Royal Bank of Canada at Scotiabank Financials Summit
Sep 07, 2016 AM EDT
RY.TO - Royal Bank of Canada
Royal Bank of Canada at Scotiabank Financials Summit
Sep 07, 2016 / 02:20PM GMT
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Corporate Participants
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* David McKay
Royal Bank of Canada - President & CEO
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Presentation
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Unidentified Participant [1]
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Ladies and gentlemen, our award winning events team runs a much tighter ship than I do. So we're actually going to get going a little quicker than I thought. We're going to have three more presentations this morning before we break for lunch and let me start by introducing our next speaker.
We are very pleased to be joined by Mr. David McKay, President and Chief Executive Officer of RBC. Dave has been with the Royal since 1988, and was appointed CEO in August of 2014. He is making his third appearance at our conference, and very interested to hear what he has to say.
Sir, thanks for being here. It's been a pretty good year for the sector.
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David McKay, Royal Bank of Canada - President & CEO [2]
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It has.
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Unidentified Participant [3]
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I think it's fair to say and certainly feels a lot different than it did a year ago. I was saying in my opening comments that I don't think oil prices are that much different, but the sentiment around the sector and RBC certainly feels different.
I guess, I wanted to start by asking, may be personal notice as everybody comes in, I took my kids to the CNE recently, you remember that a game Whack A Mole, something pops up and you've to hit it. I fell like in covering the banks post the crisis, there's been a lot of that and even in Canada where things have been pretty good, we're always worried about what can go wrong, it could be housing, it could be capital, it could be energy, could be housing again. Yet, the sector has rolled along pretty well.
Let me stop rambling and turn it over to you. From your perspective, what do you think the market underappreciates or underestimates about the Canadian banking sector, and more specifically, obviously, about RBC?
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David McKay, Royal Bank of Canada - President & CEO [4]
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Maybe I'll start with the second question, because it gives me a chance to talk about RBC. But certainly when I think about three things about what I think we do really well that I get a lot of questions about and lot of comments about that indicate to me that the market doesn't clearly understand what we can do.
The first one certainly is cost takeout. I get a lot of questions, why have you taken a one-time charge, all your peers are getting the benefits of the one-time charge, and are you taking enough cost, are you being more aggressive, and I look at our organization, particularly our retail bank where you tend to benchmark more carefully we are the lowest cost producer and we have the greatest best efficiency ratio on a fully absorbed basis as you even out the centralized cost, which you can do.
We have taken out, on average, 1,200 people a year across organization. We've absorbed those charges of CAD90 million run rate a year into our P&L versus calling them out in one lump sum charge. So, over the last five years, we've taken out 6,000 people and we've taken around roughly CAD450 million of charges into our income and not calling it out to reposition our banks. So I think we've demonstrated that if we do, do it, we do it in the right way.
As a leader, you're trying to do three things. One, you're trying to reposition your cost base, but you're trying to keep your employees engaged and your clients liking you. So the key is when I sit here with the lowest cost ratio having taken out 6,000 people, we just won the Number 1 award in J.D. Power. So we have the best customer service in this country with the lowest productivity ratio.
So that's to me an important mark that you got to do both. You got to take your cost base down, but you got to keep your employees engaged, you got to keep your customers happy, you're on a journey. And you can't get too far ahead of your customer that you start to lose them through this journey. So I think we got way ahead of the journey and I think we started this six, seven years ago.
When I took over the retail bank in 2008, we had 11,000 tellers. We have 6,000 today. Taking out 5,000 tellers, haven't taken a one-time charge and we're Number 1 in customer service. We have the greatest cross-sell ratio. We are Number 1 in market share in every business, so it's doing both, and I think what's under-appreciated is that we have taken out our cost structure, we have moved our efficiency ratio down and we've done that in a great way.
Does it mean we wouldn't take a charge going forward, if we need to reposition? In fact, we have taken significant charges to reposition in the Caribbean, to reposition our Investor & Treasury Services where in both those business, we took 3,000 people out of the Caribbean, we took another 2,000 out of Investor & Treasury Services and we've taken charges to reposition our International Wealth business.
So it's not like we're afraid to do it. We do it, we just haven't called it out on one lump sum charge which seems to create a positive momentum for about six quarters after that, that we haven't got the benefit from. So, I think we've done it very well and it's under-appreciated our ability to do that and keep customer satisfaction engagement at the highest level in this country and I think that's a job well done by the management team.
Number two, our core deposit franchise. We have the largest core deposit franchise business and consumer in the country by a large margin. It provides not only funding, but we're at historically low NIMs in that business, and in a rising rate environment or any type of hiring environment, you unlock significant profitability in a core deposit business. So there is under-appreciated, embedded profitability in our current set of businesses. Number two, that core deposit business, they are sticky customers and you cross-sell significantly off a core deposit customers. So that's the second reason why a core deposit business is so important.
And third, you'll probably hear a number of people talk over the coming days that what does your organization have to do really well to succeed in the future. And it's about data, it's about understanding trends in a digital world and collecting data and knowing a lot about your customer and that core deposit business is a rich source of data. So that franchise value today and in the future I think is significantly under-appreciated by the market.
And the third thing I would say, I don't think anyone realizes just how good City National Bank is. And we had our Investor Day in June, we put together a very ambitious program to grow it to a CAD1 billion in profit. And we're incredibly excited about starting off so well, but also the journey we're on. So, I think those are three stories that we'd like to get out in a more meaningful way.
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Unidentified Participant [5]
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Let's do that. And let's start with City National. As you mentioned, you had the Investor Day event in June and with City National being centered in the Wealth business, that's obviously I've always thought and we've talked about this, you've got Canadian P&C, you've got Capital Markets, Wealth is kind of the man in the middle so to speak that really meld those two worlds together.
Let's start with your numbers, because that's always where we end up. You're on a run rate for this year in the first year to have about CAD400 million of earnings power from that franchise and you're targeting a CAD1 billion four years out at 25% CAGR, not a small number for a bank, some of that has some macro components to it.
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David McKay, Royal Bank of Canada - President & CEO [6]
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Yes, which we broke down clearly.
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Unidentified Participant [7]
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But, more specifically, on the factors that you can control, can you talk to us about the cross-sell, the fit with Capital Markets and just how these two entities have melded so well together?
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David McKay, Royal Bank of Canada - President & CEO [8]
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Certainly, we have an enormous leverage to a higher rates in the US, where you have a 40% probability of a September raise and 60%, 65% for December. Every 25 basis point raise in the US is [$35 million of limit] for us. So all those numbers are embedded in our presentation in June. So you can see very significant leverage to higher rates. So, putting that aside and getting to the core of your question, so what do the synergies look like.
Now our core synergies are really trying to unlock the potential in our existing US Wealth franchise with 350,000 to 400,000 households, where we only have a single one point advisory relationship cross selling into that Private Banking relationship, cross selling into that corporate commercial relationship. 25% of those customers have created their wealth through their own small business and commercial franchises. Yet we had no ability to cross-sell a single new product into that advisory relationship. Yet, they rated us Number 1 in J.D. Power for a number of years. So we had permission to talk to them about new products, nothing to offer them.
So we've already embarked on a program where, in California, where our offices are co-located, we started introducing our private bankers and commercial bankers to our high net worth client base and we already have a pipeline of CAD400 million of credit deals just from those pilots alone. So if we look at the ability to drive organic growth by cross selling a completely new product shelf into the seventh largest broker in United States, it's obviously a very attractive opportunity to unlock the value of both franchises.
Two, we have CAD20 billion roughly of sweet deposits sitting within our wealth franchise that are earning very low treasury rates today, almost nothing and ability to deploy those into a commercial, retail franchise like City National and sweep them onto that balance sheet which we talked about in our numbers, it's adding 8% growth to City National alone on deposit side taking your 15% core organic growth up to 23% and deploying that into assets, is a very attractive opportunity to accelerate the growth and unlock the usage and the yield on a very substantial deposit franchise and therefore, creates enormous opportunity for us.
So cross-sell into those relationships on commercial retail, unlock that very attractive core deposit funding franchise, which allows us to compete in the jumbo mortgage industry which we've never competed in for City National.
City National is a [accommodation] lender in the US, they only reacted responsibly to inbound request from a customer and therefore, we feel we have an opportunity to kind of replicate some of the First Republic strategy of using jumbo mortgages with high net worth customers to accelerate client acquisition, particularly new markets and then cross-sell Wealth Services, Private Banking Services and Commercial Services using the jumbo as a core attraction strategy, again, a strategy not utilized by City National that we feel we can accelerate on that side.
And then lastly, to your point on capital market synergies, what City National saw as they nurtured so many talented technology companies, entertainment companies, healthcare companies as a commercial company into capital markets, and then because they had hold levels that were in that CAD30 million, CAD35 million, CAD40 million range, companies would outgrow City National, they would move to some of the large money center banks for their investment banking needs for larger syndicated deals because they didn't have the balance sheet to support their growth.
When you put a CAD1 trillion balance sheet behind the City National, we don't have to syndicate this early, we can hold that and we're first to the trough to cross-sell our equity underwriting or debt underwriting or M&A advisory or FX capabilities and keeping that customer within the RBC family a lot longer and cross referral on both sides. So, it has been -- there's a series of opportunities there that growing organically and then the last one, the fifth one is our geographic expansion.
So City National is predominantly based in LA and Southern California, wonderful market to operate in, incredible market particularly Los Angeles and Greater Los Angeles, they've expanded into New York city with their third branch now that we just opened on Wall Street and really targeting our employees and Wall Street employees with Private Banking services or in Nashville or in Atlanta where the entertainment industry is quite prevalent. So we really see an organic growth opportunity into Washington, potentially into the south again and other markets that City National didn't have the capital to do, that we certainly have the capital to invest.
So, you look at the holistic range of synergies, there's enormous growth synergy and there is cost synergy, more modest because there's not another in-bank merger to do within United States, but certainly ability to look at technology cost, cross border, look at replication between our wealth franchise and City National across some of our functional units we're looking for cost synergies. So we put a CAD50 million plus cost synergy trajectory in there, which is modest, but still helps that. So when you look at those three pillars laddering to CAD1 billion, we're really excited about.
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Unidentified Participant [9]
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Let's think about the other piece that melds in there. Russell Goldsmith is also going to head the aggregate US Gulf operations of the Company. I was pleased at the Investor Day, where you somewhat impromptu gave me a number to manage to on the legacy US business as well in terms of 300 to 350 pretax income improvement over that same period of time.
Royal Bank of Canada has a premium customer base across a lot of metrics. You see it in credit card loss rates, you see it in RBCDS assets per advisor mortgage insurance. When I look at your business in the US, your advisory business, I've always thought of it going back to (inaudible) more of a mass affluent, rather than the higher end of the market. How does that fit with the franchise that you have now, because to me it seems like an area that needs high grading in order to fit with the business that you're now showing as a more premium customer base with City National?
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David McKay, Royal Bank of Canada - President & CEO [10]
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Yes, certainly you put City National in the high net worth, ultra-high net worth category. So the crossover is certainly at the higher end of the mass affluent range, but you look at the number of customers City National has to drive their current profitability, I think we'll make -- I think your profit quotes, well, if you take your amortization of intangibles, we made CAD338 million in the first nine months of the year, we made a CAD123 million last quarter.
So I would expect us, net of intangibles, to do all better than CAD400 million, obviously, if you just extrapolate on what we've done so far. And certainly the overlap, so the number of customers that overlap at the top end of that are still a significant multiple of the number of customers that drive City National's existing profitability. So it doesn't take a lot of these customers to make a significant difference to City National, you don't need all 400 to work, you need a small subset of those or very profitable to drive that.
So, you'd be surprised how few clients City National actually has to drive that existing CAD400 million in profitability. So you don't need a lot of them. And you're right, they do cross over at the top-end and we don't have to take the City National brand down market, we can fill that in with other branded services and jumbo on executing the different way, but they give us a technology platform and the organizational structure to execute against the mass affluent client with a different branded solution with the same product.
So we thought that through and there's a number of ways we can tackle the segmentation of that client base with different brands, but all managed through a centralized management team. So it was a franchise that we needed to create the architecture to go after a multi-segmented market. We couldn't do it with the digital-only bank in the US which we created after the sale of our US franchise to P&C, we needed a full management team with all the capabilities from risk to technology to allow us to segment the US market and organize our approach against them.
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Unidentified Participant [11]
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You touched on in your opening, so we've got to get to the R word, restructuring. The industry has taken CAD2 billion collectively of charges since the end of 2014. One name conspicuous in its absence from participating in that, let me just ask this directly, you said this morning and you've said it before, we're not closing the door on taking a restructuring charge. What would the circumstances be that, that would occur?
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David McKay, Royal Bank of Canada - President & CEO [12]
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I think they will be similar circumstances to we've seen in the past where we find a business unit that's materially offside, the cost structure versus the revenue structure, we would have -- where we saw that was the Caribbean, we saw that with our Investor & Treasury Services, we were very aggressive over 18 months and restructuring almost 3,000 people in the Caribbean because our cost structure was misaligned to our revenue structure. We took a business that was losing $150 million a year in Caribbean three years ago. So, you can see, we're on track to make somewhere close to CAD200 million today, a lot of that's cost take out. So we acted very aggressively over an 18 month window and completely transformed and created a normal shareholder value.
We are watching the pace of change of our customer very carefully and we know that there's significant change of foot with our customer, how they shop, how they use channels, but you can't get too far ahead of them. So you have to pace through a change to keep your customer engaged, costs will come out. Its how you do it and how you maintain employee and customer engagement that's absolutely critical.
So if there is a shock to customer preferences and they start opting for a digital channel much more quickly, then we will adjust that. We've got plans to change our trajectory depending on customer trajectory, depending on if there is a new entrant into the banking system that shocks margins or shocks competitive offerings or customer preference as I said. So we watch that carefully. So if that occurred, absolutely, we'll reposition much more quickly and we set up the flexibility to do that.
But again, it's always with that customer in mind. The second thing, if you start eliminating branches and customers want those and you haven't proven that you can acquire a customer digitally, which no one has, actually 50% of digital sales goes to RBC, of the entire industry. So I think we're [probably] the only bank that's proven we can acquire digitally so far. You might have a problem. So you've got to do both, right. You want to get rid of that channel, you better know you can acquire through channels and no bank has really demonstrated that. So it's a balance.
So we leave the door open to say, of course, if there is a significant change or we find a business underperforming or there's been a radical change in the revenue environment, we're going to adjust our cost base and I've got three very good proof points that we've done that in the last five years very aggressively. So we're constantly monitoring for that opportunity. Having said that, we have CAD90 million built in our run rate that we're constantly adjusting our cost base every year and we're down 6,000 employees in the last five years, which I think stacks up pretty well. We are the lowest cost producer, so we haven't let the plaque buildup in the system as much as maybe others have or are catching up. So, I think we're doing a good job, but doesn't mean the job is done. The job is not done and we're being ever vigilant and the cost base, as customers change how they shop, will have to go with it.
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Unidentified Participant [13]
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Is legacy US Wealth, a business where the Royal has said for a long time, we're not thrilled about the pre-tax margins in this business, one that you feel there is that revenue expense dynamic mismatch that you talked about, that's going to be part A and here is part B, it's something I've said to you before. I think you were talking about the threat from FinTech in the banking sector before FinTech was called FinTech. So, you were early on this and I think you've prepared the bank for it.
I am always cognizant of the fact that, I'm looking at numbers on the page and you're managing a real-life business with human beings and regulators and lots of different factors. When you see the industry, the market rewarding restructuring charges for those banks that have taken it and then printing large amounts of efficiency or improving their operating leverage, do you think it's almost a competitive disadvantage to the bank in the short term to not participate along the same lines? So two disparate questions there because there is one business that maybe there is an expense revenue mismatch and then your thoughts on how the market has treated this?
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David McKay, Royal Bank of Canada - President & CEO [14]
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We're a little perplexed that the market doesn't add back the amortization of some of these charge. You've destroyed shareholder value to create the shareholder value. So, net-net, I think, we think people are smart enough to look through that. It's a little frustrating, all the press that the sell side certainly writes about it. But net-net, you get a lot through the numbers and run your numbers and see what the real efficiencies are.
I think what I worry about is, if we're not -- we lose our sense of urgency, we get complacent about looking for opportunities and that's my job to make sure we don't, and we're constantly questioning and looking for that opportunity to take it out. So, I think we've got great proof points and if I was sitting here telling that I've got the lowest -- the worst efficiency ratio and I haven't taken a charge, I think I'd be a tough story to tell. I'm sitting here saying, we've been very active, we've managed that efficiency ratio down, there's more to do. There's more opportunity.
We're number one in customer satisfaction, we've got number one market share and you got to do all of it. You can't just do one of it. Taking out cost is not hard, maintaining -- taking out cost and maintaining customer satisfaction and employee engagement is hard, and you got to do both. So my answer is, we're obviously focused on it. Do I get frustrated? No. I'm thinking long term and doing what's right for the organization and our customers long-term. And we attract that type of investor. So I think we're constantly trying to do the right thing for the franchise and we will adjust accordingly and we have all the tools available to do that.
As far as FinTech goes, I think there is -- there's a lot of investment, but what makes some of the FinTech traction difficult is that this is true of the Canadian industry, you've got a customer that's embedded in a multi-product relationship particularly if we've got the core checking account as I said off the top which is so important and that multi-product relationship is reinforced, particularly in our franchise by reciprocity, in that you get free banking if you have a multi-product relationship, you get discounts on your mortgage, you get higher GIC rates, so we're constantly, you get reward points in our credit card.
You're constantly reinforcing that the more business you bring us, the more you get in return and therefore decoupling a product into a FinTech competitor is expensive and there's not a price point that you can hit that replaces the relationship value of having four or five products, which is why the cross-sell ratio is so important, and we're Number 1 cross-sell bank in the country.
So when I think about FinTech and what they have to do to be successful, they have to take apart a deeply embedded multi-product highly reciprocal relationship that's going to cost the customer money to do that. So can I hit the price point and the service level and if you're Number 1 in customer satisfaction, what's your pitch to that customer other than simplicity? And it's really hard and while they've built simple models and easy-to-use models, the cost of acquisition for these FinTechs is really high, because they're trying to pull apart.
They're having more traction in the US because they don't have multi-product reciprocal relationships. They tend to have fragmented siloed multi-vendor relationships, you got your credit card with cap one, you've got your core deposit with cap one, you've got your mortgage with a broker, you got your investment (inaudible) and there is no reciprocity formula that sits on top of that, it's the opposite in Canada and particularly with RBC, and that we've got deep [multiple that are] hard to pull apart.
Two, they have to do something we can't. They have to find a value proposition that we can't match for one reason or another. And therefore, we can make it simpler, we can create a digital experience. We can embed that within the multi-product relationship and we can take it outside. So, I worry about value propositions that I can't replace that are embedded into other business models that create a customer value that I'm not in that business, I can't do that, I can't attach my payments business or my mortgage business, my commercial business into that value chain, it sits outside my world. I worry about those worlds, but that's how I look at FinTech. And why, I think you should be comforted that we have a lot of tools to respond and why we think we have a very strong base of multi-product, highly loyal well rewarded reciprocal customers.
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Unidentified Participant [15]
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A year ago, you and I sat here and we talked a lot about capital. There had been a few bumps in the road after the City National announcement, the capital ratio looked a little bit lower. The G-SIFI announcement, G-SIB announcement was in the offering and the term you used to me was balance sheet repurposing. I don't need to sell any of my businesses, we can get there in different way. A year later, you're at 10.5%, pretty much at the high-end of the sector. So a couple of questions.
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David McKay, Royal Bank of Canada - President & CEO [16]
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With the highest ROEs, net.
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Unidentified Participant [17]
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We'll get to ROE (multiple speakers). The capital of 10.5%, you're managing at a higher level than you have in the past. Has something changed in the way you're thinking about that, particularly with the view that we may not be a G-SIFI again this year, but it's something in the offering, will you think it's appropriate to manage capital at the high-end of this sector?
That's number one and number two, there's no such thing as a free lunch most of the time, almost all the time, today there is, but what happens with this balance sheet repurposing to your Capital Markets business, the reduction in market RWA we've seen, is there going to be a corresponding negative impact on revenue for RBC Capital Markets?
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David McKay, Royal Bank of Canada - President & CEO [18]
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There's a lot there. To sit here after making our largest acquisition as you referenced in our history, with a 10.5% CT1 ratio with the full flexibility to invest in organic growth to repatriate capital to shareholders starting to show share buyback program the last quarter as you saw, we're really happy to be able do that, feels pretty good and to generate the ROEs that we're generating, is really good. So I think we have some surplus capital there.
Without a doubt, I think there is uncertainty in the world still around how regulators will set the final Basel rules. We don't know anything, but I think we've got flexibility in that world of uncertainty. So, I think it's great to have this capital flexibility to grow, to address the uncertainties out there and to return capital to shareholders and an organic ability to grow that again, so through earnings. So, it's a great place to be, and generate the returns we are and we have enormous financial flexibility to do everything we want to do. So I think we're in a very good place.
As far as capital markets and slowing the growth there, in this lend to originate strategy that we've been on for almost a decade now, which has been so successful, we've acquired and built customer franchises across all the sectors that we wanted to, and we need to get to a critical mass and you saw us grow our balance sheet and RWAs as you reference maybe in the 10%, 15% range for a number of years, trying to acquire customers and grow a critical mass to keep a high-end top decile team engaged in cross-selling and we feel that we're out of that area of critical mass where we expect a greater cross-sell ratio against that customer base, debt underwriting, equity underwriting advisory FX and we're seeing that, so we feel we can continue to grow Capital Markets fee-based business and earnings by continuing to cross sell on to that customer franchise. We're not stopping growth, we're slowing growth, we don't think we need to grow much more than kind of 4% a year. So we certainly are slowing down that growth where we are in the cycle because we see significant opportunity.
The other thing that will be the cause is we're repurposing capital with greater efficiency. In every lent to originate model, you acquire a new customer by putting your balance sheet out there, your hopes are participating in the transaction. Sometimes they don't transact, sometimes they transact and someone else gets it. And we have great discipline now of looking at our customers and saying, we didn't transact for this. Our ROEs aren't where we want them to be. What's the probability of a transaction or a fee opportunity going forward, and if it isn't there, we're repurposing that capital into new customer relationships and therefore we can continue to grow the business from fees by recycling capital much more efficiently.
We've taken some of our Global Markets book down, taking our art business down, we've taken some of our FIC business down globally and therefore we looked at the customers we were serving, we looked at the ROEs and we said, we can take these positions off. And therefore, recycle that capital out of the Global Markets business back into the lending book and new lending relationships.
So I think you've seen us -- I think I'm very good here in capital markets, I think we're recycling capital, therefore we're acquiring new relationships and we expect to grow that business in a more efficient way with less growth in RWA, with less new capital into the business, so I think we're in a very good place to do that. So, no, we're not constraining from that perspective, but we do not need as much capital and the growth rate in RWAs will come down and we won't need to take as much risk to do what we're doing.
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Unidentified Participant [19]
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When we sat here after your appointment two years ago and you talked -- and we talked about Capital Markets, it was the one business I don't think you had direct experience in at the time and your comment to me was you originate the distribute model that we've used successfully elsewhere in the bank can be a big driver for us there as it has been.
I don't want to overplay this because as you guys all told us, there's only so much damage 2% of the loan book can do, but when I look at your energy numbers and you have an impairment ratio of 16% in that book, that's a big number as a risk, it's not going to do that much damage to the bank and clearly you've made a lot of money in investment banking from lending to that sector. But as a lender, as I go to the risk background, is there anything in that portfolio when you look at impairments so much higher than your peers that says maybe we overstepped here in some regard?
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David McKay, Royal Bank of Canada - President & CEO [20]
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The answer is no. I think we have different characteristics. So we certainly participate in the US energy market to a much greater degree because of our US capital markets franchise which is a very significant part of our overall Capital Markets operation. We participate in a leverage lending market in the US as you know and in particular, in the energy industry. But as you look at those loans, you've got two ways out. You've got cash flow, obviously, that's being impacted by energy prices and production levels, but you also have your position in the capital stack and the debt stack and security.
So you've got two ways out as any commercial corporate loan and what you've seen is that we go through all these names one by one not ourselves, our Chief Risk Officer, our Risk Committee, our regulators go through these north and south of the border and we look at our position of debt, we look at our security and we say, we stress that account and we say, in all reasonable scenarios, given our senior secured position, we should be fine. And therefore, while there may be taking action as a corporate to manage the situation or they're selling assets or working with various debtors, it won't affect our position. Therefore, we don't need to take a provision.
So, certainly, we go through all those names, we look at our position, we look at our security and we make a call with multiple inputs from a lot of people and therefore we are comfortable with our overall provisioning based on the security and how we manage that risk, and I think our credit numbers show that. But as you pointed out, we've got significant revenue coverage of the risk position we're taking and while our cumulative losses are higher than maybe our peers are, we make on average CAD300 million more a quarter in our Capital Markets business than our peers, which is [CAD1 billion, kind of CAD2 billion] over a year and we've lost, I think CAD150 million more.
So yes, our higher loss rates is only CAD150 million more than our peers on average, but we've made CAD1 billion more, that's a pretty good coverage. So I think, do I like the business? I watch those ratios closely and trading a CAD1 billion in incremental profit for CAD100 million of incremental risk is a good relationship. If it was one-to-one, I wouldn't be as comfortable telling that story, but a 10 to 1 ratio gives good coverage. So I think it talks to the earnings power of taking that risk.
Are you getting paid to take risk? The converse is we don't participate in retail sub-prime, auto retail sub-prime card second-lien mortgages. We've decided not to take that risk, others have decided to take that risk. So, there, we think we've missed the cycle in that you need a long run rate of up times to make a cushion to the volatility you get in down times. Going into that market now at the end of a consumer credit cycle is kind of a risky play because you don't have a long enough run in to make your money, to take your losses.
We've had a long run in Capital Markets, great profitability, great run rates, very profitable relationships and that's how you want to manage the cycle. So I think every bank takes idiosyncratic risk and you got to make sure you manage the revenue profit to loss ratio. And I think at a 10 to 1 ratio on Capital Markets is very good and we don't have risk in other areas that the other banks do. So I think that's how we look at them.
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Unidentified Participant [21]
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Along the same lines, when I first met you, you were head of residential real estate at the bank and you've certainly talked about your industry-leading efficiency ratios in that business as well as the Number 1 spot on the J.D. Power Customer Satisfaction Survey. But on the loan growth and revenue side, the numbers have been more middle of the pack of play. I've been of the view that some of that is voluntary on your part.
Given your retail experience, it'll be mistake for me not to bring up the topic of housing. I'm not going to talk about it with everybody, but certainly from your seat, it seems like the bank is taking their foot off the gas in residential real estate lending in Canada. Is that true, and how do you view some of the responses that we've seen from government and regulatory officials?
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David McKay, Royal Bank of Canada - President & CEO [22]
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I would say it's not true, because we've gained market share in residential mortgages. So I would say when you aggregate our total on balance sheet (multiple speakers).
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Unidentified Participant [23]
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From a growth perspective, I mean.
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David McKay, Royal Bank of Canada - President & CEO [24]
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Percent growth, yes, absolutely, but we're starting from the highest base by a long shot. We're two times the size of many of our competitors. So we're still gaining market share in mortgages, but not in Vancouver. So that's a conscious choice we've made, which came out in the analyst call and our quarterly earnings call.
We certainly feel much more comfortable about Toronto given the diversity of the economy, the number of new newer wins coming in, the household formations, the manufactures, I think it's a more stable market to invest in right now. So you're seeing some of our market share gains in Ontario, which is a very strong economy in Toronto but not in the western part of the marketplace. So I think that has been conscious.
The other area that we've consciously not done as I talked about is subprime auto and subprime auto leads to prime auto and therefore I think where we've lost over the set of overall volume premium is primarily in the auto marketplace and we've been much more careful about amortizations in doing subprime, we've made some tough choices on spread and on ROEs in that business that have cost us volume and it's just trying to manage to our hurdle rates, and not our target 18% plus but even hurdle rates in that business at times.
So I think they're smart business choices and they pay off over time, but in the short term, those are a couple of businesses where we've given up volume to others. The credit card businesses perform exceptionally well, gaining share. Business deposits is performing exceptionally well, gaining share. Our investment business, phenomenal long-term fund sales and significant share, Number 1 in the industry, not just the banks, but in all of the industry in long-term fund sales, numbers I look at monthly.
So I think our weakness, as you pointed out is auto. Our weakness is business lending, right now, where we're struggling with some of the structures and the pricing, we're still Number 1, but we've lost share there for two straight years and we're not happy about it. But again, we're watching a risk in this cycle. So I think there's two areas that (inaudible) there is opportunity to do a little better, but the key core areas, cards, mortgages, business deposits, consumer deposit, investments are all really strong and have good momentum.
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Unidentified Participant [25]
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Mortgages, you would say, it's more picking your spots based on where you see (multiple speakers).
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David McKay, Royal Bank of Canada - President & CEO [26]
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Yes, we've gained share in mortgages, but it's not [at West] and we're not over, we're under indexed in Vancouver as you heard we say, we're about on average index and it looks like in Alberta, at 16% of our portfolio in Alberta from what we can tell is, I think banks are in that 14%, 15%, 16% range, so we're roughly somewhere there. So, I think we're -- that's the volume story. We can do a little better but you got to be careful right now.
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Unidentified Participant [27]
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Alright. As usual, we've --
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David McKay, Royal Bank of Canada - President & CEO [28]
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We've gone way over it.
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Unidentified Participant [29]
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There is no shortage of stuff to talk about every time we get together. So, I appreciate you being here and thank you for your time.
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David McKay, Royal Bank of Canada - President & CEO [30]
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Thanks.
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