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Royal Bank of Canada (RY) Q3 2019 Earnings Call Transcript

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Royal Bank of Canada (NYSE: RY)
Q3 2019 Earnings Call
Aug. 21, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. Your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to RBC's 2019 third quarter results conference call. Please be advised that this call is being recorded. I would like to turn your meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.

Nadine Ahn -- Head, Investor Relations

Thank you, and good morning. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer. Then we'll open the call for questions. To give everyone a chance to ask a question, we ask that you limit your questions and then requeue. We also have with us in the room Neil McLaughlin, Group Head of Personal and Commercial Banking, Doug Guzman, Group Head, Wealth Management and Insurance, and Doug McGregor, Group Head, Capital Markets and Investor and Treasury Services.

As noted on slide 1, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. With that, I'll turn it over to Dave.

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David I. McKay -- President and Chief Executive Officer

Thanks, Nadine, and good morning, everyone. Thank you for joining us this morning. Today, we reported record quarterly earnings of CA$3.3 billion, largely driven by strong results in our retail and wealth management businesses. Our market-related businesses also performed well considering challenging market conditions during the quarter. We continued to maintain a premium ROE of 16.7% and a very strong capital ratio of 11.9%, giving us flexibility to fund strong organic growth and return capital to shareholders. I'm also pleased to announce a CA$0.03 increase to our dividend, bringing our quarterly dividend to CA$1.05 per share.

Before moving to our results, I want to touch on the macro environment. Rising geopolitical risks and trade tensions are having an impact on both business and market sentiment worldwide. This uncertainty is manifesting itself in downward trends in global interest rates. While there are risks to the outlook, current economic conditions in our core North American geographies remain solid, with unemployment near multi-decade lows and a continued resilience in the Canadian manufacturing sector.

Also, a recent report finds that Canada admits the largest number of skilled immigrants in the OECD, a contributing factor to both economic growth and household formation. On Canadian housing, we are seeing more balanced supply/demand conditions as policyholders appear to have engineered a soft landing. We're seeing positive developments in key markets, including a return to growth in Toronto and a healthy Montreal market. As the largest of the big five Canadian banks in Quebec, we are participating in the resilient growth of the economy, leveraged by the collaboration of our employees across the province in all our business segments.

Furthermore, Canada has become an attractive technology hub, attracting top talents and investment dollars, including demand for office space. We are seeing large corporations opening their global AI headquarters in Canadian cities. A recent study ranked four Canadian cities in the top 20 for tech talent in North America.

So, against this backdrop, I want to update you on our business segment performance. Canadian banking reported record earnings this quarter, underpinned by strong client-driven volume and revenue growth. At our Investor Day last year, we shared our story of how does a market leader grow. For RBC, that's to create greater value for our clients.

Not only have we grown, but we accelerated our growth. We are leveraging our scale to grow market share and thrive in this period of secular change. Over the last few years, we've made significant investments in our digital capabilities, including MyAdvisor and NOMI. Our active mobile user base increased 17% year over year to 4.3 million this quarter, and we added over 1 million active mobile users over the past two years.

We also continued to build out our sales capacity, adding over 300 client-facing experts in our retail bank over the last year, including mortgage specialists and investment advisors. Our consistent volume growth reflects Canadian banking's franchise strength. Since the end of 2016, we have added combined loan and deposit account balances of over CA$100 billion.

With RBC Ventures, we continue to move beyond banking. As part of a strategy, we recently acquired Smart Reno, a platform to enhance the home renovation experience of Canadians. We now have 17 ventures in market in areas ranging from home search to supporting newcomers to Canada. We also recently launched Ampli, a new loyalty platform with over 20 partner brands, and while early days, we expect this and other ventures to further differentiate RBC, strengthen partner relationships, and drive further client acquisition for the bank. We've seen strong growth in the number of registered RBC Ventures users, and similar to last year, we will provide an update to our Investor Day targets in our upcoming Q4 disclosures.

Our growth in credit cards remains strong, and above the industry average. This is a testament to the value our clients get from our unique offering. We are also seeing increased momentum in our mortgage portfolio, benefiting from additional sales capacity and new digital tools. We remain prudent on our new mortgage underwriting, with FICO scores in line with our existing portfolio.

In business banking, our strong performance has been driven by a focus on high-growth, high-return sectors and regions, while operating with a consistent risk framework. Our success has been underpinned by multiyear investments in top talent, cash management solutions, and technology. We are excited by the potential of new capabilities for our commercial clients, including RBC Go Digital. This new initiative with Microsoft provides a suite of turnkey technology and financing solutions to accelerate our clients' digital transformation.

Another part of our capital deployment strategy has been our journey to expand our portfolio of digitally enabled capabilities to reimagine the role we play in our clients' lives. This quarter, we acquired WayPay, a fintech start-up to help our business banking clients save time and money with a secure and simple solutions for their accounts payable processes.

Turning to wealth management, where we also reported record earnings this quarter, we generated over CA$3 billion of revenue for the first time in the segment, reflecting both market appreciation and net sales. Our clients continue to choose our broad range of products and advisory services in this challenging market environment. Our leading distribution network and strong performance versus industry benchmarks has resulted in 50 basis points of Canadian retail market share gains over the last 12 months. This is a significant accomplishment in an industry with CA$1.6 trillion in AUM. In fact, RBC global asset management has added over CA$10 billion in long-term Canadian retail net sales since the end of 2017.

The rest of the industry experienced aggregate net redemptions over the same time period. We have also continued to invest in our industry-leading Canadian wealth management platform, and we expect to continue to outgrow the market, having added close to 30 new competitive hires this year alone.

Our U.S. wealth management business also generated record earnings this quarter, as we continued to invest in both our U.S. private client group and City National businesses. We have scaled our core businesses organically with both U.S. wealth, AUM, and CNB loan growth up double digits from last year, and we expect strong growth to continue as we add client-facing talent, including seasoned financial advisors and sales colleagues.

As part of this, we expanded our commitment to serving the financial needs of our City National clients by adding to our sales teams across geographies. We also recently enhanced our services to entertainment clients with the acquisition of FilmTrack, a leader in intellectual property rights management. This builds upon our acquisition of Exactuals.

Our insurance business delivered strong results, highlighting the importance of our diversified business model. This segment continues to generate high ROE earnings with a strong and diverse client base and has developed long-term relationships with our other retail franchises.

Investor and treasury services had a challenging quarter, impacted by difficult market conditions. Despite secular industry headwinds, we are increasingly focused on markets and products where we can provide the most value to our clients. We will continue to find opportunities to drive efficiencies in this segment.

On to capital markets, the segment generated solid earnings of CA$653 million despite a challenging market backdrop that saw lower client activity in global equities. Also, a reduction in global fee pools impacted investment banking fees.

In contrast, fixed income trading revenue was solid across all regions, and we are also driving increased collaboration across our capital markets businesses. For example, RBC Capital Markets acted as M&A advisors and provided committed debt funding to Sinclair Broadcast Group in support of its announced CA$10 billion acquisition of the Fox Regional Sports Network.

Overall, we delivered a solid quarter, and I'm proud to scale momentum we have built in our core retail businesses of Canadian banking, wealth management, and insurance. We are well positioned to continue providing value-added advice and service to our existing clients, while attracting new clients with our market-leading capabilities across our segments. We are committed to balancing our investments to continue creating value for our clients and shareholders, yet we will not lose sight of our focus on disciplined cost management and prudent growth.

Before I end my remarks, I'd like to recognize Doug McGregor, as we announced this morning that Doug has decided to retire next year after 37 years at the bank. There will be more opportunities to recognize Doug, but I wanted to take this moment today to sincerely thank him for his immense contributions to RBC. As our investors know very well, Doug has played a pivotal role in growing RBC Capital Markets from being the Canadian market leader to also being a top 10 global investment bank, and under his leadership, our client relationships are strengthened, our competitive positioning is improved, and we've attracted and retained some of the best talent in the industry. Most importantly, Doug has led with strong judgment and integrity.

I'm pleased that Derek Neldner will assume the role of Group Head, Capital Markets on November 1st, and he will join our group executives. Derek is currently Global Head of Investment Banking and has been with RBC Capital Markets for over 20 years. He brings a deep experience and a strong commitment to our clients, which positions him well to lead this important business.

In addition, Mike Bowick has been appointed President of RBC Capital Markets, effective November 1st. Mike will report to Derek Neldner, and will continue to lead the global markets business and treasury market services operations. I'm also pleased that Doug Guzman, Group Head, Wealth Management and Insurance, will assume leadership for investor and treasury services, effective November 1st. Francis Jackson, CEO of Investor Services, will report to Doug. With that, I'll now turn the call over to Rod.

Rod Bolger -- Chief Financial Officer

Thanks, Dave, and good morning, everyone. Starting on slide 5, we had strong third-quarter earnings of CA$3.3 billion, up 5% from last year. Diluted EPS of CA$2.22 was up 6% year over year. Before I walk you through the segment results, I want to update you on our progress relative to the cost management guidance we provided last quarter. Given lower interest rates and the expectation of interest rate cuts, we are prudently focused on driving efficiencies and managing costs.

This quarter, expense growth slowed to 2.3% year over year compared to 6.6% in the first half of the year. About three quarters of our expense growth was from investments in transformation, as well as front-office and salesforce staff, so that we remain well positioned to continue to increase market share. We continue to drive efficiencies which create opportunities to invest in growth. We reaffirm our guidance from last quarter and expect lower expense growth in the second half of the year.

Turning to slide 6, our CET1 ratio improved 10 basis points to 11.9% as internal capital generation was partly offset by organic RWA growth, the unfavorable impact of pension and other post-employment benefit obligations, and share buybacks. In addition to our dividend increase, we bought back 1.9 million shares this quarter for a total capital return of CA$1.7 billion, or nearly 50% of earnings.

Going forward, we expect the combined impact of IFRS 16 adoption, securitization, and counterparty credit risk will impact our CET1 ratio by approximately 25-30 basis points in Q1 2020, which we expect to fully absorb through capital generation, and we remain well capitalized to absorb the incremental domestic stability buffer increase of 25 basis points, which comes into effect October 31st, 2019.

Now, moving to our business segments on slide 7, personal and commercial banking reported earnings of CA$1.7 billion. Canadian banking net income of CA$1.6 billion was up 8% from a year ago. This quarter, we saw strong volume growth across many of our products. Residential mortgages grew 6% year over year, as we continued to gain market share through increased originations and client retention. Business loan growth was up 10% year over year. Growth has been across most segments and sectors, with notable momentum in small and midmarket commercial businesses.

As Dave spoke to earlier, deposit growth was also strong this quarter, up 10% across both business and personal accounts. In particular, we saw an increase of 16% in personal GICs and deposit business growth of 9% as clients shifted toward deposits in response to macroeconomic uncertainty. Our net interest margin of 2.80% was flat to last quarter. Going forward, we expect NIM to potentially drop as much as 4-5 basis points over the next year if the current interest rate outlook and market pricing holds.

Expenses were up 5% year over year due to higher staff-related costs as we added client-facing employees and increased our investment in technology. Operating leverage in Canadian banking was 1.7% this quarter and 1.1% year to date. Adjusting for last year's gain related to the reorganization of Interac, year-to-date operating leverage for Canadian banking was 1.4%.

Turning to slide 8, wealth management reported record earnings of CA$639 million, up 11% year over year. Global asset management revenues were up 12% year over year. This was due to higher fee-based revenue on higher AUM, driven by market appreciation and net sales. Excluding the prior year's loss on an investment in an international asset management joint venture, revenues were up 6%. Canadian wealth management revenue was up 8% year over year as a result of higher fee-based revenue driven by higher fee-based assets from solid net sales from referrals, strategic hiring, and market growth. Our non-U.S. wealth management efficiency ratio of 66.3% was down from 68.5% in Q3 2018, improving 220 basis points, or 90 basis points if you exclude the previously mentioned impact of the prior year's loss on an investment in GAM.

In U.S. wealth management, revenue was up 6% year over year in U.S. dollars, driven by strong 15% loan growth at City National and higher fee-based revenue in our U.S. private client group. City National continued to generate strong growth in net interest income, up 14% year over year, with pre-provision, pre-tax earnings up 15% excluding last year's gain related to the sale of a mutual fund product and its associated team.

Deposits were up 6% year over year, and we're confident that our wide range of deposit initiatives will enable us to support the strong and prudent loan growth at City National. Last quarter, we stated that we expected NIM to be range-bound, adjusting for an 8-basis-point gain from recoveries on legacy loans this quarter. Given that U.S. 10-year bond yields declined a material 95 basis points since our last call and the Fed's recent 25-basis-point cut, City National NIM is likely to tick lower. However, we expect to continue to drive strong net interest income, driven by double-digit loan growth.

Moving on to insurance on slide 9, net income of CA$204 million was up 29% from last year, reflecting increased favorable investment-related experience and new longevity reinsurance contracts. This was partially offset by higher disability and life retrocession claims costs and favorable reinsurance contract renegotiations in the prior year.

Moving on to investor and treasury services on slide 10, earnings of CA$118 million in the segment were down 24% year over year. I&TS was impacted by lower client deposit margins, driven by spread tightening. We saw reduced client activity in our asset services business and lower funding and liquidity revenue, driven by lower realized gains from the sales of security compared to the prior year, as well as declining rates. We continue to actively manage our cost base. As a result of these efforts, costs decreased 1% year over year, and we will continue to assess and act on efficiency opportunities.

On slide 11, capital markets earnings of CA$653 million were down 6% year over year as industrywide headwinds and lower client activity impacted revenues. Corporate investment banking revenues were down, primarily due to lower loan syndication activity and M&A across the industry. Despite headwinds of declining fee pools, RBC rose to 10th in the global lead tables for the fiscal year to date. Global markets revenue was down 4% year over year amid a challenging market backdrop for both equities and fixed income trading.

As you may recall in Q3 last year, equities had a strong quarter, in particular with one outsized trade. On the other hand, credit trading was higher this quarter on positive mark-to-market on investment-grade as well as credit spread tightening. Looking ahead, our investment banking pipeline remains strong for the remainder of the year. In conclusion, we are pleased with our strong results this quarter, driven by growth in our retail businesses and our market-dependent businesses, despite industry headwinds. With that, I will turn the call over to Graeme.

Graeme Hepworth -- Chief Risk Officer

Thank you, Rod, and good morning, everyone. Starting on slide 13, our total PCL on loans was CA$429 million this quarter, equivalent to 27 basis points, and was comprised of CA$399 million in provisions on impaired loans and CA$30 million in provisions on performing loans. PCL on impaired loans decreased by CA$36 million or 4 basis points from last quarter, mainly due to lower provisions in Canadian banking. PCL on performing loans was CA$30 million this quarter, driven mainly by portfolio growth in retail, offset by seasonal credit quality improvement in the cards portfolio. We did not materially change our macroeconomic forecast this quarter, so while there was some modest impact at the segment level, overall, this had a neutral impact on our allowances. On a quarter-over-quarter basis, PCL on performing loans increased by CA$24 million from last quarter.

I'd now like to provide a bit more detail on three of our businesses. In Canadian banking, PCL on loans of CA$329 million decreased by 8 basis points from last quarter, largely due to the higher provisions we experienced in Q2 in our commercial lending portfolio. In wealth management, PCL in loans decreased by CA$3 million from last quarter, reflecting relatively stable credit trends at City National, and in capital markets, PCL on loans increased by CA$29 million from last quarter, mostly due to provisions on performing loans of CA$3 million this quarter compared to a release of provisions of CA$21 million last quarter, reflecting the change in macroeconomic forecasts noted earlier. Provisions on impaired loans were largely related to one previously impaired account in the industrial products sector. Additionally, impaired loans in the oil and gas sector contributed to provisions this quarter.

Turning to slide 14, gross impaired loans of CA$3 billion decreased by 2 basis points from last quarter, largely due to higher repayments in Caribbean banking and higher write-offs in Canadian banking. Growth of the Q2 new impaired loan formations declined in our retail portfolio, but more notably in our wholesale portfolio. We continue to see new formations in the oil and gas sector, as oil and gas prices remained under pressure this quarter, but as expected, the trend is moderating.

Overall, we remain comfortable with our exposure to the sector. It represents only 1% of RBC's loan book, is governed by borrowing bases and sized to the proven reserves of the borrowers, and it provides good protection against credit losses. The remaining new impaired loan formations in our wholesale portfolio were spread broadly across sectors and geographic regions.

Turning to slide 15, our Canadian retail portfolios were generally stable, both in terms of provisions and new formations this quarter, notwithstanding the solid growth Dave noted earlier. This not only reflects strong economic fundamentals, but also the strength of our underwriting standards, which gives us confidence that our portfolio will be resilient throughout the credit cycle.

In closing, we are pleased with our overall performance this quarter, which remains in line with our previous guidance as we continue to benefit from the diversification of our portfolios, both in terms of geography and industry as well as our prudent approach to risk management. With that, operator, let's open the lines for Q&A.

Questions and Answers:

Operator

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press *1 on your telephone keypad. To cancel the question, please press #. Please press *1 at this time if you have a question. There will be a brief pause while participants register. Thank you for your patients. And, the first question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Director

Good morning, guys.

David I. McKay -- President and Chief Executive Officer

Good morning.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Director

I had a first question on credit. I heard, Dave, your prepared remarks, and in terms of the credit commentary, but when I look at credit -- and, tell us if this is not the right way to think about it -- wholesale loan growth over the last two years has been 26%. Gross impaired loans over that two-year period have gone up 14%, but the actual allowance for these losses has gone down to CA$458 million from CA$509 million. So, just talk to us in terms of why you feel good about this wholesale credit Canada and within wholesale banking relative to U.S., and why these metrics are OK, or should we -- is it a fair pushback that why are reserves not much more higher for this portfolio? I'll start with that.

David I. McKay -- President and Chief Executive Officer

I'll make a couple of macro comments, and I'll ask Graeme to go through the reserving exercise and why we're comfortable. From a strategic perspective, as we've talked about, our loan book and our wholesale loan book is diversified across geographies globally, our hold levels are smaller, particularly in the risk-leveraged finance, often, senior positions in the capital structure, so we've managed this book very prudently over time with great diversification, disciplined hold levels, disciplined structure, and we've seen this book perform well.

You referenced the drawn loan growth versus RWA loan growth and authorization growth, which has been significantly slower in the last couple years. So, yes, while the draws have -- given some of the bridge facilities we put on that we disclosed, and Doug or Graeme can give you more color if you like on that, but certainly, we've been prudently managing our risk-weighted asset growth and our authorized exposure growth in the business. So, yes, we remain confident in business model and how we've managed it going into what looks to be somewhere near the end of the cycle. As far as the appropriateness of our reserves, I'll ask Graeme to make a few comments.

Graeme Hepworth -- Chief Risk Officer

On reserves in general, I'll start with a couple points. Certainly, we look at -- I'll start with stage 3, 2017. We certainly saw very low levels of new formations and recoveries in those periods, and so, I would say that's more of a cyclical low, and I think what we've seen in 2019 is a bit of a reemergence of credit in that space, and so, the impairments we saw in the first half of the year -- although moderated now -- will reflect some more normalization in these three allowances.

Stage 1 and 2 is certainly driven by our macroeconomic forecast. In the wholesale space, that can be more volatile. Factors like equity markets and oil prices, interest rates, all play factors into that. As I said in my speech, we didn't change our macroeconomic forecast this quarter, so we didn't make a material change in wholesale. On the capital markets side, we saw fairly neutral growth in the portfolio there, so that was an additive, whereas in City National and commercial, we did see growth there, and our baseline reserves would grow with that.

So, each quarter, I would just continue to reiterate the guidance I provided previously. The baseline here is that these stage 1 and 2 reserves will grow in line with the growth of the loan portfolios, and that will be adjusted for both credit quality and our macroeconomic forecast. More recently, as we've seen interest rates come up, that has near-term benefits to the stage 1 and 2 and near-term expected allowances, although I wouldn't say that's a signal of a healthy medium-term macroeconomic environment. So, we're always balancing all those factors when we're establishing our reserves, and overall, this quarter, as I said, we grew our reserves largely in line with the growth of our portfolio overall.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Director

And, just on that very quickly, Graeme --

David I. McKay -- President and Chief Executive Officer

Let me ask you to requeue because we've got half an hour and probably lots of question. Can you requeue for the follow-up?

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Director

Sounds good.

David I. McKay -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Meny Grauman of Cormark Securities. Please go ahead.

Meny Grauman -- Cormark Securities -- Managing Director

Hi. Just a question on that stage 1 and 2 reserving. That's new for all of us. Just understanding the fact that macro factors positively impacted Canadian banking this quarter, and acknowledging that GDP actually came in better than expected in Canada, but we have all of these uncertainties that have really bubbled up over the last few months -- trade uncertainties driving a lot of negative sentiment. I'm wondering -- does that ever come into play in terms of determining those stage 1 and 2 provisions, or is that not -- are these not issues that feed into that calculation?

Graeme Hepworth -- Chief Risk Officer

No, absolutely. The macroeconomic forecast and those kind of uncertainties absolutely play into our reserves. I think as we've outlined, we consider five different scenarios in our reserving process that look at positive economic environments to much more severe and negative economic environments, and we weight those accordingly. You referenced the trade uncertainty. The trade uncertainty is not a new story in my mind here. This is something that we've been reflecting in our forecast and our reserves since we initiated IFRS 9, effectively, and yes, the news headlines change there week to week on that front, but concern starting last year around USMCA, and now more recently as we focus more on China-U.S. trade tensions -- all these stories have been factoring into our considerations and our forecasts, and how we weight those scenarios, and ultimately establish our reserves. So, absolutely, it does play a significant role in how we consider our loan loss reserves.

Meny Grauman -- Cormark Securities -- Managing Director

Thank you.

Operator

Thank you. The next question is from John Aiken from Barclays. Please go ahead.

John Aiken -- Barclays Capital -- Analyst

Good morning. I was hoping you might dive into the rationale for having industry and treasury services now roll up into Doug Guzman. Are we looking for incremental synergies between now and these combined operations, or is this more of an administrative change that you felt was appropriate?

David I. McKay -- President and Chief Executive Officer

I think we certainly look at our opportunities to put a different lens and a different set of eyes on the business, which is always helpful as a different perspective, so yes, we're looking for Doug to build on the work that Doug McGregor has done and the team has done, and take this business, and look at the strategic context of it, and try to -- as we've talked about -- improve on the performance based on a number of challenging market conditions. We've got secular change around the impact on our asset management clients, we've got changing rate environment, we've got changing client preferences around FX and others, so there have been a number of secular winds coming across this business that I thought given Derek coming into a big role, it was an opportunity for us to ask Doug Guzman to step up and take on a challenging business right now.

John Aiken -- Barclays Capital -- Analyst

Great. Thanks for the color. I'll requeue.

Operator

Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead.

Steve Theriault -- Eight Capital -- Principal, Financials Research

Thanks very much. Rod, I'm interested in your comments around margins. You said that you can see 4 to 5 basis points of NIM downside over the next year. Can you flesh that out a bit more in terms of how many rate cuts that envisions, if any? I assume it does. Does it assume a steeper curve if we do get cuts at the short end? And, I'd love if -- I don't know how doable this is, but I'd love to get some color -- you talked about City National ticking lower. Is that a material tick lower? I think most importantly, giving your rate expectations and outlook on the all-in margins would be super helpful, to the extent that's possible.

Rod Bolger -- Chief Financial Officer

Okay, great. Thanks, Steve. I'll take those in order. On the Canadian banking margin, I hedged a little bit because I said we could potentially drop as much as 4 to 5 basis points, and part of that is the violent swings we're seeing in the interest rate-forward markets in Canada. I mentioned how much the U.S. is down versus our last call. Canada, just on the five-year, is down 50 basis points versus three months ago, when we were on this call.

So, that's going to change between now and the end of next year, and certainly, what the forward curves are saying right now is 2.17 rate cuts by the end of our next fiscal year, and a Canadian rate of 1.20%. Whether that's going to come to pass, we'll see. So, we factor all of that in. There's pricing, but we do have -- a large portion of our Canadian banking book is five-year fixed-rate mortgages, so we tend to be slower when rates are going up in terms of NIM expansion, and then slower on the way down when rates are cut, and that provides a nice hedge for us from a revenue perspective.

Typically, as rates come down, you also see deposit growth accelerate sometimes, as we saw this quarter, and we would expect that to continue and give us more favorable funding as well. So, there's a lot of puts and takes, and competitive pricing can accelerate or decelerate depending on how volumes are and whatnot. Lately, volumes have been strong, and we've seen very strong volumes on a year-to-date basis ending Q3. So, that's why the impact is somewhat muted in Canada for our Canadian banking business.

In City National, the rate changes have been even more violent, if you will. I mentioned 95 basis points on the 10-year. You look at what the forward markets are saying -- 4.2 cuts by the end of next year, down to a Fed effective rate of 1.08%. We certainly don't run our business as if that's a given, but we do manage the business if that comes to pass, and again, it's the same dynamics. That's a very strong deposit book. We had good growth this quarter. We have a lot of opportunities there. We've made strategic investments in technology within our entertainment business, multiple acquisitions so that we can again get that payments business, and keep those core deposit accounts, and that helps us from a funding mechanism.

But, if you look back at when the last time Fed funds were at those levels, that was at the end of 2017, and NIM in City National was substantially lower than it is now from a net interest margin percentage level. Now, we also benefit from having double-digit loan growth, and we expect that to continue, so that is going to give us the benefit of having an upward trajectory to our revenue targets and numbers despite a falling-rate environment, so we think we're well hedged for that.

On the enterprise issue, a lot of that is mix, and so, if you look year over year, yes, we're down, but across most businesses, we're up, and so, it's a mix issue, and so, we have seen our repo business grow at a faster rate than our core lending businesses in City National or Canadian banking, and so, that puts downward pressure on the NIM at the top of the house, although the individual businesses are up, and that's how we prefer to look at it -- individually -- because the product issues have very different risk/return profiles.

Steve Theriault -- Eight Capital -- Principal, Financials Research

Thanks a lot. I'll requeue.

Operator

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young -- Desjardins Capital Markets -- Analyst

Hi, good morning. I guess I was a little surprised by the level of deposit growth you have shown in Canada, just given your market share. And, I know you gave what the growth was in GIC, so I'm hoping you can just unpack what demand in notice deposit was, and maybe unpack a little bit about what drove that. I know you've given some targets around Ventures and 5 million active users converted to Royal Bank clients over a period of time. It sounds like you're going to give us an update to that target, but maybe you can weave in how successful you've been in terms of capturing those clients as well. Thank you.

Neil McLaughlin -- Group Head, Personal and Commercial Banking

Yeah, thanks for the question. It's Neil. I guess there's a number of factors. 1). We've talked in the past about clients looking for security and yield, and that really driving swap-out of some long-term fund volumes into the GIC, so that's part of it. On the savings accounts is the mass retail savings customer. Those are about mid-single-digit in both registered and nonregistered. And then, to your point on new client acquisition that we've referenced in the past, we have seen good year-over-year gains over the last couple years in terms of our ability to acquire that core deposit customer, and those balances are about the same range -- that mid-single-digit. So, that's really on the personal side.

On the business side, similar type of trend. We're seeing strong double-digit on the GIC portfolio, basically for the same reason, and then, fairly equal growth as we look at interest-bearing and non-interest-bearing. A lot of good things going on in the portfolio right now for the small business customer, which is really that profile for the non-interest-bearing deposit balances within our business account franchise.

And then, Rod had mentioned some of our commercial clients are just keeping some of that capital at the ready, trying to steer through some of this uncertainty, so I think that would be a walkthrough of the different categories.

Doug Young -- Desjardins Capital Markets -- Analyst

Anything on the Ventures side that you can -- in terms of how you're tracking in terms of how you're converting clients over into deposit accounts?

Neil McLaughlin -- Group Head, Personal and Commercial Banking

Yeah. So, in terms of Ventures, obviously, we're in the early innings on the strategy. We're feeling that we've got some good green shoots in terms of the connectivity with clients across the Ventures portfolio. The ultimate end goal is to convert these into -- the best case would be core deposit account holders.

One of the early successes has been in the small business space -- however, in our venture called Owner -- and we've seen thousands of customers, as they register that new business through a streamlined digital process, take up our deposit account for business customers, so that's probably our best example.

David I. McKay -- President and Chief Executive Officer

And, as we mentioned in my speech, we'll give you a more fulsome update in Q4 around the waterfall, our new acquisitions, and how the ventures are performing, but we're pretty excited about the strategy.

Doug Young -- Desjardins Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Sumit Malhotra from Scotiabank. Please go ahead.

Sumit Malhotra -- Scotia Capital -- Analyst

Thank you. Good morning. I want to start with investor and treasury services, please. So, we've certainly seen the earnings contribution -- the revenue contribution -- move lower for the past number of quarters. When I look back at some of the reasons that you folks have highlighted -- spreads on some of your high-quality liquid assets, securities dispositions, deposit margins declining -- all of this, in some form or another, does speak to the impact of lower rates, which, as you pointed out a couple times on this call, has only gotten worse in the last little while. So, when you think about this run rate that we're at right now, or this quarter's earnings of CA$120 million, is there any reason to believe that given some of these factors, this number isn't going to face continued pressure in the near term? Should that be the expectation here, or are there a few factors that you think are more transitory?

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

No, I think... When you look at the performance of the business this quarter, about two thirds of the underperformance is around the factors that you just mentioned. It's around what we call the treasury services side of the business, which is investing deposits and our HQLA, and as a result of lower rates, flat yield curve, et cetera, it's become more challenging. So, I expect that's going to continue in the near term, although I guess we've had a little bit of relief from that over the last several days.

On the other side of the business, the investor services side, some of the challenges have been around customers internalizing FX flow or using less of our securities lending businesses, and actually, grinding on core fees. That part of the business and those challenges we're managing by repositioning to a different client base, more private equity in Europe, and we're going to reposition our cost base as well, so we're working on that real-time. So, I would say on the core investor services side of the business, I'm less concerned about that. On the treasury services, we have some headwinds that we're just working through.

Sumit Malhotra -- Scotia Capital -- Analyst

And, the treasury piece -- Rod's given some context on this call for what the new rate environment means for Canadian banking and City National, but Doug, taking your comments into account, I'm hearing that that treasury piece is going to reflect this rate environment, perhaps further so, based on where long bonds have moved.

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

Not so much long bonds as short rates. This portfolio has a duration of less than two years, and so, things can change a little more quickly depending on where rates go. We're repositioning the book, and we'll try to manage through it.

Sumit Malhotra -- Scotia Capital -- Analyst

Maybe I can ask one on Citi National, or requeue?

David I. McKay -- President and Chief Executive Officer

Requeue, please.

Sumit Malhotra -- Scotia Capital -- Analyst

Thanks.

Operator

Thank you. Your next question is from Robert Sedran from CIBC. Please go ahead.

Robert Sedran -- CIBC Capital Markets -- Managing Director

Good morning. Dave, in your prepared remarks, you made a few comments about acquisitions that I guess are really to support organic growth in some of the smaller things you've been doing, but the last time you talked about M&A at the bank level, it was more about how valuations were frothy and perhaps not very interesting. I'm curious -- with valuations having come off and your CET1 ratio now all the way up to 11.9% -- if the idea behind bank M&A may be something that's more interesting today, or if you still think there's plenty of organic runway and you'd rather focus on buybacks and organic.

David I. McKay -- President and Chief Executive Officer

Yeah, it's certainly the latter. As we expected, valuations have come off -- not only have valuations come off, but I think with the large merger that we advised on expectation between BB&T and SunTrust, expectations of premiums have also come off. So, relative valuations are better. Having said that, expectations and uncertainty around the future interest rate environment and economic growth have increased in line with that.

As you've seen, the strong organic growth that we have in Canadian banking and City National in the U.S. -- in U.S. wealth management, that's executing on their secure credit strategy, executing on their advisory platform strategies, driving AUA and AUM -- we're really happy with the organic growth or market expansion. So, first and foremost, we have invested our growth in the United States, and we're expecting to see that growth and produce that growth with the elevated NIE base that we have, so I think that's first and foremost. And, we're still going to be very cautious.

I think relative valuations will continue to come off in the U.S., and therefore, we are thinking about the right strategic opportunity. I've talked about some of the challenges that U.S. midsized banks face around funding growth and around technology platforms, but we must think those issues through and solve for those issues at the same time. So, there are a number of moving parts that are continuing to drive us to focus on organic growth with a return of capital to shareholders and driving a premium ROE and premium TSR from that strategy first and foremost.

Robert Sedran -- CIBC Capital Markets -- Managing Director

So, something in that 50% total shareholder return payout ration is what we should expect?

David I. McKay -- President and Chief Executive Officer

No, I think returning capital via share buybacks, obviously, with our CET1 ratio, is important. Given that we're toward the end of the cycle, we're being very conservative with our payout ratio, around 45%, and I wouldn't expect to see that creep up in the short term, given the cycle that we're in. So, no, I think largely through share buybacks would be our primary choice at this point.

Robert Sedran -- CIBC Capital Markets -- Managing Director

Okay, thank you.

Operator

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi -- BMO Capital Markets -- Managing Director

Hey, thanks. A bit of a detailed question. I'm just looking into -- maybe for Graeme, I don't know. But, when you provide subsector or industry breakdowns of your wholesale book, three categories stand out to me that have been driving the year-over-year growth -- actually, quite a bit of the growth, going back to probably the last three years. They are what you refer to as financial services, financing products, and investments. Financing products are double from last year, financial services are now second largest to real estate, investments up CA$5-6 billion.

Can you just talk a little bit about what sort of business would this be, which one of your business segments would it be in support of, maybe a little bit around the geography, the type of RWA that it attracts, and ultimately, the types of returns that these types of businesses are generating? I think that three of them collectively are up about CA$50 billion year over year, and now account for about 20-21% of the wholesale loan book. I think of them as really -- at least, based on the qualitative description, these are leveraged industries, so are you lending to the shadow market? Is that how I should be thinking about it?

Graeme Hepworth -- Chief Risk Officer

This is Graeme. I'll maybe start on that and turn to some of my business partners here to provide a few more thoughts on the growth. If you look at something like financial services, this would be a lot of our activity that we do with funds, for example, so that could be anything from a private equity fund, to mutual funds, to other fund providers like that.

The balance of that -- and, a lot of that growth over the last few years has been in what we call capital call loans, and in terms of business attribution, we see that across three of our businesses. CNB -- City National -- has a core fund client base that they support, capital markets has likewise, and I&TS -- through, obviously, their fund servicing platform -- has strong relationships with funds. Capital call loans are the product that all those businesses have been actively using over the last few years and growing. The quality of that asset base and client business is very high quality. It is investment-grade credit quality. It is a well-structured product for us, so it's a product that we're quite comfortable with the credit quality there, and the growth has been nice from a risk perspective.

The financing products would typically be related to our securitization business, and so, that would be more of a capital markets construct. Investments, likewise, would also be a capital markets construct, typically. And so, that's where those businesses tie in. Assume that capital call loans would probably be the product that's most notably driving growth within those, but from a risk perspective, it's been a product that we've been quite comfortable with. I might turn it over to Doug to comment on some of the business drivers.

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

In terms of the capital call loans, some of the customers that we're funding -- and really, funding commitments from private equity investors or sponsors. A recent example where we've been putting more on would be Blackstone in Europe, as an example, and as Graeme pointed out, the funding is low-leverage and high-quality, and so, we're fine there.

In terms of the rest of the loan book growth in the investment bank, our real estate book continues to grow, and similarly, we have a very diversified portfolio across Canada, the U.S., and Europe, and it's largely to larger investors like Cornfield and Blackstone and other large financial sponsors. That book is in quite good shape. I don't know what else to add, Graeme.

Graeme Hepworth -- Chief Risk Officer

One of the things I'd bring up on that is not to confuse -- I think sometimes, there's some confusion that the financial services piece in the capital call loans that we make to the private equity sponsor that Doug's referring to is somehow leveraged lending. That's not what this is. This is providing loans to the actual funds themselves, not to the levered companies that they may be purchasing. As I said, these are loans that are secured by the capital call that they have on their LPs, and these are high-quality investors that these funds have, and we really look through to that and that security to secure our position here, so I just wanted to clarify that because we've had quite a few questions coming on that before.

Sohrab Movahedi -- BMO Capital Markets -- Managing Director

And, geographically, this would be broad-based, or would it be mostly -- most of the growth would be coming outside of Canada?

Graeme Hepworth -- Chief Risk Officer

Mostly, I would say the U.S. would be far and away the largest source of growth and portfolio there, and a more modest portion would be out of Europe. Very little out of Europe.

Sohrab Movahedi -- BMO Capital Markets -- Managing Director

Thank you very much.

Operator

Thank you. Your next question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca -- TD Securities -- Analyst

Good morning. Real quickly, just on -- similar type of question, but more on U.S. commercial real estate. Is there something you're seeing on the horizon that would cause that to decline substantially from quarter to quarter, because I think it's down 8%, or is that mostly currency?

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

Yeah, that book hasn't been declining on the actual secured property mortgages. We have been taking some loans off against some REITs where we made loans into revolvers years ago, and we haven't seen the kind of fee performance that we expected to see, so we have been de-marketing a bit around some of the REIT book. But, on the real estate mortgage book for large customers, we continue to grow out. The whole capital markets loan book growth, though, we're managing into a low- to mid-single-digit number, and some of that growth is occurring in real estate in the U.S.

Mario Mendonca -- TD Securities -- Analyst

But, there's no message here on credit in U.S. commercial real estate?

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

No. I'm not particularly fond of small, enclosed shopping centers, but away from that, we're just fine, and the performance of that book is really good.

Mario Mendonca -- TD Securities -- Analyst

Okay. And, just a real quick question -- Dave, if I could go to you for a moment -- and, I know there's a lot of moving parts here, and the environment has changed in the last three months substantially. Are you able to provide an outlook for total bank earnings growth? You normally do it in Q4. I'm asking you in Q3 because there have been so many changes. Are you prepared to talk through them?

David I. McKay -- President and Chief Executive Officer

There are a lot of moving pieces that we talked about in our prepared speeches and have come up in the Q&A this morning. We start with significant momentum in the business, and I don't think that should be lost on anyone. The market share gains across our core retail franchises are significant, volume growth is significant, the revenue growth is significant, and these tend to be momentum businesses. Our core economy -- despite all the questions around the volatility, and trade agreements, and Brexit -- still remains strong; employment remains strong. So, we have good momentum, but we have headwinds coming into that momentum, as all banks face. We have a couple of businesses that -- particularly investor services and treasury services -- that are underperforming that we're going to try to turn around, but we're carrying good momentum into these headwinds.

Having said that, we always talk about medium-term objectives and meeting medium-term objectives. For us, we'll talk a little bit more in Q4 how we see that balance coming out, but things are slowing, as you can see across a couple of dimensions, but combining the organic growth with ability to return capital to shareholders, we're pushing around our medium-term objectives, and I think that is where we sit right now. We feel good about the performance of our core businesses, and with good pipeline in capital markets, as we talked about, we're building a solid client franchise with long-term clients. I think that's our objective, and we feel good about our momentum.

Mario Mendonca -- TD Securities -- Analyst

That's helpful, thanks.

Operator

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine -- National Bank Financial -- Analyst

Good morning. Just a clarification on City National. Excluding the accretable yield, it looks like margins were down 13 basis points quarter over quarter, and I just want to clarify what you mean by the margin will be range-bound -- from that level, I assume. And then, on ITS, just to circle back to that business, you gave a good explanation of what two factors are weighing on that. How big is the negative carry, if you will, in the treasury business relative to just the customer slowdown and the investor services business, and how big is that liquidity portfolio?

David I. McKay -- President and Chief Executive Officer

That's two questions. So, Rod, quickly, color on NIM, and then we'll give the ITS answer, and then we'll try to take another couple questions.

Rod Bolger -- Chief Financial Officer

Quickly, on NIM, we ended 2017 in the high 2s -- so, 2.96%, ended 2018 at 3.41%, hit as high as 3.56%. As you rightly adjusted for the FDIC loans, we're down to about 3.35% now. So, I think I said range-bound last quarter when rates were 95 basis points higher. This quarter, I tried to highlight that we expected to shift down. And then, I would just suggest that if you believe the forward curve for the Fed is going back down to the levels that we saw in '17, we could see it slip below 3% at the end of next year, if that comes to happen. As Dave highlighted, the U.S. GDP has been strong, and so, do you believe that the Fed is going to cut four or five more times between now and next October? It's hard to say exactly where that NIM is going, but the trajectory is lower, and it does move much more aggressively than our Canadian banking NIM. On I&TS, I'll turn it to Doug real quick.

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

The HQLA portfolio is above CA$50 billion. It's invested in the U.S., Europe, and Canada. What else?

David I. McKay -- President and Chief Executive Officer

Is there a negative carry?

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

No, there's not -- well, there's not a negative carry, but we're not seeing much spread between our cost of funds and return on the HQLA, which is the challenge.

David I. McKay -- President and Chief Executive Officer

We'll take another couple questions if we can.

Operator

Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.

Scott Chan -- Canaccord Genuity -- Director

Good morning. Just going back to Canadian P&C, the overall portfolio growth is pretty solid, but if I look at personal, HELOCs out of personal -- which I assume is mostly auto -- has been pretty flat for a while, so perhaps maybe give us an update on what you're thinking on those portfolios and the outlook going forward.

Neil McLaughlin -- Group Head, Personal and Commercial Banking

Thanks. It's Neil. We've talked about the HELOC. There has been a trend of customers rolling out of the HELOC, looking to lock into the mortgage segment. That continues. In terms of the other personal, it's a combination of what we originate through our branches in lines of credit and unsecured installment loans, and then, our auto segment -- two thirds direct through our branches, and about one third in auto.

We've actually seen a return to positive growth in the branch-originated credit through some work we've done in our sales force and the underlying credit strategies. Auto would be -- we made some changes to the strategies there, just making sure we liked all the credit segments we were picking up. We had a bit of a push to get some growth, and we're seeing that flatten out coming off of about 2% last quarter, down to about 1%, so those would be the two segments.

Scott Chan -- Canaccord Genuity -- Director

Perfect. Very helpful. Thank you very much.

David I. McKay -- President and Chief Executive Officer

We'll take one more question.

Operator

Thank you. And, the next question is from Mike Rizvanovic from Credit Suisse. Please go ahead.

Mike Rizvanovic -- Credit Suisse -- Analyst

Good morning. I have a question for Doug McGregor on the U.S. cap markets business. Clearly, a challenging quarter, but I'm just looking at the longer-term trajectory in revenue in U.S. dollars. It hasn't really moved much the past couple years, and I realize you've made some changes in the business with respect to where you're allocating capital, so maybe a two-part question. First, are there more changes on the way in terms of where you're competing, and second, do you have a timeline in mind for when you might start to see revenue growing again, or is this something -- should we be maybe thinking about the cost side to grow the bottom line?

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

The revenue pool globally -- at least, according to Dealogic -- is down 16%. Leveraged lending is down double that, which is a decent business for us. I think in the context of the other global investment banks, we've actually performed pretty nicely here, and as Dave said, actually, the backlog in the investment bank, which has really been the challenge, is the investment banking fees for this year -- really, globally. In Europe, the U.S., and Canada, it's been slow. The backlog, actually, is really quite good. So, in terms of large deals that are going to transact over the next two quarters, we're in much better shape than we were coming into this quarter or coming into the calendar year. So, I would say depending on how the trading environment goes, I think we'll be probably doing better going forward.

Mike Rizvanovic -- Credit Suisse -- Analyst

Thanks for the color.

David I. McKay -- President and Chief Executive Officer

I'd like to thank everyone for attending today's call and for your questions. The themes are -- this is a record quarter for RBC at CA$3.3 billion, driven by really strong client volumes, revenue from our retail businesses, Canadian banking, Caribbean, wealth management Canada, wealth management U.S., insurance. We had a couple of challenging outcomes in investor and treasury services, but overall, we feel good about the client-driven momentum and feel ready to challenge some of the headwinds that are coming at us. Thank you for your questions, and we look forward to speaking again in Q4. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.

Duration: 63 minutes

Call participants:

Nadine Ahn -- Head, Investor Relations

David I. McKay -- President and Chief Executive Officer

Rod Bolger -- Chief Financial Officer

Graeme Hepworth -- Chief Risk Officer

Neil McLaughlin -- Group Head, Personal and Commercial Banking

Doug Guzman -- Group Head, RBC Wealth Management and RBC Insurance

A Douglas McGregor -- Group Head, Capital Markets and Investor and Treasury Services

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Director

Meny Grauman -- Cormark Securities -- Managing Director

John Aiken -- Barclays Capital -- Analyst

Steve Theriault -- Eight Capital -- Principal, Financials Research

Doug Young -- Desjardins Capital Markets -- Analyst

Sumit Malhotra -- Scotia Capital -- Analyst

Robert Sedran -- CIBC Capital Markets -- Managing Director

Sohrab Movahedi -- BMO Capital Markets -- Managing Director

Mario Mendonca -- TD Securities -- Analyst

Gabriel Dechaine -- National Bank Financial -- Analyst

Scott Chan -- Canaccord Genuity -- Director

Mike Rizvanovic -- Credit Suisse -- Analyst

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