Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q1 2021
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the RBC’s Conference Call for the First Quarter 2021 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.
Nadine Ahn, Head of Investor Relations
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today to answer your questions are Neil McLaughlin, Group Head, Personal and 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'd also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then requeue. With that, I'll turn it over to Dave.
David McKay, CEO
Thanks, Nadine, and good morning, everyone. Thanks for joining us today, and we hope you and your loved ones are keeping safe and well. Today, we reported very strong earnings of $3.8 billion, with earnings per share up 11% year-over-year. Our results are a testament to our diversified business model and revenue streams. We benefited from higher fee-based revenue in our capital markets and wealth management businesses and strong client-driven volume growth in both Canadian Banking and City National. Expenses remained well-controlled and top of mind, even as we increasingly saw heightened client activity levels across the bank. We also saw a small release of reserves this quarter, which Graeme will speak to later. These factors partly offset the impact of the 150 basis points of rate cuts in March of last year, which negatively impacted our earnings by approximately $400 million. Strong volume growth, elevated client activity, and our diversified business model allowed us to earn through the significant headwind. Our strategy is also delivering results in the U.S., where we are capitalizing on our investments across capital markets and wealth management. This quarter, we reported record results in our U.S. operations, generating over US$2.5 billion in revenue and over US$650 million in earnings. Our robust capital ratio of 12.5% was flat quarter-over-quarter as record internal capital generation was effectively deployed to drive strong organic growth across our businesses, while also paying $1.5 billion in dividends. Our CET1 ratio provides a significant $19 billion surplus over the current OSFI minimum. Furthermore, our ACL on loans is over $2 billion higher than pre-pandemic levels in Q1 2020. We remain well-positioned to continue funding organic growth opportunities that create value for our clients. I will now speak to how we see the macro environment unfolding. As we approach a year into the global pandemic, we are encouraged by both the number and efficacy of vaccines. This, in addition to significant pent-up demand, rising prospects of further stimulus programs, expectations of a gradual easing of lockdown measures, and pledges of continued low interest rates to support a sustained economic recovery. Recent data shows CEO confidence of corporate America has reached a 17-year high. We are also seeing the benefits of increasing public-private partnerships in the U.S. as companies are engaging with governments to distribute vaccines effectively in a timely manner. Canadian housing activity also remains elevated. While rising permit issuances are building up the new construction pipeline, we expect a lack of supply, low interest rates, elevated savings rates, continuing work-from-home arrangements, and the potential resumption of immigration to underpin continued demand. While the timing and path of vaccination programs has been uncertain and uneven so far, particularly in Canada, we expect an accelerated pace of vaccination distribution over the coming months to drive a strong economic recovery through 2021, resulting in GDP growth of 4% to 5% across North America. Against this macro backdrop, we will continue our unwavering support for our clients as global economies pivot to recovery. I now want to speak to the strong volume growth and increased momentum across our largest businesses. Part of our competitive advantage is how we leverage our scale, investments in technology, and our talented teams to deliver differentiated value and experiences to our clients. Our premier global capital markets platform crossed a record $1 billion in quarterly net income, driven by very strong performance in global markets, underpinned by robust equity trading and continued strength in credit trading. Corporate Investment Banking surpassed $1 billion in revenue for a third straight quarter, benefiting from a constructive environment for new issuance and mergers and acquisitions. We continue to be awarded significant mandates by some of the largest global clients, including serving as M&A adviser to Blackstone and providing fully committed financing for the recently announced $6 billion acquisition of Signature Aviation. Canadian Banking recorded strong volume growth year-over-year, adding over $100 billion of average volumes across lending and deposit products. While expanded central bank balance sheets, government support, and reduced spending have added significant liquidity to the system and increased the savings rate of Canadians we have also seen market share gains of over 50 basis points in personal core deposits over the last 2 years, which is a reflection of our technology investments, client support, and distribution strength. We have similarly added 100 basis points of market share in residential mortgages over the last 2 years. Our strong mortgage growth has been partly underpinned by the reengineering of the entire end-to-end process over a number of years from adjudication to fulfillment to retention, which reached an all-time high of 94% this quarter. We've also seen elevated activity in our wealth management businesses, which have remained resilient over the turbulence of the last 12 months. Our diversified RBC global asset management assets under management or AUM grew by $60 billion from last year to a new high of $540 billion as more clients chose RBC as a trusted steward for their investments. Our retail funds captured over 25% of industry-wide Canadian net sales over the last 12 months, adding to our leading 32% market share among bank-owned fund companies. Along with market appreciation, our recent growth has been the result of investment outperformance with over 80% of AUM outperforming the benchmark on a 3-year basis. Assets under administration, or AUA in Canadian Wealth Management crossed $450 billion for the first time. Strong net sales and industry-leading recruiting efforts added to our number one high net worth and ultra-high net worth market share in Canada, which is built on the trust of our clients. Similarly, U.S. Wealth Management, the seventh largest wealth advisory firm in the U.S. surpassed US$460 billion in AUA for the first time, benefiting from a proven ability to bring in both net sales and attract experienced advisers to meet the needs of our clients. And City National continued to report double-digit loan and deposit growth as we continue to execute on our organic plus growth strategy. Our expanded jumbo mortgage platform is yielding results growing over 15% year-over-year. Our market share gains across our businesses are not only a reflection of our scale but also our continued investments in technology and client-facing colleagues. We have seen an acceleration of digital trends as Canadians are increasingly reaching for their phones to fulfill their banking needs. Our active mobile user base increased 12% year-over-year to over 5 million this quarter as mobile sessions crossed 100 million for the first time. New clients to RBC can now complete the full end-to-end account opening process in minutes on the RBC mobile app. And now over 50% of personal deposit accounts are opened through our mobile browser. Since the launch of NOMI in 2017, our mobile clients have benefited from actively reading more than 1.5 billion financial insights using predictive analytics to help manage their finances. Over the years, we've also made significant investments beyond digital functionalities and into digital businesses. MyAdvisor, our digital platform for clients to activate their personalized financial plans, was launched in 2017 and now has 2.3 million clients online. And AUM at InvestEase, our robo-adviser, has continued to trend higher. Our success in Commercial Banking has also been underpinned by multiyear investments in cash management solutions and technology, where we expect insight edge fueled by our data analytic capabilities to be a key differentiator. Aiden, our AI-based electronic trading platform in capital markets, continues to gain traction during these volatile times. The number of shares and notional volumes traded on this platform are up over 45% and 75% year-over-year, respectively. Investments in sales power have also been a key driver in the growth of our personal and commercial franchises with our mortgage specialists, advisers, and commercial account managers benefiting from the investments that we've made in technology. And similarly, we've made investments in the bench strength of managing directors and capital markets, which helps us deepen client relationships and win key mandates. Despite the significant increase in capital ratios, we delivered a premium ROE of over 18% this quarter. We are focused on the continued creation of long-term shareholder value. Going forward, our priorities have not changed with respect to deploying capital. We remain focused on building on our momentum and driving accretive organic growth. In capital markets, we will continue to deepen client relationships and further diversify our revenue stream towards less capital-intensive investment banking and advisory revenue. We will also look to further strengthen senior coverage teams in key sectors. In Canadian Banking, we expect continued high single-digit mortgage growth and significant pent-up demand to drive a consumer-led recovery. And with commercial utilization rates below pre-pandemic levels, higher Canadian commercial volumes could further support the acceleration of economic activity. Continuing our innovative approach to loyalty-linked partnerships with leading Canadian partners such as Petro Canada, RBC, and Rexall recently announced a new strategic partnership that will allow our clients to earn and receive even more value in savings while accessing Rexall's health and wellness resources. As we see increased online shopping, RBC has launched pay plan, offering Canadians yet another solution for purchases at participating retailers and merchants throughout Canada. In our U.S. Wealth Management platform, we expect to see further benefits from our recent expansion into new geographies, investments in our treasury management platform, and the hiring of experienced private bankers and financial advisers. We are also expanding and deepening our existing client relationships through the interconnectiveness of our businesses. Over 65% of Canadian Wealth Management clients now have a Canadian Banking product, and we expect this to continue to grow over time as we expand the continuum of offerings to our retail and wealth clients. Also, 19% of our Canadian Banking clients have all four transaction accounts, credit cards, investments, and borrowing products with RBC. We're also looking to increase the collaboration between our capital markets and wealth management franchises to provide a broader set of capabilities to both sets of clients, including acting as book runners for debt and equity issuances. City National has seen almost $2 billion of mortgage flow through our U.S. Wealth Management channels, benefiting from our team of bankers covering RBC Wealth Management offices in key markets. Looking forward, City National is looking to make a focused push into mid-market lending in the U.S. Not only am I proud of what we delivered, but also how we continue to deliver on our purpose of helping clients thrive and communities prosper. In wealth management, alongside our existing RBC vision, ESG funds, the RBC iShares brand has launched new ESG-focused ETFs. RBC Capital Markets is playing a leading role in helping clients meet their goals and objectives, serving as exclusive financial adviser to both ENI SPA and to Greencoat UK. Wind on acquisitions of offshore wind farms, a demonstration of our growing role in Europe related to renewable power. RBC Capital Markets also acted as joint book runner on Ambridge's $1 billion sustainably linked revolving credit facility, the first such issuance by an energy borrower in the North American market. I am also proud to share that RBC has received this year's Global Catalyst Award, an honor recognizing businesses dedicated to increasing the representation of women in leadership and promoting equal access to career opportunities. RBC is also recognized as an ESG leader by third-party rating agencies with a high 86 percentile ranking on priority ESG indices. And as a reminder, today, we're kicking off our first-ever RBC Capital Markets Global ESG conference. So to sum up, our scale, innovation, and talent are our competitive advantages as we create even more value for our clients. We continue to execute on our strategy with purpose, to prudently invest in sustainable growth and strong returns for shareholders. I'll now turn it over to Rod.
Rod Bolger, CFO
Thanks, Dave, and good morning, everyone. Starting on Slide 9. We reported quarterly earnings of $3.8 billion. Earnings per share of $2.66 was up 11% from last year. Despite operating in a near-zero interest rate environment, we generated nearly $5 billion in pretax pre-provision earnings this quarter. Moving to Slide 10. We reported a robust CET1 ratio of 12.5%, unchanged from last quarter. We had record internal capital generation of 41 basis points this quarter, higher than our historical average of 30 basis points to 35 basis points. This was largely offset by higher risk-weighted assets. Outside of the impact of foreign exchange, RWA growth was underpinned by four key drivers: first, strong client-driven volume growth in Canadian Banking and City National. Second, elevated client-driven trading, derivatives, and underwriting activity in capital markets. Third, approximately $3 billion of transitional methodology changes to our securitization framework and an additional $2 billion from maturities of existing securitization notes. Fourth, these factors were partially offset by a modest $1 billion benefit from net credit upgrades that partially offsets the cumulative $13 billion impact from net credit downgrades over the last three quarters of 2020. Our CET1 ratio was also impacted by a partial reversal of OSFI's transitional capital modification, primarily driven by the reduction of the scaler rate from 70% to 50%. The remaining 19 basis point cumulative benefit should reverse over time given further reductions in scalers and migration to PCL on impaired loans. We expect to continue generating significant capital as the economy recovers. Our strategy for capital allocation has not changed. We will invest additional capital to support accelerated and prudent organic growth in order to further expand our market share in key businesses. Now moving on to Slide 11. All bank net interest income declined 4% year-over-year. As strong volume growth in Canadian Banking and City National was more than offset by the impact of lower interest rates and the impact of fiscal and monetary stimulus, which continues to drive excess liquidity into the financial system. However, after adjusting for trading results, net interest income has been steadily increasing after bottoming out in Q3 of 2020, up 3% on the back of strong volume growth. All bank NIM declined 2 basis points from last quarter, primarily due to changes in asset mix, including towards lower-yielding securities. At the segment level, Canadian Banking NIM declined 2 basis points quarter-over-quarter as the impact of low interest rates and asset mix more than offset the benefit from strong deposit growth. Looking forward, we expect Canadian Banking NIM to continue to decline modestly throughout 2021. City National's NIM was down 12 basis points relative to last quarter, largely due to the influx of deposits being invested in low-yielding short-term securities. However, City National net interest income increased for the second consecutive quarter. Recall that City National has a more asset-sensitive balance sheet with approximately 50% of its loans being floating-rate commercial loans. Also, approximately 50% of deposits are noninterest-bearing. We expect the narrowing of City National's NIM in Q1 to largely reverse in Q2, given expectations for accelerated paycheck protection program loan forgiveness as well as an improved balance sheet mix as we redeploy our strong deposit growth into higher loan balances. Following this benefit in Q2, we expect City National's NIM to return back to current levels in the second half of the year. More importantly, we expect strong volume growth in Canadian Banking and City National to completely offset the headwinds of lower interest rates by Q3. And as a reminder, our results get impacted by fewer days in Q2, particularly in Canadian Banking. While we don't expect short-term rates to increase in the near term, the steepening yield curve serves as a good reminder of the value of our low data core deposits, including substantial noninterest-bearing checking accounts. Now turning to Slide 12, noninterest income, which represented 60% of revenue, was up 4% year-over-year, providing an important countercyclical offset to the impact from low interest rates. Our diversified business model is performing as it should in times of stress, with strong trading results across our businesses, and our wealth management businesses continue to provide a growing revenue stream. Furthermore, we expect upside from our M&A advisory business as the economy strengthens. In contrast, we continue to see certain fee-based revenue streams in Canadian Banking being impacted by COVID-19, particularly those affected by lockdown measures and restrictions on travel. Targeted lockdowns have also lowered wholesale loan demand, which in turn decreased credit fees. Looking forward, we would expect to see some of these revenue streams begin to pick up as economies open. Now on to Slide 13. Expenses were up 2.6% year-over-year, largely commensurate with strong performance. Excluding variable and stock-based compensation, expenses were down 1% from last year. This follows on a similar year-over-year decline last quarter after adjusting for severance and related costs associated with the repositioning by NPS in Q4 '19. We also continue to benefit from reductions in discretionary costs, such as marketing, travel, stationary, and printing, which are around $80 million from last year. However, we are cognizant that some of these costs could start to increase as economies begin to open back up. We will continue to balance investments in key growth areas such as technology and innovation with project prioritization in other areas. We already have a number of cost containment programs in place across our businesses, and we expect to generate efficiencies from the accelerated digital adoption that Dave spoke to earlier. Looking ahead, we expect full year expense growth, excluding variable and stock-based compensation to remain well controlled in the very low single digits. Moving on to our business segment performance, beginning on Slide 14, personal and commercial banking reported earnings of over $1.7 billion. Canadian Banking quarterly net income was up 8% from last year, as the impact of lower interest rates and service charges were more than offset by strong volume growth, elevated market-related client activity and reserve releases, largely in our retail portfolios. Loan growth of 6% was largely driven by continued double-digit mortgage growth, which was a function of both the strong retention rate as well as new originations that were up over 40% from last year. Growth in commercial and credit cards continues to be constrained by the impact of COVID-19. Growth in business deposits remained robust at 25% and growth in core personal checking accounts was also very strong, up over 30% year-over-year. RBC Direct Investing also saw a material increase in client activity by individual investors with average trading volumes up nearly 200% year-over-year. Turning to Slide 15. Wealth Management reported quarterly earnings of $649 million, up 4% from last year. Canadian Wealth Management revenue was up 7% year-over-year, benefiting from higher average fee-based client assets with AUA and AUM of 7% and 12%, respectively. Global Asset Management revenue increased 17% year-over-year, primarily due to higher average fee-based client assets. Results also benefited from higher performance fees as a result of strong investment performance. These are generally earned in Q1, if at all. Favorable changes in the fair value of seed capital investments also contributed to the increase. GAM AUM increased by 13% or over $60 billion year-over-year, with nearly 60% of the increase coming from total net sales. Net sales were $7 billion for the quarter; Canadian long-term retail net sales remained strong at over $5 billion in Q1, particularly into fixed income and balanced products. Long-term institutional net sales largely from BlueBay partly offset money market outflows. Very strong volume growth at City National continues to be more than offset by lower interest rates. Deposit growth remains exceptionally strong at 36%, outpacing double-digit retail and wholesale loan growth. We also saw solid growth in U.S. Wealth Management with AUA, up nearly USD 50 billion from last year. Turning to insurance results on Slide 16. Net income of $201 million increased 11% from last year, primarily due to improved claims experience and higher favorable investment related experience. These factors were partially offset by the impact of lower new longevity reinsurance contracts and lower international light volumes. Turning to Slide 17. Investor & Treasury Services net income of $123 million decreased 14% from a year ago. Earnings were up 45% quarter-over-quarter, partially due to seasonality. Both funding and liquidity and client deposit revenue declined year-over-year as they were negatively impacted by the current interest rate environment and elevated enterprise liquidity. This was partially offset by higher gains from the disposition of securities. Turning to Slide 18. Capital markets reported quarterly earnings of over $1 billion. This was the fifth quarter in a row with pre-provision, pretax earnings in excess of $1 billion. Corporate and Investment Banking reported yet another strong quarter. M&A advisory fees generated this quarter were the second highest after the record fees reported in Q1 from a year ago. We continue to see strong equity origination fees underpinned by increased confidence and constructive markets. While debt underwriting has come down from elevated levels in 2020, they remain strong this quarter given the low interest rate and narrow credit spread environment. Looking further into 2021, we remain actively engaged with our corporate investment banking clients across all regions with respect to their strategic objectives. Our ECM and M&A pipelines are strong. Global Markets had yet another strong quarter with revenue up 12% from last year to $1.6 billion, benefiting from favorable market conditions across multiple asset classes as well as from an increase in primary activity. FIC Trading remained strong as credit trading benefited from tightening spreads. Interest rates, FX, and commodity trading all saw increased client activity and market volatility. Client activity was also strong in equity trading. Looking ahead, we expect trading activity to moderate over the coming quarters. In conclusion, we remain committed to improving productivity, attracting new clients through our differentiated products and services, and continuing to increase our market share over time. And with that, I'll turn it over to Graeme.
Graeme Hepworth, Chief Risk Officer
Thank you, Rod, and good morning, everyone. Starting on Slide 20. Allowance for credit losses on loans of $5.9 billion was down $201 million compared to last quarter. This reflects PCL on impaired loans of $218 million or 13 basis points, which is down 2 basis points from last quarter as lower provisions in capital markets and wealth management were partially offset by higher provisions in Canadian Banking. It also reflects a $97 million release of reserves on performing loans. Notably, this is the first quarter since the onset of the pandemic when we have released reserves in relation to our performing loans. For context though, this represents less than 4% of the reserves taken during 2020. Our lease balance is a more optimistic economic outlook, driven by the introduction and approval of vaccines in December of last year with concerns around the new variants and challenges with the rollout of vaccines. Turning to the credit performance of our key businesses, starting with capital markets. Compared to last quarter, gross impaired loans of $857 million decreased $348 million, and PCL on impaired loans of $18 million decreased $50 million. These decreases reflect limited new formations as clients continue to benefit from access to debt markets and substantial liquidity. As well, we saw a good resolution of previously impaired accounts, mainly in the oil and gas sector, as prices rebounded from the lows we saw in 2020. We also released $37 million of reserves on performing loans, following a $38 million release last quarter. This reflects continuing improvement in our credit outlook for this business. In Wealth Management, gross impaired loans of $289 million decreased $56 million from last quarter due to lower new formations at City National, mainly in the consumer discretionary and consumer staples sectors. Improvements in these same sectors also led to $27 million of recoveries on previously impaired loans. In Canadian Banking, gross impaired loans of $1.4 billion was up $95 million, primarily in the residential mortgage and personal lending portfolios. PCL on impaired loans of $217 million was up $48 million from last quarter with increases across all portfolios with the exception of our cards portfolio. As expected, delinquencies and impairments have begun to increase from the exceptionally low levels that we experienced last year when clients benefited from our deferral programs. While delinquencies and impairments are increasing, they continue to be at or below historical levels as government support programs remain in place, benefiting many of our clients. We do expect delinquencies and impairments to increase through the remainder of 2021 as many government support programs are scheduled to conclude this summer. Additionally, this quarter, we released $63 million of reserves on performing loans in Canadian Banking. This release came primarily from our cards portfolio, reflecting lower outstanding balances and from our residential mortgage portfolio, reflecting very strong housing market conditions. Before concluding, let me touch on our overall credit outlook. As you recall, in Q2 last year, we materially increased our reserves against performing loans. At that time, our expectation for credit losses were guided by a rapid deterioration of economic indicators caused by the significant uncertainty around the pandemic. In particular, there was uncertainty around the speed and timing of an economic recovery, the degree of government support, the size and duration of additional waves of the virus, and the availability and efficacy of a vaccine. To date, bank and government support programs have been robust and beneficial to our clients, resulting in better-than-expected credit performance. Additionally, the economy has outperformed our expectations since the onset of the pandemic with economic indicators, such as GDP and unemployment staring better than we originally expected. Although some sectors continue to be severely impacted by containment measures, other sectors are experiencing robust growth in this current environment. Despite these positive developments, concerns around the new variants of COVID-19, including the efficacy of the vaccines against these new variants, and current valuation delays could negatively impact the timing and pace of the economic recovery. Over the course of this year, we expect PCL on impaired loans to rise. The timing and level will be dependent on the success of the vaccine rollout and how and when government support programs come to an end. Concurrently, we would also expect our allowance on performing loans to decline as performing loans migrate to impaired. Our performing loan allowance could be positively impacted as uncertainties around vaccination rollout abate and the reopening of the economy supports more confident outlooks on unemployment rates and GDP growth. At 0.85% of loans and acceptances, our ACL continues to be well above our pre-pandemic levels to reflect the noted uncertainty. Thus far, we have been very pleased with the resiliency of our portfolio, which reflects our disciplined approach to underwriting and the quality and diversity of our lending portfolios. As we've done since the start of the pandemic, we will continue to actively work with our clients to help them navigate through these uncertain times. And with that, operator, let's open the lines for Q&A.
Operator, Operator
The first question is from Ebrahim Poonawala from Bank of America Securities.
Ebrahim Poonawala, Analyst
I believe you mentioned a focus at City National, especially regarding the mid-market segment. Could you provide more details on this, considering it seems we have been placing more emphasis on private banking recently? Please discuss the middle market initiative, what it involves, and how we should evaluate the success of this strategy from an external perspective.
David McKay, CEO
Yes. Those are two important parts of our growth strategy in City National. We're very excited about how we've grown the business over the last five years. As we look to the next phase of growth, I would say the first point is really important that balancing the growth between private banking, jumbo mortgages, and the commercial bank is a big priority of ours. And we've made significant progress on the mortgage strategy. 15% growth year-over-year, we originated $5 billion of jumbo mortgages last year in the U.S. And if you annualize the first quarter, it's up closer to $7.5 billion. So we're well underway with that strategy to grow the balance sheet and to balance the balance sheet off between private banking and commercial banking. And we're doing a good job cross-selling those customers into core banking. So the strategy, as we've talked about for the last five years, is really starting to play out and accelerate. We've built a strong back office to create a great client experience and that we're executing the way I hope we'd execute. That leaves us an ability to continue to grow our commercial franchise. And what we're thinking there is we have some really strategic advantages, we think, on a couple of fronts. One, we have this fantastic capital markets business, global capital markets business with very strong industry verticals that create ancillary fee-based opportunities on the advisory side for clients that will bring in through the mid-market strategy. We're thinking in a range of between $500 million and $2 billion in revenue as a target market to give some guidance there for corporates. And we've also just reinvested in our treasury management capabilities. So when you think about using our balance sheet and then cross-selling into fee-based products, which is our strategy across every business globally, this is very consistent with that. We put our balance sheet out to a new client, we come in with treasury management capabilities and great capital markets capabilities, and we drive to premium ROEs that we're looking to drive within our credit risk appetite. So this is certainly within our credit risk appetite and therefore, the ability to balance off private banking and mid-market allows us to grow and accelerate growth at our target ROEs.
Ebrahim Poonawala, Analyst
Got it. And just tied to that, Dave, is M&A a distraction or a potential contributor to the strategy?
David McKay, CEO
M&A would need to be significant enough to divert management's focus from the tremendous growth opportunities we have. We were already experiencing double-digit growth before these strategies began to take off. We feel optimistic about our organic growth prospects in the U.S., especially as competitors engage in M&A and become distracted from their clients, which enhances our organic opportunities. We are expanding our Net Interest Earnings and our sales teams in private and commercial banking, preparing for potential disruptions in the market. However, if an acquisition can accelerate our growth in commercial and private banking, we will consider it, but we have substantial organic opportunities to invest in ahead of us.
Operator, Operator
The next question is from John Aiken from Barclays.
John Aiken, Analyst
Rod, since I don't really have any significant complaints on the results, I was hoping that you might be able to walk me through the wealth accumulation plan in U.S. wealth management. I know the net impact is not overly material, but it does drive some variability within the segment's metrics. Can you remind me what the purpose of the plan is and then also what the mechanics are that cause the variability in both revenue and expense lines?
Rod Bolger, CFO
Yes, of course. Thank you, John. The plan is part of our compensation model centered around pay for performance, enabling our employees and financial advisers to invest a portion of their deferred income in the market to earn returns, which aligns with their profession. As a company, we hedge against the fluctuations in compensation expense due to market movements. Recently, especially in our fiscal first quarter, as the markets have risen, our compensation expense has increased accordingly. To manage this, we purchase a basket of securities to offset the investments made by our financial advisers and employees. This information is outlined on Page 10 of the supplemental materials, detailing the impact on revenue and expenses. You would have noticed a $20 million discrepancy in Q2 and Q3 of last year, but year-over-year, there will be significant increases in both revenue and expenses. This is why we adjust for noninterest expense growth year-over-year, as it has no economic impact, except positively for financial advisers who are allowed to invest in the market with their deferred salaries and compensation.
Operator, Operator
The next question is from Paul Holden from CIBC.
Paul Holden, Analyst
Rod, your insights on the NIM outlook and the accompanying slide were very informative. There seems to be a growing optimistic sentiment for banks regarding the steepening yield curve. I am curious about the deposit benefits you mentioned. Are there any treasury or other opportunities related to NIM today, considering the steepening of that curve?
Rod Bolger, CFO
Yes, Paul. As the yield curve increases, it's important to consider the 5-year and possibly the 7-year swap rates, though we don't engage much with the 10- and 30-year ends of the curve except for our pension plan and insurance business. The benefits to our deposits largely relate to the assets we allocate them towards, which primarily consist of 5-year fixed-rate mortgages in our Canadian retail sector and variable-rate commercial products in the U.S., along with a growing impact from the U.S. mortgage sector. Additionally, credit card balances will also experience benefits, although we have faced challenges as these balances have decreased significantly, which has negatively affected our mix since those balances usually yield higher returns. This will enhance our net interest margin as it increases. For us to take treasury actions, we would need to hedge at the 5-year swap rate or longer to establish a long-term position, but we prefer to invest deposits in client-facing assets. We anticipate that the influence of interest rate changes will start to moderate after the second quarter. Notably, rates were reduced by 150 basis points around the midpoint of our fiscal second quarter. Consequently, we expect some year-over-year challenges this quarter, but starting in Q3, these challenges will largely dissipate, allowing us to see increased revenue growth driven by our robust balance and market share expansion. This will be a key factor in our growth moving forward.
Operator, Operator
The next question is from Meny Grauman from Scotiabank.
Meny Grauman, Analyst
It's another quarter of outsized growth in the mortgage book. I'm just wondering, I understand why it's happening, but I'm wondering, is there a point where it's suboptimal to have that kind of, call it, lopsided growth in the Canadian banking business?
Neil McLaughlin, Group Head, Personal and Commercial Banking
It's Neil. We definitely don't see it as a negative for several reasons. Firstly, it’s a very sticky product. We appreciate the risk associated with it, and there are high returns on equity in mortgages. Our strategy focuses on fostering a comprehensive relationship with the customer, and mortgages play a significant role in that as one of our most profitable products to establish with clients. Therefore, we remain very confident in our strategy and are encouraged by the market share gains and the volume we're able to capture in the last three quarters.
Meny Grauman, Analyst
And Neil, just a follow-up on that. When you look at your forecast, at what point do you anticipate the business mix shifting a bit more? In which quarter do you think that will occur?
Neil McLaughlin, Group Head, Personal and Commercial Banking
Yes. Well, I think in terms of the housing market, we feel good about the dynamics. We expect, as Dave mentioned, still see strong growth throughout the rest of the year, high single digits. Immigration was dampened, and we expect to see that come back in Q4 and provide some more demand. In terms of other parts of the business, I mean, our credit card business Rod touched on in terms of the NIM impact. We were down $3 billion in balances there. So that's providing some real headwinds, not only in our NIM, but just in terms of revenue. Credit card spending will also we expect to bounce back. That will provide tailwinds of revenue there. I think part of the unknown is, Dave mentioned utilization down in terms of commercial revolvers. Entrepreneurs need to have the confidence to invest and tap into those revolvers. I think as the economy opens up, entrepreneurs gain confidence, you'll start to see commercial lending start to come back hopefully in the back part of the year.
Operator, Operator
The next question is from Gabriel Dechaine from the National Bank Financial.
Gabriel Dechaine, Analyst
Again, sticking with Neil, just looking at your deposit growth in banking has been phenomenal. I'm just wondering about that $70 billion or so increase in deposits over the past year. How should we look at that retail commercial in terms of inhibiting your loan growth, meaning it could push back consumer borrowing a few years because they're just going to tap into their savings before they start borrowing again. I'm talking about everything, excluding mortgages, obviously, because that's growing? And if you can make a similar comment on commercial lending, just trying to figure out behavior, and how that affects your loan growth outlook?
Neil McLaughlin, Group Head, Personal and Commercial Banking
Yes, that's a great question, Gabriel. We are clearly observing a buildup of liquidity. On the consumer side, this is somewhat related to my earlier comment about the credit card portfolio. There simply isn't much opportunity for consumers to spend at the moment. Our largest category is travel, dining, and entertainment, and we are not seeing consumer spending in these areas. As a result, some credit card clients are paying down their balances more rapidly. We have customers who previously revolved their balances but can now pay in full. Additionally, we have noticed a decline in the utilization of retail credit lines. Consumers are paying down their debt. Regarding mortgages, that has not been impacted at all. I believe this situation will improve over time; that's likely the outlook. The return to previous spending levels, connected to liquidity, will likely align with economic recovery.
Gabriel Dechaine, Analyst
Does it change your outlook, though? I think last quarter you said the second half, you'll have positive revenue growth in Canadian Banking or something along those lines? Could it be a couple of years before the non-mortgage categories start to grow again?
Neil McLaughlin, Group Head, Personal and Commercial Banking
In terms of the consumer lending portfolio, there are still two categories present. One is the lending we do directly to consumers through our branches and the other is our auto business. Last year, the auto business saw a significant decline. Looking at indicators from the commercial book, we experienced a decrease of over $1 billion, roughly 30% in floor plan finance. As the auto business begins to recover, you will notice an increase in that segment of consumer lending. Additionally, the utilization and consumer activity related to branch-based lending should improve as well, making that part of the year a reasonable expectation.
Operator, Operator
The next question is from Sohrab Movahedi from BMO.
Sohrab Movahedi, Analyst
Yes, I have a question for both Dave and Graeme. Back in December, your outlook seemed more cautious regarding the operating environment than it does now. I can't recall when total bank PCLs were in the low to mid-single digits. What has changed? Graeme, what should we be expecting moving forward? I know it's an incredibly challenging environment to anticipate, but what surprised you, or what was a positive development? How do you see these surprises affecting the remainder of the year?
David McKay, CEO
Sohrab, I'll start with kind of the macro view of what we're seeing, and why we're certainly becoming more confident in the trajectory that we're seeing. First and foremost, to my points around the vaccines, the effectiveness of the number of vaccines, the plans coming together the progress Europe is making, particularly the U.K., a core market for us to progress that the United States is making in vaccinating its high-risk population and its ability to reopen its economy. Even though Canada has been delayed, we're talking months here. We're not talking quarters. So we're growing in confidence in the trajectory of the vaccination of our population and the mitigation of risk. We're not there yet. So we're still waiting to see the execution of this, but we're getting more confident that the timing is starting to narrow around this when this will happen. I think that certainly, there's no shock there. It's just an evolution of the process that we're going through in a very complex operational process, but it's coming together. I think that allows us to see through to more normal economic activity, increased credit card spending in the fall, as Neil referenced, even that surplus cash, there's $200 billion of cash sitting on Canadian consumers' accounts right now waiting for a place to use it. Some of it's gone into the market. Some of it's gone to pay down debt, as we just talked about, but a lot of it's poised to grow that service sector that's been shut down and mostly impacted by the variance in COVID rate now. So I think that's leading us to feel very good about where we are as an organization, where the economy is, and how this should play out the rest of the year. Graeme, why don't you talk about your view on risk from that perspective?
Graeme Hepworth, Chief Risk Officer
Sure. A few comments. I would say what's different now versus Q4? Well, I would say, by far and away, the most notable event is when we sat here at the end of Q4, there was no known vaccines or approved vaccines. That is absolutely a huge game changer in terms of kind of putting a different lens on the uncertainty here. One of the biggest issues that we were facing in 2020 was just uncertainty around the timelines for this pandemic. That was a huge factor in it. With the introduction of vaccines in Q4, that certainly is a huge point of optimism. Now the flip side of that is we're obviously seeing challenges in getting vaccines rolled out. We're seeing variants come into play. That still does leave a significant level of uncertainty and caution in play with us. But that is really, I would say, the biggest point that kind of toggles this quarter last quarter versus this quarter. As to how that translates through to provisioning, I mean, you quoted the total bank PCL. I would really kind of dissect that into the two components. What we're seeing in stage 3 and then kind of the dynamics of IFRS 9, and how we treat performing loan loss allowances. Certainly in stage 3, 13 basis points is a very low number. I think that would certainly be at kind of the bottom end of our historic range. That's really a byproduct of, I would say, two significant things: we're certainly seeing the benefit and effects of the deferral programs that we put in place as well as certainly the positive implications of the support programs that were provided by governments across the board. As deferrals come to an end, we're starting to see those delinquencies pick back up. We do expect those stage 3 impairments and delinquencies to trend positive or trend upwards over the remainder of 2021. Government support is a big part of this. And right now as it stands, government support is expected to conclude largely this summer. That really is what will kind of influence our expectations going forward as to the degree that that's extended or morphed into new forms of support. That will really drive kind of the expectations and implications for our credit performance in the latter half of the year. When it comes to performing loan loss allowances, this is more about kind of the expectations as opposed to the actuals that we're experiencing as I said, the vaccine is positive, which has translated to a more positive macroeconomic forecast with a robust recovery really starting in the latter half of 2021, as Dave referenced, but still some degree caution on that at this point of uncertainty that I referenced. These are all the things that are in play. But when it comes to the Stage 1 and 2, that's why we did make a small release this quarter is because that ACL, that tool quantum of risk, we see has abated to some degree since we were standing at the end of Q4.
David McKay, CEO
Just for posterity, our last time at this level is Q1 of 2005 at 12 basis points.
Operator, Operator
Next question is from Mario Mendonca from TD Securities.
Mario Mendonca, Analyst
I want to clarify what you just discussed. If we consider credit cards as a measure of the Canadian consumer, credit card loss rates this quarter were around 150 to 160 basis points, which is about half of what we experienced before the pandemic. As we think about credit card losses in the coming year or two, how should we interpret this? Should we expect the expiration of deferrals and the end of government support to push those loss rates to 300 basis points before returning to normal? Or do you believe that 300 basis points represents the upper limit, and we are unlikely to exceed pre-pandemic levels? Essentially, I want to understand if government support has mitigated the spike in provisions for credit losses that we anticipated back in 2020.
Graeme Hepworth, Chief Risk Officer
Yes. Thanks, Mario. I think it's a really good question. I think this whole debate around the degree to which loan losses have been deferred or mitigated is a really great question right now, and it's part of the uncertainty that I think we're facing. Well, yes, right now, we are experiencing exceptionally low levels of loan losses and quite contrary to where you'd expect it to be at this point of the cycle. That is certainly a byproduct of the deferrals and the government support, as you've noted. Putting the government support aside for a second, credit cards were down for us this quarter, which is different than the other retail products, but that's a byproduct of the fact that credit cards have a 180-day impairments as opposed to a 90-day impairment. We would expect the flow-through of deferrals to start to pick that up over the coming quarters. The implications of the government support part are the other very material part of this, right? So as I indicated earlier, we do expect on the retail side, our delinquencies and impairments across the board to increase throughout 2021. The level that gets to the degree that that's deferred versus mitigated, I think, is really dependent on this bridge that the government has created and whether it's not just robust enough, but whether it really extends the other side and rather fully mitigate losses or whether these are really just deferred to kind of more elevated levels at the latter half of this year and early 2022, but that is a big point of the uncertainty, it's really difficult to forecast at this point in time.
Mario Mendonca, Analyst
Okay. Real quickly, then for Rod. Rod, help me think through what's going on with the non-loan earning assets. So think of all the liquid assets the bank has. It dropped last quarter, increased a little bit this quarter. What are the big drivers of that? Is it simple as saying, if loan growth reemerges in the second half, that loans will sort of crowd out some of this liquidity? Or is it really being driven by just client demand right now?
Rod Bolger, CFO
I believe it is a combination of both factors. Specifically for City National, we do not pool all our funds due to various bank requirements and regulations, as well as our legal structures and government obligations. Over the past year, City National has experienced $9 billion in loan growth, which is quite strong, alongside $18 billion in deposit growth. This additional $9 billion in loans has effectively replaced wholesale funding. We have seen a similar trend in Canadian Banking, where loan growth has dislocated wholesale funding as well, although the figures differ slightly, and deposit growth has been considerably higher. As we continue to expand our loans, we will be able to reduce lower-yielding securities and replace them with higher-earning client assets.
Operator, Operator
The next question is from Lemar Persaud from Cormark Securities.
Lemar Persaud, Analyst
Maybe for Rod. I think you mentioned that some of the discretionary costs could be returning as the economies begin to reopen. How much of that, which I believe was $80 million in discretionary costs, are you anticipating coming back in your expense outlook post pandemic?
Rod Bolger, CFO
A portion of it, some of that is certainly travel, which may not return to pre-pandemic levels, we will see. Some of that is marketing, which as the economy opens back up, as people venture out, there will be more opportunity to grow the client base. So some of that certainly will return, but I wouldn't expect all of it to return. You can factor a portion of that coming back. But again, we're going to grow earnings and revenue faster than that expense growth is going to resume.
Lemar Persaud, Analyst
What areas do you anticipate for expense growth within your low single-digit expense outlook? This pertains to everything other than variable compensation and stock-based compensation, which are both at very low single digits. It mainly refers to all other expenses. This includes our ongoing investments in technology and digital capabilities, as well as compliance with new regulatory requirements and workforce expansion. I am not excluding personnel from that very low single digits, and we are continuing to hire to sustain our market share growth. Over the past year, we have added more than 1,500 employees to keep pace with market demand.
David McKay, CEO
And to Rod's point, this is Dave. Neil's added private bankers, Kelly, and the team have added private bankers writing commercial bankers. So we are growing our capacity to serve clients, expecting the market to surge in client demand to surge yet again, and this is on top of the outstanding growth that we've got now. So we've been seeding growth, expecting recovery, and it's playing well for us right now.
Operator, Operator
The next question is from Scott Chan from Canaccord Genuity.
Scott Chan, Analyst
Dave, in your opening remarks, you talked a lot about wealth management, specifically on the U.S. side. If I look at slide 4, you've onboarded $40 billion plus with new advisers over the past few years, which is a significant amount maybe you can kind of talk about that onboarding process? Is it benefiting from new geographies and kind of looking out over the next two years, is it going to continue?
David McKay, CEO
We've been doing that both in Canada and the U.S., which is a core strategy. I'll talk to the U.S., and maybe Doug can talk to the Canadian process. Certainly, I think the value proposition, we've invested heavily in financial planning technology and our core margin lending capabilities. The infrastructure that was lacking in the platform five years ago, we have a very strong adviser offering platform right now with a great culture, and we're attracting advisers from the big platforms. That's been a consistent consolidated effort. Culture is a big part of it. We sell the culture that we have in Canada in the U.S. The capabilities we have, the teamwork we have, the cross-sell and referrals that we get through our banking partners on both north and south of the border. All that combines to be a very attractive offer to financial advisers and FAs IAs in Canada and the U.S. So that's been a core success of ours in Canada and in the U.S. for many years, and we see an opportunity to really accelerate that. We've got plans to increase that growth, particularly in the United States over the coming years and are ramping up our branch manager and sales efforts to do that. We're pretty excited about that opportunity. Doug, you've been executing this and your team, Dave Agnew for years. It's a well-proven formula for us.
Douglas Guzman, Group Head, Wealth Management
Yes, it is. The story for those of you who were at the Investor Day a few years ago, the flywheel that I put up is really working. I'd add in the U.S. today's comments, a couple of things. One is the shift to fee-based in some cases, discretionary assets and the addition of a credit product has allowed our advisers to have more to serve for their clients. But in Canada, the story we told at Investor Day was an ability that exceeds our competitors to invest in highly skilled subject matter experts at the center, allowing our advisers to become much more than investment advisers, obviously anchored in goals-based discovery and planning, but bringing in real expertise in insurance and philanthropy in trust and estate and giving advisers, frankly, more to sell than our competitors have or more to provide clients that our competitors have, which makes us a destination of choice for advisers. We're seeing through the last number of quarters of disruption as our stronger than ever interest from other firms advisers to join our platform because we've got just more firepower for them just as the client base.
Operator, Operator
The next question is from Mike Rizvanovic from Crédit Suisse Securities.
Mike Rizvanovic, Analyst
A quick one for Neil. Just wanted to go back to the gains that you've been making on the deposit, the retail deposit share in Canada. It seems like it's a pretty competitive market, like with the incentives provided, whether it's like a $300 cash upfront or, I guess, over time for a new checking account. It just seems like a very competitive market. I'm wondering, given that you have to pay for that growth to some degree, how long does that typically translate into gains in other areas? Like we've clearly seen it in the mortgage side, but I haven't seen it in the other retail loan balances in terms of your share. How is that trending? Is that just a lag, or do you expect that to maybe accelerate at some point in the near term?
Neil McLaughlin, Group Head, Personal and Commercial Banking
Yes, it's definitely competitive. Since Investor Day, we have focused on setting our goals for acquiring new clients. Before COVID, we were pleased with the growth in bringing new consumers to make RBC their primary bank. When the pandemic hit, we had to pause our efforts. However, we reopened our outreach late in Q3 and are happy with the rebound we've seen in connecting with consumers and bringing them into our franchise. Regarding incentive costs and cross-selling, we monitor these metrics closely by cohort and channel. This allows us to analyze the products, channels, and offers that bring in consumers and track their potential for adding investments, loans, credit cards, or mortgages over time. We continue to invest because our cross-sell rates remain strong. Our confidence in the strategy to consolidate and become the primary bank for our clients is as solid as it was a couple of years ago. Additionally, unlike some competitors, we incentivize clients to consolidate their business with us without requiring a minimum balance for deposit products, which we believe contributes to our higher cross-sell rates.
Operator, Operator
That is all the time we have today for questions. I would now like to turn the meeting over back to Dave.
David McKay, CEO
Thank you for your questions today. We want to highlight a few key themes. Firstly, we experienced strong client franchise growth across capital markets and wealth platforms in both the U.S. and Canada. Our retail bank saw over $100 billion in client growth, enabling us to navigate significant interest rate challenges. We noted a $400 million impact from interest rates on our U.S. and Canadian operations, but we're pleased to have managed through that. As Rod mentioned, as these headwinds start to lessen into Q2 and Q3, our robust momentum will be boosted by a resurgence in credit card and commercial banking as the economy reopens in the latter half of the year. We feel optimistic about our position. Our return on equity of 18.6% is noteworthy. We're generating a premium on the capital we invest in our business through successful cross-selling and multi-product relationships, which have positively influenced our fee-based revenue. Despite the challenges in net interest income, we demonstrated strong fee-based growth, showcasing the effectiveness of our balance sheet activity. Overall, we are pleased with our quarter. Thank you for your questions, and we look forward to speaking with you again in three months.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.