Royal Bank of Canada (RY) Barclays 22nd Annual Global Financial Services Conference (Transcript)

Royal Bank of Canada (NYSE:RY) Barclays 22nd Annual Global Financial Services Conference September 11, 2024 11:15 AM ET

Company Participants

Katherine Gibson – CFO

Conference Call Participants

Brian Morton – Barclays

Brian Morton

All right. Thank you, everyone. We’re in the homestretch here. This is the final presentation for today. With us, we have Royal Bank of Canada. Joining us is Katherine Gibson, Chief Financial Officer. Welcome, Katherine.

Katherine Gibson

Thank you.

Question-and-Answer Session

Q – Brian Morton

All right. Let me start off with kind of as you’re sitting in this role. You’re a few months into your new role as interim CFO. Maybe tell us about what have been your biggest priorities since taking the seat? And whether it’s decisions on capital, liquidity or strategy?

Katherine Gibson

Thank you. So let me start, Brian, by just thanking you for inviting us here today. My first conference. So really excited to be here. And just being here over the last couple of days, a very impressive conference. So excited to be, I guess, capping it out with this session.

It’s been a busy and exciting time at RBC. And so coming into the role has just been fantastic. I’ve been focused on taking purposeful steps across the various aspects of my mandate. I’d maybe share kind of three areas to pull out. Number one is maintaining our disciplined focus on efficient capital allocation.

During the second quarter, I think the group is, obviously, we’re all familiar, we closed our HSBC acquisition with capital above our target. So CET1 at 12.8%. We also announced in that quarter the start of our NCIB. So we’ve got that buyback in place, which is targeted on repurchasing the shares that we issued underneath the DRIP.

And then second area for me has been maintaining a focus on our balance sheet position. And over maybe just a couple of examples to call out. Over the second and third quarter for City National, we’ve been really focused on their funding and looking at bringing down their FHLB to zero. So happy to report as of the end of Q3, we have that as a lever, but that is no longer a costly funding for us.

We’ve also, on that front, been looking at the asset sensitivity for City National and put in place some forward-looking swaps to help mitigate against the volatility in a lower interest rate environment.

And I would say last, but definitely not least, is a laser-focus on efficiency and cost synergies. And the item I’d call out there relates to our HSBC acquisition, and part of it was cost synergies. We’re very clear that we felt there’s opportunity of $740 million. And happy to report we’re well on our way there, already booked $120 million. And if you pay that to an annualized run rate, we’re well on our way to hitting 50% of that run rate.

Brian Morton

All right. So maybe talk a little bit more about the HSBC Canada acquisition that just closed in March. As you sit here now nearly six months after closing, how has the acquisition performed compared to your expectations? And are there any areas where you could — there could be incremental expense or revenue synergies?

Katherine Gibson

HSBC, we’re so pleased with the acquisition. We’ve been asked a couple of times, did you get what you thought you bought? And absolutely. The quality of the book is very good. If I start at it from a balance sheet perspective, what we were looking to come over is largely aligned from a client attrition perspective. We were expecting, I think, normal course for anything of this size in this transaction that you would have a bit of client attrition. Pleased to say that we’re actually seeing client attrition below what we had forecast in our due diligence model.

From a credit quality, we, again, completed heavy due diligence on it. It’s a really clean book. Happy to say that once we’ve got it on, there’s nothing changing on that front. And the other item I would just call out from an overall acquisition perspective of did we get what we thought? The one thing is on the growth trajectory, it was a bit of an extended time horizon between announcing the deal and when we got regulatory approval and closed.

And so you can imagine that clients, and even Salesforce here, you’re not probably as excited and geared up to get out there and be driving high growth, only to then have to move a client — a new client over into RBC. So we saw growth a little bit slower. The pipelines were a little bit lighter than expected.

However, now that we’ve completed the close and have them on board, teams are really energized and excited. We’re looking at it, at how do you bring the best of both worlds, a very strong and commercial banking team in HSBC. We also have a very strong commercial banking team in RBC. And so bringing them two together, we’re just seeing the momentum and the energy coming off of that.

I’d be missed if I didn’t call out two other areas on HSBC, really touch on cost synergies. And maybe just the one thing to add to that. I’ve met with a few people earlier today and the last day as well, and I’ve — my experience with acquisitions has been, I’ll call it, more of that traditional perspective where you close and then you bring them in and you integrate over a period of time.

With HSBC, given the nature of the transaction, we completed it in what — is described as a closing convert. So we brought the entire organization in over three days. And what that meant is that all of their data was into our source system.

And I just wanted to add a little bit more color on that because that really adds emphasis to the cost synergies because come day one after that three-day weekend, we were fully on our systems, and we immediately had to recognize significant technology savings because normally, that’s a fixed cost. And so that fixed cost that HSBC was running with, no longer being allocated to the business, this was coming into ours.

So really speaks highly to the strength of RBC’s technology stock and investments that we’ve been making over the years to enable that type of transaction, and then it gives you the power of those really quick cost synergies that are coming.

The last area I would just comment on for HSBC would be around the revenue synergies. And we’re quite optimistic on this front. We’re really seeing it in three areas, and it’s only four months, but we’re seeing the momentum. And so the first area I would call out is around the opportunity of cross-selling the strengths and the breadth of RBC’s products into the HSBC client base.

The HSBC client base is higher on the affluent side. And HSBC’s wealth management products compared to RBC’s were not to the same kind of breadth. And what we’re finding is that with the HSBC clients on board, we’re able to provide this broader kind of service from wealth management. And as of Q3, we’d already had $100 million AUM connected with providing wealth management services to HSBC.

The other area on the revenue synergy relates to new products and capabilities that we’ve brought on board to ensure that the HSBC clients had retained all the functionality that they had before. And what that means for RBC clients though is that we now have these new products, such as multicurrency or enhanced trade finance. That’s another opportunity of new products being sold into the RBC legacy.

And then the last bucket I would call out on the synergy front is around just bringing in new clients. So we’ve got merged teams. We’ve got new products and capabilities and really seen ourselves appealing even more to that commercial client with international needs given the breadth of what we can be offering to them.

Brian Morton

Great. And then you talked about some of the capital impacts from HSBC? And even after absorbing the 240 basis points, the CET1 ratio remains healthy, somewhat aided by continued internal capital generation. As you look for potential ways to deploy that capital, are there any geographies or segments that you find particularly attractive?

Katherine Gibson

Great question. From — starting with capital generation, we’re really confident with our ability in generating internal capital. Just as a reference, in Q3, we generated internal capital of 70 basis points. And if you net that with the dividends that we paid out that turns into 38 basis points.

From a capital allocation strategy perspective, I would say no change to how we’ve been operating in the past. We continue to prioritize our capital allocation to organic growth with high returns. Also important, and I would say second on the list would be our capital allocation for dividends, and then also the share buyback that we talked about.

Third would be inorganic. And it’s something where we would be more focused, I would say, on smaller bolt-ons, just given changing environment at the moment, lots of moving parts in macro and lots of moving parts on the regulatory front. But really feeling strong about our organic growth opportunities. And then looking at where do we bring in the right kind of bolt-ons that meets our strategic needs as well as our goal to be delivering that high ROE performance.

You asked about regions. Maybe before I get to regions, just a comment on — there’s always lots of interests around where do we think is the right operating level for CET1? And we believe that operating or running around 12.5% is appropriate. It is adequate buffer off of the regulatory minimum.

Do we see that as a target? I would say no, that’s not a target that we’re operating to. We feel that back to what I was talking about for that capital allocation strategy, we think it’s really important, you’re investing disciplined capital allocation. We want to make sure that we’re investing and getting the return that our shareholders and our investors expect.

So we might find ourselves where it pops up a little bit. But just wanted to be clear that we think 12.5% (technical difficulty). And we do — like the team likes to say, capital doesn’t have a half-life, so you don’t have to get out there. You can manage it appropriately.

Brian Morton

Maybe a little clarification on that 12.5% because right now, the minimum — regulatory minimum is 11.5%, but they could still bump it up to 12%. So would you think that 12.5% is always like a 100-basis-point buffer? Or you can just keep and then if it moves up to 12%, you would retain a 100-basis-point buffer? Or just kind of keep it 12.5% and let that buffer shrink.

Katherine Gibson

I was going to say the buffer that we’ve got in place is, I would say is reflective of the environment that we’re operating in. And I would say, like — we feel like it’s really important to have like a stable capital allocation framework. And I would say we would generally operate to keeping that buffer consistent. So it’s pretty clear how we’re operating going forward. But if there is any change in broader pieces, maybe we would see that buffer and move around it.

Brian Morton

Okay. Great. And then another question on capital deployment. Other Canadian banks have been looking to deploy capital within the U.S. Relative to RBC’s overall size, your branch presence in the U.S. is not that large. Would you consider acquisitions as a way to grow scale in the City National franchise?

Katherine Gibson

City National is predominantly like a private and a commercial bank. And because of that, we operate with a lighter or call it branch network. We don’t need that extensive branch network. If — like if we had an intention and we don’t, at the moment, to go into mass retail, we believe that it’s critical to have significant sales — scale, excuse me, to be successful. Where we’re looking to continue to operate is in that high net worth space as well as the commercial verticals, as we feel that we can deliver kind of that differentiated value in that space.

To your question on City National and acquisitions, our focus is on driving improved efficiency and profitability in the City National business. We’re taking — or I’ll call it, we’re pulling the playbook off the shelf that we used after Capital Markets a few years ago after the global financial crisis, where we looked inward and said, we’ve got a good, a great opportunity to be looking at — how to improve our profitability. Like let’s grow, but with increased profitability. Let’s grow with improved efficiency. And that’s the same playbook that we are using for City National at the moment.

We feel that there is ongoing opportunities to improve our efficiency for that business. And there’s also ongoing opportunities to improve the profitability by looking at how do we extend our relationships with clients?

And then also looking at our book and identifying if there’s areas where we’re not meeting hurdle rate, we’ll then — we need to be in a position where we demarket that. City National, if you look to the broader kind of U.S. horizon, City National is a key part of our overall U.S. strategy, and we feel that there’s the opportunity in increasing that connectiveness across capital markets, wealth management and City National, and that’s really our focus.

For inorganic there’s — coming back to your question for the inorganic on, do we believe acquisitions? We feel strongly on that opportunity with organic growth. If there’s something that would be small as a bolt-on maybe, but you need to make sure it’s fitting right into our strategy. It’s fitting into a need that it makes sense to address the needs through an acquisition.

And then we also, given the importance of funding, we want to be ensuring that we’re not bringing on someone else’s problem where the deposit funding is not there. So few things that we’re thinking about, but feeling strong on the organic growth as we move forward with the U.S.

Brian Morton

Okay. Great. Continuing kind of on the capital theme. Although its not talked about as much. The leverage ratio has been consistent in the 4.2% area. Are there any scenarios where you might become more concerned about or focus more on the leverage ratio, where it could become like a binding constraint?

Katherine Gibson

Leverage is one of the metrics on the capital side that we keep a close eye on, manage like our CET1. At the moment, we do not see scenarios or see us being in a position where we would find ourselves with a binding leverage ratio. At Q3, our leverage ratio was 4.2 versus regulatory minimum of 3.5. So overall, feeling, obviously, a key metric needs to keep a close eye on it, but not seeing it as a binding constraint.

Brian Morton

Okay. Great. Let’s just talk about the Canadian business. You’ve seen some sequential loan growth in resi mortgage, personal, card and business has been pretty healthy across the board, despite already leading market shares. What steps are you taking to continue to gain market share? And do you see any kind of constraints or limitations on loan growth?

Katherine Gibson

The Canadian banking, if I step back with a bit of a broader comment on what underpins that loan growth, the Canadian banking business is on a really strong foundation. We’ve got a strong, solid core deposit franchise, and that drives leading loan-to-deposit ratio of 100%, which is key in this market as we’ve got low funding or cheap funding to be driving that loan growth.

We’ve also got — we proceed with very prudent risk appetite on the overall book. And we are — given our scale and our size of the broader operations, operate at a best-in-class efficiency of just under 40%.

And so with all those pieces, together, they’ve got that foundation that enabled us to have this strong loan growth going forward. And we’re sitting in a privileged position with — we’re number one market share on cards. We’re number one market share on mortgages, number one market share on commercial and then also on deposits. And we’re seeing strong growth across all of those categories.

The one I would call out would be on mortgages, I would say that we’re seeing lower growth on mortgages. I don’t think we’re unique versus anyone else in the industry. Expecting that once interest rates are to come down, we’d expect that demand would see that accelerate.

But to your question on constraints, I would want to call out for the group that our — like our view on market share is that we don’t go after it at all costs. And we want to be definitely taking every step forward with that profitability, that high return in mind. And mortgages has been one where we had seen high competition over the last couple of years.

Margins have compressed, and it’s something that we’ve been keeping a really close eye on. The mortgage is a key product, a key to the client relationship. So it’s critical that we maintain a number one market share, but we’ll not be going after additional market share at all costs, just really keeping that eye on profitability.

As we go forward, thinking in the lower interest rate environment, I think there’s the mortgage pool will be getting bigger and so maybe an opportunity there to see change in spreads as we forward. But that’s something that is a top of mind balance as we go forward.

Brian Morton

Okay. Great. Within card, the rewards program has been crucial to customer acquisitions, especially when we’re looking in the U.S. How are you approaching the credit card market? And how has your rewards experience differentiated from your competitors in Canada?

Katherine Gibson

Yes. Our bank-owned rewards program is one of the longest running in Canada. And so two years ago, we relaunched as Avion Rewards. And as part of that, we really stepped back to say like, how do we come at this slightly differently? Our goal was to step back and provide kind of value of the rewards program to all of Canadians.

And what we did at that point was look at all of our reward programs and bring them together underneath one umbrella. We had our travel program. We had our experience offers. We had cash back. We had points since we brought those altogether and put them underneath the Avion Rewards.

And at the same time, as we brought all those together, we opened up the — we call it the offering. What we really wanted was all Canadians to participate and to have a value experience that range from, I’ll call it the everyday up to the aspirational. And so up until that point, it had been — if you’re a credit card and you had the rewards, those were the individuals that were kind of had to opt into it.

And so what we did is we opened it up to all banking clients. So went from credit cards, to mortgages, to lending, et cetera. And so that RBC Client Group then had the extended value. And then we actually opened it up to all Canadians. We said we didn’t need to be an RBC client to participate.

And the reason why we did this is we wanted to be relevant in the day-to-day lives of Canadians. We wanted them to be seeing the value that was being brought to the table. And so when they thought about their bank of choice, not just thinking of RBC for credit cards, but also thinking about RBC has that broader financial offering.

And other two — just two other quick things to call out in connection to that. As it’s bank owned, we are our own manufacturer so we’re able to do and provide this program in a lower cost point that allows us to differentiate on the offering. And I’m pleased to share that the program has been doing really well. As we approach the end of the year, we’re just shy of having 10 million Canadians in the program.

Brian Morton

Great. Staying within the Canadian banking market, one of the things we’ve been hearing is, the consumer has been surprisingly resilient despite maybe a kind of a cloudier outlook at the beginning of the year. Maybe talk about any segments or geographies that you are seeing signs of concern within the consumer?

Katherine Gibson

Sure. See as you said, the Canadian consumer has been very resilient. I would say that the thing that came out across the Q3 results for the Canadian banks, which is the health of the Canadian consumer. When you look at it from a couple of different lenses, the liquidity that the Canadian consumer is sitting with is still much higher than it was before we entered into the pandemic.

We’re also seeing that the Canadian consumer is taking prudent steps in looking at managing their discretionary spend, thinking about how they’re managing that liquidity, getting ahead of potential changes to the mortgage payments that are coming.

So we are, I would say, cautiously optimistic as we think about the credit horizon. We are really clear on that are working through a credit cycle. And from a, I guess, the areas where we expect to see impact on the consumer side, mortgage book, we’re not expecting to see any material PCL.

Like back to what I was saying, we’ve got high liquidity and the behaviors that are supporting payments going forward. Our overall quality of our book is high quality. We’ve got FICO scores in the high 700s and loan-to-value of about 50% on average and about 70% at origination. So the quality of the book supports that overall view that we’re not expecting to see any significant deficiencies.

As is typical for credit cycle, we do see uptick in delinquency on unsecured book. And for us, that’s auto, credit cards, personal lending. So we have seen that tick up. We are expecting that, that will continue as we move forward. However, that is in line with our expectations. There’s nothing here that’s been surprising us from that point.

Brian Morton

Great. And maybe talk about like rate cuts, we’ve already seen three rate cuts from the Bank of Canada, most recently, just last week. Can you maybe talk about how much of an impact do you think that will have on the consumer? Will that change any behaviors?

Katherine Gibson

Sure. Yes, we’ve had, I guess, just recently a total of 75 basis points rate cut. We have not seen any significant change at this point in client behaviors. I would almost frame it from an interest rate perspective that what the changes that we’ve seen has really been, almost like pulling the foot back a bit off of the break versus us getting into that period where we’ll see individuals coming off the sidelines and we’re kind of stimulating the growth going forward on that.

So I expect there’s more — well, our forecast is that there’s more cuts to come. So we’re expecting that. And with that, we’ll see that pent-up demand. An interesting stat to share is that with every 25 basis points cut in the Bank of Canada rate. It equates to about $7 billion, $7.5 billion of surplus cash into the Canadian economy.

And so as you think about that, as we move forward, it’s not going to happen in the snap of your fingers. That would be like an 18 to 24 months kind of positive impact that flows through. But when you think about putting all that together, that is a nice positive data point as we move forward through this cycle.

Brian Morton

Great. Still RBC’s balance sheet probably remains asset-sensitive. So I guess the flip side of the rate cuts is, how do you think about offsetting the impact on NII from declining rates?

Katherine Gibson

Yes I’m going to — there’s always — never a simple answer. There’s a lot of moving parts there. So maybe I’ll just step back at a higher level and just take you through the parts that we are thinking about as we look forward into this environment.

So one thing that we always operate against is to drive regardless of the interest rate environment to have stable net interest income, and that drives the hedging policy that we put in place. And earlier in our conversation, I made a reference to the strengths of our core low beta deposit book. And what we have done with that book is put hedges in place that basically are laddered up term hedging.

And we basically are hedging back to 5-year swaps. And I’ll throw the term out there that it gets described as we put tractor hedging in place. And it’s basically is giving us a strong tailwind as we go into this interest rate, lower interest rate environment.

As I was saying, the majority of it is hedged through 5-year swaps. And the delta, if you look at the, roll on, roll off at the moment, it’s about 200 basis points. And if you also look at that 5-year swap curve, that benefit is going to be a tailwind for us for a period of time.

So even though we’re expecting to see lower rates, that this will be a tailwind that will counter it. A few other items that will have impact on net interest income as we go forward, competition. We talked earlier about mortgages. So we’ve seen kind of margin compression on mortgages. We’ve also, on term deposits seen competition on that front as well.

As we move forward, that will be something, depending on the dynamics, I referenced that as pent-up demand gets back into the market for mortgages, I think that mortgage pie will get bigger. So we might see some expansion there on the margin. Will we go back to where we were? I don’t see us, but I think there’s some opportunity there.

On the GIC side — or sorry, my Canadian lingo popping out here. On the term deposit side, really keeping a close eye on that. As I mentioned, we’re seeing the competition, but what we’re seeing is an offset to that is back to that core deposit book. And it’s sticky. It’s a core to the organization and seeing that as an offset.

The other piece, maybe two quick pieces just to call out on this topic. In a lower interest rate environment, we’re expecting to see growth pick up. It will be a positive to our net interest income. And then the other significant dynamic that came out as we had interest rates increased significantly was the movement of flows.

We saw significant transfer of money in motion. Now that’s moved into term deposits. We’re continuing to see strong growth on that front, if not at the levels that it was previously, but it’s still double digits going through. As rates decrease, we expect that we’ll see consumers make that choice to point their investment in another area. And so the reason I bring that out is, yes, that will mean that term deposits flow out of Canadian banking or retail bank, which would be a negative for net interest income.

However, the offset to that with the diversified business model that RBC operates under, we have a really strong wealth management business. And the expectation is that as those flows move, we’ll see them transfer from term deposits into investment products like mutual funds. So can be lower on the net interest income side, but we expect we’ll be picking that up on the fee income side. So net-net, for the organization, overall, flat. So lower interest rate environment, lots of moving parts, but looking to have that tailwind from tractors as a positive going forward.

Brian Morton

Great. I think that’s a nice segue into my next question. I was just going to ask about wealth management. Wealth management is kind of a significant driver for the RBC business mix. Can you talk about how you maintained a differentiated edge in this segment? And do you see any further opportunities to deploy capital in Wealth Management?

Katherine Gibson

Yes. As you called out, Wealth Management is a significant business for RBC. Deliver high ROEs and very capital-efficient. We are coming from a really strong position. If you look at our key businesses that we have in place.

So Wealth Management Canada anchored and Canada, as the name suggest, a strong broker-dealer. We’re number one in the market space for high net worth and ultra-high net worth. We also score at the top of the list. We’re the highest productivity for advisers.

Moving into our global asset management business. Again, we’re number one market share for retail mutual funds. So again, it positions us really well to have the manufacturer low-cost distribution as we have that in-house.

Our third key business is Wealth Management U.S. We’re number six in the U.S. from a full advisory perspective based on assets. That business has been doing incredibly well. And also in your more recent acquisition as the last couple of years is wealth management U.K. We had presence, and then we’ve expanded that to add in Brewin Dolphin.

And so a bit back to question on, how do we differentiate? We’re really back to that power of — or that position of strengths in that , number one in broker-dealers, number one in asset management and strong position in second home market in the U.S. and in the U.K.

From a question on, do we see where we might deploy capital or inorganic. I would say that our focus area is U.S., U.K. U.K. is heavily fragmented and lots of opportunity there. I understand it’s number three in the world from like asset pool, and that’s something that we would continue to look at what’s the opportunity to bring in a small acquisition to expand our wealth management offering there.

Brian Morton

Great. We spend a lot of time on capital and kind of some of the top line drivers.

Katherine Gibson

Yes.

Brian Morton

And we don’t have too much time left. I just want to talk about, maybe kind of like the efficiency targets? And how are you balancing efficiency goals versus the need for a continued investment?

Katherine Gibson

Great question because it’s critical, right? You can’t like start one and spend — so you have to run with this appropriate balance. And so we’re always very focused on op lev, and we’re doing a great job with this quarter alone or actually year-to-date, we’re about 3% positive op lev.

We come at it as a long-term disciplined approach. I think it’s really important that we’re always looking at it from a — what are the structural opportunities. And so as we drive the structural opportunities, it translates into long-term value. And with that, it’s depending on your strategy and where you’re at in certain environments.

It’s a call then between what are you — like what are you saving to invest into your prioritized areas of growth and then what do you have is flowing to the bottom line. And so we find that with that, that gives the appropriate kind of structure and even the culture of that continuous focus.

If we find ourselves in a situation, right, where you need to pull levers a bit faster, we always have that at our discretion. If you need to pull back on discretionary spend, we’re slow hiring or maybe prioritize to another level of investments. We always have that. But our focus is coming back to how do we make those structural changes that longer-term view to have that longer-term value to avoid having to take significant restructuring every few years.

Brian Morton

Great. And of course, I couldn’t let a bank CFO get off stage without talking about credit. But given that credit didn’t come up for the last five minutes, I’d probably say something about overall credit quality. So while overall deal formations were relatively stable in 3Q. There was a tick up in Canadian Banking. Maybe can you talk about the increase in commercial new formations? And any outlook for potential for further deterioration?

Katherine Gibson

Sure. I was going to say my CRO will be happy there. Last question was on credit. So the Canadian — the Canadian consumer, we talked about the Canadian commercial book has been very resilient as we’ve gone through. And Q3, excuse me, was the first quarter that we did take impairments. And so we had one — we actually had 2, one in the real estate sector and another one in the forestry sector.

On the wholesale side or the commercial side, it’s natural to the business. They’re large and they’re lumpy. And so even though we took a couple this quarter, it’s in line with expectations. We don’t see it as a trend that’s signaling we’re on a negative trajectory that is outside of what we’ve outlined for expectations.

These two were both in our HSBC book. I do want to just call that out. I do want to just be really clear that just because it’s in the HSBC book, it doesn’t cause us to have a different perspective of the quality of that book. And as I said at the very beginning that we’re quite happy with the credit quality of that book. It skews to larger commercial clients.

And it’s actually equivalent to even performing better than the broader RBC book. So no concerns there on the HSBC front.

Brian Morton

Excellent. We have two minutes left. Maybe we’ll open it up to the audience for…

Katherine Gibson

For sure. Okay.

Brian Morton

One or two questions. Right, in the front row.

Katherine Gibson

Go ahead. I think you’re up. The mic’s coming. I was looking — the lights are bright, so I can’t see.

Unidentified Analyst

So congratulations on the HSBC acquisition. I think it’s a fabulous acquisition. But if I could come back to City National, yes, so that was 2015. I think it was like $5 billion at the time, something like, that $5 billion or $6 billion. Can I ask a couple of very broad questions. I mean, firstly, I think in the last year, you’ve had to inject capital again into that side. I’m wondering how much that was? And just in very broad terms, given that I don’t look full time at Canadian banks, what went wrong at City National Bank?

Katherine Gibson

So at City National, when we acquired the organization, I would describe it as, it was like a community sized bank. And it grew rapidly, and we found ourselves at a size where we needed to be compliant with heightened standards. And I would say that we also found ourselves in the middle of changing regulatory expectations. And as a result, we needed to grow the infrastructure to underpin an organization of that size as well as meet the regulatory expectations for an organization of that size.

And so that’s been our top priority is moving through the necessary build-out for that infrastructure. We’ve also been looking at what are the other areas of opportunity. And I touched on it before in that when you look at the bulk and when you compare City National to peers, we’re running at a really high efficiency level. And so there is opportunity, and we’ve already been executing the initiatives on that front to bring down the efficiency.

And we see more opportunity to go forward. An example, we’ve reduced our headcount by about 500 already, and there’s more opportunity there. From a profitability perspective, we talked about that before. So also seeing there’s opportunity there. We’re looking to simplify the business as well.

We’re taking it back to our core operations. We’ll deliver that targeted ROE for us. And that’s what you’ve seen kind of over, I would say, last year and even some quarters this year, and that we’ve looked at where do we need to exit. So sold a couple of noncore investments.

We are also like looking at, say, for example, our real estate footprint and how do we optimize the real estate? So stepping back and looking at it on all fronts to say, how do we optimize? Because we feel like we have significant opportunity there, but as a priority, making sure that we build the infrastructure necessary to address the heightened standards expectations. I’ll need to come back to you on that one.

Brian Morton

Sure. Quickly.

Unidentified Analyst

Just a follow-up on Julian’s question about City National. I think it’s clear for me what essentially will be done in the efficiency front, and rightsizing the business, et cetera. But just on the revenue side, you talked about opportunities. Can you put a little bit more meat on that? Like what opportunities are you seeing that could grow that franchise?

Katherine Gibson

Yes. Well, I was going to say it’s a bit of like looking back in and how do we improve that profitability? And so on the revenue side, looking at, how do we extend our relationship with clients? Taking it beyond just say, one product and looking at it from all of the suites of products that City National has, but also improving the connectedness between City National and the rest of RBC’s businesses.

So looking at how are we connecting with — we’re doing a better job of connecting with our capital markets and our wealth management. And then the other piece, just back to, going through and being really clear on what’s our hurdle rates. And if there’s loans on our books that aren’t at the hurdle rate, making the call that’s below our hurdle rate, and we need to be demarketing.

Brian Morton

Great. Please join me in thanking Katherine for her time today.

Katherine Gibson

Thank you.

Brian Morton

Thank you very much. Also please, I invite you all to come join us for lunch downstairs, I believe, in the Metropolitan Westroom. Thank you very much.

Katherine Gibson

Thank you very much.