Royal Bank of Canada (RY) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to RBC's conference call for the fourth quarter 2020 financial results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.

Thank you and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer and Graeme Hepworth, Chief Risk Officer. Then, we will open the call for questions. Also joining us today are Neil McLaughlin, Group Head, Personal & Commercial Banking, Doug Guzman, Group Head, Wealth Management, Insurance and I&TS and Derek Neldner, Group Head, Capital Markets. As noted on slide one, 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. To give everyone a chance to ask questions, we ask that you limit your questions and then re-queue. With that, I will turn it over to Dave.

Thanks Nadine and good morning, everyone. And thank you for joining us today. I will start with some context on the fourth quarter and then provide my thoughts on the macro backdrop and how we are positioned heading into 2021. Today, we reported fourth-quarter earnings of $3.2 billion driven by continued strength in our leading Canadian banking, capital markets and wealth management businesses. Despite the significant impact from near zero interest rate and challenging operating environment brought on by the COVID-19 pandemic, earnings per share were up 2% year-over-year. We benefited from strength in trading and underwriting revenue in capital markets, strong fee-based revenue growth in our wealth management businesses and double digit volume growth in both Canadian banking and City National. Our results this quarter also benefited from our continued focus on risk management and cost control. Now for a few thoughts on the macroenvironment heading into 2021. The economy has rebounded well to-date. But given the emergence of the second wave of COVID-19 in our core markets, we expect economic growth to slip over the next couple of quarters and project Canadian economic growth in 2020 down over 5%. However, we project GDP growth to rebound 4% to 5% in 2021. The pace of economic recovery still remains contingent on the uncertain trajectory of the pandemic. While we received positive news on the development of a series of vaccines, much uncertainty remains on the timing and execution of the rollout of a vaccination program. As a result, we will need to continue to focus on bridging and mitigating the impact of the pandemic on our citizens. We applaud the significant support government programs have provided to our clients to-date. We are pleased to see key programs extended. Measures to curb the spread of the disease must put the health and safety of people first and foremost, but also remain flexible and dynamic to manage the damage done to the economy and particularly to small businesses. For RBC's part, we will continue to work with our clients to support them through this difficult time. Since the start of the pandemic, we provided significant support to our clients, including deferrals on more than $90 billion of loans. While the majority of clients have returned to making payments on their loans, some will experience further difficulties with the effect of the second wave and Graham will speak to this later. Therefore, while long term interest rates have started to move higher, we are operating with the belief that low short term interest rates will persist for an extended period. Low interest rates combined with elevated levels of monetary and fiscal stimulus provide both a buffer for individuals and businesses to manage the uncertain year ahead. It also provides a catalyst for growth, once the health risks have been minimized. Throughout the uncertainty and volatility of the past year, the strength and liquidity of our balance sheet has remained a constant. We ended the year with a record CET1 ratio of 12.5% with Common Equity Tier 1 of nearly $6 billion over the past year. This provides a $19 billion buffer against the current regulatory minimum of 9%. In addition, we increased our allowance for credit loss to over $6 billion, up nearly $3 billion from last year and this represents over 4.5 times coverage of our last 12 months write-offs and nearly 90 basis points coverage of loans and acceptances. Our strong balance sheet gives us flexibility not only manage the uncertainty ahead but allows us to continue supporting our clients, spur growth in the economy and drive shareholder returns. This year, we paid over $6 billion in dividend to our common shareholders, up slightly from 2019. Despite the significant increases in capital levels, we delivered a premium ROE of 16% in the fourth quarter and continue to create value for our shareholders for tangible book value per share up 5% in a stressed year. Heading into 2021, we are maintaining our three and five year medium term objectives. However, we recognize that meeting this target for the near term will be challenging or be challenged by the ongoing impacts of COVID-19, the prolonged low interest rate environment and capital deployment restrictions. One path to higher ROE and EPS growth will be through our continued emphasis on prudent cost control. Our past investments in digital capabilities, data and cyber and risk management systems have underpinned our ability to support our clients and manage the last nine months with operational resilience. While we continue to invest in our core businesses and strategies, we remain committed to running our bank more efficiently with an emphasis on containing expenses and driving productivity. I now want to speak to the full year performance of our businesses. All our core businesses reported strong client volumes, driven by our investment in technology, our advice-led sales force capability, award-winning client experience and simpler, easier to use products matched with resilient customer needs. Canadian banking reported net income of over $5 billion for the year, underpinned by strong volume growth. We have added over 60 basis points of market share in core checking accounts over the last two years alone. We view this as a core relationship product and our goal remains to add more clients by expanding our digital capabilities and reach and leveraging our scale to add more relationship value. Our Canadian banking and wealth management teams continue to partner to provide a continuum of offerings to our retail and wealth clients, covering the full spectrum of clients segment and needs. From our InvestEase's robo-advisor and direct investment brokerage platforms up to our full-service discretionary wealth management. We have seen significant expansion of client relationships through this closer collaboration with over 65% of Canadian wealth management clients now having a Canadian banking product and with further cross-sell initiatives in progress. We are proud of the success we have had in an advisory role with clients. MyAdvisor, where clients can meet virtually with digital financial specialists, surpassed two million client onboarded with a personalized plan since its launch in 2017. Turning to the mortgage business. We recorded very strong residential mortgage growth of 11% year-over-year. The Canadian housing market has been exceptionally strong as work from home arrangements have driven an increased desire for more space, including in suburban areas and smaller markets. A limited supply of detached homes and pent-up demand have also contributed to housing activity. We continue to gain market share through our 750 strong mortgage specialists driving more new originations and an overall focus on client loyalty where we are seeing retention rates at nearly 92%. While low interest rates will continue to support buyers, we expect mortgage growth to slow going forward as pent-up housing demand begins to cool. In credit cards, our partnerships and engaged membership base drove nearly $120 billion of purchase volume this year despite the reduction in travel. With RBC Ventures, we continue to advance our strategy to differentiate the bank by creating value beyond banking. Ownr, for example, which provides digital incorporation services has now supported 13,000 new business starts in 2020 alone. Of those we incorporated, we have been able to convert 57% to RBC business banking. In addition,. Ownr recently acquired Founded, adding both scale and new product offerings including higher-margin subscription services to our existing book. Turning to wealth management where we generated over $2.1 billion in earnings in 2020. In these volatile times, we are seeing an increased demand for holistic wealth management and active asset management solutions. RBC Global Asset Management, retail funds captured over 40% of Canadian net sales this year, consistently outpacing industry trends and added to our leading 16% market share in Canadian retail AUM. The strong performance in net sales was driven by our expanded advice and planning capabilities along with very strong investment performance in our funds with 70% of AUM outperforming the benchmark on a three-year basis. More broadly, the RBC iShares line continues to be a strong partnership, capturing a significant 20% of year-to-date industry flows as of September. In our Canadian wealth management advisory business, we continue to hire experienced investment advisors while also seeing very limited attrition rates. Our industry-leading recruiting efforts have added nearly 15 billion in AUA over the last two years and our over 1,850 investment advisors drive revenue per advisor is nearly 30% higher than the Canadian average. We saw yet another strong year of organic franchise growth in our U.S. wealth management and City National franchises. We have brought in over $60 billion of AUA since 2018 through hiring experienced financial advisors in our U.S. private client group. We continue to organically scale up the platform, which is the seventh largest wealth advisory in the U.S. by advisor account. We also continue to see strong volume growth at City National with loans up 25% and deposits up 31% from last year with broad-based growth across all business lines. City National grew its client relationships by nearly 14% over the last two years and we will drive targeted efforts to deepen these relationships. We also continued to add private bankers to accelerator our strategy to provide complete financial solutions to high net worth and ultra high net worth clients. Turning to our insurance segment which generated net income of $831 million in 2020. This segment continues to generate high ROE earnings and provides a good source of diversification against credit and interest rate risk. Our diverse insurance client base is building relationships with our other Canadian retail franchises and have added over 800,000 clients since 2018. Capital markets had an exceptional year, generating near record earnings of $2.8 billion and a strong ROE of 11.7% while absorbing total PCL of $1.2 billion. The strong results speak to a diversified business and a geographic mix, balance sheet optimization and a well-managed risk profile which together results in lower than average earnings volatility relative to global peers. Our global markets businesses reported very strong results this year as they benefited from robust client activity and successfully navigated a volatile market environment. Looking ahead, we expect trading activity to moderate in the year ahead. Client engagement was exceptionally strong on our fixed income and equity desks and to further value to clients, RBC Capital Markets launched Aiden, an AI-based electronic trading platform which has already traded over 2.5 billion shares and 65 billion of notional volumes over the last 12 months. We also supported our corporate investment banking clients' financing needs through various stages of the pandemic. As liquidity concerns moderated, our clients continued to take advantage of low interest rates and constructive equity markets to raise capital, thereby boosting our underwriting revenue. Looking into 2021, we do not see this elevated pace of underwriting activity continuing. Although M&A activity was on pause through most of 2020, we have led some very significant transactions. For example, recently RBC Capital Markets acted as financial advisor to Cenovus as part of their $24 billion merger of equals with Husky. In the very active technology sector, RBC acted as active joint bookrunner on Nuvei's IPO and as exclusive financial advisor to Lightspeed on the acquisition of ShopKeep. Looking ahead, we are more engaged with our well-capitalized clients on strategic advisory mandates and are seeing the M&A pipeline start to build again. Also, we are deepening client relationships in the U.S. and will also look to strengthen senior coverage teams in key sectors. In conclusion, our performance in 2020 speaks to the scale, strength and resilience of our diversified business model and the significant investments we have made in technology and our people over a number of years. Despite the significant impact of COVID-19, we seamlessly mobilized to support our clients, strengthened our balance sheet, invested in our core franchises, supported communities and paid dividends to our shareholders. We enter 2021 with strong momentum, strength, stability and operational resilience to support our clients and continue creating value for them. And to our shareholders, we are grateful for your support and we remain focused on executing our strategy to deliver long term value. I also want to take this opportunity to thank our more than 86,000 colleagues across the bank for their relentless dedication in supporting our clients, communities and each other in such an extraordinary year. I will not turn it our to on alternate over to Rod.

Thanks Dave and good morning everyone. Starting on slide 10. We reported quarterly earnings of $3.2 billion. Earnings per share of $2.23 was up 2% from a year ago. Pre-provision, pre-tax earnings of $4.6 billion were up 4% from last year, despite absorbing the impact of lower interest rates, which I will speak to shortly. Before I turn to segment results, I will spend some time on four key topics, expenses, capital, net interest margins and non-interest income. Starting with expenses, which were down 4% year-over-year or down 2% when excluding the impact of severance and related costs within I&TS last year. This quarter highlighted our continued commitment to prudent cost management with the vast majority of expenses either relatively flat or down from last year. Variable compensation in the quarter was down significantly from last year, largely in capital markets. We also continued to benefit from further reductions in marketing and travel costs which were down approximately $80 million from a year ago and more than offset incremental COVID-related costs. Offsetting cost increases on discretionary items was an increase in technology and related costs as we continued our investment in digital solutions to enhance our clients' experience. As Dave mentioned, we will balance investments in key growth areas while also being laser focused on cost, including balancing project prioritization. We also have a number of cost containment programs already in place across our businesses. Looking ahead to 2021, we expect expense growth to remain well-controlled in line with our pre-pandemic commitment to slowing expense growth. Moving to slide 11. Our CET1 ratio increased 50 basis points quarter-over-quarter to a strong 12.5%. Our capital build was yet again underpinned by strong capital generation which added 31 basis points to our ratio this quarter. I will now discuss RWA movements on slide 12. Negative risk migration was partly offset by continued paydown of corporate credit facilities to levels closer to those before the onset of the pandemic. Now last quarter, we guided to credit migration on our commercial portfolios over the coming quarters and we saw that expected trend crystallize this quarter. 70% of the lending-related net credit downgrades this quarter were driven by migration in Canadian commercial lending largely related to vulnerable sectors. We reviewed a large majority of our Canadian commercial portfolios and absent a material adverse event, we don't expect further significant migration going forward. And as a reminder, next quarter we will include a reduction in OSFI's transitional capital modification which is expected to impact our CET1 by an increase of approximately 10 basis points. Now moving to slide 13. Net interest income declined 2% year-over-year as strong volume growth was more than offset by the impact of lower interest rates. All bank NIM increased three basis points from last quarter benefiting from slightly lower, albeit still elevated enterprisewide liquidity. At a segment level, Canadian banking NIM declined two basis points quarter-over-quarter as the impact of lower interest rates and asset mix more than offset the benefit from strong personal and business deposit growth. City National NIM was down seven basis points relative to last quarter. Given the more asset sensitive nature of the balance sheet, lower interest rates continued to negatively impact loan and investment yields. This was partially offset by lower funding costs. Looking forward, we expect NIM to continue to decline modestly in both Canadian banking and City National. However, we would expect positive net interest income growth year-over-year in both segments by Q3 next year as we expect the impact of lower interest rates to be more than offset by our strong volume growth. We also expect to see elevated liquidity levels continue to decline to more normal levels through balance sheet optimization and as the Bank of Canada programs begin to roll off in the coming quarters. Turning to slide 14. Non-interest income was down 3% year-over-year or up 3% net of insurance fair value change and the prior-year gain on the sale of BlueBay's private debt business. Our results this year show the benefits of a diversified business model with our non-interest income representing over 50% of total revenue, providing an offset to the impact of lower interest rates. The strong performance of market-related revenue also highlights the countercyclical nature of some of our non-interest revenue streams. Strong capital markets and wealth management non-interest income offset lower fee-based revenue in Canadian banking which was affected by the impact of COVID-19. Moving to our business segment performance beginning on slide 15. Personal commercial banking reported earnings of over $1.5 billion. Canadian banking quarterly net income was $1.5 billion, down 5% from last year as the impact of lower interest rates in card service revenue more than offset lower provisions for credit losses and strong volume growth. Core checking account growth was up over 20% from last year. In addition, personal GIC balances were up mid single digits. We are also seeing strong growth in our direct investment balances and business deposit growth was up a robust 25%. This strength extended to mortgages with double digit growth driving total loan growth of 5% year-over-year. Commercial banking loan growth declined to 2% year-over-year. However, with commercial utilization rates remaining below levels noted in March, there is potential upside with sustained economic growth. The sequential decline in card service revenue was largely related to $35 million of one-off items with underlying spending volumes also lower from last year. However, we did see an uptick in credit card balances as the economy slowly opened up in the summer. Turning to slide 16. Wealth manager reported quarterly earnings of $546 million, down 25% from last year. Excluding the impact of the BlueBay gain last year, net income was down 8% year-over-year, largely due to the impact of interest rates and higher expenses, primarily in our U.S. wealth management business. Canadian wealth management benefited from higher fee-based client assets. This was partially offset by the impact of lower interest rates. Global asset management revenue decreased 15% year-over-year, but excluding last year's gain, revenue was up 8%. AUM increased by over $50 billion year-over-year with over two-thirds coming from total net sales and the rest from constructive markets. Net sales were broad-based with two-thirds of the long term sales driven by international institutional mandates. Very strong volume growth at City National was more than offset by lower interest rates. Retail loan balances increased 15% year-over-year underpinned by a focus on jumbo mortgages. Commercial loan growth was up 26%, or up 13% excluding the impact of BBB loans. We also saw solid growth in our U.S. private client group with AUA up $27 billion from last year, benefiting from both higher market returns and net sales. Now turning to slide 17, we discuss insurance results. Net income of $254 million this quarter decreased 10% from a year ago, primarily due to unfavorable annual actuarial assumption update, mainly related to mortality experience. Turning to slide 18. Investment treasury services net income of $91 million increased $46 million from a year ago as the prior-year included severance and related costs associated with repositioning the business. Excluding this, earnings were down 29% year-over-year. Given revenue headwinds in this challenging environment, we will continue to assess and act on strategic cost management initiatives in this business. Turning to slide 19. Capital markets reported record fourth quarter earnings of $840 million. This was the fourth quarter in a row with revenue over $2 billion in pre-provision, pre-tax earnings in excess of $1 billion, reflecting the continued strength of our premium capital markets franchise. Corporate investment banking reported yet another quarter with revenue over $1 billion, up 16% year-over-year as we continue to deepen client relationships and support financing needs. Our clients continue to pay down previously drawn credit facilities to more normalized levels and instead took advantage of lower financing costs to access debt capital markets which contributed to strong debt origination fees. Our equity underwriting business also benefited from the shift in financing trend as equity markets also remained constructive. While the M&A pipeline is recovering and our advisory revenue remains muted, we gained market share in what is an area of focus. Global markets had yet another strong quarter with revenue up 22% from last year to $1.3 billion, wrapping up a strong year where business generated revenue of over $6 billion. Equities trading remained strong benefiting from elevated volatility and strong client flow in equity derivatives. We continue to see strong credit trading benefiting from narrowing credit spreads and secondary trading activity. Rates trading continues to be robust and higher fees and commodities were offset by decline in FX trading. Now turning to slide 20, a final thought on our three and five year medium term objectives. We met three out of the four of our stated financial objectives while falling short on EPS growth given significantly lower interest rates and a record level of PCL recorded under IFRS 9 this year. Despite current headwinds, we remain committed to our medium term objectives. However, we are suspending our 2021 targets highlighted at our 2018 Investor Day. The current macroeconomic forecasts around the forward interest curve and GDP growth on a cumulative basis are materially lower than where they were in June 2018 expectations. But as Dave and I mentioned earlier, we remain committed to improving productivity, attracting new clients through our differentiated products and services and increasing our market share consistently over time. And with that, I will turn it over to Graham.

Thank you Rod and good morning everyone. Starting on slide 22. Gross impaired loans of $3.2 billion or 47 basis points were down $662 million or 10 basis points from last quarter, maybe due to fewer impairments across all business segments with capital markets accounting for nearly two-thirds of the decrease. Turning to slide 23. PCL on impaired loans of $251 million or 15 basis points was down $147 million or eight basis points from last quarter due to lower provision across all business segments. In Canadian banking, PCL of impaired loans of $169 million was down $95 million or nine basis points from last quarter as the impact of payment deferrals and government support programs kept delinquencies and impairments muted. In capital markets, PCL on impaired loans of $68 million was relatively flat to last quarter. In wealth management, we had no net PCL on impaired loans this quarter but the provisions required for new impairments were offset by recoveries previously impaired loans. Turning to slide 24. We maintained out allowance from credit losses at a strong $6,1 billion or 0.89% of loans and acceptances, consistent with the prior quarter. This resulted PCL on performing loans of $147 million this quarter which is down by $133 million from last quarter, mainly in our Canadian banking retail portfolios and in capital markets. While this quarter there were favorable changes to our forecast for house prices as well as the near term Canadian and U.S. GDP growth, equities and U.S. bond yield, we elected to increase the weights to our downside scenarios by 10% give the resurgence of containment measures due to the rise of COVID-19 cases in many of the regions where we operate. Let me now comment on Canadian banking relief programs, starting on slide 25. At the end of October, nearly 90% of retail deferrals offered as part of our client relief program have expired. Only 2% of those deferrals have become delinquent, of which a third were delinquent prior to the referral being put in place. This has resulted in a slight uptick in early stage delinquencies from the Q3 lows. Of the remaining $6.3 billion in active deferrals, which represents less than 2% of our Canadian banking retail portfolio, over 75% are expected to roll off by December with the balance mostly rolling off by March 2021. Nearly all of the active deferrals are from our residential mortgage portfolio which includes HELOC. Of these active deferrals, less than 2% of the balances are uninsured with a current LTV greater than 80%. And the majority of those balances are in Alberata which has seen a decline in home prices over the last few years. While we do anticipate retail delinquencies to rise over the coming quarters as all deferrals roll off, at present delinquencies remain lower than our normal rate. Turning to slide 26. Nearly 90% of commercial and small business deferral have also expired. Nearly all of our clients who had a payment due after the expiration of the deferral period have returned to performing, in line with the general credit performance of those portfolios. For clients who took deferrals and have a business deposit account with us, deposit balances at the end of October averaged over 14 times of their monthly debt service obligations, up from an average of 11 times last year. The increase in debt service coverage is due to rising average deposit balances and declining utilization for borrowers who have taken deferrals. 35% of active deferrals and 41% of the expired deferral population operate in a vulnerable sector. And through our client outreach program, we have proactively contacted almost all of our retail and commercial clients who requested a deferral to see how we can best support them. And while the majority of clients have indicated that they don't require further assistance, we are working with those who do to help them navigate these challenging times. Turning to slide 27. Certain sectors have been negatively impacted by containment measures put in effect to curb the spread of COVID-19 while others have benefited. This exposure represents 5% of our total loans and acceptances outstanding, down from 6% last quarter as utilization trends continued to decline. Let me discuss the sectors that represent the majority of our vulnerable exposures, starting with commercial real estate on slide 28. Nearly 30% of our vulnerable exposure is to retail-related commercial real estate which continues to be impacted by business closures and physical distancing measures making rent collections more challenging. Only a small portion of this exposure is to smaller independent retailers and non-investment grade enclosed malls which has seen rent collections trend down again as COVID-19 restrictions have turned in certain regions. Most of this exposure has a high debt service coverage ratio and lot LTV. Nearly 30% of our vulnerable exposure is in the consumer discretionary sector. Retailers with limited to no online presence, hotels that continue to see low occupancy rates and recreational companies that have been forced to temporarily shutdown to meet COVID-19 restrictions continue to be the most impacted segments of this sector. Over a large portion of this exposure is secured. Casual dining restaurants with no drive-through or takeout options have also been impacted. But the majority of our restaurant exposure is in the quick service segment. 20% of our vulnerable exposure is in the oil and gas sector which continues to be impacted by low commodity prices, due in part by the reduction in demand from COVID-19, limited access to capital and a weaker market for asset sales. A larger majority of exploration and production exposure benefits from a borrowing base loan structure. Thus far, all borrowing base redeterminations have been relatively benign, supported by higher commodity prices compared to the spring. And most of our remaining vulnerable exposure is in portions of our transportation and other services sectors. While each sector is unique, we believe that the support programs in place will continue to help mitigate potential loan losses. Overall, the macroeconomic environment has proven more supportive than originally forecasted at the onset of the pandemic, due in part to the extent of government support programs which resulted in better than anticipated credit performance this year. More recently, though, the emergence of a second wave of the pandemic has led to the reintroduction of restrictions which will negatively impact the economic recovery. We believe the economic impact of this second wave will be less severe than the first wave given the narrower and more targeted restrictions that have been introduced, a better understanding of the virus which as lead to stronger consumer and business sentiment and continuing government support. However, there is considerable uncertainty around the speed of the economic recovery and the availability of a vaccine as well as renewed pressure on vulnerable sectors due to the newly imposed restrictions. These are all factors which resulted in us putting greater weight on our downside scenarios, as I noted earlier. For context, our primary pessimistic scenario has the Canadian unemployment rate at above 9% until March 2023 and house prices declining by 8% and remaining depressed until late 2023. If such a scenario were to play out, we could see our ACL on performing loans increase by approximately 18%. As we look forward into 2021, we expect to see an increase in delinquencies and impairments over the coming quarters, particularly in our vulnerable sectors. But we believe that we are adequately reserved at this time. To conclude, we are satisfied with the resiliency of our high quality diversified portfolio, which has benefited from our strong risk-aware culture and disciplined approach to underwriting which remains focused on effective learning structures and solid risk return profiles. And as we have done since the onset of this pandemic we will work with our clients to help them continue to navigate through these uncharted times. And with that, operator, let's open the lines for Q&A.

[Operator Instructions]. Our first question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead.

Good morning. I guess a question for you, Graeme. Two parts. One, as we think about the outlook for PCLs, it sounds like you and your peers, just listening to the banks yesterday, have accounted for the migration we expect to see next year. So when we think about the PCL outlook, is it safe to assume that we go back in 2021 to the 25, 30 bips PCLs that we were used to pre-COVID? And if you can speak to just in terms of what your expectations are around the shift to impaired versus performing? And how soon could we see reserve releases actually begin? Thank you.

Sure. Thanks, Ebrahim, for the question. I would maybe break that out into the two parts, kind of the latter part of your question and talk a bit about the impaired piece and then what that means overall. But I think as we look into 2021, certainly on one hand, we are kind of working our way through recovery. But as we see short term headwinds like certainly the second wave that we are facing now, that will have an impact and it will have an impact on our vulnerable sectors. As well, we see deferrals rolling off and delinquencies starting to increase on the backend of that. And government support will over time normalize. And as those things come together, we do see a world where delinquencies and thus impairments will start to increase through 2021, particularly getting to higher levels of the backend of 2021. And so that's kind of how we see it flowing through this year. the point. When you think about performing PCL and ACL there, certainly we have built our provisions up through 2020, kind of very mindful of the pandemic and quite frankly the uncertainties associated with that. And so while there are pieces like the vaccine news coming out are positive in that regard, there are a number of factor that will go into how we think about our stage one and two allowances. First and foremost, the incurrence of stage three, the incurrence of impaired loans will be the biggest factors in driving how we think about stage one and two. Stage one and two is really there to address what we expect in the future and as that future actually manifests, we would expect that to kind of drive our considerations under stage one and two. But other considerations that will in there that will drive it is whether our forecast changed materially from where we are thinking about the world right now. To-date, we have largely, I think, trended consistent with macro projections we put forward. Housing has been one area that I would say has been materially better than what we had kind of started out with. But as we work through the vulnerable sectors and consider some of the key risk there, particularly in those commercial books, those are the areas that we worry about. And so we would be balancing all those things as we think through 2021. But there is such a high degree of uncertainty as to how that plays out, I think we are somewhat reluctant to put a real pin on the number there.

Got it. Thank you.

Thank you. Our next question is from John Aiken with Barclays. Please go ahead.

Good morning. Dave or Rod, I wanted to talk to the capital ratio, the 12.5% and not asking the usual what are the uses for capital. I think we all know that. But I mean if we are going to look at coming out of 2021, hopefully when we are in a more normalized environment, although I think we have been saying that for a long time now. What is your philosophy in terms of where the capital sits today? And where do you think it might be able to migrate? Is it going to go up? Is it going to go down? And what would you be comfortable with when everything is all said and done?

I will start, John. And then I will let Rod chime in. Certainly, as we think of a more normalized world where the buffers are restored to where our regulators want them and we are able to start to leverage this capital, as you said, into shareholder value accretion, whether it's buyback or growth or whatever adds to shareholder value. So as we think through where that normalized level was, we go back to where we were largely pre-pandemic, 10.75%, 11%, roughly. If things do not change from a regulatory perspective, we would view that as kind of where we would like to run the bank and therefore the capital, that surplus to that, in a more normalized world, we would like to create shareholder value.

Yes. And the other element I would chime on is, obviously we are restricted from increasing the dividend and share buybacks and that makes sense given the pandemic. But as I was listening to Graeme talk about the outlook for PCL, just recall, a year ago we had gross impaired loans of about $3 billion and total allowances of about $3.5 billion. Now we have gross impaired loans of $3.2 billion and reserves, including acceptances, $6.3 billion. So think about our excess capital of $18 billion plus that $6.3 billion as strength and a fortress balance sheet. And as we have seen the losses come through in this pandemic, we are well-positioned to support our organic growth and our strategic initiatives going forward.

Great. Thanks for the color, guys. I appreciate it.

Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Good morning. A couple of questions for Graeme. This might not be a fair one but I look at the 14 basis points loss rate in Canadian banking, lowest that it's ever been. Like, what would that be if not for all these support programs? And then relatedly, you added $147 million through your performing provision. Is there a debate at all? Like, if you were to, just going by your models as you set them, would you be releasing reserves at this point? Or do you see that as a scenario that's worth considering?

So, thanks Gabriel. Maybe to start on the Canadian banking. Certainly, we see the level of provisions, the stage three level provisions this quarter being very muted, as I said, in a huge part due to the deferral programs that we put in place to support our clients and then certainly the by-product of the strong government support that's been out in the marketplace supporting those clients. And you really see that as a consequence of really the decline in new impaired loan formations this quarter that's really driving that. So this is not about the recoveries or reversals in that form. So that's driving that. And you are asking what it would have otherwise been, else-wise? I mean I would more look at through a lens as kind of what is our normalized stage three PCL. And that would be the context you could kind of consider it in, if you will, because we haven't really seen the impact of the pandemic flow through to this point. Additionally, I think it really is reflective of, I think, the very strong client base we drive at Canadian banking. We very much focus on our prime and super prime client base there. And so we do have a high-quality client base, which isn't to say that that client base won't be impacted at all in the pandemic, but it does, I think, position us in a very strong place to go through this. And then, your other question around the thinking around stage one and two. I mean, again, I kind of go back to my earlier comments here. This quarter, again, we had improvements in our forecast around HPI, some modest improvements in other areas. So that would be a positive from an ACL perspective. We did get more concerned about the kind of the likelihood of a second wave and we are certainly seeing that manifest itself. And so those were kind of competing impacts that would kind of offset each other. And then, management's discretion comes in here and view comes in here as well and we go through an analysis looking at kind of the forward forecast, how we think government support will eventually roll off. And those all come into play post the spot where we took a slight increase in our overall performing ACL. We really took the bulk of that back in Q2 when we built up our balances. And really, what we have seen in Q3 and Q4 are some adjustments to that as we kind of work through with new information, but haven't really had us change our view materially. Certainly, things like the vaccine is important new information out there that's come to light over the last couple of weeks. So as Dave alluded to in that, there's still a lot of unknown information there as to how that's going to impact the economic recovery and that will be something we will be thinking through carefully in Q1. Hopefully, we will all have a better line of sight as to what that means. But those are all kind of factors that kind of led us into our thinking for Q4 this year.

Yes. I guess, we are just all trying to figure out what these ratios look like when all the support programs roll off. And it sounds like everybody is struggling with that. So thanks.

Thanks Gabriel. Take the next question.

Thank you. Our next question is from Meny Grauman with Scotiabank. Please go ahead.

Hi. Good morning. Just turning back to the buybacks. I understand I also would want to be cautious. But do you believe there is a good case to be made for allowing buybacks now, let's say? Is that something that is, is there a valid argument for that in your view?

Look, I think, Meny, if you listened to all our commentary around kind of the uncertainty of the next six to nine months and the timing of this and the impact on our clients, notwithstanding there is extended government support. So we are trying to evaluate all of that. And I think as you have seen, we have focused on growth in client areas where we are sure-footed, particularly mortgage growth and where we really understand that client base very well. It's largely a growth through an existing client. So if we were sitting here today saying, would you take back capital, if you could, I think it's a little premature. I think we want to see a more stable recovery. We want to see a more stable unemployment rate. And I think caution still should rule the day. So I wouldn't push the regulator right now. But as things progress, as we start to see more stability and clarity in a normalized world, then it would be appropriate. So I think that's the way you have to look at it. There's still uncertainty out there and we are going to be prudent in how we manage the bank.

And just a follow-up on that. We are hearing from other management teams and I think maybe it's a consensus that the second wave is less damaging. This current lockdown is going to be less damaging from an economic point of view than the first wave. People are getting used to it and they have workarounds. You sound cautious. But sort of would you share that view? Or how would you look at the risk here in terms of the second round of lockdowns?

Absolutely. I think we have learned a lot and it was in Graeme's comments around how the second wave will play. And we are not going into the same sense of lockdown. We have recovered 2.4 million out of the three million jobs lost. There's still 600,000 unemployed. So that's a big step forward. Many of the remaining 600,000 are in kind of a narrower segment, a service industry. So absolutely, the second wave, in addition, bolstered by extended government support will have less impact than the first wave. We are just taking a cautious approach. Having said that, you have seen very significant volume growth and client growth across all our businesses from capital markets to the wealth franchise to the Canadian banking franchise. That's really strong growth that you are seeing at lending products and deposit products. So we are operating very effectively, still with a conservative risk profile. And you can see that manifest itself in our stage three losses. As I think the previous analyst commented, those are very low loan losses, yet we are continuing to grow our balance sheet and our franchise and it talks to our client base and our risk posture that we are good at this. So I think net net, we are finding a way to grow this franchise to create long-term value while managing in an uncertain environment.

Thanks a lot.

Thank you. Our next question is from Scott Chan with Canaccord Genuity. Please go ahead.

Hi. Good morning. Rod, I wanted to go back to your comments and I just want to make sure I got it right. I think you talked about that you believe or you are targeting that the bank could get back to NII growth in fiscal Q3 2021 on the Canadian and U.S. line. I guess one is that, did I hear that correctly? And maybe kind of talk about how that intertwines with your comments on kind of margin compression near term versus the volume trends?

Sure. Sure. Thanks, Scott, for that. So the largest player here on the net interest income and the NIM is when the interest rate decreases took place, which was, think about it into the middle of March. So you are talking about halfway through our second fiscal quarter in 2020. So as we are in Q1 of 2021, the year-over-year comparison has the higher interest rates from the prior year for the full quarter. In our second quarter in 2021, you are going to have it for half the quarter last year. So those are going to be tough comparables. So on a year-over-year basis, the NIM compression is severe. On a sequential basis, it's muted just like it was this quarter. And so as we roll into Q3 next year, the year-over-year decline is going to be much lower than what we have seen for the previous four quarters at that point. And so therefore, our volume growth, which has been very strong, will more than offset that. And so you will be able to see net interest income growth on a year-over-year basis, starting in Q3 for both of those businesses which are interest rate sensitive.

That makes sense. And if I could sneak in one more for you, Rod, just on the costs. It came in well this quarter. And if I look at fiscal 2020, costs were up 2.5% at the all bank level. Is that a good kind of metric to use next year, kind of in that low single digit range?

Yes. We are striving for lower than that next year. Obviously, we will see how capital markets and wealth management play out because there's a higher variable comp element based on market-driven forces. But all other expenses, we are actually targeting lower than that 2.5% this year.

Okay. Thank you very much.

Thanks for your question.

Thank you. Our next question is from Doug Young with Desjardins Capital Markets. Please go ahead.

Hi. Good morning. Just, Rod, sticking with you on the NIM side. If I look at the all bank NIMs, excluding trading 1.62%, it's down 45 basis points year-over-year and I get kind of the different moving pieces. But what I would like to focus in on is the impact that has come through because of the amount of liquidity that you are holding. And just wondering, as you think forward, so maybe the two-part question, like what has been the impact on your all bank NIM, excluding trading, from the excess liquidity? And how do you see that unfolding over the next two years as some of that liquidity comes out? Should we anticipate some of that being backed out?

Yes. So there's always a lot of noise on the all bank NIM. Obviously, the excess cash and liquidity that we have right now is just playing a part in that. There's a part on mix depending on the types of assets that you have on the balance sheet. So there's a little bit of nuance there and how you are growing certain levels in certain businesses as well. But I would look at it as a few things, right. As some of the government programs are rolling off as we get into the second and third quarters next year. So some of those programs are going to be winding down and we are going to be repaying some of that money back, which is going to strip down some of the excess liquidity. The other element is that we would expect our loan growth to outpace our deposit growth, which wasn't the case this year. So going into 2021, as that happens, that will also use up some of that excess liquidity. And then also, we are going to be doing some term funding to comply with TLAC. But it's going to be lower and has been lower this year and we expect it to be lower next year than it was in previous years. So that's also going to help. So all of those are going to be putting a little bit of upward pressure on it. But let's not get overly exuberant on that because the interest rates are low. Yes, the longer rates have come up a bit. But there's not going to be a whole lot of upward momentum from a double digit basis point perspective.

And just to follow-up, maybe --

We are trying to let everyone get in here. We do plan on going over for a few minutes. I know our speeches were longer at the end of the year. So we will run over and try to clear the queue here. So let's move on and please requeue for a second question.

Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.

Good morning. Rod, probably for you. It's fairly detailed, but when I look at your other income, there has been significant volatility in that other line. And I wouldn't really be so focused on --

Mario, we lost your line.

We lost you. Maybe, operator, we will go to the next question and are we --

We got connected this time, Mr. Mendonca?

Guys, can you hear me now?

Yes.

Can you hear me now?

Yes.

Sorry about that. Rod, I wanted to go do sort of a nitpicky question here on income. There's a fairly significant, there's a lot of volatility in that other income line this year, a lot more than we had in the past. Normally, I wouldn't care so much. But the number is fairly large and it can have a pretty significant swing in other income quarter-to-quarter. Could you talk a little bit about what's caused all the volatility in that other line this year? And maybe specifically this quarter?

Yes. Sure. And a lot of this, unfortunately, is accounting and maybe we should put some information in to kind of help find the key to that. Because well, one thing is year-over-year, you had the BlueBay gain in there last year, which was $151 million, right. So that was a one-time event in Q4 2019. But then on a recurring basis, you have three real drivers. You have the wealth accumulation program in U.S. wealth management, where that expense moves up and down as what our employees have invested in moves up and down, but we hedge that. So on the one side, the expenses move up and down, but on the other side, the hedge is in revenue and that revenue comes through this line item. So that's typically a large driver of that volatility, but it has no impact on the bottom line typically. The other element is a lot of our securitization hedging, also in capital markets goes through this line item on the one side and trading on the other side. And then, the third element is some of the funding that we do across currencies and globally through our I&TS funding and liquidity platform. Again, you are getting some revenue here and an offset in net interest income, trading revenue or vice versa. So I can assure you that the year-over-year decrease of 2.96% is about 95% to 100% covered by those three items, which are accounting items with the exception of the one-time gain. And on a quarter-over-quarter basis, it's also the case. So we can probably provide a little bit better clue of how that goes back and forth, but there's really no economic decrease that you saw on that line item.

Yes. So maybe just a little bit of help there in understanding the offsets would probably get me all the way there. Thank you.

Thanks, Mario. Next question?

Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Thanks. Question for Neil. Obviously, good mortgage volume growth. Neil, can you give us a sense of how the mortgage spreads are on the new business versus the old business that's rolling off? Like my understanding is, mortgage spreads are higher. So I am just trying to kind of circle the square on why you continue to feel this margin pressure in Canadian banking. Thanks.

Yes. Thanks for the question. I think Rod touched on overall the biggest driver is really around interest rates that Rod touched on. Business mix plays, I think, a very small part of this. In terms of specifically the mortgage business, business mix in terms of really strong mortgage originations driving that growth would definitely contribute to that. And we are pleased with our performance in 2020 despite kind of the extreme slowdown as the pandemic hit, we did really slingshot out of that and compete well. I would say, earlier in the year, the spreads were tighter. There has been some relief there. But it's still, I would say, a very competitive market.

So can you comment on what the new business coming on, how the spreads on that compares with the business that is rolling off, if you will or getting renewed?

It will change month-to-month, but it's relatively even.

Thank you.

Thank you. Our next question is from Lemar Persaud with Cormark Securities. Please go ahead.

Thanks. Just continuing on Scott's question on expenses. It seems like there could be a lot of puts and takes into 2021. So presumably, some of the COVID-related expense growth could become a tailwind. And if we are heading in the right direction towards a more normal operating environment, then some of the travel and business investment-related costs could come back. So all in, I guess, could you talk about what are the bigger puts and takes that go into your expense outlook for 2021? And then finally, do you think positive operating leverage would be somewhat attainable for 2021? Thanks.

Thanks Lemar. It's Rod. I will take that. So on the expenses, there will be a natural uptick for us on a few items. As we have mentioned, we have been investing in technology and we have been growing that spend over the last few years. The accounting requires you to capitalize and amortize that. So the spend that we have been building over the last few years continues to have a little bit of a headwind there as you amortize that. That's cash that was spent in recent years, but that will impact us going forward. I think overall, some compensation items for a lot of folks came down this year because of the lower earnings. And so therefore, as we reset that and hopefully have better performance next year, that might be a headwind. We also added some FTE, mostly on the front line this year. And as those headcount are with us for the full year, there's some natural uptakes there. So you do have some natural inflation there, but you also have our efficiency programs that we have been working through, which is why I was able to guide to an overall increase, absent some of the variable compensation nuances below that 2.5% growth rate this year in the low single digits. And so that's what we are aiming for. And in terms of positive operating leverage, again, it's important to look at it by business because business mix is such a big part of it because the margins are so different. But again, it's going to be the second half of the year. It's going to be tale of two halves of the year. Second half of the year, you are going to see better operating leverage. First half of the year is going to be a tougher operating leverage environment because of interest rates.

All right. Thanks. And, sorry, go ahead.

Yes. We will requeue then. Thanks.

Thanks.

Thank you. Our next question is from Mike Rizvanovic with Credit Suisse. Please go ahead.

Hi. Good morning. A question for Neil. I wanted to go back to your mortgage growth and specifically the market share gains you have been seeing, which clearly have been very strong for quite some time now. So what I am wondering is what's your outlook going forward? And have you reached a point where maybe you have picked some of the low hanging fruit? And does it get tougher from here to sustain that growth relative to your peers? I am not sure how much pricing goes into that as a driver into that mix. But if you can comment on what you sort of foresee going forward, that will be helpful.

Sure. Thanks for the question. I definitely wouldn't say any of the business we are winning is low hanging fruit. I mean, our regional leaders will tell you it's exceptionally competitive out there. I would say earlier in the year, there was one competitor that I don't think had the sort of the distribution scale. Obviously, we expect all of our competitors to come back hard at us. We have consistently, I guess, really sort of two factors. One, we have consistently grown our distribution capability. So we are looking for quality mortgage specialists. We set a really high bar. We don't sort of staff up and then staff down. We are sort of always kind of growing that sales force. And we have over 1,700 mortgage specialists that are out connecting with clients. So that's, I think, the first piece. The second piece in terms of really driving the growth and the market share is, we talked about this a couple of times over the last year. We have really gone through and often felt we have optimized each part of that business. So from lead generation, lead conversion, how we get through adjudication, right through the fulfillment, we feel we started the year really firing on all cylinders and I think we are really well-positioned to come out of the pandemic and compete well. So that and then I think good representation with our sales capability in the markets that are really growing in Ontario, BC and Quebec, where you are seeing the largest growth. So that's what I really think is the sort of the fundamentals of our success. I wouldn't say we are going to continue to see this growth rate. Rod had mentioned or sorry, I think Dave had mentioned, we do see growth rates starting to come off, but coming off a very high level.

And just real quick. So is pricing a major contributor to your recent gains?

No. I mean, we would say we do not lead with price. I would say price is something when we found ourselves be uncompetitive. It was because we were a few basis points outside the competition. And we take a lot of work to make sure we are constantly triangulating what the market price is and it's become very fragmented, product-by-product, region-by-region. But we do not lead with price. Our target is to be offer a competitive price with better advice and better reach.

Okay. Thanks for that.

And you heard the previous question that margins have been stable, which is the best mark on that. Next question, please?

Thank you. Our next question is from Paul Holden with CIBC. Please go ahead.

Thanks for taking my question. So I heard your message loud and clear on being conservative for the next six, nine months or so and continue to focus on lower risk opportunities. Wondering how you think about the pivot in a post-pandemic world, which eventually we will see? Do you think you need to pivot to different areas of growth when that happens? And what might be those areas of growth you could pivot to?

Well, if you look at the solid growth that we have exhibited across all our businesses and market share gains in wealth management and market share gains in capital markets and in the retail bank, I think we are doing a good job of continuing to grow the franchise and serving our customers. So it's not like we have gone into a risk defensive position and aren't putting any business on the books. We are serving our customers very well. I think our investment in technology has allowed us to cross-sell and retain clients to a greater rate. And I think that's driving our growth. So when you see mortgage retention rates at the historically high levels they are, it's from reengineering the processes and focusing on that. So I don't want people thinking that we are on a risk-off position. Our growth would indicate otherwise, I think the posture. So as we come out of this, you are going to see some of the contributions to our net income growth from businesses that have had a hard time this year. Our credit card business, payments, balances are down, as you can see, almost $2 billion. Card activity has been pretty stable, but our clients aren't revolving and aren't using the product the same way. That business can rebound. You have seen the significant impact interest rates have had on our wealth franchise in the United States, significant impact. We have earned through that. That's going to be a contributor to growth as we come back through that. As we look at client activity levels really drive our volume growth. So we don't change our risk appetite. We don't change our risk posture significantly through a cycle. Therefore, we are not going to go into a big risk-on position. We manage through cycles. It's really how our clients interact with us and what their needs are. And we certainly will see our business clients and our commercial clients and capital markets clients go on to the front foot more and that should drive M&A mandates, that should drive underwriting activity, DCM, ECM. And so those activity levels, we are really well-positioned for. We have invested in this franchise. As you can see, as Rod referenced, our front line numbers have gone up. We are positioning ourselves to emerge with an accelerated momentum at the end of the year by investing in capabilities, investing in staff. So that's how we are signaling shifting to the front foot, getting ready for more client demand, investing in client value and technology. So we feel very good about where we are today on momentum and our relative position to capture further growth coming out of this.

Got it. Thank you.

Yes. We will take and try to clear the queue. We have got a few more questions.

Okay. Thank you. Our next question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead.

Hi. Thanks for taking my question again. Just a follow-up, Dave, on capital allocation. Completely get that you want to be a bit more cautious in the near term. But as we look out, I mean, I think, you have a stock which is probably one of the best valued bank stocks trading close to two times price to book. Give us a sense of how you think about buybacks versus M&A? And again, I get you kind of ruled out brick-and-mortar type franchises in terms of M&A. But is it fair for shareholders to expect you to be a little bit more creative when it comes to capital allocation and looking beyond buybacks if and when we get to that stage?

We are always looking for opportunity to grow shareholder value. We have kind of signaled to you the parameters that we are looking at, if we would make an acquisition and the shareholder returns and the timing of those shareholder returns. First and foremost, to my previous answer, I won't go through it again, but we see significant organic growth opportunity. You are seeing double digit growth across our businesses. And that's from the investments we have made. So we are going to use capital and that's the highest ROE. You have seen us deliver 16% ROE in Q4 at a 12.5% CET1 ratio. It tells you the focus we have on driving shareholder value. But absolutely, we are looking to scale in the United States. And we have got a significant franchise momentum there and we continue to look for opportunities. It has to have a cultural fit. It has to drive the right synergies. We have to be confident in that synergy journey. But it's not like we are sitting back and not doing anything. We are looking. We are thinking. So if there's an opportunity that presents itself that checks the boxes, we will absolutely use that surplus capital to execute a growth trajectory. We are just very conscious of the trade-offs that we have, organic growth first. And we expect to continue to meet our organic growth plans and generate surplus capital. So I think from that perspective, looking forward, we have significant strategic flexibility and we are going to use it smartly to create value for you. So absolutely, we are looking at all three mechanisms. And Rod, did you want to jump in?

Yes. I will just provide two data points, Ebrahim, that might help. One is we are trading at a 25-basis point discount right now to our 10-year historical price to book value. So that's something to keep in mind. The other element is even into this pandemic, over the last five years, we have grown our book value per share, which is a key driver of shareholder value at almost 7% annually on a CAGR basis. So you are able to drive that sort of growth and all of that largely has come organically, as Dave cited, those are other considerations that you should factor in.

Thanks for your question, Ebrahim.

Thank you.

We have a couple more, maybe a few minutes to go here.

Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Yes. Thanks again for affording me to requeue as well. Neil, back to you. Just want to get a sense of given the margin outlook that you have for this segment and I know there's been a good amount of discussion around total banking expenses, but do you see a way forward for you where the segment efficiency ratio can improve without the net interest margin turning around?

Well, I think, Rod touched on our outlook for NIM, as we signaled, is a basis point or two per quarter into 2021. Operating leverage, just sort of picking up on Rod's comments, is really going to be a back half of the year or midyear story. A couple of other things specific to our business that just building on beyond rates that Rod talked about, things like the interchange impact. As we get into the second half of next year in that card services other income line, that would be fully into our run rate. Things right now in terms of, we waive certain fees. We have provided interest rate relief on credit cards that will take us into 2021 that will be fully rolled off the business in the back half of 2021. And then COVID cost. We don't see the same type of occupancy costs. We need to invest in things like Plexiglass and those sorts of things. So the back half of next year, we do see the opportunity for positive operating leverage and that's when you will start to see the efficiency gains start to come.

Thank you.

Okay. I think we have answered all the questions in the queue. So I just want to thank everybody for attending today. And maybe just to summarize what we would like you to take away from the Q&A and our speeches and the themes today. Number one, significant client momentum across all our businesses. You look at the market share gains in the retail bank, really strong capital markets, trading, investment banking performance, outstanding flows in the wealth franchise and AUM growth and AUA growth. And when you look at that client momentum, as we exit into a more normalized year, that will continue to grow. So we feel very good. At the same time, you look at almost record low stage three losses. We are growing our franchise. We are growing our balance sheet. We are managing risk exceptionally well. It positions us very well in a normalized world to continue to put our balance sheet to work. So I would say our risk management capability, the quality of our client franchise that Graeme works. So I think you should take comfort. We are growing this franchise at a premium level. We are delivering a premium ROE. We are managing our risk in a premium fashion. We have got a premium CET1 ratio. It gives us enormous strategic flexibility to accelerate out of this. And I feel very good. In addition to technology investments, you heard Rod talk about our focus on cost control and keeping low single digits. Those are all levers with momentum that create shareholder value at a premium ROE. So I think we feel very good. I think that's the story that we wanted to tell today and thank you for your questions. Have a great holiday season and we will certainly talk to you in the new year.

Thank you everyone. The conference has now ended and please disconnect your lines at this time and we thank you for your participation.