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