Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Trade tensions escalating once more between the US and Canada.
Speaker 2: President Trump imposing those automotive tariffs had to take effect
Speaker 2: next week. Canadian Prime Minister Mark Karney, Well, he's vowing
Speaker 2: to fight those tariffs with retaliatory action. He's saying that
Speaker 2: nothing right now is off the table and he will
Speaker 2: use every measure to protect the Canadian economy. Canada's largest bank,
Speaker 2: RBC coincidentally, was holding its investor day today. CEO Dave
Speaker 2: McKay morning there that this there could be some short
Speaker 2: term volatility and the economy over there that they will
Speaker 2: have to adapt. I'm pleased to say that Dave joins
Speaker 2: us right now, coming fresh off of that investor day,
Speaker 2: and I do want to start there, Dave, because the
Speaker 2: numbers you gave were pretty impressive, not so much because
Speaker 2: they change, but more importantly, you said you're standing by them.
Speaker 2: You guys have had long term targets in place for
Speaker 2: years now. A lots change over the last few years,
Speaker 2: a lot's changed over the last few weeks. What makes
Speaker 2: you comfortable in standing by those targets.
Speaker 3: Well, thanks for the opportunity to join you today, and yes,
Speaker 3: We just finished our investor day, the first one we've
Speaker 3: done in seven years, and when you think about all
Speaker 3: of the targets and strategies and opportunities that we articulated today,
Speaker 3: it was very much about the medium and long term.
Speaker 3: These are opportunities in the United States, opportunities in Canada,
Speaker 3: opportunities in Europe, and we're certainly whether we have a
Speaker 3: tara for and dispute, and whether it's a short term
Speaker 3: dislocation or medium term dislocation, these strategies kind of supersede that.
Speaker 4: Whether they're growing in the.
Speaker 3: Transaction banking space in the United States and globally, growing
Speaker 3: our commercial bank and mid corporate bank in the United States,
Speaker 3: or a wealth management business in the US focusing on
Speaker 3: generative AI and the significant impact AI is going to
Speaker 3: have on our business, all of these kind of transcend
Speaker 3: the short term location of a trade challenge and an
Speaker 3: impact on the economy. Yes, therefore, we still thought it
Speaker 3: was really important to tell our story and to go forward,
Speaker 3: and we're gonna have to deal with those challenges, as
Speaker 3: I'm sure we'll talk about, but what we're working on
Speaker 3: really transcends that over the medium term.
Speaker 2: Yes, certainly so, and I'm in agreement with that, and
Speaker 2: we talk about this idea. We introduce you as of
Speaker 2: course having the largest bank in Canada, but really, I
Speaker 2: mean you are banking customers in a big way on
Speaker 2: both sides of the border, not just so they're in Canada,
Speaker 2: but you have a huge presence here in the US.
Speaker 2: Do you not worry at all given the political climate
Speaker 2: and for at least what right now seems to be
Speaker 2: a very tenuous relationship between the leaders of both countries
Speaker 2: that you may actually have to pick one side of
Speaker 2: the border or the other.
Speaker 3: No, as you mentioned, we're not only the largest bank
Speaker 3: in Canada, but one of the largest banks in the world,
Speaker 3: and a number of our businesses in the United States
Speaker 3: are top ten. We have a top ten capital markets
Speaker 3: business the United States, for the fifth largest wealth manager
Speaker 3: in the United States, and we've got a top twenty
Speaker 3: five commercial banks.
Speaker 4: So the United States is very important to us. When
Speaker 4: I look at this.
Speaker 3: One hundred year relationship between can United States, built on trust,
Speaker 3: built on economic interests of both sides, and today we
Speaker 3: have a balanced trade agreement between the two groups.
Speaker 4: Four hundred billion dollars of goods and.
Speaker 3: Services trade go across the border each year, and therefore
Speaker 3: Canada is a very relevant partner to the United States.
Speaker 3: It makes America more profitable, more competitive, and more.
Speaker 4: Secure at the end of the day.
Speaker 3: So I think when we look at that relationship, we
Speaker 3: hope as we sit down and we go through these
Speaker 3: discussions there's continues to be bilateral discussions between both countries.
Speaker 3: There is strong rhetoric in the market, but when you
Speaker 3: get down to the basics of the relationships, it's so
Speaker 3: important to each country economically that we're just hopeful that
Speaker 3: the outcomes over the next week or two weeks find
Speaker 3: their way into that bucket that doesn't disrupt what's been
Speaker 3: a very profitable and important economic integration and continued opportunity.
Speaker 3: And for Canada this presents an unparalleled opportunity to transform
Speaker 3: our country and get some things done that we haven't
Speaker 3: been able to get over the last ecurd.
Speaker 1: And we'll get to that in a moment. But when
Speaker 1: it comes to the economic impact from the tariffs, at
Speaker 1: least here in the United States, there's a lot of
Speaker 1: concern over the uncertainty that that results in and perhaps
Speaker 1: a paralysis that companies and consumers will experience, perhaps slowing
Speaker 1: the economy there's a rising number of Canadian business leaders
Speaker 1: who also fear that a crisis is looming, and many
Speaker 1: of them are worried that the economy could slide into
Speaker 1: a recession. Is that your base case scenario as well,
Speaker 1: that Canada would tip into recession.
Speaker 3: That is not our base case scenario, but certainly a
Speaker 3: potential scenario given the severity of the teriffs and particularly
Speaker 3: reciprocal terrorists that we'll learn about more on April second.
Speaker 3: So no, We've certainly seen lower interest rates in Canada
Speaker 3: stimulate consumer demand. We've seen lower interest rates in Canada
Speaker 3: stimulate commercial demand and hiring, our unemployment rate, rent down
Speaker 3: towards the end of the year, we saw a good
Speaker 3: mortgage growth, and all that, to your point, has slowed
Speaker 3: with the uncertainty of the impact of terraffs. So we're
Speaker 3: seeing less home sales, We're seeing businesses pull back. We're
Speaker 3: seeing pipelines in our M and A activity. All banks globally,
Speaker 3: from Goldman Slaves to ourselves are talking about customers.
Speaker 4: Pausing on the M and A site.
Speaker 3: So all that we have seen an impact, just from
Speaker 3: the rhetoric of the impact of the tariffs have slowed
Speaker 3: the economy and now we've got to see what sectors
Speaker 3: it impacts, what's the magnitude and duration of the tariffs,
Speaker 3: and then businesses can adjust. Some businesses can absorb the
Speaker 3: impact of their margin, some will pass it on to consumers,
Speaker 3: some will innovate and find new customers and other markets
Speaker 3: for it. So it's not like the pandemic where the
Speaker 3: economy is shut down within a couple of weeks and
Speaker 3: we had a dislocation. This will take time to place
Speaker 3: through the economy. There's talk absorbers in the economy. Government
Speaker 3: will come through with some programs to buy business's time
Speaker 3: to absorb. So it's very much a different scenario than
Speaker 3: the pandemic, and we just have to sit back and
Speaker 3: not overreact and get to the best place possible.
Speaker 1: So whether Canada tips into recession or not will may
Speaker 1: just depend on leadership. And Mark Karney is a new
Speaker 1: Prime Minister of Canada at least for the next month,
Speaker 1: maybe longer if he actually wins the election in late April.
Speaker 1: I'm curious how you think he's managing the economy and
Speaker 1: this interim period as Canadians get ready to head to
Speaker 1: the polls.
Speaker 3: You we'll go through the democratic process and decide which
Speaker 3: Prime minister who gets to be prime minister, Which of
Speaker 3: the the four or five incumbents who are trying to
Speaker 3: compete for this. I think what's really important that whoever
Speaker 3: gets elected, is that we pursue this opportunity that's in
Speaker 3: front of us to transform our economy, get rid of
Speaker 3: the barriers to growth that slowed us down for decades
Speaker 3: that we haven't got done. Get big projects approved, whether
Speaker 3: energy projects to the West Coast to Asia, energy projects
Speaker 3: to the United States, more ellen g the United States,
Speaker 3: rare earth minerals that the US and other markets need.
Speaker 4: Food and agriculture.
Speaker 3: We have a huge hothouse capability and growing more capacity
Speaker 3: around feeding the world. All these we've been slow to
Speaker 3: develop and therefore we have this opportunity. So as Canadians,
Speaker 3: it's really important that we debate who leads this country
Speaker 3: and who can execute that mandate. Prime Mister Carney has
Speaker 3: only been in the job for a couple of weeks.
Speaker 3: He hasn't had a lot of opportunities called an election already,
Speaker 3: so very much we're in this period where the government's distracted,
Speaker 3: All levels of government are distracted around running for election.
Speaker 3: We have a very shortened campaign, particularly compared to the
Speaker 3: United States. There's about four weeks left before we go
Speaker 3: to the polls as a focus times for Canadians decide
Speaker 3: who they want to lead the country. And yes, it
Speaker 3: will be hard to do both, and therefore business has
Speaker 3: to step in.
Speaker 4: Premiers have to step in, and we have to get
Speaker 4: through this period.
Speaker 3: And I think the US administration recognizes that Canada is
Speaker 3: distracted during this election period and therefore more attention can
Speaker 3: be paid when we get to May. So I think
Speaker 3: that's the way things will play in our country. And
Speaker 3: I think you know, we're looking forward to moving through
Speaker 3: this this democratic process expediently and making a decision with.
Speaker 2: Regards to the structure of your business and particularly some
Speaker 2: of the changes that have been made. Had that big
Speaker 2: acquisition a year ago of the d HSBC assets, the
Speaker 2: Canadian assets of HSBC, I mean that sort of provided
Speaker 2: a little bit more of a domestic focus, or at
Speaker 2: least bolstered that domestic focus. Do you anticipate that the
Speaker 2: growth of this company, given geopolitics, you might have to
Speaker 2: bolster your Canadian presidence even further.
Speaker 3: Well, to your point, HSBC was a fantastic acquisition for
Speaker 3: our customers, our franchise and for our shareholders, and we continue.
Speaker 3: We are reaffirmed today our seven hundred and forty million
Speaker 3: dollars of expense energies.
Speaker 4: We're about ninety percent through that.
Speaker 3: We talked about an additional three hundred million dollars of revenue.
Speaker 4: S energies coming from that deal.
Speaker 3: So it's been incredibly a creative to our organization and
Speaker 3: to our shareholders, and are incredibly proud of that.
Speaker 4: But you heard where a lot of the growth is
Speaker 4: going to come from. It's from the United States.
Speaker 3: And therefore, despite all the success we're having with HSBC,
Speaker 3: we still forecast roughly the same balance between Canadian and
Speaker 3: non Canadian earnings, which is seventy thirty right now, to
Speaker 3: maintain that ratio over the next five years. Given such
Speaker 3: strong growth opportunities in the United States from City National
Speaker 3: Commercial Bank and Entertainment Bank, has great opportunities for more productivity,
Speaker 3: new mortgage origination and servicing capability, cross selling products into
Speaker 3: our ultra high networth business capital markets, particular as strategy
Speaker 3: or on FX and equity finance and equity derivatives, more
Speaker 3: growth in their investment banking franchise. We have two percent
Speaker 3: market share right now, we aspire to go to two
Speaker 3: and a half. So when I look at the opportunities
Speaker 3: in Canada, they're matched exceeded by the opportunities in the
Speaker 3: United States.
Speaker 2: Well, I'm glad you went there too, because I am
Speaker 2: curious as to what's going on right now with City National.
Speaker 2: Obviously and then not necessarily get off to the best
Speaker 2: to starts. I am curious as to what you're articulating
Speaker 2: to investors right now about City National's role under the
Speaker 2: RBC umbrella. Is there going to be an expansion of
Speaker 2: that mortgage business, is that is there going to be
Speaker 2: an expansion of the direct lending business. Is it going
Speaker 2: to be an expansion of wealth and management? Where are
Speaker 2: we going to see the biggest growth?
Speaker 3: Well, we have three major pillars, as I said in
Speaker 3: the US, so I've talked about the capital markets and
Speaker 3: wealth franchise who have very strong growth opportunities. So City
Speaker 3: National we're replatforming the business now. I would say we
Speaker 3: had significant success and we grew too quickly with City National.
Speaker 3: We tripled the size of that bank since we acquired
Speaker 3: it in twenty fifteen, but we didn't keep the risk
Speaker 3: and compliance and technology platform, didn't keep up with the
Speaker 3: growth of our customer franchise, so we now kind of
Speaker 3: growth a slote a bit. We have this opportunity to
Speaker 3: replatform the business and that's been a source of significant
Speaker 3: cost and effort for us, and we're working through that
Speaker 3: very nicely.
Speaker 4: So I would say from a customer.
Speaker 3: Franchise perspective, we've been extremely successful, but we've got to
Speaker 3: get the risk and control infrastructure up to speed, and
Speaker 3: that gets us to one of the few heightened standard
Speaker 3: banks in the United States, and we think that's a
Speaker 3: great position to build off mid corporate and commercial space
Speaker 3: going forward.
Speaker 2: How far long you are in that process?
Speaker 4: Are we near the end of it?
Speaker 3: As we signal to the market, we think our peak
Speaker 3: expense rates are at their max now and we start
Speaker 3: to roll off some of that cost going into twenty
Speaker 3: twenty six as we continue to complete key stages that
Speaker 3: overall journey and cost structure should come down from here.
Speaker 3: So that's a part of the investor's thesis that we
Speaker 3: presented today that we're at max run rate as we
Speaker 3: complete the various segments in this journey, our cost tructure
Speaker 3: will come down, and that's a fairly material contribution to
Speaker 3: RBC's profitability, and certainly to see in these profitability as
Speaker 3: we can reduce the level of complexity in the organization
Speaker 3: and reduce the cost structure of the organization.
Speaker 1: Can you talk a little bit about your ambitions in
Speaker 1: Europe outside North America, the idea that you're going to
Speaker 1: be focusing more on growing that business. Will it come
Speaker 1: at the expense of the US.
Speaker 4: No.
Speaker 3: I think the beauty of being one of the largest
Speaker 3: in the world and having the capital generation ability that
Speaker 3: we have today. Organically, we're running the bank at thirteen
Speaker 3: point two percent ct one ratio. We have seventy five
Speaker 3: basis points a quarter of organic capital.
Speaker 4: Growth allows us to do all things.
Speaker 3: At the same time, we have enough capital to grow
Speaker 3: Canada the way we've talked about. We have more than
Speaker 3: enough capital to grow capital markets and commercial banking and
Speaker 3: be strong partners to US businesses. At the same time,
Speaker 3: we have organic and inorganic capacity in Europe and the
Speaker 3: United States. So when you have such strong profitability in
Speaker 3: high roees capital efficiency being a big part of our
Speaker 3: investment thesis, it gives you more cadence to reinvest in
Speaker 3: the business. Therefore, that's the beauty of our franchise and
Speaker 3: our investment thesis and why our stock has performed so
Speaker 3: well is that organic capital creation and our ability to
Speaker 3: do all things at the same time with our capital
Speaker 3: based at the same time we have operating in data
Speaker 3: and technology scale. We spend over five billion dollars a
Speaker 3: year in technology.
Speaker 4: I'm able to.
Speaker 3: Execute pro I gave an example to the investor group
Speaker 3: today where we delivered on the most complex integration of
Speaker 3: a bank any bank's ever done, particularly in Canada of HSBC.
Speaker 3: At the same time we build a brand new global
Speaker 3: transaction capability. At the same time we're building this commercial
Speaker 3: banking replatforming that.
Speaker 4: They just talked about.
Speaker 3: That capacity to do that plus degenerative AI work that
Speaker 3: we're doing means we have technology, data, business skill that
Speaker 3: allows us to.
Speaker 4: Use so much at the same time. So the answer
Speaker 4: is we're going to do it all, Okay.
Speaker 1: So AI is a key tool to get there. I
Speaker 1: want to wrap things up our conversation with something you
Speaker 1: had said earlier, which is the next Prime minister, whoever
Speaker 1: he is or she is, well in this case, he
Speaker 1: will need to transform the economy. And this idea that
Speaker 1: Canada needs to kind of go back to its roots,
Speaker 1: which is a resource economy. Talk about the priority that
Speaker 1: that means, perhaps the energy sector, the agriculture sector, the
Speaker 1: resource sector will get from RBC.
Speaker 4: It's a great question.
Speaker 3: So we're very supportive of all our sectors in Canada,
Speaker 3: being Canada's largest bank, and we're excited about the incremental
Speaker 3: opportunities around infrastructure that really adds to Canadian's prosperity and
Speaker 3: helps our global partners. So building more pipelines will be
Speaker 3: important to the Canadian government, particularly as it helps countries
Speaker 3: like Japan and Korea with their LNG needs. Building more
Speaker 3: connectivity to the United States is really important and therefore
Speaker 3: we plan. If it's important to our country and to
Speaker 3: our government, then it's going to be important to us,
Speaker 3: and therefore we'll follow that lead. But certainly we have
Speaker 3: the balance sheet capacity and the energy expertise, are one
Speaker 3: of the larger energy banks in the world, the supporting
Speaker 3: what's an important part of this overall transition to a
Speaker 3: greener energy infrastructure obviously, but a more secure energy infrastructure
Speaker 3: is increasingly what's being talked about between Energy security is
Speaker 3: now very high on the agenda of all countries, particularly
Speaker 3: Western country in North America.
Speaker 1: Dave really appreciate your taking some time to speak with
Speaker 1: us on your investor to day. Dave Makai is president
Speaker 1: and CEO of RBC