WEBVTT - Royal Bank of Canada President & CEO Dave McKay Talks Growth Targets, Tariffs and Election

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Trade tensions escalating once more between the US and Canada.

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<v Speaker 2>President Trump imposing those automotive tariffs had to take effect

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<v Speaker 2>next week. Canadian Prime Minister Mark Karney, Well, he's vowing

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<v Speaker 2>to fight those tariffs with retaliatory action. He's saying that

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<v Speaker 2>nothing right now is off the table and he will

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<v Speaker 2>use every measure to protect the Canadian economy. Canada's largest bank,

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<v Speaker 2>RBC coincidentally, was holding its investor day today. CEO Dave

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<v Speaker 2>McKay morning there that this there could be some short

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<v Speaker 2>term volatility and the economy over there that they will

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<v Speaker 2>have to adapt. I'm pleased to say that Dave joins

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<v Speaker 2>us right now, coming fresh off of that investor day,

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<v Speaker 2>and I do want to start there, Dave, because the

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<v Speaker 2>numbers you gave were pretty impressive, not so much because

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<v Speaker 2>they change, but more importantly, you said you're standing by them.

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<v Speaker 2>You guys have had long term targets in place for

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<v Speaker 2>years now. A lots change over the last few years,

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<v Speaker 2>a lot's changed over the last few weeks. What makes

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<v Speaker 2>you comfortable in standing by those targets.

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<v Speaker 3>Well, thanks for the opportunity to join you today, and yes,

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<v Speaker 3>We just finished our investor day, the first one we've

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<v Speaker 3>done in seven years, and when you think about all

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<v Speaker 3>of the targets and strategies and opportunities that we articulated today,

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<v Speaker 3>it was very much about the medium and long term.

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<v Speaker 3>These are opportunities in the United States, opportunities in Canada,

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<v Speaker 3>opportunities in Europe, and we're certainly whether we have a

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<v Speaker 3>tara for and dispute, and whether it's a short term

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<v Speaker 3>dislocation or medium term dislocation, these strategies kind of supersede that.

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<v Speaker 4>Whether they're growing in the.

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<v Speaker 3>Transaction banking space in the United States and globally, growing

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<v Speaker 3>our commercial bank and mid corporate bank in the United States,

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<v Speaker 3>or a wealth management business in the US focusing on

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<v Speaker 3>generative AI and the significant impact AI is going to

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<v Speaker 3>have on our business, all of these kind of transcend

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<v Speaker 3>the short term location of a trade challenge and an

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<v Speaker 3>impact on the economy. Yes, therefore, we still thought it

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<v Speaker 3>was really important to tell our story and to go forward,

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<v Speaker 3>and we're gonna have to deal with those challenges, as

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<v Speaker 3>I'm sure we'll talk about, but what we're working on

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<v Speaker 3>really transcends that over the medium term.

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<v Speaker 2>Yes, certainly so, and I'm in agreement with that, and

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<v Speaker 2>we talk about this idea. We introduce you as of

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<v Speaker 2>course having the largest bank in Canada, but really, I

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<v Speaker 2>mean you are banking customers in a big way on

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<v Speaker 2>both sides of the border, not just so they're in Canada,

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<v Speaker 2>but you have a huge presence here in the US.

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<v Speaker 2>Do you not worry at all given the political climate

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<v Speaker 2>and for at least what right now seems to be

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<v Speaker 2>a very tenuous relationship between the leaders of both countries

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<v Speaker 2>that you may actually have to pick one side of

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<v Speaker 2>the border or the other.

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<v Speaker 3>No, as you mentioned, we're not only the largest bank

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<v Speaker 3>in Canada, but one of the largest banks in the world,

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<v Speaker 3>and a number of our businesses in the United States

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<v Speaker 3>are top ten. We have a top ten capital markets

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<v Speaker 3>business the United States, for the fifth largest wealth manager

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<v Speaker 3>in the United States, and we've got a top twenty

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<v Speaker 3>five commercial banks.

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<v Speaker 4>So the United States is very important to us. When

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<v Speaker 4>I look at this.

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<v Speaker 3>One hundred year relationship between can United States, built on trust,

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<v Speaker 3>built on economic interests of both sides, and today we

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<v Speaker 3>have a balanced trade agreement between the two groups.

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<v Speaker 4>Four hundred billion dollars of goods and.

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<v Speaker 3>Services trade go across the border each year, and therefore

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<v Speaker 3>Canada is a very relevant partner to the United States.

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<v Speaker 3>It makes America more profitable, more competitive, and more.

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<v Speaker 4>Secure at the end of the day.

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<v Speaker 3>So I think when we look at that relationship, we

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<v Speaker 3>hope as we sit down and we go through these

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<v Speaker 3>discussions there's continues to be bilateral discussions between both countries.

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<v Speaker 3>There is strong rhetoric in the market, but when you

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<v Speaker 3>get down to the basics of the relationships, it's so

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<v Speaker 3>important to each country economically that we're just hopeful that

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<v Speaker 3>the outcomes over the next week or two weeks find

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<v Speaker 3>their way into that bucket that doesn't disrupt what's been

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<v Speaker 3>a very profitable and important economic integration and continued opportunity.

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<v Speaker 3>And for Canada this presents an unparalleled opportunity to transform

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<v Speaker 3>our country and get some things done that we haven't

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<v Speaker 3>been able to get over the last ecurd.

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<v Speaker 1>And we'll get to that in a moment. But when

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<v Speaker 1>it comes to the economic impact from the tariffs, at

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<v Speaker 1>least here in the United States, there's a lot of

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<v Speaker 1>concern over the uncertainty that that results in and perhaps

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<v Speaker 1>a paralysis that companies and consumers will experience, perhaps slowing

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<v Speaker 1>the economy there's a rising number of Canadian business leaders

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<v Speaker 1>who also fear that a crisis is looming, and many

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<v Speaker 1>of them are worried that the economy could slide into

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<v Speaker 1>a recession. Is that your base case scenario as well,

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<v Speaker 1>that Canada would tip into recession.

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<v Speaker 3>That is not our base case scenario, but certainly a

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<v Speaker 3>potential scenario given the severity of the teriffs and particularly

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<v Speaker 3>reciprocal terrorists that we'll learn about more on April second.

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<v Speaker 3>So no, We've certainly seen lower interest rates in Canada

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<v Speaker 3>stimulate consumer demand. We've seen lower interest rates in Canada

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<v Speaker 3>stimulate commercial demand and hiring, our unemployment rate, rent down

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<v Speaker 3>towards the end of the year, we saw a good

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<v Speaker 3>mortgage growth, and all that, to your point, has slowed

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<v Speaker 3>with the uncertainty of the impact of terraffs. So we're

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<v Speaker 3>seeing less home sales, We're seeing businesses pull back. We're

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<v Speaker 3>seeing pipelines in our M and A activity. All banks globally,

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<v Speaker 3>from Goldman Slaves to ourselves are talking about customers.

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<v Speaker 4>Pausing on the M and A site.

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<v Speaker 3>So all that we have seen an impact, just from

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<v Speaker 3>the rhetoric of the impact of the tariffs have slowed

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<v Speaker 3>the economy and now we've got to see what sectors

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<v Speaker 3>it impacts, what's the magnitude and duration of the tariffs,

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<v Speaker 3>and then businesses can adjust. Some businesses can absorb the

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<v Speaker 3>impact of their margin, some will pass it on to consumers,

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<v Speaker 3>some will innovate and find new customers and other markets

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<v Speaker 3>for it. So it's not like the pandemic where the

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<v Speaker 3>economy is shut down within a couple of weeks and

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<v Speaker 3>we had a dislocation. This will take time to place

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<v Speaker 3>through the economy. There's talk absorbers in the economy. Government

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<v Speaker 3>will come through with some programs to buy business's time

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<v Speaker 3>to absorb. So it's very much a different scenario than

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<v Speaker 3>the pandemic, and we just have to sit back and

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<v Speaker 3>not overreact and get to the best place possible.

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<v Speaker 1>So whether Canada tips into recession or not will may

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<v Speaker 1>just depend on leadership. And Mark Karney is a new

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<v Speaker 1>Prime Minister of Canada at least for the next month,

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<v Speaker 1>maybe longer if he actually wins the election in late April.

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<v Speaker 1>I'm curious how you think he's managing the economy and

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<v Speaker 1>this interim period as Canadians get ready to head to

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<v Speaker 1>the polls.

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<v Speaker 3>You we'll go through the democratic process and decide which

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<v Speaker 3>Prime minister who gets to be prime minister, Which of

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<v Speaker 3>the the four or five incumbents who are trying to

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<v Speaker 3>compete for this. I think what's really important that whoever

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<v Speaker 3>gets elected, is that we pursue this opportunity that's in

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<v Speaker 3>front of us to transform our economy, get rid of

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<v Speaker 3>the barriers to growth that slowed us down for decades

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<v Speaker 3>that we haven't got done. Get big projects approved, whether

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<v Speaker 3>energy projects to the West Coast to Asia, energy projects

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<v Speaker 3>to the United States, more ellen g the United States,

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<v Speaker 3>rare earth minerals that the US and other markets need.

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<v Speaker 4>Food and agriculture.

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<v Speaker 3>We have a huge hothouse capability and growing more capacity

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<v Speaker 3>around feeding the world. All these we've been slow to

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<v Speaker 3>develop and therefore we have this opportunity. So as Canadians,

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<v Speaker 3>it's really important that we debate who leads this country

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<v Speaker 3>and who can execute that mandate. Prime Mister Carney has

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<v Speaker 3>only been in the job for a couple of weeks.

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<v Speaker 3>He hasn't had a lot of opportunities called an election already,

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<v Speaker 3>so very much we're in this period where the government's distracted,

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<v Speaker 3>All levels of government are distracted around running for election.

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<v Speaker 3>We have a very shortened campaign, particularly compared to the

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<v Speaker 3>United States. There's about four weeks left before we go

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<v Speaker 3>to the polls as a focus times for Canadians decide

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<v Speaker 3>who they want to lead the country. And yes, it

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<v Speaker 3>will be hard to do both, and therefore business has

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<v Speaker 3>to step in.

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<v Speaker 4>Premiers have to step in, and we have to get

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<v Speaker 4>through this period.

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<v Speaker 3>And I think the US administration recognizes that Canada is

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<v Speaker 3>distracted during this election period and therefore more attention can

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<v Speaker 3>be paid when we get to May. So I think

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<v Speaker 3>that's the way things will play in our country. And

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<v Speaker 3>I think you know, we're looking forward to moving through

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<v Speaker 3>this this democratic process expediently and making a decision with.

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<v Speaker 2>Regards to the structure of your business and particularly some

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<v Speaker 2>of the changes that have been made. Had that big

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<v Speaker 2>acquisition a year ago of the d HSBC assets, the

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<v Speaker 2>Canadian assets of HSBC, I mean that sort of provided

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<v Speaker 2>a little bit more of a domestic focus, or at

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<v Speaker 2>least bolstered that domestic focus. Do you anticipate that the

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<v Speaker 2>growth of this company, given geopolitics, you might have to

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<v Speaker 2>bolster your Canadian presidence even further.

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<v Speaker 3>Well, to your point, HSBC was a fantastic acquisition for

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<v Speaker 3>our customers, our franchise and for our shareholders, and we continue.

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<v Speaker 3>We are reaffirmed today our seven hundred and forty million

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<v Speaker 3>dollars of expense energies.

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<v Speaker 4>We're about ninety percent through that.

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<v Speaker 3>We talked about an additional three hundred million dollars of revenue.

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<v Speaker 4>S energies coming from that deal.

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<v Speaker 3>So it's been incredibly a creative to our organization and

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<v Speaker 3>to our shareholders, and are incredibly proud of that.

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<v Speaker 4>But you heard where a lot of the growth is

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<v Speaker 4>going to come from. It's from the United States.

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<v Speaker 3>And therefore, despite all the success we're having with HSBC,

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<v Speaker 3>we still forecast roughly the same balance between Canadian and

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<v Speaker 3>non Canadian earnings, which is seventy thirty right now, to

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<v Speaker 3>maintain that ratio over the next five years. Given such

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<v Speaker 3>strong growth opportunities in the United States from City National

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<v Speaker 3>Commercial Bank and Entertainment Bank, has great opportunities for more productivity,

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<v Speaker 3>new mortgage origination and servicing capability, cross selling products into

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<v Speaker 3>our ultra high networth business capital markets, particular as strategy

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<v Speaker 3>or on FX and equity finance and equity derivatives, more

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<v Speaker 3>growth in their investment banking franchise. We have two percent

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<v Speaker 3>market share right now, we aspire to go to two

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<v Speaker 3>and a half. So when I look at the opportunities

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<v Speaker 3>in Canada, they're matched exceeded by the opportunities in the

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<v Speaker 3>United States.

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<v Speaker 2>Well, I'm glad you went there too, because I am

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<v Speaker 2>curious as to what's going on right now with City National.

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<v Speaker 2>Obviously and then not necessarily get off to the best

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<v Speaker 2>to starts. I am curious as to what you're articulating

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<v Speaker 2>to investors right now about City National's role under the

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<v Speaker 2>RBC umbrella. Is there going to be an expansion of

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<v Speaker 2>that mortgage business, is that is there going to be

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<v Speaker 2>an expansion of the direct lending business. Is it going

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<v Speaker 2>to be an expansion of wealth and management? Where are

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<v Speaker 2>we going to see the biggest growth?

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<v Speaker 3>Well, we have three major pillars, as I said in

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<v Speaker 3>the US, so I've talked about the capital markets and

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<v Speaker 3>wealth franchise who have very strong growth opportunities. So City

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<v Speaker 3>National we're replatforming the business now. I would say we

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<v Speaker 3>had significant success and we grew too quickly with City National.

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<v Speaker 3>We tripled the size of that bank since we acquired

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<v Speaker 3>it in twenty fifteen, but we didn't keep the risk

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<v Speaker 3>and compliance and technology platform, didn't keep up with the

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<v Speaker 3>growth of our customer franchise, so we now kind of

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<v Speaker 3>growth a slote a bit. We have this opportunity to

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<v Speaker 3>replatform the business and that's been a source of significant

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<v Speaker 3>cost and effort for us, and we're working through that

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<v Speaker 3>very nicely.

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<v Speaker 4>So I would say from a customer.

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<v Speaker 3>Franchise perspective, we've been extremely successful, but we've got to

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<v Speaker 3>get the risk and control infrastructure up to speed, and

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<v Speaker 3>that gets us to one of the few heightened standard

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<v Speaker 3>banks in the United States, and we think that's a

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<v Speaker 3>great position to build off mid corporate and commercial space

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<v Speaker 3>going forward.

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<v Speaker 2>How far long you are in that process?

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<v Speaker 4>Are we near the end of it?

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<v Speaker 3>As we signal to the market, we think our peak

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<v Speaker 3>expense rates are at their max now and we start

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<v Speaker 3>to roll off some of that cost going into twenty

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<v Speaker 3>twenty six as we continue to complete key stages that

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<v Speaker 3>overall journey and cost structure should come down from here.

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<v Speaker 3>So that's a part of the investor's thesis that we

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<v Speaker 3>presented today that we're at max run rate as we

0:11:29.160 --> 0:11:32.360
<v Speaker 3>complete the various segments in this journey, our cost tructure

0:11:32.360 --> 0:11:35.840
<v Speaker 3>will come down, and that's a fairly material contribution to

0:11:36.120 --> 0:11:39.080
<v Speaker 3>RBC's profitability, and certainly to see in these profitability as

0:11:39.080 --> 0:11:42.160
<v Speaker 3>we can reduce the level of complexity in the organization

0:11:42.240 --> 0:11:44.160
<v Speaker 3>and reduce the cost structure of the organization.

0:11:44.679 --> 0:11:47.360
<v Speaker 1>Can you talk a little bit about your ambitions in

0:11:47.400 --> 0:11:50.840
<v Speaker 1>Europe outside North America, the idea that you're going to

0:11:50.840 --> 0:11:53.959
<v Speaker 1>be focusing more on growing that business. Will it come

0:11:54.000 --> 0:11:55.800
<v Speaker 1>at the expense of the US.

0:11:57.640 --> 0:11:57.720
<v Speaker 4>No.

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<v Speaker 3>I think the beauty of being one of the largest

0:12:00.200 --> 0:12:03.040
<v Speaker 3>in the world and having the capital generation ability that

0:12:03.080 --> 0:12:06.160
<v Speaker 3>we have today. Organically, we're running the bank at thirteen

0:12:06.200 --> 0:12:08.760
<v Speaker 3>point two percent ct one ratio. We have seventy five

0:12:08.760 --> 0:12:12.240
<v Speaker 3>basis points a quarter of organic capital.

0:12:11.960 --> 0:12:15.679
<v Speaker 4>Growth allows us to do all things.

0:12:16.000 --> 0:12:17.960
<v Speaker 3>At the same time, we have enough capital to grow

0:12:18.040 --> 0:12:19.760
<v Speaker 3>Canada the way we've talked about. We have more than

0:12:19.840 --> 0:12:22.880
<v Speaker 3>enough capital to grow capital markets and commercial banking and

0:12:22.960 --> 0:12:25.680
<v Speaker 3>be strong partners to US businesses. At the same time,

0:12:25.720 --> 0:12:29.319
<v Speaker 3>we have organic and inorganic capacity in Europe and the

0:12:29.400 --> 0:12:32.360
<v Speaker 3>United States. So when you have such strong profitability in

0:12:32.440 --> 0:12:35.400
<v Speaker 3>high roees capital efficiency being a big part of our

0:12:35.440 --> 0:12:39.040
<v Speaker 3>investment thesis, it gives you more cadence to reinvest in

0:12:39.040 --> 0:12:41.800
<v Speaker 3>the business. Therefore, that's the beauty of our franchise and

0:12:41.800 --> 0:12:44.280
<v Speaker 3>our investment thesis and why our stock has performed so

0:12:44.400 --> 0:12:48.920
<v Speaker 3>well is that organic capital creation and our ability to

0:12:48.960 --> 0:12:51.360
<v Speaker 3>do all things at the same time with our capital

0:12:51.360 --> 0:12:54.000
<v Speaker 3>based at the same time we have operating in data

0:12:54.040 --> 0:12:57.360
<v Speaker 3>and technology scale. We spend over five billion dollars a

0:12:57.440 --> 0:12:58.400
<v Speaker 3>year in technology.

0:12:58.600 --> 0:12:59.280
<v Speaker 4>I'm able to.

0:12:59.280 --> 0:13:03.760
<v Speaker 3>Execute pro I gave an example to the investor group

0:13:03.840 --> 0:13:07.640
<v Speaker 3>today where we delivered on the most complex integration of

0:13:07.679 --> 0:13:11.160
<v Speaker 3>a bank any bank's ever done, particularly in Canada of HSBC.

0:13:11.320 --> 0:13:13.560
<v Speaker 3>At the same time we build a brand new global

0:13:13.600 --> 0:13:17.920
<v Speaker 3>transaction capability. At the same time we're building this commercial

0:13:17.960 --> 0:13:19.240
<v Speaker 3>banking replatforming that.

0:13:19.200 --> 0:13:19.959
<v Speaker 4>They just talked about.

0:13:20.400 --> 0:13:23.360
<v Speaker 3>That capacity to do that plus degenerative AI work that

0:13:23.400 --> 0:13:27.960
<v Speaker 3>we're doing means we have technology, data, business skill that

0:13:28.040 --> 0:13:28.880
<v Speaker 3>allows us to.

0:13:28.840 --> 0:13:30.720
<v Speaker 4>Use so much at the same time. So the answer

0:13:30.760 --> 0:13:32.000
<v Speaker 4>is we're going to do it all, Okay.

0:13:32.040 --> 0:13:34.520
<v Speaker 1>So AI is a key tool to get there. I

0:13:34.559 --> 0:13:37.120
<v Speaker 1>want to wrap things up our conversation with something you

0:13:37.160 --> 0:13:39.600
<v Speaker 1>had said earlier, which is the next Prime minister, whoever

0:13:39.920 --> 0:13:42.280
<v Speaker 1>he is or she is, well in this case, he

0:13:42.600 --> 0:13:45.200
<v Speaker 1>will need to transform the economy. And this idea that

0:13:45.760 --> 0:13:47.640
<v Speaker 1>Canada needs to kind of go back to its roots,

0:13:47.640 --> 0:13:51.760
<v Speaker 1>which is a resource economy. Talk about the priority that

0:13:51.760 --> 0:13:56.800
<v Speaker 1>that means, perhaps the energy sector, the agriculture sector, the

0:13:56.840 --> 0:13:59.080
<v Speaker 1>resource sector will get from RBC.

0:14:01.200 --> 0:14:02.120
<v Speaker 4>It's a great question.

0:14:02.200 --> 0:14:05.560
<v Speaker 3>So we're very supportive of all our sectors in Canada,

0:14:05.559 --> 0:14:08.840
<v Speaker 3>being Canada's largest bank, and we're excited about the incremental

0:14:08.880 --> 0:14:13.080
<v Speaker 3>opportunities around infrastructure that really adds to Canadian's prosperity and

0:14:13.120 --> 0:14:17.280
<v Speaker 3>helps our global partners. So building more pipelines will be

0:14:17.320 --> 0:14:20.400
<v Speaker 3>important to the Canadian government, particularly as it helps countries

0:14:20.440 --> 0:14:23.320
<v Speaker 3>like Japan and Korea with their LNG needs. Building more

0:14:23.320 --> 0:14:27.200
<v Speaker 3>connectivity to the United States is really important and therefore

0:14:27.680 --> 0:14:30.160
<v Speaker 3>we plan. If it's important to our country and to

0:14:30.240 --> 0:14:32.240
<v Speaker 3>our government, then it's going to be important to us,

0:14:32.240 --> 0:14:35.280
<v Speaker 3>and therefore we'll follow that lead. But certainly we have

0:14:35.360 --> 0:14:37.840
<v Speaker 3>the balance sheet capacity and the energy expertise, are one

0:14:37.880 --> 0:14:42.560
<v Speaker 3>of the larger energy banks in the world, the supporting

0:14:42.920 --> 0:14:46.600
<v Speaker 3>what's an important part of this overall transition to a

0:14:46.640 --> 0:14:51.080
<v Speaker 3>greener energy infrastructure obviously, but a more secure energy infrastructure

0:14:51.080 --> 0:14:54.720
<v Speaker 3>is increasingly what's being talked about between Energy security is

0:14:54.760 --> 0:14:59.360
<v Speaker 3>now very high on the agenda of all countries, particularly

0:14:59.400 --> 0:15:00.840
<v Speaker 3>Western country in North America.

0:15:01.320 --> 0:15:03.520
<v Speaker 1>Dave really appreciate your taking some time to speak with

0:15:03.600 --> 0:15:05.800
<v Speaker 1>us on your investor to day. Dave Makai is president

0:15:05.880 --> 0:15:07.760
<v Speaker 1>and CEO of RBC