Royal Bank of Canada at TD Cowen Inaugural Financial Services Summit Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Mario Mendonca - TD Cowen - Analyst : Yeah, and thank you to everyone who is joining us for this session as well. This is a important time for our banks. There have plenty of quarters, Graeme, where you haven't even got a question or very -- you can get a lot of airtime. I think you now know you are among the most popular people on these calls. Maybe let me just start with a broad -- first, a broad question first. What are the big risks that are top of mind to you today and does the reduction in rates, the 25 basis point cut, does that mean anything in the early going?

Question: Mario Mendonca - TD Cowen - Analyst : Let's talk about the mortgage market. It's everybody's favorite topic if you're a Canadian, particularly you're a Canadian in the financial services sector. I've held the view that mortgages won't be the problem, but mortgages certainly are causing a problem because we're seeing some of this pressure in, say, personal loans, credit cards. But let's focus on mortgages first. Let's talk about how Royal's mortgage -- mortgages or the variable mortgage, how they're different from your peers and what the trend has been like? What's some of the experience in the variable rate side? Acknowledging that we haven't seen the big reset yet, we haven't seen the big renewals, but you've got some experience because interest rates have been high for some time now. So let's talk about the mortgage market with an emphasis on the variable rate mortgages.

Question: Mario Mendonca - TD Cowen - Analyst : So I've always argued that mortgages are such a big part, an important part of the Canadian Bank balance sheet that we have to get that right. The banks have to get it right. They can't sit on their hands. The regulator can't sit on their hands. Borrowers, mortgage borrowers, can't sit on their hands. So again, it's not that I'm dismissive of the risks on the mortgage market. It's just that the consequences of getting it wrong are so bad that everybody's very proactive when it comes to getting the mortgage market right. But now let's switch gears into the part you were getting into a little there, which is the unsecured market. And maybe not purely unsecured, but let's talk about that category that we call personal loans. I'm thinking auto loans, lines of credit, installment loans, credit cards. I think for Royal, that might be 10% or 12% of your Canadian balance sheet. Would that be right?

Question: Mario Mendonca - TD Cowen - Analyst : Yeah, it's about 10% to 12%. I can sort of endorse that. I've done the work myself to make sure that I've got that number right. And the reason why I bring that number up, 10% to 12%, is because it's not 50%. But that category of loan loss is really starting to move. We've seen that go for -- this is industry stats, from 70 basis points or so a year ago to 125 basis points today. So help me think through, what's your best feeling on this? Could this continue to ramp up materially over the next few quarters, maybe the next year? That's what a lot of us are grappling with on the sell side and for investors. How much longer will this continue to move higher before the benefit of rate cuts calms things down? Can you help me think through that?

Question: Mario Mendonca - TD Cowen - Analyst : Let's flip over for a moment. So another bank -- we've just been through reporting season, another bank sort of surprised the street with uncomfortably high losses in their corporate and commercial book. The gross impaired loan formations across a number of loan segments or sectors were elevated. And it served as a reminder that these things are hard to predict on the corporate commercial. It's very different from retail. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 06, 2024 / 1:10PM, RY.TO - Royal Bank of Canada at TD Cowen Inaugural Financial Services Summit So what I like to get from you now is, how do you feel about the big sectors, the big segments of your corporate loan book, commercial real estate, wholesale trade, financial services? Are there any segments that are meaningful to Royal that you would draw our attention to over the next little while?

Question: Mario Mendonca - TD Cowen - Analyst : I'm going to move away from credit risk in a moment, but I want to make sure I think I understand what you're suggesting here. On the retail side, mortgages, these loan to values are great. We're probably not gonna see a lot of losses there. Unsecured personal losses will continue to move higher. Whether they peak in Q4 or Q1 or Q2 or later will depend on the direction of interest rates and unemployment. And the issue on the corporate commercial side, you would have us focus more on the US than Canada. And I think the answer there is, unless there's a hard landing, you're suggesting that what we'll see is idiosyncratic episodic losses but not a hard cycle, unless, of course there is a hard landing in the economy, in which case those losses could move higher. But for now, you'd point us more to episodic, idiosyncratic losses. Is that a good summary of the credit story?

Question: Mario Mendonca - TD Cowen - Analyst : Okay. So let's focus on something a little different. Every time a bank does a big US deal, I always brace myself for something to go wrong because it's different down there, and it's not our home market. But the last deal Royals done is this HSBC Canada, and from the outside looking in, that integration looks like it was quick and effective. And it certainly showed up that way in Q2. Now it's just one quarter. But from your seat as the Chief Risk Officer, were there any interesting or unique risks that you had to cope with in this acquisition of HSBC Canada?

Question: Mario Mendonca - TD Cowen - Analyst : Okay. We've got a minute left. But I do want to just touch on one quick topic. Can you give us any indication as to Royal meeting the requirements of the consent order? Are there any issues outstanding? Are you essentially done? Does it feel good?

Question: Mario Mendonca - TD Cowen - Analyst : Thank you, Graeme. And we're going to end it there. Thank you to Graeme and everyone who joined us. Appreciate you taking time today.