Q: 2024 was characterized by a lot of change in the macro environment, rates, inflation, and economic growth. How are you thinking about the macro environment for 2025?
A: In the first quarter, we witnessed record capital markets results, spanning investment banking, corporate banking, and the markets side as well. Many of our clients ramped up their activities as they began to hedge against perceived macro risks.
However, towards the end of the quarter, we observed the influence of the tariff narrative that began in January with the new president's administration. This negative narrative and the volatility it introduced had an immediate effect on the psychology of consumers, small businesses, and large corporates.
We noticed a slowdown in housing and a reduction in consumption on both sides of the border. This can be attributed to consumers becoming more apprehensive, and in the US, other factors such as layoffs are affecting consumer sentiment. On the small business and commercial side, there was a deceleration in hiring and investment decisions. M&A transactions also began to slow down.
Historical patterns show us that uncertainty and unpredictability make it difficult for capital to be deployed effectively, from individual consumers to large corporations. This manifested in February with a more cautious approach and significant market reactions.
Q: Tariffs have introduced an additional layer of uncertainty and potential challenges for many clients. What’s your view and assessment of the shifting trade landscape?
A: Historically, America's strength has been in multilateralism, building global partnerships over the last century that have allowed the U.S. to focus on its forte – allocating capital and leveraging the strengths of other countries. This multilateral approach has enabled capital to flow into the United States at unprecedented levels, which is a key component of the U.S. economy's success.
Tariffs, however, can hinder this process rather than facilitate it. The concern is that we are embarking on a grand experiment with tariffs at a level we haven't seen before, which represents a significant departure from the practices that have underpinned many of the country's successes.
In fact, the strategy of the U.S. government to fund tax cuts may inadvertently impact those who are also most affected by the tariffs. There is a need to return to a growth agenda that was in place before, across all borders, and to continue advancing in partnership.
Q: While acknowledging the high degree of uncertainty, how do you view the credit outlook?
A: It’s difficult to quantify due to unknown factors such as the duration and magnitude of tariffs and the ability of companies and consumers to adjust. Nonetheless, we maintain our credit cost forecast for 2025.
Examining our broader loan book, including consumer, commercial, small business, and the rest of the capital markets, performance is largely as anticipated, supported by a constructive environment with decreasing unemployment in Canada and stable employment in the U.S.
Regarding tariffs, we have not taken stage one and two provisions for expected loss, unlike during the pandemic when we took a $2 billion provision due to the rapid economic shutdown. Tariffs differ as their duration is uncertain, and companies can adapt by finding new markets or consumers absorbing costs through efficiency gains or exchange rate adjustments. The effects on corporates, commercial entities, and consumers will vary, and we must wait to see how the economy adjusts.
RBC is in a position to read and react, coming from a strong base and aiming to maintain the momentum from the first quarter of this year.
Q: The US is very important strategically for us. In 2024, 50% of capital markets revenue came from the U.S.; we employ a lot of people and remain active in many communities. Can you talk about the U.S. market and why it is critical to RBC’s growth strategy moving forward?
A: The U.S. is considered our second home market, and we have significant ambitions there. We are excited about the potential for our platform and plan to operate with a more cohesive strategy. This approach aims to leverage the core pillars of our business—wealth management, capital markets, commercial banking, and private banking – in a unified manner to better serve customer segments.
We plan to introduce a horizontal, integrated strategy that showcases the best of RBC. Our unique value proposition, which includes technology, service, advice, and ideas, is well-received by our customers, ranging from large corporates to private banking clients. They appreciate RBC's culture and offerings, which are distinct from U.S. and other global banks, and they are eager for us to expand our presence.
Our U.S. strategy involves organic investment to enhance our technology and operational platforms. Significant resources are being allocated to this effort, and we expect to complete key components soon, which should reduce associated costs. This year is pivotal for us as we aim to finalize much of this work.
Q: RBC’s acquisition of HSBC represents the largest in the bank's history. As we approach the one-year anniversary of the closing, can you discuss the lessons learned during the integration process, the opportunities you see ahead, and the strategic impact and importance of this transaction?
A: This opportunity has been transformational for us in many ways. It has significantly benefited our shareholders, creating accretive value so quickly within a year, which is evident in our share price. The process was challenging and required immense effort – it took us three years from initial deal conception, through negotiations, preparations, and execution, to a year after closing. We've achieved a great deal, particularly in February when we concluded our transition services agreement.
On the first day, a year ago, we successfully migrated 99% of our clients within a 72-hour period. This involved transferring 800,000 clients from large corporates to consumers over a weekend onto our tech stack, a challenging task that allowed us to eliminate a significant portion of costs immediately.
With 4,000 employees now focused on sales, customer acquisition, and cross-selling, we anticipate a boost in capacity for the organization. We gained valuable insights from HSBC on cross-border transaction banking and managing market segments. HSBC's account management approach, which involves maintaining long-term relationships with customers, is something we're learning from and integrating into our practices.
Overall, we're not just excited about the financial impact but also the operational and strategic benefits we've gained. HSBC has provided us with a new perspective on serving global customers in transaction banking, and we're aiming for even greater achievements moving forward.
Q: Let’s discuss some of the implications of AI and potential use cases. How is RBC handling the transition from pilot programs and testing to full-scale commercialization, while assessing the returns and ROI of AI?
A: A lot has happened since ChatGPT 2.0 came out almost two years ago. Reflecting on my time in Silicon Valley viewing the production of these models in 2023, we anticipated that retraining the models with our data would take three years and cost between $50-$100 million for a macro model LLM. However, this process did not take three years, but rather one year, and the cost was about a tenth of the initial estimate.
The models are incredible, though not without flaws, as they still have accuracy issues (referred to as hallucinations). But in some cases, 80% or 90% accuracy is sufficient, while in others, 99.9% is necessary.
The models have retrained exceptionally well and have high potential. So why haven't we seen more benefit? If you take a model and embed it into an existing process, or change your processes, have people change to use the model differently, it's a significant change to what they're used to doing.
It will happen, but you're on this curve. RBC has seen more significant success in our Salesforce applications because they are already embedded into the architecture of the bank. Slower progress is not due to model development, the challenge lies in embedding these changes into the workforce and operational processes.
That’s why we’ve had amazing success with Salesforce, highlighted by Marc Benioff's recognition of RBC as a global leader in using generative AI models, which showcases the sophistication of these models and their impact on productivity, cost savings, cross-sales, and customer experience.
Ultimately, there's evolution at play here and this is where the divergence in results versus modeling occurs. Generative AI is the real deal and it's not a question of if, but when and how we adapt to these models as we integrate them across the bank.
