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Good morning, ladies and gentlemen. Welcome to RBC's 2026 Second Quarter Results Conference Call. Please be advised that this call is being recorded. Operator instructions. I would now like to turn the meeting over to Asim Imran. Please go ahead.
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Katherine Gibson, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions are Erica Nielsen, Group Head Personal Banking; Sean Amato-Gauci, Group Head Commercial Banking; Neil McLaughlin, Group Head Wealth Management; and Derek Neldner, Group Head 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 bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Operator instructions. With that, I'll turn it over to Dave.
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 our market-related businesses and operating scale in our Canadian Personal Banking 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 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 and 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 advised CPPIB on its U.S. $4.2 billion acquisition of atNorth, a Pan-Nordic data center operator, as well as acted as joint active book runner 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 adviser to Arq Resources on their sale agreement with Shell, a transaction valued at $22 billion. In the United States, RBC acted as joint lead book runner 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&N Investment Council 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 USD 800 billion included USD 5 billion in net new assets this quarter and over USD 2 billion in recruited assets benefiting from our continued adviser recruitment. Furthermore, credit and lending balances were up 16% from last year, reflecting growing demand from U.S. clients for our full-service capabilities. Loan growth in City National was also strong, up 9% year-over-year in U.S. dollars. RBC Global Asset Management 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 Banking 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 maintained very high retention rates as clients moved 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 multiproduct 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 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 in 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 CUSMA 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 CUSMA 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, with a 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 U.S. region efficiency ratio from 83% in 2024 to 75% this quarter. We continue to make significant progress in bringing together our strong U.S. 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, streamlining workflows and delivering more hyper-personalized client experiences by leveraging our proprietary ATOM Foundation model and our 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 digital capabilities or the best adviser 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 and procedure articles for advisers is processing approximately 2 million searches per month. In 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 and capital markets, growing our adviser base in North American wealth advisory businesses while adding relationship managers across our Commercial Banking businesses in Canada and City 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 $0.12 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, Katherine, over to you.
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 U.S. 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, for 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 noninterest 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 in money and 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. Noninterest 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 at 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 loans. Pre-provision pretax 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 were flat sequentially, largely driven by higher nonmaturity 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. Noninterest 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 balanced mandates. This was 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 U.S. 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 pretax earnings of $1.8 billion were up 30% from last year, reflecting strong revenue growth. Global Markets revenue was 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 and 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 volumes. 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 Graeme.
Great. Thank you, Katherine, 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, imposing potential headwinds to growth. Currently, our Canadian GDP growth and unemployment rate base case forecasts are a 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 point 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, predominantly 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've identified a small subset of higher-risk clients, most of whom 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 on 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 the 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 U.S. 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 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, U.S. tariffs, trade policy uncertainty and a shrinking population will likely keep economic risk elevated. Despite heightened uncertainty, we remain confident in the overall quality, diversification and resilience of our portfolios. Our robust provisioning framework and monitoring allow us to assess a wide range of adverse 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. And now back to Dave.
Thanks, Graeme. 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 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&A.
分析師問答
Operator instructions. And your first question comes from the line of Ebrahim Poonawala with Bank of America.
Maybe, Dave, for you, just listening to your prepared remarks on the macro and then Graeme 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 6 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 where the 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 and his administration where USMCA negotiations might be going, just at least — 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?
Yes, Ebrahim, 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 the positive growth that we're looking at, our forecast might be on the more optimistic side in our economics group, but we're thinking 1.5% 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 those sectors are such a big part of the Canadian economy, and we've shown an ability to grow through that, the consumer is still spending and the consumer is saving as well. So I see so many positive trends in the Canadian economy that's allowed us to be resilient. Notwithstanding that, we should be eyes wide open about the Section 232 impacts that have had on the Ontario economy in particular; it's led to credit weakness that we've recognized in our portfolio in Stage 3 and in Stage 1 and 2 builds, as you know. So there is a little bit of caution there that we're not through the Section 232 impacts. But I still come back to this is an important trade relationship 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 parts of the Canadian economy and then 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 getting — I'm excited about the opportunity to deploy RBC capital into that, and we have a significant balance sheet to do that. 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 energy opportunities, rare earth minerals, infrastructure opportunities, electricity grid. 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 U.S. economy, that's significantly bolstered by a structural fiscal deficit at the government level. So in Canada, that's going to help 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 think that's well put. And maybe a follow-up, Dave. The other thing here 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 regulator to sort of accelerate fintech charters, just frame that for us. When you think about — I mean, you all have been at the forefront or ahead of the pack, I would argue, on all things AI. One, is the opportunity meaningful in a market like Canada that can flow 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?
I do think it's a really meaningful opportunity. We gave you some data points as we continue to — we've built over 200 models. We have our employees that are making great use of this. You see the productivity lift that's making our employees more efficient and 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 capability with our commercial account managers, with our private bankers, with our wealth managers, with our asset managers, with our investment bankers, you look at the productivity lift and the ability to be more efficient but more effective as well in front of the customer, it's a 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 $1 billion target out there. We fully intend on meeting that target over the next 18 months as we put in 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 throughout my career. And I always come back to the basic foundation: 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 nonregulated financial institutions for their savings if they're concerned about cyber risk, capital base to absorb errors and fraud and operational risk. So customers are going to be judicious in trust and brand and scale and capability and price. And I think that all goes together. It's not just going to be on price. And we've seen that through our history: at the end of the day, trust matters. So we're competing, I think, with moats as well that are not going to be disintermediated. And then if there is a competition, we are fully capable of building this. 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 out there.
Your next question comes from the line of Gabriel Dechaine with National Bank Financial.
Question to start on the credit picture here. You had gross impaired loans going up, a couple of conflicting data points. Gross impaired loans went up and then you had lower loan losses. And part of the lower loan loss figure was because performing provisions were quite low. I'm just wondering, can you explain that? Why you wouldn't feel compelled, given the macro outlook, the uncertainty vis-a-vis CUSMA, the inflation risk, all that stuff, to be a little bit more aggressive on the performing build this quarter? Coverage ratios.
Yes. Good question, and it's Graeme. What I would point to is the build we did do related to that uncertainty. We certainly acknowledge it. We did increase the severity of our downside scenarios. Roughly speaking, that would have added about $80 million to our Stage 1 and 2 provisions, all else being equal. But counter to that, what played out this quarter is the credit quality side of it. As I noted in my comments, we've seen more stability, if not some improvements, in a lot of our credit indicators — ratings migration, watch list, delinquency trends. So credit has, since the beginning of 2025, been experiencing increased trends and we've been adding about $80 million a year to our performing loan loss allowances for credit quality. With that stability playing through this quarter, we actually released $20 million on credit quality. So you're seeing that stability play through into our performing loan loss calculations. And so that's what countered that build on severity and left us in a bit more of a neutral status. And then to support that, the increase in the GIL ratio is notable, but more importantly is the new formations. I think that's a better indicator of some of the trends we're seeing — we've seen generally improving trends on new formations. The GIL ratio itself is getting higher and I would expect it to increase going forward. That's reflecting a few things: workouts are taking longer, and when you look at, say, residential mortgages, there's a fixed capacity in the system, and we're at that fixed capacity. Until that starts to balance better, we'll see that GIL ratio increase. Likewise, on the wholesale side, while we're seeing some better trends there, it's still very uneven. Workouts, when we 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 until 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.
Okay. And then on the margin side of the discussion, I think the HSBC purchase accretion is behind us now, so steady state now. Your tractors are a tailwind, I suppose, the mortgage refinancing in the back half sounds marginally positive. Is that a little bit less spread-enhancing than you thought previously? Just throwing a few things together, but I want to get your general outlook for NIM going forward.
Gabe, it's Katherine. I'll take that question, and then I'll get Erica to step in because we've also got the money-in-motion which is playing a key part in our results and we expect it to as we go forward. You probably have heard me say this before: for all-bank NIM, we feel that it has a lot of moving parts. I would guide you to the guidance on net interest income, excluding trading, which remains in the mid-single digits. I feel like it's a better construct for Canadian Banking. If I take it to the Canadian Banking 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've called out, will have a tailwind — the tractor effect will 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 the unknown is really competitor actions and client actions: to the degree that as term deposits roll down, how much will move into demand deposits and how much will move into investment products? Even as it moves into investment products, yes, that's compression to NIM, but overall, it's still positive to revenue for the organization. With that, I'll turn it to Erica.
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. As we think about the back half, there are a couple of dynamics we're watching. One is the competitive intensity as it relates to price as we go into the latter half of the spring/summer market and into the fall. 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. That will play a role. The second dynamic is how we think about hedging and the cost of that hedging, which has been more volatile in the last quarter than in prior quarters. Sometimes that is a cost to the business that we bear. 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.
Your next question comes from the line of Matthew Lee with Canaccord Genuity.
Maybe a bigger picture one. 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? Is the growth algorithm now more about organic deployment of capital, fee income growth, productivity, capital return? Maybe touch on those pieces.
Maybe I'll take that. Certainly, as we look across our businesses, to capitalize on growth, it is an organic 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 we're 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. You're seeing good client flow. You're seeing Capital Markets momentum. Derek can talk about his pipeline, but we're seeing very strong client flow activity through our advisory businesses and our equity capital markets businesses. There's a lot of corporate-driven activity, which is good to see as well and a balance there. You're seeing an opportunity for the residential mortgage business to restart — green shoots, as Erica mentioned — and that provides a foundation for growth. Commercial Banking demand should pick up if trade uncertainty alleviates. Then there are the major projects that we can fund. And then there's a cost opportunity: a very significant opportunity to continue to be more efficient in this organization, deploying AI as part of that. Those benefits are just starting to accrue as we deploy those 200 models and embed them in our flows. So you've got growth, you've got costs, and all those are very supportive of structural ROEs. We don't even really need margin expansion. Margin stability gets us there. Some of our businesses are operating at historically low margins, and therefore you heard us mention that we're hopeful that given how tight funding is for many organizations, you get back to a little more reasonable margins and better hurdles than you're seeing today. I'll stop there. Derek, maybe on the Capital Markets side, you can talk about the opportunities for growth you're seeing.
Sure. Thanks, Dave, and thanks for the question. A few observations I would make: we had a very strong quarter and importantly, we continue to see that activity as we look forward. Our pipelines on the investment banking side remain at record levels. The conditions that have driven very high levels of client activity in our sales and trading in Global Markets continue to be in place. We're seeing very good demand from clients for lending and financing capital to help support their initiatives. As we look forward, we continue to see a very constructive environment for our clients. Consistent with our Investor Day messaging, we see lots of opportunities for organic growth across all four of our major businesses in Capital Markets. In Global Markets, we're investing in our sales teams and building out new capabilities around 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. In Corporate Banking, loan growth to support both our markets clients and our Investment Banking clients against their strategic initiatives is critical. And we're seeing great progress in our global transaction banking and cash management build-out with opportunities to deploy capital to invest in those product capabilities. From a geographic lens, we're optimistic about levels of activity in Canada in line with major government-supported initiatives. The U.S. as our second home market is a large opportunity for us, and we've got significant growth ahead. We also see good opportunities to continue to invest and expand our footprint in Europe. So across the businesses and geographies, we see very good opportunities for organic capital investment.
Your next question comes from the line of Sohrab Movahedi with BMO Capital Markets.
Okay. Dave, 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 you said something closer to historically low margins. 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 6 months, but over the medium term, is it going to be a case of retaining this resilient ROE being in and around where you are with the return on assets, and the capital levels are going to drift closer to the bottom end of the range that Katherine talked about? Or how do you see the capital-ROA dynamic playing out and in which business segment?
There's a lot in that question. Let me start on macro: yes, we're absolutely targeting an ROA of 1%, as you saw in our Investor Day. From that perspective, we want to continue to move higher. From all the levers — growth, efficiency and productivity — we aspire to a higher ROA. As that filters through into decisions to deploy capital and return capital to shareholders, our posture today is a little conservative; we're going to keep capital levels towards the higher end of that range while we get through conflicts and trade uncertainty. You saw us deploy a 2% share buyback. That was a use of capital — roughly 30 basis points of RWA capital. We'll keep it closer to the higher end in the short term, but we'll continue to return capital; you saw us announce an NCIB to repurchase up to 3% of our shares. Returning capital to shareholders will be a constant trend and we may accelerate it as appropriate. We do feel we can operate this bank over the medium term at a lower target CET1 ratio within our range and return capital to shareholders. We're generating significant capital through profitability and expect to generate more going forward. So we'll move into the mid-range or lower end of that CET1 range over time while continuing to return capital. We're committed to exceeding our target ROE of 17-plus percent. We had a very strong ROE this quarter, which tells you the earnings power and capital efficiency of the organization continue to improve. We'll keep balancing growth and EPS with book value per share growth and target ROEs. The capital efficiency and operational efficiency opportunities will allow us to make progress on all those metrics and create shareholder value.
Your next question comes from the line of Mario Mendonca with TD Securities.
Real quickly on some dynamics on the loan side. Commercial loan growth is good at 3% year-over-year in Canada, but it's light relative to what we're seeing from some of your peers. Could you comment on that? And then the $12 billion increase in wholesale lending this quarter — that's a big number, not something I'm used to seeing. Could you speak to those two items?
Thank you, Mario. On the commercial side, we've been pleased with our commercial growth for an elongated period. We've taken share for 12 consecutive quarters leading into Q1. We don't have the full results for Q2 yet, but going forward we're starting to see some nice tailwinds. Our pipelines are strong. We've seen continued growth and resilience in sectors less impacted by tariffs, like agriculture, public sector, services, health care and seniors housing. We've seen strong month-over-month momentum. In March and April, we saw the largest month-over-month growth rates we've seen in about six months. We're starting to see pickup in Ontario real estate correlated to government announcements and some early wins in the defense sector. I have confidence we'll continue to pick up share and grow into the second half of the year, amplified by medium-term benefits from infrastructure spend, the impact of new global trade agreements and eventual CUSMA resolution.
Derek, do you want to talk to Capital Markets?
Sure. Thanks for the question, Mario. We saw very good growth in the corporate loan book quarter-over-quarter. That reflects broader client activity, both in strategic M&A — which sometimes requires term loans or bridge facilities that are shorter term in nature as they fund acquisitions — as well as organic capital build associated with major infrastructure investments. We also had success this quarter adding some new large clients, larger investment-grade names where we've been building relationships across the platform and have the opportunity to come into their core banking group, which was a nice win. So growth reflected activity across those areas. Broadly, we're being disciplined in managing risk and capital allocation. The incremental growth you saw this quarter skewed more heavily investment-grade than our broader book, increasing overall credit quality of the book notwithstanding higher growth.
I think we have a few more questions to go.
Your next question comes from the line of Paul Holden with CIBC.
Derek, you gave a pretty good update and outlook on the near-term growth for Capital Markets. What about longer term — can you build revenue and earnings in Capital Markets off what's shaping up to be a very good 2026, which was projecting to be growth off a very good 2025? How much longer can this growth continue?
Paul, very good question. I'd break it into three pieces. Near-term, our pipeline visibility is strong and will carry us through a number of quarters. Medium-term, structural dynamics fueling activity among corporate and institutional clients remain intact. Geopolitical uncertainty, inflation, commodities and other factors are driving heightened levels of trading activity in our markets business and we expect many of those trends to persist over the next few years, ebbing and flowing quarter-to-quarter. In Investment Banking and Corporate Banking, we're seeing multiyear strategic trends driving activity: supply chain shifts, consolidation, energy transition, digital infrastructure spending — these demand capital and will continue to drive activity. Finally, we can't control the environment. If there is a shock and we see a slowdown, we take comfort in our incremental growth strategies that can outperform irrespective of market conditions and the core stability and quality of our franchise that has delivered lower volatility of results relative to many peers.
Okay. I think we have one more question from Mike.
Your final question comes from Mike Rizvanovic with Scotiabank.
I'll keep this quick. Just a quick one for Erica. Can you provide some color on deposit flows? I'm looking at the bottom left quadrant of Slide 24. It's the first time in a while we've seen personal and savings come off. I understand the GIC dynamic going to mutual funds. But what about the personal and savings side? Was there any anomaly in the quarter? Does it go back to positive in the near term? Any thoughts on that would be helpful.
Mike, thanks for the question. A couple of reflections: in Personal Banking we play a large role in the growth of our clients across all of our businesses. As we discussed last quarter, there is accelerated movement of money from Personal Banking into Wealth Management. When you look at those figures at the bottom left and the movement, that is also us supporting rotation back into equities both in our broker, GIC and RISA business, as well as in our core personal banking business via direct investing and Dominion Securities channels. We also saw rotation within our balance sheet as clients move out of term deposits into mutual funds. We had a stellar quarter from a mutual funds perspective in Q2: February was our second-highest month ever in mutual fund sales, and our market capture at about 25% was strong. So we're supporting clients as they rotate into longer-term positions balancing savings and equities, and we'll continue to support that.
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. The theme to take away is very good growth 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 touch on as much today. Thank you very much for your questions, and we look forward to seeing you next quarter. Thank you.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.