RY - Royal Bank of Canada (RY) Scotiabank 24th Annual Financials Summit (Transcript)

2023-09-06 17:24:09 ET

Royal Bank of Canada (RY)

Scotiabank 24th Annual Financials Summit Call

September 06, 2023, 09:35 AM ET

Company Participants

Dave McKay - President and Chief Executive Officer

Presentation

Unidentified Analyst

[Starts Abruptly] President and CEO of Royal Bank of Canada. Hi, Dave.

Dave McKay

Good morning.

Unidentified Analyst

Thanks very much for being here.

Dave McKay

Sit here?

Unidentified Analyst

Grab a seat.

Dave McKay

Good morning, everybody.

Question-and-Answer Session

Q - Unidentified Analyst

So, I was debating, should we talk about Taylor Swift or macroeconomics? So, I went with macro.

Dave McKay

Fair. I got a lot of new friends.

Unidentified Analyst

So I think the best place to start or really where I want to start with you is on the macro, because on your Q3 call, you made a number of comments about the macro outlook that I found very interesting as an analyst, as a former economist. You talked about structurally uncertain macro backdrop. You talked about an operating environment that's changing at a faster pace than what we've seen in over a decade. So, can you elaborate on those risks? And how they impact? How you manage the bank? It seems like it's definitely a challenging period here in terms of being the CEO of Royal Bank of Canada.

Dave McKay

Well, I think it's challenging for any CEO. I think it's maybe less challenging for the bank, RBC CEO, given the diversification of our business and the strength of our customer franchises. But a lot's changed. Some of these trends in thematics on the macro side were happening before March financial crisis in the United States. And then some of -- some new ones have manifested themselves that we should talk about.

But really some of the themes that have pushed this year are themes we've talked about on stage before, and that's the need for a strong deposit franchise and how funding and capital have been key issues, where the funding markets and the funding environment in both Canada and the US have changed. Deposit betas have changed much more significantly. And there's very different dynamics happening in the US and Canada that are diverging the market and I think the opportunities.

In the United States, you have fundamentally a lot of liquidity has left the system. $2.5 trillion have left the system out of $19.5 trillion. That has put pressure on regional banks to fund their model. You see US regional selling assets paying much higher deposit betas for their existing funding and are really struggling to grow given the inability to fund and the question about how much capital is going to be required to absorb some of the mark to market losses will have to take to their balance sheet they haven't taken before.

So, very difficult funding environment in the United States. Having said that, the asset betas were a little bit higher. So, some of those funding costs are being passed on in the marketplace, but certainly having a core deposit growth franchise, and that's one of the reasons that we've invested so heavily in US Cash Management. We'll be launching that this fall, but certainly a very important part of our overall US strategy is to build a US core funding capability for the long term. We've done well funding our business now. But as we think into the long term, having a US corporate cash management capability, we think really enhances our franchise another service to sell to our kind of night largest capital markets business in the United States, and therefore, a very strong component. So, addressing some of those challenges coming back to a great customer franchise with core funding.

The US consumer is more resilient than the Canadian consumer right now because they have a 30-year fixed mortgage. And therefore, they're not being disrupted by a higher mortgage payments. They've managed down their cash quite significantly. So, you've seen that run-off happen on US balance sheets, but there's still strong spend, which is why inflation is so persistent in the United States is you've got a very strong consumer.

Contrast that to Canada where the consumer has not run down their deposits. They're keeping a much higher liquidity position. We've not seen a run-off of all the pre-pandemic deposits that built up, but we are seeing cash flow -- disposable cash flow reduced by higher mortgage payments. And therefore, the Canadian economy is slowing faster, and rates will probably start coming down faster in Canada than the US. And it looks to us right now that we will be able to engineer a softer landing.

But a very different dynamic in Canada. You have more conservative consumer. Growth is slowing faster. You're seeing certainly those mortgage payments increase, and therefore, the economy's cooling a little bit faster in Canada. But the banking environment and the funding environment remains much more solid because of those surplus deposits, because of the nature and environment. And that's where our core capability again comes into play with the strongest core funding ability in Canada with our large market leading consumer and commercial franchise, very, very strong from a funding and capital position.

And therefore, those two worlds from a macro perspective are playing out very differently. Inflation will play out differently. The rate environment will ultimately play out differently. And, therefore, you have to manage the businesses quite differently. And both played to our strengths and the diversification of our strengths across Canada and the US, but will not be exactly the same.

So I think from that perspective, complex environment and evolving environment and why having the scale in North America across industries, but ability to fund and have the capital is really, really important.

Unidentified Analyst

And I want dig into your US strategy in more detail. You mean, you touched on the Cash Management, which is part of the capital market strategy in the US. But before that, sticking to one more macro question, just from a rate perspective, I mean, it sounds like you're may be leaning more towards the dovish side when it comes to the Bank of Canada, and we'll get a rate announcement today. But how big a risk in your mind, especially in Canada, is the higher for longer scenario? It sounds like it is a very significant risk.

Dave McKay

It's a tail risk for Canada and I think it's a tail risk that's manageable. I think we're seeing the good numbers come out. We're seeing that disposable income drop. We're seeing spending drop in Canada across a number of categories when you look at your credit card flows. And therefore, Canada is getting a handle on this, because higher rates are repricing credit and therefore slowing inflation. So, I think we should expect to see rates start to come down next. And I think that's well in advance of any major repricing of the mortgage book.

So, as you look at kind of the mean scenarios, we should be fine. We should engineer a soft landing here, and there's lots of room to do that into 2024. The majority of the repricing will happen in '25 and '26. And therefore, there's lots of time to hold, make sure we have a handle on inflation, get rates down, start to signal to the market. And therefore, we have lots of room to manage a soft landing here, and we expect that to happen.

Unidentified Analyst

I want to shift to -- before we talk about...

Dave McKay

I'm very positive on the Canada's ability to manage this. It could be a little bumpier in the United States.

Unidentified Analyst

And we'll get to that. In terms of -- one thing I wanted to talk about first was just expenses and expense management in a slowing revenue environment. And you announced some severance in Q3 and highlighted the actions you're taking in order to better manage expenses, not just on -- in terms of salaries, but also in terms of the discretionary spend in order to drive operating leverage going forward. The question is, is that going to be enough in your view? And sort of a part b to that is, historically, Royal Bank has been very reluctant to take big restructuring charges, and I'm wondering has that view changed at all given this environment, this inflationary environment, a more challenging environment. Is there any sense that maybe now there is? You don't have to commit to anything, but at least philosophically, is there potentially a change in the appropriateness of that kind of more severe action on your behalf?

Dave McKay

No. As you saw, we announced internally and externally a reduction in employment levels about 2% where we're not taking explicit charge, we'll absorb that in our cost structure. I feel like we've really -- it's taken a couple of quarters for a number of reasons. One, you need regulatory approval to move these programs forward in Canada, where you don't in the US. So it's a very different market. And therefore, we've obtained regulatory approval to move these programs forward. And therefore, we'll absorb that cost, but that is a net 2% reduction.

As part of an overall program to manage our cost structure down, whether it's looking at different projects, where we're spending on technology and making sure that we adjust to an operating environment that will see reduced rates over time, but to get that inflationary cost structure that's pervasive -- was pervasive across all our suppliers and higher salaries for employees, we feel, as you heard us talk about in the Q3 call, that we've got a handle on that. Now that you'll see a significant change year-over-year and quarter-over-quarter in our Q4 results. And we're forecasting in mid-single digits, and, hopefully, kind of flattish quarter-over-quarter. And, therefore, cost shouldn't be a story as far as these types of increases you saw in the first couple of quarters.

You have to be cognizant that we are undertaking the largest initiative in our history in acquiring and absorbing HSBC is a phenomenal opportunity for RBC and for Canada and for the HSBC clients and employees. We see significant operational synergies, client synergies. We're excited about the franchise. There's lots of capabilities they have that we bringing into RBC. We took a very significant positive step forward last week with approval by the competition bureau and their view that there's a healthy competitive environment in Canada and that this transaction does not change that healthy competitive dynamic that we see in asset betas and all the pricing -- competitive pricings that happens in Canada and the robust competitive market that we have across so many institutions.

So that was a big step forward for us. We still require final approval from OSFI and the Minister of Finance to conclude that. And then, we have an implementation period, which will lead to a close and conversion we hope early next year. So I think from that perspective, that is a heavy load for the organization to carry. And therefore, we are working very hard on that right now. It's very exciting opportunity for us with very significant shareholder returns and synergies, not just in the short term, but in the long term. And you'll see us outline that early in the new year, subsequent to approvals and how we see that. We feel very good about cost structure, but we'll start to talk a little bit more about the revenue and client opportunities that we haven't talked about today going forward.

So I think from that perspective, we have almost 2,000 people working on this transaction right now. We've moved a lot of them from other projects to this one. And, therefore, we need to carry a little bit of that extra cost structure to make sure we do this really, really well. It's a seminal opportunity for RBC and for Canada. So, I think from that perspective, we're managing that well. And therefore, as we come through that, we start to redeploy some of those resources mid next year, subsequent to hopefully a successful approval and close.

So I think that is part of what we're trying to manage. And it's a big undertaking to take a large bank and in one weekend move it on top -- all those clients on top of your technology infrastructure, but accrues enormous benefit to clients and employees and shareholders and Canada taxpayers immediately, because we unplug from one system and all that cost structure and moving on to our technology stack overnight. So that is a big undertaking right now. We just sold the Investor Services business, which was also a big undertaking, very complex detaching from the organization.

So, we're handing a lot of heavy stuff. We see that. We're moving through that. We've already got control over cost structure. You'll see strong performance coming out of Q4 into Q1. And therefore, we feel very good about the coming quarter and quarters.

Unidentified Analyst

I want to get back to...

Dave McKay

It shouldn't be an issue that we're going to have to keep coming back to.

Unidentified Analyst

Okay. I want to get back to the US strategy. You talked about the macro and some advantages that the US economy has or the US consumer has over Canada. But when I listened to you two weeks ago now on the call, you sounded quite negative on the US banking sector, maybe more negative than I've ever heard you. And it didn't sound like this was just a cyclical commentary, it sounded a lot more secular in terms of just the operating costs weighing on profitability in the US banking sector. So, the obvious question is how does that impact your US strategy across City National, wealth and capital markets? And where does it -- does it change the priority in terms of where you're focused, where you're more willing to put extra capital into the business?

Dave McKay

I would say inherently, yes. The US economy is performing very strongly. The US banking system is not performing very strongly compared to that. Whereas the Canadian economy is performing well and the Canadian banking system is performing very well. There's a lot of uncertainty around deposit flows as we just talked about. There's uncertainty about the ultimate kind of regulatory changes around capital, liquidity, funding, term funding that still have to come down and how the system is going to adjust to the risks that just went through.

So, the nature of my comments and just reinforcing them is it's an uncertain operating environment and a challenging operating environment to fund your balance sheet and to capitalize your balance sheet. When you see bank selling assets because they can't fund them, that's not a normal environment, and that's not good for the long term health of the economy, even though the economy is performing strongly.

So, I think it is a challenging environment, and that was the nature of my comments and it's uncertain. And, therefore, you got to -- you get back and stick to the basics and you got to really focus on how you're going to fund your balance sheet going forward, how you're going to capitalize it, and wait to see these rules play through. Whereas in Canada right now, we understand that rules of engagement, we understand -- we're excited about the HSBC transaction because you can't be more sure footed than in your own market. And to be able to take it an incredible franchise like that and put it onto your technology stack and serve all those customers in an environment you understand, you can -- the rules are stable right now, and you can plan going forward, it just makes it easier to do business.

Any business in any sector doesn't like uncertainty. And, therefore, we have to work through that in the US and see where those rules go and see how the system funds itself, see how those $2.5 trillion that moved out of the banking system, does that increase? Does that decrease? Does that flow back? Do you see greater liquidity? Or does quantitative tightening continue to squeeze the banks? This is not normal environment. It's a stressful environment, and any US bank CEO will tell you the same thing. So, I think it's that uncertainty to manage, it's a difficult environment.

Unidentified Analyst

And so in terms of the levers that you have in terms of the business mix in the US, how does that translate into how you're thinking about it?

Dave McKay

So, again, the diversification of our business in the US is really important to come back to. We've got three fantastic client franchises. We've got the ninth largest capital markets franchise in the US. We've moved up from eleventh to ninth. We're seeing strong underwriting activity, strong advisory activity, even though it's been a little more muted given the rate environment, but we see the pipelines building. We see strong hiring activity. We see great opportunities to continue to build on. Some of our industry focuses around tech and healthcare and the leaders in that business are doing very, very well in addition to banking and others.

So, we're seeing the breadth of the investments we made across sectors start to grow our advisory business. We're seeing stronger markets performance in the US on DCM and others. ECM, obviously, a bit slow. So, the capital markets franchise and its ability to continue to grow, with corporate cash management ability to cross sell to all those relationships where we're usually in the top tier in either credit syndicate, we have our right to ask for the business.

We've built this corporate cash management product with top CFOs and treasurers across the US. So, we've got a readymade customer base that are willing to adopt this. And we're very excited about bringing that, not only funding, but that fee-based services as well onto our services list for all of these clients. So, capital markets opportunities, we're very excited about, and we see good pipeline.

The US wealth story is just a -- we moved up to fifth in the US on the assets under administration. We continue to hire advisors, add advisors. We've invested in technology. We've grown our secured lending portfolio to $8 billion to $9 billion. Now, we see other products now that we can add to franchise, continuing to cross sell those customers. It used to be uniquely an advisory trading relationship with a customer we've had a secured lending relationship. We'll add our mortgage capability and other capabilities to that and continue to grow these affluent and high net worth client relationships through that wealth franchise.

It's very, very exciting. While we're hiring more advisors and continue to migrate advisors in, I think we brought 127 advisors in and almost $30 billion of AUA every year. Year-on-year, we continue to grow this franchise and perform very well in advisor and customer satisfaction. So, it's just a fantastic organic growth story there as well.

And on the City National side, we've tripled this bank since we acquired it. We thought we'd have a record year in City National this year. And everything got turned upside down in the March upheaval when certainly deposit betas changed and customer flows, and we have high net worth, ultra-high net worth, and commercial customer franchise, and they started moving money around, and that was replaced by money coming in from new customers and other customers.

So, net-net, we did very well by particularly in the US by having a stable funding base in the US, albeit at a significantly higher beta, which all banks are seeing. Some of that's been passed on with better asset pricing and better asset betas, and we'll -- hopefully, we'll continue to see that perform in the US that way. And an opportunity to really improve on a revenue stream, manage our cost down certainly and approve the operating environment. So it was a challenging quarter. Everything ran against us. You'll see it stabilized in Q4 and improve next year. And we still see enormous opportunity for the City National franchise.

So, diversification of institutional and corporate high net worth affluent advisory, commercial and private banking, and City National with upside to perform better, it's a great franchise to have in the US, and they're very, very hard to build at the end of the day, very hard to build. There's not a lot of acquisition opportunity. It's an organic build. And therefore, we've got the capital, the scale, the ability for Canada to help. This is a great story for RBC and very, very hard to replicate.

Unidentified Analyst

I'm curious the competitive landscape for that business, I mean, obviously, this time last year, I might have probably still asked you, "Are you interested in First Republic?" Obviously, they don't exist anymore, or, I mean, they're part of JPMorgan. So, the question is, from a competitive landscape, is there opportunity there? Or is it now -- you're competing with JPMorgan instead of First Republic. So that's...

Dave McKay

We compete against everybody. I think at the end of the day, it creates organic opportunity for us as we offer choice. We offer great service. It's a fantastic franchise. As the industry consolidates, I think clients look for alternative solutions, and therefore, a fantastic customer franchise that we have from wealth. We have brought in teams from First Republic on the wealth and City National side, and SVB. We continue to see great organic opportunity. So I think that's the focus, first and foremost.

Matching culture and matching strategy, yes, there is less opportunity out there right now in the US. We have personal banking and consumer banking is a scale business. And you've heard me say for a decade now that that's not a strategy, continues to be not a target for us. We have a good commercial bank within CNB, and we want to continue to grow that commercial bank and we'll continue to focus on that. But for me, I just continue to see significant organic growth opportunity.

The biggest challenge for every bank except a couple in the US is to find funding. Like, we could grow from demand -- customer demand alone. We could grow our asset business in the 20% range. We can't fund that growth rate now in the US profitably. And therefore, you have to manage your growth much more carefully around funding levels and the cost of funding and how much customers will pay versus what competitors are offering.

So, it's a trickier environment to grow for sure, but very significant growth opportunities. But, no, I don't see -- on the commercial side, we'll continue to think about it. On the wealth side, we'll continue to think about it. But we're doing really good job growing organically.

Unidentified Analyst

So that was my follow-up question in terms of M&A. It's still an organic growth story in terms of capital markets and wealth and that's not true...

Dave McKay

Certainly capital markets is an organic growth story. We have scale already. Our acquisition wouldn't make sense for us. We're buying people and relationships. They're mobile. They're very difficult strategies [indiscernible] not worked very well. Historically, some banks have disappeared because of their capital markets M&A strategy gone wrong and the cultural shift that it brings. We have scale already.

So for us, where we need scale, we need more MDs. We need more MDs in certain industries like tech and healthcare continue to build those out. That's where we're under scale, but you don't get that through acquisition. You get that by attracting through culture, through a strong balance sheet. You attract teams and you attract people and we'll continue to build that out. But an M&A strategy in capital markets wouldn't make sense for us. We've got the corporate cash management capability we've built, and therefore, we feel like we have a really strong global capital markets operation that's capable.

You will see us continue to think about UK Wealth and to build on a very successful Brewin Dolphin acquisition. We're very interested to continue to build a global wealth franchise and to serve that high net worth franchise. It's a higher ROE business. It performs well for us through a cycle and, therefore, helps us build a higher ROE, lower volatility customer franchise, which is our investment thesis. And we continue to deliver that. We continue to build a franchise that delivers a premium ROE, lower volatile, premium growth franchise. And we're investing in that growth. Whether it's HSBC, corporate cash management, new MDs, City National, we continue to invest in premium growth, the same customer targets that we know produce lower volatility through a credit cycle.

And therefore, that's the franchise we promised we'd build you, and that's what franchise we're building. And you're seeing that the benefits of that organic growth and that customer franchise. We just need to get the cost structure down so the operating leverage pops through a little bit more. And we feel that's eminently within our control. It's nice to say, okay, customer franchise is doing really well. Growth is doing really well. Our deposit franchise is throwing through our diversification and risk management is throwing through. All I got to do is get that cost bit down. And we'll be able to deliver that operating leverage that we want. But that's within our control at the end of the day. So, it's good to be in that position.

Unidentified Analyst

And so, if I heard you right, so the aspiration from a wealth perspective is more of a global franchise. I mean, you're number one in Canada, top three in the UK with Brewin Dolphin...

Dave McKay

Yeah.

Unidentified Analyst

So, okay.

Dave McKay

And we'll selectively look at opportunities. There's not a lot of targets here, as you can imagine the wealth franchise. We probably would focus, and we are focusing on distribution versus manufacturing. We have for the past decade focused more on the distribution side and owning that customer relationship and trying to cross sell that customer relationship is where we're focused, which is what Brewin Dolphin was, certainly. And we'll continue to look for those opportunities while we deepen our product suite and deepen our relationship with those existing customers, which are quite significant.

A great opportunity in the US. We're doing a better job in Canada, whether private banking and premier banking, cross sell into our fantastic RBC DS wealth franchise. So you're seeing deeper product shelf in Canada, real deep in that canon. That's a big part of the value proposition. The UK is to deepen that product shelf and cross sell. So that drives higher ROEs. That drives organic growth, and that drives the premium EPS. So, I think that's how we think about it. That's how we're executing. We've got the pieces, and we're pushing it forward.

Unidentified Analyst

So, shifting from strategy to management. I'm curious your thoughts, in Q2, you were very candid in talking about two mistakes that you the organization made. One was over-hiring during the pandemic. The other one was not foreseeing the rapid move in deposits into higher-yielding products. The question is just as you take a step back, what management lessons do you take away from that episode?

Dave McKay

Well, I think every bank in the world, including JPMorgan, didn't see the rapid shift into higher-beta deposits. So, I wouldn't say it was a mistake. It's something that we have to adjust to, for sure. I think we saw, given the affluence of our customer base and the size of our customer base, we did see faster flows. I think a part of our overall strength as a franchise and why we're number one in J.D. Power for, I think, seven out of eight years now, we're number one in the wealth side, and advisory and customer satisfaction, is we do the right thing for the client day-in, day-out, year-in, year-out. And this was about doing what's right for the client and reaching out to them and saying, you have surplus liquidity. You should be putting it to work. Don't leave it in your core checking account. We'll watch that. We've got great AI technology.

I know you want talk about AI. We monitor 15 million customers' accounts every day for -- and give them advice about what they should be doing with their money. That's why we're number one in J.D. Power, doing the right thing. The right thing was to talk to clients. Not every competitor did that. I think some competitors counted their margin. We did the right thing by the client. That led to an acceleration of the flows into higher-yielding products with a customer, but higher beta costs for us. And it was -- it went so fast that our revenues were shocked by it, and that, again, was not something we planned for. And therefore, it was hard for us to adjust the cost base to the big gap in revenue we had to our plan.

So, the rapidity of the change caught us a bit off guard, but not -- the whole thematic around the change was the same every bank faces. Are you going to do the right thing for your client? And that was absolutely the right thing to do for our client, and the clients will reward us for doing the right thing.

As far as the hiring side, yes, we had -- every bank and most companies outside the tech companies had significant -- in 2022 significant turnover. Like, we saw tech companies hiring aggressively. We saw higher change in employee turnover. We hadn't seen before, it was benign through, obviously, the pandemic that we saw tech companies hiring. We lost a lot of frontline people. We had to replace them. It came to a point in the summer of 2022, we couldn't open certain branches, even the province of Quebec, because we had such significant turnover. They went through a massive hiring spree, so that didn't happen again in the summer of 2022 into the fall. And the tech companies stopped hiring as they went through their challenges. Attrition went to zero at the end of the day and we overshot.

But we overshot because we tried to solve the core problem serving the customer properly at the end of the day. And JPMorgan, again, talked about the same thing. So, we overshot for the right reasons. And we could have adjusted a bit quicker to that overshoot, and we're a bit slow doing it, but we've got a handle on it now to the point that we talked about. And we've got our cost structure moving down. We've got our FTE moving down in the right direction. We'll keep managing that with a number of levers that we have that we just talked about. And should be a story in the past. But we did it because we put the customer first. We put service first, and that's how you build a long-term franchise that's sustainable.

Yeah, we're disappointed for a couple of quarters, but we got it back in Q3, and we'll get it back in Q4 again in Q1 and move forward from there. But we did it for the right reasons. We just -- it had a little bit more volatility to it than we wanted to see happen, but we got to handle on that and we'll move forward.

Unidentified Analyst

I wanted to -- you mentioned it. I asked Scott about AI. I want to ask you. I know you're very passionate about technology. I always enjoy getting your insights on technology and how it relates to banking. So, same type of question. A lot of hype around AI, but from an investor's point of view, is this something that is going to move the needle on expenses or revenue or both or neither? How do you see it from that perspective? Obviously, a very exciting technology, but what's the bottom line here for investors?

Dave McKay

I think the headline is this is an incredibly exciting technology that's not ready for prime time, but we'll be ready in a foreseeable -- in a short to medium term. And I think each of these technologies are kind of building. I would say, we went through the blockchain chain technology, and I think it hasn't proven to be a great changer, but it's still evolving and still changing and it could continue to create a powerful technology, but it's taken a long time to evolve.

The first phases of reinforcement learning and the first phases of AI we invested heavily in, and they've produced great results for us across the bank. They are not game changers, but there are small scale innovations that are changing different parts of organization from Aiden, and trading and equity trading, block trading business to our adjudication businesses. AI has been deployed across the organization very successfully by our Borealis AI team and our market leading Borealis AI team that we built organically. We didn't acquire. And they created a great value for us. And we've earned a great return on that investment.

But I saw the curve starting to shift. And I saw the innovation starting to slow a bit. But that curve has led to this new generative AI curve. And it is exponentially different and more exciting. But those models have been trained in a very different open environment that you now need to retrain those models on your own data in a more of a closed environment, in a hybrid environment with trust layers to protect your data and protect your privacy. All that has to be done in the right way.

The potential of the model is there. The use cases are incredibly exciting. They have revenue opportunity and cost opportunity. They have an opportunity to make our employees better and faster in front of the client and more productive front of the client. We have potential, I think, to wow the client in many ways. So we have a number of use cases there. We have a number of use cases that we've started already within the technology group and encoding, and lowering the cost of delivering technology significantly. And those are real. And then we have real use cases on the operations, obviously contact center, branch side, and improving the cost structure of the organization.

So, when you look at this -- but it's not something that we can do tomorrow, it's something that we can do over the next two years, I would say. To retrain the models, we've chosen a couple of partners already. I've spent myself a lot of time in California talking to many, many companies about the -- where their development's at, what's required, how we're going to do this, who we're going to partner with. So, I think we're pretty evolved as far as our knowledge of the sector to the point where we're moving forward now in building these use cases. But it's not going to happen in 2024, I don't think. But I'm pretty excited for 2025, and they are, I think, pretty fundamental at the end of the day. So, very excited about the technology, but everything's building, right. And it's an exciting future, but we've got work to do.

Unidentified Analyst

And is this something that could be a sustainable advantage for Royal Bank? Or it's more along the lines of every bank -- maybe Royal Bank is ahead, but everyone's going to catch up, and so this is not a sustainable advantage for your bank in particular? How do you view that?

Dave McKay

Accessibility to the technology will be universal. You will have large tech firms that provide this as a service, so you can plug into a generative AI model, a large language capability, and it will sit on top of your data potentially, and you'll adjust to it. But the real value comes from your ability and your scale in using the technology and understanding from prompt engineering, which would be words that you'll hear over and over and over again as we hire and develop prompt engineers. How you train them, how robust and broad your data set is, will create ability. As an organization, your facility in deriving value from data and your accessibility in organization of data, how you have a franchise that collects data, is really important. So data scale becomes really important, as well as brand scale and trust, and trust in how you're going to use it. So I think brand scale and trust scale is also very important.

So the benefit then comes from not accessibility. Everyone will have an ability to plug into a generative AI model. But you're -- the expertise that you've built over these decade and AI and technologies will facilitate your organization in leveraging this technology into value and to competitive advantage. That's where the difference is. And that's what we've proven through the first generation of AI with Borealis. We have adapted this to our environment. I think we're well positioned and ahead of the curve in executing against this new technology. It's very exciting and it's different. The large language model concept and capability and trust layer is fundamentally different.

Unidentified Analyst

Well, I think that's all the time we have. So, we'll leave it there, but thank you so much, Dave. Appreciate you being here.

Dave McKay

Thank you, everyone. Bye.

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Royal Bank of Canada (RY) Scotiabank 24th Annual Financials Summit (Transcript)