Royal Bank of Canada (NYSE:RY) Q3 2023 Earnings Call Transcript

Royal Bank of Canada (NYSE:RY) Q3 2023 Earnings Call Transcript August 24, 2023

Royal Bank of Canada beats earnings expectations. Reported EPS is $2.13, expectations were $1.99.

Operator: All participants please stand by, your conference is ready to begin. Good morning, ladies and gentlemen, and welcome to RBC’s Conference Call for the Third Quarter 2023 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.

Asim Imran: Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Nadine Ahn, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; and Derek Neldner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then re-queue. With that, I’ll turn it over to Dave.

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David McKay: Good morning, everyone, and thank you for joining us. Before we begin, I want to acknowledge the tragic events in the Northwest Territories, D.C., and Hawaii, with the ongoing wildfires. Our care and concern is with all those in these areas and we’re supporting community relief efforts, and we are here to help affected clients and employees. Moving now to our results. Today we reported third-quarter earnings of $3.9 billion or adjusted earnings of $4 billion, up 11% from last year. Pre-provision pre-tax earnings were up 7% year-over-year. Revenue grew 19% to $14.5 billion, as our performance yet again demonstrated the strength of our diversified business model, which produced revenue growth across our businesses.

Personal and Commercial Banking revenue increased 7% from last year. Capital Markets had another strong quarter with over $1 billion in pre-provision pre-tax earnings, gaining share across Global Markets and Investment Banking amidst, declining fee pools. Wealth management revenues were up 10% from last year and Insurance Revenue, net of PBCAE was up 22% year-over-year. Expenses were up 23% year-over-year, largely due to the acquisition related costs, FX, and share-based compensation. Excluding these items and growth in variable compensation, expenses were up 9%. We also added a further $120 million of PCL on performing loans this quarter and we remain well-provisioned for a softer economic outlook. We ended the quarter with a CET1 ratio of over 14% while maintaining a diversified funding profile.

Our strong balance sheet and premium ROE, are important elements of our value creation model. Before I provide updates on our growth and cost strategies, I will speak to what remains a complex and challenging environment from a macro, operating, and regulatory perspective. On the macro front, consumer spending remains resilient. At the same time, it appears the magnitude of interest rate hikes is having its intended effect of reining in persistently elevated inflation. The increase in the price of goods and services has slowed to 2% and 4% respectively. While immigration levels and labor markets also remain strong, we are seeing evidence of slowing labor markets, as evidenced by slowing wage growth, lower job postings, and an increase in Canadian unemployment.

Consequently, our base case forecasts a softer economic outlook. We expect slowing growth and lower inflation due to the lagging impact of monetary policy, combined with a slowdown in China and elevated climate in geopolitical risks. The length of time Central Banks will have to be in a whole pattern before decreasing interest rates will be a key determinant of the impact on consumers, and businesses and the economy. We are operating in a structurally uncertain macro backdrop. Furthermore, the operating environment is changing at a faster pace than we’ve seen for over a decade, particularly in the U.S. Banking sector. U.S. banks are facing increasing regulatory and funding requirements, which were exacerbated by quantitative tightening and other actions taking liquidity out of the U.S. banking system.

Nearly $2 trillion sits in the Federal Reserve’s overnight reserve — reverse repurchase facility, including a significant increase in usage by money market funds. A higher cost of doing business is reducing profitability for U.S. regional banks but by higher funding costs and pressure to reduce lending capacity to protect capital and liquidity. City National is not immune to these factors, with both loan growth and profitability being impacted by the higher cost of attracting deposits and continued investments in its operational infrastructure. While we expect these cost pressures to continue for City National, we expect to drive future benefits from its asset-sensitive balance sheet. Furthermore, we are well positioned to benefit from our diversified U.S. business mix, including our top 10 Capital Markets and Wealth Management platforms, which generated over 90% of U.S. pre-tax pre-provision earnings over the last 12 months.

Given the current operating environment and economic backdrop, I will now speak to the actions we are taking to optimize structural efficiencies to support our strategy of creating long-term value. While we have a strong foundation to do so, we have not been satisfied with our recent operating leverage, and so we’ve heightened our focus on expense control. We have acted by slowing discretionary spend, prioritizing investments, and moderating hiring to benefit from natural attrition. Our actions to date have resulted in a 1% reduction in FTE, excluding the partial sale of RBC Investor Services, in our summer student program. We expect to further reduce FTE by approximately 1% to 2% next quarter, through attrition and targeted reductions. We will continue to monitor the changing landscape and are ready to accelerate further tactical actions as deemed appropriate.

In addition, we’re also maintaining our discipline around capital allocation as highlighted by the partial sale of RBC Investor Services. We remain focused on driving the bank forward including the planned acquisition of HSBC Canada. The transaction once approved and closed is expected to drive attractive financial returns, or positioning RBC as a bank of choice for newcomers and commercial clients with International needs. We’re also investing to create even more value including leveraging our leading Borealis AI Institute to expand our capabilities and artificial intelligence. We’re expanding end market use cases and credit adjudication, cyber security, client offers, and through our Aiden trading platform. I will now speak to key growth drivers across our segments.

Starting with Canadian Banking, our largest business. We had our best ever quarter for new-to-RBC client acquisition with record volumes from newcomers and new partnerships, including ICICI Bank Canada. Personal deposits were up 14% from last year. Our stable low-cost, low-beta deposit franchise allows us to efficiently fund our loan growth. Our attractive funding structure is also expected to provide a relatively smooth revenue stream, which Nadine will speak to shortly. We continued to see a shift in the deposit mix towards term products, as new and existing clients continue to value our higher yielding offerings. We also continue to enhance our franchise by expanding our offerings and partnerships, an important part of our client centric model.

We’re excited to be the official financial services partner for the 2024 Taylor Swift, The Eras Tour in Canada. Earlier this quarter, we launched our new loyalty partnership with METRO, in Quebec, while also opening our innovative ShopPlus platform and Avion rewards to all Canadians. Many of our Canadian Banking clients are members of our internationally recognized award-winning program. And we expect to grow this membership base by 50% in the next three to five years. On to mortgage growth, which moderated to 5% from last year and we expect industry origination activity to continue along this trend. We remain focused on the trade-offs between spreads and new mortgage originations as intense pricing competition is limiting expansion in asset betas.

We will remain disciplined to ensure new originations continue to meet internal hurdles of economic value. Business loan growth remained strong up 14% from last year, as we continue to see balanced growth including solid growth in agriculture and supply chain sectors. With inventory levels remaining below pre-pandemic levels, there is a continued runway for growth. Moving to our global diversified Wealth and Asset Management franchises, which are key contributors to our premium return on equity. Starting with Canadian Wealth Management, assets under administration were up 7% from last year, increasing to a record level of approximately $550 million (ph). On Slide 30, we provide new disclosures on our leading adviser productivity, which remains significantly higher than peer averages.

U.S. Wealth Management, AUA was up 7% from last year to a record level of approximately $575 billion. We also added over 20 new advisers this quarter a key source of growth. RBC Global Asset Management, AUM increased 3% from last year despite unusual conditions where market outperformance was heavily weighted towards a narrowband of U.S. technology stocks. Our clients chose us as a trusted advisor, largely due to our performance in investment expertise. Nearly, 85% of our AUM have outperformed the benchmark on a three-year basis a challenging period for markets. Furthermore, we are confident that our leading money-in franchise is well-positioned for any client-driven reversal of GIC inflows back to investment products. We added to our alternative product suite this quarter by launching the RBC Global Infrastructure Fund, which exceeded commitment targets.

Capital Markets had a strong quarter, as we benefited from the growing strength of our diverse business model. While industry-wide fee pools remain muted, our businesses showed continued momentum and delivered market share gains to drive outperformance. Our cross-platform teams are building undervalued positions as trusted advisors to our clients across geographies and products. In Corporate Banking and Investment Banking, we continued to advance the globalization of our business and deepen our sector and product coverage of our franchise. These investments are reflected in our participation in key mandates across diversified industry groups. Translating into a move to ninth in global league tables on a year-to-date basis up from 10th last year.

Going forward, we are seeing increased client conversations and the buildup of a healthy pipeline. In Global Markets, we also delivered strong market share gains across several core products and focus areas for accelerated growth. Our strong market share in the spread business worked well for us this quarter. Furthermore, investments we’ve made in our macro business have also positioned us to support our clients. We are pleased that the strategic investments in talent and technology and the changes we’ve made to our organizational structure are producing results. In conclusion, our investments and our people, technology, products, and services, continue to create more value for our clients, they’re driving strong volume growth and client activity across our businesses.

We also remain committed to delivering more value for our shareholders by efficiently allocating investments and capital within our stated risk appetite. Nadine, over to you.

Nadine Ahn: Thank you, Dave, and good morning, everyone. Starting on Slide 8. We reported earnings per share of $2.73 this quarter, adjusted diluted earnings per share of $2.84 was up 11% from last year, as broad-based revenue growth was partly offset by higher expenses and increases in PCL on impaired loans off of low levels a year ago. Before focusing on more detailed drivers of our earnings, I will highlight the continued strength of our balance sheet. Starting with our strong capital ratios on Slide 9, our CET1 ratio improved to 14.1% up 40 basis points from last quarter, mainly reflecting net internal capital generation, share issuances under DRIP, and the impact of the partial sale of RBC Investor Services. Looking ahead, we do not expect there to be a material impact from the implementation of the fundamental review of the trading book or IFRS 17 in fiscal Q1 2024.

We continue to expect that our CET1 ratio will remain above 12% following the close of the planned HSBC Canada transaction in the first calendar quarter of 2024 pending regulatory approvals. Moving to Slide 10. All bank net interest income was up 7% year-over-year or up 6% excluding trading revenue. These results reflect our sensitivity to higher interest rates, as well as the benefit from higher volumes, particularly in Canadian Banking. All bank net interest margin excluding trading results was down 1 basis point from last quarter as margin expansion in Canadian Banking was more than offset by NIM compression in other lines of business. On to Slide 11. We walk through this quarter’s key drivers of Canadian Banking NIM, which was up 3 basis points from last quarter.

The embedded advantages of our structural low beta core deposit franchise continue to come through this quarter. The latent benefit of recent interest rate hikes has resulted in a widening of deposit spreads. NIM also benefited from changes in asset mix, including strong growth in credit card balances. Importantly, NIM headwinds associated with the flows from non-maturity deposits into GICs abated this quarter. However, we continued to be impacted by the tightening of mortgage spreads as competition remains highly intense. Going forward, we continue to expect to see the structural benefits of our latter deposit portfolio come through. The increase in swap rates seen over the past year should result in reinvestment rates that are higher than those rolling off, which in turn should provide tailwinds.

However, as we’ve seen in past quarters, there are other factors that impact quarterly changes in margins, including changes in product mix both in assets and funding. With respect to competitive pricing, we assume intense competition for deposits and mortgages will continue. Any changes in the timing and extent of these assumptions could have an impact on the trajectory of net interest income. Turning to City National. NIM was down 11 basis points from last quarter, including the benefits from hedging, mainly reflecting an adverse funding mix shift into interest-bearing deposits as well as rising deposit betas. These headwinds more than offset the benefit of Fed rate hikes on City National’s asset-sensitive balance sheet. Moving to Slide 12.

Non-interest expenses were up 23% from last year. Approximately, 10% of this growth was driven by a combination of acquisition-related costs and macro-driven factors such as FX and share-based compensation. Beyond these factors, growth in variable compensation added a further 4% to the overall growth in expenses. The core drivers of organic expense growth were investments in people and technology. Salaries excluding the impact of RBC Brewin Dolphin were up 17% from last year as investments in our people reflected FTE growth of 6% year-over-year as well as inflationary impacts of salary increases announced last year. We also incurred a high — higher level of severance, which I will speak to shortly. The growth in FTE was prevalent in Canadian Banking where FTE was up over 1,500 year-over-year and up 2,500 from the end of fiscal 2021.

Investments in product innovation, also added to the segment’s expense growth. In Capital Markets, expense growth was driven by higher variable compensation to measure with a rebound in revenues as well as ongoing technology investments and build-out of products. At City National, we continue to make investments in the operational infrastructure in support of the bank’s next leg of growth, including higher professional fees and staff costs. On to Slide 13. I missed the ongoing challenging operating environment, I want to reiterate Dave’s comments on our heightened focus on cost containment. Firstly, we are in the process of reducing our employee base. FTE excluding the impact of summer students is down 3% quarter-over-quarter. This was largely driven by the impact of the partial sale of RBC Investor Services operations.

Excluding the sale, much of the FTE reductions to date have coming Canadian Banking, which was down 2% quarter-over-quarter, excluding the impact of summer students. As attrition and the slowdown in hiring are running their course. Additionally, over the last two quarters, we have seen an aggregate severance cost of nearly $70 million. Moreover, we expect to further reduce FTE by approximately 1% to 2% next quarter resulting in additional severance costs being recognized in Q4. Another lever at our disposal is the managing of discretionary spend, which is already begun to slow. Looking forward, we see further opportunities to reduce discretionary spend across various work streams, including business development, advertising, and professional services.

Moving to our segment performance beginning on Slide 14. Personal and Commercial Banking reported earnings of $2.1 billion this quarter, with Canadian Banking pre-provision pre-tax earnings up 5% year-over-year. Canadian Banking net interest income was up 9% from last year due to higher spreads and solid average volume growth of 7%. Non-interest income was down 1% year-over-year, partly due to a $66 million impact of retrospective HST on payment card clearing services announced in the Government of Canada’s 2023 budget and enacted in Q3 2023. Excluding this, non-interest income was up 4% driven by higher service charges and foreign exchange revenue reflecting increased client activity. Year-to-date operating leverage for the segment was nearly 1%.

Turning to Slide 15. Wealth Management’s earnings were down 18% from last year, including the decline in profitability at City National on the back of the challenging expense environment, rising funding costs, and higher provisions for credit losses. The remaining businesses within Wealth Management saw combined earnings growth of 5% underpinned by higher net interest income in our International Wealth Management business, as well as solid asset growth in our North American Wealth and Asset Management businesses, amidst challenging market conditions. Wealth Management earnings also benefited from the gain on the partial sale of RBC Investor Services operations. Turning to Slide 16. In Capital Markets, we earned pre-provision pre-tax earnings of $1 billion reflecting the benefits of our diversified business model and market share gains across both Global Markets and Investment Banking.

Corporate and Investment Banking revenue was up 74% from last year as the prior year included the impact of loan underwriting markdowns. Excluding this, revenue was up a strong 30% year-over-year underpinned by higher debt originations across all regions, share gains in M&A, and improved equity originations. Lending and other revenue was up 6% from last year, reflecting strong results in transaction banking supported by margin expansion as well as solid securitization financing activity. Global Markets revenue was up 18% from last year, reflecting an increase in fixed-income trading revenue on the back of good client flow, an improvement in the credit trading environment. These factors were partly offset by lower equity trading revenues admit lower volatility.

Turning to Insurance on Slide 17. Net income increased $227 million up 22% from a year ago, primarily due to favorable investment-related experience. The Insurance business generated gains related to movements on interest rates on assets backing reserves. To conclude, our results this quarter were largely underpinned by the strength of our leading Canadian deposit franchise as well as broad-based client-driven revenue growth. Looking forward, our full management team remains committed to rationalizing expenses with the goal of driving positive operating leverage. With that, I will turn it over to Graeme.

Graeme Hepworth: Thank you, Nadine, and good morning, everyone. Starting on Slide 19, I’ll discuss our allowances in the context of the macroeconomic environment. As Dave noted earlier, during the quarter, we saw labor market start to soften. However, unemployment rates remained exceptionally low, which is contributed to persistent consumer demand, economic growth, and inflation. Accordingly, the Central Bank continued to tighten monetary policy, the markets are now contemplating a higher for longer interest rate environment. With this backdrop, we added provisions on performing loans for the fifth consecutive quarter. This quarter’s provisions reflect increasing levels of delinquencies and credit downgrades, a higher weighting ascribed to our more pessimistic scenarios, and ongoing portfolio growth.

Provisions on performing loans were predominantly in the City National and Capital Markets, reflecting the more challenging conditions in the United States. Allowances on performing loans for our retail portfolios were largely unchanged this quarter, as negative drivers were offset by an improvement in our baseline forecast for housing prices. In total, our allowances for credit losses on loans increased by $182 million this quarter to $5 billion. Moving to Slide 20, provisions on impaired loans were up $58 million or 2 basis points relative to last quarter. While provisions continue to normalize from pandemic lows, our PCL ratio of 23 basis points remain below historical averages. In Canadian Banking, provisions were stable this quarter with lower provisions in the commercial portfolio offset by modestly higher provisions on personal loans and residential mortgages.

Expected losses in the retail portfolio continued to be delayed due to strong employment and elevated levels of consumer deposits. We do expect credit trends in retail to weaken as the labor markets soften and more clients are impacted by higher mortgage payments. These credit trends will be led by credit cards and unsecured lines of credit consistent with the traditional credit cycle. In Capital Markets, provisions of $158 million were up $45 billion compared to last quarter. Given the relatively large size of our client’s loans and Capital Markets, loans can vary from quarter to quarter. I’m sorry losses can vary from quarter to quarter. This quarter, we took a large provision on three related financings in the commercial real estate sector in a large provision on a loan in the transportation sector.

In Wealth Management, provisions were also higher this quarter and included a larger provision in City National on a commercial real estate loan secured by an office property. The Office segment remains challenging, given the fundamental change in demand for office space post-pandemic. However, challenges within the commercial real estate sector are not exclusive to the office segments, any property facing multiple headwinds is a greater risk in the current high rate environment. For example, the larger provision in Capital Markets this quarter was on loans secured by multifamily properties. The segment of commercial real estate that continues to perform very well in the aggregate. In this instance, the properties were now impacted by the higher rate environment, but also by elevated unemployment rates and negative socioeconomic change in the region.

But we are now seeing the impairments and losses we have been expecting in this sector, we remain comfortable with our commercial real estate exposure. As I noted last quarter, the portfolio is well diversified and has been originated to sound underwriting standards in support of a strong client base. Additionally, loss rates on impaired loans are typically lower in commercial real estate as they benefit from the value of the properties held as tangible collateral. And finally, losses are expected to be manageable relative to the size of the portfolio, and the portfolio is well-provisioned. Over the last several quarters, we have significantly increased reserves on performing loans, in our IFRS 9 downside scenarios reflected a decline in commercial property values ranging from 15% to 40%.

Moving to Slide 21, gross impaired loans were up $391 million or 4 basis points this quarter. The increase was primarily driven by capital markets, where new formations were higher, largely due to the impairment of the commercial real estate loans I noted earlier. We’ve now seen four consecutive quarterly increases in gross impaired loans. However, our GIL ratio of 38 basis points remains below pre-pandemic levels. So to conclude, we continue to be pleased with the ongoing performance of our portfolios. Our retail portfolio continues to outperform expectations supported by low unemployment rates in elevated consumer deposits. Despite some larger impairments during the quarter, our GIL and PCL ratios remain below long-term averages, highlighting the size and diversification of our loan portfolios.

We are still expected — expecting PCL-impaired loans between 20 basis points to 25 basis points for the year, consistent with the guidance I provided last fall. Looking forward, the impact of inflation and higher rates is expected to play out over a number of years and we are still in the early stages of the current credit cycle. As we move further into the credit cycle, we expect to see losses driven by more systemic factors arising from the anticipated economic slowdown. Ultimately, the timing and magnitude of increased credit costs continue to depend on the Central Bank’s success in contributing to inflation while creating a soft landing for the economy. We continue to proactively manage risk through the cycle and we remain well capitalized to withstand plausible, and get more severe macroeconomic outcomes.

And with that, operator, let’s open the lines for Q&A.

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Q&A Session

Operator: Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi: Okay. Thank you. Neil, last quarter, I think in your segments, you were probably a little bit unpleasantly surprised by the movement from non-interest rates to term deposits. This quarter, I guess a little bit pleasantly surprised maybe not surprised, but that’s what it looks like to me. I mean, when you think about this, are we stabilized or do you expect some variability around these types of net interest margins, at least on the funding side? When you look ahead over the next couple of quarters anyway.

Neil McLaughlin: Thanks for the questions, Sohrab. Yeah, I mean, last quarter we had commented that the GIC book on — for personal deposits has grown $15 billion quarter-over-quarter. So, you heard Nadine comment about that trend is starting to lessen. In this quarter, it was about half of that. So, that’s I think the trend we’re on. Overall, I think we feel very comfortable that we continue to win in gathering deposits, where the rates are? They’re still incentives for that retail investor — the place that in a term investment. So, I think that’s the trend. We are seeing across into those term deposits really every category as we monitor the flow of funds, really every category of deposits are flowing in there, but I think important to call out that about half of that growth is coming from external deposits. So, again that strength of the platform to be able to gather those deposits.

Sohrab Movahedi: Okay. Can I just ask you on the asset side? I think you’ve maybe noticed the intense competition on mortgages and mortgage spreads in particular. I wonder if you could just share of how mortgage spreads were in the quarter compared to, I don’t know recent quarters. And then I don’t know if this is a stat that you could share with us Neil, but if you had to think about the stock of your mortgage book between kind of existing mortgages and kind of net new mortgages if you are actually seeing an improvement in the LTV of one versus the other or maybe put differently are we seeing faster pay downs from savings on existing stock of mortgages. Thank you.

Neil McLaughlin: Sure. So, I’ll start with the profitability question, the margin question on mortgages. Obviously, mortgages are a key relationship product for us, but we do price our mortgages to make sure we’re meeting the hurdle. And I think you heard that in the prepared comments of the top. Despite the competition that there was just the rapid volatility in swaps has impacted mortgages I think across the street. We said the market is competitive, but we do look at it and expect some normalization as we saw that volatility and swaps start to abate. When we look at it overall in terms of profitability, we do look at the levers we have in the short term and long term, and I think we feel very confident that we have levers over the medium term if we need to pull them to manage the profitability there.

In terms of your second question around LTV and pay-downs, we are seeing I’d say some trends there where your clients are saying I’m going to make some lumpsum payments come renewal to take down the impact of those that payment shock. And then on LTVs, I’d say at origination, we are seeing, I’d say, a slight decrease of LTVs at origination, but not something I would say worth calling out the portfolio overall.

Sohrab Movahedi: Okay. Thank you.

Operator: Thank you. The following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young: Good morning. Maybe this for Dave, but big picture question, you talked a bit about interest rates and the impact at the beginning of your comments like can you talk about the key impacts on Royal’s results and NIMs or credit or whatever metric you want to talk a bit from a higher for longer rate environment and generally as the impact more positive, as the impact neutral or negative, just love to hear your thoughts. I get this question a lot love to hear your thoughts on this.

David McKay: Yeah. Thank you for that question. It was an important part of the overall economic construct trying to forecast what type of lending we might have. And Canada differs from the United States in the construct of higher for longer. And if you look at the U.S. style mortgage when you have so many U.S. mortgage holders who are in 30-year fixed open mortgages it gives them enormous flexibility in times of rising rates and persistently high rates, those interest yields that they’re paying their mortgage are kept low and they have disposable income to spend in the U.S. economy and you’re seeing why the U.S. economy has had this persistent inflation challenge more so than Canada. The reverse is true in Canada because we have five year terms, four or five year terms.

We reprice that the amount of disposable income that’s being pulled into debt servicing of mortgages slows the Canadian economy down more quickly, which is why Canada is a little bit ahead of the curve in most western countries and getting inflation under control. But going forward, the period of time that the Bank of Canada has to hold at these rates then to make sure we’ve brought inflation down to our targets is critical as you know, we have the industry has a significant portion of mortgages maturing in ’24, ’25 the rate resets if rates hold will pull more disposable income out of the economy and slow it even faster. So, it’s hard to predict how much spending will slow, we’re starting to see spend slow right now. So, it’s important to contrast a bit the two economies and the amount of disposable income that will go to service mortgages given the structure of the industry.

And therefore for that reason for business investment and community it’s more important for Canada to start easing. Then it is for the U.S. for those factors. So, we watch closely inflation rates are coming down, core inflation rates are coming down nicely, and if we can start to ease in 2024 that’s going to really help the economy get through this to a soft landing. Does that help?

Doug Young: It does. I’m more interested in how you think that kind of flows through your results? And I’m sure you get these questions internally and from the board and what not, but I’m just curious as to if we don’t have that easing what types of pressures like obviously there’s benefits in certain aspects of your business pressures and other like what’s the ultimate impact on your business, if we stay higher for longer isn’t more positive-neutral or negative, and that’s kind of where I was hoping to go.

David McKay: Yeah. Maybe I’ll ask Nadine, to jump in as well, but it’s certainly the focus is on medium to longer term rates. So, we’re not looking so much at the short term rate as we are looking for how the market expects rates to evolve. So, we set our mortgage rates off swap curves in the five year curves and four year curves, and therefore, markets expecting inflation to stay a bit higher, and therefore, we’ve seen rates go up recently in both markets and therefore how that expectation comes off will certainly help clients deal with the mortgage resets. To Nadine’s point as the rates have gone up, it’s helped our deposit book obviously in the carry on, our deposit book, and tractors on our deposit book and it’s part of — a big part of the story of the NIM increase.

So, we’re trying to say how do you balance short-term gain from the strengthening deposit book versus difficulties your clients could experience on the credit side, with higher rates. And as a bank, you are constantly balancing those two areas. The other area that I’ll comment on and hand it to Nadine that’s important to understand our asset betas. So, I referenced asset betas in U.S. regional banking. The U.S. regional banks have done a better job than Canada and passing on the cost increases to customers through higher asset betas. The intense competition that Neil referenced in the Canadian market that we unable in many cases to pass on somebody’s higher asset. Deposit betas through asset betas including in the mortgage market starting to see some improvements along there as we’re able to pass on some of these heightened costs from movement into GICs, but the U.S. is ahead of us and balancing higher deposit betas will higher asset betas and we’re hopeful Canada will follow that trend as well and that will help our results as we pass on the higher costs that we’ve talked about over the last two or three quarters.

With that, I’ll hand it to Nadine, an important construct.