Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q4 2021
Operator, Operator
Good morning, ladies and gentlemen. Welcome to RBC’s Conference Call for the Fourth Quarter 2021 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.
Asim Imran, Head of Investor Relations
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Nadine Ahn, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Neil McLaughlin, Group Head, Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management, Insurance and I&TS; 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 re-queue. With that, I’ll turn it over to Dave.
Dave McKay, President and CEO
Thank you, Asim, and congratulations on your recent appointment to RBC’s Head of Investor Relations. And good morning, everyone, and thank you for joining us today. This morning, we reported fourth quarter earnings of $3.9 billion. Our results include further releases of PCL on performing loans, primarily reflecting improvements in our macroeconomic and credit quality outlook. Pre-provision pretax earnings of $4.8 billion were driven by robust client activity, driving fee-based revenue growth in Canadian Banking, Wealth Management and Investment Banking. In addition, Canadian Banking and City National continued to generate strong volume growth. These factors were partly offset by a moderation in our global markets businesses, the continued impact of low interest rates, and higher expenses, largely due to variable compensation. As we continue to invest in our core businesses and strategies, we’re committed to running our bank efficiently and driving improved productivity. Looking back, 2021 was a year that saw RBC stepping up for our clients and communities while supporting our employees. Across our core businesses, we saw robust client activity. And as a result, we delivered record revenue of nearly $50 billion. We earned $16 billion in net income and generated 19% ROE while paying $6.1 billion in taxes, over $6 billion in dividends and meeting all of our medium-term objectives. Also noteworthy was our strong double-digit growth in book value per share, highlighting our ability to compound the value of our business while maintaining the quality and risk appetite of the RBC franchise. We ended a strong year with a record CET1 ratio of 13.7%, up 120 basis points, with CET1 capital up $7.5 billion from last year. As we turn our focus to 2022 from a macro perspective, we continue to see a strong recovery with consumer spending almost 20% above 2019 levels, increased mobility in society and corporate management teams actively pursuing growth opportunities. At the same time, we recognize our significant challenges, including supply demand imbalances, disrupting supply chains and various parts of the economy, including labor, housing and energy markets. These factors are driving uncertainty and adding to inflation risk, which we are closely monitoring. While higher interest rates could add some drag to economic growth, we do not see material credit concerns, given excess client liquidity, strong underwriting, including testing for higher rates. As Nadine will speak to later, we are well positioned to benefit from rising interest rates, given our leading Canadian deposit franchise and the asset-sensitive nature of U.S. Wealth Management’s balance sheet. To highlight the potential benefit over time, the impact of lower interest rates reduced our revenue by approximately $1 billion in each of the last two years, the majority in Canadian Banking and U.S. Wealth Management, including City National. Additionally, we are poised to benefit from the deployment of unprecedented buildup of liquidity that we expect Canadians will use for a better tomorrow, whether that is to buy a home, increase discretionary spending or invest in financial markets. Within this context, let me expand how our momentum and ability to create value for clients, along with our premium franchises position RBC to succeed heading into 2022 and beyond. Our strong balance sheet gives us flexibility to continue supporting our growth momentum and strategic initiatives in addition to driving increasing shareholder returns. And this morning, we announced a $0.12 or 11% increase in our quarterly dividend, while also announcing our intention to repurchase up to 45 million common shares under a normal course issuer bid. We remain focused on driving premium organic growth, including expanding our market-leading position in Canada. We see growth opportunities in each of our Canadian businesses and our results this year reflect the value we create for our clients. In Canadian Banking, we added over $35 billion in mortgages and over $22 billion in personal deposits over the last year, leading to market share gains in both these anchor products. We have added and continue to add to our 1,750-plus mortgage specialist sales force. We also continue to invest in digital tools and capabilities to enhance the client experience and the productivity of our sales team. Looking forward, we expect mortgage growth to be strong in a high single-digit range, supported by low interest rates supply-demand imbalances affecting prices and increasing immigration activity. We are seeing a strong recovery in transactional purchase activity, which helped drive a sequential increase in credit card balances, including revolvers. And though commercial utilization rates remain well below pre-pandemic levels, we are seeing an uptick, which is helping drive the emergence of stronger commercial lending activity. We’re also hiring commercial account managers and priority industries, including an RBCx, where we provide capital advice to the growing innovation ecosystem. And as we move up the value chain and continue to reimagine banking and innovation, we are well positioned for a world of payment modernization and open banking. RBC Ventures remains core to accelerating our growth by creating value beyond banking, including in our health care and youth ecosystems. We are excited about Dr. Bill, a venture which helps reduce the complexity of medical billing for physicians. We are currently serving nearly 3,000 Canadian physicians, up 28% from last year. Also within the health care vertical, we continue to support Canada’s medical community with our exclusive multiyear strategic partnership with the Royal College of Physicians and Surgeons of Canada. In the Youth segment, Mydoh is a new pillar that helps kids learn and practice money management. We recently hit a milestone having onboarded 10,000 Canadian households. Over the last two years, we have added 350,000 net new Canadian banking clients, including over 200,000 this year alone, in a period when clients weren’t making as many decisions to switch banks, and immigration activity was muted. Given the value-added initiatives we put in place, we are well positioned to continue attracting even more clients, an important area of focus. Almost 70% of our Canadian banking clients who have a core checking account and/or mortgage with us also have a card and investment relationship. And clients with mortgage and checking accounts that were onboarded three years ago in 2018 have deepened their relationship to all four products at a rate that is three times greater than any other acquisition relationship. This leads to another core part of our Canadian strategy, which is to deepen our client relationships, including providing access to best-in-class award-winning service and advice, which has defined our leadership in wealth and asset management. As I noted earlier, we expect much of the buildup of liquidity in the system will be used to increase discretionary spending or be invested. And our full set of integrated end-to-end industry-leading wealth and asset management solutions has well over $1 trillion in client assets. This covers the full spectrum of client segments and needs, ranging from digital-only solutions up to full-service discretionary wealth management. Following a record year last year, RBC Direct Investing finished 2021 with another year of exceptional growth, including record trading volumes and record new client acquisitions with nearly half of new clients added this year being under the age of 35. And investors have seen account openings double from the last year. In the wealth advisory space, our leading scale is complemented by our differentiated technology and investment expertise, including private banking, insurance, estate, philanthropy and business planning solutions. These factors drive strong advisor productivity with RBC Dominion Securities ranked number 1 amongst bank-owned advisory firms in the 2021 Investment Executive Brokerage Report Card. In MyAdvisor, a digital platform to review financial plans now has nearly 3 million clients. Overall, our Wealth Management businesses continued to see strong growth in client assets. On a year-over-year basis, Canadian Banking and Wealth Management Canada AUA increased 26% each. With RBC Global Asset Management, we have a leading North American asset manager at scale with 85% of AUM outperforming the benchmark over the last three years at below average fees. It’s a testament to the strength of the platform. RBC Global Asset Management was recognized for its outstanding investment performance at the 2021 Canada Lipper Fund Awards. RBC GAM AUM was up 15% year-over-year. While higher markets were a large contributor, we also saw record Canadian long-term retail net sales of over $20 billion or 17% of all industry-wide flows, adding to its leading market share in industry AUM. And though we can’t control where equity markets will go, we are well positioned to add to our market share and industry net flows as clients can choose from a broad range of products and advisory services, which increasingly include an ESG and alternatives product suite. Our scale, innovation and ability to deepen client relationships with leading value propositions underpin our 30% ROE across our banking, wealth and asset management platforms in Canada. Turning to the U.S., I want to focus on our diversified growth strategy. Our client franchises across wealth management, private and commercial banking and Capital Markets generated US$10 billion or 25% of total revenue over the last 12 months. Our U.S. Capital Markets franchise, our largest U.S. business, had yet another great quarter as we reported strong investment banking revenue on higher M&A advisory and loan syndication activity. We are increasingly deepening relationships and winning significant M&A advisory mandates with important partners such as Blackstone. Earlier this year, RBC Capital Markets acted as exclusive financial advisor to Blackstone on the acquisition of Ellucian, a leading education technology solutions provider. This followed being the advisor on their acquisition of Signature Aviation. Looking forward, our investment banking pipeline remains strong, benefiting from the strength of our franchise. Our goal is to be a top 10 global investment bank while maintaining our position as a clear leader in Canada. And with this in mind, we have added a number of managing directors in U.S. Investment Banking, especially in technology and health care sectors, while also focusing on sustainable finance, a growth opportunity for us and our clients. City National continues to be a growth company with wholesale loans up a further 3% over last year or up 11% excluding PPP trends. Our mid-market strategy, along with the expansion of market coverage is expected to add to our growth trajectory. Mortgages at City National were up 23% year-over-year as we continue to grow our high net worth private banking capabilities with a mortgage-led growth strategy. And deposit growth was up a strong 25% this year. Going forward, we continue to expect strong loan growth in our City National businesses. And in U.S. Wealth Management, we grew client assets 30% year-over-year to nearly US$570 billion, including the addition of high-quality advisors to our private client group platform. We are increasingly adding lending products to provide holistic advice to our U.S. wealth clients. Our securities-based lending portfolio has increased by over $2 billion or nearly 60% year-over-year. Beyond our underlying business performance in 2021, we recognize we have an important role to play in accelerating clean economic growth. A key pillar of our enterprise strategy is to play a leadership role in the transition of our economy to net zero emissions, including helping clients work through an orderly energy transition. As part of that, we are committed to providing $500 billion in sustainable finance by 2025. And in addition to our own net zero commitments, we are pleased to have joined the Net-Zero Banking Alliance. To sum up, we are entering 2022 with strong momentum and are well positioned to take advantage of secular and macro trends and deliver client and shareholder value over the near and long term. Our focus will be to drive growth while maintaining prudent risk management and expense discipline. We will continue to leverage the size and strength of our balance sheet to consolidate our broad-based leadership position in Canada including deepening client relationships and investing for the innovation economy. And in the U.S., we will continue to execute on our multi-pronged growth strategy across Capital Markets, City National and Wealth Management. Before I conclude, I want to thank our more than 87,000 colleagues for their relentless dedication and living our purpose through the extraordinary times. And now, I’ll pass it to Nadine Ahn, our new CFO, who is well known to the investment community from her time as Head of Investor Relations and CFO of RBC Capital Markets previously. Nadine brings a wealth of experience gained over 20 years at RBC, including a number of positions of increasing responsibility to our corporate treasury group. And Nadine, over to you.
Nadine Ahn, Chief Financial Officer
Thank you, Dave, and good morning, everyone. I will start on slide 11. We reported quarterly earnings of $3.9 billion, up 20% from last year, including the benefit of a $355 million release of PCL on performing loans. Earnings per share of $2.68 was also up 20%. Pre-provision pretax earnings of $4.8 billion were up 4% year-over-year, including the impact of a legal provision at City National. Before I expand on earnings drivers, I will speak to capital on slide 12. Our CET1 ratio was up 10 basis points sequentially to a strong 13.7%. Our strong earnings net of dividends added 42 basis points to our CET1 ratio, highlighting the capital generation power of our diversified business model and premium ROE. Robust client-driven business growth across our largest segment was partly offset by $2 billion of net credit migration. Looking forward, we will continue to take a disciplined approach to deploying capital to create long-term value for our shareholders. We will lead with client-driven organic RWA growth and look to revert back to our traditional policy of twice a year dividend increases, returning to the midpoint of our 40% to 50% dividend payout ratio objective. This morning, we also announced a normal course issuer bid, which will allow us to repurchase up to 3% of our common shares outstanding, giving us yet another lever to manage our capital levels. Moving on to slide 13. Net interest income was up 1% year-over-year or up 4% excluding the impact of lower fixed income trading revenue, which was impacted by lower spreads on repo balances. Strong volume growth more than offset continued margin headwinds driving solid net interest income growth in both Canadian Banking and City National. Turning to Slide 14. At the segment level, we had outsized NIM compression in our largest banking franchises. Canadian Banking NIM decreased 9 basis points sequentially, partly due to an accounting adjustment of 2 basis points or $22 million, which we do not expect to repeat going forward. Another 2 basis points was due to lower mortgage prepayment revenue, a reversal of favorable trends we noted on our Q2 earnings call. The 3 basis-point impact from lower asset spreads is largely related to strong mortgage originations as the benefit from sequential credit card growth was offset by growth in lower spread mortgage loans. City National NIM was down 20 basis points sequentially, with 11 basis points related to lower loan fees, largely from the forgiveness of the first round of PPP loans. Another 7 basis points was due to lower loan-to-deposit ratio trends as deposit growth continued to outpace strong loan growth. Going forward, we expect both Canadian Banking and City National margins to stabilize around current levels with a bias to the upside as central banks raise interest rates. While City National’s interest rate sensitivity is largely driven by an increase in short-term rates, Canadian Banking would benefit more from a broader across-the-curve increase. We estimate that a 25 basis-point increase in interest rates across the curve could result in over $250 million of additional revenue over 12 months across Canadian Banking and U.S. Wealth Management, inclusive of sweep deposits. We expect to benefit from a rate hike in the second and third years would be higher than seen in the first year. Turning to slide 15. Noninterest income was up 20% year-over-year. We continue to see strong growth in higher ROE investment management and mutual fund revenue in Wealth Management and Canadian Banking. Strong M&A deal flow and loan syndication activity were reflected in higher advisory and credit fees as we execute on our Capital Markets client-centric growth strategy. Higher card service revenue in Canadian Banking reflected Canadians' increased spending on travel and entertainment heading into the holiday season. As we continue to enhance our rewards program and drive higher client engagement through increased options to earn and redeem points, we adjusted our rewards liability by $29 million this quarter. Offsetting this was an expected moderation in Global Markets revenue, which I’ll provide more details on shortly. Turning to expenses on slide 16. Noninterest expenses were up 9% year-over-year, a legal provision of $116 million in City National impacted expense growth by approximately 2 percentage points. Adjusting for this provision and excluding higher variable and share-based compensation across our businesses, expense growth was 2% year-over-year. As quarterly Capital Markets compensation ratio typically experiences volatility in the fourth quarter, it’s important to look at full year trends. And the 2021 annual ratio of 35% is consistent with 2020 levels. Salaries and benefit costs were up 4% from last year as we continue to add employees in Canadian Banking and City National to support increasing client activity. Marketing costs were also higher as the economy opened up, and we increasingly engaged with new and existing clients across our businesses. However, there is also an element of seasonality in the quarter-over-quarter increase of certain line items. Looking forward to 2022, we expect marketing costs to trend higher than pre-pandemic levels as we execute on our strategic growth initiatives. However, corporate travel costs are expected to remain below pre-pandemic levels in the near term. Overall, we expect annual expenses, excluding variable and share-based compensation to grow at the higher end of the low-single-digit range as inflationary pressures and higher investments to support growth initiatives are expected to be offset by our continued focus on driving efficiencies and productivity gains. Moving to our business segment performance, beginning on slide 17. Personal & Commercial Banking reported earnings of $2 billion this quarter, including the benefit of lower PCL. Canadian Banking pre-provision pretax earnings were up a strong 8% from last year as solid revenue growth was supported by strong operating leverage. Looking forward, we expect annual operating leverage to be closer to the high end of our historical 1% to 2% guidance with the potential to be above that range as central banks raise interest rates. Canadian Banking revenue was up 6% year-over-year with net interest income up 2% from last year. On a sequential basis, an uptick in commercial loan growth added to continued strength in mortgages. Growth in credit card balances was largely related to higher purchase volumes with payment rates remaining elevated relative to pre-pandemic levels. Noninterest income was up 15%, largely due to higher mutual fund distribution revenue underpinned by higher AUA, including record net sales as client liquidity continued to move into investment products. Card service revenue was up on higher purchase volume. Turning to slide 18. Wealth Management reported fourth quarter earnings of $558 million, driven by strong investment management and mutual fund revenue growth and robust volume growth at City National. These were only partly offset by a commensurate increase in variable compensation, higher non-compensation costs and a legal provision and lower spreads at City National. Double-digit client asset growth across our North American wealth businesses benefited from both higher markets with strong North American equity markets more than offsetting weakness in bond indices as well as strong net sales. RBC GAM attracted total net sales of over $12 billion in the quarter with strong institutional flows adding to continued momentum in Canadian long-term retail net sales, which added $4 billion to AUM. The majority of Canadian retail flows went into balanced mandates. Turning to insurance on slide 19. Net income of $267 million increased 5% from a year ago, primarily due to favorable annual actuarial assumption update, partially offset by lower favorable investment-related experience, including the impact of realized investment gains in the prior year. Insurance revenue benefited from higher group annuity sales and growth in longevity reinsurance and Canadian insurance sales. Looking at I&TS on slide 20. Net income of $109 million increased 20% from a year ago, primarily driven by higher revenues from our Asset Services business. Funding and liquidity revenue was also higher year-over-year, as the prior year reflected heightened impacts from elevated enterprise liquidity. Turning to slide 21. Capital Markets reported earnings of $920 million, up 10% from last year. Pre-provision pretax earnings surpassed $1 billion for the eighth quarter in a row. Corporate and Investment Banking reported strong investment banking revenue as our platform performed very well in an environment of robust deal flow and elevated sponsor activity. In contrast, Global Markets moderated from elevated levels last year. FICC revenues were down 14% year-over-year, reflecting similar trends across the industry. Lower spreads continue to impact repo and secured financing revenue, which was down 18% year-over-year. Equities revenues were down 17% as volatility levels normalize closer to pre-pandemic levels. To conclude, we continue to drive strong growth in volumes and client assets and are well positioned to benefit from higher interest rates. And while we look to accelerate our growth momentum, we remain focused on expense management and effectively deploying capital to continue delivering value for our shareholders. With that, I’ll turn it over to Graeme.
Graeme Hepworth, Chief Risk Officer
Great. And thank you, Nadine, and good morning to everyone. So, starting on slide 23. Allowance for credit losses on loans of $4.4 billion is down $1.7 billion from its peak in Q4 of last year, reflecting the ongoing improvements in our macroeconomic outlook and the credit quality of our portfolio that Dave noted earlier. In 2021, we released over 50% of the pandemic-related reserves on performing loans built in 2020. Releases this quarter were primarily in our commercial, personal lending and cards portfolios in Canadian Banking, reflecting further improvements in our macroeconomic outlook and the credit quality of those specific portfolios. Allowances for these portfolios do remain above clinic levels, given ongoing headwinds that I will touch on later in my remarks. Turning to slide 24. Our gross impaired loans of $2.3 billion were down $253 million or 4 basis points during the quarter. Impaired loan balances decreased across all our major businesses and new formations of $298 million remained close to the nine-year low set last quarter. In Canadian Banking, we had modest increases in new formations during the quarter, with increases in the unsecured personal lending and small business portfolios. In Capital Markets, new formations were limited to just $7 million as clients continue to benefit from favorable market conditions. Turning to slide 25. PCL on impaired loans of $137 million or 7 basis points was down by 1 basis point and declined for a sixth consecutive quarter. The low level of provisions throughout 2021 reflected the quality of our client base, our prudent underwriting practices, the economic recovery underway and the impact of government support programs on delinquencies and impairments. In the Canadian Banking retail portfolio, PCL on impaired loans was down $12 million quarter-over-quarter due primarily to lower write-offs on credit cards. During the year, the retail portfolio has benefited from higher client deposit levels, decreasing unemployment rates and ongoing government support programs. For context, this quarter, approximately 6% of our retail lending clients were still receiving government support, down over 60% from the peak observed in 2020. In the Canadian Banking commercial portfolio, PCL on impaired loans was down $3 million quarter-over-quarter. Provisions taken this quarter continued to be primarily in sectors impacted by COVID-19. However, the portfolio overall continues to see low and stable delinquency rates, net credit upgrades and reductions in credit watchlist exposure. In Capital Markets, we had a net recovery on impaired loans for the third consecutive quarter. This portfolio is not materially impacted by government support programs and has benefited from a constructive operating environment and strong market liquidity. And finally, in Wealth Management, PCL on impaired loans increased $14 million quarter-over-quarter. During the quarter, we took additional provisions on a loan written off in the information technology sector at City National. Overall, we continue to be pleased with the positive trends in our loan portfolio, supported by favorable market conditions. While many individuals and businesses have weathered the worst of the pandemic, a number of headwinds remain, as Dave noted. Rising and persistent COVID-19 cases and the prospect of new variants create the potential for continuation or resumption of COVID-19-related containment measures. Inflationary pressures may also impact our clients to increasing costs driven by supply chain disruptions and labor shortages and to increases in interest rates. We have incorporated many of these risks into our provisioning scenarios, which leaves us comfortable with our current levels of allowances. Looking forward, we do expect our PCL ratio on impaired loans to trend back toward long-term averages over time. In addition to the headwinds I’ve already noted, the wind down of government support now underway will also impact both our commercial and retail clients. Though the full impact will take time to materialize due to the strong levels of liquidity, savings and job demand currently in place. Additionally, we have seen strong recoveries on impaired loans over the past few quarters, which we do not expect to persist given the low levels of impaired loans now remaining. That said, as I noted for a number of quarters, we expect to be able to draw down on the existing allowance on performing loans, just that our total PCL across all stages will remain below long-term averages. Importantly, we are steadfast in our commitment to supporting our clients and delivering advice, products and insights to help them navigate the evolving macroeconomic and operating environment. With that, operator, let’s open the lines for Q&A.
Operator, Operator
Our first question is from John Aiken from Barclays. Please go ahead.
John Aiken, Analyst
Good morning. I wanted to start off on Capital Markets. Derek, we saw an exceptionally strong year. But, as the second half evolved, we saw revenues trailing off a little bit. And the revenues in the quarter were one of the lowest over the last eight quarters. Was there anything in the quarter you’d highlight as unusual, either positive or negative? And is this a run rate you’re looking for in terms of 2022, or can we get the revenues a little bit higher from here?
Derek Neldner, Group Head, Capital Markets
Thank you for the question. I will address it in two parts. First, regarding Q4, we felt it was a solid quarter. As Nadine reviewed, we had strong activity in Investment Banking, particularly in M&A and loan syndications, and we expect this level of activity to continue with a healthy pipeline heading into next year. However, we did see a revenue slowdown in the markets business, driven by a few factors. One factor is the normalization of client activity and the volatility we experienced in Q4, which has picked up as we entered fall but was weaker during the summer. Additionally, Q4 is typically slower due to the seasonal lull in August and summer. Therefore, we do not view Q4 as reflective of future normalized quarters. Another factor is our careful risk management approach coming into fall due to uncertainties surrounding COVID and community reopenings. This cautious mindset was evident in our VAR metrics and lack of trading losses during the quarter. Fortunately, the return in fall was smooth, and the markets remained robust. In retrospect, our cautious approach to risk was prudent given the circumstances. Looking forward, as we have communicated, we see normalization in markets and expect our run rate to settle above pre-pandemic levels. Prior to the pandemic, our pretax pre-provision earnings were typically in the $800 million to $850 million range, while during the pandemic, they were elevated to around $1.1 billion to $1.2 billion. As Nadine mentioned, we have achieved eight consecutive quarters over $1 billion, starting with the first quarter of 2020, which was before the pandemic's impact. It's an area of focus for us, and while we expect normalization, our goal is to maintain that run rate above $1 billion in terms of pretax pre-provision.
Operator, Operator
Our following question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
I guess, just a question, Dave. As we think about capital allocation, I think that’s going to be a big deal in terms of just some of the decisions you will be making. Talk to us in terms of when we think about the CET1 north of 13.5%, beyond funding for organic growth, the announcements you made this morning. How do you think about inorganic growth? Last quarter, you talked about strategic partnership for asset generation. I would love to hear your thoughts around asset management, wealth management, distribution there might be opportunities there where you could deploy some of this excess capital?
Dave McKay, President and CEO
Yes, I think your question touched on part of my answer. You're focusing on the right themes. One key point we want to emphasize this morning is that we've started to see more capital-intensive, higher-return growth opportunities emerging in credit cards and commercial lending in Canada. Our mid-market corporate strategy in U.S. Capital Markets and Corporate Banking is aimed at utilizing more of our balance sheet. As you mentioned, we have a strong capacity for organic capital generation that will support most of this, and we're anticipating solid growth in risk-weighted assets as our clients increasingly utilize our balance sheets. The primary focus remains on organic growth. Regarding inorganic growth, several of our ventures are gaining traction. We mentioned two new ventures today, including Dr. Bill, which was developed partly through acquisition to enhance our presence in the health care sector. This partnership has seen great success, with a growth of 28%. We'll continue to expand that area. We also introduced Mydoh today, aimed at family finance, which represents an exciting opportunity. Similar initiatives in the U.S. may allow us to expand our client base in new ways that differ from our historical approaches. As we work on future-proofing the organization, we're planning acquisitions in these sectors, as well as in the small business and mortgage areas, particularly through OJO, which will help clients find and close on homes. These capabilities will open up growth opportunities in both the U.S. and Canada. We expect to focus on relatively small acquisitions, ideally in the $20 million to $150 million range, to avoid the high costs associated with later-stage acquisitions that involve significant goodwill. We also have four major ventures that require scaling, and we have a bold plan to support that at a national level. Ventures like Ownr, which we've discussed previously, and Dr. Bill, along with OJO on the housing side, represent segments where we can effectively deploy capital for growth. We're committed to scaling those ventures, which have shown a strong positive response from customers. Additionally, regarding more traditional Wealth Management distribution, we're interested in acquiring platforms, primarily in the U.S., but also in Europe, to fortify that segment. We are looking for quality opportunities while being prudent in evaluating value and potential shareholder dilution because we also have organic growth capabilities. We aim to create shareholder value and remain mindful of dilution. Lastly, we also have the option to return capital to our shareholders, which we are beginning to do through share buybacks. No strategic changes are occurring here; our capital is highly strategic and provides us with significant options moving forward.
Operator, Operator
Our following question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Graeme, you talked about normalization and PCL ratios back to where they were pre-pandemic. And I just want some clarification there in terms of the timing. Is this, in your mind, a 2023 story where we basically get back to where we were pre-pandemic, is that the right year to think about?
Graeme Hepworth, Chief Risk Officer
Yes. I think there’s some hesitancy on timing because I think there’s a high degree of uncertainty out there and certainly you can just reflect on the last week and we see kind of the emergence of new variants and kind of the uncertainty associated with monetary policy to remind us of that. I’d say, we’re obviously in exceptionally benign credit environment and it’s manifested itself with incredibly low levels of loan losses. I think last quarter, we were 8 basis points, this quarter 7 basis points. So, having said that, we do see that kind of trending back to more normal levels. It will happen over time. There’s a number of factors that we look at and kind of thinking about the timing, and those will hit different portfolios at varying paces. Some of those factors are certainly around kind of the asset prices and the implications that had on recoveries. And on the wholesale side, we’ve seen, I think, I said, three quarters in a row now where we’ve had net recoveries in Capital Markets. Certainly, we don’t see that persisting in the coming quarters. And so that will influence our provisions there and kind of return us back to more normal levels over time there. On the retail side, though, we benefited from strong asset prices more in the housing and auto space. But those will persist for a longer period. And so that will take time for that to kind of revert a normal, and that will be related to kind of the portfolio turning over. Secondly, I think I mentioned government support. Certainly, we’ve assumed that government support has had the degree of suppressing loan losses in the near term. Our debate has really been around degree to which that is mitigated or simply deferred. As government support has been extended a few times, that’s really had two applications. The first is, it’s mitigated more of the losses than we originally anticipated. And so, that’s due to more consumers being bridged to reemployment, businesses being bridged to reopening. But secondly, it’s also delayed the timing. And we think that’s going to kind of start resulting in increasing loan losses. I think, we’re on a more definitive path now on the government support winding down. Certainly, we’re seeing that on the consumer side. And I think the small business is going to happen over the coming months. So, we’ll be looking for signals in our portfolio on that kind of side in the coming quarters, whether that be through kind of ratings changes or delinquencies, particularly in the unsecured consumer products there. And then lastly is around the macroeconomic environment that we kind of talked about. And the current economic environment is very robust and supportive of the credit outcomes. So, we don’t see that changing and tipping things in the near term. But we are looking at inflation and supply chain, and those will have impacts over time and the prospect of rising rates also will factor in over time. If you put all this together, like things like supply chain, will have more of a near-term impact on our small business and commercial portfolios whereas higher interest rates will take more time. It will affect our real estate portfolios and pockets of our corporate portfolio. But that’s unlikely to be a factor in this coming year. And so, I think in 2022, we’ll see a rising levels of loan loss allowances. But, as I said in my comments, I think the total PCL there will still be well below kind of historic norms. And I think it’s more into 2023 and beyond that you start to get into kind of more normalized levels.
Operator, Operator
Our following question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
I want to ask you a broad question around inflation and related risks. Now, you’ve already addressed sort of your expectation for operating expense growth. And you’ve talked about expectations for Central Bank rate tightening in response to higher inflation. But wondering if there’s any kind of other impacts, whether negative or positive that we should be thinking about in terms of bank earnings in a higher inflationary environment?
Dave McKay, President and CEO
I’ll start and then I’ll see if anyone wants to jump in, I think Graeme could add up here. Certainly, an inflationary environment helps our asset growth helps the economy grow, right? So you think about asset inflation, if it’s healthy and under a normalized channel, not excessive, then you don’t build a bubble and that can be supportive of overall balance sheet growth and profitability growth from that perspective. Where you start to worry is when you start to see excess asset growth in a certain area, and that inflationary impact has to be watched in a number of asset classes. And then, you worry about it from, obviously, your customers’ cost management and their margins and their ability to maintain healthy kind of debt coverage ratio. So, we worry about it from a risk perspective. Maybe Graeme will touch on that. So, this is positive and negative, and that’s why as a bank, you have to watch these things carefully, and on the asset and CPIs and what impact they’re having. And we’ll get a look into that increasingly with the quarterly numbers that we see from our clients in their income statements and balance sheet. So, off the top of my head, those are two areas that we certainly talk about as a team. Graeme, did you want to jump in on that?
Graeme Hepworth, Chief Risk Officer
Yes, I believe the current inflationary environment is generally beneficial for the bank. While we expect to see improvements in our revenue, these will be accompanied by increased credit costs, as I mentioned earlier. Different portfolios will react differently. For instance, our small business and commercial clients tend to be more affected by price increases and will have less flexibility with suppliers, leading to greater impacts on our credit costs, which ties back to my earlier comments about our future outlook. This situation will eventually result in higher interest rates, although it may take some time before we see the effects on our credit costs. With our fixed rate portfolio, the interest rates are set, and changes will only be seen during refinancing, which tends to happen over several years rather than months. Each portfolio will absorb these changes in unique ways. The corporate portfolio, for example, is likely to be more stable since these clients can better pass on their inflation-related costs. We need to consider how different portfolios will be affected overall, but in the long run, this will lead to rising loan loss costs.
Paul Holden, Analyst
And then just quickly, can you tell us what your inflation range expectations are?
Graeme Hepworth, Chief Risk Officer
Well, I think we have a number of scenarios that we analyze. And each of those scenarios is going to have slightly different assumptions embedded in it. We look at the different ranges for kind of purposes and capital resiliency. So, I’m not sure there’s a single answer we’d give you on that, but really to look at a wide range as we think about both capital and earnings on that front.
Operator, Operator
Thank you. The following question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Doug Young, Analyst
Just looking at the Wealth Management division, I mean, pretax pre-provision earnings got up 3%, if I exclude the legal provision. It doesn’t really match with what we’re seeing in the asset growth. And I guess my question is, is there any other unusual items? And guess where I’m going is I know there are several segments in here, Canadian Asset Management, Wealth Management, CNB. I’m just hoping to provide maybe some perspective on what you’re seeing pretax pre-provision wise, because I think there’s probably some good news stories in the asset management side that may be overshadowed by some just near-term pressure in CNB, City National Bank? And I guess, this isn’t maybe a question, but a statement. It would be helpful to have City National Bank removed from the Wealth division because I do think sometimes it clouds it out. So, I was just hoping to get some color on that.
Nadine Ahn, Chief Financial Officer
Thanks. It’s Nadine. I'll start by expressing my appreciation for your advice on segmentation. Regarding U.S. Wealth Management, there are a few important elements to note. We've highlighted the strong performance in Wealth Management, especially in Canada and the U.S., driven by significant growth in assets under administration (AUA). This business has variable compensation that scales with growth, resulting in a strong margin, and we've been adding many advisors to support AUA growth. Overall, there is strong momentum in this business moving forward from a pretax pre-provision perspective. For City National, we did mention the margin compression experienced, and the primary factor has been related to PPP loans, which we anticipate will decrease going into next year, alleviating that headwind. We have seen robust asset generation, but the deposit levels have remained high, affecting the loan-to-deposit mix ratio and exerting pressure on margins. As interest rates rise next year, we expect to see margin expansion for City National. On the cost side, we have significantly expanded that bank, necessitating infrastructure investments, which accounts for the recent uptick in costs related to the City National platform, aside from provisions. Looking ahead, we anticipate strong operating leverage in that business segment due to expected changes and stabilization of the net interest margin. I'll turn it over to Doug to discuss further.
Doug Guzman, Group Head, Wealth Management, Insurance and I&TS
Yes, sure. I think the hypothesis on the question is a very good one. So, if you looked at the core Canadian larger franchises of Global Asset Management and Wealth Management Canada, a couple of things that are probably not obvious. So, there are some compensation true-ups in the quarter. That’s a good news fact and that while we didn’t get the accruals right throughout the year, those are performance-based or profitability-based compensation programs. So, that’s not a normalized run rate. There’s seed capital like quarter-over-quarter was a little bit lower than the prior quarter, but they’re, again, not fundamental to the success of the business. So, you’re right. The big franchises that drive the bulk of the earnings in the non-U.S. part of the segment are very healthy and fundamentally very strong.
Operator, Operator
A following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Just a follow-up for Derek on the Capital Markets outlook. I guess, some of the indications there, but do you think earnings growth and PPPT growth in your segment can be positive in the coming year? And then a separate question, Dave, Nadine. Well, Dave, in your opening remarks, you talked about paying $6 billion of taxes in this past fiscal year makes me think about the liberal proposal to introduce the surtax on banks on the Canadian earnings presumably. Have you done any work to quantify the impact of that proposal? Thanks.
Dave McKay, President and CEO
So, I’ll let Derek go first, and I’ll follow on with the tax question.
Derek Neldner, Group Head, Capital Markets
Sure. Good question. Not an easy one to answer in terms of the outlook on client activity. I guess, the way I would approach it is, obviously, 2020 was a very strong year for us, given elevated client activity, and coming into 2021, we had expected there’d be some normalization of that activity. It probably didn’t normalize as much as we feared; and so we had a constructive backdrop for this year, and you saw that result in a 3% growth in revenue and 5% growth in pretax pre-provision for 2021 off of what was a prior high watermark in 2020. So, notwithstanding some expectation of normalization, we did manage to drive strong revenue, pretax pre-provision growth and then obviously, a very strong NIAT on the back of the PCL recovery. So, I think as we now look forward to 2022, it’s a little bit of a similar situation. Client activity on both the Investment Banking, Corporate Banking side as well as in market still continues to be very healthy. We see that continuing right now. And against that backdrop, I think we feel quite good about our pipeline and level of activity. But what’s obviously difficult to predict is particularly building off of some of Graeme’s points as we see dynamics around variance and changes in monetary policy and inflationary pressures and how policymakers may react to that, it’s difficult to predict what the Capital Markets environment will look like for the full year. So, certainly, our objective is to continue to drive growth, but it will be somewhat dependent on the market backdrop and level of client volumes.
Operator, Operator
Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca, Analyst
Graeme, can we revisit your comment from Q3 ’21? You suggested that the impaired loan PCLs ratio in 2022 might be higher than the long-term averages. Some of us found that estimate a bit high. Now, I get the impression from this call that you're indicating it might actually be below long-term averages. Have I understood that correctly? Also, could you explain this change?
Graeme Hepworth, Chief Risk Officer
Yes, thanks, Mario. I believe when we made those earlier comments, we were referring to peak points in a specific quarter, rather than an annual total. That context is important. As we've progressed in the recovery, with ongoing government support and more clients transitioning back to reemployment as the economy reopens, we feel more comfortable and confident that many of the loan losses we anticipated have actually been reduced and not just postponed. There remains a lot of uncertainty, and, as I mentioned earlier, the timing for returning to more normalized levels is still unpredictable and will vary by portfolio. I covered how various factors will influence retail and wholesale portfolios differently, with some impacts, like rising interest rates, taking longer to manifest. This adds more perspective on how our current thinking compares to last quarter's comments.
Nadine Ahn, Chief Financial Officer
Yes. I would just say that we’re still working out some of the details but nothing has been announced as yet. So, a little difficult for us to comment on an impact until we get more information on it.
Operator, Operator
Our last question is from Nigel D’Souza from Veritas Investment Research. Please go ahead.
Nigel D’Souza, Analyst
I wanted to circle back on an earlier comment. You mentioned that you have conducted testing for the impact of higher rates on potential credit risk. And I was wondering if you could flesh that out and give us some color on the type of scenarios you were testing for the timing and pace of interest rate increases and how you thought about that impact in relation to credit expansion?
Dave McKay, President and CEO
Yes. So, we do a lot of different scenario analysis and stress testing for different purposes, right? And so at the most granular level, we do that as part of our origination practices when we’re originating a new residential mortgage or we’re originating commercial mortgage. Some of that’s quite prescriptive in the residential mortgage space, where B20 has us looking at clients’ capacity to service debt for a plus 200 basis-point increase in interest rates, similar in the commercial real estate side. Then certainly, we also then obviously do as much more at the portfolio level. And so, whether it’s our determining our loan loss provisions and our ACL, again, we don’t have a single scenario there. We have certainly a baseline exercise, and Nadine referenced some of the assumptions there that go into our baseline. But then we look at a range of, I think we’ve evolved about five different scenarios that we look at that kind of describe different interest rate environments, some more moderate increases, some more severe likewise. And then, we also contemplate much more implausible environments that really go into our stress testing program. We’re really kind of making sure we continue to have the right level of capital adequacy in place, and we do those exercises. Across the bank, we do those in conjunction with our regulators as well. So, again, some of the earlier comments on inflation, there isn’t that kind of a fixed single scenario that we kind of lock in on. But we look at a range, we weight those different ranges appropriately, and then that all factors in to how we determine the ACL as an example that we do.
Neil McLaughlin, Group Head, Personal & Commercial Banking
Yes, thank you for the question. This is Neil. I’ll begin by discussing our observations regarding housing as we assess the market concerning the mortgage segment. Over time, it's evident that the primary influence on the housing price index, particularly in major markets like Toronto and Vancouver, and more recently in Ottawa, has been significant growth in double digits. The key factor here is the interest rate, which affects affordability and consumers’ ability to manage their payments, as Graeme outlined. Looking ahead, we believe that immigration levels have essentially halted, which has led to a lack of demand in the housing market. We anticipate that as rates rise, this situation may generate some compensating demand. Historically, we've seen various regulatory measures impacting markets like British Columbia and Toronto, resulting in moderate price corrections, followed by recoveries over the subsequent 18 months. These are the factors we take into account. Graeme has effectively covered our confidence in underwriting and stress testing to ensure that both consumers and commercial clients can manage their debt through the metrics we utilize. Those are the key perspectives we consider regarding our loan book. Graeme, do you wish to add anything?
Graeme Hepworth, Chief Risk Officer
Yes. I believe our approach to managing the mortgage portfolio emphasizes consistency throughout market cycles. We are not leveraging risk to drive growth. It’s important to note that our client base consists of high-quality prime clients, and we do not operate in the subprime market. Our product offerings are primarily focused on first lien products, which are quite robust. We discussed the stress testing related to interest rates, ensuring that our clients can thrive in a higher rate environment. We utilize a risk-based strategy for our loan-to-value ratios, which allows for prudent engagement with clients and effective management throughout various economic cycles.
Operator, Operator
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. McKay.
Dave McKay, President and CEO
Thanks everyone for questions. We covered a lot of ground today. I think, in my takeaways in summary, I kind of covered a lot of it and one of the questions I took. But overall, I think the takeaways are really strong client activity and growth market share gains across Canadian Banking, Canadian Wealth, Capital Markets, City National, U.S. Wealth, U.S. Capital Markets, very strong momentum. You saw the momentum in the quarter-over-quarter numbers, which positions us well. And our disappointment also was that we didn’t drive as much to the bottom line as we would normally with that type of volume. We walked through kind of the margin impacts and trying to price mortgages in a rising rate environment as was called that was a little trickier and a number of one-offs this quarter on the margin side, expenses a bit elevated, some one-times in there. And therefore, as we look forward, our degree of control. We plan for a rate environment that to a great question I think Sohrab, plan for a rate environment that was less tightening. And therefore, there’s upside opportunity to our own forecast. So, we’re confident in our operating leverage going forward and the momentum we have in the business. So, thanks for your questions, all great questions. And wish everyone a good holiday season and look forward to seeing you in the New Year. Thanks very much.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.