Neil McLaughlin: Yeah. Thanks for the question. Yeah. I think there’s a couple of factors. I think, to your point, in terms of the — if you look at just — we do monitor flows from the different products. If you look at, for example, in the core checking account, I think that would be one where we started to see a softening of balances there. And I think that rate environment has now been high for quite a while. And if you wanted to make that swap, I think a lot of that has already happened. We also see, as you break down that category, where do we see the movement. And it is coming from individuals with very high balances over $100,000. So that, I think is probably dissipated. I think the other trend is just around confidence in terms of the retail investor.
And we had been seeing negative net sales in our mutual fund platform and that has I think, really gotten to the point where we’re about flat. So as that confidence builds and the retail investor gets that money off the sidelines and decide to put it back into the market, I would say that would be the other trend.
David McKay: Maybe I’ll jump in. It’s Dave. Just to build on that. We’re still as we look at how customers in the U.S. and Canada are keeping core balances. And there still is — the average balance across most of our customer segments are still higher than pre-pandemic. So while growth has stopped, we still see customers for a number of reasons. One, safety and security, just the shocks that we’ve been through, there’s a conservatism built in there, inflation, whatever it happens to be, consumers are still carrying in Canada about what 19%, 20% higher average balances. So predicting that is important. In the U.S., when you look at the ratio of non-interest bearing balances to total balances, historically, it’s been about 15%.
That ratio is up near 25%. So U.S. consumers are carrying a significant surplus liquidity in their core balances as well albeit coming down more quickly in the U.S. than Canada where it’s flat. So there still is that surplus savings concept that gives you a cushion and a downturn and an ability to service debt even when it shocks to your personal situation, but also has that question, how does that money move back into mutual funds, in the GICs to stay on the core checking account, all those, we’re trying to predict, but it’s important to understand that concept.
Meny Grauman: Thanks for that Dave.
Operator: Thank you. Following question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala: Good morning. I guess maybe Nadine, if you could dispense and time and expenses. So the Slide 12 is extremely helpful in terms of the walk to the $7.861 billion this quarter. As we think about the actions that you’ve laid out into 4Q, what’s — and then we have HSBC Canada coming up in the first calendar quarter next year. Just talk to us how you’re thinking about expense growth moving forward and the likelihood of driving positive operating leverage. I think what I’m struggling with is, should we see that 7.8 actually drift lower or else equal as we think about ’24 and then HSBC Canada closes or is there still some more upward push to that number?
Nadine Ahn: Thanks for the question, Ebrahim. A very important conversation. So we’ve been very vigilant and you see on Slide 13, where we started to break down some of the actions we’ve been taking since we had our conversation on the call last quarter. We are not done. We were moving forward, as we indicated in Q4 to further reduce our headcount by the 1% to 2%. Obviously, there’s going to be some severance costs that come with that in the fourth quarter. And so you’re going to start to see the benefits of that run rate pushed through into 2024. We are looking to continue to moderate on our discretionary expense, and you saw that come down in terms of the increase in Q3, and then we’re going to look to do that more as we go into 2024 as well.
And we’re going to evaluate where we’re at from our headcount and look at where we can address our structural cost base more explicitly as well into 2024. So the expectation is that we are going to look to slow down significantly. Our growth in NIE into next year, just coupled with the actions we’ve been taking to date as well as what we’re planning on a go-forward basis. Sorry, HSBC, obviously, we’ve been outlining our cost base, and we outlined in terms of the $1 billion as part of the integration there.
Ebrahim Poonawala: Understood. And just as a follow-up, when you think about operating leverage, was the response to the earlier question that we should see the Canadian NIM drift higher in this backdrop if the Bank of Canada holds rates?
Nadine Ahn: Correct. Yes. We start to see the benefits of that structural deposit base and the rates continuing to persist up, marring any other shifts in mix we’ve been discussing.
Ebrahim Poonawala: Thank you, guys.
Operator: Thank you. Following question is from Paul Holden from CIBC. Please go ahead.
Paul Holden: Thank you. Good morning. So I want to continue with the interest rate conversation a little bit of a different angle versus Doug’s question because this is an important one. Just as we’re heading into 2024, I think the market expectation for central banks, both in Canada and the U.S. to reduce rates, which traditionally would be a negative, I think, on NII. Is there anything different in this scenario just because of the dynamics we’ve seen over the last six, nine months that might mean central bank rate costs are less of a negative than you’ve historically seen?
Nadine Ahn: I think you want to focus again on what we’ve seen from the rising interest rates to date and the latent benefit that we continue to get on our margin expansion. When we talk about interest rate decreases and we referenced the sensitivity there. That’s an immediate parallel shock in the curve overall. So we continue to benefit from the rates that we’ve already seen rising that we managed our interest rate exposure, while we are exposed to a drop in interest rates, we will — that will happen over time and we mitigate that through our hedges. I would say that the other benefits associated with drop in interest rates really will be related to refinancing on the mortgage book and then potentially releasing some of the pressure on the refinancing there for our customer base.
Paul Holden: Okay. So if I understand you correctly, Nadine, then central bank rate reductions in 2024, if the long end of the curve stays where it is, is not necessarily that much of an NII or earnings negative?
Nadine Ahn: Correct. You can tell us on our sensitivity that particularly for Canadian Banking, more of their interest rate sensitivities on the longer end of the curve past two years, yes.
Paul Holden: Got it. Okay. I’ll leave it there. Thank you.
Operator: Thank you. Following question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca: Good morning. Dave and Nadine, as I go through your presentation, it appears that the steps the bank is taking to address expenses, they seem incremental like taking FTE down another 1% or 2% talking about marketing and travel. That’s my impression from the outside looking, and this seems very incremental. And wouldn’t — part of the reason why I’m offering that is when you look at City National, the business isn’t profitable anymore. I mean a business you paid over $5 billion for in 2015 didn’t make any money this quarter. So it seems like the issues are sort of — they’re much bigger than can be addressed by an incremental move on expenses. So I guess what I’m asking here is, is there something in place for a more drastic move to take expenses down to address City National, for example, or just the bank as a whole. I mean do you agree with me that the steps are incremental?
David McKay: Yeah, I’ll start and then Nadine can fill in. So the overall FTE reduction, when you’re a regulated institution, you’re a big bank takes a while to get all of the regulatory approvals in place to move forward for one. Two, I agree, it’s an FTE reduction is a component of an overall expense reduction exercise that’s much more significant. So as we target a much slower growth in Q4 and into next year, it’s because of all the actions we’re taking on all the other discretionary items that we haven’t kind of outlined in the slide. So it is part of a bigger program and a more ambitious program that you’ll hear more from us over the coming quarter. So it’s fair. FTE, we did the first part through normal attrition and just slowing things down.
