Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q3 2024
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the RBC 2024 Third 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. Please go ahead.
Asim Imran, Presenter
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Katherine Gibson, Interim Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions are Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; and Derek Neldner, Group Head, Capital Markets. As noted on slide one, 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.
David McKay, CEO
Thanks, Asim. Good morning, everyone, and thank you for joining us. Today, we reported third quarter earnings of CAD4.5 billion, adjusted earnings of CAD4.7 billion, underpinned by strength across our largest businesses. Canadian banking net interest income was up 26% year-over-year, or 11% excluding the impact of HSBC Bank Canada, which I will speak to shortly. These results were driven by higher interest rates and strong volume growth. Asset management and wealth management revenue growth was underpinned by over 15% growth in fee-based assets over the prior year, as well as higher transactional revenue. Capital markets reported revenue of CAD3 billion, while generating pretax pre-provision earnings of CAD1.2 billion, as we continue to win market share in key products amidst rising fee pools. Our continued focus on improving productivity drove all bank operating leverage of 2%. Pre-provision pretax earnings growth was 16% year-over-year or 8% excluding HSBC and adjusting for specified items; credit quality remains strong. It reported a return on equity of 15.5% or adjusted ROE of 16.4%. On the foundation of a common equity Tier 1 ratio of 13%. Strong earnings generated significant 70 basis points of capital this quarter, or 26 basis points net of dividends in RWA growth. This is more than what we earned in the first-half of the year, underscoring the capital generating power of our diversified business model. Our premium ROE positions us to continue deploying our growing capital base towards client-driven RWA growth and returning capital to shareholders, while maintaining appropriate capital buffers. As always, we look at the intrinsic value of our business when determining the level of buybacks. As we remain well-positioned to compound growth in book value per share, which was up 11% year-over-year, we expect an increasing level of buybacks over the coming quarters to continue providing long-term value to our shareholders. I will now provide an update on the recent acquisition of HSBC Canada, which contributed earnings of CAD239 million or adjusted earnings of CAD292 million excluding specified items. Results this quarter benefited from the accretion of purchase accounting marks, CAD90 million of cost synergies achieved and CAD156 million of underlying earnings, including higher-than-expected Stage 3 PCL. Having realized annualized run rate savings to date of approximately 50% of our stated target, we are confident we will achieve our expense synergy goal of CAD740 million per year. We also remain impressed by HSBC Canada's fundamentals, including the strength of the franchise and the balance sheet we acquired. Employee and client engagement is high and our combined sales force continues to rebuild lending origination pipelines, which had narrowed ahead of our extended close. While still early, we see encouraging client activity and opportunities for revenue synergies across the enterprise. HSBC Canada retail clients are being referred to our Canadian wealth management business and are now benefiting from our deep investment management and planning capabilities. Existing RBC retail clients are also benefiting from new product and service capabilities, including foreign currency accounts. Our combined commercial banking clients are poised to benefit from the upcoming expansion of our trade, finance, and global cash management offerings. Before discussing our business results in greater detail, I will provide my perspective on the macro environment where the U.S. has outperformed a softening Canadian macro backdrop. In Canada, higher interest rates and rising unemployment are impacting consumer spending and business investment. This in turn has led to moderating non-shelter inflation and lower GDP per capita. In contrast, U.S. inflation remains above the targeted range. However, there are signs that the restrictive interest rate policy is stabilizing supercore inflation measures, while the U.S. labor market remains resilient. Declining job openings and rates of attrition point to some weakening. The short-term divergence of monetary policy between the Bank of Canada and the U.S. Federal Reserve is expected to narrow ahead of expected and accelerating U.S. interest rate cuts, with positive implications for yield curves. While there's a higher degree of geopolitical uncertainty and volatility, our diversified businesses are well positioned for the macro-driven shifts in the operating environment. We expect to see the benefits of lower short-term interest rates and capital markets activity, constructive equity markets, availability of credit, improved debt serviceability, and the flow of money from deposits into investments. As we continue to provide our clients with valued advice and solutions amidst a complex backdrop. We're also delivering on our strategic priorities across our largest businesses and geographies, including expanding our funding and transaction banking capabilities. Starting with Canadian banking, where core deposit growth remains central to our client acquisition strategy. While one quarter doesn't make a trend, total banking account deposits grew faster than GICs on a sequential basis. Furthermore, we are beginning to see retail clients augment their portfolios with diversified investments such as mutual funds. We remain well positioned to retain and capture this money in motion following the ongoing shift in the interest rate outlook and client sentiment. Within personal banking total deposits were up 21% from last year, or up 8% excluding HSBC Canada. We're having our strongest year-to-date acquisition volume, with new to bank checking acquisition up over 20% year-over-year, driven by value propositions such as RBC Vantage, strong client acquisition in the newcomer segment, and partnership referrals. Our leading digital channels continue to deliver award-winning experiences to our clients, a key indicator of client satisfaction, which in turn is important to the health of our franchise. We're proud that RBC ranked number one in customer satisfaction in both the J.D. Power 2024 Canada Banking App Mobile Satisfaction study and the Canada Online Banking Satisfaction study as well. Our proprietary loyalty program also won multiple awards this quarter at the Loyalty 360 awards, including the Platinum Award for brand-to-brand partnerships, a foundational element of Avion rewards. Credit card balances were up 13% year-over-year, or 11% excluding HSBC Canada. While Canadians are spending less, our total client spend was up 7% from last year, including higher airline spend. Mortgage growth was up 12% or a modest 3% excluding HSBC Canada. We remain disciplined in our approach as we look to strike a balance between consistent through the cycle growth and spreads amidst intense competition. Houseful, an RBCx venture, provides a differentiated growth channel as we look to move up the client acquisition funnel in our client's home-buying journey. In our leading commercial banking franchise, deposits were up 25% year-over-year, or 12% excluding HSBC Canada. Business loans were up 43% from last year, or 14% excluding HSBC Canada, largely from increased activity from our existing clients. We are seeing gains in market share across all segments and priority industries; our clients benefit from the recent investments in our frontline capabilities and coverage teams. Turning to capital markets, where we reported pre-provision pretax earnings of CAD1.2 billion this quarter, or CAD4 billion year-to-date, above our annualized guidance of CAD1.1 billion per quarter. We generated CAD3 billion in revenue this quarter, with half of this coming from the U.S., our second home market and an important element of our growth strategy. Investment banking revenue was up 36% from last year, benefiting from a recovery in global fee pools and a more than 40 basis point gain in market share, notably in M&A. We are seeing also early signs of success and client wins in a recently launched U.S. cash management platform where we will look to add further capabilities. RBC Clear was awarded the best overall bank for cash management in the United States from the Global Finance Magazine 2024 awards. Global Markets reported CAD1.4 billion in revenue this quarter, down 1% from last year, as our equities business was impacted by legislative changes to the dividends received deduction under Canadian federal measures. Looking forward, we have a robust M&A pipeline as our continued investments in people, product capabilities, and client coverage, combined with an increasingly constructive environment, is driving more active client dialogue amidst secular trends. However, market volatility could slow the velocity for moving deals from announcement to close. In contrast, this market volatility can continue to act as a constructive tailwind for our sales and trading businesses, a demonstration of the strength of our diversified platform. Moving to our wealth management segment. Assets under administration in Canadian wealth management were up 20%, or nearly CAD100 billion from last year, increasing to a record level of over CAD650 billion. RBC Dominion Securities, part of our Canadian wealth management franchise, was named the highest-ranked bank-owned investment brokerage in Canada in 2024, investment executive brokerage report card. This is the 18th year in a row that RBC has won this prestigious honor. Assets under administration in our U.S. wealth management platform also reached a record, up nearly CAD74 billion, or 13% year-over-year to a record AUA of nearly CAD650 billion. Furthermore, loans and deposits in our U.S. wealth management franchises reported strong year-over-year growth this quarter. Our U.S. wealth management advisory business is the second-largest contributor to U.S. dollar results. RBC Global Asset Management's assets under management increased CAD100 billion, or 18% from last year to an all-time high as well, benefiting from robust equity markets and increasing inflows to higher yielding fixed income funds as interest rates begin to decline. RBC GAM also gained market share in retail mutual funds as it generated positive net sales in a quarter, where it appears the industry is attracting net redemptions. In conclusion, we continue to execute against our stated strategies to generate premium ROE and growth. As part of the journey, we recently announced a few key executive appointments. First of all, I would like to thank Doug Guzman for his leadership and for the pivotal role he has played leading RBC Wealth Management from strength to strength and insurance over the years. In addition, we look forward to welcoming Erika Nielsen, Jennifer Publicover, and Sean Amato-Gauci to the next quarterly call as Group Heads of Personal Banking, RBC Insurance and Commercial Banking respectively. We will also continue to invest to drive diversified growth across client segments and sources of funding, while maintaining our focus on efficient capital allocation, prudent risk management, and improved productivity. Furthermore, as it relates to our broader U.S. footprint, we are focused on improving connectivity across our three platforms. Katherine, over to you.
Katherine Gibson, CFO
Thank you, Dave, and good morning, everyone. Starting on slide eight. We reported diluted earnings per share of CAD3.09 this quarter. Adjusted diluted earnings per share was a record CAD3.26, up 15% from last year. These adjusted results included net earnings from HSBC Canada, up CAD292 million. Turning to capital on slide nine, our CET1 ratio was strong at 13%, up 20 basis points from last quarter, mainly reflecting internal capital generation net of dividends. This was partly offset by net credit migration in wholesale portfolios and strong growth across our Canadian banking and capital markets portfolios. We also initiated share repurchases this quarter, buying approximately 480,000 shares for CAD73 million. Moving to slide 10. All bank net interest income was up 17% year-over-year or up 19% excluding trading revenue. These results were largely driven by the addition of HSBC Canada, as well as higher spreads and average volume growth in Canadian banking. All bank NIM, excluding trading revenue, was up 1 basis point from last quarter, mainly driven by tailwinds in Canadian banking. This was partly offset by changes in asset mix in capital markets, non-trading portfolios, as well as lower earnings on residual capital reflecting the close of the HSBC Canada acquisition. Canadian banking NIM was up 8 basis points from last quarter. HSBC Canada drove 4 basis points in NIM expansion this quarter, mainly reflecting the full quarter benefit from the accretion of purchase accounting fair value adjustment. Core Canadian banking NIM was up 4 basis points sequentially. NIM benefited from improvements in product mix, including strong growth in core deposits. This quarter also included a favorable benefit from treasury-related activities. In addition, the benefits from our tractored core personal banking deposit portfolio continued to flow through. However, these benefits were partly offset by competition for deposits and mortgages, as well as the dilutive impact of the BA CORRA migration. Looking forward, we expect fourth quarter Canadian banking NIM to be down a couple of basis points sequentially, reflecting the continuation of headwinds noted this quarter. This is in line with our prior guidance for higher NIM in the second half of the year. Moving to slide 11. Non-interest expenses were up 11% from last year, excluding HSBC Canada integration costs and the impact of amortization of intangibles, adjusted expense growth was 9%. Further, excluding HSBC Canada run rate expenses and other macro-driven factors such as FX and share-based compensation, core expense growth decelerated to 5% year-over-year. The bulk of core expense growth was driven by higher variable compensation, reflecting strong results in capital markets and wealth management. Looking forward, we continue to expect all bank core expense growth, in addition to HSBC Canada run rate expenses, to be at the top of the mid-single-digit range for the fiscal year, with volatility within the range largely driven by movements in variable compensation. Given the uncertain macro environment, we remain vigilant in controlling costs and running the bank efficiently. Turning to taxes. The non-TEB effective tax rate was 16.5% this quarter, or an adjusted tax rate of 20% on a taxable equivalent basis. Going forward, we expect next quarter's adjusted tax rate to be towards the higher end of our full-year guidance of 19% to 21% on a taxable equivalent basis. Broadly, our guidance for fiscal 2025 effective tax rate is similar to that of the fourth quarter as Pillar 2 income taxes may arise in relation to jurisdictions where our operations have an effective tax rate below 15%. Turning now to our Q3 segment results beginning on slide 12. Personal and commercial banking reported earnings of CAD2.5 billion. Canadian banking net income was up 17% year-over-year. My following comments will now exclude any impact to Canadian banking from HSBC Canada. Canadian banking's earnings were up a strong 8% year-over-year. Net interest income was up 11% from last year, reflecting higher spreads and robust volume growth. Non-interest income was up 5% year-over-year, reflecting the benefits of market appreciation and increased client activity, which together drove higher mutual fund distribution fees, as well as higher service revenue and FX revenue. Year-over-year growth was also impacted by the prior year's CAD66 million retrospective HST on payment card clearing services. Expenses were up 5% from last year, helping to drive a 4.9% operating leverage and underpinning a leading 39% efficiency ratio. Turning to slide 13. Wealth management's earnings were up 30% from last year as market appreciation and net sale continue to drive strong performance in our wealth management, advisory, and asset management businesses. These factors were partly offset by higher variable compensation. In light of emerging industry developments around pricing dynamics for advisory sweep deposits, we note our total U.S. wealth management cash sweep is approximately $30 billion, of which the majority is in non-advisory accounts. Since the beginning of the rate hiking cycle, our pricing has been well above industry averages, particularly as it pertains to our largest wealth management relationships. As such, we do not anticipate making any material changes to our pricing of advisory sweep deposits. City National generated $77 million in adjusted earnings this quarter, over $115 million excluding the impact of losses on non-core investments. The non-core losses taken this quarter are consistent with our efforts to realign City National's path forward. Turning to our capital markets results on slide 14. Pre-provision pre-tax earnings of CAD1.2 billion increased 18% from last year. Corporate and investment banking revenue was up 23% from last year, reflecting strong municipal banking activity as well as continued market share gains across most major products, amidst a recovering fee pool and the impact of FX translation. Global markets revenue was down 1% from last year as headwinds in credit trading and equity derivatives trading were partially offset by higher debt underwriting and stronger results for rates, foreign exchange, and commodities trading, as well as the impact of FX translation. While business momentum remains strong, we note that the second half of the year, and in particular the fourth quarter, tends to be a seasonally slower period for capital markets. Turning to slide 15. Insurance net income of CAD170 million was down 21% from last year, driven by lower insurance investment results. It is important to note that the results in the prior year period are not fully comparable as we were not managing our asset and liability portfolios under IFRS 17. Importantly, our core business performance was strong, reflecting improved claims experience and business growth across the majority of our products. To conclude, our strong business performance drove a 16.4% adjusted ROE this quarter. Looking forward, we expect to maintain our medium-term objectives, including an ROE of 16% plus and diluted EPS growth of 7% plus while maintaining strong capital ratios. With that, I'll now turn it over to Graeme.
Graeme Hepworth, Chief Risk Officer
Thank you, Katherine, and good morning, everyone. Starting on slide 17, I will discuss our allowances in the context of the macroeconomic environment. During the quarter, the economies of Canada and the U.S. both softened. In Canada, relatively weaker consumer demand, higher unemployment rates, and the impact of elevated interest rates are continuing to weigh on consumers and businesses. In response to the softening economic backdrop and with the expectation that inflation rates will continue to edge lower, the Bank of Canada cut the overnight rate for two consecutive months this quarter. This marks the first set of reductions in rates since the current rate hiking cycle began in early 2022. In the U.S., slowing inflation and an uptick in the unemployment rate means the risk of interest rates remaining at current levels is also beginning to ease. Across these two economies, macroeconomic uncertainty has overall reduced. With this backdrop, we saw credit quality continue to weaken this quarter with net credit downgrades and elevated watchlist and delinquency rates. These outcomes are in line with our expectations for where we are in the credit cycle. Consistent with last quarter, we added reserves on performing loans, reflecting weaker credit quality and portfolio growth, partially offset by more favorable scenario weights as we gain more confidence in our base case scenario. Across our portfolios, we took a total of CAD42 million of provisions on performing loans this quarter. This marks the ninth consecutive quarter where we added reserves and performing loans, resulting in a total ACL of CAD6.1 billion. Moving to slide 18, gross impaired loans were up CAD353 million or 3 basis points this quarter, primarily due to increases in Canadian banking. Commercial new formations were driven by relatively large impairments in each of the real estate-related and forest product sectors. In capital markets, a decrease of CAD354 million this quarter is mainly due to lower impaired loans in the real estate-related sector. This reduction reflects CAD442 million in foreclosed properties related to real estate loans that are now accounted for as investments. Despite higher formations of gross impaired loans this quarter, turning to slide 19, you can see provisions on impaired loans were down CAD49 million relative to last quarter. Higher provisions in Canadian banking were more than offset by lower provisions in capital markets and wealth management, with capital markets provisions down CAD65 million compared to last quarter. In our Canadian banking portfolio, provisions were up CAD32 million, driven by higher provisions in commercial banking, residential mortgages, and other personal lending. All quoted figures thus far have included the HSBC Canada portfolio. On its own, the portfolio contributed CAD81 million provisions on impaired loans, mostly due to the two larger commercial formations noted earlier. Despite the elevated impairments in PCL this quarter, we remain confident in the overall credit quality of the loans we acquired from HSBC Canada. The HSBC Canada portfolio reflects credit characteristics that are in line with or better than the associated RBC portfolios and drive scale and diversification benefits. On slide 20, we provided some additional details on our overall commercial real estate exposure. The sector has generally been performing well, but pockets of weakness have surfaced based on property type, with office properties being more sensitive to post-pandemic impacts. With respect to the larger commercial real estate impairment referenced earlier, our borrower-owned interest in and operated a number of properties in the office property sector. This is the first meaningful office-related default in our Canadian portfolio, with a more elevated exposure that arose from the combination of HSBC's and RBC's portfolios last quarter. Overall, our exposure to Canadian office commercial real estate loans represents less than 1% of our total loans and acceptances, and both of our loans are typically benefited from amortization and additional recourse outside of the properties held as collateral. As I noted in the previous quarter, impairments and losses have been consistent with our expectations and are well within our risk appetite. We continue to be prudently provisioned for exposure to the sector with our downside provisioning scenarios reflecting a reduction in commercial real estate prices of 25% to 40%. To conclude, while we are pleased with lower provisions on impaired loans this quarter, we still expect provisions to remain elevated and continue to increase going into and throughout 2025. We continue to prudently build reserves on performing loans reflecting the credit outcomes of the softer macroeconomic environment we are currently experiencing. Moving forward, credit outcomes will continue to be dependent on the magnitude of change in unemployment rates, the direction and magnitude of changes in interest rates and residential and commercial real estate prices. And as always, we continue to proactively manage risk through the cycle and remain well capitalized to withstand plausible yet more severe macroeconomic events. With that operator, let's open the lines for Q&A.
Operator, Operator
Thank you. We will now take questions from the telephone lines. Our first question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Good morning. I guess maybe a question for you, Dave. I think I heard you say that we should expect a pickup in buybacks, given how you view the intrinsic value of the stock. So I guess the question is on capital allocation. One, correct me if I'm wrong, but I'm not sure, unless something macro-wise goes wrong, why Royal should be earning a lower ROE relative to the 16% you reported this quarter, and if the stock continues to perform well, maybe trading at a condensed price-to-book. We've seen this with the likes of J.P. Morgan in the U.S. where would you rather accumulate dry powder to fund organic growth next year, leave some room for M&A? Just how are you thinking about capital allocation given the capital that the bank is accreting and the possible uses and your patience to allow capital to build in the near-term? Thanks.
David McKay, CEO
Thanks, Ebrahim, a very important question. I think the answer to your question is yes to the points you made that we have such significant organic capital generation capabilities, as I referenced the 70 basis points this quarter building that we'll have the luxury of doing both. So I do believe in the strategy that there is no half-life to capital. You can only misspend it. So accreting capital in our balance sheet for future strategic optionality is part of the plan and you should expect that it could run up as we prepare for the next leg of growth. At the same time, it offers us the luxury of buying back shares. So we will return capital through buybacks, because we look at our intrinsic value, we look at the opportunities these franchises have to continue to build on the momentum that you see now. And we're very excited about that. And you saw that in our results this quarter. So the plan is to do both. The plan is to continue to buy back shares, to return capital, to drive premium TSR, which is very important in the short-term and medium-term, as well as provide an opportunity to build on the balance sheet to deploy capital into the right target. But we're going to be patient like we were with HSBC. We're going to look for the right thing and we won't make a mistake. And I hope we've earned your trust that that's how we deploy capital and we'll do it smartly, all with the goal of outperforming on total shareholder return.
Ebrahim Poonawala, Analyst
Very clear. Thank you.
Operator, Operator
Thank you. Our following question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi, good morning. I have a question for Graeme regarding the impaired PCL ratio, which is at 26 basis points this quarter, below the average historical loss rate. I'm curious to know if you believe this ratio has peaked or if we are still likely to exceed the average historical loss rate in the future.
Graeme Hepworth, Chief Risk Officer
Yes, Meny, thanks. It's a good question, an important one. Certainly, I think we're very pleased with the credit outcome this quarter. I think when we go back to kind of where I got at the beginning of last year that we were looking at kind of 30 basis points to 35 basis points for the year. I would say through the first half of this year, we were certainly trending in line with that. And I would still say, I think that is still a fair range to be kind of thinking about. We've outperformed at this range. I would say that outperformance this quarter is certainly attributable to wholesale. Both capital markets and City National came in kind of lower than previous quarters and our expectations. Again, that's positive, but on wholesale, it is more volatile quarter-to-quarter. And so I wouldn't read that into a definitive indication that we've now turned the corner. In aggregate, when we look going forward, the trends on retail are still negative. We're still seeing that increase across almost all products. Overall, I would say, though, that the timing of that has kind of been more prolonged than we had originally anticipated. So we do see it kind of growing through 2025. And I think the peak is probably less acute than maybe we were thinking about kind of at the beginning of this year. But there are still significant headwinds there. Unemployment is still on the rise. We think we're getting closer to peak unemployment now, but it is still on the rise. And we still see a consumer who faces a lot of headwinds with the current rate environment. Yes, rates have come down, but many of these consumers still haven't faced the full impact of the repricing of their mortgages and the associated payment impact that comes with that. And so these are all factors that leave us still quite cautious through the end of this year and going into next year, but nonetheless kind of very pleased with the performance we saw this quarter.
Meny Grauman, Analyst
Thanks. And just as a follow-up, you talk about the peak on the retail side being lower than what you originally expected. Is that just a commentary on rate cuts or is there something else?
Graeme Hepworth, Chief Risk Officer
On the retail side, unemployment is always the primary factor. It has played out more slowly than we anticipated. This has allowed clients to be more resilient with their cash and liquidity, providing a buffer that we may not have fully appreciated. However, the trends remain significant, especially concerning unsecured products, which we believe will drive growth in 2025.
Meny Grauman, Analyst
Thank you.
Operator, Operator
Thank you. Our following question is from John Aiken from Jefferies. Please go ahead.
John Aiken, Analyst
Good morning. Was hoping that you give us a little bit of insight in terms of the integration going on with HSBC. I mean, obviously we're seeing the financial benefits, but are you able to talk about some of the metrics like cross-selling to HSBC clients or customer attrition? I mean, I'd love to hear it on an absolute level, but basically I'm assuming, I guess what you had planned for would probably be a little more reasonable?
Neil McLaughlin, Group Head, Personal and Commercial Banking
Yes, thanks for the question, John. It's Neil. We are really pleased with the fundamentals of the business. We're seeing clients engage with our branch network and good mobile adoption. Appointments are increasing, and renewals are coming in as we hoped. Client attrition is within our estimates. When we put the transaction together, we made sure to reach out to these clients. While there is some attrition, we feel comfortable with the situation. We're seeing positive signs, as many clients are coming into existing RBC branches to renew products. These portfolios are starting to blend quickly, which we see as a positive for convenience. Regarding cost synergies, there are three main areas for revenue synergies. First, we want to cross-sell RBC products to HSBC clients. We're off to a good start but are currently focused on building relationships with these clients. We're noticing strong early flows into Dominion Securities and wealth management, with over CAD 100 million in assets under management coming from these clients. Second, we're finding opportunities to sell new products designed for HSBC into our existing portfolio, including trade finance and sophisticated cash management products. We've already sold 7,000 foreign currency accounts to our RBC customers. Lastly, we're seeing new clients acquired from the previous HSBC salesforce, which is building our pipelines well.
John Aiken, Analyst
Great. Thanks for the call. I'll re-queue.
Operator, Operator
Thank you. The following question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
Thank you. Good morning. Since we've entered the rate-cutting cycle, certainly in Canada and probably soon in the U.S. Just wondering if there's anything you can point to or how you're thinking about sort of the NII and earnings sensitivity to rate cutting sort of beyond the simple disclosed NII sensitivity, like is there any nuances why this cycle maybe could be different than past cycles because of some of the funding mix shifts we've changed, et cetera? Some additional thoughts would be helpful. Thank you.
Katherine Gibson, CFO
Good morning, Paul, and it's Katherine. So a great question and a lot of moving parts in connection with that. So I'll actually step back and give a bit of a holistic view of the items that we're thinking about that would have potential impact to NIM covering off both Canada and the U.S. So let's start with the interest rates on the Canadian side; we're expecting to see strong tractor benefits continue to flow through, and this is really showing the advantages of our structural low-cost beta core personal banking deposits. We're seeing swap rates will long roll off about 200 basis points if you look at where swap rates were three to five years ago. Rate impacts to a cut would mostly impact the non-tractor portion of our low beta deposits. And this is roughly about one-third of the EVE NII sensitivity type of movement in that short end of the curve. The other item that you would have seen in our commentary for the last few quarters now impacting NIM would be around intense competition around pricing for deposits, as well as mortgages. And we expect to see that continue as we go forward. Neil might want to add to that after. And then we're also client-driven mix shift and keeping an eye on that as interest rates move, we've seen with interest rates increasing the shift into GICs as the nuclear portion moved in. And so, as rates come down, the expectation is that we will see a flow out of GICs. Stepping back, though, on that, we would expect that Canadian Banking with the lower GICs, we would see a negative impact to net interest income. But tying into Dave's comments, the diversification of our business really stands strong here. The expectations with those flows, given the strength of our wealth management business, we would be seeing those flows move into wealth management. So net-net, really looking at that as flat across the organization in that environment. And then you referenced the U.S., so just a quick call out on City National. It has been an asset-sensitive business. And in connection with that, we have been putting on forward hedges to protect us in the down rate environment. And so that is expected to take volatility out of the number as we go forward.
Paul Holden, Analyst
Okay. That's helpful. I mean there's a number of things you gave us to think about in Canada. My read based on the answers you provided, I think, maybe less NII sensitivity from rate cuts than we might see based on the disclosed numbers? Is that a fair takeaway then?
Katherine Gibson, CFO
Yes, that's a fair takeaway.
Operator, Operator
Thank you. The following question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Doug Young, Analyst
Hi, good morning. Just on City National Bank. Just hoping to get a little bit of color, you talked about the back of the adjustment, earnings CAD115 million. Can you quantify the performing loan allowance release, the non-core losses, maybe a little more detail? And I guess what I'm trying to get at is this kind of a reasonable jump box spot. Like have you turned the corner? It seems like the progress in the last two quarters is moving in the right direction. Just to hope to get some color on that.
Katherine Gibson, CFO
Good morning.
David McKay, CEO
Yes, so Katherine will start, and then I'll make a comment.
Katherine Gibson, CFO
Yes, thank you. I'll start by answering your question on the specifics on the non-core impairment charges that I talked to. These are related to steps that City National has been taking to simplify the business, and it's really to focus on the areas that have that higher return. So it's really tied into our comments that we've made previously around City National focusing on that normalized path to higher profitability. So with that, I'll turn it over to Dave.
David McKay, CEO
We are actively working on several initiatives to simplify our business, which involved exiting certain ventures and ancillary businesses that aren't essential to our long-term mission. This simplification is crucial for enhancing our focus on target customer segments. As part of this effort, we took two charges this quarter, which we expect will positively impact earnings in the upcoming quarters and years. Additionally, we have decreased our workforce by about 500 full-time equivalents, leading to significant cost reductions. There's still potential for further cost reductions within the organization, and we are concentrating on that. A considerable portion of our costs has been allocated to enhancing our operational and risk infrastructure, and addressing the public consent order. These expenditures are currently reflected in our run rate, but we anticipate reductions as we meet our milestones in 2025 and 2026. Transitioning our bank to higher standards involves substantial cost absorption, and we are making progress on this journey. We have also intentionally reduced our balance sheet, while continuously working to increase deposits and offload low-yielding assets. We aim to replace these assets with higher-yielding options and, more importantly, establish deeper relationships with clients. The team is successfully moving inactive low-yield assets and targeting new clients, and we are building a strong pipeline for future growth. All of this indicates our potential to enhance our position moving forward.
Doug Young, Analyst
Maybe just sorry, go ahead.
Graeme Hepworth, Chief Risk Officer
It's Graeme. I thought I'd jump in too because I think competed in your question there was just a bit of understanding on their PCLs and the dynamics there. Maybe just to decompose that into two parts. So there was a release on their kind of performing PCL. That was a bright part of a couple of things there. One, certainly, in our overall forecast, we have accelerated some of the rate cut expectations in the U.S. And so that's had a positive impact and kind of how we kind of think about the projection of future losses. That did offset some softer assumptions we had in the U.S. around unemployment and GDP. Additionally, the scenario change leading that we talked about earlier also benefited kind of how we're thinking about City National's loan losses going forward. Additionally, this quarter, City National kind of, again, came in lower than some of the previous quarters in their actual impaired losses. Overall, again, I think the portfolio there is performing well. But as I said, other portfolios, wholesale is a bit more volatile quarter-to-quarter, and we continue to remain cautious there. I think overall, the performance this year has been a bit better than we expected. I think coming out of last year with the regional bank issues, it was a concern there. And the client portfolio there has been more resilient than expected, but we're still in a cautious situation there.
Doug Young, Analyst
Okay. And then just second, there's been a steady decline in market risk RWA over the last, call it, three quarters. Is that intentional? Or are you taking down risk in capital markets? Just hoping if you can elaborate maybe a bit on that.
Graeme Hepworth, Chief Risk Officer
Derek, do you want to add?
Derek Neldner, Group Head, Capital Markets
Sure. Yes. Thanks, Doug. The short answer is, no, there hasn't been any material shift in our risk appetite or purposely taking risk off. Obviously, there's various points in time in the trading business. We're mindful of volatility or different economic or geopolitical events. But broadly, our risk appetite has remained fairly similar. As always, we're looking at our business and finding different ways to optimize around capital as we focus on continuing to support and improve our ROE. So there's a number of different initiatives that have helped to address that tactically. But overall, no meaningful shift in our risk appetite approach.
Doug Young, Analyst
Okay. Appreciate the color. Thanks.
Operator, Operator
Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Sohrab Movahedi, Analyst
Okay. Thank you. I think the question will probably be directed at Dave, Graham, and maybe Derek. I think the cautious tone I heard, Dave, around the macroeconomic environment. And I think Graham basically suggests that we will have some sort of elevated perhaps PCL outlook. But I'm just trying to kind of better understand if that's just being uber conservative, given the comments that, but you still plan to also do some buybacks? And whether or not if a declining rate environment, even if it's coming at us at the pace that it is, is actually going to be its steepening yield curve, like I think that's going to be really additive to Derek's business as well here. So can I just better understand the degree of conservatism I think that Graham is placing in the PCL commentary and Derek's outlook for pretax pre-provision, especially in the capital markets, and that dovetails with buybacks and pace of buybacks and your view of intrinsic value, please?
David McKay, CEO
Yes, great question. We have been careful in our statements across the board, not just regarding risks. The momentum in our franchise is very strong, with plenty of opportunities for continued strong growth. If you look at return on assets and the current opportunities, we are experiencing historically low margins in some of our largest businesses, like mortgages, which are earning only a third of what they used to. This is partly due to the rising rate environment, making it difficult to manage a mortgage business effectively. Historically, margins have been higher in a declining or stable rate environment, allowing us to fund and hedge that business and customer pipeline more efficiently. As the industry adjusts, discipline will return to the competitive landscape, which could enhance our overall profitability and return on equity. There are significant opportunities in a lower rate environment as consumer spending may rise with more disposable cash flow available, benefiting several areas, including savings and the credit card business. In terms of capital markets activity, a lower short-term rate could lead to more mergers and acquisitions and greater capital investments in both corporate and commercial lending. This could help stimulate a recovery in the economy and support a soft landing. We are still anticipating a soft landing in the economy, expecting positive growth in both Canada and the U.S., but not predicting a recession. We expect lower interest rates and a flatter yield curve. With the hedging strategies we've implemented, we are positioned to manage volatility and continue to perform strongly. We want to convey that the situation is uncertain and volatile, and consumers have not yet adjusted their mortgage pricing. There are unknowns that we are working to manage, but we feel confident in our ability to handle them. It's important to note that we have not fully assessed the economic landscape yet, but we are cautious about it moving forward. Hopefully, that clarifies things.
Sohrab Movahedi, Analyst
It's super helpful. Graeme, if you had to probability weight, if you're going to be increasing the weighting to the base case higher or lower in your IFRS 9 modeling in 2025, knowing what you know today, what would it be, do you think?
Graeme Hepworth, Chief Risk Officer
I won't make any predictions on that, as we evaluate our situation each quarter based on the information available at that time. I find it challenging to discuss future expectations. Each quarter, we conduct a thorough assessment of the existing risks and uncertainties, and we adjust our actions and assumptions accordingly. This quarter, the changes in our allowance weights reflect increased certainty following the Bank of Canada's interest rate cuts, indicating that inflation is likely under control and the uncertainties of a high inflation environment are less prevalent. This shift influenced our decisions this quarter. However, we will reassess how this impacts future quarters as the time comes.
Sohrab Movahedi, Analyst
Thank you for taking my questions.
Graeme Hepworth, Chief Risk Officer
Sohrab, good question.
Operator, Operator
Thank you. A following question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca, Analyst
Good morning. I wanted to clarify two quick things that I didn't fully understand during the call. First, Katherine, you mentioned the sweep accounts in the U.S. and that the bank doesn't feel the need to adjust rates there. Could you elaborate on that?
Katherine Gibson, CFO
Sure. We wanted to be clear with the market that our pricing on these suites is approximately CAD31 billion, or CAD30 billion in the U.S. From a competitive standpoint, we believe we are in a strong position. Regarding any inquiries about potential pricing changes, considering our competitive positioning, we do not anticipate any significant adjustments moving forward.
Mario Mendonca, Analyst
Helpful. And Graeme, I would like to clarify on page 18, you mentioned a CAD452 million reduction due to certain loans being converted to investments. Did I understand that correctly? What was…
Graeme Hepworth, Chief Risk Officer
Yes, that's correct. We had a series of commercial real estate loans that were impaired several quarters ago as part of our work in that area. We foreclosed on those loans and effectively taken ownership. We wanted to point out that these loans have transitioned from the impaired loan category to an investment category. I wanted to be very clear about that, but it's all in line with our workout strategy and recovery plan.
Mario Mendonca, Analyst
So those get mark-to-market going forward then?
Graeme Hepworth, Chief Risk Officer
Not mark-to-market per se to get held as investments and accounted for consistent with that. Katherine might have more to add on that accounting treatment.
Katherine Gibson, CFO
I can just add on quickly. Graeme nailed it, and think about it as those have just come on to our books now and they're sitting there as assets versus loans. So think about it as commercial properties sitting on our books.
Doug Guzman, Group Head, Wealth Management and Insurance
Mario, regarding the suites, I believe it’s crucial to recognize the rationale behind our current position, which, as Katherine mentioned, is quite different from the pressure others may be feeling. We made a strategic decision several quarters back to pass some of the increasing rates onto our customers due to the rising interest rates. Consequently, our clients are currently facing rates that are higher than those offered by our competitors. This situation naturally warrants our attention, especially since it is attracting significant focus. However, as Katherine noted, we don’t see the necessity to make substantial adjustments now, since we have already made those adjustments in favor of our customers some quarters ago.
Mario Mendonca, Analyst
Okay. I have a broader question for Dave. Canadian investors may be too polite to express it, but they seem to have lost patience with large U.S. deals that primarily destroy value. I’m not saying City National falls into that category, as it wasn't big enough to cause significant harm in the context of Royal. However, it is clear that recent U.S. deals have not benefited Canadian shareholders. In your reply to Ebrahim, you mentioned capital allocation. I want to know if the bank would consider pursuing a large transformative transaction in the U.S., or if capital allocation there will primarily focus on fixing City National, possibly with small acquisitions that could enhance value. What are your thoughts on U.S. capital allocation going forward?
David McKay, CEO
It's a great question. It's a very large marketplace. It's a highly and intensely competitive marketplace for the profit pool shift. And to your point, generally, banks and all the industries have been quite unsuccessful in making them work. So we are highly cautious at the end of the day. So there could be tuck-in opportunities as far as a large transformational I think we've learned a lot through the City National venture as to how to run a bank in the new changing environment. I would say it's a very high bar to clear. At the end of the day, to get everything right and a very complex bar, you have to be incredibly sure-footed about your synergies. When we first moved on City National, we didn't have anything in the United States. It was our first step into the market and therefore, our synergies were growth. The market changed on us as far as the regulatory environment and the whole construct that we've had to adjust to that. So you need a stable market and a stable set of rules to invest in and we don't have that yet in the U.S. We're very conscious of the dilutive impact. And therefore, the bar for us to do anything inorganic in the U.S. is very high. You just saw us allocate CAD13.5 billion of capital to Canada for HSBC, pretty strong signal that we were incredibly sure-footed on that acquisition and it drove very significant shareholder value. We have opportunities in a highly fragmented kind of U.K. wealth space to build on Brewin Dolphin as well against small tuck-ins. So to your point, I guess, I'm trying to guide you, we don't feel we need to bet the organization on U.S. acquisition. We did do that with City National. That was a very conscious part of the strategy. We decided to go with low financial risk, higher operational risk strategy to reenter the U.S. commercial banking space. Obviously, to your point, it's low financial risk, but the operational risk has been challenging, but we're getting a handle on it. We're going to drive, as we've talked about, a strong return for our shareholders over time. We don't need to do a transformational acquisition. But if one lined up to a very, very high bar, I can't say never, but the bar is incredibly high, and we don't see anything on the horizon.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.