Royal Bank of Canada (RY) RBC Capital Markets Canadian Bank CEO Conference – (Transcript)

Royal Bank of Canada (NYSE:RY) RBC Capital Markets Canadian Bank CEO Conference January 9, 2023 8:40 AM ET

Company Participants

Dave McKay – President & CEO

Conference Call Participants

Darko Mihelic – RBC Capital Markets

Darko Mihelic

Okay. We’re good to go. All right. Great. Good morning, everyone, and welcome to the RBC Canadian Bank CEO Conference. For those of you who don’t know me or forgotten what I look like over the years, my name is Darko Mihelic. I’m the research analyst here in Toronto. I cover the large Canadian bank space. And I’d like to formally welcome you all back to an in-person conference this year.

Similar to prior years, our presentations today will be in a fireside chat format. The schedule, you should all have a schedule, and each speaker’s biography is available on our website. So I don’t have to do these long time consuming introductions. And like previous years in-person, there was an opportunity for audience Q&A through an app called Slido.

And so what I’m going to try and do today is sort of block off the last 5 minutes or so, of each chat to take the most popular questions that’s been upvoted by you, the audience. So if you’d like to submit a question during any of these sessions, just please click on the QR code on your table and log into Slido with a password. And once you’re in there, you can choose the room, and you can log your questions in for each session.

So I would really appreciate some participation from the audience. I have my own set of questions that I intend to ask, certain angles that I see. But every year, I get surprised by what some people ask and what people are interested in, and I get to learn along the way as well. So please, big encouragement from me for all of you to please type in a question and upvote to the question that is most near and dear to your heart.

So without further ado, I think what we might try and do is start this session a little bit earlier and ask the CEO from RBC, Dave McKay to please come up to the stage.

Dave McKay

Good morning. Good morning, everybody. Imagine RBC Capital Markets conference without snow.

Darko Mihelic

Yeah. I was actually tell [Multiple Speakers] good start to the year. Yeah. Hopefully, the weather cooperates for a few more days. For those of you who are in town a bit longer. Dave, I want to ask a bunch of questions, and I think I want to start off digging away at capital because it’s been a pretty big issue lately. We’ve had the domestic stability buffer increased by the regulator, and it elicits a number of questions. So I think right-off talk about it, I just want to start to ask about capital and dig away. And we can take this conversation anyway you want.

Why don’t we start with your view on how Royal is positioned in light of a higher capital requirement and in light of the fact that you’ll be closing an acquisition at some point, and possibly the DSP even rising by that point. So maybe we can just open it up a little bit wide and let you kick-off and talk about your position on capital and how Royal is positioned for HSBC in light of the change?

Dave McKay

Yeah. I know it’s on everybody’s minds. It’s great to see everybody off the top of the year. Certainly for us, capital has been a strength for a long time. We’ve managed the organization conservatively for a long period of time. We’ve always said that the capital has no half-life, and we’ll use it well and we felt that we’ve used it extremely well. So from that perspective, it’s given us a lot of flexibility.

So as you think about the recent changes to capital levels from OSFI, the announcement of a wider range of DSP, maybe I should just kind of walk you through how our strength and our flexibility and the size of our balance sheet and how we’ve managed it gives us enormous confidence in absorbing the acquisition having capital for growth and having capital for future acquisitions. So as you know, we finished the year, Q4 with 12.6% CET1 ratio. And as we think about organic growth, and we’re going to see strong organic growth, we think this year across most of our business.

Therefore, we’re looking at a net capital organic generation ability, a little bit below what we would normally run 60 basis points to 80 basis points. But this year, we think we can do around 50 basis points of organic capital build. We have positive impact from Basel IV reductions because we had managed our assumptions conservatively, particularly around LGDs and others, we’ll have a positive 70 basis point impact from Basel IV. So we’re already looking at a 120 basis point capital build from those two impacts.

And then we — as you saw, we turned on a DRIP with a modest discount, and that will give us around 30 basis points. So we’re looking at 160 basis point capital build in 2023, which will take us up to around 14 to pre the close subject to approval, obviously, but I’m running through the hypothetical scenario of the HSBC acquisition, which is going to impact CET1 by around 240 basis points. So if it gets approved and closes in Q3 or if it gets approved and closes in Q4, you’ll see us in a range of just under 12% CET1 ratio at the close of HSBC.

And assuming it’s in, say, Q4 2023, so enormous ability to absorb that acquisition still be well above the threshold of 11% with a comfortable buffer to continue to grow organically. That’s in 2023. As you go through and if you make an assumption, if there’s further utilization of that DSP range, historically, there’s been time to adjust. It doesn’t come in and get a significant impact. Like that wouldn’t come in and get implemented overnight. Therefore, we’d have time to build into that.

So as we look into Q1 ’24 and Q2 ’24 again, you’re going to build capital pretty significantly through earnings through the DRIP as we look through the capital build in 2024 after organic growth, you’re going to see 60 basis points to 80 basis points of organic capital build. You’re going to see another 40 basis points of DRIP. So as we look through to 2024, we see even by Q2, being well into the 12.5% range, and then finishing the year closer to the 13%-plus range in Q4.

So irrespective of what happens with that DSP range, we’re going to close, subject to approval, HSBC, well above the current minimums. We’ll move well above any type of minimum threshold at the max range of DSP, have capital for growth, have capital for acquisitions. And therefore, the conservatism that we’ve had, all that capital, the earnings power of the franchise diversified across so many client franchises, it just — the confidence we have in moving through that and being well above 12.5%, 13% in the next six quarters is, really gives us enormous flexibility to absorb an acquisition to grow and not need an equity raise.

So I think off the top, I wanted to give everyone comfort, that’s the capital waterfall. And therefore, we have enormous flexibility. Having said that, when you — there’s no having said that, that is kind of our perspective on going forward with a lot of flexibility. If there is a recession that’s more severe than the mild recession that we forecasted, this is a cyclical buffer, right? So it’s supposed to be built up in good times. And as you’ll hear, hopefully, and you should ask Peter this question, [indiscernible] said it publicly many times.

Buffer’s to be used in a downturn. Therefore, if the downturn is more severe and you’re seeing more volatility in earnings and credit, then you would expect that wouldn’t be the time that the DSP gets used, used upwards. It should be drawn down from that point. So as we look through scenarios of modest recession to maybe severe recession, if we put up still much lower probability on that, much, much lower probability and we look at where the DSP might go, you have to take into consideration how it’s supposed to be used. And if there is a more severe recession, we don’t forecast that.

You would expect some flexibility in lowering the overall threshold. And that’s how we understand the buffers are to be used. So Peter’s and OSFI have said that publicly many times, and obviously, should be discussed today. So as we look at those scenarios, we have enormous confidence in the flexibility to absorb any volatility around uncertainty. We have the flexibility to absorb our largest acquisition ever subject to approval and we have the flexibility to continue to make acquisitions to grow our franchise. We’re in a great place to continue to create significant shareholder value.

And I want to give everyone confidence to do that. I think that’s one of the most important — I know it’s in your minds that capital waterfall gives me a lot of confidence and the organization confidence to continue to hire to grow to look for growth.

Darko Mihelic

So a number of follow-ups on that.

Dave McKay

Yeah.

Darko Mihelic

Thank you for the waterfall. That’s very helpful.

Dave McKay

Yeah.

Darko Mihelic

It does elicit a couple of follow-ups. First follow-up would be, what about the level of buffer that you want to run over and above what OSFI sets? Is it now almost necessary to run with a higher buffer just because you never know tomorrow, he could raise it, and he could raise it pretty quickly on you. Does it necessitate a higher hurdle rate for future acquisitions as well?

Dave McKay

We always run an operational buffer just because you don’t want to dip below your minimum thresholds ever, right, and face the need to maybe do something that’s off plan. So we always run a buffer above minimums. And you’ve seen us do that, and it tends to be in the range of kind of 50 basis point buffer just for volatility and uncertainty from quarter-to-quarter. You never want to run it close to the line. We’ve always done it that way.

Is there a need for us to? No. We — certainly, as a G-SIB, as a large organization, we’ve run this organization more conservatively so we can take advantage of opportunity, which you just saw us do. Capital has no half-life. So you’ll see us continue to rebuild that capital for flexibility to other — continue to grow in the United States is a core part of our overall thesis. That hasn’t changed even with the HSBC transaction and to continue.

So we’ll continue to build with an operational buffer, and we’ll continue to use capital wisely. You saw us kind of build capital and hold capital to the right opportunity came along, and we used it just need to create great shareholder value and in organic and inorganic growth, and we’ll run the bank the same way while continuing to return capital to shareholders. You saw us pursue share buybacks pre-HSBC. You’ll see us continue to do that once we rebuild our capital and there really no change in how we want to manage the capital.

Darko Mihelic

Even to future acquisitions? And I guess the other thing is when I look at…

Dave McKay

We’re building capital for the flexibility to take advantage of opportunities to create shareholder value. And there’s no change to that and generate strong premium ROEs along the way from our friends. The strength of our client franchise and the cross-sell and the returns and the efficiency and scale that we bring allow us to drive, as you’ve seen, higher ROEs off a higher capital base. Even with all that capital we’re carrying, we’re still driving 16%-plus ROE from that. So that’s the strength of this franchise, like, even with all that excess capital to still drive premium quartile ROE off that higher capital base.

Darko Mihelic

And given the waterfall that you’ve provided here, it almost seems as though it means that a U.S. acquisition, which sounds like you’d still like to do in the U.S. to build upon the platform, still seems like it’s not in the cards for this year. I mean, it looks like you’re generating enough capital for HSBC, maybe a little bit for some bumps along the road in case, but it almost pulls you out of the race, so to speak, for an acquisition in the U.S. this year?

Dave McKay

I don’t think there’s a race for an acquisition.

Darko Mihelic

Race is a bad way.

Dave McKay

Yeah. We’re tending to focus on smaller technology capabilities right now. But yes, for us to turn around and do something significant on the back of HSBC in the next year, that’s not in the cards.

Darko Mihelic

Has the mood changed out there for acquisitions? I mean, we’re getting Competition Bureau talking, they want to look at the [indiscernible] I think they sent out a tweet. There’s lots of push and pull in the U.S. with regulatory approvals with other acquisitions. Has the mood changed a little bit? Has it made it more difficult to make an acquisition? Does it necessitate perhaps going forward smaller acquisitions?

Dave McKay

Right. I mean, I think there’s so much value to be created in growing and adding capabilities that accelerate organic growth, right, versus absorbing a franchise that there’s always a good reason to sell, right, versus to buy. So we still see enormous opportunity organically in the organization across all our U.S. franchises, not just City National, but you look at the opportunities within Capital Markets.

Coming off a soft year, we’re certainly very excited about the capabilities that we’ve invested in from cash management to more advisory capabilities across the business and that getting traction through the year. The Wealth Management franchise continues to hire advisers and grow and add product and deposits. So very excited. We’re the sixth largest wealth manager in the U.S. and continuing to grow.

And then City National, obviously, with very strong core organic growth within its footprint, within its customer franchise. We’re serving the same types of customers, entertainment industry, the technology industry, real estate. We moved into the mid-corporate area. So there’s enormous organic growth opportunities in the United States. And therefore, that — that is the core focus of what we’re doing, and we’ll add-on where necessary. But for us, even through Q4, you saw this strong performance across our U.S. Wealth franchise. We’re very excited about that.

And you always have to debate, do I distract management with something small versus just having them stay focused on the organic growth and continuing to build that franchise. We’ve taken it from a $20 billion franchise to a $90 billion franchise. And that’s by staying focused on customer franchise, staying focused on improving our operational performance. And we’re very excited about the ability to improve the profitability of the existing balance sheet and efficiency of the existing franchise as well as growing it.

So I always debate to say, if I do something small, it’s going to distract management and could detract from the core organic growth capability. So for me, it’s rather being patient, waiting for the right opportunity and staying focused in the U.S. on core organic growth.

Darko Mihelic

Okay. I want to switch themes. There’s been a lot of talk about Canada as a country having a very indebted consumer base and a lot of people have gotten into mortgages with very low rates. You have a very large mortgage book in Canada. So I wanted to talk a little bit about that vulnerability and to sort of flesh out sort of what’s coming down for the next year or two on the mortgage front. There’s a lot of talk of people hitting their triggers. There’s significant increase in mortgage payments coming.

Can you maybe share some statistics around your mortgage book that should make us feel like this pig in the python kind of effect is not scary? How many people have hit their point? How many people will have a very big increase in mortgage payment in the next year or so? Is there anything you can flesh out here for us to make us feel better about that vulnerability in Canada?

Dave McKay

I know, again, it’s on everybody’s mind. I mean, I think we all have to start by the strength of the mortgage franchise and the mortgage market in Canada, right? Yes, we’re seeing significant reduction in core resale and purchase activity down on average about 38% across the country, more in core markets like Vancouver and Toronto in the low 40s. Yes, prices have come off from their peak in March. We’re up 14% and are down about 6% year-over-year, but on the back of a very significant increase.

But we’re still — having said all of that, when you look at sales to listing ratios, you look at overall demand factors in the core mortgage market, immigration, household formation, jobs, this is still a balanced marketplace with very strong demand supply fundamentals. So we’ve been saying that for years. That has not changed at the end of the day. Yes, prices moved up rapidly and are going through a correction, a needed correction because the affordability of a home in Canada has never been worse. So — and that’s driven by rates and house price increase.

So as you think about the overall structure, we can’t lose sight of, this is still a very well-balanced, well-structured marketplace without excess supply with a shortage of supply and continued long-term persistent demand creation from immigration and household formation. So let’s not lose sight of that. Notwithstanding that, we’re in a cyclical delta here that we have to understand. And I come back to — so how do we, at RBC sit down and answer your question, because I think it’s really important to understand the structural advantages we have in gaining insight into our customers and into that question that you asked.

So I’m going to give you a structural answer, and then I’ll give you the specifics to our portfolio. Structurally, our two decade investment in core banking and core checking pays enormous dividends to us. One, it’s a core source of funding and low beta funding, which I’m sure we’re going to get to around NIMs, huge advantage right now, an income tailwind. Two, it gives us enormous data, data that we use to understand cash flow and cash flow stress and income stress and we model off of that and huge data to cross-sell. We have a 50% premium on our cross-sell ratio to the industry average of 11%. We’re cross-selling at 18% of our customers have three core products, it’s because of the core information and our banking relationship.

So when it comes down — so those three benefits I’ve talked about for a decade now. And they’re paying huge dividends for us and drive our ROEs and drive our premium franchise performance. And I can’t say that enough on stage. So when we take the credit benefit of that, so how do we take that information and answer your question. So we apply a lot of AI capabilities and models to all cash flow data. We look at incomes. We look at the stress of inflation on expenses in a household. And we monitor cash flow to interest payments, as you would in any corporation. We do that at every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us. So we have deep, deep insight into our overall portfolio.

And then we monitor house prices at the MSA, at the street level. And we know our collateral values. So we use AI, and we use all this data to segment the portfolio. When it comes to the variable rate portfolio, which is roughly $100 billion to $120 billion portfolio. We go through that variable rate mortgage portfolio. And we start to segment out what the delta is in the trigger rates and the rate resets in ’23, ’24 to 2025. We model that cash flow. We model the cost increase from inflation. And we come up with a perspective on this group of clients with these rate resets that are coming at them in each of the sequential two, three years will or will not have a cash flow challenge and we have a pretty clear view of that. We stress that cash flow challenge. We look at a bucket. And then when we get into a bucket that we think you might have a cash flow challenge, we say, what’s the collateral value of your home? And we have deep insight in the collateral value of your home. And we put the two together to say which one of our clients has a cash flow challenge. And we stress that against today, no, but in the future, if you lose what’s the probability you might lose your job.

And then who also has a cash flow challenge plus has a collateral challenge. And that’s the bucket you have to be concerned about because if you have — the customer is unable to make their payments, and you have to take an action with that client to realize on their collateral, which is the last resort. You have skip a pay payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client. But then you look at that bucket with your analytics and your AI to say, where do you have a joint problem of cash flow and collateral. We do that actively all the time. And we have a bucket that we’re monitoring that has both. And that bucket, I can tell you, is in the low-single digit percentages of our portfolio. And that’s the bucket we’re managing.

And that bucket changes, but it doesn’t change by 10%. It changes by $10 million here and there. And that is a very small part of our portfolio. The vast, vast majority of our portfolio has the ability to absorb the cash flow delta because we see their income. We see the volatility of that income over time. We know where it comes from. We see their house and their collateral value, and they have significant equity in their homes. So we watch for the situation where they have — and we work proactively with those customers. So even if you were to apply a 100 fold increase in default and loss on that portfolio is not meaningful to our overall business when it’s in the low-single digit percent of your portfolio.

So the comfort you should get is deep data and deep insight. It still comes — gives us confidence and where to focus, where the risks are. We have tools to manage that, and we’ll work through this. So it’s not a big part of the portfolio at all. And that’s on the assumption that the vast majority of — well, the majority of that, not vast, but the majority of them, more than 50% of that variable rate portfolio will have a trigger impact. So we do see a significant trigger impact in the variable rate mortgage product. But the cash flow was there to absorb it, and the collaterals are there to absorb it, to a large degree. And we’ll continue to monitor that, but there’s significant buffers there.

The other scenario you have to look at is we’re in a very strong employment market. We still have 900,000 open jobs in Canada. So if there is a displacement from one sector to the next, we still have significant demand in construction, in retail, in hospitality, health care. There is still strong, strong demand for jobs. So if you’re displaced in one sector, there is a job for you in this economy, and that’s different than other recessions that we’ve been through.

The last piece is there’s still the significant excess liquidity buffer in our country. It’s coming off, not as fast as coming off in the United States. If you look at the liquidity buffer built up during the pandemic in the U.S. of $2.5 trillion, $1.5 trillion has rolled off already. It’s down to about $800 billion, and you’re starting to see the credit manifestation of that slowly. It’s still nascent, but you’re starting to see default bankruptcy manifestation from that.

In Canada, we still have roughly 75 — 70% of that build is still there versus 30% in the United States. We’ve seen roughly 25% roll off, but a big chunk of that roll-off is in your more affluent customers who are reinvesting for yield versus burning cash because of inflationary cash flow burn. So it’s for a good reason, it’s a reinvestment reason.

So we still built very strongly about the fundamental supporting cash flow, employment even with displacement shocks, with the tech layoffs that are coming, there are other jobs in the economy to continue your cash flow. There’s a significant liquidity build to absorb the shock if something’s happened to you. And there’s a time lag between when you lose a job and get a job. And there’s significant collateral in the system, and we have deep insight into that.

So from our perspective, the investment in core banking, the investment in data and AI give us this really unique ability to see and understand our portfolio and monitor it continuously and act with our customers to mitigate risk. So I think the structural capability answer is as important as the message I want to leave that low-single digit percent of our portfolio has a payment and collateral potential, but they’re still working.

So I think that is a really important kind of overall perspective on why we’re not blindly going to this. We have deep, deep insight into what’s going on. We have deep ability to use AI to stress and to model and to look at it and therefore, confidence in the different scenarios that come out of our portfolio and therefore, a willingness to continue to find those customers and to lend and can support Canadians going forward through this difficult time, which is a difficult time for many Canadians. Really important question and answer.

Darko Mihelic

And it’s a good thorough answer. And so I wanted to really quickly hit a couple of follow-ups before we hit PCLs and NIM. What if rates go higher? How much can the mortgage book handle if rates get going higher?

Dave McKay

Yeah. So we’ve obviously stressed to higher central bank rates and therefore, the problem doesn’t shrink. It does grow. But it doesn’t grow materially from where we were.

Darko Mihelic

Okay. So if you take that low and mid-single digit, you could see a 30%, 40% increase with another 75 basis points, say, go to 5%, but it’s still off a very small base of problem. So despite the strength that you see in the economy and the ability to absorb shocks, we’re still looking at normalizing PCLs into 2023. So maybe you can talk a little bit about what you see normalizing where. And if I’m not mistaken, the last — my check was the consensus had you growing EPS at 5.5% this year. Now that’s below your medium-term target. That can happen. But I’m just curious if you can talk a little bit about where your PCLs might drift to? Why they’re normalizing higher? And is that going to be the big swing factor that maybe the 5.5%, is that reasonable to think in a normalizing sort of PCL world?

Dave McKay

Yeah. PCL is very difficult to forecast. So what we’re forecasting in our base case is a fairly significant increase in unemployment, given the timing maybe mismatch between losing a job and finding a job as we see kind of a reallocation of human capital within our economy. So in our base case forecast, we do have unemployment going up to, I think, we’re closer to 6%. So in that normalization scenario is a higher unemployment rate, which is driving that.

What we are seeing currently in our portfolio is very low bankruptcy default, and most of it still flow default. So usually, it’s about 50% bankruptcy, 50% flow default in your consumer portfolios and we’re seeing a pretty consistent flow. And those can be driven by all the other factors from job loss, divorce, health issues. There’s still large macro drivers of financial challenge. And those drive kind of your flow write-offs in bankruptcy, we’re forecasting because of that expectation of a tick-up may not happen.

But in that normalization is built a fairly significant kind of 80 basis point increase in overall unemployment. If that doesn’t happen, then you won’t see the same normalization. So it’s not status quo unemployment that drives that. It’s an increase in unemployment that would have to drive that normalized loss ratios of kind of 25 basis points. [indiscernible] want to go?

Darko Mihelic

Yeah, that’s where I wanted to go. Thank you. And I’m just keeping an eye on time because I want to touch on a couple of other topics. Maybe we can touch on net interest margin, net interest income growth for the year. The bank has had a pretty good expansion of NIM. But are we reaching the peak of it and how should we think about your net interest income growth for — I mean, it looks like it’s — consensus has it around double-digit growth. Maybe you can talk to expectations.

Dave McKay

Yeah, absolutely. Again, one of our core strengths. The investment in commercial and consumer core checking low beta capability, low beta deposits continues to be a franchise story for us and will continue to drive NIM expansion into 2023 along with very strong funding levels. So we’re still forecasting a range of NIM expansion of 10 basis points to 15 basis points next year, which is really significant to a balance sheet of our size.

You’ll see a good chunk of that in the first half of the year, and then we’ll see where rates go from there. We’re still forecasting kind of central bank rates to go up and come down. So a net-net flat is coming, our economics group or forecast. So in an environment of net flat, we’re still going to see NIM expansion. We’re extending the duration of our portfolio to protect against any downside or limit the downside if rates do correct faster. But when you listen to the narrative from the Fed or the narrative from the Bank of Canada, they’re going to have to hold rates where they are to ensure they manage inflation within the target range, and we don’t expect to see a meaningful runoff certainly in the near term. So rates should hold for a while. Our expansion is strong.

And I think that’s a really strong story driving what you just said is, along with good growth, not as growth that we’ve seen in the mortgage portfolio, certainly in the past year mid-single digit in mortgage, but strong commercial growth. Still you’re going to see very strong NII growth from our franchise, so kind of is a good position to be in, right? Funding, NIM expansion, capital flexibility to continue to drive the franchise and absorb our largest transaction. The earnings accretion that comes from HSBC is very, very significant for us and overall drives a mix of very strong, consistent earnings that drive high dividend payout ability.

Darko Mihelic

And is there anything that concerns you regard — I mean, you mentioned the deposits. You mentioned was it 75% of the deposits are still there from the surge from the pandemic?

Dave McKay

Yes, systemically in Canada.

Darko Mihelic

Specific to Royal though, what I’m interested in understanding is, do you see that strength perhaps really fading towards the back end of the year as people absorb higher payments as they pay their taxes as the normal course? I mean, the concern that we have is that this funding advantage shrinks, and then rates fall. That’s my worst-case scenario. Can you talk us through why I shouldn’t be that concerned that NIMs in 2024 [indiscernible]?

Dave McKay

The mitigants to that systemic issue or one’s extended duration in our balance sheet, both in the U.S., really important and in Canada. That acts as a mitigant to the downside, whereas we had the short duration to get the significant benefit on the upside. We’re waiting for this for five to 10 years, extend duration, so you don’t see the same runoff on the downside. So that’s really important to understand.

Two, the other mitigant is growth. Last year, we acquired 400,000 net new customers. And that’s before we announced the deal in Quebec with Metro, before we announced the partnership with ICIC Bank. And before you’ll see a number of partnerships coming forward continuing to invest in our ventures strategy, which is really starting to kick in, and we have great heart for that strategy as a long-term differentiated strategy. So as we think about client acquisition, it will be higher than 400,000 going forward. We’re back to where we wanted to be in our Investor Day when we talked about 500,000 a year.

So offsetting then the systemic potential runoff and burning of some of that cash — excess cash is very strong organic growth through our core franchise strategy of leveraging partners, leveraging our network, growing our network, investing in technology and creating value for customers and acquiring us a significant growth franchise. ICIC Bank alone we expect in the first year to do 50,000 more acquisitions. And that’s a franchise we’re going to continue to build.

Quebec, a very important market to us with the partnership, sponsorship with the Canadians, but also with Metro. We’re very excited about. We’ll continue to grow in a market where we’re underpenetrated. We’re the third largest bank in Quebec. So we have opportunity to grow there. So when you think about offsetting that duration, growth, cost management, all of those are abilities for us to continue to deliver strong NII growth.

Darko Mihelic

Okay. I haven’t seen a question show up on my Slido iPad. Maybe I’m reading it wrong. But with that, maybe I always like to give the CEO the last word. So Dave, maybe you can just give everybody here what you’re — what you think the key messages are for 2023 for your shareholders and possible investors?

Dave McKay

Well, I think just to summarize, we covered a lot of them through your questions, but I’ll start with the strength of the franchise. At the balance sheet level, enormous capital strength, ability to absorb our largest acquisition ever, ability to continue to grow, ability to continue to make acquisitions. And that — we have not diminished that flexibility going forward. And therefore, you could see us be front footed as an organization and taking advantage of opportunities. That’s a really important point, right? And through HSBC, creating an opportunity to add $1.5 billion of earnings is a very, very meaningful strategy for us.

Liquidity and funding, again, low beta deposits, the funding we get from our core banking or corporate cash management capabilities, the information flow that we get both for risk management and for marketing and understanding of that customer and delivering them the right products and services at the right time and enormous capability and strength from that liquidity profile. The strength of our overall diversification of our overall franchise. So very excited about our retail Canadian banking capabilities, the addition of HSBC, as I said, but also the investment in partnerships, the investment in technology, the investment in ventures, the core organic growth across credit cards, deposits, mortgages, commercial, we feel very strong about. And we exited the year with really good momentum and continue to build on that momentum. Very excited about that.

The addition of Brewin Dolphin in the U.K. and now the overall strength of a true global wealth management capability, kind of number one in the Canadian market, number six in the U.S. market, number three in the U.K. market. Now you’re starting to see the synergies of putting together a global customer franchise around wealth. That’s been our objective. Brewin Dolphin was a key piece, continue to look for opportunities to build out a true global wealth franchise. You’ve seen significant growth, particularly coming out of the U.S. The U.S. is going to be a very strong contributor to our revenue and franchise growth in ’23. Rates really helped, but also organic growth there and just the organic growth that I talked about in wealth.

And we’re looking — we’ve invested in our Capital Markets business. We had an off year last year. We took the underwriting marks. It was a volatile market. We’re looking for that business to bounce back. But long-term investments in more coverage, more advisory capability, but also the U.S. corporate cash management investment is a very strong strategic piece for funding, but also for ancillary revenue and cross-sell into relationships where we’re already in the syndicate or already — they’re already strong partners. We have a right to ask for the business, and therefore, we feel very good about the long-term perspectives and the short-term perspectives of our Capital Markets franchise.

So diversified globally diversified by client. We’re focused. Technology is paying off, and we feel really strongly with the flexibility of capital funding, client franchise that partnership investments that we are on our front foot and feeling good about the franchise, notwithstanding that there’s a volatility. And that’s the benefit of ROI is that through these uncertain markets, good times and bad times, we can manage through that and absorb that and continue to deliver strong shareholder value and strong ROE, so.

Darko Mihelic

Okay. With that, that’s an excellent wrap up for us. Thank you. This ends our session. Thank you very much.

Question-and-Answer Session

End of Q&A