Royal Bank of Canada at National Bank Financial Financial Services Conference
Mar 30, 2017 AM EDT
RY.TO - Royal Bank of Canada
Royal Bank of Canada at National Bank Financial Financial Services Conference
Mar 30, 2017 / 02:45PM GMT
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Corporate Participants
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* Mark Hughes
Royal Bank of Canada - Chief Risk Officer
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Conference Call Participants
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* Gabriel Dechaine
National Bank Financial, Inc. - Analyst
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Presentation
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [1]
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Okay, I'd like to welcome our next presenter Mark Hughes from Royal Bank of Canada. He has been with the bank since 1981. I want to make sure I got that one right.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [2]
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36 years.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [3]
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And then was recently named Chief Risk Officer in 2014. And a few things happened in between those two dates
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [4]
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The fourth year doing this.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [5]
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So appreciate you coming to Montreal and attending our conference. And I'd like to kick things off with, and I asked the last presenter this question, but as a Chief Risk Officer you are much more involved in these things.
A year ago we were all panicking about oil and gas, or I shouldn't say a year ago, 2015. And then 2016 turns out to be not as bad as expected. And now we are starting to see recoveries on these oil and gas loans.
Are you surprised by this outcome? And are you not only surprised, but are you thinking we are out of the woods at this point?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [6]
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Thank you for having me, by the way, and good morning everyone. We certainly have seen recovery. Obviously, a $50 or so price is a lot better than $30 or $20 or wherever the downside could have been.
It's not $100, it's not $80. So there is still room to try to get back to where we were.
But $50, I think, is an area where it has stabilized, the companies. You are seeing, obviously, now some M&A activity that's been going on. Some of the stronger players are looking to grow.
I think you won't really get all the way back until we start to see some of the capital expenditure programs kick back in again. We are starting to see, I think, some greenshoots on that regard. So I definitely have a much more positive view today.
I don't view it anywhere near as it would have been in 2015 or 2016. But we still have a little bit of a ways to go to get back to where we were.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [7]
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And if we see a return to $30 oil or something like that for whatever prices, were there changes or adjustments made to the portfolios within the past year that would make us, I guess, insulate you more from a risk standpoint than what the case was two years ago?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [8]
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I think definitely the companies that have survived and have gone through this they've either restructured or they survived well are coming out of this healthier. Their balance sheets are healthier. I think we've said in the past in some of our commentaries there is a bit of a difference between a US company and a Canadian company and we operate very much in both.
US companies may hedge a bit more or historically hedged a bit more, but were a little bit more leveraged. Canadian companies didn't hedge as much but were maybe a bit less leveraged. In both cases I think you are seeing that their financial position is less leveraged today than it would have been.
And so they are, I think, in a better position. If we had to go back down in price they are in a bit better position to survive and continue to sustain themselves. The guys that were really weak I think have been either taken out or bought or replaced.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [9]
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I think if I recall correctly some of the pressure on your oil and gas book wasn't necessarily, I guess, real pressure. It was the outcome of the shared national credit review where you were pressured to take allowances higher.
Is there, and maybe we can start with what the shared national credit is, but the process is ongoing. Is there any deep dive in any particular portfolios under the SNC review this year?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [10]
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So the SNC review is a little bit of a tricky answer for your question. Technically it's supposed to be confidential and I'm not supposed to say what the answer is. But what I would say, and perhaps to give you maybe a bit of a clue that's in the public domain, is the OCC does publish twice a year a view on their view of credit in the United States.
I think the last one was December-ish and the two usual suspects were there, which was leverage lending and oil and gas. Leverage lending was portrayed as because of the heightened standards and discipline that been in the market for the last few years they saw some positive developments in that market, and in oil and gas I think they felt that they had gotten on top of the issue with the actions that they were taking a year or so ago. So I'm not exactly answering your question but hopefully giving you a little bit of a clue as to how I think they think.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [11]
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Okay. And then on the, I guess, the indirect side, things are getting better on the direct energy exposure side. It looks like things aren't getting worse on the indirect, side and when I say indirect I mean consumer portfolios and things of that nature.
It looks like credit card delinquencies have started to taper off. Should we start to see PCL improvement as a result of that? Or are you still somewhat guarded on your expectations for consumer credit performance?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [12]
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Certainly in the oil patch it is --
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [13]
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Canadian --
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [14]
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-- still a little bit more elevated than it was before and what we are seeing in the rest of the country. I think as there was a bit of a lag for the second-order impacts to hit there is going to be a bit of a lag in the second-order impacts to come down. But, again, we are seeing, I think, positive perspectives there.
Unfortunately, I think we are still seeing unemployment in that area being a little bit higher than it was for the rest of the year. That I think ties into that capital expenditure point that I made a bit earlier. If we start to see more capital expenditure I think we will see better employment statistics, which will then feed better into some of the more second-order impacts.
But definitely the concern, if you like, has gone. It's now into if there were issues how do we deal with our client and give them solutions to keep going.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [15]
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Other than the low oil and gas price causing loan losses to go up, there was also a capital impact. So as credit quality deteriorates the Canadian RWA models, which are sensitive to credit quality, increase the capital consumption of your loan book.
Have you quantified what the impact of credit migration was over the past eight well two years? And if there was an impact, what's the likelihood we start to see some of that quality, credit quality improve translate into lower capital intensity?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [16]
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The number, I guess, that I have off the top of my head is a 12-month sort of number for our corporate oil and gas exposures would have been about a $2.5 billion RWA increase over that period, which on a $450 billion total bank is still pretty small. As I think we tried to say during all of the crisis of the two years, while we are certainly a substantial player in the oil and gas industry, the way we have such a diversified portfolio oil and gas is still a reasonably small number.
And while the impact is there we, obviously, have some customers that have been adversely affected, and we have to try to find solutions to help them. In terms of the overall condition of the bank it's the diversified aspect of it is really what carries us.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [17]
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So yes, not a material number. Can you remind me what your credit outlook, for Royal and for other banks loan-loss levels were lower than expected in Q1. Could we see lower PCL ratios this year versus last year at a consolidated level?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [18]
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I definitely would think that the PCL levels this year will be lower than last year. That's always, I guess, we all should knock on the table or something, that's always barring something actually occurring.
But the circumstances that I'm seeing at the moment would put us back in, I think, the phrase I have been using before the oil and gas crisis was we were in a benign credit environment. So that's in the mid-20s, I guess, in terms of PCL. In the oil crisis we were in the mid-30s.
We're back, I think, down under 30, barring anything changing. Our credit portfolios whether they are on the retail side or the corporate side we feel pretty good about them at the moment.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [19]
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Mortgages. There's been a wide divergence in Canadian mortgages, big divergence in growth appetite. Some banks double-digit growth, other banks lot lower than that.
You are in that camp. And Dave McKay has signaled some caution, let's say BC mortgages in particular, he is cooled off on that market, my words.
What are you seeing that's causing this concern and that might be different for other banks? I guess why are you more conservative?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [20]
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I think we have a set of standards, a set of discipline around what we feel is good credit for us, what are the type of borrowers that we are happy lending to, what are the LTVs that we are happy to lend to, what are their repayment characteristics, etc. And we try to stick to that discipline. And that still allows us to have very positive growth.
Maybe not the same as some others how the others do their growth. I will let you ask them that.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [21]
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I will.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [22]
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But in terms of ours I think we are pleased with our growth base because we are actually sticking to our guns in terms of what we think is the right type of business to be doing for RBC.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [23]
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Have you quantified the exposure to offshore buyers in your book? And why, presumably why would you deemphasize that type of client?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [24]
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Our exposure to what, I guess, I would say is non-resident Canadians is very low, in the sort of 1% or 2% type of range --
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [25]
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Of the mortgage book.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [26]
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Of the mortgage book. So it's not really an area that we've focused on. We do actually focus on a segment called newcomers, but well over 90% of that particular segment are actually permanent residents in Canada.
They have Canadian credit history. They have been here for a few years, maybe not 20 years or 30 years, but they have been here for a few years to establish that credit quality. And the newcomer market is the one that we think has continued opportunity for growth because there's a lot of immigration people coming here, and we don't really focus on non-resident foreign investors.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [27]
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How does a market like Toronto's or previously Vancouver's play into the appraisal process? So when you see prices going up 20% a year and appraisals, based on my experience anyway, they look at comps.
So if the house down the street sold for X and then the next one is I which is X+1, whatever, it just feeds into itself. The appraisal becomes, I guess, a little bit more fluid. How do you, have you made any changes to the appraisal process and how do you deal with a market like Toronto's?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [28]
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We haven't made any changes. We have already in existence if there are circumstances of high appreciation, etc., that type of adjudication would get passed up to a more senior adjudicator to consider the circumstances. But in terms of what the decision is that we actually would make it is still really about the credit ability of the borrower.
What is their cash flow? Can they actually afford the house at the price they are paying? What is the interest rate that they are going to end up paying? What are their other cash flow obligations?
And so their debt service capability. That is really what is the crunch in terms of how we make a decision.
While the prices are definitely going up and it is causing a lot of angst, I think, for first-time homebuyers because they can't really necessarily afford the deposit or whatever or they are getting outbid in a lot of circumstances because it's a very active bidding type of market, the people that we are actually lending to are still meeting our lending criteria in terms of their cash flow ability to pay us back. And so we still feel, even in a very tough market like Toronto still feel pretty good about our ability to do good growth there with our good customers.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [29]
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So a lot of this growth is coming in the uninsured market, right, with average prices in Toronto over, I think they are over $1 million now, by definition is uninsured. And we've seen that trend pretty steadily for the last few years where there has been very little growth in insured mortgages, lots of growth in uninsured.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [30]
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And that's I think really where the challenge is for the first time homebuyers because at that level the deposit that they are required to put up is now substantial. It's not $25,000, it's not $50,000, it's hundreds of thousands of dollars. And if I think if the Ontario government is going to do anything about it, it is really trying to solve that type of community of residents in their province, how do you keep the first-time homebuyers at the table?
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [31]
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So what we saw in Vancouver was the stamp tax, foreign buyer tax and it's back on the table in Toronto potentially and there is a positive outcome to that. It does chill out the frothiness in the market. But then there's maybe unintended consequences where you start to see weakness in construction activity if volumes just aren't there.
How do you think about your exposure to say the building sector and then the ripple effect of maybe some job losses in that sector, which are as a percentage of total Canadian employment well above historical standards? How do you think about that exposure?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [32]
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Absolutely. We have limits. We have, obviously, the individual builders that we talk to we have ratings on their credit quality.
We have rules around the type of development we have, so if we are doing condos how much is pre-let before we would lend money, etc. So, again, I think in that regard it is making sure you stick to your discipline before you actually are putting money on the table.
I think the other thing that I am observing, though, is while Toronto does have cranes and condos, etc., we are seeing a lot of building outside of Toronto, too. And so there is, even if Toronto itself can slow down places like Milton, etc., there is still a lot of housing growth and building construction going on in those locations. So Ontario, the constructors may end up not doing everything in downtown Toronto, but there is still a lot of opportunity, I think, in Ontario at the moment.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [33]
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So IFRS 9, it's coming and in June we are going to get an update from the CBA. Now if I look at broad, I guess, the makeup of the bank and what can make it more sensitive to IFRS 9 from a volatility standpoint of their provisions, geographic mix and duration of the loan book and also existing position. So the expectation is that the allowance that you have today is going to have to be bigger under IFRS 9.
So if I had a bank that had a low ratio of allowances to total loans versus a bank that had a high ratio of allowances to total loans, I would expect the one with the low ratio to be more impacted in a negative way from IFRS 9. And that's actually where you are at that end. What am I missing in that narrative?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [34]
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So I think three things maybe I would say. First of all, the low level of where we are today is because of a fairly substantial buildup in impaired loans over the last couple of years related to the oil and gas market. I think we are expecting, as we talked about at the very beginning, to see some resolution in that.
So as impaired loans come down our ratio goes back to more normalized levels. So I am not actually that concerned about that ratio point.
Another observation I would make on IFRS 9 is, I think over an economic cycle the level of provisions that we would take should be pretty much the same that we have experienced over recent years. What I think IFRS 9 will do is that the volatility of those provisions will change fairly dramatically and that you will be taking them earlier and you will be taking perhaps a steeper curve up and then presumably, assuming the regulators allow it, a steeper curve down.
We did a little bit of a model, for example, with oil and gas and so we looked at what happened, what would have happened if we had had IFRS 9 in place a couple of years ago with oil and gas. We would have actually taken larger provisions a couple of years ago then we took. That would've actually not replicated our actual experience, so we would have taken more provisions than we actually would have needed to take, and we would today be in a reduction of those provisions cycle to bring us back down to where we are today.
So higher up and faster down. That is what I think is going to happen. But over the cycle the actual aggregate amount I think we will see pretty much the same.
The third thing I would say is in terms of the overall impact on, say, November 1 you do have to, I think, take into account we do have a deduction on our balance sheet already for expected loss that goes against CET1 capital. And that's about $1.4 billion. And I think that number will actually be a fairly significant mitigant to any day-one impact --
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [35]
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Transition impact.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [36]
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-- as to how we go from where we are now to November 2, if you like.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [37]
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Fair enough. And so the volatility issue that you were talking about earlier in the oil and gas, that was helpful. Essentially would be looking similar to what we saw from US banks.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [38]
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Yes, I think that's exactly right.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [39]
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Okay. Now this isn't the first accounting change --
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [40]
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Probably won't be the last.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [41]
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I've seen more than I'd like to, frankly. But the pattern is tends to be the same. As analysts we focus on it, spend a lot of time writing about it and waste of a lot of ink, frankly, and then it happens and then a few months later life goes on.
This one feels a little bit different in the sense that if it you think about the impact on your earnings and potential volatility that it can create that that can have a real impact on a stock's valuation. More volatile earnings lowers the valuation.
So could there be a real world impact from this accounting change in the sense that it could affect your decisions on where you want to extend loans? Which sectors you want to be in? You might want to be you might not want to be as big and oil and gas under IFRS 9 or some other volatile sector.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [42]
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It's a great question and as we try to figure out what this is going to mean internally. I think and at the end I don't actually think it's going to change much for RBC for one critical reason, I think, which is over the last number of years that I have been in these type of jobs, internally as we are planning our years forward, are doing our business plan, our five-year outlook, etc., we actually do include expected loss in those plans today.
So while we don't disclose what those numbers are because we haven't been required to, we don't account that way, we actually have been making strategic decisions and resource allocation decisions on a go-forward basis already using not exactly the same accounting mechanisms but pretty close. So I don't think it's going to have that significant a strategic impact. And then, again, if I look at the oil and gas situation, so I did say we would have ramped up quicker, we have been long-time lenders to the oil and gas sector.
We like the oil and gas sector. We like our clients. We think we have a lot of experience there.
Just I think because we took faster and larger provisions on that ramp-up I don't think strategically we would have changed. We wouldn't have abandoned the industry. We wouldn't have said this time to shrink the industry because of this volatility.
I think we would plan for exactly what we did, which is we talked to clients, we tried to figure best solutions for them. We mitigated to where we could and we rode through it.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [43]
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So we are pragmatic. Canadian boring is beautiful.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [44]
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Well, I think it all comes down to do you plan? And I think we try to plan ahead, and it is pretty much a client business and you have to stick with your clients. You can't just drop them just because something is not quite right.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [45]
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Shifting to the US, you made a pretty important acquisition a couple of years ago and I don't think I've had a chance to ask you this. We focus on using the balance sheet, Royal's balance sheet to help National, City National, to help City National grow. What did you do on integration to align City National's underwriting standards to Royal's or were they already very aligned?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [46]
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First of all, I think City National is a great acquisition for RBC. You said in the intro how long I have been in RBC.
Almost every year I've been in RBC it is really about what are we going to do in the United States. And over the years we have looked at a lot of opportunities.
We did one a number of years back, didn't quite work out as good as this one. This one I think is really where we have hit the right buttons.
In terms of acquiring City National, we spent a lot of time on due diligence and I was personally involved in some of the due diligence. I had a large credit team that was down there. We went through their credit files.
We went through their credit processes. We went through how they delegated authority. We went through how they approved deals.
We went through the talent in their risk department, succession planning, talent management, that sort of stuff. And we came back with a really very positive sense of the bank. They really do understand risk.
They had quite a similar approach to risk to what we have at RBC. And it was really that cultural connection that I think made us all feel very good.
Since we have acquired them integration has, obviously, proceeded. All of the exposures that we currently have, they are aggregated. So if we have a client and they have a client we aggregate those exposures together and we make decisions based upon the aggregation.
All of our industries we have aggregated our exposures to industries and we manage it now on an holistic industry type of basis. They operate with delegated authorities from me in the same way that I have delegated authorities to the CRO in the UK or in New York.
If a particular transaction goes above those delegated authorities the transaction comes to either New York or Toronto. It gets an escalation very similar to how RBC has always operated. I do portfolio reviews with them to see the type of transactions they are doing if I haven't seen them on an escalation type of basis.
I've sat in on a number of their individual reviews where they have briefed their executive team. There is a lot of connection between the risk and return, why are we dealing with this client, what is the business we are doing with the client, who do we know at the client. It is a very people-orientated type of because it's a bit more of a focus on high net worth type of clients, and that's worked extremely well.
So I think the biggest challenge we've had is really we are undertaking CCAR in the United States this year for the first time. It's a private filing, next year it's a public filing. And they have to be they are part of that, they are part of the holding company we have down there.
In previous years they had done DFAST which is a smaller version. And so it has put some challenges on getting the right data into our CCAR models. But from my perspective at risk I couldn't be happier with what we've got.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [47]
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And what sort of a, more of a growth question, but what sort of, how much additional limits, sector limits and retention limits, things of that nature, how do those change?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [48]
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They haven't really changed that much actually. We have tweaked them a little bit higher, but they actually like the limits they have for the client level you have. So lending more money to the same client doesn't necessarily, isn't necessarily the right answer.
You lend the amount of money that is appropriate for the client and the client hasn't changed. The client is the same. So where we are seeing growth is not actually increasing limits, but it is just expanding the amount of deals they do.
So they have been able to reach some new clients. We have been able to have some synergy with our capital markets business where we have been dealing with some corporates. They can then deal with some of the senior executives of those corporates.
They offer some retail type products we weren't offering before so that we can join up the dots, if you like, in terms of the product offering. And that has worked out extremely well.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [49]
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So City National is in wealth, but then there is the legacy wealth business which has been restructured. And I assume that some of that restructuring was related to some of the losses we saw, I believe, in 2015 on, there was --
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [50]
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No, actually the losses I think you are referring to was actually on the international side of things outside of the United States.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [51]
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Right.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [52]
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But we have restructured in the United States, so I will keep on that. We've brought in new management. There is a new CEO of that business.
I think as you would have seen in the first-quarter results that we released, already we have seen quite a good turnaround. They have made some very good changes to how we operate, working a lot much more closer with the rest of RBC.
Before it was a bit of an operating a bit in isolation --
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [53]
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That was the issue, I guess.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [54]
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Exactly. And that mentality, if you like, has definitely changed. And we are very pleased with the progress that Michael Armstrong is the new CEO there, we are very pleased with what he is doing with the team.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [55]
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And it's a simplification of the footprint has also been a part of the --
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [56]
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It has. And just even some pricing changes and what you are focusing on.
Now with City National we can actually add some credit products to the type of brokerage business that they were doing. They were just essentially stuck on traditional brokerage business. Now we can actually be a little bit more of a full service to a client, that helps a lot, as well.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [57]
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FinTech, I have to ask the FinTech question. But I'm actually genuinely interested in, we focus on it on the PNC Bank and how are you going to capture new customers and --
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [58]
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How fancy is the phone?
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [59]
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And how it is going to make the bank more efficient. But how does FinTech play into the risk of function of the bank, and which is I'm sure a factor but one that we aren't paying attention to?
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [60]
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Technology, digitization, artificial intelligence, all are big buzzwords these days. Interestingly enough when I think about technology and risk, we actually have benefited, I think, from technology and the approaches quite a bit already over recent years. And maybe people hadn't quite realized it.
So what I think about in that regard is what do we do in risk? We actually adjudicate credit. Should we lend or shouldn't we lend?
In the retail bank we've actually had risk scoring models for a number of years now. So we will actually input data into the credit decision for the retail client and make those decisions.
We actually have data on where people live so we understand is there a location issue, so you want a mortgage but you are in a bad location. When there were fires and floods in places we were able to use that data with respect to what is our insurance liability through our Insurance business.
So we have actually as it turns out actually been using data analytics quite a lot. The challenge now I think is really how can we take it to the next level?
Technology is really just increasing more and more. So can we use that to create greater opportunity, greater knowledge. Some of the example is can we actually now turn it not just for credit adjudication but in terms of the cost of the process.
And in this regard, the AML world is in risk at RBC. So we look at many transactions every day. How much of the data analytics through technology can we use in artificial intelligence to actually speed up that process, speed up and identify what are the problem transactions versus what are not the problem transactions.
So I do see definitely a big wave of opportunity, but it is actually building on a foundation of risk data analytics that we have been using for a while now. And I actually think part of the reasons why we have had relatively benign risk metrics over the last number of years is because we've been able to benefit from the use of some of those techniques, which we wouldn't have had in say the last credit crisis in the 1990s. We wouldn't have had it in those days.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [61]
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So is there any reluctance to go to modern on the adjudication process? And what I mean by that is instead of looking at Beacon scores and debt service ratios, you are looking at how often does she go to Starbucks and how many checks bounce, da, da, da. All these nonconventional --
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [62]
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We are experimenting with all of that sort of stuff. If you on a credit card did you just buy a TV but you really can't afford it, or are you forgoing how much you spend on your food. And all that stuff can be a little big brother-ish, I guess, but the possibilities are there.
I think for me in the adjudication the area that I actually think is an opportunity is can I actually migrate it from the retail world into the commercial world and then into the corporate world. The corporate world at the moment is very a idiosyncratic, very individual from your credit decision.
But I think there's a lot of things that we could actually add in terms of data analytics that we probably don't take as much advantage of today that we could. So can I migrate through the rest of the bank some of what we do today. I think that's a big opportunity, as well.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [63]
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So ultimately better PCL ratios.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [64]
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Correct.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [65]
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But other than the credit metrics the risk and on the FinTech side, I think how do you avoid being the bank that is in the paper one day, customer data breach. That's a another big component of this --
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [66]
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Absolutely. And you are touching on an area of where does a risk officer versus a business opportunity, who gets to drive what? Because just really as simply as possible if I wanted to be truly to mitigate every risk I could possibly think of we wouldn't do a lot of that mobile technology, we wouldn't let people be dealing with Facebook or LinkedIn or all of those sort of things because they are all gateways to potential problems very, but that's not the real world.
So I have to be able to figure out how can we manage risk within RBC and still allow the customer to have that experience because that's the experience that they want. So in the regard it's what our technology people have to do is they have to build the right firewalls and the right boundaries, if you like, as to where can the bad guys get through.
So if they get through, if they steal someone's phone and they get a password where can they go with it and how do you protect the data once they get through the first door so they can't get through the second door, they can't get through the third door. You have to build those mitigations in or you just would not be able to compete in the world today of what our client expectations are.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [67]
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Well, thank you for that. I will just, is there anyone in the audience -- we do have one hand up there.
==============================
Questions and Answers
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Unidentified Analyst [1]
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(inaudible - microphone inaccessible)
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [2]
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It's a great question and from a guy who has been around for 36 years I am definitely not a millennial. But I do have two kids who probably count as that.
We are trying to spend a lot of time on innovation in risk management, just in risk management. The bank I think you've heard Dave McKay is a huge focus on innovation for the bank. But in risk management we spend a lot of time at universities with innovation challenges.
We actually had a team, four people, four students from Rotman in yesterday to my operating committee in risk management where they were presenting some ideas. We have hackathons where we try to stimulate the younger people in our group to come up with ideas what could we do differently.
It can't be from me trying to tell a young person how can we change they need to, they are sitting there at the coalface doing stuff every day. What can we use technology for to be either quicker or faster or better.
And the only thing I can do is actually give them an environment that stimulates them to put forward those ideas. And we try to do that a lot with either internally or with universities.
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Gabriel Dechaine, National Bank Financial, Inc. - Analyst [3]
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And on that note, Mark, thank you so much for your time. Great discussion.
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Mark Hughes, Royal Bank of Canada - Chief Risk Officer [4]
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Thank you very much.
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