Good morning, ladies and gentlemen. Welcome to RBC's Conference Call for the First Quarter 2023 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Nadine Ahn, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions Neil McLaughlin, Group Head, Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management and Insurance; and Derek Neldner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. [Operator Instructions] With that, I'll turn it over to Dave.

Thank you, Asim, and good morning, everyone. Thank you for joining us. Today, we reported first quarter earnings of $3.2 billion or $4.3 billion adjusting for the Canada recovery dividend and other items. Our results are a testament to our diversified business model underpinned by momentum from client-driven growth across our largest segments as well as the benefit from higher interest rates. Our performance this quarter also reflected record capital markets revenue driven by strong Global Markets results as well as market share gains in Investment Banking. What has been a difficult industry-wide environment for advisory and origination activities. Reported expense growth was elevated to 17% year-over-year. However, as Nadine will speak to shortly, expense growth included a number of notable drivers this quarter. Expense growth over the last 12 months has reflected strategic investments in client-facing roles and technology to enhance our value proposition and infrastructure, including artificial intelligence capabilities. A credit to these investments, RBC was recently ranked number two amongst global banks and a recent benchmark of AI maturity in business. While we're seeing the benefits of our strategic investments in talent and technology, the entire leadership team is committed to moderating expense growth from these elevated levels and driving efficiencies across the bank. Our results were also impacted by higher PCL this quarter, although PCL on impaired loans remained well below historical averages, given strong employment and consumer balance sheets, we expect them to continue increasing from cyclical lows. Correspondingly, we have added to our Stage 1 and 2 reserves this quarter, an important pillar and holistic strength of RBC's balance sheet, which includes strong capital and liquidity metrics, including our low-cost Canadian deposit base. We ended the quarter with a CET1 ratio of 12.7% and expect to maintain a CET1 ratio of at least 12%…

Thank you, Dave, and good morning, everyone. Starting on Slide 9, we reported earnings per share of $2.29 this quarter. Excluding the $1.1 billion impact of the Canada recovery dividend and other smaller items of note, adjusted diluted earnings per share was $3.10, up 8% from last year. Total revenue was up 16% year-over-year or up 7% net of PBCAE. Pre-provision pretax earnings were up 7% from last year as strong client-driven revenue growth more than offset elevated expense growth, which I will discuss shortly. The impact of higher provisions for credit losses was partially offset by a lower adjusted effective tax rate, resulting in adjusted net income growth of 5% year-over-year. Before I discuss our segment results, I will spend some time on 3 key topics: capital, the outlook for net interest income and our related funding advantage; and finally, our expense outlook. Starting with our strong capital ratios on Slide 10, our CET1 ratio rose 10 basis points from last quarter, reflecting strong net internal capital generation of 39 basis points, net of $1.8 billion of dividends to our common shareholders. This was partially offset by the 20 basis point impact of the Canada recovery dividend and other tax-related adjustments. Next quarter, we expect Basel III regulatory reforms to drive a 70 basis points to 80 basis point benefit, largely reflecting the removal of the sector-wide credit risk RWA scaling factor under the new IRB framework. Furthermore, we expect to see RWA reductions reflective of our well-diversified portfolios and the conservatism of our wholesale risk parameters relative to the prescribed parameters under the new framework. Moving to Slide 11. All bank net interest income was up 18% year-over-year or up 29%, excluding trading revenue. These results reflect our earnings sensitivity to higher interest rates as well as the…

Thank you, Nadine, and good morning, everyone. Starting on Slide 19, I'll discuss our allowances in the context of the macroeconomic environment that Dave referenced earlier. While markets have already started to recover, the real economic impact of inflation and higher interest rates is just starting to influence credit outcomes. On the whole, we believe the probability of a more severe inflation and interest rate environment has started to reduce. However, as Dave noted, we continue to expect a moderate recession in 2023. With this backdrop, we built reserves on performing loans for the third consecutive quarter. Provisions on performing loans this quarter were driven by 3 factors: First, from a macroeconomic perspective, we move closer to our forecast recession, bringing more of the associated expected credit losses into the IFRS 9 provisioning window. This was partially offset by a modest shift in our scenario weights, reflecting the lower probability of more adverse inflation and rate scenarios that I just noted. Second, the credit quality of our portfolio continued to trend back to more normal levels with sustained increases in delinquencies and credit downgrades. And finally, we added reserves for ongoing portfolio growth. In total, our allowance for credit losses on loans increased by $268 million this quarter to $4.4 billion. Moving to Slide 20. Gross impaired loans were up $400 million or 5 basis points this quarter with higher impaired loan balances across each of our major lending businesses. This was driven by an increase in new formations, which are returning to pre-pandemic levels. In our wholesale portfolio, new formations were up $220 million compared to last quarter, with the largest increases in the real estate related and consumer staple sectors. We do not expect to incur losses on a large majority of the new formations in the real…

[Operator Instructions] And we will take the first question from Meny Grauman, Scotiabank. Pleas go ahead.

Dave, for a number of quarters now from the outside looking in, it sounds like you're focused on getting expenses more under control. And then we have a quarter like this one where it still looks like that's not mission accomplished yet. And I'm wondering, are you frustrated by that? And how do we interpret that in terms of -- are we just seeing more of a persistency of inflation coming through what's really the challenge in terms of -- what seems to be like a key focus for you for quite a while now?

I guess you could hear that in my comments -- my prepared comments. There's a couple of factors at play. One, there is persistent inflation out there that just doesn't come through only on the salary and benefit line as we -- as all companies across the world, increase base pay and compensation to match the inflationary environment, but it also comes through our third-party strategic sourcing line of all our partners, all the companies that we work with from technology to advisory, to consultants, all those inflationary costs come through other lines of business. So there's we are in a hyperinflation environment. The second area that all companies are struggling with is the productivity from a hybrid workforce, and we -- lots of discussion around how are we working, how efficiently are we working as an economy? And I think we're working through that uncertainty as well. I think Nadine did a good job in kind of walking back some of the headline numbers to a more reasonable number. But that volatility, I think, has caused us to have to refocus on different areas of our cost opportunity. We do see opportunity. We did invest significantly in growth. As I talked about, I think the last time, if we aren't going to see that growth, and we're going to have to kind of reposition some of our capacity, but we are still forecasting a relatively mild recession and a softer landing and then opportunities to continue to access good growth. So I think we're on it. I think it's a volatile market. There's a lot of things going on. We're repositioning the bank for a very different world going forward as far as technology capabilities across the board. It's a very complex operating environment. Having said that, we got to do better, and we're going to do better.

And just as a follow-up, I know you've been very vocal, Royal. You've been very cautious about taking restructuring charges historically. But is the environment different now? And again, given the persistence of this issue, does it change your view on that tool?

No. We think we have the tools with doubling down in different areas to manage this in the normal course right now as we normally do. And you'll see our expenses get under control.

Next question is from Ebrahim Poonawala, Bank of America.

I guess maybe a question for Graeme. You mentioned higher interest rates impacting credit or credit normalization. At what point -- and I hear you in terms of expectation for a mild recession. But at what point do we start worrying about credit normalization actually leading into a more pronounced deterioration that looks a lot recession-like? Like what are the indicators? Is it all about jobs and what the job market does? And give us a sense of across the customer segment, commercial consumer, where are you seeing the most pronounced pain due to the higher interest rates?

Yes. Thanks, Ebrahim. Maybe just to provide a little bit more color on kind of how we're thinking about the environment. I think, as we've guided earlier, we certainly continue to expect that credit outcomes, negative credit outcomes will rise through the year as we progress through the year heading back towards more historic norms kind of expecting that to start to peak out towards the end of this year and to the first half of next year. As you said, there's different aspects we look at that. And that these are the things that really factor into our models in IFRS 9. And so as you said, it's debt servicing costs, certainly, that directly impacts things like our mortgage portfolio. But we do worry about and think about the overall kind of wealth effect and how that's going to squeeze out discretionary income -- discretionary expenses as well. And so that's kind of the things that factor into why we forecast GDP the way we do and why we're forecasting unemployment to increase over the course of this year. Right now, we're at exceedingly low levels there, but we do expect the unemployment to graduate up to kind of more in that 6.5% to 7% range at the tail end of this year before kind of coming back to more historic norms. And so those are the factors that we think really go into our models and how we assess kind of the overall loan losses. Having said that, we continue to see in the near term and kind of very significant outperformance, particularly on the job space. We've continued to expect unemployment to rise. We've continually been surprised by the strength of the job market in Canada and the U.S. And so that's kind of always what continues to push back the timing of this normalization a little further than we'd anticipated. But -- so yes, jobs is a big one here. And what you see -- when you think about the retail side, maybe to break into that a little bit further, certainly, we're seeing the delinquency trends kind of move up. But the insolvency side of it, which is kind of the other half of the equation, is very much tied to the labor market. And we have seen insolvency start to tick up a little bit, but they're still well below pre-pandemic norms. And so until we really start to see that kind of an situation, labor move, it's going to continue to be a near-term benefit to the overall credit outcomes.

And just on that, Graeme, higher rate structurally, when we look at the commercial real estate market, C&I borrowers were seeing their cost of capital go up, no material pain there.

Commercial real estate is, certainly, as I noted, I mean, that is one of the portfolios that we are most focused on for sure. I would say it's a sector that I think the underwriting standards have been very strong. Have been very disciplined on for some time. If you look at portfolios, we were doing a deep dive review on our Canadian commercial portfolio, for example, looking at the mortgage side of that. I mean, we have had a strategy very focused on kind of your top-tier clients. And so these are clients that I think are very seasoned, very capable to weather kind of a through-the-cycle set of challenges. And two, again, the underwriting standards have been very, very strong there. You look at our mortgage portfolio on that side. We've got guarantees or partial guarantees on 95% of those commercial mortgages. I just it's an indicator of, again, the strength of the underwriting standards And so things will trend up, but they're going to trend up from what's been near 0 numbers in that portfolio for a long time. But right now, these are still, I would say, forward expectations, we're not seeing a lot of real negative outcomes in that portfolio at this point in time.

Next question is from Doug Young, Desjardins Capital Markets.

Just on the CET1 specifically on RWA movements. It looked like market risk RWA was down 8% quarter-over-quarter. Counterparty RWA down 11%. Just hoping to get a little bit of color of what drove this? And should there be a reversion down the road? And Nadine, the Basel is going to be 70, 80 basis points positive come Q2. I think there's further changes coming from a regulatory perspective, specifically around the trading book and maybe next year. Can you talk a bit about what the offset would be? Or is there any other negative items that are coming down the pipe on the CET1 ratio side?

Thanks for the question, Doug. It's Derek Neldner. I'll maybe start addressing your RWA question from a business perspective, and Graeme can chime in and Nadine may want to add as well. But in terms of the trading businesses, we obviously saw very, very strong levels of client activity in the quarter. It was a very robust environment. And against that, we were able to drive good velocity and turnover in our trading book inventories and also bring down some of those inventories in particular, in our credit trading businesses where, as you know, it was a tougher environment in 2022. Our inventory levels went up a little bit, and we were able to bring those down against a very strong trading environment in Q1. And so that really was the largest contributor to a decline in our market risk RWA. As you noted, we also did see a decline in our counterparty credit risk RWA. That was really, again, a function of improving credit environment, but as well some FX movement that helped bring RWA down. And then finally, we did see a moderation in commodity prices. And so that did bring down our counterparty RWA against some of our commodity trading positions. Go ahead, Graeme.

No, I think -- I mean, on that part, I think Derek absolutely captured it right. It's -- this is a quarter with good liquidity. It allowed us to be much more in the moving business and not in the storage business trading side of it. So I think those are absolutely right factors. But I guess there are pieces were on the overall 70, 80 basis points.

Yes. Just as it relates to on the horizon, we will be implementing the remaining components of Basel IV that are coming into effect next year. So that's related to FRTB and CBA. We don't expect those to have material impacts overall, Doug, in terms of our CET1 ratio.

Next question is from Mario Mendonca, TD Securities. Please go ahead.

Could we first go to the margin? I was a little surprised to the margin, but it clearly relates to that dynamic you described where the expense was reported in NII, but the income in noninterest income. Is there any way you can help us understand what effect that had on the all-bank margin in the quarter? It would be helpful to understand what that margin might have looked like, was it up 5 basis points sequentially if that dynamic hasn't played out? Is that something you can quantify, Nadine?

Sure, Mario. So if I just start from the total bank NIM of down 9 basis points, -- as you commented, a lot of that relates to the Capital Markets business, where we have the cost of funding, which obviously has gone up with interest rates going up, showing up in the NII line and then their offsets or other income. So when I break out the 2 main drivers of that primarily attributed to the repo business as well as some of our equities derivatives businesses, that takes our number down and what you're getting from a capital markets perspective then on a total bank level, that would take that number down, which is roughly about 12 basis points down to 1 or 2, which is mainly on the loan book as margin impacted by higher funding costs. When I look at it at the all-bank level then, so if you take out a substantial portion attributed to that, you're looking at the increase of 1 basis point. Within that number, we are down a few basis points as it relates to our increased liquidity position. That relates, as we commented in terms of our LCR increase, but also we've increased our funding. That will get absorbed as we go through the year and the loan book growth contributes to the margin.

Okay. So Nadine, maybe let me -- I may have misunderstood it then. The 1 basis point lift in the margin all-bank already appropriately excludes that effect that you referred to, that effect of expensing in one area of revenue in another. Is that true?

That is correct. What I would say was it represented a bit under where we would expect it to be is because of the higher liquidity position. In addition, there was one movement to anomaly between quarters another couple of basis points.

Okay. So that really gets -- that's helpful. So now I think I understand why the margin -- I think I understand these margin dynamics a little bit better. So it really does lead to my second question, which is the overall margin sensitivity and improvement for an asset-sensitive bank like Royal it appears to be diminishing over time. And it's for all the reasons I think you offered, deposit betas, migration, maybe even deposit attrition. And that disclosure you provide in your presentation where you break out costs, funding costs and like the income where that breakout you do in your presentation, that's awfully helpful. But the message I'm getting here is that, that asset sensitivity that Royal has benefited from like we're in the final innings of that. Would you agree with that, that we're in the final innings of the benefit for these asset-sensitive banks?

No, we do expect to -- I think if we go back to our structural deposit benefit that we have, which continue -- which drives our assets in site higher rates, and we continue to expect to benefit from that going forward. I think what you're seeing in terms of what you commented on the near-term movements as it related to the deposit migration, we expect that, that will have slowed given that the interest rates have gone up and they expect to level up. So a lot of that movement will have slowed down. We will continue to see the margin expansion benefit for our structural deposit base. And that is going to be a bit sensitive, Mario depending upon what happens to the longer end of the yield curve. And we've seen it move quite significantly just perspectives on where we're at with rate increases. So it's obviously, we're dealing with a bit of an inverted yield curve right now. That has been moving around to the tune of 30 to 50 basis points over the last quarter. And so that's where the value driver as we start to think about that margin expansion coming from that structural deposit base. .

And then I'll stop here. The guidance you offered for mid -- I think you said mid-teens growth in NII in Canadian Banking in 2023. The math is pretty simple. It would imply that the domestic or the Canadian banking margin will be essentially flat or maybe marginal, maybe up slightly going forward. That's what the math tells me just by plugging in your mid-teens. Is that right? Is that essentially what you're telling us that margins could be kind of flat from here in Canadian Banking?

I think what you could expect in the next quarter is continue to see a bit of that pressure as it relates to the deposit mix movement, but we do expect to see the margin expansion still continuing through the latter half of 2023, Mario.

Next question from Scott Chan, Canaccord Genuity.

Nadine, just a follow-up to that line of questioning. You talked about the Canadian P&C, but I think you offered comments on the U.S. side as well on to the National Bank being better in 2023. And just wondering the factors in context that relative to kind of the deposit base declining and likely decline through a few years as well?

Sure. So for City National, we had commented, I believe, in Q4 towards the end of the quarter, we had increased our liquidity position related to some changes around parameters. That was funded through FHLB. So the impact of that fully in the Q1 is what you're seeing in terms of a lot of the decrease from the 5 basis points. As we look forward for City National, we did comment that we are expecting to continue to see benefit from our loan growth through the funding of both our deposit sweeps and our low-cost deposits. However, we will potentially need to supplement that for FHLB, which would put some further pressure on margins, I would think, into next quarter, similarly to what you saw this quarter. However, we do expect to see the expansion of that as we start to stabilize that deposit level through the latter half of 2023. We haven't sensitivity on the asset side, so that can still benefit significantly.

Okay. So the comment was that you expect NII in 2023 on the U.S. side to slightly outpace Canada this year from what you see right now?

Correct.

Next question is from Sohrab Movahedi, BMO Capital Markets. Please go ahead.

I just wanted to maybe ask a question, Neil. I appreciate the additional detail you provided around customer behavior when it comes to savings accounts, deposits, GICs and the like. Can you also talk a little bit about what's happening on the loan side when it comes to mortgages, variable mortgages, what sort of behaviors you're seeing? And maybe comment a little bit about how those mortgage holders, variable mortgage holders, I guess, how many of them would have credit cards with you? And what sort of insights, I guess, are you seeing from a credit quality perspective that might be here?

Sure. So thanks for the question. So on the variable rate mortgages, I guess there's a couple of themes. Not surprising, we're seeing percentage of originations really drop, really getting down to kind of 15% of originations Keep in mind that the entire portfolio, about 1/3 of the portfolio is variable rate. So we're seeing a very dramatic shift there. We're also seeing a shift overall to basically fewer first-time homebuyers. You can imagine not a product that first-time homebuyers are going to take on. And then we've already commented on this, but just in terms of trigger rates we have seen a good portion of that variable rate portfolio go through that process around trigger rates. The earlier cohorts that went through it saw bigger increases. The ones that have been more recent have had smaller increases. Graeme commented, those are embedded in the credit performance. One of the things just to add to Graeme's comments is that, overall, those variable rate mortgages did start from a lower delinquency level than average. So we're starting to see the move up to the average, and we're seeing the more recent cohorts actually have lower incremental payments. So a real focus around the category, reaching out, talking to those clients, and we do break it down and look at a couple of factors, including what's the collateral those customers have, what are the FICO scores. And then Graeme touched on just seeing the excess deposits. So whether it's excess deposits or we have seen wage inflation over time from when many of those mortgages were taken out, and that is helping those clients deal with the increased payments. So that's maybe a little bit of color on variable rate mortgages. And Graeme, did you want to -- anything you want to add?

No, I think you touched on some key points. I think the one I think you do draw out there, which I think is important is that we are seeing delinquency rise in that segment, as I noted. But as you know, Neil, that they're starting from a position of strength again, and that's true of our client base as a whole. Again, the strong employment situation, the strong liquidity situation and that portfolio that segment of that portfolio in particular kind of was starting from a better-than-average situation and then that's trending up, but that's why the overall delinquencies in the mortgage book are relatively stable quarter-over-quarter.

And then in terms of your second question, just about the percentage of mortgage holders with credit cards. It's over 50%. So we have obviously a very strong credit card lineup. We do have a relationship-based model. So the majority of our mortgage holders do hold other products and over half of that portfolio also hold a credit card with us.

And just a quick, I guess, housekeeping item. Nadine, you didn't mention any impact of the DRIP discount on the CET1 ratio was the uptake not what you expected? Or any sense as to how that DRIP discount is.

Yes. No, we do our uptake in the DRIP has been what we expected, Sara, and we do expect to get about 10 basis points a quarter as it relates to that.

Okay. So included -- would there have been about a 10 basis point benefit this quarter? .

In terms of this quarter impact, the DRIP was just started, so it's going to be smaller than the 10% that we had in -- that we expect full 10 for next quarter.

[Operator Instructions] The next question is from Joo Ho Kim, Credit Suisse. Please go ahead.

Just one on Capital Markets. There was a commentary that the bank outperformed the global fee pool from Corporate and Investment Banking side. I'm curious if that outperformance was the same on the Global Markets side as you have some commentary there? And more importantly, would you have a sense of what the PTPP earnings capacity might look like from Capital Markets this year? Obviously, it will ebb and flow with the market. But curious if you have a baseline sort of expectation similar to the guidance that you provided back in early 2022.

Sure. Thank you for both those questions. From a market share perspective, as you noted, in our advisory and origination businesses is in Investment Banking, we can get very real-time market share data. And so as you pointed out and as Dave highlighted in his comments, we did have a very strong quarter in what was a tough environment, we did gain share and moved up in our rankings. To your question on Global Markets, the data that we can get is not quite as real time. There's a little bit of a lag, and so we'll be waiting to get some of that data. But when I look at a variety of different information we can access and just anecdotal data points, I do think that our performance this quarter reflected both a benefit from some of our business mix. We are, as we've talked about in the past, have a larger credit business. That business performed very well and a very large rates, FX and commodity business. And those businesses all had a constructive environment. But away from the mix, I do think we picked up share in a number of businesses in Global Markets, which I think is a reflection of a number of the new strategic initiatives we've been implementing in that business. over the last couple of years, but in 2022, in particular. To your question on pre-provision pretax, obviously, we've discussed in the past that we think in a normalized environment, we could contribute $1 billion plus a quarter. When we look at the resegmentation and the addition of Treasury Services and Transaction Banking plus combined with our ongoing growth initiatives, we do think that we can lift that bar to $1.1 billion. And so again, I would caveat that we are in a cyclical business and that depends on a normalized quarter. But in a relatively normal environment, that's the goal that we'll continue to be shooting for is $1.1 billion plus.

The next question is from Rizvanovic, KBW Research. Please go ahead.

Derek, if I could just follow up, I wanted to ask a question about the trading line. Obviously, a great quarter for you guys. I'm wondering, in an environment like this, did you just get paid better for your transactions on the trading side just given some of the numbers that we track just to try to get a look ahead in terms of the volume that comes into the market overall, it seems like this is still an outsized quarter. We really see the volatility spike. We didn't see trading volume spike and yet here you are sitting at $1.4 billion trading, which was a great number. Anything to suggest that maybe it was outsized a little bit because you're just getting paid more or maybe not as much volume.

A few different comments. I mean, overall, I would say, it was a very strong quarter for our trading businesses, and I would describe it as a very clean quarter. So there weren't any notable onetime items or anything. It was just really good client volume, a constructive market backdrop. And I think our teams managed risk and executed very well against that backdrop. A few observations, though. I think, one, fiscal Q1 for us always tends to be a seasonally strong quarter for the trading businesses. We do get some benefit from the calendar year-end and how some of our clients are managing their balances and how other banks are managing their balances. So Q1 always tends to be seasonally a stronger quarter for us. This year, there was a constructive backdrop as I think a lot of our clients were repositioning their portfolios around year-end and for the year ahead. With what continues to be a wide array of views for how 2023 may play out. So that drove heightened client volume. And then as I mentioned, I think our mix did play to our favor a little bit. In 2022, our mix created some natural headwinds for us because of challenges in the credit business. Repo spreads were still quite depressed. None of those have been dramatic changes, but obviously, it was a more constructive quarter for credit. We have continued to see some moderate improvement in our repo spreads. And so I think our mix has helped. And then importantly, I think our team has just executed really well on a number of strategic initiatives that we've been investing in and focused on over a number of quarters. So -- all to say, it was a very robust quarter. I certainly wouldn't expect that kind of run rate to continue through the balance of the year. But at the same time, there were no one-off items or anomalies. It was just a really good solid backdrop and our team executed well against it.

And then maybe just quickly for Neil. On your residential mortgage lending in Canada, I'm not sure if you want to provide any guidance on where you think your growth level could drop. It looks like you're up about 50 bps quarter-over-quarter. What I'm wondering is just given the dynamic of potentially higher rates for longer, so -- like is there a possibility that the mortgage book starts to shrink here, not materially, but maybe by a few percentage points. Is that something that you think is a possible outcome if you do get this dynamic of higher rates for longer and obviously, the origination volume seems to be very weak right now? Home sales are very weak. Is that something that's a possibility in your view?

Yes. Thanks for the question. To your point, originations are down materially, probably about in the range of 40% in terms of transactions. And then you overlay the -- just the HPI decrease, and that further takes it down in terms of the actual dollars hitting the balance sheet. So right now, Q1 is not really the heavy origination period of the year. We are getting reports in the market that some inventories are coming online. Some properties are actually staying on the market for shorter periods of time. So it's probably too early to tell. Our outlook for the mortgage business for the full year would be mid-single digits. is where we see it getting to, but there isn't anything when we look through the portfolio based on what we would see where negative growth in the quarter would be something we would expect.

Next question is from Lemar Persaud, Cormark Securities. Please go ahead.

I want to turn back to expenses, specifically at the all-bank level. And looking at your Slide 13, is there any element of investment either in terms of technology or FTE related to enhancing collection processes, related to the tougher credit environment perhaps in Canadian Banking? Or is the growth in tech and comp all kind of strictly related to growth initiatives?

Yes, I'll take the question. No, there isn't technology that we would need to put in, in terms of the collection activities. I mean, it is -- we -- if you look at our largest increase in expenses year-over-year is compensation that's partly due to wage inflation Dave spoke to, but also bringing on additional complement of FTE, mostly in front of the client, where we're looking to really build volumes. But we have started to build up that collections group in terms of just capacity, but it's not a technology driver at all.

And then maybe coming back to an earlier comment from Dave on expenses and the ability, I think, to pull back expense growth at the top line slows. If I look at your bucketing and waterfall on your Slide 13, what are some of the areas you can pull back on expenses if the revenue growth environment kind of slows?

Yes, sure. I'll take that question. Thank you, Lemar. So in terms of when you look at the bucketing, I would say on the investment in people, we've obviously ramped that up quite significantly over the latter half of 2022 as we were investing for growth, and you see that with our strong volume. So that was one of the buckets I commented will start to taper off as we absorbed some of that hiring that we've seen early part of the year. I would say also, when you look at the discretionary and other, David commented that, that is also a bucket that's being impacted in inflation. And that's one area that if we start to see any headwinds coming from the economic downturn that we can pull back on that. That's primarily driven off of not only increase in terms of marketing but also travel, business development that has started to pick up, particularly given where we were on the lows from Q1 in '22. And from a technology standpoint, what you're seeing there is a lot of the investments that we've done not only from a client perspective and driving a lot of our growth in terms of our applications for Canadian Banking, for Wealth Management and for Investment in the Capital Markets business. And part of that also would drive further efficiency savings as we look out into latter years, as we've talked about how we've been focused on our zero-based budgeting.

The next question is from Paul Holden, CIBC. Please go ahead.

I apologize, I missed a portion of the call. So if you've already addressed these, I do apologize. But questions. I guess the first one is on regulatory deal risk. You've done transactions, both south of the border and Canada. So wondering if you can provide any insights on what you think the primary differences are between the regulatory process in the U.S. versus Canada? And then also, just remind us sort of your current confidence in the timing of the HSBC transaction?

Maybe I'll take that, it's Dave. Certainly, there's a time period difference between when we went through City National 8 years ago in the current environment. We are going through that process, an orderly process with the Competition Bureau, OSFI, and the finance department. Now we're providing information to them. We still remain confident that this is a good transaction for Canada, a good transaction for HSBC clients and employees and a good transaction for our shareholders. And therefore, we're going through that process now -- It's a normal process, doesn't feel any different than the last process we went through in the United States, where you provide a lot of information on your business, and we're confident the numbers tell the story. So that's how I can comment so far as we're early days. But everything is proceeding according to what we expected.

And then second question is just with respect to the outlook for commercial loans, are you seeing any indications of slowing demand, whether that's in -- or I guess in the Canadian business specifically?

Yes. Thanks for the question. We actually have seen our commercial lending pick up over the last couple of quarters. And I'd say overall sentiment from commercial clients is probably a little bit mixed. We see some of them who feel -- they waited long enough. they need to start to pull a lever to invest in the business and they're deploying capital and starting to lean into revolvers or taking out term debt. And you have others who I think are a little more cautious. But overall, that growth that we're talking about, we do see that growth continuing to be fairly -- quite strong throughout the year. And it's underpinned by a change in strategy and levers we pulled last year, we resegmented the business and we put more experienced and additional FTE against our larger commercial clients in the one segment we didn't feel we were really capturing our fair share. And that's playing out exactly how we wanted. So we're quite confident in the strategy. And then the second comment I would make is we're just really pleased with the diversification. So we see essentially very even growth across all sectors. We see very consistent growth across all regions. So we're not seeing anything -- any one sector really overweighted. And we -- I think that's the strategy and provides good diversification in terms of our risk profile.

The next question is from Mario Mendonca, TD Securities. Please go ahead.

Can we go to two comments you made during your opening that caught my attention. When you said that the hybrid working model, hybrid working force model, you question sort of productivity. And then you in a separate comment, that seemed unrelated, but is related in my mind, you talked about how losses could emerge in commercial real estate. So what I'm getting at here is if the world really is going to -- if we're going to function in this hybrid working model where a bunch of us working at home, is the message here that big occupiers of commercial real estate like Royal, like the rest of our banks, need to revisit their commercial real estate needs and address the productivity and address the inflation by actually unloading this commercial real estate. Is that why you're sensitive to commercial real estate losses going forward?

No, I think it would be almost the opposite. I think that the absence of working together in many ways has led to productivity and innovation challenges and society isn't back together enough and working enough. So it actually narrows the opposite. Now there's been a lot of dialogue among CEOs globally now about what is the productivity and creativity of your workforce in this hybrid world and what the future hybrid world. And we're in this discovery area and trying to find balance with employees. You hear a lot of commentary about it. I think most CEOs would tell you that there is a productivity loss. I think we can identify both in our organization productivity gains and productivity losses depending on the group you're looking at from operations to head office to sales. So we're working through that as an organization. We're working through that as an economy and a society. And I think there's opportunity for improvement. So it's actually the opposite. I'm trying to say that we likely need more people back at work, not permanently, like not 5 days a week, but more than we're seeing today. We're going to support some of the demand for commercial real estate and hence, our balanced approach I don't think I said there's a heightened commercial risk.

Sorry, what Graeme did offer is that commercial real estate was an area of risk going forward. Maybe, Graeme, is that true? Did you say that? Or was I

Right. I mean, so commercial real estate has got 2 headwinds, right? You've got the overall headwind of a higher interest rate environment, which is affecting the asset class as a whole. And then certainly, sub portfolios within that like office have the additional headwind that companies are implementing hybrid models. And -- but as Dave is saying, how that plays out over time is uncertain, right? And so certainly, if it goes down a more negative path as you're articulating, where companies choose to be in a more permanent state in a hybrid model that will impact the kind of the demands and needs around that footprint. But as Dave is pointing out, we've also got companies seeing that we see negative impacts on productivity on that front. And so this is going to play out over time, but certainly, it's a portfolio because of that, that we're more focused on, and we're cautious

I'll talk about this now. But the point I'm thinking through here is if Royal sends out an e-mail tomorrow to its 80,000 employees saying, everybody come back to the office, it certainly seems to me that commercial real estate risk is diminished because you're using it again. Is that not the right way to look at it?

Yes, that's part of the reason, but it's not going to be returned to pre-pandemic levels either. So there is going to be some dislocation. But I think we're probably edging back to a better balance and we saw in '21 and '22. So we're finding our way, I think, as a society. I think all CEOs in every sector I talk to are struggling with the balance of attracting, retaining, developing talent promoting talent, building culture, creating productivity, it's tough. It's really tough. We don't have the final model yet. So I'm trying to highlight there's opportunity to be better at this. There's opportunity to be more productive about it. I think that provides a support level under some commercial real estate, but there will be companies like us that re-lease some real estate, I don't think we'll have 100% of the portfolio we had before. So we're finding our way towards that. And I think it's a balance that creates an overall environment that I think is constructive. So I think we're just trying to highlight that perspective that we're confident of our portfolio. We're evolving as a society, and we'll manage it.

I think the answer is we just don't know yet, but I appreciate you trying to put some texture around it. So a little further along in my understanding.

So maybe I know we've run over there. Maybe I'll operator, I'll cut it off there. I think we only had one question in the queue given that we've gone a fair bit over. So maybe I'll summarize some of the thematic that came out in the questions and maybe some of the deltas that happened over the quarter. And I think the first takeaway I'd like everyone to have is our franchises built over putting the customer first. That helps us create high ROEs, sustainable growth over time. And very much, as you saw on the deposit and filtered into the margin questions, but it's really building a solid client franchise, building a solid funding franchise with a strategic advantage for RBC, leveraging the money in and money out and keeping it within the RBC ecosystem is all part of the strength of our client franchise. And that really was put on, I think, strong exhibit today and the money flow, money in and out, it came at lower margins, but that's the right thing to do for a client. It may have surprised you a little bit, but that's how the client is reacting to a higher interest rate environment, and it's the right thing to do. And therefore, that helps create higher ROEs, high retention, higher cross-sell, creates a funding strategy for us as we've termed out some of that money with term GICs, creates a good liquidity profile That levers into a very strong balance sheet with 12 7, higher liquidity than you've seen funding strength. So again, from that perspective, I think this is overall enhancing the high ROE franchises in Wealth and Canadian Banking, U.S. Wealth that we have. The second thematic is certainly on cost. And as I mentioned, we hired -- and…

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