Operator: The next question is from Lamar Persaud for Cormark Securities.
Lemar Persaud: I want to go back to HSBC, and I’m wondering if you guys could talk about the reasoning behind the Lockbox Agreement on the deal. Just a bit unusual in nature. Like couldn’t you guys just reduce the purchase price by the expected earnings up close that are going to accrue to Royal, or should I be really thinking of it as just a sweetener offer by Royal to get the deal done since essentially you’re just paying upfront for future earnings is there kind of some other underlying reason?
Dave McKay : So there’s always a mechanism that you have to agree on as you go through an extended — potentially extended approval period and transition and conversion period that do you allow the seller to dividend out, retain capital at a certain level at the end of that transaction? And how do you do that? And what’s the efficacy of dividending out earnings over the prescribed period or you could set up a lock box where you settle that upfront, and it makes it a seamless easier transition at the other end. So I would look at it as a very effective mechanism to deal with that. And therefore, these are earnings that are going to be retained on the balance sheet that we acquire and therefore, should be viewed as a net of the gross purchase price of 13.5. It’s a very effective means of doing the transition at close.
Lemar Persaud : And then if I could squeeze in another really quick one for Nadine. Can you just add some additional color on what drove the under-provisioning for variable comp throughout 2022? Like what I’m trying to understand is, is it plausible we could see this again going forward? Or should we just think about this as strictly onetime in nature?
Nadine Ahn : I think there’s two dynamics, and maybe I’ll let Derek weigh in given his perspective on how he manages his business, but just from an accounting perspective, like we plan for a comp ratio of the business plans for that, and then we work through the year. And obviously, given Capital Markets, I would say two things. If you look at the last two years, there’s been quite a bit of volatility through the year in terms of how the markets have performed, which makes it very difficult unlike the rest of the bank to kind of give a standard accrual on that. I think the last two years have been a bit exacerbated in that regard. So the objective is obviously to accrue it evenly through the year. But given changes, especially in a market-sensitive business, that can make that challenging. But I’ll turn it over to Derek and how we think of that comp overall.
Derek Neldner: Building off of Nadine’s comments, obviously, we often — and I think most banks all approach a similarity, they use Q4 as a period to true up on the year-end variable compensation. To your question, the last few years have been much more volatile than we’ve seen in other years. We obviously saw very robust years in 2020 and 2021, and then obviously some unforeseen challenges in the macro environment that impacted 2022. So I would expect that the last few years, we’ve seen a little more magnitude to that Q4 true up than we would in more normalized times. Just importantly to highlight the true-up and the change you’re seeing year-over-year isn’t just a function of this year, it really reflects two things. Last year, we had a very strong year.
So we actually had a — we had a healthy accrual and we released some of that in Q4 of ’21. This year, given some of the headwinds, we’ve increased the accrual. In aggregate, that’s about a $307 million swing year-over-year, roughly half of that from a release last year and half of it from an additional accrual this year. When you adjust for that, the NIE for the quarter would have been up 12% and compensation would have been up 8%, which is roughly in line with the 7% growth that we’ve seen in FTE. And to comments that Dave made, that’s really reflective of the opportunity we see to continue to build the business in strategic areas. I think it’s consistent with our strategic plan. And frankly, we feel we’re notwithstanding the more challenging environment.
We’re seeing good results of that with market share gains in a number of our key areas. So it really is reflective of a timing difference. I think it is exacerbated by the volatile environment we’ve been in the last year or two and would not expect it in more normalized times to be as much of a variance as you’ve seen this year.
Nadine Ahn : Just to the earlier question — I’ll jump in sorry on the earlier question, the day 2 impact of the provisioning for HSBC Canada acquisition is $300 million. Sorry to interrupt you.
Dave McKay : I think we’ll continue to run over for about 10 minutes. I think we have a couple of questions in the queue and try to get to them.
Operator: The next question is from Mike Rizvanovic from KBW Research.
Mike Rizvanovic : A question on business lending. So maybe for Neil or for Derek, I know it’s impacting both segments. But if you sort of look at the drivers there, I’m just wondering about the acceleration. It doesn’t look normal given where rates have moved, given the macroeconomic headwinds, and it’s just gotten better. So I’m guessing you’ll probably say that it’s just normal course. Your customers are growing, they’re growing their businesses. But can you talk about other elements? And the two that sort of come to mind for me are what is the element of maybe some of your clients using facilities because they are concerned about the macro picture? And then secondly, is there some sort of new market share coming into the banking space that’s been driving part of this over the last few quarters where maybe nonbank lenders are pulling out and the Canadian banks have been able to sort of step in here?
