Paul Holden : Okay. And my second question is related to City National. So Dave, you provided some pretty clear and useful expectations around return to profitability starting next quarter and improving through ’25. I guess what I want to understand is to what extent does that impact the all bank results, i.e., is the improvement in profitability next quarter simply a result of that intracompany transaction? Or are there action plans that are actually going to impact the bottom line earnings as well?
David McKay : Paul, thank you for that question. So as we think about the rapid growth we’ve gone through in City National, the return to profitability has a couple of factors. One, the absence of the write-down of the noncore assets, obviously, has a significant benefit. Two, we executed a reduction of over 5% of employee layoffs in Q4, and you’ll start to see the cost run rate of that 5% reduction in those severance costs, which are absorbed within the businesses, we don’t call them out there. So I think from that perspective, that provides a tailwind, continued expense management. We still have a very high expense ratio for a business of this size compared to peers. So with the new management team under Greg Carmichael, they have a clear focus on how to drive competitive for a CAD $70 billion to CAD $100 billion bank productivity ratio.
So that’s very much in our focus to do that as we look at streamlining the organization and the benefits of some of the technology investments we’ve made. Then I would say over — that’s in ’24. And then so we expect to exit the year with a more normalized run rate and then into ’25 kind of run it where we’re hoping to be this year at the end of the day. We still face kind of overall challenges from funding costs, as you can imagine, but that will start to alleviate as you see rates start to come down in the U.S. maybe sooner than most people thought they would that provides benefit on funding, but also puts a little bit of pressure on our revenue line, and we’ll watch that carefully. But as you saw in our capital markets franchise, 7 or 8 years ago after a period of very rapid balance sheet growth.
We ended up with a lot of single service lending clients. And I would say the capital markets business over the last 5 years has done a fantastic job of leveraging existing balance sheet in RWA until multiproduct relationships, higher ROEs have come from that. And this is part of a growth process in a franchise that’s growing quickly. And you’ll see that in City National as well, as Greg and Howard and Chris and the team, along with Kelly Coffee, continue to focus on clients with deposit relationships with FX relationships with cross-sell. On the commercial and private bank side, you’ll see us start to enhance our overall profitability and ROEs from that. So it’s a journey in the United States, but you will return to profitability. And then we will get back to more normalized towards the end of the year and into ’25 and start to realize the benefits of this very strong franchise at the end of the day.
It’s been a difficult year — it came at us really quickly in March. And I think we’ve done a good job pivoting and have a number of levers to do that.
Operator: The next question is from Doug Young from Desjardins Capital Markets.
Doug Young : Maybe, Dave, if staying with City National Bank, I guess I’m more curious — what’s gone wrong since all the different things that have kind of played out since you bought the business? And I’m more curious I kind of understand a bit of the macro side of it. Is there things that you would have done differently? Or is there other things within your control that you can kind of talk a little bit about? Or was this just all — most of the macro side just kind of went against you?
David McKay : I think it’s the latter. I mean, since we bought it, we’ve had 7 good years at the end of the day, and we had a plan this year to have a record year for City National. So I would say we’ve been very happy with the franchise, and it’s carried the organization in growth. And I think given the tough year we’ve had, it will provide a bit of a tailwind for us into ’24, obviously, as we can perform better and then again into ’25. So I would first challenge, it hasn’t been a strong performer for us. And we thought coming into the year pre the financial — the banking crisis in March that we would have our strongest year. And — but it was the macro environment. It was the rapid move in deposit costs kind of the volatility of the customer franchise as far as money movement, not only within the U.S. banking center, but increasingly outside the U.S. banking sector led to much higher betas than we had ever seen in this franchise.
This franchise has operated in this client segment for 60 years, and we have not seen this type of volatility in the overall business. So it came at us really quickly. We didn’t plan for it. I think we pivoted well. I think to your question, what could we have done better? I think we could have focused on growing with more multiproduct clients quicker. I think the focus on — deposits came in so quickly and so easily to this franchise over the last 5, 6 years, we were along with $35 billion of deposits in midway through the financial crisis, we focused on a lot of single service lending. And I think if we had really focused on leveraging into multiproduct relationships, we’d see a different profitability model now. And just to pivot from — don’t forget, this was a community bank when we bought it, and we’ve grown it now into a midsized regional and we are replatforming this thing for the next decade.
So going from a community bank to a regional bank is not an easy journey, and we’re well into that now. And therefore, we will have a platform that’s more profitable and able to grow multicurrency relationships, including U.S. cash management into the mid-corporate sector in the coming year. So I think from that perspective, overall, in any journey, it takes a long time to build these franchises. And I think any journey, you’re going to hit a few bumps. I would say it’s mostly macro. We think the client franchise and the long-term potential is very, very strong in this franchise.
Doug Young : I appreciate the color. It was just the question I get asked, so I do appreciate the.
David McKay : Glad you asked it. Thank you.
Doug Young : Yes. And then, Nadine, just on the NIMs and the comment that not — it’s not peaking yet. And I understand the tractors and how that unfolds. Can you dig maybe a little bit more into that? Or maybe that’s just everything that’s behind the story. And then can you kind of bring that up to the all bank level in terms of what you’re thinking in terms of the evolution of the all bank then excluding trading over the coming year?
Nadine Ahn : Sure, Absolutely. So when you think about our — if I start with Canadian Banking, and I mentioned that the benefit we continue to get from the deposit tractors. And if you look at it, that’s really going to leg over for quite a period of time, even if rates start to come off and you look at our interest rate sensitivity, that shock is for an immediate 100 basis point, but we’re continuing to leg into those higher rates, and that will continue to benefit. There are offsets to that, as I mentioned. And one of the things that we saw earlier in the year was really around the deposit mix shift, that has, as Neil mentioned, abated quite significantly. And if rates start to come off, that is something that probably will start to see that even shift back maybe from the bank standpoint into mutual funds, which is the benefit for us as well.
