Royal Bank of Canada (RY) Barclays 21st Annual Global Financial Services Conference (Transcript)

Royal Bank of Canada (NYSE:RY) Barclays 21st Annual Global Financial Services Conference Call September 12, 2023 3:30 PM ET

Company Participants

Nadine Ahn – Chief Financial Officer

Conference Call Participants

John Aiken – Barclays

John Aiken

[Call starts abruptly]

Ladies and gentlemen, we’re going to carry on. I’m very pleased to have meeting on CFO of Royal Bank. Thank you very much for coming back. Hopefully, we treated you well enough last year but…

Nadine Ahn

Yes. No, worked really well. So I decided to come back. Despite all the weather, Fashion Week, what else going on.

John Aiken

Nadine, I wanted to have your view in terms of the macro outlook because the questions that I get on the Canadian banks these days are less about the specifics operating of the banks and just basically what’s going on. So can you talk about what the bank’s view is for the economic outlook for Canada and the U.S. and tactically or strategically, how is the bank dealing with a bit of a bigger question mark than we usually have.

Nadine Ahn

Yes. I think that’s one of the things. There’s a lot of uncertainty. And that’s why it’s so important of the way we think about managing our business overall and the diversification of our business and our revenue streams to really think about that long-term view because you’re seeing so much ebb and flow in the near term and really think about how we manage our business overall through a cycle. So when you think about what’s happening from the macro environment, you’re starting to see the impact of rates happen through bringing down the inflation. I think both within Canada and the U.S., I mean we didn’t expect it to be a linear trajectory. So every time it bumps in a particular month, I think there’s a lot focus that that’s going to be at the time when rates have to move up again. But you’re starting to see it — starting to see the labor market slow.

In Canada, it’s a bit of a different construct just because you do have the strength of immigration. So while you’re still seeing job creation, you are seeing it not necessarily keep in line with what you’re seeing from the number of immigration and the inflow of a population into Canada. You’re starting to see wages come up. And so you’re starting to see that slow down. In Canada, you’ve seen the contraction in GDP. I think part of the difference between Canada and in the U.S. and it’s really a construct of how the slowdown is occurring. In Canada, we talked about a lot about, I’m sure we’ll talk a bit more about housing in the mortgage market. You’re seeing the credit price through a bit more quickly in Canada, it’s still sitting on a higher degree of savings. We’re still sitting about, in Canada, the benefit we have at RBC and being able to see that through our deposit franchise; Canada sitting about a surplus of 20% pre-pandemic levels. But you’re starting to see the mentality of the Canadian culture knowing that, that mortgage refinancing is coming, you’re starting to see a bit more slowdown in some of that discretionary spend. You’re starting to see some — but the lower cohorts are really holding on to that liquidity.

In the U.S., it’s a bit of a different construct. I think, in Canada, you’ve got the closed system. The liquidity is still saying on the balance sheet. In the U.S., the consumer has a different degree of resiliency, right? Because they’ve got that longer term of their largest debt. You’re sitting on the 30-year term mortgage, so you’re not seeing the slowdown as much through the consumer standpoint. You’re seeing it more from the contraction in liquidity in the market. And if you just talked a bit of the fact that [ph] come out really a reduction of the — not only the quantitative tightening but also the ability to take liquidity out of the market through the repo. And so you’re seeing the slowdown come more through the contraction of credit, the reduction in supply of funding as opposed to through the consumer. And so you’ve got a bit more of a challenge, I think, in the U.S., you’re starting to see the slowdown but it’s manifesting a bit differently.

And so then when we think about the bank in aggregate, we’re seeing that the strength overall of the consumer, we’re seeing that the reaction as it relates to credit. You still got the opportunity for the growth and we’re seeing, given our diversified model, where you think about whether we have it in — and we can talk a bit a bit more on the retail side but also across both our capital markets business, our wealth management business and you think that our exposure is in the U.S., really but we’ve had the advantage of being more on the capital market side and some of the things we’re doing there and the growth we’ve had in wealth management.

So I think in Canada, you’re expecting to see that slow down. That’s why we’re still forecasting that the anticipation that we will start to see the rates come down towards the latter half of 2024. And it’s starting to do with this job overall but due to the health of the consumer in Canada, the pricing through the credit more quickly, U.S., a bit more of a different dynamic in terms of how the slowdown is occurring.

John Aiken

And I’ll let the audience get into residential mortgages in terms of credit risk. But you touched on immigration in Canada as — it’s a very interesting dynamic. Can you talk about what implications that are for housing, residential mortgage growth? And if you’re able to talk about the underpinning conflict where there’s some populous movement about immigration not being supported with household builds?

Nadine Ahn

Yes. I think in Canada, it’s really two components, right? You touched on the fact of immigration, which is, for Canada’s growth story, be contributive to our GDP and it is really an issue as it relates to housing around supply-demand. And so that is keeping housing prices at a stabilized level. And so for people with equity value in their home, that’s a great thing. However, for those trying to get into the housing market, obviously, there’s an affordability issue. So that’s the socioeconomic issue. I think when you couple that with the fact that what you’re seeing on the liquidity side, you’re seeing in particular what we’ve noticed, it — the surplus liquidity that greater than 20% still sitting, that’s really sitting in the lower cohorts actually from both the FICO score standpoint as well as the balance size.

So you’re sitting with a higher degree of liquidity to start to think about managing that payment stream. When you think about the tail risk, if you will, around mortgage or housing risk as it relates to more banking sector than, the issue really comes down to what’s the creditworthiness of your book? What is the health of the balance sheet of the consumer? And I think we are entering the cycle where, in Canada, in particular, there was a disbursement of the stimulus through to pretty much the full stack. And so you’re sitting with a healthier consumer going into a period of increased cost as it relates to housing.

For our book, in particular, you’ve got a very healthy credit book overall. You have a loan-to-value ratio on average about 50%. You have a FICO score that’s north of 800. And so what you’re really looking about how are they going to manage that payment stream? And we’ve talked a lot about the different product constructs in Canada, in particular, on the variable rate side. For us, a larger proportion of our book is in fixed rate. For the variable rate side, there is 75% or so [indiscernible]. And what that means is we don’t have a negative [ph] in product. And as a result of that, we’ve had a lot of our clients, given that surplus liquidity to be able to pay down and/or be able to adjust their payments.

Then the question really is around the fixed book and that’s kind of a later evidence of whether we’re going to start to see how the credit plays down. And so if you think about, if rates do come down like are anticipated, for people, that’s about a 25% payment increase. If rates stay up, you’re talking about 35%. And what we’ve seen in addition to the surplus liquidity is we have seen some wage inflation.

So the question really is, how are we going to manage through this period and through to ’25 and ’26. And when you look at what that tail risk in particular for our book is, that’s — if you take [indiscernible] that’s about 1% of our book. So I think it’s manageable [ph]. Socioeconomic impact really comes down to the supply and demand. And I think one of the things that advantage in Canada as it relates to OSFI and our regulator is there’s a separation there on a bit of that state [ph]. It is not a political environment — their focus really on managing the safety and soundness of the financial sector as it relates to the risk of the mortgage product.

And so some of the things that you may have heard them talking about are really, are we happy with negative amortizing mortgages? Are we happy the fact that is that sending the signal through to the consumer? And so that’s where their focus is. The supply-demand question is a political one, right? And so I think what you’re finding is there’s been a bit of a mix between confusion of the socioeconomic, the housing supply/demand against the broader mortgage market. And really, they are two separate things.

For us, it’s going to be a question then also what does that mean from a volume growth standpoint. And I think we have the confidence, given our client base to continue have that premium growth overall and our ability to continue to widely aperture as it relates to our client acquisition, which has been quite strong. So, I think that’s — always to keep in mind those two dynamics. And I think if you think about what the actual risk is, as we look forward to the mortgage, I think it’s manageable. It’s not that you’re not seeing the impact of clients it is that they want to see it as it relates to slowing down the broader economy.

John Aiken

Thank you. So there’s very — and you ticked off all my question. So to change tax, I wanted to congratulate you on the Competition Bureau’s approval of the HSBC Canada acquisition and I’m not expecting to comment on this but from my standpoint, that was the highest degree of risk, not that I felt that it was a — likely to be denied but that to me now, the rest of the process is almost ticking boxes. But aside from that, can you talk about what — what prompted you to pursue HSBC? What does it bring to Royal? And whether or not — and because of the approval process and delays, what you’ve been able to do — when you had to — do to prepare for the acquisition and integration?

Nadine Ahn

I think the approval by the Competition Bureau was definitely a positive step forward in getting the regulatory approval. And I think that it just reflects the competition side of environment [indiscernible] the opportunity for our Canadian client base is quite significant. This is quite a coveted asset for us in terms of if you think about an opportunity to acquire an asset in your home market to be able to have the cost synergies, to be have the quality of assets with the type of credit discipline as part of our cultural overall, the ability to have connectivity to that global client base, which we’ve been already building a number of relations through in terms of we’ve talked about the importance of immigration to Canada.

And so this is something that is highly accretive for us, not just from a high ROE business. So upon close — will be immediately but also if you think about the synergized earnings to be able to take high-quality asset, bring it on to our systems and be able to have confidence that we still continue to have as it relates to the cost synergies.

So we’re looking to take out roughly 55% of HSBC Canada’s cost base, still delivering on what we communicated as part of the announcement around the $740 million related to the overall cost. And we’ve also got opportunities that we haven’t really been looking through the revenue synergies. It’s bringing products to Canada like multicurrency accounts. I think HSBC has been known globally in relation to that product. And now we’re able to bring in not only to our RBC clients but to continue to keep connectivity with HSBC clients, which is so important. They have huge strength in areas of finance [ph] and their global payment system. So those elements as well, we’re looking to bring to Canada. And what we get to bring in terms of you think about our product offering, HSBC Canada, in particular, given they were meeting under a global construct, get the same level of investment in Canada compared to products. So we’re able to bring the fact that we have the number one product in Canada as well [ph].

So it’s going to be highly accretive from an ROE standpoint, definitely looking to deliver on the earnings of $1.4 billion fully synergized that we talked about in the EPS accretion. So we’re really excited about it. It is a close and convert. And so this is something that is not necessarily done a lot, particularly with the bank, it’s the part of the conversations we actually have with the regulators on the timeline we’re working with. That is a lot of heavy lifting plus the fact that we’re doing some of these build-outs and forward enhancements.

So we are — the benefit of that is then that you converted it [ph]. And I make this on easy. I know our CTO would be quite ready to they might not given the amount. So it is required to lift from the organization, requiring a lot of focus but I think the benefits that you’re going to see is the fact that we’re able to capitalize on those much faster as a result of that [ph]. So this is hugely exciting for us, a lot of lifting but really happy to have landed this a strong well-run Canadian assets that we’re looking forward to?

John Aiken

[Indiscernible] the opportunities but I guess one of the downside from your area of expertise is the impact of the sense this is going to have a pro forma on capital. Now Royal has come out and stated that both close — CET1 ratio will be above 12%. Can you talk about your, I guess, comfort level in that statement? And what the normal rates should be for [indiscernible] that level?

Nadine Ahn

Yes. We’ve been building capital in anticipation. Obviously, the close happened early next year. We’re sitting in our 14.1% and have a huge degree of confidence given the strength of our high ROE [ph]. So we’re doing great in terms of our capital, internal capital generation. We do have the drip on in order to ensure that we get that capital level and we are still confident we’re going to be north of that 12% upon close. And then I think as it relates to further capital generation, as I mentioned, we’re going to be adding an accretive ROE business with the synergized earnings. And so given the strength of our other business and their premium growth, there’s no concern around our ability to continue to generate capital and then be able to continue to invest organically in our businesses, which is our primary area of focus.

We make sure that from a dividend standpoint. We grow that in relation to our earnings and manage within our 40% to 50% payout ratio. We are very prudently run organization. And so we do like to keep a buffer as it relates to capital in terms of time of stress. And then there’s always going to be opportunities to further look for M&A.

So as it relates to our outgoing trajectory OSFI has communicated that they are going to be moving us to the domestic stability [ph]. They’ve taken us now to 11.5%. So we are sitting well north of that, obviously, in anticipation of the acquisition. And so as we get to that point when they announce the remaining 50 basis points, I think we have full ability to build our capital given the strength of our franchise to be able to meet the expectations that we will keep the buffer over that just to manage prudently and continuing to make sure we have sufficient capital for growth.

John Aiken

I will pause at this point, you see if there’s any questions from the audience.

Nadine Ahn

My IR person has not allowed to ask the question.

John Aiken

I mean one of the — one of the things that your CEO, Dave McKay has been — it is the expenses, like headcount and quite open with the fact that’s potentially overshot in terms of what was being built out. Can you talk about what you as an organization are doing to control expenses? You’re talking about headcount reduction and what your goals and aspirations are and you think you can get back to a positive operating leverage before we get the synergies from HSBC?

Nadine Ahn

Yes. I think we’ve been quite transparent. We talked a bit about the uncertainty of the economy and there’s definitely been a lot of rapidity and movement as it relates not to just changes in the economy but also in terms of changes in the employment as well. We did operate in an environment towards the end of last year where we saw our attrition rates double from the normal attrition rate and almost previous triple from where we would have seen them at the — at the COVID modes. And you can imagine organization of this size — of volume [ph] by our clients. We were trying to keep up with that pace. In addition, building up our tech space as well in anticipation of having to bring on more resources for HSBC Canada and then everything, the music stuff kind of stopped, right?

The tech industry started slowing down and laying off. Employees sentiment quickly changed. People are more concerned about losing their jobs, then moving away from their jobs. And so we ended up having an overhang in terms of where we had deployed resources given some of the slowdown in the volumes that we anticipated from the mortgage side. So that was where we pivoted, right? We’ve pivoted in Q2. We commented on that on the call. And in Q3, we really slowed down hiring and what to look to absorb the people. And that’s where you saw our headcount come off, primarily through attrition and not letting hiring and that was primarily in the retail bank. So we saw our headcount come off high about 2% [ph] in that area. And we’ve communicated that we’re looking for further reduction in the fourth quarter of 1% to 2%.

The other area we focused on, obviously, discretionary. We came off of COVID lows. We’ve seen inflation build expenses [ph] in terms of scenarios like marketing et cetera. And so we’ve been really focused on making sure that we are a bit more vigilant in terms of when we do things like travel, when — where we spend on marketing, et cetera. So we’ve been able to call that back as well. This is good housekeeping things in the end of the day. And so the 1% to 2% is really looking at our workforce and saying where do we have individuals that maybe are not contributing as much in the areas where we need to and that’s really where that’s coming from.

There’s definitely more opportunity for us. I think we’ve been very focus on where we’ve been improving productivity, where we’ve been improving efficiency. When you look at where we’ve been spending. A lot of the growth has actually come out of the U.S. And when we look at Canada, our Canada, across all of our businesses, including wholesale, which obviously has a higher efficiency ratio versus 50%. So it’s an efficient business. It doesn’t mean we can’t be better and we are probably spending a bit more even in Canada in anticipation of HSBC integration, while we are putting the costs related to the integration in the center. We pulled forward some of that application development we talked about.

So we are spending a bit more right now as it relates to some of the build-out we’re doing for HSBC. When you look at the spend we’ve been doing in the U.S., we thought our capital markets business, our wealth management business and they’re about 70% of our revenues. And so capital markets, we’ve been investing in tax management. We’ve been investing in talent. We’ve been investing in our global markets business to move up market share. And City National, we’ve talked about this in terms of we’ve tripled the size of the bank and we’ve been working on replatforming it for the next leg of growth.

It does not mean there’s not opportunities to improve efficiency. And I think, as I’ve been commenting today, very challenging to look for efficiency opportunities when you’re running to keep up with volume. So now is an opportunity in the U.S., in particular, to identify those areas and that’s what we’ve been working through with City National as well.

We’re their [indiscernible] for efficiency. And I think as we look into even Canada, post the acquisition of HSBC, this further opportunity from a structural basis on our cost base. So there’s more that we’re going to be doing. The focus for 2024 is positive operating leverage. And we feel that we’ve been — as it relates to the cost increases. As we’ve communicated for fourth quarter we’re looking for that to be in the mid-single digits on a year-over growth trajectory and we’re going to continue to focus on it. And I think that we thought the strength of our revenue base but you always have to prepare for the day where that’s going to come off and recognize, I mean, further potential headwinds as we slow down the economy, that’s something we got focused on.

John Aiken

One of the factors that have been causing a lot of cost inflation outside of inflation had been regulatory costs and investment in technology. Is that something that is continuing on a similar trajectory or that is leveling off a little bit to give you a bit of a help on operating leverage?

Nadine Ahn

We have consistently invested in our business. I think that we’ve been at the forefront in terms of our technology build-out. We looked to spend money on innovation. We were very early on with things like AI and Borealis and our AI-generated trading platform. This is something that we continue to focus on investing. You have to have money to continue to be able to focus on investing and invading in the financial services space. We built out a lot of products for our clients. We’ve got leading a — and that’s why we’ll be able to attract a lot of investment advisers in the U.S. is because of the tools and the products that we’ve given them.

We have to create capacity for them. And so if you think about our cost base overall, I think given our structural and absolute dollar level, we have enough money to be able to continue to spend on that. What we’re doing is trying to bring it down from the levels that you’re seeing it at today and a lot of that is driven off of just increase in overall people and where can we get more efficient. So it’s been very important to continue to have to invest. The key, though, really is just to get a safe feeling from the CFO’s seat, in particular, is you have to ensure that you have the return on that investment, right and the prioritization. I think the challenge sometimes can be that because we’ve been so focused on investing, growing given our scale, which allows us to spend, you got to make sure that you recognize where you’re prioritizing for best [indiscernible], right?

And I think a lot of that discipline has actually come through with HSBC Canada, right? It’s for just given the amount of volume and resource list that is requiring really focusing on the impact, building out the multicurrency it, building out the trade finance capabilities, building out from a global cash management, investing in the U.S. and global cash management offering. It’s focusing the organization on where is for the greatest impact. I think that, that was probably a discipline when revenues are good, may not be as much of a focus. And so I think even some of this with the acquisition has allowed us to [indiscernible].

John Aiken

And when it comes to sales, the Canadian banks are very interesting because [indiscernible], in particular, has Canada in the U.S., very large balance sheet but you get the pure scale advantage because you’re operating in two countries? Or is that leakage, in terms of different operating environments. Are there areas that you think you might actually be able to improve your efficiency on a North American basis?

Nadine Ahn

I do think in terms of — I mentioned Canada, where we have an efficiency of sub-50%. I think when you look at the U.S., where there’s a real opportunity, we do have — if you think about our mix in the U.S. you have very much market sense or [ph] much higher efficiency just by nature. You’ve got your capital markets business, wealth management business. There is opportunity there. We’ve been investing in the business. And so now the question really is to get that revenue trajectory off of it. So you’re seeing it come back and the fact that if we think about the investment we’ve made in people, particularly in capital markets when you’re looking at it from — very high ROE on the M&A side. We’ve moved up, honestly, to gain a market share. And as you start to gain that market share, you have the opportunity to widen the operating leverage, particularly in the capital markets business.

The investments we’ve been making in cash management looking to drive a stable source of funding to support our capital markets loan book, right? And that’s going provide further accretive opportunity, both from an ROE standpoint but also from a margin expansion in the U.S. So those investments are going to pay off the ability to create further operating leverage in U.S.

I would say, in our Wealth Management business, that’s 1 area that’s difficult but then you’re looking at it from a high ROE business. The other we touched on briefly is [indiscernible]. And while it’s smaller of our businesses in the U.S., the other continue to count for 7% of the revenues, you’re in 95% [ph], there’s huge opportunity there as well to drive better operating leverage. So I think those policies, I wouldn’t say it’s necessarily a North-South type of thing. It’s really an opportunity within those businesses.

I think the thing that you can think about from a North-South, particularly in the U.S., where you do have increased regulatory burden, you have an increased focus on things like process controls, testing, are there opportunities to where you can induce that more cost effectively. I think because we’ve probably been a little further behind on that journey than some of our U.S. peers is definitely an area that we’re looking at to improve overall operational efficiency in the U.S. But in Canada, I would say that we’ve pretty much done a good job kind of getting through some synergies we talked about in the other areas.

John Aiken

Classic. And from the audiences anyone has any questions. No. Very…

Nadine Ahn

[Indiscernible]

John Aiken

Yes. You’ve talked about the market share aspirations in capital markets. Can you give us a sense in the U.S.? And is there also a percent of your consolidated revenue or earnings that you would want to grow [ph]?

Nadine Ahn

Yes. I think we’re very pleased with the growth organically we’ve had in our capital markets business. I mean we’ve really taken that business from the ability to move up the league tables to be of growth expectations as it relates to global markets business. We’ve been investing in that. That journey is probably a little earlier on in its stage and the expectation there is to probably mean the divergence between the market side between the players [indiscernible] increase that by 1% to 2%. We do have no aspirations to grow the capital markets business bigger in relative proportion to the rest of the bank.

So as we think about some of the opportunities that we’ve been talking about, as it relates to both our wealth management growth our retail banking growth both in Canada and what we’re seeing within City National on the commercial side, it’s more keeping it right sized as relative to the growth of the rest of the bank, not to grow it in any more substantial size relative to that.

Unidentified Analyst

I also had a question about capital markets. It seems like a lot of the U.S. players have been fairly positive about just the green shoots in the revenue environment improving substantially kind of from the last few months. Would love to just hear your sense of kind of your revenue opportunity and just the backdrop in that business?

Nadine Ahn

Yes. Thank you. I mean I think we’ve definitely seen while the investments have been lower, we’ve been improving on our market share on that standpoint. And you’re starting to see actually building. So the expectation is that’s quite positive and constructive going forward. Obviously, ECM has been given some of the uncertainty as it relates to environment but you’re starting to see positivity as it relates to on the M&A front, probably in terms of how to grow [ph]. And I think it’s also given the investment in the verticals that we’ve waited for. It’s a really a testament to how we’ve been able to move up from a market share standpoint, looking very constructive going forward.

John Aiken

Anything else? Okay. Nadine, you talked about growing the cash management business in the U.S. to help fund the capital markets book. But can you talk about liquidity deposits in a broader sense, particularly in the U.S. [indiscernible]. We’ve seen the transition of products in Canada negatively impacting our margins but there has been out of liquidity. And so can you speak to the experience in the U.S., what you learned, if there’s anything that you may have changed operation?

Nadine Ahn

No, I think when you look at the — what happened in the U.S. environment, in particular, during the crisis in March, it was a recognition and this is always very interesting from a liquidity concept. You worry about things like concentration, you worry about large balance side. I think the interest point was the rapidity with which the balance has moved. And I think that’s been a lot of topic of conversation recently to say that the run, if you will, was something that in terms of the pace never really was ever anticipated that in terms of that quickness.

When we look at it from our balance sheet, a couple of things. First of all, taking aside the rapidity within the City National balance, we actually saw was the price of quality from [indiscernible]. So given RBC, given our pass-through in the market, similar to what you would have seen from the large money from your bank [ph], we actually had a number of clients diversify into us from City National standpoint. So we also did see some clients recognize the fact around the diversification. So we’ve been able to hold our balances, albeit our mix is suffering similar to what you’ve seen at other banks [indiscernible] in particular.

So we’re working on that. We’re working on focusing on growing that deposit base. I think unlike in Canada, where we had first and fundamentally focused on building that deposit franchise, in City National, it had not been a concentrated focus. And so what happened was you got through liquidity, you’ve had such great loan growth and liquidity where your deposit ratio is not a problem. Actually, a lot of banks are trying to find places to get better yield as interest rates were falling. However, the problem now is you have to be able to fund the bank in a manner that you can create margin.

And so our focus is on ensuring that we’re focused on growing that deposit base. We’re focused on looking at managing. We’ve taken it down from where it was at the start for the crisis hit. But it’s a hard slot for deposits in the U.S. We have seen liquidity come out of the system to a greater extent than you have in Canada and the pressure that’s putting on the ability to extend the credit is quite substantial. You’re seeing banks sell off loan portfolios. So the advantage we have within City National, we’re holding our deposit base. We have the ability to grow it. You have to be conscious of what the nature of that cash is and what you’re going to invest into. But because of the slowdown in credit, there is an opportunity for us to improve our margins overall. And so while the cost of funding is increasing, there’s also the repricing happening on the asset side. And I think because we’re not as pressured from a capital standpoint, we’re able to be much more selective in how we put that cash out.

But I think it just reinforces the fact, particularly if you think about the commercial banking area in the U.S., what is going to be your source of funding? And that is where you’re going to see continued pressure, I think. And that’s why for us, in particular, a lot of the strategies we’ve been looking at in the U.S. have been, what’s the sense of cash going to be, right? And so particularly why we’ve focused on cash management from the capital market but particularly when you look at multi-management and the access the discrete deposit base [ph].

That is so integral to how a bank operates. And that’s why, in Canada, it has been our focus to have that low beta deposit franchise and you cannot go out and I think we’ve evidenced this. You cannot go and buy that overnight because you can’t have the confidence that, that cash will be around. You can’t turn the yield on it you would want to. And so that has always been a focus of us in Canada. You can see and start to think stand through in terms of how we’re thinking about our strategies in the U.S. as well. But I think it really comes down to fundamentals of liquidity.

I do think it will be interesting to see how the perspective, particularly around the regulator that translates through in terms of how they think about liquidity rules and how they think about the stickiness or stability of the deposit base. Because concentration has always been something well understood in liquidity, balance has been always something understood in liquidity. I think that, combined with the rapidity with which things can move, is a very, very different dynamic that hasn’t been thought through to the same extent.

So you also have to think about the relationship that you have. Now you could argue — in City National, or so you could argue that in SCD, well, they had a relationship with the banker. But did they really, the Treasurer at the end of the day is the sponsor, right? And so you have to kind of follow the chain. Like who is the decision-maker as it relates to where those funds are placed. So while there was — as it related to the social media element and I think thinking that everything kind of has this cliff effect on 30 days, et cetera, is something that we can hold on to. Bigger issue is really understanding the nature of that deposit base and that really comes down to a relationship ensuring that you have stable source of funding.

John Aiken

The absolutely fascinating. We are running against time so one final question?

Unidentified Analyst

Just 2 questions for me. One, I just wanted to clarify with you. What the current sort of level of CET1 requirement is? I know obviously, the DSB has moved up a few times. I believe you had mentioned 11.5%. I just wanted to clarify with. And then, secondly, in the event that DSB does move up further perhaps later this year and 2024 relative to your 12-plus percent pro forma post HSBC closed, Any sort of levers you have to perhaps reduce RWAs or increase your common equity capital in the event that DSB does move higher post close HSBC?

Nadine Ahn

So just to confirm, our minimum capital requirement for CET1 right now stands at 11.5%. OSFI has signalled that they will look to raise the DSB by 50 basis points. They have not communicated when that will take effect or when they will announce that. In terms of our ability, we continue to optimize capital. I think the benefit we have is really around the strength of our internal capital generation overall. We’ve got very high ROE businesses. We continue to accrete capital. I think that when it comes to optimization, we’re always looking at that. And I think that’s one of the importance of investing in data in particular and because there’s elements that you think that you’re going to have 100% risk [ph] and the opportunities there because you get refinement in the data. I wouldn’t say there’s anything from an overall business construct per se directly. But I think it’s really coming down to our ability to have that strong capital generation overall and be able to have this growth — organic growth.

John Aiken

Nadine, as always, thank you very much.

Unidentified Analyst

Thank you very much.

Nadine Ahn

Thank you very much, John.

Question-and-Answer Session

End of Q&A