interest income at City National was up 4% year-over-year, driven by continued strong volume growth. We expect this trend to continue going forward even as City National's net interest margin continues to narrow over the next two quarters, partly driven by continued build in excess deposits. City National’s average loan to deposit ratio of 75% has decreased from pre-pandemic levels of 84% in Q1 2020. Turning to slide 12, while we don't expect short-term policy rates to increase in the near term, we have strong leverage to rising interest rates as half our deposits are zero or low-rate core deposits. In addition, the economic recovery we expect will further growth in higher-yielding asset classes as credit cards and commercial loan utilization rates begin to rise in Canadian banking. City National has a more asset-sensitive balance sheet with roughly 50% of its loans in floating rate commercial loans. Looking forward, a 25 basis point increase in interest rates across the curve, with a stable deposit base could generate an additional $135 million in Canadian Banking net interest income over a 12-month period, and a 25 basis point increase in U.S. interest rates could generate a further $90 million of revenue in U.S. Wealth Management, including the benefits from our suite deposits. Turning to slide 13, our results this quarter continue to highlight the benefits of a diversified business model as market-related revenue across our largest segments benefited from elevated client activity and constructive markets. This continued to offset pandemic-related headwinds in our personal and commercial banking businesses. Strong capital markets activity boosted underwriting and advisory revenue, resulting in higher credit fees and continued growth in both assets under administration and assets under management that helped drive higher mutual fund and investment management fees in wealth management and Canadian banking. On slide 14, non-interest expenses were up over 7% year-over-year, largely driven by higher compensation, commensurate with strong results in wealth management and capital markets along with market-related movements in our U.S. wealth accumulation plan. Our results in the current quarter also included a favorable sales tax adjustment of approximately $40 million across all businesses. Excluding variable and stock-based compensation, expenses were down 4% from last year, and further adjusting for foreign exchange, our controlled costs were largely flat year-over-year, and this is after already lowering the growth rate over the last two years. As economies reopen, we remain focused on controlling key discretionary expenses like travel, and prioritizing investments that drive fine value. We'll also continue to execute our zero-based budgeting program that has resulted in a number of effective cost containment initiatives being implemented across RBC. Now moving on to our business segment performance, beginning on slide 15, Personal & Commercial Banking reported earnings of over $1.9 billion, largely driven by Canadian Banking, and Canadian Banking pre-provision, pretax earnings were up 8% from last year. Canadian Banking revenue growth was up 4% year-over-year, driven by double-digit growth in mortgages, personal and business deposits, higher mutual funds, distribution fees, and continued strength in direct investing volumes. Card service revenue was also up due to higher purchase volumes, as well as lower costs related to our rewards program. Canadian Banking expenses were well controlled, down 1% from last year, helping to drive operating leverage of 4.7%. Historically, we have targeted 1% to 2% operating leverage in Canadian Banking through the cycle, and we would expect to be above the top end of that range over the next few quarters. Turning to slide 16, Wealth Management reported quarterly earnings of $691 million, up 63% from last year, Canadian Wealth Management revenue was up 15% year-over-year, with assets under administration up 22% or nearly $90 billion. Mobile Asset Management revenue increased 26% year-over-year with assets under management up 15% or over $70 billion. RBC GAM net sales were nearly $15 billion in the quarter with continued strength in institutional mandates, including BlueBay. Canadian long-term retail sales of over $7 billion remain healthy in a quarter where the Canadian mutual fund industry recorded a strong RRSP season. The majority of our retail net sales flowed into balanced mandates with lower net sales in fixed income strategies, partly related to a pullback in North American bond returns. U.S. Wealth Management assets under administration growth was also strong, up over 30% in U.S. dollars. Turning to insurance on slide 17, net income of $187 million increased 4% from a year ago, mainly due to lower travel and disabilities claims costs and the favorable impact of actuarial adjustments. Turning to slide 18, Investor & Treasury Services net income of $120 million decreased 47% from a year ago. Funding and liquidity and asset services revenue declined year-over-year as the prior year reflected a more constructive environment as well as higher gains from the disposition of securities. Lower interest rates continue to negatively impact client deposit revenue. Turning to slide 19, Capital Markets reported another record quarter with earnings of over $1 billion. Corporate investment banking reported record revenue of $1.2 billion reflecting strong deal flow and elevated client activity. M&A advisory fees were the third highest on record as an improving macroeconomic climate has increased buying confidence levels in boardrooms. Robust ECM revenue was underpinned by strong IPO activity and constructive equity markets. Looking forward, we're seeing increased client activity and momentum in our M&A, advisory, and ECM businesses. Global Markets had a very strong quarter with revenue of $1.6 billion. We saw record equities results this quarter, benefiting from our participation in strong primary activity and derivatives flow. Fixed income trading results were down from last year, with lower volatility impacting rates and FX trading. This was partially offset by increased client activity in client trading, which benefited from constructive markets. Lower spreads hurt the repo and secured financing business, which benefited from elevated client funding demand and rate cuts last year. While primary issuance has positive implications for secondary activity, we do expect both debt underwriting and fixed trading results to moderate from strong results over the last year to close with strong momentum across our core franchises, and with a robust capital position, disciplined expense management, and leverage to higher rates, we are well positioned to continue delivering long-term growth. And with that, I'll turn it over to Graeme.
Graeme Hepworth, Chief Risk Officer
Thank you, Rod. And good morning, everyone. Starting on slide 21, the allowance for credit losses on loans of $5.5 billion was down $389 million compared to last quarter. This reflects provisions for credit losses on impaired loans of $177 million, or 11 basis points, which was down two basis points from last quarter and is at its lowest level in over 15 years. It also reflects the $260 million release of reserves on performing loans, primarily in Canadian banking and capital markets. Our macroeconomic forecast shows continued economic recovery as government support remains in place and vaccine distribution accelerated in our key markets this quarter. This is further supported by the significant level of savings Canadian households have accumulated since the onset of the pandemic, estimated at $212 billion. These savings should help support a strong economic recovery. While our release of provisions this quarter was more than double a release in Q1, our allowance for credit losses remains about pre-pandemic levels at 0.79% of loans and acceptances. We continue to take a prudent approach to provisions given the uncertainties associated with new COVID-19 variants, continued lockdown measures in a number of regions, and the significant government support that has suppressed default rates. I'll now speak to the credit performance of our key businesses starting with capital markets. Compared to last quarter, gross impaired loans of $700 million decreased $157 million, as we continue to see good resolution of previously impaired accounts largely in the oil and gas sector, which benefited from a more supportive oil price environment. Provisions for credit losses on impaired loans reflected a net recovery of $29 million this quarter, reflecting recoveries on loans in the oil and gas and other services sectors, partially offset by impairment on a commercial real estate loan in the retail space. We also released reserves on performing loans in capital markets for the third consecutive quarter. This quarter's release of $87 million reflects continuing improvement in macroeconomic forecasts, particularly for Canadian and U.S. GDP, global equity prices, and oil prices. In Wealth Management, gross impaired loans of $338 million increased $49 million from last quarter due to higher new formations at City National from borrowers in the consumer discretionary and technology sectors, along with a few smaller borrowers in the commercial real estate sector. Despite these noted impairments, provisions for credit losses on loans were relatively benign this quarter, and overall credit quality of the portfolio remains strong. In Canadian Banking, gross impaired loans of $1.4 billion remained stable from last quarter, and a $54 million increase in gross impaired loans in our retail portfolios was offset by a $55 million decrease in gross impaired loans in our commercial portfolios. Provisions for credit losses on impaired loans of $195 million was down $22 million from last quarter with decreases across all portfolios, with the exception of our cards portfolio. Higher write-offs in cards are attributed to the end of our deferral programs in Q4 2020, with card balances written off after 180 days past due. I would note that delinquency rates for cards have decreased relative to last quarter, as the impact of the client deferral program has largely migrated through to conclusion. Looking at our portfolio more broadly, delinquency rates for all products and regions across Canadian Banking are down compared to last quarter and remain at or below historical levels. As government support programs remain in place, benefiting many of our clients both directly and indirectly. This quarter, we also released $155 million of reserves on performing loans in Canadian Banking. The release came primarily from our cards portfolio and our commercial portfolio, reflecting the improvements in macroeconomic forecasts including GDP and short-term unemployment rates and our overall credit outlook. Turning to the Canadian residential mortgage portfolio on slide 25. As Dave touched on, we have been growing our residential mortgage exposure and market share since the start of the pandemic while maintaining a prudent and consistent approach to risk management. Origination metrics on loan-to-value, debt service, and FICO scores have remained largely unchanged compared to pre-pandemic levels. We've also stressed the portfolio for a higher interest rate environment, which demonstrates that the vast majority of our clients have the capacity to absorb a significant increase in interest rates. That said, we have taken a conservative approach to our reserves for performing residential mortgages, which are stable compared to last quarter. Improvements to our house price forecasts were offset by an increase in the weighting to our downside scenario, given the rapid growth in house prices since the start of the pandemic. To conclude, while credit trends improved this quarter, we continue to maintain a cautious approach to reserve releases until a larger percentage of the population is vaccinated, vaccines prove effective against new COVID-19 variants, and the economic recovery takes hold. At the onset of the pandemic, I noted that the prime nature of our retail portfolio and the diversity of our wholesale portfolio would serve as strong mitigants against the economic impact of COVID-19, and this remains true today. In our retail portfolio, FICO scores and loan-to-values remain strong, and our clients have increased savings and lower utilization rates on cards and personal lending products throughout the pandemic. In our wholesale portfolio, diversification across sectors has served us well, which is 4.5% of total loans and acceptances are to sectors most vulnerable to COVID-19. Additionally, we are seeing positive trends in many of our three key credit indicators. Watch lists are declining, upgrades are overcoming downgrades, and delinquency trends are stable. Both our retail and wholesale portfolios are well diversified geographically, which has helped mitigate the risk of an uneven global economic recovery and has allowed us to benefit from the reopening of the economies in certain regions. With many government programs scheduled to conclude in the fall, we do expect delinquencies and impairments to increase in Q4 and into the first half of 2022. However, we don't expect them to be as acute as we initially expected at the onset of the pandemic. Additionally, we expect to be able to draw down on the allowance for performing loans we built in 2020 so that our total provisions for credit losses across all stages will remain below long-term averages. With that operator, let's open the lines for Q&A.
Operator, Operator
Thank you for your patience. The first question is from Ebrahim Poonawala from Bank of America Securities. Please go ahead.
Ebrahim Poonawala, Analyst
Good morning. Well, I guess my question was now tied to capital return, Dave. In your prepared remarks, you talked about the payout ratio being at the low end as far as the dividend is concerned. Understanding that there's some benefit from lower provisions for credit losses, higher capital markets. Talk to us, one, in terms of the dividend payout as we look into next year your appetite for the dividend payout being at the higher end, maybe 50% or even exceeding that. And secondly, I think one question given the significant capital build outlook that you outlined, can we see buybacks being significantly stronger than what we are used to from the Canadian banks or from Royal over the last five years to ten years?
David McKay, CEO
Thank you for your question. We anticipated it, so I appreciate it. As we consider the best way to return capital to our shareholders, our strong capital position allows us to create ample organic capital over time to support RWA growth. We see significant organic growth opportunities within our platform. Our primary goals reflect this outlook. Moreover, with our pro forma CET1 exceeding 13% in Q3, we believe we can accelerate growth and return capital to shareholders at a faster pace. Regarding your inquiry about the dividend payout ratio, our long-term strategy remains to align our dividend payouts with core earnings growth, as you mentioned, and we have adjusted to the lower end due to challenges in raising dividends. The main message we want to convey is that we consider our core earnings to be quite robust. I’ve mentioned several existing advantages within our business. Improved credit card performance and a growing number of active customers have contributed to a significant reduction in credit card balances, leading to an increase in revenue. We anticipate a rebound in these areas, supported by strong profitability in our core deposit book in both Canada and the U.S. These factors give us confidence in our core earnings and the potential to raise the payout ratio back to the higher end of the spectrum. Therefore, our strategy of returning earnings to shareholders remains unchanged. We are confident in our ability to do so, thanks to the favorable conditions and our solid capital foundation. In terms of longer-term capital returns, we have several options at our disposal, and we plan to implement accelerated buybacks as a key strategy for returning capital to shareholders. We are also exploring other dividend return mechanisms. We are analyzing various scenarios to maximize returns for our shareholders. In summary, we are excited about the opportunity to support accelerated organic growth, increase our dividends based on current core earnings, and return excess capital to our shareholders.
Ebrahim Poonawala, Analyst
Got it. Thank you.
Operator, Operator
Thank you. The next question is from Gabriel Dechaine, National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Yes, I have a similar question, actually. And, more so on the Organic RWA growth because you do have, if pro forma close to $12 billion of excess capital above 11%. You got the buybacks, you got the dividends, but there are limitations there. I'm just wondering how you're thinking about capital consumption via organic growth. And, what does accelerate growth look like to you? How long it could take to kind of chew through that excess capital, which is great to have, but it also depresses your returns, ironically, during a quarter where you have a 19% return on equity.
David McKay, CEO
Maybe I'll start, and then perhaps Rod will chime in. In my comments, we emphasized a couple of new platforms, especially in the mid-market commercial sector in the United States, focusing on private companies with revenues between $2 billion and $5 billion. These are attractive companies, and we have established a dedicated team led by Rich Roseto, who has experience building similar businesses at other large banks, which gives us confidence in our capabilities. We expect to see new growth trajectories, including drawdowns in our operating lines, which are significant. We are the market leader in business financing, and right now, our operating lines are underutilized. Thus, we anticipate drawdowns that will utilize capital. Our global capital markets business is strong, especially in the busy U.S. marketplace requiring capital for underwriting and increased lending opportunities, and our pipeline is active. We expect our core businesses to experience accelerated growth driven by new clients and existing business on the balance sheet, which will likely consume more risk-weighted assets than we previously projected. Overall, we are optimistic about our growth prospects and are managing that within our current risk appetite. Importantly, this will not deplete the excess capital on our balance sheet, so our core acquisition strategy remains focused and unchanged. We aim to create shareholder value and growth through acquisitions and are selective about how we should deploy capital for that purpose. This presents significant opportunities for us to achieve both growth and return capital to shareholders. It's an advantageous position to be in. We believe that the businesses we are investing in will begin to accelerate, consuming more risk-weighted assets and positioning us for strong growth across our Canadian banking, U.S. wealth management, commercial banking, and global capital markets operations, all of which are experiencing increased client activity and have robust networks. We have invested in expanding our capabilities to seize these growth opportunities, and we are eager about what lies ahead.
Gabriel Dechaine, Analyst
Thank you.
Operator, Operator
Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi, good morning. Just one clarification before my real question, how much of the $40 million sales tax adjustment that Rod called out was in Canadian banking?
Rod Bolger, CFO
I think this goes across our Canadian businesses. We didn't disclose that. But Canadian Banking business is a good share of our overall businesses in Canada. All of our businesses are obviously number one or number two market share in Canada. So you can roughly allocate that based on the size of the Canadian Banking business. We're not disclosing that. But it was a fair amount but not a substantial amount.
Meny Grauman, Analyst
Thanks for that, Rod. And then just wondering, we've heard from a few peers, so they talked about kind of post-pandemic step function up in terms of the run rate of their capital markets business. I'm wondering from your perspective how you view your capital markets business coming out of the pandemic. In your commentary, you talked about maybe a little bit of a moderation in terms of some of the trading revenue. Regardless of markets, is there a step function in your capital markets business? Do you feel like you've met headway through this volatile period?
Derek Neldner, Head of Capital Markets
Sure. It's Derek Neldner. I'll take that question. Thank you for it. I'll come out of two ways. I think if we look at the pipeline overall right now further to Rod and Dave's comments, we continue to see a very strong backlog and pipeline in our investment banking platform driven by M&A, as well as ancillary financing. Some of the flow financing has moderated a little bit from the peaks, but we continue to see very good levels of activity. In our corporate banking business, while as you would have seen from prior quarter results, our loan utilizations in corporate banking came down significantly following the peak post-pandemic. Last year, we have seen that stabilize and we're seeing a lot of good incremental financing opportunities to support our corporate clients come up on the back of M&A and organic growth initiatives that our clients are pursuing. In the markets business, we've obviously had a very robust backdrop for the last 12 months. We do expect that will normalize from the peaks. But continuing to see a very good both equity and fixed income market, we do expect that while it will normalize, it will normalize above pre-pandemic levels. I think the second item I would highlight and further to some of Dave's comments is notwithstanding some normalization in the market. We feel we've got a very sound strategy to continue our growth in capital markets. We've made some important investments in the talent side. We've done some reorganization of our business that Dave alluded to in his comments. We do think that through a number of our initiatives and investments we are well-positioned to continue to grow our client businesses, increase our market share, and that should move our business to a level above where it was pre-pandemic.
Meny Grauman, Analyst
Thanks Derek. I didn't want to leave you on.
Operator, Operator
Thank you. The next question is from Doug Young from the Desjardins Capital Markets. Please go ahead.
Doug Young, Analyst
Good morning. My question is about City National Bank. Rod, I may have missed it, but could you explain the impact of a 25 basis point increase in rates on that business? I would appreciate it if you could break down that business further. I'm not sure how to determine what the pre-tax, pre-provision earnings were this quarter, but if you could discuss that and whether there was year-over-year growth, that would be helpful. Additionally, if we set aside the provisions for credit losses, what is the outlook for this business on a pre-tax, pre-provision basis for the upcoming years? Thank you.
Rod Bolger, CFO
Thank you for that, Doug. We have disclosed the impact on both businesses, which amounts to approximately $85 million. It is essentially split evenly between the private client business and City National Business, primarily due to the sweep balances. Furthermore, City National stands to benefit more if loan rates increase, as its loan portfolio is partially variable. However, half of the portfolio consists of longer-term fixed loans, including a growing mortgage portfolio, unlike the sweep business. For pre-tax, pre-provision figures for that business, you can expect it to be around $200 million on a standalone basis. This is based on their call reports, though there are some factors related to purchase accounting that are not significant. That business is set for growth; however, we have been affected by lower interest rates, which have compressed our margins. Although we have managed to reduce the growth rate of expenses, we are still investing and increasing the expense base. In the first three and a half years post-acquisition, we experienced strong operating leverage with expenses growing in the mid-teens, but now that rate has slowed to single digits. Revenue growth has also decelerated due to interest rates. Nevertheless, we are now positioned for growth; we are seeing double-digit increases in deposits and loans, and our mortgage portfolio is expanding alongside commercial loans. This growth is expected to continue as the U.S. economy improves, leading to higher earnings. We reached a peak in Q3 of 2019, but we anticipate sustained growth throughout 2022 and 2023.
Doug Young, Analyst
Great. Thank you.
Operator, Operator
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Scott Chan, Analyst
Good morning. Derek, could you elaborate on the capital markets? You mentioned that the U.S. accounts for about half a percent, which represents 50% of the revenue, while the other half is non-U.S. Could you discuss some of the themes you mentioned regarding investment banking and global markets, particularly any differences? Additionally, since you operate as a global markets platform, are there any revenue synergies that may have emerged from the pandemic?
Derek Neldner, Head of Capital Markets
Sure. A couple of questions in there that I'll try to address. And so, from a geographic perspective, as Dave mentioned, over half of our revenue today would be in the U.S. We do also have a very strong platform in Europe, and obviously, the strength in our domestic platform in Canada. We're very happy with our geographic footprint. We see very good growth opportunities in the U.S. and it continues to be the primary focus. But we'll invest in the global platform where we see good opportunities, but clearly the U.S. is where we see the most attractive opportunity at this point in time. Between corporate investment banking and global markets in terms of differences we see in terms of the outlook. As I mentioned right now, the pipeline is very robust on the investment banking side. We are optimistic that will continue for some time, given the confidence that we've seen returned to corporate clients as the economy has re-emerged. We do see a little bit more normalization in the markets business. You saw that quarter over quarter, and we expect that that will continue. So a little more strength maybe on the corporate investment banking side with a little more moderation in the market side of the business. I think, finally, in terms of your comment on synergies. This is an area where as we've continued to invest and grow our business. We have really been focused on driving more synergies, both across geographies and across our platform. All these businesses are very interrelated. Our investment banking activities are clearly supported by the loan book, as we see primary issuance that drives secondary trading activity, and that can then trigger cross-sell opportunities across other businesses. So, we feel we're doing a good job capitalizing on those synergies, but we continue to believe there's more we can do there. We've undertaken some reorganization of the business to allow us to better capture that, and we feel good about the opportunity ahead to do so.
Scott Chan, Analyst
Right. Thank you very much.
Operator, Operator
Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.
Lemar Persaud, Analyst
Thanks. So I just want to flip back to domestic mortgages. So domestic mortgage growth seems to slow a bit sequentially relative to what we've seen at some peers. And when I see this, and just knowing that Royal was actively taking market share, it just makes me wonder if you guys are intentionally tapping on the brakes because maybe the risk-reward isn't there. Or maybe there's something else. Just wondering if you could offer any commentary on that?
Neil McLaughlin, Group Head, Personal and Commercial Banking
Yes, thanks for the question. It's Neil. I think when we look at the mortgage business, it's certainly not about risk; we embrace it. We've been experiencing double-digit growth in the mortgage sector for over a year and believe it continues to have significant momentum. Quarter-over-quarter, we observed very competitive pricing in the market, both in terms of offered rates and acquisition offers, with some competitors providing more than double the standard rates. We decided to leverage this momentum and focus on maintaining our client relationships while also targeting better spread deals. There was a slight slowdown in this quarter, but I have no concerns regarding our ability to grow our market share in the mortgage sector. I anticipate that momentum will return in the third quarter.
Lemar Persaud, Analyst
Excellent. And that's it for me. Thank you.
Operator, Operator
Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Sohrab Movahedi, Analyst
Thanks. I wanted to ask Graeme about his cautious approach to reserve releases. Looking at the bank's total provisions for credit losses over the last five years, it seems the average has been around 35 basis points. Could you clarify if you are suggesting that zero or even recovery positions in total provisions could continue for the foreseeable future?
David McKay, CEO
So thanks for that question. Certainly a good place to talk to because there's a lot of complexity between the different stages of allowances here. Certainly this quarter in a total provisions for credit losses perspective, we were in a net release position. When you say for the foreseeable future, obviously, we can't be in that kind of spot for an extended period. But if you look at how this could play out in the coming quarters. And then certainly, this is very conditional onto those key proof points I referenced in my comments. We're really dependent on how the vaccine rollout kind of precedes in the coming months that we really get the health outcomes. We're looking for how the economy reopens subsequent to that, and then thirdly, really how kind of the transition of government programs, kind of concludes, if you will. And so, obviously, a lot of dependencies on those. But we are seeing very good fundamental credit indicators in our portfolio and then that's obviously seeing that translate into very low Stage 3 losses. So all the data analytics would indicate in the near term that we will have continued good Stage 3 performance. As we get more confident in those proof points I referenced, then that could yield further Stage 1 and 2 releases. We do expect though, over the latter half of this year and into kind of the early half of 2022 that those impairments and delinquencies will rise and Stage 3 will rise with that. But again, I think we've got a very prudent loans put up in Stage 1 and 2. And so that'll be more funded by kind of transition out of Stage 1 and 2 and into Stage 3. And so that's why I kind of comment and so the variability between those three stages could change depending on how those factors play out over the coming months. But in aggregate, we feel quite confident that the total provisions for credit losses will kind of remain within our long-term averages and in the near term could see continued benefits.
Sohrab Movahedi, Analyst
Okay. Thank you.
Operator, Operator
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca, Analyst
Good morning. Rod, if you could go to some comments you've offered in the past on the expense side, you suggested that operating leverage could be better in the second half of 2021 than it was in the first half. Looking at spending trends in 2020, it does look like operating leverage should be fair bit better. Can you offer in the outlook on operating leverage in the second half in the context of some of the expenses that some areas of the expense lines that you should see some increases, or maybe moderation expense there?
Rod Bolger, CFO
Yes. Thanks, Mario. I like to kind of bifurcate between stock-based compensation, variable compensation, currency exchange, and then all the other expenses, right, that are more controllable, which we've done in the chart that we added. I would expect that we would have positive operating leverage into the second half of this year; Canadian Banking is well-positioned for positive operating leverage with good expense discipline. I think our FTE might have been up year-over-year, but down quarter-over-quarter. So we're managing that well and we're continuing to grow the client base. And now, revenue growth is accelerating. And then you look at the wealth businesses, a lot of that depends on the market. If we keep constructive equity markets, we should see continued positive operating leverage. At the all-bank level, a lot of it gets down to mix. You can run a scenario where you have positive operating leverage of 2% across all five segments, and that negative at the top of the house, sometimes the accounting and insurance can confuse the top of the house because you can get some big trades that have big revenue, but also predefined client acquisition expenses. So, but all-in-all, we should see positive operating leverage at the top of the house in the second half of the year, absent some market disruption.
Mario Mendonca, Analyst
Okay. And then just my final question is on the all-bank margin, I like to separate what I see from the domestic and the U.S. retail banking segments and what I see at the rest of the bank. It does seem to me that we should see some progression in the margin because low-margin liquidities are coming down. Rates are moving higher, cards might improve. But I didn't get the sense from listening to your opening comments that you'd expect the all-bank margin to improve. I may have misunderstood. But what is that outlook? And if it's not going to improve, can you offer some reasons as to why?
Rod Bolger, CFO
Yes. Thanks for that. And it's important to look at that. There's a lot of complexity to that as you get into, right? We're going to see positive net interest income at the Canadian Banking level in the second half of the year; we’re going to see positive net interest income growth in City National in U.S. dollar terms. And we'll see positive for both of those for the full year, which I think is important. But what you might see because of the stronger Canadian dollar, is you might see that benefit at the top of the house kind of evaporate as you convert it from U.S. dollars to Canadian dollars. But we'll get a benefit on that in expenses, so it's not going to hurt earnings. Similarly, loan book margins and Derek's business have come down, utilization is down versus a year ago, and margins have come down. There's so much liquidity out there. So you got to look at some of those other businesses trading net interest income and might see a little bit of headwinds, but it's not a big driver. Loan book and capital markets, again, not a big driver. So when you add all that up, because of foreign exchange, because of trading books, you might see at moderate and be kind of zero-ish. But the core businesses, you're going to see net interest income growth in the core businesses and local currency. And that's what's going to drive the overall earnings at the top of the house.
Mario Mendonca, Analyst
Okay. Thank you.
Operator, Operator
Thank you. The next question is from Paul Holden from CNBC. Please go ahead.
Paul Holden, Analyst
Thank you. Good morning. So I want to kind of go back to a point Rod just made in his answer regarding the amount of liquidity out there. Appreciate your optimism regarding the outlook for loan growth. And I'm totally there with you given economic data we're seeing out of the U.S. But the concern, I guess, is that there's so much liquidity out there that maybe that return to loan growth at the industry level might take longer than we're originally thinking. So, wondering if you can put some thoughts around the timing on that, not to a specific quarter, but will it come later in 2021 or we have to wait for 2022, or we have to wait for later in 2022? Just sort of some general thoughts around timing would be helpful.
David McKay, CEO
Paul, I’ll begin, and then Rod can add on. In my comments, I mentioned that one of the major areas of loan growth for us is the return of our credit card balances to the $19 billion to $20 billion range, up from $16 billion. This is usually linked to economic activity and card usage. Our analysis indicates that this relationship will likely persist, although there may be some lag due to the excess liquidity in the market. While it might not perfectly mirror past economic cycles, we believe any delay will be minimal. Client behavior tends to remain steady, and we expect card purchases to increase alongside this. Regarding business financing, liquidity and cash flow optimization are also expected to show some lag, which we are already starting to observe. In the mid-market commercial sector, utilization rates are still at cyclical lows. Given the current economic activity, we anticipated an inventory and receivable increase that hasn't materialized yet. On the corporate side, we are seeing liquidity contributing to paydowns on draws from last year. As Derek pointed out, with those paydowns occurring, clients are now focusing on growth, which will lead to increased drawdowns. Overall, we are observing some delays across our three business sectors, but we are beginning to see the correlations strengthen. Rod, would you like to add anything?
Rod Bolger, CFO
Yes. I mean, if you look structurally at some of the points Dave made, right, you've got the force working against you is the liquidity. Arguably 20 years of savings rate in both Canada and the U.S. over the last year, so that hurts loan growth. But then you have structural with mid-single-digit GDP growth that everyone is forecasting, that's going to drive it up. Plus, I think companies are going to be less likely to play more just in time. Because of supply chain issues that are out there, they're going to hold more inventory. That's going to be positive. And then you look at the mix of businesses, even when we've had negative loan growth in capital markets over the last year, we've had positive at the top of the house, because we have such strength and diversified business. City National strong double digits, that's a good starting point. Even with our mortgage business going from double digits to high-single digits, even if it falls to mid-single digits by the second half of next year, because you put it all together, we're still going to have good positive loan momentum.
David McKay, CEO
And then the glass-half-full side, it could feed into our investment business, as we talked about in our speeches. So there's as many positives or more positives than there are negatives to that liquidity.
Paul Holden, Analyst
I want to delve a bit deeper into the growth of business loans. You mentioned there might be a lag. This is somewhat speculative for everyone, but do you think the lag could be one or two quarters, or might it extend to something more significant like four quarters?
David McKay, CEO
Neil, do you want to take a stab at that?
Neil McLaughlin, Group Head, Personal and Commercial Banking
Yes, certainly. We're observing notable trends in revolvers, especially in a couple of sectors. In our core commercial business, the revolver utilization rate has decreased by 10% compared to pre-pandemic levels. Additionally, our deposits have increased by approximately $40 billion. As the economy begins to reopen, I expect entrepreneurs will regain the confidence to invest that capital. We anticipate being closer to a one to two quarter timeline, rather than a four-quarter timeframe. However, certain sectors, like our auto finance business, are facing challenges due to a lack of inventory to finance, which is tied to supply chain disruptions. We expect inventory to start coming back online early next year with microchips reaching manufacturers, which will lead to significant growth. Similar observations can be made regarding our consumer lending business, where there might be roughly a four-month lag before we see direct lending rebound after the economy opens, as consumer spending and travel resume as Dave mentioned.
Paul Holden, Analyst
That's helpful. Thank you. Appreciate it.
David McKay, CEO
We have one more question in the queue. We'll go to that.
Operator, Operator
Thank you. The next question is Nigel D'Souza from Veritas Investment Research. Please go ahead.
Nigel D'Souza, Analyst
Thank you. Good morning. I wanted to ask the employee reduction in a different way. And I was wondering if persistent U.S. dollar weakness does that change how you evaluate your U.S. franchises? So, for example, if we turn into a world where the Canadian dollar is closer to parity, does your strategy in the U.S. change, and do you start prioritizing Canadian businesses more? Or does currency not have a major impact on your outlook here?
David McKay, CEO
I would say that currency doesn't have a long-term impact. In fact, it may actually make capital deployment slightly easier at that time. As we focus on growing our franchise, especially with our goal to drive premium growth through pre-tax pre-provision earnings of $5 billion, we require a substantial presence in the U.S. markets. This includes strong business segments in U.S. wealth management and commercial banking to continue delivering strong profits. Therefore, the U.S. market is absolutely essential to our overall growth strategy and performance, regardless of the current status of the U.S. dollar. In fact, it may enhance our growth potential. While the dollar will obviously affect earnings and risk-weighted assets, it does not alter our fundamental need to balance growth among Canada, the United States, and Europe.
Nigel D'Souza, Analyst
That makes sense. Thanks for the color. Thank you.
Operator, Operator
Thank you. This concludes today's question and answer session. I'd like to turn the meeting back over to Mr. McKay.
David McKay, CEO
I just want to thank everybody for their questions. The core messages that I think came up both in the speeches, but also in a lot of great questions that we received that we're very happy with our pre-tax pre-provision earnings of 11% and $5 billion. I think it really highlights the organic growth capability of this franchise. You saw strong performance across the board. Then we had a chance to highlight where we see embedded profitability in business we've already earned from clients, whether that's the existing credit cards in customers' hands, whether that's a significant number of operating lines that we already have with customers that will get drawn. Overall, increased economic activity will drive growth without having to earn a new client. We've got the interest rate tailwind that we think differentiates ourselves both in Canada and U.S. already on our balance sheet. You heard a number of strategies to acquire new clients and grow, whether that's, you know, a unique RBC badge and leveraging our differentiated loyalty platform to completely change the core client business. We're having enormous success with the College of Surgeons and attracting high-net-worth medical professionals in Canada and we're very excited about that. You heard about our new growth strategy in the midmarket corporate on top of a very successful, as Rob pointed out, mortgage strategy in the U.S. that's really getting significant traction with already $15 billion of mortgages on our balance sheet in the U.S., and growing your core double-digit growth in our City National Bank, we expect to continue. So we feel that the investments we've made, we didn't back off capital markets opportunities are significant in our advisory, M&A, ECM, and DCM business. So we feel very well poised now through historic investments to capitalize on the growth and the investments that are going to get made to transition and improve our society. So thank you very much for your questions. I look forward to seeing you in Q3. Have a good summer.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.