Royal Bank of Canada Q2 FY2025 earnings call

• Financial Performance: Second quarter earnings were $4.4 billion, with adjusted earnings $4.5 billion. Pre-tax pre-provision earnings nearly $7 billion. Revenue grew 11% year-over-year driven by various segments.
• Balance Sheet: CET1 ratio 13.2%, excess capital ~$5 billion. Core deposit growth across segments, loan-to-deposit ratio 97%.
• Dividend and Repurchase: Quarterly dividend increased by $0.06; intention to repurchase up to 35 million common shares.
• Macro Environment: Uncertainty from trade policies, inflation, and interest rates; Bank of Canada and Fed expected to be dovish.
• Business Trends: Personal Banking has leading distribution, Commercial Banking has leading market share, Wealth Management has strong fee-based revenue, Capital Markets has robust Global Markets revenue.

Personal Banking: Earnings of $1.6 billion. Average deposits increased 13% year-over-year (8% excluding HSBC acquisition). Residential mortgage growth supported by client renewals and origination volumes. Credit card spending resilient but expected to soften. Commercial Banking: Net income $597 million, up 3% year-over-year. Average deposit growth 15% year-over-year (10% excluding HSBC). Average net loans and acceptances up 22% year-over-year (9% excluding HSBC). Loan growth expected in high-single-digit range next year, moderating in the back half. Wealth Management: Net income $929 million, up 11% year-over-year. Assets under administration growth 11% in Canada and 9% in the US. RBC Global Asset Management assets under management $694 billion, with robust net sales across asset classes. Capital Markets: Net income $1.2 billion, down 5% year-over-year. Global Markets revenue up 23% year-over-year due to volatile market driving client activity. Corporate Investment Banking revenue down 7% year-over-year. Insurance: Net income $211 million, up 19% year-over-year. Higher insurance service results and investment results.

• Net Interest Income: Maintain 2025 all-bank net interest income growth guidance of high-single-digit to low-double-digit, excluding trading.
• Core Expenses: Expect all-bank core expense growth at upper end of mid-single-digit range for 2025.
• Dividend and Repurchase: Dividend increased, share repurchase intention announced.

• Macroeconomic: Uncertainty from trade policies, inflation, and interest rates.
• Credit: Reserve build due to prudent provisioning; impaired loans build, with some administrative factors resolved.
• Housing: Contained housing resell activity and mortgage growth due to tariff uncertainty; monitoring condo segment and regional risks.

Q: Good morning. I didn't expect to be first anyways. I'd like to ask about your increase in gross impaired loans. You did mention that a big chunk of that was tied to a large Canadian retailer. Thanks for that. Do you -- how much discretion are you using to classify loans as impaired? Because one perspective is that maybe this is a Royal-specific issue. We've seen a couple quarters of higher GILs, but maybe the bank is just being a bit more proactive in how they classify something as impaired. They could still be paying you, but you're assessing the risk and deciding, let's classify those as impaired. So, you're more conservative in a sense than maybe another bank might be.

A: Yeah. Hi, Gabriel. It's Graeme. I'll take that. Thanks for your question. Just to get some broader context on the GIL build this quarter, we just were over $1 billion increase quarter-on-quarter. As I noted in my speech, about 40% of that was related to some administrative concerns and those have all been resolved subsequently. So, the overall build isn't quite maybe as large as the headline relates to. To your question on kind of discretion, I mean, I can't speak to what others do in their processes. I would say we have very well-defined processes and rules on how we -- as when -- how we determine when something is impaired. Those rules and when we impair something isn't strictly driven on when a company stops paying or not, it would be on our forward views of that company as well. And so, some of the companies we have put into impaired loan status over the last two quarters are still paying interest to us. We then in turn take that and just build that into our reserves as we receive that interest. So, there is some discretion in that regard, but I would say we're very consistent in our processes. We certainly haven't changed our approach in that -- in recent quarters. And I would just also note that maybe on the impaired, again, the wholesale, it just can be a bit more episodic quarter-to-quarter. It's not quite as consistent in the way retail is. I think if you go back to the latter half of last year where we had, I would say, very low impaired in PCL in our wholesale businesses, we noted at the time that that was probably not representative of the cycle either. And so, I think, again, you just kind of look quarter-to-quarter and maybe how this trends over longer periods. I don't think we saw this quarter with something unique or kind of newly indicative of where we see things trending.

Q: Good morning. I wanted to follow-up actually Graeme with you on credit. So, sorry if I missed this. I'm not sure if you talked about what your expectations were on impaired PCL for the back half of the year. And just talk to us as you think about peak PCLs being pushed into 2026, are there new areas of stress within the book? So, are there areas within sort of the commercial book where you're seeing stress maybe due to tariffs or a prolonged kind of a slow economy that are emerging, which are informing that we own? I'm just trying to think about as we think about all these macro reserve builds, is it just conservative management of building reserves, or do you have a sense of a line of sight on how this plays out and the stress areas maybe already beginning to emerge where future losses could come through?

A: Yeah. Thanks, Ebrahim. Just to maybe provide a few different pieces on that. In our slide there on the ACL build, we totally kind of break down the drivers of what's building that ACL, right? And so, the three really big component parts there, one is credit migration. So that's a direct reflection of what we're seeing with our clients, their risk profiles, if you will, their financial profiles. And that, this quarter was about 20% of that build and that's kind of in line, and in fact, quite a little bit lower than what we've been seeing in prior quarters. So, I wouldn't say at this point, we're seeing newly emerging kind of credit pockets of concern, at least directly to our client base. 80% of the build is really more on kind of our go-forward view and just the uncertainty around that go-forward view, right? So, our base case was weaker this quarter, not hugely weaker, but certainly we've increased our views on unemployment going forward. We pulled back a little bit of our views on HPI and GDP. And so that's contributing to it. That's just reflecting the current uncertainty in the market right now. And there is some real direct economic impacts of that. But more -- the third part was just really increasing the weights. We introduced this new scenario to really try and target kind of the uncertainty we're seeing. That by itself didn't really increase our reserves because we already had some fairly pessimistic scenarios in there, but it was really attributing more weight to that. And the more weight is just -- again, just us trying to I think address this uncertain environment and get ahead of that to some degree.