Royal Bank of Canada (TSX:RY) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
Royal Bank of Canada reported earnings of $5.5 billion and adjusted earnings of $5.6 billion, marking the second highest quarterly performance on record.
The bank's return on equity was 17.2%, underpinned by a strong common equity tier 1 ratio of 13.5%.
Capital markets reported record net income due to strong performance in global markets and investment banking.
Wealth management saw robust results with $10 billion in net new assets in Canada and US $5 billion in net new assets in the US.
The macroeconomic outlook remains cautiously optimistic, with Canada showing resilience despite geopolitical risks and trade uncertainties.
The bank aims to leverage AI to create $700 million to $1 billion in enterprise value, having developed over 200 AI models.
Royal Bank of Canada increased its dividend by 14% year over year and announced share buyback plans for up to 45 million common shares.
Management highlighted growth opportunities in AI, energy, digital infrastructure, and aerospace as key areas for future expansion.
Concerns include geopolitical tensions, trade uncertainties, and inflation risks, which could impact credit conditions.
Full Transcript
OPERATOR
Good morning ladies and gentlemen. Welcome to the Royal Bank of Canada's 2026 Second Quarter Results Conference call. Please be advised that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press STAR followed by the number one on your telephone keypad. If you would like to withdraw your question, press STAR one again. Thank you. I would now like to turn the meeting over to Asim Imran. Please go ahead.
Asim Imran (Moderator)
Thank you and good morning everyone. Speaking today will be Dave Mackay, President, and Chief Executive Officer; Kathryn Gibson, Chief Financial Officer; and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions, Erica Nielsen, Group Head Personal Banking Shanna Matagowji, Group Head Commercial Banking and Neil McLaughlin, Group Head Wealth Management and Derek Nellner, Group Head of Capital Markets. As noted on slide 2, 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 Royal Bank of Canada 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.
Dave Mackay (President and Chief Executive Officer)
With that I'll turn it over to Dave. Thanks, Asim and good morning everyone and thank you for joining us today. We reported earnings of $5.5 billion and adjusted earnings of 5.6 billion, our second highest quarterly performance on record. As you'll See on Slide 4 Pre provision pretax earnings were up 15% from last year, benefiting from strong revenue growth of 11% and all bank operating leverage of over 3%. Our performance this quarter delivered a 17.2% return on equity on the foundation of a robust 13.5% common equity tier 1 ratio. These results were underpinned by the strength of our diversified business model, benefiting from both a constructive environment for market related businesses and operating scale in our Canadian personal bank and commercial banking segments. Capital markets reported record net income reflecting strong performance in both global markets and investment banking. Wealth management continued to report strong results across our North American advisory and asset management businesses. Personal banking results were driven by an operating leverage of 3% and growth of in money balances. Commercial banking generated an ROE of over 17%. Moving to slide 5 starting with capital markets where global investment banking improved their last 12 month market share to over 2% as we saw record levels of fee based revenue from strong M&A advisory activity as well as debt and equity origination in global markets. Our ongoing investments in talent and technology are strengthening our equities franchise which also reported record revenue this quarter. Our strong FICC franchise also reported solid results. We also saw solid growth in our financing transaction banking businesses as we continue to support our clients growth aspirations. With the leading Canadian franchise as well As a top 10 ranked global business, we are in a great position to support and grow alongside key macro trends including AI, Energy, digital infrastructure and aerospace and defense around the world. In AI and related infrastructure, we advise CPPIB on its US $4.2 billion acquisition of Atnord, a pan Nordic data center operator, as well as acted as joint active bookrunner on Alphabet's $8.5 billion inaugural Maple Senior Unsecured Notes offering the largest bond offering ever in the Canadian market. In the energy space, RBC acted as an exclusive financial advisor to ARC Resources on their sale agreement with Shell, a transaction valued at $22 billion. In the United States, RBC acted as joint lead bookrunner to Fervo Energy on their recent $2.2 billion IPO. Wealth management continued to drive strong performance in a volatile environment. Clients are coming to us for trusted advice as they move money back into investments across our distribution network including our full service Dominion securities and PH and N investment counsel channels as well as through our personal banking network. Our leading Canadian wealth management business with assets under administration of over $1 trillion benefited from both market appreciation as well as $10 billion in net new assets this quarter. U.S. wealth Management AUA of nearly $800 billion included U.S. $5 billion in net new assets this quarter and over U.S. $2 billion in recruited assets benefiting from our continued advisor recruitment. Furthermore, credit and lending balances were up 16% from last year, reflecting growing demand from US clients for our full service capabilities. Loan growth in City national was also strong, up 9% year over year in US dollars. RBC Global Asset Management assets under Assets under management surpassed $800 billion this quarter, benefiting from leading mutual fund net sales as we continue to capture money in motion in our Canadian retail channels amidst changing client preferences. In this context, the combined Personal bank and Canada Average deposits and aua were up 5% or $34 billion year over year with spot personal banking AUA surpassing $300 billion for the first time. We maintain very high retention rates as clients move between deposits and investments. As always, we're guided by doing what we think is right for them given interest rate and equity market conditions. Mortgage growth continued to be impacted by macro uncertainty and moderating house prices with funded volumes Largely driven by an increase in switch activity. Importantly, approximately 90% of home equity balances had a multi product relationship. Commercial banking growth remains resilient despite facing two structural demand headwinds with Ontario seeing the greatest impact. Firstly, tariff driven uncertainty is having a disproportionate impact on the growth in trade exposed sectors such as supply chain. Secondly, we continue to see moderating demand in commercial real estate, particularly in condo development. Nonetheless, we have delivered 12 consecutive quarters of market share capture and leading balances lending balances as of last quarter. We're seeing growth in health care and other service oriented sectors and regions such as the Prairies. And we're also beginning to see increased FX and cash management related activity. I'll now shift to the macro environment. We are operating in a world of competing signals. Equity markets are hitting record highs driven in part by expectations of rising corporate profits and an AI enabled future. At the same time, bond yields tell a different story, reflecting the risk of monetary tightening as inflation pressures build from both the direct and indirect impacts of the energy shock. Throughout this period of volatility, the Canadian economy has remained resilient with an annualized GDP growth tracking at 1.7% in Q1 2026. Core inflation, excluding energy has stayed broadly stable and our own card spending data shows consumers are still spending in service related sectors despite the energy disruption. So far, weakness in tariff exposed sectors has not spread to the broader economy with growth seen in several sectors including energy and agriculture. However, uncertainty remains elevated. The near term outlook for Canada hinges on how CUZM&A negotiations unfold and how long the Middle east conflict persists, with impacts yet to be fully felt on input costs. The outcome of these factors will have implications for client demand, supply chain stability and the direction of monetary policy. Looking further out, there are emerging opportunities that are creating optimism. We believe the resolution of KUZM&A uncertainty, new trading relationships and the advancement of major nation building projects can meaningfully expand the Canadian economic ecosystem, creating a multiplier effect over the near to medium term. RBC research sheds light on enormous opportunity for Canada. The country can become an energy superpower, strengthen its presence in the critical mineral supply chain, expand power infrastructure and build a stronger strategic defense posture. We encourage policymakers and all levels of government to continue to work together to secure Canada's future prosperity. As Canada's largest bank, we're well positioned to support the future, the strong balance sheet and leading franchises. We backed that commitment with action. We recently announced an Indigenous advisory and finance practice within RBC Capital Markets to help expand access to capital for Indigenous owned major projects and investments beyond Canada. Global fee pools have maintained their momentum as the macro environment continues to support growing corporate activity and strategic boardroom discussions. Our own investment banking pipeline remains healthy in part due to our ongoing investments in talent to build bench strength in high priority areas. Moving to slide 6 we constantly strive to optimize long term shareholder value through increased profitability, client driven growth and returning capital to shareholders. We have increased our return on assets to approximately 90 basis points by executing against key strategic initiatives. We have increased our revenue productivity through our diversified fee based businesses and by leveraging our technology and operational scale to improve cost efficiency, all while continuing to grow our businesses. We've improved our US region efficiency ratio from 83% in 2024 to 75% this quarter. We continue to make significant progress in bringing together our strong US franchises as we drive towards our target of a regional efficiency ratio in the low 70s. We're also committed to our bold ambitions when it comes to generating $700 million to $1 billion in enterprise value from AI. We've developed over 200 leading edge AI models rethinking how we operate, streamline workflows and delivering more hyper personalized client experiences by leveraging our proprietary Atom foundation model and are increasing data scale within our Lumina platform. Since 2025, LLM token usage has increased by over 500% reflecting the speed at which AI is being integrated into daily workflows and critical business processes. Our digital assistant uses AI for intent detection and orchestration, navigating clients to to digital capabilities or the best advisor across the network, allowing our people to focus on deepening client relationships. We've also deployed AI to deliver significant time savings. An AI powered search of policy procedure articles for two advisors is processing approximately 2 million searches per month. Commercial banking Our clients financials are being ingested and spread using AI. AI is also accelerating how we're building our technology platform of the future. To date, AI has contributed to the development of over 24 million lines of code and facilitated over 120,000 code reviews. Given the importance of combining technology with talent, we continue to invest in our people to accelerate client driven profitable growth opportunities which remains our priority. We're hiring senior talent in key sectors in capital markets, growing our advisor base in North American wealth advisory businesses while adding relationship managers across our commercial banking businesses in Canada and Sydney National Bank. Beyond these strategic investments, we remain committed to returning capital to shareholders in a balanced way. Our total payout ratio has increased from 51% in 2024 to 65% in the first half of 2026 this morning we increased our dividend by 12 cents from last quarter, a 14% increase year over year as we look to drive our dividend payout ratio towards the midpoint of our 40 to 50% medium term objective. Buybacks remain an important avenue for returning capital to shareholders. We increased our buybacks to 7 million shares this quarter at an annualized pace of 2% of our common shares outstanding. Furthermore, we announced our intention this morning, subject to relevant stock exchange and regulatory approvals, to commence a normal course issuer bid to repurchase for cancellation up to 45 million common shares. We plan to continue buying back our shares as we believe their intrinsic value remains higher than current valuations. Given the opportunities to improve both profitability and growth while maintaining a strong balance sheet in an uncertain environment, however, we remain disciplined. We will look to optimize not only ROE and EPS growth, but also the compounding of our book value per share growth which is also an important driver of long term shareholder value. And with that, Kathryn over to you.
Kathryn Gibson (Chief Financial Officer)
Thanks Dave and good morning everyone. Starting with slide 8 this quarter we reported strong results with diluted earnings per share of $3.85. Adjusted diluted earnings per share of $3.90 was up 25% from last year reflecting solid revenue growth and all bank operating leverage of 2%. FX trends including US dollar weakness reduced earnings by 85 million from last year and earnings were sequentially impacted by three fewer days this quarter. Turning to capital on slide 9, the CET1 ratio of 13.5% was down 20 basis points from last quarter. Our strong ROE of 17.2% was underpinned by 75 basis points of internal capital generation this quarter net of both dividends and client driven RWA growth. We generated 23 basis points of capital which was mostly offset by repurchases of 7.4 million shares from approximately $1.7 billion. Retail parameter changes which we guided to in Q1 and the impact of market movements on OCI balances also had a modest negative impact. Moving to slide 10, all bank net interest income was up 6% from last year reflecting volume growth and higher spreads. This was partly offset by lower purchase price adjustments or PPA related to the acquisition of HSBC Canada. All bank net interest margin was up 3 basis points from last quarter. All bank NIM excluding trading revenue was down 2 basis points sequentially, including the impact of lower lending spreads in capital markets which partly reflects a shift toward investment grade loans. As a reminder, the cost of funding of certain transactions particularly in capital markets is recorded in interest expense while related revenue is recorded in other noninterest income. This was particularly evident on a year over year basis this quarter. Canadian Banking NIM was flat relative to last quarter including a 4 basis point impact from lower HSBC Canada acquisition related PPA and increased competitive pricing pressures for term deposits. These were offset by continued benefits from our structural hedges and seasonally higher spreads within our lending portfolio which in the past has included items such as higher credit card revolve rates. Moving to slide 11, reported non interest expense was up 8% from last year. Adjusted expense growth was 9% of which approximately half was driven by higher variable compensation consistent with higher revenues in wealth management and capital markets. The remainder of the increase was largely driven by a combination of growth related initiatives including higher salaries and other staff related costs as well as ongoing technology initiatives, marketing and business development. Legal provisions of 84 million in corporate support also contributed to the increase. Our adjusted all bank operating leverage of 2% helped lower our all bank adjusted efficiency ratio by 1 percentage point from last year as we continue to focus on expense discipline. This includes optimizing our multichannel distribution network and leveraging both digital and AI driven initiatives across multiple workflows and businesses. Moving to taxes as per our guidance, the adjusted non TEB effective tax rate of 22.5% largely reflected changes in earnings mix.. I'll now Turn to our Q2 segment results beginning on slide 12. Personal Banking reported strong earnings of $1.9 billion this quarter. Net income in Personal Banking Canada was up 18% from last year. Revenue growth was 6% benefiting from the strength of our leading scale and money in franchise as client balances shifted between core banking accounts, term deposits and our diverse investment offerings including within our wealth management business. Net interest income was up 6% from last year reflecting solid average volume growth and higher margins. Non interest income was up 5% from last year reflecting double digit growth in mutual fund revenue partly offset by lower service charges including impacts from regulatory changes we guided to in Q1. Volatility in card service revenue also impacted the quarter. Operating leverage was strong 4% benefiting from continued expense management. Turning to slide 13, Commercial Banking reported strong net income of $854 million up 43% from last year which included elevated PCL on both performing and impaired LO pre provision. Pre tax earnings were up 5% from last year driven by higher net interest income growth reflecting higher volumes and a favorable deposit mix as well as higher margins. Deposits increased 3% from last year and flat sequentially largely driven by higher non maturity deposits despite seasonally higher tax payment activity by our clients amidst continued tariff related uncertainties. Loans were up 3% from last year or 1% sequentially. Turning to wealth management on slide 14, net income of $1.2 billion was up 28% from last year reflecting strong revenue growth. Non interest income was up 10% reflecting higher fee based client assets driven by market appreciation particularly in North American equity markets and net new asset growth in RBC Global Asset Management. We continue to see positive retail net sales with $5.2 billion in long term retail largely distributed across equity and balance mandates. This is partly offset by outflows in institutional mandates which can be lumpy in nature. Transaction revenue reflecting increased client activity in Canadian wealth management also contributed to the increase. Net interest income was up 10% from last year benefiting from higher spreads reflecting higher mortgage roll on rates and loan growth in US wealth management including City National Bank. Canadian wealth management also contributed to the increase reflecting deposit growth. Turning to our capital markets results on slide 15, record net income of $1.5 billion increased 23% from last year underpinning a strong ROE of 14.8% and an efficiency ratio of 53.2%. Strong pre provision pre tax earnings of $1.8 billion was up 30% from last year reflecting strong revenue growth. Global markets revenue is up 16% from last year reflecting continued momentum in cash equities and derivatives and a rebound in credit trading from a challenging market backdrop last year. This was partly offset by market headwinds for rates trading in Europe this quarter. Corporate investment banking revenue was a record up 17% from last year. Investment banking revenue was up 27% from last year and lending and transaction banking revenue was up 10% driven by higher volume. Turning to slide 16 insurance net income of $218 million was up 3% from last year reflecting strong insurance investment results from lower funding costs as well as lower expenses. This was partly offset by lower insurance service results on unfavorable claims experience offset partly by the favorable impact of reinsurance contract recaptures. Premiums and deposits were up 17% from last year reflecting strong segregated fund and group annuity sales. Corporate support reported a net loss of 102 million. Segment net interest income and expenses represented a modest 2% and 1% of all bank results respectively, underscoring our disciplined approach to transfer pricing and expense allocation. We are similarly disciplined when it comes to allocating capital internally, including a 12.1% capital attribution rate to our business segment which we increased last year. We also allocate the leverage required to each business segment's attributed capital. In conclusion, I'll now spend a few minutes updating our outlook for the remainder of 2026. We continue to expect that annual all bank net interest income growth, excluding trading to be in the mid single digit range, including over $250 million of lower PPA benefits. We expect portfolio mortgage spreads to be marginally higher by the end of 2026 as roll-on spreads are expected to be slightly higher than roll-off spreads. However, any changes in competitive intensity could provide headwinds. We also maintain our guidance of full year all bank expense growth in the mid single digit range and positive all bank operating leverage, including higher variable compensation and costs associated with growth related initiatives and continued investments in our safety and soundness framework. Lastly, given the uncertain environment, we intend to maintain capital levels closer to the higher end of our targeted CET1 range while returning capital to shareholders through dividends and share buybacks. With that, I'll now turn it over to Graham.
Graham Hepworth (Chief Risk Officer)
Great. Thank you, Kathryn, and good morning everyone. I'll now discuss our allowances in the context of the current macroeconomic environment, evolving Geopolitical tensions and Ongoing trade uncertainty. As Dave noted earlier, while North American economies continue to show resilience, we are also seeing soft underlying conditions with geopolitical risks and trade uncertainties pushing inflation and interest rate risk higher and posing potential headwinds to growth. Currently, our Canadian GDP growth and unemployment rate base case forecasts are little changed from last quarter. However, the base case is conditional on the conflict in the Middle east being resolved in the near term and the core of CUSMA largely remaining intact. While our base case outlook remains cautiously optimistic, the uncertainty around our forecast has increased. As a result, we have incorporated a modest amount of additional severity into our downside macroeconomic scenarios. Furthermore, consistent with the last four quarters, we've also retained elevated weightings to our downside scenarios. These scenarios incorporate potential impacts from inflationary and geopolitical headwinds. Turning to slide 18, we took a total of 18 million or 1 basis points of provisions on performing loans this quarter. This was driven by unfavorable macroeconomic impacts, which were partially offset by changes in credit quality and updates to our retail models. Moving to slide 19, gross impaired loans of $9.8 billion increased by $623 million or 4 basis points from last quarter, primarily driven by capital markets and wealth management. In capital markets, impaired loans increased by $321 million, driven by formations across a few sectors including real estate, forest products and consumer discretionary the increase in real estate is predominantly driven by one larger commercial real estate file in the U.S. in wealth management, impaired loans have increased by $224 million, predominately in city national and driven by names in utilities, real estate and other services sectors as well as our consumer mortgage portfolio. Recall that in the first quarter of 2025 we had increased performing provisions on select mortgages at City national due to the California wildfires. This quarter we have identified a small subset of higher risk clients, most of which were subject to deferral programs that we have now moved into impaired status While impaired loans remain elevated, new formations decreased quarter over quarter across most segments, including capital markets. Turning to Slide 20 PCL and impaired loans of 34 basis points or $899 million was down 169 million or 6 basis points Quarter over quarter, reflecting lower provisions across capital markets personal banking and commercial banking. In capital markets, PCL and impaired loans totaled 113 million, down 132 million quarter over quarter due to the absence of any larger losses on new individual impairments partially offset by incremental provisions on some existing impaired names. In personal banking, PCL and impaired loans totaled $488 million or 36 basis points, down $28 million quarter over quarter, driven by lower provisions in residential mortgages and personal loans, partially offset by higher provisions in credit cards. The credit cards portfolio in particular has seen a sustained increase in PCL over the last few quarters driven by regional pressures, particularly in Ontario. In commercial banking, PCL and impaired loans totaled $246 million or 53 basis points down 27 million quarter over quarter. While we saw a reduction in new provisions, impairments remain elevated due to softer economic conditions in Canada, especially in economically sensitive sectors and regions. In wealth management, PCL and impaired loans totaled 52 million or 16 basis points, up 18 million quarter over quarter, with new provisions in both the utilities and other sectors. To conclude, while we are pleased with credit performance this quarter, we continue to have a cautious outlook on credit for the Canadian economy. We are seeing signs of stabilization and we expect to see continued modest economic growth. Sectors exposed to US Tariffs have experienced job losses, but those losses have not spread to the broader economy. Internally, credit indicators have generally been stable or improving. This includes a stabilizing delinquency rates across most retail products as well as moderate improvements in wholesale indicators such as watch list exposure and files. Moving to our workout team in terms of the external environment, headwinds from the conflict in the Middle East, US Tariffs, trade policy uncertainty, and a shrinking Population will likely keep economic risks elevated. Despite heightened uncertainty, we remain confident in the overall quality, diversification and resilience in our portfolios. Our robust provisioning framework and monitoring allow us to assess a wide range of potential outcomes and impacts to our portfolio. We continue to expect Our full year 2026 provisions on impaired loans to remain within the range we previously guided to now Back to Dave thanks Graham.
Dave Mackay (President and Chief Executive Officer)
So to close, we continue to execute against our strategic priorities and look to drive improvements in our profitability metrics while deploying capital for client driven growth and returning capital to shareholders. Our underlying strength is built on a foundation of a strong brand, a robust balance sheet and one RBC diversified business model where we have leading scale in our home market while having a diversified footprint at scale beyond Canada. This combination that has underpinned the resilience of our earnings through several shocks over the recent cycle, generating an average ROE of 16% from 2020 onwards and over 17% over the last 12 months. With that operator, let's open the lines for Q and A.
OPERATOR
At this time I would like to remind everyone in order to ask a question, press Star, then the number one on your telephone keypad and your first question comes from the line of Ibrahim Punawala with Bank of America. Please go ahead.
Ibrahim Punawalla (Analyst at Bank of America)
Good morning. Maybe Dave for you, just listening to your prepared remarks on the macro and then Graham kind of handicapping credit risk tied to the war, the trade uncertainty, I guess the question from an investor standpoint is is the risk of things breaking negatively over the next six to 12 months higher than things moving in the right direction and a year from now looking a lot more constructive? As you look at both those one is that the right frame through which to think about whether macro could go either well or negatively? And within that, do you have enough confidence based on what you're hearing from either the Prime Minister Carney and his administration, where USMCA negotiations might be going and what you're seeing in terms of the ground reality in Canada today that things have actually stabilized and are ready to improve, or is it still too early to make a call there? Thanks.
Dave Mackay (President and Chief Executive Officer)
Thanks Ibrahim. A very good question. So I feel good about where we are. I think I'm really impressed by the resilience of the Canadian economy right now. When you think about positive growth that we're looking at, our forecast might be on the more optimistic side in our economics group, but we're thinking one and a half to 1.6% GDP growth over the coming four quarters and that's in the face of very little Residential real estate activity, very little commercial activity. The fact that that's such a big part of the Canadian economy and we've shown an ability to grow through that. The consumer's still spending and the consumer saving as well. So I see so many positive trends in the Canadian economy that allowed us to be resilient to what we have. Notwithstanding that we should be eyes wide open about the Section 232 impacts that have had on the Ontario economy in particular. That's led to credit weakness we've recognized in our portfolio in stage three and stage one and two builds, as you know. So there is a little bit of caution there that we're not through the section 232s. But I still come back to this is an important trade deal for both countries. It's pursuing along a track that's not dissimilar to the track that happened the last time. And I'm optimistic we'll get to something that's good for both countries. So I'm impressed by the resilience notwithstanding, the section 232s have impacted the Canadian economy and created some weakness there. And then there's the longer term investment. You saw the risk on Canada, you saw the investment flows shifting, you saw Canada moving in. These are going to still take a while to get shovels in the ground, but they're moving at a pace and in parallel that we haven't seen before. And I'm excited about the opportunity to deploy RBC capital into that. And we have a significant balance sheet to do that. The investment. We're going to have an investment forum again with the Prime Minister in the fall and we're going to showcase some of these, a number of these energy opportunities, rare earth minerals, infrastructure opportunities, electricity grid. When you go through the fence build, you go through the opportunities for this country to deploy capital that creates value for our partners around the world and diversifies our economy. It's really, really significant and I haven't seen it in my kind of 40 years in this organization. So the resilience in the short term, the meaningful opportunities in the long term, and part of that resilience I should mention is we are running a structural fiscal deficit as well across provinces and governments. And therefore like the US economy, that's significantly bolstered by a structural fiscal deficit at the government level. So is the Canadian economy that's going to us absorb some of the uncertainty in the short term. So I hope that answers your question. But I think resilience in the short term, growth in the medium term, I
Ibrahim Punawalla (Analyst at Bank of America)
think that's well put and maybe a follow up. Dave, the other thing that investors are sort of actively thinking about is disruption risks to banks, legacy revenue streams and margins. As we think about AI and the effort by the OSFI to sort of accelerate fintech charters, just frame that for us. When you think about you have been at the forefront or ahead of the pack I would argue on all things AI, One, the opportunity is that meaningful, do you think in a market like Canada that can fall to the bottom line and secondly the risk from fintechs being able to scale up at a much faster rate due to AI and how you think about disruption risk.
Dave Mackay (President and Chief Executive Officer)
I do think it's a really meaningful opportunity. We gave you some data points as we continue. We've built over 200 models. We have our employees that are making great use of this. You see the productivity lift that making our employees more efficient, more effective. The ability for us to serve I think 25 million customers with the same cost base is our objective. So when you look at the opportunities to marry this AI capabilities with our Commercial Account Managers, with our private bankers, with our wealth management, with our asset managers, you look at our investment bankers, you look at the productivity lift and the ability to make to be more efficient but more effective as well in front of the customer. It's significant lift and it's really exciting. I think it's going to make our employees better and it's going to make our employees more effective in front of the customer. It's going to allow them to serve more customers at the same time. And therefore we're super excited about that across every single business, including right into the back office. So I think this is meaningful. We put that billion dollar target out there. We fully intend on meeting that target over the next 18 months as we put into the investor day and then we'll take it from there. I just see the pervasiveness of the technology capability throughout the bank. To your second point on disruption. I've seen this model, this scenario run throughout my career and I always come back to the basic foundation is are we capable of building the same thing? Is there anything inherent in a patent or a capability that we can't do? And the answer is absolutely not. In fact, we have enormous scale to create these technologies and accelerate their deployment into our business model. So there's nothing that we see out there that we can't do just as quickly. The other advantage and moat that we have is in this complex world fraught with risk and fraud and uncertainty, trust and brand and Security become paramount and therefore I don't think customers are going to choose non regulated financial institutions for their savings if they're what is the cyber risk of that institution? What is the capital base of that institution to absorb errors and fraud and operational risk? So we talk about customers will move their money freely. No, I think customers are going to be judicious in trust and brand and scale and capability and price. I think that all goes together. It's not just going to be on price and we've seen that throughout history at the end of the day. So we're competing I think with moats as well that are not going to disintermediate and then if there is a competition, we are fully capable of building this and you've seen our response with Gosmart and our ambition to build that out into a much bigger capability for our clients and we can respond. So I think that's the premise I keep coming back to. I always ask and make sure can we build it? Can we deploy this? Is there anything different between our product and theirs? No. Okay. Is this a price issue? Okay, then let's talk about price. So I think that's how I would look at it. We feel fully confident in matching any of the tools available.
Ibrahim Punawalla (Analyst at Bank of America)
Got it. Thanks Dave.
OPERATOR
Your next question comes from the line of Gabriel Dechaine with National Bank Financial. Please go ahead.
Gabriel Deschane (Analyst at National Bank Financial)
Hey, good morning. Question to start on the credit picture here. You had gross impaired loans going up. A couple of conflicting data points, I guess. Gross impaired loans going up and then you had lower loan losses. Part of the lower loan loss figure was because performing provisions were quite low. I was just wondering and you explained that. But I'm just wondering why you wouldn't feel compelled given the macro outlook, the uncertainty vis a vis Kuzma, they, inflation risk, all that stuff that you weren't a little bit more aggressive on the performing build this quarter.
Graham Hepworth (Chief Risk Officer)
Yeah. Thanks David. Coverage ratios. Thanks. Good question. And it's Graham, what I would point to with that. So the build we did do related to kind of that uncertainty. We certainly acknowledge it. I would say we did increase the severity of our downside scenarios. Roughly speaking, that would have added about $80 million to our stage one and two provisions. All else being equal but kind of the counter to that. What played out this quarter is the credit quality side of it. Right. As I noted in my comments, we've seen more stability if not some improvements in a lot of our kind of credit indicators, if you will, ratings, migration watch list, delinquency trends and so credit has for the last, I think since the beginning of 2025, we've been adding about $80 million a year to our performing loan loss allowances for credit quality, reflecting kind of those increasing trends around delinquencies, et cetera. And so with that stability playing through this quarter, we actually released 20 million on credit quality rates. So that's just, you're seeing that credit quality, that stability playing through into our performing loan loss calculations. And so that's what kind of countered that build on that severity and kind of left us in a bit more of a neutral status there and then maybe just kind of to support that. I mean, you did note the increase in the GIL ratio. Again, I think more importantly is just noting, noting the new formations. I think that's a better indicator of kind of some of the trends we're seeing. We've seen generally improving trends on new formations. The GIL ratio itself, it's getting higher. I would expect it to increase going forward. That's just reflecting a few things. Even as new formations kind of stabilize, workouts are just taking longer. When you look at say res mortgages, there's a fixed capacity in the system and we're at that fixed capacity. And so until that starts to balance better, we'll just see that GIL ratio increase. Likewise, on the wholesale side, again, while we're seeing some better trends there, it's still very uneven. And workouts, when I look at some of the bigger names in our GIL balances on the wholesale side, I wouldn't expect we'll see resolution on those files till probably closer to the tail end of this year. So there's a timing part of when resolutions ultimately play out in those GIL ratios.
Gabriel Deschane (Analyst at National Bank Financial)
Okay, thanks for that. And then on the margin side of the discussion, excuse me, I think that HSBC purchase accretion is behind us now, so steady state now your tractors are tailwind. I suppose the mortgage refinancing in the back half sounds marginally positive. Is that a little bit
Kathryn Gibson (Chief Financial Officer)
less spread enhancing than you thought previously? Just throwing a few things together, but want to get your general outlook for Nim going forward. Thanks. Hi, good morning, Dave, it's Kathryn. I'll take that question and then I'll get Erica to just step in because we've also got the money in motion, which is playing a key part in our results and expected to as we go forward. So you probably have heard me say this before, like for the All Bank Nim, we feel that it's got a lot of moving parts. And so actually I'll guide you to the guidance on the net interest income excluding trading, which I said remains in the mid single digits. I feel like it's a better construct for Canadian banking. So if I take it to the CB NIM level, we are expecting it to be largely stable over the back half of the year. As I mentioned in my remarks, there is a little bit of seasonality that played into Q2, so we'll likely see some volatility between the quarters in the second half of the year as that seasonality rolls off. But the key drivers, as you called out, we'll have as tailwinds, which would be the tractor. So that'll continue to play out for the rest of the year. We'll have some of that mortgage roll on and roll off that Erica can touch on as well. And then I would say the unknowns is really the competitor actions and then the client actions as well. It's just to the degree that as we've seen term deposits roll down, how much will move into demand deposits and how much will move into investment products. But even as it moves into investment products, yes, that's a compression to nim, but overall, just a reminder, it's still positive to revenue for the organization. With that I'll turn it to Erica.
Erica Nielsen (Group Head Personal Banking)
Yeah, thanks Katherine, and thanks for the question. So on mortgages in particular, as we look to the back half, Gabe, you're quite right that on the roll off dynamics on that portfolio, we do see lower spread mortgages rolling off. So as we think about the back half, there's a couple of different dynamics we're watching. One is the competitive intense scale as it relates to price as we go into the latter half of the spring summer market and into the fall. And of course we want to compete effectively, but we want to balance the margin that we're going to earn on the volume that we're competing for. So that will play a role. The second dynamic that's happening in there is of course how we think about hedging and the cost of that hedging, which has been more volatile in the last quarter than it has been in prior quarters. And sometimes we have to. That's a cost to the business that we have. And so we'll see where markets are as we go through the back half of the year to determine how those hedge costs perform for us.
Gabriel Deschane (Analyst at National Bank Financial)
All right, thank you.
OPERATOR
Your next question comes from the line of Matthew Lee with Canaccord Genuity. Please go ahead.
Matthew Lee (Analyst at Canaccord Genuity)
Hi, thanks for my question. Maybe a bigger picture one just given the fact that you're Already operating at a premium ROE and a bit above guidance. How should investors think about the next leg of EPS growth if ROE is stable from here? I mean, is the growth algorithm now more about organic deployment of capital fee income growth, productivity, capital return? Maybe touch on those pieces?
Dave Mackay (President and Chief Executive Officer)
Yeah, maybe. I'll take that. It's Dave. Thank you Matthew for your question. Certainly as we look across our businesses to capitalize on growth, it is an organic growth story for us. We obviously have done a great job in integrating HSBC and we have growth opportunity from those clients and we're well on our way to meeting our cross sell commitments of $300 million and a little over halfway there already. So we're seeing growth out of the HSBC portfolio. You're seeing strong growth coming out of City national. We reported 9% growth out of that business. So we're adding account managers, we're seeing strong demand on that side, we're seeing geographic expansion. So City national is on its front foot. So you're seeing good client flow, you're seeing the capital markets and maybe I'll turn it to Derek next to talk about his pipeline and what's going on. But we're seeing very strong client flow activity through our advisory businesses, our equity capital markets businesses. Obviously it's a lot of corporate driven activity which is good to see as well, and a balance there. And then you're, you're seeing an opportunity for the residential mortgage business to restart. You're seeing green shoots as Erica mentioned, and that provides a foundation for growth and commercial banking demand from hopefully the uncertainty alleviating in cross border trade, all of that before we get into the major projects that we can fund. And then there's a cost opportunity, there's a very significant opportunity for us to continue to be more efficient in this organization, deploying AI as part of that. And those benefits are really just starting to accrue as we deploy those 200 models across the organization and embed them in our flow. So you've got growth, you've got costs and all those are very supportive of structural roes. And we don't even really need margin expansion. Margin stability gets us there. But some of our businesses are operating at historically low margins as well. And therefore you heard us mention that we're hopeful given how tight funding is for many organizations that you get back to a little more reasonable margins and better hurdles than you're seeing today. So I'll stop there, I'll provide some more comments in my summary. But maybe Derek just on the capital market side to talk about the opportunities for growth you're seeing. Sure. Thanks Dave.
Derek Nellner (Group Head Capital Markets)
And thanks for the question. I mean, just a few observations I would make. Obviously we had a very strong quarter. Importantly, we continue to see that activity as we look forward. Our pipelines on the investment banking side remain at record levels. I think the conditions that have driven very high levels of client activity in our sales and trading and global markets business continue to be in place and we're seeing very good demand from clients for lending and financing capital to help support those initiatives. And so certainly as we look forward, we continue to see a very constructive environment for our clients. Against that backdrop and consistent with our investor day messaging, we see lots of opportunities for organic growth across all four of our major businesses in capital markets. So in global markets we're investing in our sales teams, we're investing in building out new capabilities around our equity equities, FX and commodities platforms as well as broader financing platforms. In investment banking, we continue to make very good progress on hiring and building out our sector capabilities. And then importantly in corporate banking, the loan growth to support both our markets clients and our investment banking clients against their most important strategic initiatives is critical. And then finally, obviously we're seeing great progress in our global transaction banking and cash management build out. And we continue to see opportunities to deploy capital to invest in those product capabilities. And finally, I would just say, you know, Dave touched on a little bit earlier, but when I bring a geographic lens to us, we're very optimistic about the levels of activity we have seen and we anticipate going forward in Canada in line with a number of the major government supported initiatives. The US as our second home market is obviously a very large opportunity for us and we've got a, it's the largest part of our business today, but significant growth ahead. And then increasingly we see some very good opportunities to continue to invest and expand our footprint in Europe. So right across the businesses and our three core geographies, we see very good opportunities for organic capital investment.
Dave Mackay (President and Chief Executive Officer)
I think we should go to the next question. Thanks. Derek.
OPERATOR
Your next question comes from the line of Saurabh Movahedi with BMO Capital Markets. Please go ahead.
Saurabh Movahedi
Okay, thank you Dave. I just want to. Excuse me, I just want to go back to ROE for a second. I think in response to one of the questions you said that some of the businesses are actually not quite operating at capacity or I think you said something closer to historically low margin. So can I get a sense of which businesses do you think are not quite where you would like them to be? And as we think about the outlook that you've presented, not necessarily over the next six months, but over the medium term, is it going to be a case of retaining this resilient ROE is going to be in and around where you are with the return on asset and the capital levels are going to drift closer to the bottom end of the range that Katherine talked about. Or, or how do you see the capital ROA dynamic kind of playing out and in which business segment?
Dave Mackay (President and Chief Executive Officer)
There's a lot in that question. So let me just start macro at your last question. Yeah, we're absolutely targeting an ROA of 1%, as you saw in our investor day, moving it there. So I think from that perspective we want to continue to move that higher and I think from all the levers that we have from growth, from efficiency and productivity capabilities are driving us to aspire to a higher roa. And as that filters through into our overall decisions to deploy capital and return capital to shareholders, I think where our posture is today is that we're, we're a little bit conservative in that we're going to keep our capital levels towards the higher end of that range. You saw us deploy 2% share buyback and that was a use of what about, Catherine, 30 basis points of capital, our WA capital, roughly. So I think from that perspective, we'll keep it closer to the higher end in the short term as we get through the conflicts and the war and the uncertainty around trade agreement and Section 232 impacts. But then as we look at our commitment to keep returning capital to you above, that is an important marker for us as we'll continue to do buybacks and you saw us announce an NCIB to do that up to 3% of our shares. So returning capital to you will be a constant trend and then we'll look for opportunities to accelerate that, as we did in Q2, to get higher into that range, more towards that 2 to 3%. So I think it's not a change in how we've articulated it, Sohrab. It's being strategic and tactical, I might call it, at the same time that there's a constant level of return and then there's going to be an acceleration and our desire to do that. And yes, we do feel we can operate this bank over the medium term at a lower target CET1 ratio in that range. And therefore we're not saying that we're always going to be at 13.5, but we want to be there now. But I do say that I can see running this bank at a lower capital level and returning that capital to you. And we're generating such significant capital through our profitability. We think we're going to enhance our profitability going forward so we're going to generate even more capital. But from that range we do see ourselves moving into the mid range or lower end of that range over time, continuing to return capital through organic and capital returns. So I hope that helps. It's tactical in the short term, but continue to be strategically aligned towards that and where the ROEs end up. We're committed to exceeding as best we can our target ROE that we gave you of 17 percent. We had a very strong ROE this quarter and a shortened quarter that tells you their earnings power and the capital efficiency of this organization continues to improve and we expect it to continue to improve. I've also guided that we balance growth and growth and eps are really important. Therefore why would you turn, if you can, a 13 or 14% ROE opportunity down if you can continue to drive an overall balance and mix in your organization of 17% going forward. So we're always trying to balance growth and EPS growth with book value growth per share along with target ROEs. And I think the capital efficiency and the operational efficiency opportunity is going to allow us to do all of that. I think that's the magic in our business model that will continue to improve on all those metrics. I think that gives us enormous shareholder value creation opportunity.
OPERATOR
Your next question comes from the line of Mario Mendonca with TD Securities.. Please go ahead.
Mario Mendonca (Analyst at TD Securities)
Good morning. Real quickly on some dynamics on the loan side. So commercial loan growth, it's good at 3% year over year in Canada, but it's light relative to what we're seeing from some of your peers. Maybe a comment on that. And then the $12 billion increase in wholesale lending this quarter, that's a big
Sean
number, not something I'm used to seeing. So could you speak to those two? Yep. Thank you, Mary. Sean, on the commercial side, we've 3% year over year, 1% on a quarter over quarter basis. I would say, you know, we've been pleased with our commercial growth for an elongated period. We've taken share capture for 12 consecutive quarters as Dave mentioned, leading into Q1. We don't have the full results for Q2 yet. And going forward we're really starting to see some nice tailwinds. Our pipelines are really strong. We've seen continued growth and resilience in some of the sectors that have been less impacted by tariffs like agriculture, public sector services, healthcare, seniors housing, etc. Seen some really strong month over month momentum in March and April. We've seen the largest month over month growth rates that we've seen in about six months also in the business. And then we're also starting to see some pickup in Ontario real estate directly correlated to the HST announcements and some early wins in the defense sector. So I've got some confidence that we're going to continue to pick up share and grow into the second half of the year. And that's further amplified, as Dave mentioned, with the medium term benefits that we'll see from the infrastructure spend, the impact of the new global trade agreements as well as the eventual CUZMA resolution. Derek, do you want to talk to capital markets?
Derek Nellner (Group Head Capital Markets)
Sure. Thanks for the question, Maro. Yeah, we obviously saw very good growth in the corporate loan book quarter over quarter as you highlighted a few things. I would highlight one, you know, that really reflects some of the broader activity we're seeing amongst clients, both in terms of strategic M and A, which sometimes requires term loans or bridges that are shorter term in nature as they fund into those acquisitions, as well as some of the organic capital build that we're seeing across, you know, major infrastructure investments and otherwise. In addition, we had very good success this quarter adding some new large clients. And so these were larger investment grade names that, you know, we've been building relationships with across the platform and finally had the opportunity to come into their core banking group, which was a very nice win for us. So it really reflected growth across those three areas. Broadly, we're being very disciplined in how we're managing risk and capital allocation around it. That incremental growth you saw this quarter skewed more heavily investment grade than our broader book. So it's actually increased the overall credit quality of the book, notwithstanding the higher level of growth you saw in the quarter.
Dave Mackay (President and Chief Executive Officer)
I think we have a few more questions to go.
OPERATOR
Your next question comes from the line of Paul Holden with cibc. Please go ahead.
Paul Holden (Analyst at CIBC)
Thanks. I was going to ask the question on the commercial loan growth, but we already got an answer for that. Maybe I'll try quickly a different one. Derek, you gave a pretty good update and outlook on sort of the near term growth for cap markets.
Derek Nellner (Group Head Capital Markets)
What about kind of, I guess one of the things we're struggling with for the group, not just for rbc, is kind of like can you build revenue and earnings in cap markets off of what's shaping up to be a very 2026, which was projecting to be growth off a very good 2025, like how much Longer can this, can this growth continue? Yeah, thanks Paul. Very good question. You know, I'd really break it into three, three pieces. As I mentioned, in terms of the near term visibility of our pipelines that we see, we continue to be very encouraged by the level of activity. And so that certainly will carry us through, you know, a number of, a number of quarters. To your question, when we think sort of medium term and how sustainable is the level of client activity? You know, there can always be macro shocks or other things. But our base case is we think some of the structural dynamics that are really fueling activity amongst both our corporate and private asset and institutional asset management clients really remain intact. And so, you know, touching on those, obviously some of the geopolitical uncertainty, the uncertainty that's creating around the economy, inflation, commodities, et cetera, these are all driving heightened levels of run rate trading activity in our markets, business. We think a lot of those, you know, trends in terms of the environment we're in over likely the next few years stay intact. They'll ebb and flow a little bit quarter to quarter. But the volatility and the level of uncertainty that we're seeing from a variety of different factors probably persists within the investment banking and corporate banking business. Usually when you see that uncertainty, you might see lower activity. But what we're seeing is some multi year strategic trends that are driving activity. So when you think about shifts to supply chains, benefits of scale, obviously very constructive regulatory environments that are facilitating transactions and consolidation, energy transition, digital infrastructure spending, these are all multiyear trends that we think will continue to drive activity and capital required for investment. And then finally, I would just say we can't control the environment. We're optimistic on the outlook, but if there was some shock and we saw a slowdown, we take a lot of comfort in the incremental growth strategies we have that can outperform irrespective of what the market environment brings. And the core stability and quality of our franchise that I think you've seen play out over many years in terms of lower volatility of results than many of our peers.
Dave Mackay (President and Chief Executive Officer)
Okay, I think we have one more question from Mike.
OPERATOR
Your final question does come from Mike Rzvenovic with Scotiabank. Please go ahead.
Mike Rzvenovic (Analyst at Scotiabank)
Hey, good morning. I'll keep this quick. Just a quick one for Erica. Can you provide some color on deposit flows? So I'm looking at the bottom left quadrant of Slide 24. I do find it interesting that it's
Erica Nielsen (Group Head Personal Banking)
the first time in a while we've seen personal and savings come off. I understand the GIC dynamic going into mutual funds. But what about the personal and savings side? Is that something that was there any anomaly in the quarter? Does it go back to positive in the near term? Any thoughts on that would be helpful. Yeah, Mike, thanks for your question. Just a couple reflections. I think when we think about the personal bank, we play a very large role in the growth of our clients across all of our businesses. So you think about the, we talked about it in the last quarter, some of the accelerated movement of money from the personal bank into wealth management. So when you look at those figures at the bottom left of 24, that is also us supporting a rotation back into equities, both in our broker, GICs and RISA business as well as in our core personal banking business, going over to our direct investing and DS channel. And then as well some of the rotation that's happening on our own balance sheet as clients are coming out of term deposits and going into mutual funds. And we had a stellar quarter from a mutual funds perspective in Q2. We saw February was our second highest month ever in mutual fund sales and our market capture at about 25% of the bank market capture was tremendous. We know we're supporting clients as they rotate into their long term positions of having the balance between savings and equities. And we'll continue to support that as the organization for our clients.
Dave Mackay (President and Chief Executive Officer)
Okay, thanks Erica. So that brings our call to a close again. We had a very strong quarter. You saw strong client flows across all our businesses. You saw really good margins and enhanced profitability from that. And I think the theme that you should hopefully take away from this is very good growth opportunities, opportunities across all our businesses, commercial capital markets, the consumer bank, insurance, wealth management, not just in Canada, but the United States and in Europe, which we didn't get to touch on as much as well today. So thank you very much for your questions and look forward to seeing you next quarter.
OPERATOR
Thank you ladies and gentlemen. That concludes today's call. Thank you all for joining.
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